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This discussion indicates a difference between a modified accrual accounting approach and a full accrual accounting treatment for the work with government statements. The main difference is in recording and analyzing the expenditures in statements. The use of the modified accrual accounting is more appropriate for both accountants and readers of statements because only the most important and relevant financial information is presented in them. It is important to state that the modified accrual accounting approach is adopted by the Governmental Accounting Standards Board for developing government fund statements.
In addition to the full accrual accounting, there is also a modified accrual accounting approach that is used to work with government fund statements, and the main focus is on the existing financial resources. In contrast to the accrual basis accounting associated with the measurement of economic resources, the modified accrual accounting utilizes another perspective proposed by the Governmental Accounting Standards Board (GASB) (Reck, Lowensohn, & Wilson, 2012). From this point, the modified accrual accounting is used to demonstrate the fiscal accountability.
These two approaches differ from the cash-basis accounting in terms of the time when revenues and expenses are recorded, and there is a significant difference observed while comparing and contrasting the full accrual accounting and the modified accrual accounting. If the accrual accounting refers to assessing both revenues and expenses when the changes in economic resources are observed, the modified accrual treatment applies another strategy. The assessment of revenues is conducted when they are available, but the next step is the treatment of expenditures that is observed when they are incurred (Freeman, Shoulders, Allison, & Smith, 2012). The focus on expenditures means discussing all the spending made during the fiscal year without focusing on the time when the purchased assets can be used. Thus, the modified accrual treatment is not related to returns on capital assets (Reck et al., 2012). This approach allows avoiding the misleading information in fund statements with the focus on taxes and expenditures related to different periods.
The modified accrual treatment can be discussed as a more advantageous choice from the perspective of readers of financial statements. The reason is that the information regarding the short-term accountability is reflected in the statement, and there is no any other irrelevant information that can mislead the reader (Reck et al., 2012). The use of the modified accrual accounting approach allows presenting the actual statement of revenues and expenditures available at the concrete period of time (Freeman et al., 2012). The full accrual approach has more disadvantages as it reflects expenses without references to the real changes in revenues and costs.
Thus, the modified accrual accounting is applicable in those situations when it is necessary to present the actual exchanges in revenues and expenditures related to the concrete period. As a result, any information that is not related to the selected fiscal period is not included in the statement. This approach is adopted in many organizations because it is rather difficult to predict the expenses associated with different periods. Therefore, the modified accrual accounting approach is more applicable in this case. However, the challenge is faced when it is necessary to adapt the statements made according to the modified accrual accounting approach to using the full accrual accounting as the lack of the economic information can be observed in that case.
References
Freeman, R., Shoulders, C., Allison, G., & Smith, R. (2012). Governmental and nonprofit accounting. New York, NY: Prentice Hall.
Reck, J., Lowensohn, S., & Wilson, E. (2012). Accounting for governmental and nonprofit entities. New York, NY: McGraw-Hill Education.
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