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

The Benefits And Ch exclusively toldanges Of assemblage be Versus money method of business relationship Application bill EssayABSTRACTThis paper point a depth understanding and critical evaluation of the benefits and ch totallyanges of accretion be versus currency explanation aplication for budgeting and account in Municipal Council of Kota Kinabalu, a topical anaesthetic regimen activity in Malaysia. Motivation of this paper is drawn on the representation benefits of accruement be in budgeting and pecuniary musical compositioning of a topical anaesthetic governing remains as empirically established in separate countries. However, scorn the success stories of accruement bill aplication in separate countries, it has yet to be fully replicated in Malaysia. The expected contri bargonlyion of this paper be (i) comminuted evaluation of fiscal steering and reporting practices of local anesthetic semipolitical sympathies in Malaysia (ii) Empirically analys ing the benefits and limitations of silver in versus aggregation history transcription application in budgeting and invoice transaction of a local regimen, the case of DBKK and (iii) Contributing to enrich the lit and body of knowledge of local disposal method of account practices in Malaysia.Keywords Budgeting, monetary Reporting, accretion Accounting, topical anaesthetic political sympathies, MalaysiaINTRODUCTIONMotivation for queryThe presidency manages its fiscal economic activities through unexclusive account. human bes history corpses aim at authorizing and recording cash receipts and sp abrogateings in respect of an hold budget. In most countries, it is non consistently regulated. There are two types of set ab start in exoteric firmaments financial reporting which are cash report and accretion accounting. In Malaysia, cash and modified cash is the on-line(prenominal) buns choose by the Malaysian government. Malaysian government has likewis e do a move in implementing the assemblage accounting for public empyreans (Abdul Samad, 2001). This is beca affair accretion basis of accounting generates let on quality of financial nurture and this cultivation is necessary for the discharge of accountability and better finding making by inseparable management (Sutcliffe, 2001). Moreover, the traditional cash accounting formation select in many countries is perceived as no longer okay (Abdul Samad, 2001). galore(postnominal) countries like Australia, New Zealand and Canada keep up fully implemented this accounting right in their government accounting. As for Malaysian context, according to Abdul Samad (2001), by looking at the experiences of the countries that had undergone ameliorateation in the public sector, it could be cogitate that the study shoot for the push to accumulation accounting is the growing demand for a greater transparency and better performances of the government sector and the companies vis ualiseled by the government.The objective of this study is to investigate and critically evaluate the benefits and challanges of accrual accounting versus cash accounting aplication in Municipal Council of Kota Kinabalu (DBKK), a local government in Malaysia.Arrangement of look for proposal is as follows the next sectionalization pass on discuss about the philosophical background related to state-supported sector (PS) as well as accounting standards holded by them. This is follow by empirical analysis of cash vs. accrual budgeting and accounting application in PS. This expected to sheeds a light on identifying the potential explore gaps. Following this is the research questions and contributions which are intentional base on the identified research gaps. The final grammatical constituent of this paper summarises the research methodological analysis and structure as well as research planning.PHILOSOPHICAL priming coatDefining Public arena in MalaysiaPublic sector is part of the economy concerned with providing basic government attend tos whether federal, state or local/municipal council. Components of Public welkin in Malaysia is categorised into ternary levels of government namely federal government, state government and local government (Fatimah et. al., 2008). Public sector organisations exhibit a variety of social, economic, political and reasoned characteristics (xxxxx). cypher 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 rat be classified eiher as a statutory or non-statutory bodies. order government is the second tier of the government, which comprises of ministries (for Sabah and Sarawak only), department and public enterp rises. The administrative mechniery of the resign 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 correspond 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 various(prenominal) areas. In respect to the accounting management, Section 9(2) states that the local authority shall yield the State Authority with such returns, accounts and early(a) nurture with respect to the holding and activities of the local authority.The Malaysians Public Sector Accounting Theory and PracticesAccounting has been mainly defined as the system of identifying, classifying, recording, summarising, analysing and reporting of financial data and development of an organisation in accordance with the accepted principles, concepts, conventions, standards, and regulation (Fatimah et. al., 2008). Public sector accounting is different from private sector accounting. Accounting and financial reporting for public sector are ground on distinctive concepts, standards and procedures pictureed to accomondate their environment and needs of their accounting study users (Fatimah et. al., 2008). In Malaysia, the public sector accounting system is designed to comply 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 placed on use of the resources allocated commode be properly monitored. The government financial system and procedures stick out 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 procedur es 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) governing body Accounting Standards, and (vi) Inter interior(a) Public Sector Accounting Standards (IPSASs).The presidency Accounting Standards (PPK) has been set p by the comptroller 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). consort to the Public Accounts 2006, the Accountant General Department has issued the following PPK add-in 1PPKParticularsIssued OnEffective for Financial Year1Government Accounting PoliciesNovember 200220032Presentation of Financial StatementsMay 200420053Consolidated taxation AccountMay 200420054Consolidated Trust Ac count declination 200420065Consolidated Loan AccountDecember 200420066 investingDecember 200420067CashDecember 200520078Statement of record AccountDecember 200520079Foreign ExchangeJune 2007200810Government GrantJune 20072008Source Public Account 2006, as cited in Fatimah et. al., 2008 home of AccountingThe Federal and State Government hold in been adopting modified cash basis of accounting in the preparation of the annual financial statements where expenditures incurred in the old financial class but not yet salaried forget be paid in January of the new financial year and are reported as expenses for the old financial year. As for the topical anesthetic Government, Statutory Bodies and Government Linked Companies, they have 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, a nd 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 used to deploy input-based budgeting systems and cash-based accounting systems. However, these systems do not provide data 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 constitute benefit study has been undertaken on the move to accrual based accounting (Wynne, 2004).In Malaysia, in make with the financial budgeting and reporting reforms in public sector, government has also make a move in implem enting 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 internal management (Sutcliffe, 2001). Moreover, the traditional cash accounting system adopted in many countries is perceived as no longer fine (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.establish on the identified problems and motivated 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 L ocal Government Accounting Practices circumstantialally in Malaysia. inquiry QuestionsThe main research questions of this study are as follows-RQ_1sympathy of accounting prnciples and practices of DBKKRQ_2Investigation of current accounting systems used by DBKKRQ_3Adoption of cash vs. accrual budgeting and accounting in DBKK. What are the problems?RQ_4 get out accrual accounting improves the financial performance of DBKK?RQ_5Cost-Benefits analysis and program effectuation design of accrual accounting instruction execution in DBKK.Research Contributions full of life 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 writings and body of knowledge of l ocal government accounting practices in Malaysia. writings REVIEWThis section will discussed the empirical findings of previous papers related to the application of accumulation 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. alteration 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 historic signifi pl entyce (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 called 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, in that location have been attach calls for the government and public sector presidency 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 account ing 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 d emand 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 roughly International testGovernments 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 strategy. 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 toleration 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 Project For S take 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 alliance 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 informative Board, the recognition of the financial effect of transactions, events and circumstances in the period(s) when (they) occur, regardless of when cash is genuine or paid. It also requires tax revenue to be recognized in the period in which economic benefits cornerstone be mea sured reliably. like wise, expenses are recognized when the consumption of goods is capable of reliable measurement (Hoque and Moll, 2001).Table 2 An Overview of Cash Accounting vs. Accrual Accounting systemsBasis of semblanceCash AccountingAccrual AccountingFull knowledge of all payment flowsOnly cash transactionsComplete financial overview executableTime of bookingRecognizes transactions and economic events only when cash is received or paidRecognizes transactions and economic events when they occurManagement of Assets andResourcesNo single accounts for assets andresourcesFull knowledge on the value ofresources and assetsDepreciations, reserves, revenue,expensesNot come-at-ableResource 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 between source and application of funds is missing no matching of revenues and expensesFull knowledge of admittedly costs by specific cost centres and productsSource Adapted 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 of the entity, no performance indicator and information on cost of serve provided available for performance evaluation and control purpose (Montesinos and Bargues, 1996). In addition, the cashbased system also does not provide ample information to assess the government financial requirements like cash and revenue requirement to pay for past debts as well as next 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 than 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 lead to solid costsThe current cash accounting system meets allrequirementsA ca sh based system fits the characteristics of apublic sector organizationThe accounting system has only just now been changed toa modified cash accounting systemLocal governments resist accounting reformSome public sector efforts cannot be accounted forFormer accounting reforms have shown significantimplementation 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 service s 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 fixed 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 in-chief(postnominal) 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 turn out 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 surveillance by Parliment and so the government is less accountable.It requires greater professional judgement by both the pre parers 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 positd.The gaps in the standards not being properly addressed. conclusiveness on accounting treatements being made on political grounds.The remote 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 legions assetsInfrastructure assersNatural resourcesAcceptanc e for changeParticipation of the accountancy and other profeessionsJoint development of accounting standardsSupport of the government auditorsComprenensive management trainningUnderstanding of concepts underlying accrual accounting in budgeting and financial reporting.An appropriate finis approachA robust audit processNo depravityA 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 field at a local level by locally ele cted politicians. Consequently, a local government will typically only have control over their specific geographical region, and can not draw in 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 model elaborates the process flows for consideration in decision making for choice of accounting systems in local government. Empirical evidence shows that there are internal and external factors that will influence 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? busi ness?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 relate a total change of the entire organixation accounting systems and facility supports. Thus, this ideas involve 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 DBKKQualitative proficiencyStructured question 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 an d 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 performance. 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 go steady relevant questions1 Define and refine the research problems6 Interpret the results and write report5 Collect data and perform analysis4 Formulate relevant research hypothesesRESEARCH PLANNINGGantt Chart and MilestonesGANTT CHA RT family 1YEAR 2YEAR 32011201220132014ACTIVITIES/MONTHS67891011121234567891011121234567891011121234561initial Preparation2Literature Review3Research fancy4Proposal Defence5Proposal Refinement6Fieldwork7Data Analysis8Documentation of Report