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CandleFocus Glossary Editor
Modified accrual accounting is a hybrid approach to recording transactions that combines elements of accrual and cash basis accounting. It is widely used by government entities for ensuring fiscal accuracy and effective budgeting. This approach is based on the principles of fiscal periodicity, materiality, and economic entity.
In modified accrual accounting, revenues are recognized as soon as they become measurable/available, which is often when the cash hit the bank account. Similarly, expenses are recorded when the related liabilities become due or obligations are incurred. This double-entry bookkeeping approach helps to match related expenses with revenue for determining profits of a certain period. Such an approach is much more accurate than the cash basis accounting where revenue and expenses are recorded when cash is received and paid.
Unlike accrual basis accounting, modified accrual keeps a close eye on the cash flow by categorizing assets, liabilities and revenues into current and non-current categories. If a transaction involves a current asset, revenue/expense is recorded when cash is received; whereas if it involves a long-term asset, an accrual is recorded when there is a change in future cash flow.
Despite its accuracy, modified accrual accounting cannot be used by businesses preparing financial statements in accordance with IFRS or GAAP. Although it is a widely accepted accounting method by government entities and nonprofit organizations, businesses are prohibited from using modified accrual in order to maintain transparency and accuracy of their financial statements.
Modified accrual is an effective approach for government agencies and nonprofit organizations to manage their finances in furtherance of their mission. It is a method that neatly combines the accuracy of accrual accounting with the simplicity of cash basis accounting. Depending on their unique requirements, government entities and nonprofit organizations can use this accounting method for extra clarity and accuracy with their statements.
In modified accrual accounting, revenues are recognized as soon as they become measurable/available, which is often when the cash hit the bank account. Similarly, expenses are recorded when the related liabilities become due or obligations are incurred. This double-entry bookkeeping approach helps to match related expenses with revenue for determining profits of a certain period. Such an approach is much more accurate than the cash basis accounting where revenue and expenses are recorded when cash is received and paid.
Unlike accrual basis accounting, modified accrual keeps a close eye on the cash flow by categorizing assets, liabilities and revenues into current and non-current categories. If a transaction involves a current asset, revenue/expense is recorded when cash is received; whereas if it involves a long-term asset, an accrual is recorded when there is a change in future cash flow.
Despite its accuracy, modified accrual accounting cannot be used by businesses preparing financial statements in accordance with IFRS or GAAP. Although it is a widely accepted accounting method by government entities and nonprofit organizations, businesses are prohibited from using modified accrual in order to maintain transparency and accuracy of their financial statements.
Modified accrual is an effective approach for government agencies and nonprofit organizations to manage their finances in furtherance of their mission. It is a method that neatly combines the accuracy of accrual accounting with the simplicity of cash basis accounting. Depending on their unique requirements, government entities and nonprofit organizations can use this accounting method for extra clarity and accuracy with their statements.