Accounting Theory and

Practice (ACT 4191)

Lecturer
DR. RIDZWANA MOHD SAID

Group Members
NUR FATIMAHTUL ZAHRA MOHD ALI EX02677
DURUL FASIHAH MOHD NOOR
EX02686
NURUL BAIYAH RAZAK
EX02690
AZLINA OTHMAN EX02735
BAZNAH ABU BAKAR
EX02738

Topic 5
ACCRUAL VS. CASH

OUTLINES
1) Definition
2) Migration Path in Public Sector
3) Accrual vs. Cash Accounting Concept from Public Sector Perspective
4) Issues of Cash-Based Financial
Reporting
5) Implication Of Accrual-Based Financial
Reporting
6) Benefits of Accrual Accounting to
Public Sector

DEFINITION
Cash
Accounting

Records cash
payments and
receipts when
they are made
or received

VS
.

Accrual
Accounting
A method of
recording expenses
as they are
incurred and
income as it is
earned during an
accounting period

MIGRATION PATH IN PUBLIC

SECTOR
Cash
Accounting
As-is
Status
Assets are not
capitalized
Liabilities are
recorded outside the
accounting system
System is distributed
and disparate
IPSAS cash basis of
accounting
Costing information
is not integrated

Accrual
Accounting
In future
Status
Assets and liabilities are
accounted
Centralized system with
single database
Fully integrated with OBB
and other relevant systems
Full IPSAS compliant on
accrual accounting
Costing data on outputs,
programs and activities

ACCRUAL vs. CASH

ACCOUNTING CONCEPT FROM PUBLIC SECTOR
PERSPECTIVE

ACCOUNTING
ITEM

CASH
ACCOUNTING

ACCRUAL
ACCOUNTING

Short and long

term liabilities

Liabilities not recognised.

All liabilities accounted for where present

obligation exists due to past event for
which settlement requires outflow of
economic benefits

Leases

All transactions in terms of leasing

arrangements are expensed when
paid.

Leasing arrangements are categorised as

finance or operating leases and assets
held under finance leases are recognised
in the AFS.

Non-current and
current provisions

Provisions are not recognised.

All provisions accounted for where

liabilities exist of uncertain timing or
Amount

Debtors and
creditors

Debtors and creditors are not raised.

Revenue and expenses are recorded
when cash is received or paid

Debtors and creditors are raised in order to

account for revenue and expenditure when
it accrues to the entity

Property, plant
and
equipment

Property, plant and equipment are

expensed when acquired

Property, plant and equipment are

capitalised / recognised as assets when
Acquired

Investment
property

No distinction is made between

investment property and property, plant
and equipment.

Distinction is made between investment

property and property, plant and
equipment.

Inventories

Inventories are expensed when

acquired, e.g. government
departments expense all inventories
Acquired

Inventories are capitalised as current

assets when acquired, and expensed
when consumed.

ACCOUNTING
ITEM

CASH
ACCOUNTING

ACCRUAL
ACCOUNTING

Service revenue

Service revenue is recognised

when cash is received for
services rendered or to be
rendered in the future (e.g.
advances received).

Service revenue is recognised in the financial

year when services have been rendered (i.e.
when the revenue is earned).

Sale of goods

Revenue is recognised for the

sale of goods when cash is
received.

Revenue is recognised for the sale of goods

when the entity has transferred to the buyer
the risks and rewards of ownership and when
the entity no longer controls the goods

Government grant
and subsidy
revenue
conditional grants

Revenue is recognised when

government grants and subsidies
are received, even if the grants
are conditional.

Revenue is recognised for government

grants and subsidies received when the
conditions (if any) are met.

Interest

Interest received or paid in cash

is recognised.

Interest is recognised once it accrues.

Accrual of
expenses and
revenue for
incomplete billing
periods

Revenue for services rendered or

sale of goods and expenditure for
purchases or services received
are recognised when the related
cash is received or paid

Revenue is recognised when services are

rendered and goods are sold and expenses
are recognised when goods or services are
received, taking into account the accruals for
revenue and expenditure for the last few days
of the financial year for which billing takes
place after year End

ISSUES OF CASH-BASED
FINANCIAL REPORTING
Cash basis financial reporting disadvantage
is a misalignment between income and the
expenses incurred to produce that income.
Therefore, the monthly cash basis financial
statement does not give an accurate picture of
the actual profitability. The problem with the
mismatch of income and expense is that it does
not let a firm know each month on how they are
really performing financially.

Issues that can arise in cash-based financial reporting are

:
It affects a company's books only once a completed
exchange of value has occurred.
Less accurate than accrual accounting in the short term.
Expenses are not recorded on the financial statements
until they have been paid.
It is difficult to accumulate cash reserves to pay unpaid
bills because of the current tax laws.
It can lead to bankruptcy (but reports the company as
making profit)

IMPLICATION OF ACCRUALBASED FINANCIAL

REPORTING
1) Assess the accountability for all resources
the entity controls and the deployment of
those resources
2) Assess the financial position, financial
performance and cash flows of the entity
3) Make decision about providing resources to,
or doing business with, the entity

ACCOUNTING TO PUBLIC
SECTOR
1)
Cost Savings
Costing data of output enables more effective
evaluation of alternatives to achieve the outcomes

2) Revenue Generation
Information on assets facilitate unlocking of values
3) Better Service Delivery
Assets listing provide a database for infrastructure
management leading to better maintenance of
assets

CONCLUSION
Implementation of accrual accounting in public
sector is hoped to bring Malaysia at par with
other developed countries.
The challenge is a number of specialised
recognition issues arise when accruals is applied
to the core public sector. This is because certain
types of assets and liabilities simply do not exist
in the private sector. These include heritage
assets, military assets, infrastructure assets and
social insurance programs.