Modified accrual accounting

Modified accrual accounting combines aspects of accrual basis accounting with cash basis accounting. The purpose of this type of accounting is to measure the flows of current financial resources in governmental fund financial statements. The standards for modified accrual accounting are set by the Government Accounting Standards Board (GASB). As the name implies, this approach to accounting is primarily used by government entities. The accounting requirements of government entities are considered to be sufficiently different from those of for-profit entities to require this different approach.

The two main features of this type of accounting are:

  • Revenues are recognized when they become available and measurable. Availability arises when the revenue is available to finance current expenditures to be paid within 60 days. Measurability occurs when the cash flow from the revenue can be reasonably estimated.
  • Expenditures are recognized when liabilities are incurred. This is the same approach used under the accrual basis of accounting, though inventory and prepaid items can be recognized as expenditures when purchased, rather than first being capitalized as an asset. In addition, depreciation expense is not recognized. Instead, assets are expensed when purchased.

There are several naming conventions that distinguish modified accrual accounting from accrual basis and cash basis accounting. For example, net income is instead called an excess or deficiency, while expenses are instead referred to as expenditures.