Question

In preparing GPFR for public sector entities, the choice of basis of accounting to apply is a critical matter. The decision has to be made on whether to prepare the accounts on cash basis, modified cash basis, modified accrual basis or accrual basis.

Required:

As a newly appointed Head of Public Accounts Division of the Controller and Accountant General’s Department, you are required to write a memorandum to The Controller and Accountant General:

1. Explaining each of the four (4) basis of accounting indicated above.
2. Suggesting any four (4) factors to be considered in choosing a basis of accounting for the preparation of a general purpose financial report of public sector entities.

Answer 1

The cash basis measures cash flows at the time those flows actually take place. The modified cash basis allows a short period of time after the year-end for settling liabilities of the year just ended (and treats this expenditure as occurring in the year just ended). The full accrual basis records expenditures and revenues when they become due (i.e. in many cases before the associated cash flows take place). It records assets and liabilities and is therefore associated with the production of balance sheets. It is also associated with providing depreciation on assets with finite lives. The modified accruals is similar to the full accruals basis, but it is simpler because it does not involve the capitalisation of fixed assets (nor the provision of depreciation of fixed