Cash accounting policies and accrual accounting policies when applied respectively to the same transaction or events of the same entity will produce different pictures of the financial performance, position and cash flow information of the entity. Thus, the choice of alternative policies needs to be given much consideration. The International Public Sector Accounting Standards Board (IPSASB) permits the use of cash accounting policies whilst encouraging the application of accrual accounting policies in the preparation of financial reports for public sector.
Required:
Discuss the difference between cash accounting policies and accrual accounting policies in terms of recognition and or treatment of the following in the Financial Statements: (4 marks)
i) Revenue
ii) Capital asset
iii) Allowances and provisions
iv) Contingent liability
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Revenue
Cash accounting policy
Revenue is recognized in the statement of cash receipt and cash payment when received. No asset is recognized when the revenue is not received at the reporting date.
Accrual accounting policy
Revenue is recognized when earned but not when received. Revenue receivable are treated as assets on the statement of financial position.
Capital asset
Cash accounting policy
Capital assets are recognized as expenditure for the year in which the asset was purchased or developed. No depreciation is charged to the determination of cost of service of the period.
Accrual accounting policy
The asset is recognized as an asset. The cost of the asset is written off over its useful life in the determination of financial performance.
Allowances and provisions
Cash accounting policy
No room for allowances and provisions since recognition is purely on cash basis.
Accrual accounting policy
Allowance and provisions are made on receivables, stock loss and non-current assets.
Expenditure
Cash accounting policy
Expenditures are recognized when paid for. Unpaid expenditures are not accounted for.
Accrual Accounting Policy
Expenditure is recognized in the determination of financial performance when incurred not when paid for. Expenditure outstanding is reported as liability in the financial position of the entity.
(1 mark for each policy explained= 4 marks)