Government accounting or PSA is guided by certain principles. Here, we will examine 13 such principles. Many of these principles will be discussed separately later on. And many of them are intertwined with financial accounting. They are listed and explained below.
List if 13 principles of government accounting
- Cash basis
- Accrual basis
- Modified cash basis
- Commitment basis
- Modified accrual basis
- Fund accounting
- Historical cost
- Deprival value model
- Market value
- Replacement cost basis
- Materiality principle
- Consistency principle
- Recognition principle
This is the principle that recognizes revenue, expenses, and expenditure when cash is received or paid. It doesn’t matter the period when the cash is received. If an expenditure for last year was paid this year. On a cash basis, that expenditure will be accounted for this year that the cash was paid. The same is true for revenue. If the revenue were to be earned next year and the cash was received this year, then that income is recognized this year. Cash basis doesn’t give rise to debtors and creditors in the books of accounts.
This basis recognizes income when they are earned and expenses and expenditure when they are incurred. It doesn’t matter whether they are paid or owing. If revenue was earned last year but the cash was received this year, the accrual basis principle claims that the revenue must be recognized in the previous year. Although cash was paid in the following year. This gives rise to debtors and creditors.
Modified cash basis
Under this government accounting principle, revenue, expenses, or expenditure owed for the previous year can still be recognized as income, expenses, or expenditure within the next three months of the following year for cash to be received. For example, if expenses have not been paid for 2021. There will be a window of three months in 2022 to allow payments to be made. If paid during those months, the expenses will be recognized in 2021. However, if they were not paid during the window, then they are moved to 2022 when they will be paid.
This basis is used mostly when there is a purchase order. Here, the expenditure or expenses are recorded in the books of the account even though the actual contract or job is yet to be done. More so, it recorded anticipated expenditure from a contract concerning a purchase order.
Modified accrual basis
This principle is used to record revenue when cash is received and expenditure when they are incurred. This means that revenue applies on a cash basis while expenses apply accrual basis.
This is the management of several funds through stewardship. Each fund is made to cater to a particular activity. And are regulated by special laws. Fund accounting ensures that people saddled with the responsibility of managing each fund are accountable to it.
Capital expenditure is valued at historical cost. That is the cost of buying or building it. For example, a ministry buys a building for 120 million Naira. As long as the building exists, 120 million remains the cost. However, there are limitations to the historical cost principles. These are market value, replacement cost, and deprival value.
Deprival value model
This is determined on the premise that the value of an asset is equivalent to the loss that the owner of an asset would sustain if deprived of that asset. As a result, the model identifies just the amount that would compensate the entity for the loss of an asset. (Source: IPSAS Explained by Ernst & Young)
Market value is the price at which a capital expenditure in government accounting can be traded by a willing buyer and seller in an arm’s length transaction. It is usually calculated at the end of the year. Or at the reporting date. Most cases on 31st December. The problem with using market value is that it is difficult to calculate the market price of some capital expenditures. For example, what I’d the market value of the third mainland bridge in Lagos Nigeria?
Replacement cost basis
It is the cost of a government business enterprise that can replace an existing capital expenditure.
In the materiality principle, the information provided to users of public sector accounting should be material enough so that their decisions will not be impaired by false information. Again, information is material if it will affect the decision of the user of the information. Therefore errors and misstatements that are material should be properly disclosed. Also, any transaction in the financial report that is material should be disclosed in those statements or their notes.
In PSA, any method used in recording transactions should be used consistently. It should not be changed unless there are good reasons to do so. For example, if an MDA uses the cash basis of government accounting, it must continue using that basis. However, if a law requires a change of that method – probably a change to the international public sector accounting standard (IPSAS).
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The recognition principle complies with the accrual basis of the government accounting principle. It states that revenue is recognized in the year they are earned and not when they are received. If revenue is earned in 2021 and the cash is received in 2022. The revenue is deemed to be recognized in 2021.
The 13 Basic governmental accounting principles discussed are not exhaustive. They are used in federal, state, and local government. Ministries, departments, and agencies (MDAs) comply with IPSAS, meaning that they used modified accrual basis. Also, many of the principles above are used in the private sector.