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Due to ease of compilation of information, Cash-Basis of Accounting was used

by governments across the world. Some benefits of cash-basis of accounting

are:

• Government budgets & appropriations are cash based. Monitoring of

receipts and spending are easier.

• Cash based financial reports are budget compliant.

• Principles underlying the cash basis are easy to understand and easy to

explain.

• Compilation of cash-based information is easier.

• Operating costs are lower.


• No need to exercise any judgment in determining the amount of cash

flows for the period.

4. Cash-Basis of Accounting System, however, has following limitations/

shortcomings:

• Information on assets and liabilities is not available.

• Impact of consumption of stock of net assets held by government is not

known.

• Cash accounting focuses solely on the cash flows of the current period.

• Accountability of government for use of its resources becomes difficult.

• Reporting of receipts and payments in great detail may lead to problems

in understanding the information.

• There is no system of reporting of contingent liabilities which may have

significant impact on future revenues.

• Matching of costs and benefits is not possible.

Major benefits of adoption of Accrual-Based Accounting System and

International Public Sector Accounting Standards (IPSASs) are summarized as

under:

• The quality of Government Financial Reporting can be improved

manifold.

• Comparable financial information is available.

• Harmonization of Financial Reporting within the Government entities.

• Reliability of financial information increases

• Performance evaluation becomes easier.


• Compliance Reporting is possible with reference to principles and

standards.

• Accountability is ensured.

• Efficient and standardize Financial Reporting system results into better

Decision-Making.

• Information on assets and liabilities are readily available.

• Matching Costs are recorded against the revenues.

.
Cash Basis of Accounting is a simple method which can be learnt quickly and

performed with confidence. It does not require training as a book keeper or an accountant

to understand the method, so it can be performed almost by all with basic education. In

contrast, it is not in accordance with the Generally Accepted Accounting Principle or

GAAP unlike the Accrual Basis. It presents and unrealistic view of financial transaction.

Prepayments, Accruals, Debtors (Account Receivables), Creditors (Account Payables)

etc, are completely ignored. It does not follow the matching concept.

One of the benefits of Accrual Basis is that in addition to the cash flow information, users

will also have additional information about assets and liabilities. Accrual-based

accounting keeps better track of assets and liabilities than cash basis accounting, making

it easier to see where a business really stands. Financial reports prepared under this

method also allow users to assess accountability for all resources the entity controls and

how those resources are used. This facilitates better asset management, including better

maintenance, more appropriate replacement policies, identification and disposal of

surplus assets, and better management of risks such as loss due to theft or damage.

But despite of these advantages, there are still drawbacks to accrual-based accounting.

One of those is that it is relatively more complex than the Cash Basis. Some aspects are

more difficult than cash implementations. For example; it is difficult for a government

organization to know the full amount of tax revenue that it is likely to receive at a given

time. It can also provide information overload, particularly for small entities. In addition,

setting up an accrual basis business also involves burdensome task of identifying and

valuing all of the company's assets and liabilities.


Confusion may also exist during the application of accrual basis because net income

does not equal the period's change in cash. Accrual-based accounting also doesn't track

cash flow very well unlike the Cash Basis of accounting. It is entirely possible, for

example, for an accrual-based income statement to show an impressive profit while cash

flow is very poor. Despite this drawback, most large businesses rely on accrual basis

accounting because of its increased accuracy.

It is possible to convert Cash Basis to Accrual Basis or vice- versa

Each of these methods has its own advantages and drawbacks. While some

organizations have the choice of either working with Accrual basis or the Cash basis,

but for others, it is required by regulation to use the Accrual basis. Whichever

method is chosen, the important thing is to properly satisfy the reasons for its

adoption

Read more: Accrual Accounting Pros & Cons |

eHow.com http://www.ehow.com/about_5437604_accrual-accounting-pros-

cons.html#ixzz127D7Qbwy

Adams, R. A. (2006) Public Sector Accounting and Finance. Revised ed. Lagos,
Nigeria: Corporate Publishers Ventures.

Nwaorgu, I. (2003) Public Sector Accounting and Finance. Nigeria: Beans


Expressions Nig.
Simons, H and Smith, J. M. (1972) Intermediate Accounting: Comprehensive
Volume. Cincinnati, USA: South-Western Publishing Co. in Akpakpan, B. A. (2002)
An Introduction to Financial Accounting. Kaduna, Nigeria: Abamm Publishing Co.

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