Accrual Accounting


The international scholarly and practicing accounting communities are nowadays vigorously disputing the efficiency of the traditionally followed cash-based accounting method. Contemporary analysts fervently advocate the benefits of the state-of-the-art accrual accounting methodology.  Among the most authoritative supporters of the new method are the International Monetary Fund and the European Commission (Perrin, 1998). However, while the obviousness of the accrual accounting model do seem to be relatively clear for the overwhelming majority of the international and domestic accounting process stakeholders, still it remains unclear whether the system would become ultimately predominant on the accounting scene. The aim of this paper is to evaluate the prospective utilization and its repercussions of the commercially based accrual accounting system public sector , to analyze whether the adoption of the accrual accounting and total abandonment of the cash-based accounting algorithm will ultimately enhance the accountability standards and efficiency of the public sector or not (Connonly & Hyndman, 2006).

The Rationale of the Accrual-based Accounting System

In accordance with the modern postulates and standards of the accrual accounting system, while the accounting report or statement is being completed by the analysts the accent is deliberately made on the efficiency of the costs utilization. The idea was taken from the private sector, in where the goals are not only accomplished, but all possible actions are taken to reduce the costs required (Pina, Torres, 2003). The primary differences between the two methods are that under the first method the calculations required are made when the due cash payments are either received or paid. Under the new accrual approach the records are made when the revenues are earned and the losses are incurred respectively, even if the payments have not been exercised still.

The International and the U.K. Transition to the Accrual Accounting System and the Advantages of the System

The pioneers which introduced the accrual accounting system were Chile and New Zealand. The transition to the discussed model was substantiated by the number of empirically inferred benefits (Mellet, 1997). In 2006 the decision of the United Kingdom to introduce the system on the agency level was dictated by the following advantages of the accrual financial accounting system:

  • This accounting algorithm conditions enhanced financial management. The unanimously shared opinion of the scholars and the practitioners is that the adoption if this method enables to reflect the currently disposable public financial resources and the ones that are projected to be obtained more effectively. As a result, three staged algorithm of consolidated public financial statements have been introduced in the United Kingdom.
  • In contrast to cash-based scheme of public accounting, accrual accounting system enables to disclose all available financial resources and to conduct analysis of the pending liabilities and assets of the public agency
  • The public entity revenue output operations are accentuated. Comparatively, under the principles of cash-based algorithm, the stress is made upon the input operations and transactions.
  • The causation between the resources utilized and the outcomes achieved is considerably more evident.

Nowadays, the reformist trends have been commenced in the majority of the European Union countries. At the national level the reforms and the necessary prerequisites ( i.e. the amendments to the monetary turnover system and the change of the legislation) have been accomplished in Sweden, Spain and Finland. The reformations are still underway in UK and France, while on the local level these countries have almost completed the overhaul.

Contemporarily, in the United Kingdom the dual accounting system is being gradually replaced by the accrual accounting scheme (Perrin, 1998).  At the local several notable agencies have fully shifted to the new system. The most illustrative examples of the transitional modes includes the activity of Scotland Yard police bureau, the activity of the national court administration of the United Kingdom and the tax collection agencies of the country. The offices of the Queens administration are still following traditional approach, but the change is being highly anticipated by the analysts.

International Conceptual and Practical Frameworks

The most significant accomplishment is the paradigm of the rising popularity and sophistication of the accrual accounting principles and techniques have been made by the International Federation of Accountants. In its numerous reports this highly authoritative international agency has outlined the major advantages of the proposed accrual accounting methods for the national governments and fervently advocates the adoption of this policy. The encapsulation of the guidelines, recommendations and provision can be found on the regularly issues International Public Accounting Standards (commonly abbreviated as IPSAS). The IPSAS guidelines (21 up to 2012) are nowadays been used as facultative or mandatory bylaws in France, UAE, Holland, Israel , Thailand and some other countries (Connonly, Hyndman, 2006). The followers of the transition policy position the adoption of this policy the NATO and the EU commission financial authorities as a one of the most persuasive argument in favor of the policy. Compliance with the IPSAS principles is currently underway in the United Kingdom and the analysts anticipate that by the end of 2017 the process will have been eventually finalized.


Having analyzed modern national and international experiences, several definite conclusions can be drawn. First and foremost, although the press of the conservatively oriented opposition (those who support conventional cash-based approach) is still strong, the advantages of the accrual approach are evident (Chan, 2003). Secondly, the practice evinces that solid steps have been taken by both the national to implement these policies. This trend is supported by the structural changes in the auditing practices of the authoritative and influential international organizations.

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