1.1 Introduction Accounting systems and reporting systems are very important for financial accountability, managing budgets and decision making. In the past, the main purpose of government accounting was to ensure proper use of public money and for this reason just a cash budget was enough. However, accrual accounting has gained great importance in many countries to ensure financial compliance as well as operational efficiency. To achieve this, businesses have to fully report their financial position including the liabilities and assets as well assess the operation costs which should include use of assets.
Accounting systems are classified into four types namely; cash, modified cash, full accrual, and modified accrual (Michael et al, 2005). They systems refer to the accounting principles which establish when events or transactions should be recognized for financial reporting. However, these accounting systems are somehow schematic; for instance, in nations with a cash based system, their accounting has two approaches, i.e. appropriation or budgetary accounting that tracks appropriations at different levels of the expenditure cycle and cash basis accounting that recognizes an event or transaction only when cash is disbursed.
Therefore, accounting requirements depend on agencies and programs, a full accrual accounting system can be appropriate for an agency which has commercial activities or delivers services while for other agencies budgetary and cash based system can be satisfactory (Michael et al, 2005). This report will focus on the differences between these accounting systems, issues of transparency for each system and Provide examples of reporting distortions or discrepancies when using specific accounting tools. 2.0 Differences between modified accrual, full accrual, and cash budget. A cash based budget refers to budget where most of the appropriations are on a cash basis which measures the flow of cash resources (Lynch & Martin, 1993).
In the cash based budget, appropriations define annual commitment and limits of payment i. e. financial obligation are met within the fiscal year and the annual tranche of multiyear commitments. Therefore, this budget fits well the need for expenditure control and compliance. This system only recognizes events and transactions when cash is paid or received i. e. as compared to other accounting systems (modified accrual and full accrual) in cash basis accounting, expenses and revenues are only recorded when they are paid no matter when they were actually invoiced (Lynch & Martin, 1993).
Therefore, financial statements generated under this accounting system cover cash disbursements, cash receipts, and opening and closing cash balances. This system is mostly used by corporate entities as compared federal agencies and governments which often use modified accrual based system. Under the cash budget where appropriations are on cash basis accounting focuses on cash rather than credit (Michael et al, 2010). According to principles of business valuation, a company’s value is measured based on the level of cash it has.
Therefore, the cash based accounting system demonstrates the future growth potential of a company and its liquidity presents an accurate picture of the organization. Moreover, this system removes uncertainties organizations may face, including dealing with bad debts since there is no credit there are no customer receivables in the accounts that might default in the future (Patrick et al, 2012).