Modified Accrual Accounting

Definition

Modified Accrual Accounting is an accounting method commonly used by government entities which combines aspects of accrual accounting with the cash basis of accounting. In modified accrual accounting, revenues are recognized when they are both measurable and available. Conversely, expenditures are recognized in the period in which the related fund liability is incurred, provided that it is measurable.

Examples

Example 1: Property Tax

A local government’s property tax revenue is recognized when it becomes both measurable and available. Suppose property taxes are levied on January 1st, due by March 31st. The revenue might be recognized as they are collected within 60 days of the fiscal year-end, which makes them available for fiscal year-end obligations.

Example 2: Grant Revenues

A city receives a federal grant for education, which is measurable at $1 million, but the grant will only be recognized as revenue when the funds are received and used for their intended purpose within the period specified by the grantor.

Example 3: Payroll Expenditures

Government employee salaries are recognized as expenditures when the employees earn their wages, even though the payment might occur in the subsequent period. Therefore, the salary expense is recorded when the liability is incurred.

Frequently Asked Questions (FAQs)

What is the difference between modified accrual and full accrual accounting?

Modified accrual accounting recognizes revenues when they are both measurable and available and expenditures when the fund liability is incurred. Full accrual accounting recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash transactions happen.

Why do governments use modified accrual accounting?

Governments use modified accrual accounting because it aligns with their budgeting processes and financial reporting needs. This method provides an effective means of managing public funds by focusing on the availability of resources for current year obligations.

How does the “available” criterion in modified accrual accounting work?

In modified accrual accounting, revenue must be collectible within the current period or soon thereafter to be deemed “available.” Typically, this period is 60 days after the fiscal year-end, but it may vary based on governmental policies.

Can modified accrual accounting be used by private businesses?

No, modified accrual accounting is specifically designed for governmental entities. Private businesses are generally required to use the full accrual accounting method per Generally Accepted Accounting Principles (GAAP).

Accrual Accounting

Accrual accounting is an accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash transactions occur.

Cash Basis Accounting

Cash basis accounting records revenues and expenses only when cash is received or paid.

Fund Accounting

Fund accounting is an accounting system emphasizing accountability rather than profitability, primarily used by non-profit organizations and governments.

Revenue Recognition

Revenue recognition is the principle dictating the process and timing for recording revenue into the financial statements.

GAAP (Generally Accepted Accounting Principles)

GAAP refers to the standard framework of guidelines for financial accounting used in any given jurisdiction.

Online References

Suggested Books for Further Studies

“Governmental and Nonprofit Accounting: Theory and Practice” by Robert J. Freeman and Craig D. Shoulders
“Accounting for Governmental and Nonprofit Entities” by KPMG LLP
“Governmental accounting, auditing, and financial reporting (GAAFR)” by Stephen J. Gauthier

Fundamentals of Modified Accrual Accounting: Governmental Accounting Basics Quiz

### Does modified accrual accounting recognize revenues when they are earned? - [ ] Yes, whenever they are earned. - [ ] No, only when cash is received. - [x] No, only when measurable and available. - [ ] Yes, anytime during the fiscal year. > **Explanation:** Modified accrual accounting recognizes revenues only when they are both measurable and available, not merely when they are earned. ### When are expenditures recognized in modified accrual accounting? - [ ] When cash is paid out. - [x] When the related fund liability is incurred. - [ ] When the budget is approved. - [ ] At the end of the fiscal year. > **Explanation:** Expenditures are recognized in modified accrual accounting when the related fund liability is incurred. ### Which entities primarily use modified accrual accounting? - [ ] Private corporations. - [ ] Small businesses. - [x] Government entities. - [ ] Nonprofit organizations. > **Explanation:** Modified accrual accounting is primarily used by government entities. ### Why is the "available" condition important in modified accrual accounting? - [ ] To delay revenue recognition until the next period. - [ ] To match revenues with cash receipts. - [x] To ensure revenues can be used for current period obligations. - [ ] To align with federal tax policies. > **Explanation:** The "available" condition ensures that revenues can be used to meet current period obligations. ### Can property tax revenues be recognized before they are collected? - [x] Yes, if they are measurable and available. - [ ] No, only when cash is received. - [ ] Yes, immediately when levied. - [ ] No, they must be collected first. > **Explanation:** Property tax revenues can be recognized when they are measurable and available, even if they are not yet collected. ### How is liquidity addressed in modified accrual accounting? - [ ] By matching revenues and expenses. - [ ] By deferring expenditure recognition. - [x] By recognizing revenues when they are available. - [ ] By immediate expense recognition. > **Explanation:** Liquidity is addressed by recognizing revenues when they are available for spending. ### Which period is typically used to define "available" in modified accrual accounting? - [ ] 30 days after the fiscal year-end. - [x] 60 days after the fiscal year-end. - [ ] 90 days after the fiscal year-end. - [ ] Accordance to grant period guidelines. > **Explanation:** Typically, the "available" period in modified accrual accounting is 60 days after the fiscal year-end. ### What advantage does modified accrual accounting provide for budget management? - [ ] Simplifies the accounting process. - [x] Aligns with governmental budgeting practices. - [ ] Increases financial complexity. - [ ] Mirrors private sector accounting. > **Explanation:** Modified accrual accounting aligns with governmental budgeting practices, aiding in effective budget management. ### Expenditures such as salaries are recognized when: - [x] The liability is incurred. - [ ] The payment is made. - [ ] The budget is approved. - [ ] The fiscal year starts. > **Explanation:** Salary expenditures in modified accrual accounting are recognized when the liability is incurred. ### Why is modified accrual accounting not used by private businesses? - [ ] It's too complex for them. - [x] It's designed to meet governmental financial objectives. - [ ] It requires federal approval. - [ ] It is less accurate. > **Explanation:** Modified accrual accounting is specifically designed to meet the financial reporting and budgetary needs of government entities, making it unsuitable for private businesses.

Thank you for exploring the realm of modified accrual accounting. Continue to broaden your governmental accounting knowledge and excel in your financial education!