Commitment basis accounting is primarily used in the public sector along with the cash basis. It records transactions when an agreement or commitment is made between both parties. The issue of a purchase order signifies a commitment. Therefore, the transaction will be recorded in the commitment account.
One benefit of a commitment basis in government accounting is that it ensures financial and budgetary control. From the memoranda, each civil servant with the authority to spend cash can be monitored. And if they spend above the committed amount, this will be seen in the accounting system.
Advantages of commitment basis
Commitment accounts kept on a memorandum basis have several advantages. These include:
- A separate payment tabulation is available when required
- Adjustments occurring when the actual expenditure has been obtained do not affect the final accounts
- It is an aid to financial control. A commitment is regarded as a charge which has been made on a budget provision
- It takes a realistic view of financial transactions
- It reveals an accurate picture of the state of financial affairs at the end of the period
- It is used for both economic and investment decision-making since all parameters for performance appraisals are available
- It aligns with the ‘matching concept; and
- It makes allowance for the diminution in the value of assets employed to generate revenue.
Disadvantages of commitment basis
The system of commitment basis of accounting has the following disadvantages:
- The system involves extra work. Actual figures have to be substituted for the commitment provisions to finally determine the running balances under the sub-heads of expenditure.
- It is over-expenditure on a commitment basis in the expectation that
- the government may finally release funds to settle the legal obligations.
- At the year-end, all commitments that are the subject of unfulfilled orders will
- have to be written back to reflect the exact picture of the transactions which took place during the year.
- Balances, which ought to have lapsed in the Vote Book at the end of the year,may be spent by issuing local purchase orders to exhaust the votes.