Governmental agencies have two key objectives: to report whether current-year revenues are sufficient enough to finance current-year expenses and to demonstrate whether resources are being used according to legally adopted budgets. It enables government agencies to focus on short-term financial assets and liabilities.
It also permits them to divide available funds into separate entities within the organization to ensure that money is being spent where it was intended.
As a result, expenses are recorded in the same period as the revenues they generated.
While the revenue recognition and matching principles are rather straight forward, their application is often subject to seemingly arbitrary rules and requires the use of estimates(Cooper, Lyman, 2002).
In cash-basis accounting, revenues and expenses are also called cash receipts and cash payments.
Cash-basis accounting does not recognize promises to pay or expectations to receive money or service in the future, such as, prepaid payables and receivables, and prepared expenses.
Discuss the advantages and disadvantages of these concepts, explaining the reasons why these concepts may be difficult to apply or may be inconsistent with other concepts.
Accounting statement and records are a periodic summary of account activity within a period and the documentations involved in the preparation of it (Thomas and Ward, 2012: 4).
Modified accrual accounting is commonly used by government agencies.
Modified accrual accounting borrows elements from both cash and accrual accounting, depending on whether assets are long-term, such as fixed assets and long-term debt, or short-term, such as accounts receivable (AR) and inventory.