PUBLIC SECTOR ACCOUNTING AND FINANCE
One of the main distinguishing factors between public and private sector organisations lies in their objectives and sometimes funding structure. While public sector bodies have a more social objective and focus more on the allocation or distribution of public goods and services within the country, private sector bodies have the main objective of increasing the wealth of their shareholders (IFAC, 2011).
However, both private and public sector bodies face similar operational and business challenges brought on by the economic environment and climate. A crucial question therefore is how to account for the activities of private ...view middle of the document...
The main focus of this essay is to critically discuss the contention that modern commercial accounting approaches are crucial to central government if it is to improve efficiency in delivery of services. Thus the study will examine the merits and demerits of the two different public sector accounting approaches above and their implications on public sector financial reporting. This will be done in the perspective of the two traditional approaches to role of the public sector within the economy. The discussions will be summed up in a conclusion, highlighting the main points of the paper.
2.0. Approaches to Public Sector Accounting:
From the foregoing, there exist two principal approaches to public sector accounting. The question of whether it is appropriate for donor institutions such as the IMF, World Bank, European Union, to apply significant pressure on countries to adopt accrual accounting practices is debated by Wynne (2003). This section will focus on examining the merits and demerits of the cash accounting basis and the accrual accounting basis.
2.1. Cash Basis:
According to Wynne (2003), while it is reasonable to assume that the prime objective for the production of financial statements is to provide information that is useful for the decision making needs of those for whom they are prepared, within the public sector such information is used for political rather than economic decision making. The main advantages of the cash basis of accounting include:
- The cash basis reflects a more accurate picture of the cash position of the public sector body and hence the impact of any decisions can be fully reflected in real terms in the financial statements. Within the public sector for instance, under the cash basis for instance, income from taxes will only be recognised when it is paid into the public coffers and expenditure from such income is also recognised only when it is paid out of the public coffers.
- The cash basis is simple to apply and simple to understand. Considering the nature of the public sector workforce, as well as the nature of the main stakeholders of the public sector, the cash accounting basis provides a simplistic way of reporting performance than can easily be understood by the citizenry (Wynne, 2003). Perrin (1998) further observes that the cash basis of accounting is relatively cheap to operate, simple and objective.
- The cash basis provides a more reasonable basis for accounting within the public sector, based on the traditional role of the government as being the allocation of resources within the economy. This is because the government does not seek to make any gain from the provision of goods or services and is more focused on economic development and welfare, and not profitability.
However, there exist disadvantages to the cash basis of accounting. The main disadvantages of cash based accounting within the public sector include:
- It does not reflect the actual economic performance...