When do municipalities use full accrual accounting?
The full accrual basis accounts for all transactions and records both long-term and short-term balances.
Proprietary funds use the full accrual method of accounting since proprietary fund revenues and expenses most closely represent private sector financial transactions. This is because governments do not need to reflect the cash on hand for these activities like they do with other sources of funds designed to meet obligations, like bond payments.
What’s the difference between modified accrual and full accrual?
Full accrual accounting recognizes expenses as liabilities when incurred, not paid, and revenues when earned, not received. In other words, full accrual accounting tracks transactions, not cash flow.
In contrast, modified accrual accounting mixes aspects of the cash and full accrual bases. Specifically, under modified accrual accounting, revenue is accounted for using the full accrual basis; that is, revenue is recorded when the transaction occurs. However, expenses are accounted for using a cash basis or at the time when cash exchanges hands.
A municipality may want to use fund accrual accounting if it has little debt and intends to maintain strict control over its cash flow. But, if a municipality wants more flexibility in its budget, the modified accrual method may be more appropriate.
Example:
A municipality records lottery ticket sales in its proprietary fund. Since these funds use the full accrual basis, they would record lottery ticket revenue when tickets are sold, not when cash is received.
What’s important here?
Financial statements must be presented using full accrual accounting. Therefore, no conversions need to be made for proprietary funds since they are already recorded using the full accrual method.
That means government and fiduciary funds may require adjustments to convert cash or modified accrual data to the full accrual basis.
