What Is Modified Accrual Accounting? (And Who Uses It)

Modified accrual accounting is an alternative bookkeeping method that combines accrual basis accounting with cash basis accounting

cash basis accounting
Cash basis refers to a major accounting method that recognizes revenues and expenses at the time cash is received or paid out. This contrasts accrual accounting, which recognizes income at the time the revenue is earned and records expenses when liabilities are incurred regardless of when cash is received or paid.

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. It recognizes revenues when they become available and measurable and, with a few exceptions, records expenditures when liabilities are incurred.

Accrual accounting is a widely used method for recognizing revenue and expenses in accounting. It is the preferred method for financial reporting for most organizations and is required by government agencies and other public organizations. Modified accrual accounting is a specialized variation of the accrual accounting method that is designed to provide more detail about a company’s true financial condition. This method is most often used by government and nonprofit organizations for their financial reporting, as it is a more detailed and accurate way of recording the transactions of the organization. In this blog post, we will explore the basics of modified accrual accounting and discuss its advantages and disadvantages. We will also discuss the best practices to ensure your organization is compliant with modified accrual accounting requirements and explain why it is important for organizations to use this specialized accounting method.

Modified Accrual Accounting | Current Economic Financial Resources Measurements | CPA Exam

Who uses modified accrual accounting?

Government agencies typically use modified accrual accounting. Although they are permitted to do so, public, for-profit businesses may choose to use an alternative accounting technique that complies with IFRS or GAAP (generally accepted accounting principles). Modified accrual accounting is a system that businesses can use internally, but audited records frequently demand the accrual-basis system. Government Accounting Standards Board (GASB)-established modified accrual accounting practices are used by state and local governments.

Because they are primarily focused on current-year financial obligations, government organizations employ and accept this accounting strategy. These organizations’ primary financial goals include determining whether government agencies use resources in accordance with legally adopted budgets and demonstrating whether current-year revenues are sufficient to cover current-year expenses. Modified accrual accounting can help government organizations achieve both of these objectives because it enables them to take into account short-term liabilities and assets and assists them in allocating available funds among various organizational units.

What is modified accrual accounting?

A revenue system known as modified accrual accounting combines components of accrual-basis and cash-basis accounting styles. Only when cash is received or paid in are revenues or expenses recorded under cash-basis accounting. Regardless of whether there are any cash transactions, accrual-basis accounting records revenues or expenses. Cash-basis accounting documents short-term assets, while accrual-basis documents long-term assets. Both have elements, and modified accrual style takes into account whether an asset or debt is long-term or short-term. With this approach, expenditures are recognized as liabilities when they become measurable revenues.

Professionals may record short-term assets, such as inventory and accounts receivable, using modified accrual accounting when the impact of the event changed the company’s cash balance. When this happens, accountants use a cash basis to record all transactions on an income statement and omit short-term assets from the balance sheet. Professionals can also apply this technique to long-term assets, which include fixed assets and long-term debt and are affected by economic events that may last for several recording periods. In order to depreciate, amortize, or deplete the asset for the duration of its liability, experts record these items on a balance sheet.

What are the benefits of modified accrual accounting?

The combined use of cash-basis and accrual-basis methods results in the advantages of modified accrual accounting. On a monthly report, for example, the cash-basis aspect provides a clear picture of the organization’s finances for the immediate future. The cash-basis system accounts for both past and present transactions because it records deposits and withdrawals as they occur. A “surplus” may be recorded because the cash-basis system does not take into account future transactions that have not yet occurred.

Professionals may find the modified accrual accounting’s accrual basis feature useful in these situations. Even if the transaction is still pending, the accrual-basis side of the system manages revenues and expenses as they become obligations. This ensures there is no double spending of account funds by accounting for the allocation of funds toward future expenses. The organization will have a clear representation of all transactions, both past and present, in this way.

What is the primary difference between full accrual accounting and modified accrual accounting?

Modified accrual accounting and full accrual accounting recognize current long-term debt differently, which is one of their main differences. Companies that employ full accrual accounting record the portion of long-term debt as it is incurred and at its fair value. Modified accrual accounting, on the other hand, determines the current portion of long-term debt as it evolves, deteriorates, and depletes over the course of its existence.

The modified accrual accounting system, as opposed to other approaches, such as full accrual accounting, can represent recent expenses and revenues more accurately because short-term events are recorded by professionals using it on a cash basis. As a result, government agencies are able to continuously adjust their budgets as needed to meet the demands of government entities’ spending and make sure that their spending is in line with the agencies’ plans.

Tips for using modified accrual accounting

Here are some pointers for using this accounting method if you work in finance:

FAQ

Which government funds use modified accrual accounting?

All governmental funds (general, federal special revenue, other special revenue, general debt service, debt service, and capital projects) are accounted for on a modified accrual basis.

What is the difference between modified cash and modified accrual basis?

The same types of accounts are used by modified cash basis and accrual basis. The accrual method, however, requires you to record income when transactions occur, whether or not money is transferred, and expenses when you are billed.

Which financial statements are prepared using modified accrual accounting?

(3) Modified accrual accounting is used to time revenues and expenditures for fund-based financial statements of government funds, and accrual accounting is used for governmental activities for government-wide financial statements.

What is modified cash accounting method?

The two main methods of bookkeeping, cash and accrual accounting, are combined in modified cash basis, an accounting method. By recording sales and expenses for long-term assets on an accrual basis and those for short-term assets on a cash basis, it aims to achieve the best of both worlds.

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