accrual accounting

accrual accounting

The Importance of Accrual Accounting

1. Introduction

An analysis of the transparency of public authorities reveals that procedures for disclosure and access to public information usually cover traditional areas of public authority operations. It is relevant to verify how successfully the economic size of the state is disclosed at public authorities, including government and local public treasurers, who have a very important role in ensuring transparency of operations of public authority accounting systems, able to provide decisions with a wide scope and be an information source for relevant users. Accrual accounting is much more transparent than the adopted cash flow accounting in Lithuanian practice; however, cash flow statements at authorities retain a significant value in revealing part of the economic size of authority operations. Accrual accounting, compared to cash flow accounting, has the following advantages: it guarantees the recording of operations at the moment of creation, immediately or after creating corresponding obligations, instead of subsequently occurring payment operations. Periodical consolidation of budget financial statements intended for the public rather reveals the level of economic size of the state. As accrual accounting is transparent, there should be no problem in identifying the thing actually bought with the resources noted in economic size indicators of financial statements and indicating the acquired thing actually recorded in accounting.

The successful functioning of any public authority, including government and local public authority, and its efficient and transparent operations are vital for citizens. The need for public authorities to ensure the transparency of their operations grows naturally along with the public demand for transparent and efficient operations in order to achieve greater confidence in state institutions, strengthen the rule of law, and accelerate economic progress. The aim of ensuring transparency at public authorities is a legal relation related to substance providing the procedure for disclosure and access to public information and sustainability of the information disclosure. Transparency in decision-making processes in public authorities is implemented through the principle of open governance.

2. Benefits of Accrual Accounting

The important thing in connection with this development towards a more extensive use of accrual accounting is that there is a growing understanding that the way we present the accounts affects the quality of the decision-making process. One recognizes that the accounting system has a more important function than to be just a framework for the registration of money transactions, and that accounting must contribute to the interpretation and clarification of the financial consequences of different decisions. Earlier, and to some extent still, the belief in the expressions of financial statements constructed according to the cash accounting system was rampant. These financial statements bore such names as “the result” and “the profit forecast”. The accounts were interpreted so that one concluded “here we have the result so far”, “this year’s expected surplus” and “the annual net operating.” But the biggest difference of the new accounting system will be that the special problem that leads to statements according to the given paradigm will disappear. During 2001, NOMESKO also chaired a working group with the aim of identifying some of the challenges that the government faces in connection with the accounting change. Three of the main arguments for introducing a new system were that the financial management should be strengthened, that the financial information should be understood by the parties that were intended users of the financial information and that management could take place in a more businesslike form. Each of these arguments will have efficiency-enhancing consequences for the government’s activities and further on for the welfare of the community.

In recent years, many governments have introduced new accounting systems that involve both cash and accrual accounting, and for the new public accounting systems – correctly – accrual accounting is emphasized. Norway’s policymakers are planning to introduce the new accounting system from the state budget in 2004. Many European countries are already using the type of accounting system that is now being introduced, and several organizations offer advice on how to make the transition. The introduction of the new accounting system has been delayed and the accounting system is now introduced for the state budget from 2004.

3. Implementation of Accrual Accounting

Despite showing initial resistance to the innovation of an accrual accounting system, many countries have moved decisively in this direction.

Moreover, the public sector is characterized by a large number of different organizations such as schools, communities, universities, research centers, regional institutions, museums, theater systems, and many others, whose accounting settings are not homogeneous. For this reason, it is possible to foresee a period of profound changes with the definition of common accounting rules, cost announcement, corporate finance plans, elimination of intra-sectoral subsidies, and a more rational and transparent allocation of resources from the state to the local governments.

The accrual implementation will provide a unique and coordinated institutional environment that is absent in the current Italian public management system. However, the adoption of this tool by the public sector may pose numerous problems, especially if it is aimed at using the Public Administration’s accounting information to facilitate government choices and the work of the Court of Auditors.

To address the different points of view in the implementation of accrual accounting in the public sector, 21 Italian professional experts participated in a comprehensive Delphi study. Under a single framework known as General Financial Regulations (GFR – Ragioneria Generale dello Stato 2007), the public sector implementation of the accrual accounting system has been a required requirement.

The idea of implementing accrual accounting in the public sector has generated interest among researchers. In the recent past, many public sector institutions have attempted to move from cash to accrual system of accounting. Harmonization of public sector financial management using a common accounting framework can be very beneficial, not only in terms of overall performance, but also in terms of budget coherence and alignment.

4. Challenges of Accrual Accounting

The upgrading should pass through several phases. The Ministry of Finance rules in Indonesia have been released to organize organization restructuring associated with accounting procedures and financial reporting. Before this issuance, the Ministry of Religion must collect support from hundreds of organizations which are under its supervision. These organizations are religious courts, the Ministry of Religious Court, religious universities, religious and pilgrimage affairs, and vocational schools of religious theology. The tasks and responsibilities of each institution are different. It makes sense that each institution, may or law, knows the financial situation. The accrual of upgrading represents a significant effect on the responsibility of religious service institutions at the ministerial level. Accrual means to prepare financial statements in a certain form, manage and use resources effectively and efficiently. In small organizations, cash base, the task to prepare cash reports and submit cash reports is the financial staff’s duty. The head of the organization is responsible merely to sign the report. Accrual is different; the head must contribute to consolidation and recognize ministry duty. Accrual reporting necessitates the head to read financial reports because this accounting system acts for the performance reflection. Accrual implies the head’s responsibility for financial management and organizational operational excellence.

The implementation of accrual accounting in the public sector imposes some challenges. Experience from some countries such as Australia, New Zealand, and the United Kingdom has been used in dealing with public sector changes from cash-basis to accruals as a benchmark. The most significant deficit of upgrading from cash base to accruals has been the topic of accountability. The demand for accountability by the legislature body and central government has increased. However, what American studies have found is that accrual accounting prevents the organization from deciding on important events, a kind of communication that legislature body interests are simply technical.

5. Conclusion

The case proposed by the author, however, has not revealed anything particularly new, since the necessity of accrual accounting is long recognized and topical, public discussion, such as the exchange rate at the end of p. 2011 about the transaction costs of IFRS, also aims to improve accounting. Nonetheless, more or less, the critics of the nation’s generally accepted accounting systems outlined here are also agreed on that, but in a nutshell and from the perspective of audit services. In particular, the tangled constraints of the expert circles make it for the academic increasingly difficult to make his complicated research-related issues accessible to a broader readership through the publication in scientific journals. This, therefore, may need to be excused an autodidact like the author willingly aware of possible careless deficiencies in an argumentation with these pages, the readers of works of a foreign field somewhat facetiously as book.

As the timing of revenue and costs is crucial for the assessment of economic performance and management of companies, accounting is certainly more than tracking cash transactions. Unfortunately, the conventional single-entry accounting cloaks this information largely, especially as bookkeeping results primarily from the compliance with tax law requirements. However, without suitable accounting data, it is ultimately necessary that independent research is required to assess the economic performance of companies. This chapter, therefore, emphasizes the urgent need for companies to adapt their accounting to their information needs and recommends the implementation of accrual accounting as the only reasonable alternative.