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2002 December Report of the Auditor General of Canada Appendix—Accrual accounting
2002 December Report of the Auditor General of Canada
December 2002 Report—Chapter 5
Appendix—Accrual accounting
What is accrual accounting?
Accrual accounting refers to an underlying basis of accounting used to record the financial transactions of an entity. Accrual accounting recognizes transactions and other events when they occur, rather than when cash or its equivalent is received or paid.
Accrual accounting records expenses in the period when the goods or services are consumed, it records revenues in the period to which they pertain, and it matches multi-year benefits associated with long-lived assets to the time when they are expected to be used.
Why is accrual accounting important in government?
Accrual accounting helps users appreciate the full scope of government—the resources, obligations, financing, costs, and impacts of its activities (including the costs of consuming assets over time). This more complete picture enables legislators to hold the government more accountable for the stewardship of its assets, the full costs of its programs, and its ability to meet short-term and long-term financial obligations.
Accrual accounting can also help improve decision making within departments, for example, as follows:
- Managers increase their focus on the stewardship of assets because all assets are recorded in the financial accounts of the department. Managers become more aware of the assets under their control and the need to consider such issues as maintenance requirements, replacement policies, the identification and disposal of excess assets, risks such as loss caused by theft or damage, and the full impact of assets on service delivery.
- Managers increase their attention to the management of liabilities under their control because existing and potential liabilities are recognized. Managers become more aware of their responsibility for these liabilities and the need to develop plans for managing them, including identifying the impact of existing liabilities on future resources. If liabilities are not recognized, there is less reason for managers to consider certain issues and effectively manage those liabilities.
- With all the costs of operations being recorded in the accounts of the department, managers become more aware of the complete picture of their financial performance (all costs and revenues). Managers are then more inclined to consider all of those costs in making various decisions, such as the evaluation of the cost-effectiveness of in-house delivery versus contracting for services, the appropriateness of a cost-recovery policy, or the amount to charge other departments for services provided.