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Overview of Modified Accrual Accounting
Definition of
Modified Accrual Accounting
What is Modified Accrual Accounting? Modified Accrual Accounting is a hybrid accounting method that combines elements of both accrual accounting and cash accounting. It is primarily used by state and local governmental entities for their governmental funds (e.g., general fund, special revenue funds). Under modified accrual, revenues are generally recognized when they become measurable and available to finance expenditures of the current period. Expenditures (not expenses, in governmental accounting for funds) are generally recognized when the related fund liability is incurred, if measurable, except for unmatured interest on general long-term debt, which is recognized when due.
Activities Related to
Modified Accrual Accounting
Here is a list of Modified Accrual Accounting related activities:Â
Recognizing property tax revenue when levied and available, Recording expenditures when goods or services are received and a liability is incurred (for governmental funds), Differentiating between expenditures and expenses, Capitalizing certain long-term assets but not typically depreciating them in governmental fund statements, Recognizing debt proceeds as other financing sources, and Preparing governmental fund financial statements that focus on current financial resources.
This method adheres to standards set by the Governmental Accounting Standards Board (GASB).
The Importance of
Modified Accrual Accounting
Modified Accrual Accounting is important primarily for governmental entities as it focuses on the flow of current financial resources and fiscal accountability. It helps demonstrate whether current financial resources were sufficient to cover current period expenditures, which is a key concern for taxpayers and government oversight bodies. While different from the full accrual accounting used for business-type activities of governments or for commercial enterprises (which follow GAAP), modified accrual is designed to meet the specific reporting objectives of governmental funds.
Key Aspects of
Modified Accrual Accounting
Governmental Fund Focus
Primarily used for the financial reporting of governmental funds (e.g., General Fund, Debt Service Funds, Capital Projects Funds).
"Measurable and Available" Revenue Recognition
Revenues are recognized when they are both measurable (quantifiable) and available (collectible within the current period or soon enough thereafter to pay liabilities of the current period).
Expenditure Recognition
Expenditures (decreases in net current financial resources) are generally recognized when the related fund liability is incurred.
Current Financial Resources Measurement Focus
Emphasizes the flow of current financial resources rather than long-term economic resources.
Concepts Related to
Modified Accrual Accounting
Modified Accrual Accounting is distinct from both full Accrual Accounting and pure Cash Accounting. It is a key component of governmental accounting standards set by the Governmental Accounting Standards Board (GASB). It impacts the preparation of governmental fund financial statements. Understanding its specific rules for recognizing revenue and expenditures is crucial for those working with government finances.
Modified Accrual Accounting
in Action:
The Adventures of Coco and Cami
Imagine Coco and Cami's town government is managing its finances. Professor A explains that governments often use a special method called Modified Accrual Accounting for certain funds.
Learn with our entrepreneurs how this method differs from the accounting they use for their shops, focusing on when the town can actually use its money to pay its bills for the year.