ACCOUNTING PRACTICES &

DEVELOPMENT IN PUBLIC SECTOR

Accrual accounting

Introduction
The Malaysian Government has adopted &
developed various accounting systems in ensuring
effectiveness & accountability in accounting &
reporting for public sector organizations
Among the accounting systems being used are
Accrual Accounting, Micro Accounting System
(MAS), & Standard Accounting System for
Government Agencies (SAGA)

INTRODUCTION
Heeks (1998) states that:
The creation of new information systems
is an essential component in the creation of
accountability.
When a decision is taken, information about
the decision & its outcomes must flow to all
those to whom the decision maker is
accountable
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ACCRUAL ACCOUNTING
Accrual accounting concept states that: Revenues
are recognized in the period in which the revenues
are earned & expenses are recognized in the
period in which the expenses are incurred in
generating the revenue
It is a technique of recognizing revenues &
expenses of an organization over a particular
period for the purpose of determining profit

ACCRUAL ACCOUNTING
It does not require any movement of cash
for accounting purposes
Because accrual accounting makes the
distinction between the receipt of cash &
the right to receive; and the payment of
cash & the legal obligation to pay cash.

ACCRUAL ACCOUNTING
However, Jones (2000) pointed out that there is
another method called MODIFIED ACCRUAL
ACOUNTING SYSTEM
This is a new & compromised technique used by
most Government for fund reporting on spending
activities
Some Government agencies in the United States &
their local authorities have adopted this method
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ACCRUAL ACCOUNTING
Under the Modified Accrual Accounting System:
All revenues are recognized either when they are
received in cash or when collection of the amount
can be reasonably estimated to be received in the
near future
All expenditures are recognized in the period in
which goods & services are received or a liability
is incurred
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CASH, ACCRUAL & MODIFIED

ACCUAL BASES OF ACCOUNTING
BASES OF ACCOUTNING
Point of Recognition

REVENUE

EXPENDITURE

CASH

When cash is
received
When cash is
paid

ACCRUAL

MODIFIED

When revenue is
earned

When measurable
& available

When expenses
is incurred

When expenditure
is incurred

APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
Currently the Malaysian public sector uses
either cash basis, modified cash or accrual
basis of accounting in preparing their
accounts
Abdul Samad (2001) states that these
situations exist because there is no specific
provisions for public accounting & financial
management
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APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR

Neither found in the following rules or

regulations:
1. Financial Procedure Act 1957, nor the
2. Unclaimed Monies Act 1965, or the
3. Pension Fund Act 1991
Stating the mode of accounting to be
adopted by the Public Sector organizations
for preparing their accounts
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APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
Many countries have begun to change their
accounting techniques from cash basis to either
modified cash basis, accrual basis, modified
accrual basis or a combination of those techniques
In Malaysia, there is no such body similar to the
US Government Accounting Standard Board or to
the Public Sector Accounting Standard Board of
Australia to look into the pronouncements or
guidelines in formulation standards applicable to
the public sector as a whole
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APPLICATION OF ACCRUAL
ACCOUNTING IN PUBLIC SECTOR
However, Malaysia is still in the process of
of studying & analyzing the feasibility for
the migration to accrual accounting as that
being done by other countries in the world
Countries such as Canada, New Zealand,
Australia & the United Kingdom, have
successfully migrated to accrual accounting
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ADVANTAGES OF USING
ACCRUAL ACCOUNTING
1. The use of accrual accounting will provide a true
financial position of the public sector agencies
It is believed that accrual accounting can show
exactly how much an organization earned rather
than how much they have collected in terms of
revenue in particular accounting period
It enables expenses incurred to be matched with
revenue earned in the same period
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ADVANTAGES OF USING
ACCRUAL ACCOUNTING
2. It has been accepted as a standard to measure
performance in a similar manner to the Private
Sector
That profit measured implies the level of success
in a particular period
The cash basis merely provide the amount of
cash inflows & outflows in a particular period
Thus restricting the measure of performances
among Public Sector agencies & discouraging
inter-sector comparisons
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ADVANTAGES OF USING
ACCRUAL ACCOUNTING
3. The presentation of both an operating statement
& a statement of financial position will allow the
calculation of performance indicators
The performance indicators can be used to
compare targets with other Public Sector or
Private Sector entities
This is expected to create a more efficient
operations in Public Sector entities
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DISADVANTAGES OF
ACCRUAL ACCOUNTING
1. Accrual accounting brings about more
subjectivity into the accounts & this could
distort the accounting information that is being
produces
For example, the use of different depreciation
methods would lead to a different amount of
depreciation expenses to be charged to a
particular accounting period, as well as
The estimates used in determining the salvage
value of an asset & its expected useful life
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DISADVANTAGES OF USING
ACCRUAL ACCOUNTING
2. During period of rising prices, the
relevance of the accrual concept is rather
limited
For example, during inflation the same
quantity of sales made will result in a
higher sales value figure compared to
sales made during a period of normal
prices
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DISADVANTAGES OF USING
ACCRUAL ACCOUNTING
3. The cost of switching to an accrual accounting
system will be high as it involves more
administrative & accounting costs
All Government assets must be measured &
valued before being reported for the first time in
the Balance Sheet
The numerous numbers of Government assets
with different types & of different nature would
involves a large amount of costs to be allocated
& used for measuring those assets
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CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUNTING
1. Accrual accounting does not support the main
objectives of accounting for the Public Sector
i.e. for stewardship & performance evaluation
purposes
These objectives require Government
agencies to report fully, frankly & promptly
upon the stewardship of receipts, payments,
assets & liabilities
In addition, such reports must disclose
resources used & how resources were used
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CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUNTING

With regard to accounting for performance

evaluation purposes, it can only be achieved by
combining the analysis of financial statements
with information that has been produces from
other available resources
2. The iterative changes in the implementation
process involves additional works & require
development of new skills by Department
finance officers
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CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUTNING

The time factor & lack of skilled

personnel to handle the conversion to
accrual accounting in the Public Sector
has contributed to the resistance towards
the changes required by accrual
accounting

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CHALLENGES IN IMPLEMENTING
ACCRUAL ACCOUTNING
3. The conversion to accrual accounting will
require the Public Sector organizations to
identify their fixed assets
The peculiar characteristics & nature of
Public Sector assets may cause difficulties
in determining the value of those assets
In addition, there will also be problems in
providing depreciation on those assets
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THE FUTURE OF ACCRUAL

ACCOUNTING IN MALAYSIA
The adoption & use of accrual accounting in
Malaysia is seen feasible as the
corporatization & privatization of major
Government projects have proven to be
successful
Examples include Syarikat Telekom
Malaysia, Tenaga National Berhad & Pos
Malaysia
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THE FUTURE OF ACCRUAL

ACCOUNTING IN MALAYSIA
Upon privatization exercises, the concept of
valuation of assets are needed to comply
with the commercial requirements
Therefore, the Government entities will be
compelled by circumstances to produce
accounts of acceptable standards for
commercial use.
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