What are the disadvantages of cash basis of accounting

There are about 6 (six) bases of public sector accounting as compare to only 3 (three) bases of accounting in financial accounting.Summary of ContentsAdvantages and Disadvantages o

What are the disadvantages of cash basis of accounting

There are about 6 (six) bases of public sector accounting as compare to only 3 (three) bases of accounting in financial accounting.

Summary of Contents

  • Advantages and Disadvantages of cash basis in public sector accounting
  • MEANING OF PUBLIC SECTOR ACCOUNTING BASIS
  • WHAT ARE THE BASES OF PUBLIC SECTOR ACCOUNTING
  • CASH BASIS ACCOUNTING IN PUBLIC SECTOR ACCOUNTING
  • ADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING
  • DISADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING
  • CONCLUSION

Advantages and Disadvantages of cash basis in public sector accounting

But in this particular public sector accounting guide we will consider the advantages and disadvantages of cash basis accounting in public sector or the advantages and disadvantages of cash basis in public sector accounting.

first let see the meaning and explanation of public sector accounting basis.

Related Guide: Advantages of accrual basis accounting in public sector

MEANING OF PUBLIC SECTOR ACCOUNTING BASIS

These are the main fundamental assumptions that underpin financial statement preparation in the public sector.

It refers to the order in which revenues, expenditures, and transfers are recognized in the accounts and presented in the financial statements, as well as the accompanying assets and liabilities.

It establishes a framework for tracking the governments and government agencies financial activities, as well as when those actions are recognized and reported in the financial statement.

WHAT ARE THE BASES OF PUBLIC SECTOR ACCOUNTING

There are several accounting bases that can be applied in public sector accounting depending on the policies and regulations of the government.

the public sector accounting bases include the following:

  1. Cash Basis
  2. Accrual Basis
  3. Budgetary / Appropriation Basis
  4. Commitment Basis
  5. Modified Accrual Accounting Basis and
  6. Modified Cash Accounting Basis

IPSASB allows for the use of both cash basis (in the short term) and accrual basis (ultimately) form of financial reporting.

The implementation of accrual-based financial reporting is recommended as the ideal goal for all public financial reporting.

This IPSASB has created standards expressly for nations that continue to report on the cash basis of accounting but encourage the voluntary disclosure of accrual-based data.

Read Also: Disadvantages of accrual basis accounting in public sector

Linkages with budgeting (which is still done on a cash basis in many countries) and statistical reporting standards, such as the International Monetary Funds Government Finance Statistics, are also being considered by the IPSASB.

CASH BASIS ACCOUNTING IN PUBLIC SECTOR ACCOUNTING

Contrary to the accrual basis, the cash basis of accounting holds the view that only the cash effect of transactions is recorded.

In other words, revenue is recorded when cash is received and expenditures find their way into the accounts only when cash is paid.

Acquisition of capital assets is recorded as cash outflow when cash is paid and no depreciation is charged on such assets. This position implies that credit transactions

READ ALSO:WHAT ARE THE SOURCE OF REGULATORY FRAMEWORK

The financial statements prepared under the cash basis provide readers with information about the sources of cash raised during the period, the purposes for which cash was used and the cash balances at the reporting date.

Hence, the statement of financial position reflects only a balance of cash and cash equivalent which is represented by fund balance while income statements simply are a summary of cash receipts and disbursement.

ADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING

  • The accounting basis is relatively simple in terms of its development, management and administration as compared to another accounting basis. this makes it less costive to operate as the basis does not require any sophisticated accounting system and expertise.
  • it avoids the subjective judgement required in another accounting basis such as the accrual accounting basis such as treatment of depreciation and provisions.
  • it provides a means of monitoring receipt and payment against cash budget. Government is concerned with the movement of cash within the public sector system, that is, how revenue is obtained and how these revenues are utilized as well as the balance left as against budget.
  • it facilitates fiscal stewardship in that in the public sector where the concept of cash limit is used in budgeting the use of resources, compliance can be determined easily.

DISADVANTAGES OF CASH BASIS IN PUBLIC SECTOR ACCOUNTING

  • The net worth of the government (defined as the excess of an asset over liabilities) cannot be ascertained under this basis.
  • Measuring the performance of an organisation under this basis becomes difficult since the system provides no information on capital and income which serves as a basis for performance financial measurement.
  • The going concern concept is less applicable under this accounting basis since assets and liabilities which give an indication of going concerned are written off in the year in which they occurred.
  • Tracing receivables and payables becomes very difficult since no accounts are maintained on creditors since failure to do so shift the future source of loan.

CONCLUSION

Advantages and Disadvantages of cash basis in public sector accounting. IPSASB allows for the use of both cash basis (in the short term) and accrual basis (ultimately) form of financial reporting.

This guide looks at the advantages and disadvantages of both forms of accounting. The accounting basis is relatively simple in terms of its development, management and administration as compared to another accounting basis.

This makes it less costive to operate as the basis does not require any sophisticated accounting system and expertise. The net worth of the government (defined as the excess of an asset over liabilities) cannot be ascertained under this basis.

Note:

The public sector accounting post or guides or articles are not limited to these 10 countries alone:

  1. Ghana
  2. Nigeria
  3. United States
  4. Uganda
  5. India
  6. Kenya
  7. Philippines
  8. Malaysia
  9. Tanzania
  10. South Africa

But instead, it targeted all the countries in the world since public sector accounting is being practiced in every country in the world, so wherever country you are in the world, you can read public sector guides here since public sector accounting applications are similar.

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