Why do governments use modified accrual

Note: To navigate this guide on a mobile device you must use the Table of Contents. Modified accrual is a combination of cash basis and full accrual basis.

Revenues are recognized when they are both measurable and available. Expenditures, however, are recorded on a full accrual basis because they are always measurable when they are incurred. The measurement focus of governmental funds affects which transactions are recognized in the operating fund. Modified accrual basis of accounting measures the current financial resources available.

It is basically a hybrid of accrual and cash basis of accounting. Fixed assets, such as property, plant and equipment, and long-term debt are not recognized in this accounting basis on the balance sheet because they are not considered a "current" financial resource. Revenues are recognized when they are available revenues are collected in the current period or shortly after and measurable. Modified accrual accounting is used and accepted by governmental agencies because these entities have a much different goal from for-profit and nonprofit entities.

A governmental entity is focused on current-year obligations, and the modified accrual basis focuses mainly on short-term financial assets and liabilities. Financial reporting for a governmental agency has two key objectives: to report whether the entities current-year revenues were sufficient to pay current-year expenses, and to demonstrate whether the entity acquired and used its resources according to its legally adopted budget.

The modified accrual basis of accounting combines the cash basis and accrual basis of accounting to accomplish both objectives. Revenue recognition standards are different for governmental entities than for business entities.