Public Sector Governance and Accountability Series: Budgeting and ...

182 Paul Boothe
TABLE 6.1 Cash Accounting versus Accrual Accounting
Characteristic Cash accounting Accrual accounting
Operational requirements Relatively simple Relatively complex
Links to traditional budget
and revenue systems Relatively strong Relatively weak
Coverage Records only transactions Records estimated noncash
that result in cash payments transactions as well
or receipts
Timing Records only transactions Records the estimated
that occur within the future effects of current
accounting period
transactions and policy
changes
Audit and control Relatively simple Relatively demanding
Source: Adapted from Athukorala and Reid 2003: 26.
weaknesses of the two accounting systems. The cash system of accounting,
because of its simplicity, is relatively easy to implement and operate. The
relative ease of audit and control is also a positive characteristic. However,
its coverage is limited only to transactions that result in cash payments or
receipts, and it considers only transactions that occur within the relevant
accounting period. Conversely, the accrual system of accounting is relatively
complex to implement and operate and demanding in terms of audit and
control. However, its strengths include coverage of noncash as well as cash
transactions and recognition of the future effects of transactions and
policy changes.
Finally, it is worth noting that relatively few governments actually use a
pure cash or pure accrual system of accounting. Modified systems are often
used. For example, governments may accrue revenues and expenses but
account for capital purchases in the period that they occur. In addition,
public sector accounting systems are often in a state of transition, continually
being modified to reflect changes in practice or changes in the external environment
in which they operate.
Accrual Accounting in OECD Countries
As noted above, there has been strong encouragement for OECD countries
to adopt accrual accounting in the public sector: “Multilateral institutions,
such as the International Monetary Fund (IMF) and the World Bank, are
encouraging governments to introduce accrual accounting, and much work