* CHAPTER

Basic Governmental Accounting Concepts

 Chapter
Outlines
• Understanding the different bases of accounting
• Understanding what measurement focuses are used by
governments
• Defining and understanding the nature of assets
• Defining and understanding the nature of liabilities
• Defining and understanding the nature of net assets
 * UNDERSTANDING THE DIFFERENT
BASES OF ACCOUNTING
Non accountants tend to think, understandably, that there is
only one way that organizations record transactions.
If a government buys something and then pays the bill, one
would expect that all governments universally would record
that transaction or event the same way, at the same time.
Not so; in fact, the same government, within its same set of
financial statements, may record that simple purchasing and
bill-paying transaction in as many as three different ways.
 * UNDERSTANDING THE DIFFERENT
BASES OF ACCOUNTING
The simplest way to understand the concept of “basis of
accounting” is to view the basis of accounting as determining
when a particular transaction will be recorded in the financial
statements. In order to understand this concept, three
different bases of accounting will be examined—
1. the cash basis,
2. the accrual basis, and
3. the modified accrual basis.
4. the budgetary basis
 * Cash Basis of Accounting

Under the cash basis of accounting, revenues are recorded when cash is
received. Expenses are recorded when cash is paid out. For example, a
government purchases office supplies from a neighborhood office supply
store, Clips. The supplies are ordered on January 1, received on January
15, and paid for on January 31. Under the cash basis of accounting, no
accounting entries are recorded until January 31, when the office
supplies are actually paid for.
NOTE:
the cash basis of accounting is not an acceptable basis of accounting for
preparing governmental financial statements in accordance with GAAP.
So why look at the cash basis first? Because it is the easiest to
understand and will help you to understand the other accounting bases.
 * Accrual Basis of Accounting

Under the accrual basis of accounting, transactions are recorded

when they occur, irrespective of when actual cash is received or
paid. Revenues are recorded when earned or when the government
has the right to receive the revenue. Expenses are recorded when
incurred.
Continuing the examples started in the cash basis of accounting
discussion, for the purchase of office supplies, the transaction
actually occurs when the government receives the office supplies.
That is when it has a legal obligation (i.e., a liability) to pay the
supplier. So, under the accrual basis of accounting, the expense (and
a corresponding liability) is recorded on January 15, the date that
the supplies are received and the government owes the supplier the
money for those supplies.
 * Modified Accrual Basis of
Accounting
The modified accrual basis of accounting can be thought of as falling somewhere
between the cash basis of accounting and the accrual basis of accounting.
In other words, transactions are generally recognized when they occur (similar to
the accrual basis of accounting), but the timing of the ultimate cash receipt or cash
disbursement may have an impact on when the transaction is recorded (similar to
the cash basis of accounting.)

Many of the differences between the modified accrual basis of accounting and the
accrual basis of accounting concern the timing of when revenue is recognized.
Under the modified accrual basis of accounting, revenues are recognized (i.e.,
recorded in the financial statements as revenue) when they are susceptible to
accrual. To be susceptible to accrual, revenues need to be both measurable and
available. In determining whether revenues are measurable, the government does
not have to know the exact amount of the revenue in order for it to be subject to
accrual.
 * Modified Accrual Basis of
Accounting
Many of the differences between the modified accrual basis of
accounting and the accrual basis of accounting concern the
timing of when revenue is recognized. Under the modified
accrual basis of accounting, revenues are recognized (i.e.,
recorded in the financial statements as revenue) when they
are susceptible to accrual. To be susceptible to accrual,
revenues need to be both measurable and available. In
determining whether revenues are measurable, the
government does not have to know the exact amount of the
revenue in order for it to be subject to accrual.
 * Budgetary Basis of Accounting

The budgetary basis of accounting refers to the accounting

principles that a government uses to prepare its budget for its
main operating fund, the general fund, as well as certain
other funds called special revenue funds. Sometimes
governments use generally accepted accounting principles to
prepare their budgets for these funds, in which case the
budgetary basis of accounting would be the same as the basis
of accounting required for fund financial reporting for these
funds, which would be the modified accrual basis of
accounting.
 * UNDERSTANDING WHAT MEASUREMENT FOCUSES
ARE USED BY GOVERNMENTS

If the basis of accounting describes when transactions are

recorded, the measurement focus can be viewed as defining
what transactions are recorded.
There are two different measurement focuses that are used
in the preparation of financial statements for governments.
They are:-
 the economic resources measurement focus and
 the current financial resources measurement focus.
 * Economic Resources Measurement
Focus
The economic resources measurement focus is used in the
preparation of the government-wide financial statements and
in the fund financial statements by funds that undertake
business-type activities. These types of funds are called
proprietary funds.
 * Current Financial Resources
Measurement Focus

The current financial resources measurement focus is used in

the fund financial statements by funds that are called
governmental funds. For simplicity, think of the governmental
funds (general fund, special revenue, capital projects, and
debt service are examples) as those funds other than the
proprietary funds.
 * DEFINING AND UNDERSTANDING THE
NATURE OF ASSET

“Assets are probable future economic benefits obtained or

controlled by a particular entity as a result of past
transactions or events.”
Some of the types of assets often found on a government’s
statement of financial position are
• Cash • Cash equivalents • Investments • Taxes receivable •
Accounts receivable • Grants and other receivables •
Inventories • Capital assets • Prepaid expenses
 * Cash

The current financial resources measurement focus is used in

the fund financial statements by funds that are called
governmental funds. For simplicity, think of the governmental
funds (general fund, special revenue, capital projects, and
debt service are examples) as those funds other than the
proprietary funds.
 * Current Financial Resources
Measurement Focus

The current financial resources measurement focus is used in

the fund financial statements by funds that are called
governmental funds. For simplicity, think of the governmental
funds (general fund, special revenue, capital projects, and
debt service are examples) as those funds other than the
proprietary funds.
 * Current Financial Resources
Measurement Focus

The current financial resources measurement focus is used in

the fund financial statements by funds that are called
governmental funds. For simplicity, think of the governmental
funds (general fund, special revenue, capital projects, and
debt service are examples) as those funds other than the
proprietary funds.
 * Current Financial Resources
Measurement Focus

The current financial resources measurement focus is used in

the fund financial statements by funds that are called
governmental funds. For simplicity, think of the governmental
funds (general fund, special revenue, capital projects, and
debt service are examples) as those funds other than the
proprietary funds.
 * Current Financial Resources
Measurement Focus

The current financial resources measurement focus is used in

the fund financial statements by funds that are called
governmental funds. For simplicity, think of the governmental
funds (general fund, special revenue, capital projects, and
debt service are examples) as those funds other than the
proprietary funds.
 * Current Financial Resources
Measurement Focus

The current financial resources measurement focus is used in

the fund financial statements by funds that are called
governmental funds. For simplicity, think of the governmental
funds (general fund, special revenue, capital projects, and
debt service are examples) as those funds other than the
proprietary funds.