The Benefits And Challanges Of Accrual Accounting Versus Cash Accounting Application Accounting Essay

The Benefits And Challanges Of Accrual method of method of score Versus Cash fliering Application be EssayABSTRACTThis paper propose a depth understanding and critical military rank of the benefits and challanges of assemblage account statement system versus coin history aplication for budgeting and reporting in Municipal Council of Kota Kinabalu, a topical anesthetic giving medication in Malaysia. Motivation of this paper is drawn on the potential benefits of accrual be in budgeting and financial reporting of a local anesthetic anesthetic authorities as confirmablely established in other countries. However, despite the success stories of accrual chronicle aplication in other countries, it has still to be fully replicated in Malaysia. The evaluate contribution of this paper be (i) Critical evaluation of financial counseling and reporting practices of local government in Malaysia (ii) Empirically analysing the benefits and limitations of cash versus accrual acc ounting screening in budgeting and accounting transaction of a local government, the case of DBKK and (iii) Contributing to enrich the literature and remains of cognition of local government accounting practices in Malaysia.Keywords Budgeting, financial Reporting, Accrual Accounting, Local giving medication, MalaysiaINTRODUCTIONMotivation for ResearchThe government manages its financial economic activities by ordinary accounting. ordinary accounting systems aim at authorizing and recording cash receipts and expenditures in respect of an agreed budget. In most countries, it is non systematically regulated. There argon two types of approach in frequent orbits financial reporting which be cash accounting and accrual accounting. In Malaysia, cash and special cash is the current basis adopted by the Malaysian government. Malaysian government has also make a come across in implementing the accrual accounting for public sectors (Abdul Samad, 2001). This is because accrual bas is of accounting generates break down quality of financial information and this information is needful for the discharge of accountability and correct decision do by internal management (Sutcliffe, 2001). Moreover, the traditional cash accounting system adopted in many countries is perceived as no longer fine (Abdul Samad, 2001).Many countries like Australia, New Zealand and Canada find fully implemented this accounting tame in their government accounting. As for Malaysian context, according to Abdul Samad (2001), by face at the experiences of the countries that had undergone reformation in the public sector, it could be concluded that the major demand for the push to accrual accounting is the growing demand for a great transparency and better exertions of the government sector and the companies controlled by the government.The objective of this theme is to investigate and critically evaluate the benefits and challanges of accrual accounting versus cash accounting aplicat ion in Municipal Council of Kota Kinabalu (DBKK), a local government in Malaysia.Arrangement of research proposal is as follows the next section will discuss about the philosophic background related to to unexclusive Sector (PS) as well as accounting standards employed by them. This is follow by empirical synopsis of cash vs. accrual budgeting and accounting application in PS. This expected to sheeds a light on identifying the potential research gaps. Following this is the research questions and contributions which are designed found on the identify research gaps. The final part of this paper summarises the research methodology and structure as well as research planning.PHILOSOPHICAL rangeDefining Public Sector in MalaysiaPublic sector is part of the economy concerned with providing basic government services whether federal, state or local/municipal council. Components of Public Sector in Malaysia is categorised into three tiers of government namely federal government, state g overnment and local government (Fatimah et. al., 2008). Public sector organisations exhibit a variety of social, economic, political and legal characteristics (xxxxx).Figure 1 Components of Public Sector in MalaysiaThe federal government s the highest tier of the government, which comprises of the minsitries, departments and public enterprises. Ministris are the highest boy in the federal administratives followed by government department/agencies which responsibles for implementing government policies. While, a public enterprises can be classified eiher as a statutory or non-statutory bodies.State government is the second tier of the government, which comprises of ministries (for Sabah and Sarawak only), department and public enterprises. The administrative mechniery of the State is headed by the State Secretary.The local government is in the third tier of the government hierarchy in Malaysia. The local government is governed by the Local Governmen number 1976. By virtue of Section 2 of this Act, local authority mean any City Council, Municipal Council or District Council. In Malaysia, the power of the decision making is transferred to the local authorities administer their individual areas. In respect to the accounting management, Section 9(2) states that the local authority shall furnish the State Authority with such returns, accounts and other information with respect to the property and activities of the local authority.The Malaysians Public Sector Accounting Theory and PracticesAccounting has been more often than not outlined as the system of identifying, classifying, recording, summarising, analysing and reporting of financial data and information of an organisation in accordance with the accepted principles, concepts, conventions, standards, and regulation (Fatimah et. al., 2008). Public sector accounting is different from clubby sector accounting. Accounting and financial reporting for public sector are based on distinctive concepts, standards and procedures designed to accomondate their environment and needs of their accounting information users (Fatimah et. al., 2008). In Malaysia, the public sector accounting system is designed to survey with the Federal Constitution, statutory and other legal requirements.In general, the public sector uses fund accounting where seperate accounts are maintained for each fund so that limitations and resrictions move on use of the resources allocated can be properly monitored. The government financial system and procedures can be devided into two categories namely financial procedures and non-financial procedures. The financial procedures related to the finance and accounting of public funds. While, the non-financial procedures on the aspects including finance and accounting.The government financial system and procesures are based on (i) Federal Constitution, (ii) Financial Procedure Act 1957, (iii) Treasury instructions, (iv) Treasury circulars, (v) Government Accounting Standards, and ( vi) Inter subject Public Sector Accounting Standards (IPSASs).The Government Accounting Standards (PPK) has been set p by the accountant superior general Department since 2002. Its objective is to prescribe the standards and the basis for preparation of government financial statements in accordabce with the requirements of the Federal Constitution and the Financial Procedures Act 1957 (Revised 1972). According to the Public Accounts 2006, the Accountant General Department has issued the following PPKTable 1PPKParticularsIssued OnEffective for Financial Year1Government Accounting PoliciesNovember 200220032Presentation of Financial StatementsMay 200420053Consolidated Revenue AccountMay 200420054Consolidated Trust AccountDecember 200420065Consolidated Loan AccountDecember 200420066InvestmentDecember 200420067CashDecember 200520078Statement of Memorandum AccountDecember 200520079Foreign modifyJune 2007200810Government GrantJune 20072008 reference work Public Account 2006, as cited in Fatimah et. al., 2008Basis of AccountingThe Federal and State Government ease up been adopting change cash basis of accounting in the preparation of the annual financial statements where expenditures incurred in the old financial year but not yet stipendiary will be paid in January of the new financial year and are reported as expenses for the old financial year. As for the Local Government, statutory Bodies and Government Linked Companies, they train been adopting accrual basis of accounting in the preparation of the general purpose financial statements.Types of accounting systemsThe bases of accounting systems are generally classified into four broad categories cash, modified cash, modified accrual, and full accrual. This classification refers to the accounting principles that determine when the transactions or events should be recognized for financial reporting purposes.Problem StatementsTraditionally, governments utilise to deploy input-based budgeting systems and cash-bas ed accounting systems. However, these systems do not provide information that is necessary for a government to operate efficiently and effectively (Hoek, 2005). despite the potential benefits of the accrual system in promoting financial efficiency and accountability (Wynne, 2004 xxxx xxxx xxxx), still not all government agencies have implemented this system and empirical research have established evidence on why some countries have not done so (Wynne, 2004 xxxx xxxx xxxx). Additionally, no apostrophize benefit study has been undertaken on the move to accrual based accounting (Wynne, 2004).In Malaysia, in line with the financial budgeting and reporting reforms in public sector, government has also made a move in implementing the accrual accounting for public sectors (Abdul Samad, 2001). This is because accrual basis of accounting generates better quality of financial information and this information is necessary for the discharge of accountability and better decision making by inte rnal management (Sutcliffe, 2001). Moreover, the traditional cash accounting system adopted in many countries is perceived as no longer satisfactory (Abdul Samad, 2001).Empirically, many research on accrual accounting have been carried out in western countries such as New Zealand, Australia, Finland, Greece, Denmark, Sweden and United States (Hoek, 2005 xxxx xxxx xxxx), but few researches have been done covering public sector in Malaysia.Based on the identified problems and incite to carry out this research to determine whether local authorities have fully adopt the accrual accounting in recording the income and expenditures. This research is expected to contribute to the enrichment of body of knowledge in the area of Local Government Accounting Practices specifically in Malaysia.Research QuestionsThe main research questions of this study are as follows-RQ_1Understanding of accounting prnciples and practices of DBKKRQ_2Investigation of current accounting systems used by DBKKRQ_3Ado ption of cash vs. accrual budgeting and accounting in DBKK. What are the problems?RQ_4 get out accrual accounting improves the financial accomplishment of DBKK?RQ_5Cost-Benefits analysis and syllabus implementation design of accrual accounting implementation in DBKK.Research ContributionsCritical evaluation of financial management and reporting practices of local government in Malaysia.Empirically analysing the benefits and limitations of cash versus accrual accounting application in budgeting and accounting reporting of a local government.Comprehensive program implementation design for implementation of accrual-based accounting in local government.Contributing to enrich the literature and body of knowledge of local government accounting practices in Malaysia.LITERATURE REVIEWThis section will discussed the empirical findings of previous papers related to the application of Accrual Budgeting and Accounting in Government Sector all over the world. Specific attention will be focused on financial reporting in local government of Malaysia.The Move to Accrual Budgeting and Accounting in Government SectorIdentifying Strategic Research IssuesBudgeting Accounting Reporting in Government SectorsPublic Sector Accounting Principles PracticesFigure 2 Mapping the Literature ReviewThe Public Sector Accounting Principles and Practices The World ViewsBudgeting and Accounting Reporting in Government Sector. knowledgeability Cronological EventsThe Move to Accrual Accounting Identifying The Research GapsThe move from the cash basis to the accrual basis of accounting in the Australian Public Sector (APS) was a key element of the New Public Management (NPM) reform program and an event of historical significance (Davis, 2010).One of the most crucial aspects of New Public Management (NPM) was the wave of reforms in financial information systems. These changes are an essential element in improving the management and decision-making of government institutions, which is also call ed New Public Financial Management (NPFM) (Guthrie et al., 1999).The cornerstone of reforming financial information systems is the introduction of accrual accounting in the public sector, at the expense of traditional cash accounting systems (Lapsley, 1999). Several governments have been adopting and implementing accrual accounting systemsOver the last 20 years, there have been increasing calls for the government and public sector cheek to move to accrual based accounting and adopt private-sector style financial statements (Wynne, 2004).Traditionally, cash accounting in public sector focused on the control of expenditure. The reform of the public sector has changed the traditional role of accounting to one that is focused on accountability and the efficient allocation of resources. This implies that accounting should concentrate upon outputs, performance measurement, efficiency, costsaving, productivity and performance measurement (Hoque and Moll, 2001 Broadbent and Guthrie, 1992). This in turn requires that new accounting technologies be employed such as planning program budgeting, accrual accounting, performance indicators and annual reporting mechanism (Hoque and Moll, 2001). Accrual accounting if being adopted in public sector, provides a better quality of information and a better way of discharging accountability among the public sector managers.Many countries like Australia, New Zealand and Canada have fully implemented? this accounting reform in their government accounting. As for Malaysian context, accordingto Abdul Samad (2001), by looking at the experiences of the countries that had undergone reformation in the public sector, it could be concluded that the major demand for the push to accrual accounting is the growing demand for a greater transparency and better performances of the government sector and the companies controlled by the government.Public Sector Accounting Some International licenceGovernments and Public Sector Entities (PSEs) of the developed part of the world which were once using Cash-Basis of Accounting are now rapidly moving towards Accrual-Based Accounting System. Some of these countries have not only implemented the full Accrual-Based Accounting but have also adopted International Public Sector Accounting Standards (IPSASs) for compilation of government accounts and financial reporting. Status of implementation of Accrual-Based Accounting and adoption of IPSASs by the Governments is as under Australia (State, Federal and Local Governments) Canada (State, Federal and Local Governments) Finland (Government agencies and whole of Government) France (Local Governments) Germany (Some Government Organizations) Ireland (Pilot chore For Selected Government Departments) Italy (Local Governments) Malaysia (Local Governments) Netherlands (Government agencies and Local Governments) New Zealand (National and Local Governments) Sweden (Central Government agencies and Local Governments) Switzerland (Local Governments) Tanzania (Local Governments) United Kingdom (Local Governments) USA (Federal Government)Source South Asian Federation Of Accountants, 2006Comparative analysis of the governmental financial information systems International EvidenceSource Christiaens et. al., (2010)Accrual vs CashCash accounting requires the record of inflows and outflows of cash. Accrual accountingas defined by Federal Accounting Standards Advisory Board, the acknowledgment of the financial effects of transactions, events and circumstances in the period(s) when (they) occur, regardless of when cash is standard or paid. It also requires tax income to be recognized in the period in which economic benefits can be measured reliably. Like wise, expenses are recognized when the consumption of goods is capable of veritable measurement (Hoque and Moll, 2001).Table 2 An Overview of Cash Accounting vs. Accrual Accounting systemsBasis of comparisonCash AccountingAccrual AccountingFull knowledge of all payment flowsOnly cas h transactionsComplete financial overview possibleTime of bookingRecognizes transactions and economic events only when cash is received or paidRecognizes transactions and economic events when they occurManagement of Assets and visionsNo single accounts for assets andresourcesFull knowledge on the value ofresources and assetsDepreciations, reserves, revenue,expensesNot possibleResource consumption and the wear and tear of resources is displayedCost and results accountingNo knowledge of costs by specific cost centres or service products since the linkage surrounded by source and application of funds is missing no matching of revenues and expensesFull knowledge of true costs by specific cost centres and productsSource altered from Athukorala, S. Reid, B. (2003)The main advantage of the cash system is simplicity, objectivity and the need to assess the compliance with cash budgets. However there are limitations like the system does not disclosed a true financial and economic position o f the entity, no performance indicator and information on cost of services provided available for performance evaluation and control purpose (Montesinos and Bargues, 1996). In addition, the cashbased system also does not provide sufficient information to assess the government financial requirements like cash and revenue requirement to pay for past debts as well as future services, besides fail to provide the government complete information on all that they owe (Hillier, 1996).Advantages of accrual accounting in governmentA number of researchers argue that cash based financial system and accrual accounting is both useful, however financial reports based on accrual accounting has its own advantages and significance to the modern government. Accrual accounting in government provides better quality financial information, more comprehensive and increase efficiency. This allows a better way of discharging accountability (Abdul Samad, 2001 Sutcliffe, 2001 Hoque and Moll, 2001 Wynne, 2004) by extending the assessment of financial performance beyond the application of cash (OECD, 1993) and supports a better decision making by internal management (OECD, 1993 Sutcliffe, 2001) by providing information on the full cost of operations and the resources used to deliver services to the public (Hoque and Moll, 2001).Reasons for not adopting accrual accountingaPanel ALocal governmentsPanel BCentral governmentsBalance sheets and profit/loss calculations areof less importance in the public sectorCash accounting systems are better complementto budgetary accounting systemsAccounting reform would chasten to considerable costsThe current cash accounting system meets allrequirementsA cash based system fits the characteristics of apublic sector organizationThe accounting system has only just been changed toa modified cash accounting systemLocal governments resist accounting reformSome public sector efforts cannot be accounted forFormer accounting reforms have shown significantimplement ation problemsAccrual accounting has limited potential tosupport political decision-makingaMultiple reasons simultaneously possible.Source Adapted from Wynne, 2004.Comprehensive analysis of Accrual Based Accounting in Government SectorAdvantagesDisadvantagesRiskEssential Pre-ConditionsAccrual based financial accounts have more information than cash based accounts and have a greater focus on outputs rather than just inputsThe information available from accrula based accounts facilitates a better quality of management and decision making, including in the case of allocation of resources.It enables comparisons of full cost of services with the costs of the provision of those services by the private and voluntary sector.It provides greater comparability of management performance results which are not affected by the timing of cash payments and receipts and which information about stubborn and current assets and liabilities.It designed to measures profit, a concept which is meaningless in the public sector, where surpluses can arise from the failure to provide agreed services.Maintenance of public asets is mopre of the essence(predicate) than providing information on their value.It takes budgetary control away from finance staff, as they decide when cash is paid, but non-financial managers and suppliers decide when invoices are issued.It does not appear to have ensured adequate costing system.It has not been wiodely used by other countries.Cash-based accounting is comparatively simple and abjective.Its complexity may mean that there is less charge by Parliment and so the government is less accountable.It requires greater professional judgement by both the preparers and auditors of government accounts.Loss of financial control with the introduction of a more complex system.Diversion of resources from more productive reforms.The possibility of government accounting being bought into dispute if accrual accounting fails.The possibility that international accounting standards could be applied with no real understanding of issues involved.The gaps in the standards not being properly addressed.Decision on accounting treatements being made on political grounds.The external auditor being unable to prevent politically-based amendments to the accounts.An adequate timescale and budget not being allowed for the change.The IT systems not being adequate.The process of financial management and expenditure control being made more difficult.Accounting issued to be agreed before accrual absed accounting can be introducedTaxation revenuesDepreciationsApproaches to the recorgnition of assets multitude assetsInfrastructure assersNatural resourcesAcceptance for changeParticipation of the accountancy and other profeessionsJoint development of accounting standardsSupport of the government auditorsComprenensive management trainningUnderstanding of concepts inherent accrual accounting in budgeting and financial reporting.An appropriate culture approachA robust audi t processNo corruptionA recognition of the time needed for change.An IT capacity.A willingness to use incentives and penalties.That the accrual based approach is part of a process of reform.Source Summarised from Wynne, 2004The Research Focus Local Government Accounting in MalaysiaLocal Government (LG) accounting has attracted the attention of some members of the academic and professional community since the end of the 19th, early 20th century (e.g. Cooke, 1887 Cleveland, 1909 Metz, 1909 Walker, 1923 Morey, 1933, 1934 Welcker, 1934) as cited in Sargiacomo and Gomes (2010). A LG can be defined as the government of a town, city, county, or region at a local level by locally elected politicians. Consequently, a local government will typically only have control over their specific geographical region, and can not pass or enforce laws that will affect a wider area. Local governments can elect officials, enact taxes, and do many other things that a national government would do, just on a smaller scale.This research will be focusing on a local government accounting issues in Malaysia and taking Municipal Council of Kota Kinabalu City as the sole local government body that is to be investigated.Development of Theoritical FrameworkThe following theoritical framework elaborates the process flows for rumination in decision making for choice of accounting systems in local government. Empirical evidence shows that there are internal and external factors that will ascertain the choice of cash-based or accrual-based budgeting and accounting. The choice is strategically important for local government efficiency and accountability.Cash-Based SystemEfficiency? Accountability?in LGChoice of Accounting Systems in LGInternal External FactorsPoliciesAccrual-Based SystemThe choice to move from cash-based to accrual-based accounting systems is not an easy tasks. It will involve a total change of the entire organixation accounting systems and facility supports. Thus, this ideas i nvolve a costs. (explain further)RESEARCH METHODOLOGYThis research will need to employ a combination of qualitative and quantitative research techniques to investigates and clarifies the identified research questions. Summary of the research investigations and methodologies are as tabulated belowNo.Research QuestionsMethodologyInstrumentsRQ_1Understanding of accounting prnciples and practices of DBKK soft TechniqueStructured query and inspections of records/policies/circularsRQ_2Investigation of current accounting systems used by DBKKQualitative TechniqueStructured interview and inspections of records/policies/circularsRQ_3Application of cash vs. accrual budgeting and accounting in DBKKQualitative TechniqueStructured interview and inspections of records/policies/circularsRQ_4Will accrual accounting improves the financial performance of DBKK?Quantitative TechniqueAccounting Experiments comparing the effects of cash versus accrual accounting on 10 years historical financial performa nce. Is there any different?RQ_5Cost-Benefits analysis and program implementation design of accrual accounting implementation in DBKK.Quantitative TechniqueDeterminantion of costs and benefits associated with implementation of accrual-based accounting in DBKK. This research also will provide a comprehensive program implementation design for adoption of accrual-based accounting in DBKK.RESEARCH STRUCTURE2 State the research objectives3 Determine relevant questions1 Define and refine the research problems6 attend the results and write report5 Collect data and perform analysis4 Formulate relevant research hypothesesRESEARCH PLANNINGGantt Chart and MilestonesGANTT CHARTYEAR 1YEAR 2YEAR 32011201220132014ACTIVITIES/MONTHS67891011121234567891011121234567891011121234561Initial Preparation2Literature Review3Research Design4Proposal Defence5Proposal Refinement6Fieldwork7Data Analysis8Documentation of Report