When do Municipalities use the Cash Basis?
Some smaller municipalities will use the cash basis method if they have a low volume of financial transactions. This method is simple and straightforward, as it only requires the recording of actual cash inflows and outflows.
Some states allow certain municipalities to report on a cash basis, but it is not acceptable for federal grants, bonds, or reporting for oversight agencies. In those later instances, GAAP-compliant financial statements are prepared under the regulations of the Governmental Accounting Standards Board. This is because the simplicity and short-term focus on availability under the cash basis fall short of GAAP and GASB requirements to offer accountability for the government to act in the future.
GAAP and GASB requirements are that enterprise funds and fiduciary funds use full accrual accounting, while governmental funds use modified accrual accounting that combines accrual basis accounting for expense reporting and cash basis accounting for revenue recognition.
Governmental funds are used for non-exchange type functions where the entity gets tax revenue and provides general public services. Because modified accrual accounting agrees with the dictates of the cash basis, revenue is considered to be available when it is both measurable and collectible in the current financial period or soon enough thereafter to pay for the liabilities of that period. Expenditures are recognized when they are due and payable, which is when the entity has a legal obligation to pay and resources are available to pay the obligation.
Example:
Under the cash basis, a municipality may record tax revenues when they receive the funds even though the funds are for a period including a different fiscal period.
Under the cash basis of accounting, revenue is recorded when received (not earned) and expensed when disbursed (not incurred). Receivables boost accrual income, and payables boost accrual expenses that reduce income, but receivables and payables familiar to accrual accounting are not present using the cash basis.
Check to be sure if your end-of-year financial reports need to be on a full accrual basis. If so, adjusting entries to go from cash to accrual basis (GAAP) have to be recorded at year-end.
What’s important here?
Some municipalities will report using the cash basis for budgetary purposes and convert to GAAP-compliant financial statements at year-end. DebtBook does not offer cash basis entries, but modified accrual and full accrual accounting entries are available in the application.
