Date: 2024-07-26 Page is: DBtxt003.php L0300-Cash-Basis-Accounting
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ISSUES
Cash Basis Accounting Widely used in the Public Sector, but very weak compared to full accrual accounting |
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The difference between cash basis and accrual basis accounting
The double entry construct, and the classification of accounts between balance sheet accounts and profit and loss accounts has been fundamental to accounting for several hundred years. The concept of accruals is an integral part of this sort of accounting. Cash basis accounting is nothing more than a 'cash book' where receipts and expenditures are recorded. There may be some analysis, but the key difference in the characteristics of capital spending and operational expenditures is not clearly required. With the double entry construct and the differentiation between balance sheet and profit and loss accounts, it is very much easier to make sense of the accounting, and to hold people accountable for performance. With cash basis accounting, it is very much easier to hide errors than it is with accrual based accounting. TPB note: In my own career, I have been able to identify serious mismanagement and fraudulent reporting because of the rigorous linkege there is between changes in the balance sheet and the reported profit. Most people who engage in fraudulent reporting have difficult hiding their misfeasance because of this linkage. | ||
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Why do Governments use cash basis accounting?
The double entry construct, and the classification of accounts between balance sheet accounts and profit and loss accounts has been fundamental to accounting for several hundred years. The concept of accruals is an integral part of this sort of accounting. Cash basis accounting is nothing more than a 'cash book' where receipts and expenditures are recorded. There may be some analysis, but the key difference in the characteristics of capital spending and operational expenditures is not clearly required. With the double entry construct and the differentiation between balance sheet and profit and loss accounts, it is very much easier to make sense of the accounting, and to hold people accountable for performance. With cash basis accounting, it is very much easier to hide errors than it is with accrual based accounting. TPB note: I have worked as a consultant for the World Bank and the United Nations on Government Financial Management. There is no appetite within most Government's for really rigorous financial management, rather there is a preference for rather weak and flexible reporting methods. This has advantages for politicians, but is a disaster for everyone else. I was recruited by a well known accounting firm to work on some of the government financial management reform that was being implemented by Western experts in the Former Soviet Union in the 1990s. I was appalled, because the Western systems being recommended were worse than the accounting already in place in the Soviet style bureaucracies of the FSU. The result was that these governments completely lost control and were gamed in such a way that a multitude of very rich oligarchs emerged. When I tried to take a stand on this, I was very unpopular and reallocated to other work. I wish I had had the power to get a hearing at that time ... but did not. I made enough noise to ruin my career ... but not enough to get the problem solved! |