Question

Many governments budget on the cash basis. Explain why a government would budget on a cash basis rather than on a GAAP-basis. What basis of accounting would you recommend for a municipality’s budget? Explain and justify your selection.

Answer 1

To facilitate a true budget and actual comparison, governments should present actual revenues and expenditures on the same basis the law requires for budget preparation. Sine budget prepared on the basis of expenditures as per GAAP will often exceed cash-basis expenditures by the amount of encumbrances outstanding. Thus government use cash basis rather than the GAAP basis to show the true picture of accounts.

I shall recommend municipality budget on cash basis as it will :

• not add manipulative revenues and expenses in order to show better performance
• efforts would be be laid down to actually use the cash and record it to generate revenues
• give better presentation of accounts and would be easy to read and understand for hte common persons.