In public sector accounting, the use of cash basis accounting is very common. This might be because of the ease of application. It allows a primary school certificate holder to post accounting records. But it comes with a lot of disadvantages.
Cash basis of PSA defined
It is a basis in public sector accounting that recognizes revenue when cash is received and expenditure when they are paid irrespective of the year the transaction occurs.
The cash basis of public sector accounting (PSA) is the easiest method for recording government financial transactions. And in the preparation of financial statements. The use of cash means that items like depreciation, impairments, reserves, and defenders will not be on the books of account. This will make the job easy for the bookkeeper.
It recognizes only cash items. Therefore, if a department purchases an item for 43 million Naira but pays only 37 million for the year. It is only the 37 million Naira that will be recorded in the books of account. And shown in the financial statements.
This basis doesn’t allow the preparation of profit or loss statements. However, it gives the accurate value of the cash that the MDA owns. Also, the balance sheet will not contain debtors and creditors. The reason for this is that cash not paid or received is not recognized in the books.
However, it favors the use of cash flow statements. There, items that cash was paid or received can easily be presented. This can be based on cash inflow and outflow. Or on the three cash flow activities. That is, operating, investing, and financing activities.
The international public sector statement of accounting standards (IPSAS) discourages the use of cash basis. And it is on the mission to encourage the government and its MDAs to voluntarily apply the accrual method. All IPSAS standards are on an accrual basis.
Efforts are yet to be realized because most governments and their ministries, departments, and agencies (MDAs) still apply that cash basis principle. However, government business enterprises that are allowed to earn profits used a different PSA basis.