Date: 2024-11-21 Page is: DBtxt003.php bkTVM009051100
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Burgess Manuscripts
TrueValueMetrics ACTION INFORMATION FOR ALL OF SOCIETY Metrics about the State, Progress and Performance of Society, the Environment and Economy Metrics about Impact on People, Place, Planet and Profit |
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Chapter 5
ACCOUNTING'S KEY CONCEPTS 5-11 ACCRUAL VERSUS CASH BASIS The sector perspective should not be ignored ... ... ... |
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Accrual accounting
Accrual accounting Accrual accounting is used in the business world because it matches the expenses and the revenues within a reporting period so that the profit results are not distorted. This type of accounting has been the norm for commercial and industrial entity accounting since early in the industrial revolution ... but has not been used in most governmental entities. The principles associated with accrual accounting are clear, but in some government accountancy (such as the United States) the statutory authorities and the regulators have seen fit to suspend the accrual principles and allow important assets and liabilities not to be recorded in balance sheet accounts. How convenient! I tried to engage the International Federation of Accountants (IFAC) on this problem in the 1990s, but there was enormous pushback from those with power and influence. The argument gets made that the accrual method would pose an excessive burden on government accountants, yet it is a requirement for corporate entities and has been for almost 150 years! Another example of one rule for government and another rule for everyone else! Accrual principles apply when TVM Value Accountancy is used for the analysis of economic activity and all of the analysis perspectives that are possible. The same concepts of accrual apply in value accounting as in money profit accounting. This has many benefits, including the bringing into account of future impact of present activities, both beneficial and detrimental. Cash based accounting Cash based accounting is common in government organizations. The US uses a cash based system. These systems have become intertwined with budget procedures ... have become increasingly complex and legalistic and increasingly seem to be inadequate to control funds and achieve any reasonable level of accountability for anything. Cash based accounting in government is one of the weakest aspects of modern governance and makes a mockery of responsible financial management ... which is almost certainly the big reason why it has remained the favored system of accounting in government. Some countries have moved away from cash based systems in order to get better control of the financial management of government ... notably New Zealand, Australia and the UK. The move from cash based to more accrual based accounting is a substantial change with the potential for much confusion. TVM Value accounting can learn from the large scale government accounting experience ... and have an easier time simply because the scale is more manageable. |
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