A government typically provides Government-Wide Financial Statements and Governmental Funds Financial Statements. The Government-Wide Financial Statements use the accrual basis of accounting while the Governmental Funds Financial Statements use the modified accrual accounting. Modified accrual basis of accounting measures the current financial resources available. It is basically a hybrid of accrual and cash basis of accounting. Fixed assets, such as property, plant and equipment, and long-term debt are not recognized in this accounting basis on the balance sheet because they are not considered a “current” financial resource. Revenues are recognized when they are available (revenues are collected in the current period or shortly after) and measurable.
For property tax revenue to be considered revenue in the current period, it needs to be collected within that period or sixty days after the current period. Expenditures are recognized when the costs have been incurred to acquire goods or services in the current period. Therefore, depreciation is not recognized as expenditure. Instead, capital outlay is used to show the current resources used to pay for property, plant, and equipment. Principal and interest on long-term debt are shown as expenditures in a period when they become due or within one month after the fiscal year end. Modified accrual basis of accounting recognizes proceeds on long-term debt in the current period in the Statement of Revenues, Expenditures and Changes in Fund Balance as an “other financing source”.
For a review of the types of entities that follow GASB versus FASB accounting guidelines, please refer to Part One in this series, “On What Basis Are You Accounting for That” and Part Two in this series, “Accrual-Based Accounting”.
