The commitment basis of government accounting helps in budget control. It helps those in charge of governance to know what expenditures are to be committed in a particular period. Therefore aids planning.
Commitment basis of PSA defined
It is a basis on which expenditures are recognized as soon as an agreement to make a purchase or enter into a contract is in place. In most cases, transactions are recorded immediately when a purchase order is received by the ministry, department, or agency.
This basis focuses on when a commitment is made and not when the transaction occurs or cash is paid. Therefore, it records a transaction immediately when there is an agreement or contractual relationship between the MDA and the contractor or suppliers.
In principle, a commitment is said to be made when a purchase order is signed by both parties. From that moment the transaction is recorded in the books of accounts. The record, however, is not usually part of double entry and is thereby referred to as memorandum accounts.
Commitment basis accounting cannot be used in the preparation of government reports. One reason is that the transactions have not taken effect. Once the event has occurred, the cash or accrual basis of public sector accounting is used to record the transaction. Therefore, the record will be canceled from the commitment accounting system.
This method is useful for budget and budgetary control. It helps check civil and public servants’ activities. If cash is spent above the committed amount, an explanation must be provided. While those who spent below it are commended.
An example of commitment basis accounting is when a purchase order is signed to acquire computers for a government department in May 2022. However, the actual acquisition took place in July 2022.
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What this implies is that in May 2022 the transaction was recorded using a committed basis. However, in July when the computers were bought, either cash or accrual basis is used to account for the transaction.
This method is mainly used in the public sector. You can’t find it under private sector accounting. Also, government business enterprises do not use this method in recording transactions onto their books of accounts