Modified accrual accounting combines cash and accrual methods to record obligations when incurred and expenses when paid. It is used by government agencies to avoid appearing to have a surplus. It clarifies short-term financial reports and incorporates the cash and accrual methods.
Modified accrual accounting is a technique that combines the cash method of accounting with the accrual method of accounting. It is used to ensure that obligations are recorded when incurred and expenses are recorded when paid. In essence, it represents the items that are measurable and available in the accounts. Government agencies frequently use this method.
The main purpose of the modified accrual method of accounting is to avoid the appearance of having a surplus when in fact it is earmarked for a future purpose. For this reason, income is recognized when it is available to be used as a liability. This does not necessarily mean that the funds are immediately available, but rather that they will be raised in the short term. A typical period limit for receiving funds using this method is 12 months.
Although in modified accounting accrued liabilities are frequently accounted for in the period in which they are incurred, there are some exceptions. One is with inventory that can be accounted for when it is purchased or used. Liens such as mortgages and liens may also be accounted for in different periods. Interest on long-term debt may be shown on the due date instead of the period in which it is incurred as well.
One of the benefits of modified accrual accounting is that it clarifies short-term financial reports, such as monthly ones, by showing the true financial statement. This can give a clear picture of finances to parties who do not work with an organization on a daily basis but need clarity on the organization’s financial affairs. For this reason, the method can be particularly useful for organizations that work with groups such as a board of directors.
The cash basis is one of the methods incorporated in modified accrual accounting. It is a fairly straightforward method, where inputs consist of withdrawals and deposits as they occur. The drawback of the cash method is that it only shows current and past expenses, rather than accounting for known future expenses or commitments. This can give the financial statements the appearance of having a surplus.
Accrual basis is the other method incorporated in modified accrual accounting. Instead of recording the actual cash flow, this method is used to track transactions. An entry is made when you have committed to pay, rather than when payment is actually received. The method does not record when cash is received or a debt is paid. This method can be used for incoming cash or anticipated expenses.
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