- 6 Marks
Question
There are two main bases of accounting in the public sector, and these are cash basis and accrual basis. These two bases differ in many respects, though there are some similarities.
Required:
Contrast cash basis and accrual basis of accounting in the public sector in terms of:
i) Recognition of revenue
ii) Recognition of expenditure
iii) Disclosure of non-financial assets
iv) Notion of depreciation
Answer
The difference between cash basis and accrual basis of accounting is as follows:
| Point of Difference | Cash Basis | Accrual Basis |
|---|---|---|
| Recognition of revenue | Revenues are recognized only when cash is received from the transaction or event. | Revenue is recognized when it is earned, and any revenue due but not received is reported as an asset (receivable) in the statement of financial position. |
| Recognition of expenditure | Expenditures are recognized when payment is made for the transaction or event in the period in which the payment was made. | Expenditures are recognized when incurred, being the time obligation has been established by the contract. Any such expenditure not paid within the year is reported as a liability (payable) in the statement of financial position. |
| Disclosure of non-financial assets | Non-financial assets acquired during the year are treated in whole as expenditure in the statement of financial performance and thereby not disclosed in the statement of financial position. | Non-financial assets acquired are capitalized and reported in the statement of financial position at carrying amount. |
| Notion of depreciation | No depreciation is charged since the whole cost of the assets is written off at the time of acquisition. | Depreciation is recorded as an expenditure in the statement of financial performance. |
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