 Hello and welcome to this session in which we will discuss the modified accrual basis which is one of the basis of accounting we have many so it's very important to look at the accounting basis from a different perspective in order to understand what is modified accrual. We're going to start with the cash basis of accounting and I hope as an accounting student taking a governmental accounting course you understand what is the cash basis nevertheless we are going to review it briefly what is the cash basis of accounting the cash basis is when do you recognize revenues and when do you recognize expenditure well under the cash basis revenue is recognized when available when cash is available and expenses and specifically they call them expenditure are recognized when cash paid and that's why it's called the cash basis if you receive the cash it's considered revenue when you pay the cash it's considered an expenditure I hope you know this now I also you hope I hope you know that this is not a gap method this is not a gap method so when you took intermediate one intermediate two advanced accounting you did not use cash basis what you used is accrual or full accrual and in a nutshell what is the basis of full accrual when do you recognize revenue when do you recognize expenses you would recognize revenue when earned it means you did the work you complete your side of the contract you deliver the product you earn the revenue you don't have to receive it in cash you can receive it in cash later you recognize the revenue now expenses and here we are using the word expenses are recognized when incurred what does that mean it means you would record your expenses as soon as they are incurred it means you have a responsibility for those expenses although we have not paid them yet so we have the cash basis on one end relying everything on cash and we have the accrual or full accrual on the other end now those are kind of the two extreme basis of accounting guess what we have something in between and that's called modified accrual modified accrual is something a little bit like cash accounting something a little bit like accrual it has the features of both that's why it's called modified now we have other measurement now we call it modified you can also call it for that matter modified cash but since in tax book the tradition is to call it modified accrual but nevertheless you can call it modified cash because it's in some instances it's similar to cash and others it's similar to accrual so when do we recognize revenue when do we recognize expenses revenue are recognized when they are measurable and available and don't worry we're going to discuss this and expenditures are recognized when incurred so notice when incurred is similar to full accrual it's similar to full accrual but revenues are recognized when measurable and available which is a little bit different and it's not like cash it's similar to cash we will see what measurable and available is before we proceed any further i have a public announcement about my company farhatlectures.com farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses my CPA material is aligned with your CPA review course such as becker roger wiley gleam miles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today so the modified basis of accounting is a new method and if you're taking governmental accounting this will be the first time you view this and governmental accounting is difficult because if you don't fully understand full accrual you will find difficulty understanding full accrual the modified basis is usually used by governmental entities and not for profit organization and we will explain why why do they use this method this method combines as i mentioned the the basis for cash and the basis for accrual it has the basis for both the purpose is to provide a more accurate representation of the entity's financial position because government entities they don't you don't care about their profitability you don't care how well they are using the resources for government entities remember you want to hold them accountable so modified accrual is a better measurement if you want to hold them accountable and you will see why shortly so the modified accrual basis focuses on the flow of financial resources and recognize revenues and expenditure when they become measurable and available so what you care about is how well they are doing basically on a budgetary term budgetary term means in the short in the short term how well they are doing because you want to hold them accountable like for example a company let's take for the sake of illustration just to compare and contrast a company like amazon a company like amazon it took them 10 years until they became profitable that's fine investors are okay with this they are looking for long-term investments well when you judge a government entity you you don't care about 10 years you don't care about three years why because you might move out that's not your concern your concern is you want to hold them accountable when you are a citizen under that entity therefore you need a different accounting measurement this is why we use modified accrual why because it's you're gonna see the way we measure revenues the way we measure expenses also the way we measure assets and liabilities it will help us with accountability issues not profitability not long-term prospect of the entity we're not interested in that so let's go back to revenues again what did we say about revenues we recognize revenues when both revenue is measurable and available what does measurable means measurable means you can measure it you can put a dollar amount on it and that's not difficult for government means that the amount can be reasonably estimated that's fine we can estimate it now available what is available okay a live available is when the revenue is collected within the current period that's great if it's collected within the current period that's available if i'm getting the money that's available or soon enough after the end of the period now how do we define soon enough we're gonna see in most governmental textbook and most government it's 60 days after the period end now why 60 days what is the what is the logic behind this number so i did not collect it in this period because for cash basis i have to have a this period government says no you have 60 days to count that as revenue for this period so once the period ends so let's assume this is year one guess what you have 60 days an additional 60 days to include revenues in year one now why here's the assumption the assumption is this in year one you you are going to incur certain expenses your expenditure let's call them expenditure you're gonna you're gonna incur some cost and because we in businesses we use credit simply put companies they kind of give give each other a time period to pay so you might incur an expenditure here and you may not pay it until within 60 days of the next year well guess what since the the expenditure happens in year one well the money that's coming in year two is meeting that expenditure therefore we'll say well soon enough it's as if it happened in that year so that's why we said it's measurable and available and we define available 60 days because within those 60 days you're going to receive some money and some that money will be used to pay current liabilities that was outstanding as of year one an example of revenues we're going to have many many lectures about revenues which we do have many lectures about revenues property taxes sales taxes certain grants so on and so forth expenditure it's easy because it's more similar to to the accrual I recognize when the related liability is incurred rather when the cash is paid so it's not like the cash it's more like the accrual and simply put an expenditure as a decrease in financial resources to settle a liability with current financial resources so when you pay when you pay your liabilities what do you pay them with you pay them with cash you cash would leave you that's a financial resource and specifically that's a current financial resource and remember this word current because we're going to be emphasizing this word shortly so expenditure are finance with current financial resources current financial resources mainly cash this is a little bit different than the cash basis because under the cash basis you wait until you pay here you don't wait until you pay if a liability incurred and you are going to be using current financial resources you have not used it yet but you are going to be using it it's an expenditure so simply put if a government order supplies the expenditure is recognized when the supplies are received now we have an obligation and the related liability is incurred because now we receive them we have the either return them or pay for them you have you have the obligation rather than then when the payment was made under the cash basis you wait until the payment is made so the modified accrual what we just did we explain how revenue and expenditure which is expenditures easier to understand than revenues because what should be because it's more similar to full accrual revenues is measurable and available now let's move from the income statement because revenues and expenditure are in quote income statement account move to the balance sheet which what we called measurement focus what are we measuring what's on the balance sheet the balance sheet is assets and liabilities so what is being measured which assets and which liabilities are we measuring now i hope you know at this point if you if you if you're thinking what do we measure which assets and which liabilities as far as you know we measure all assets and all liabilities and indeed when we're using full accrual we use something called the economic resource measurement focus and the economic resource measurement focus basically a term it's a term that what's the definition of it you measure all assets all liabilities economic everything regardless of their timing or duration whether that asset is a long-term asset or a short-term asset whether that liability whether that liability the short-term liability or a long-term liability we capture it we measure it we measure it on the balance sheet if we are using economic resource measurement so it focuses on the entities total economic resources everything all your long-term assets when you measure a company when you invest in a company you don't only look at their current assets you look at everything why do you want to measure their operational accountability overall how well they are doing you're not only interested in short-term you're interested in long-term and when we say economic resource measurement it's the equivalent word of full accrual or simply accrual now let's talk about governmental accounting where is the focus of the fund when it comes to governmental accounting we learn about funds what's the focus of the fund the focus of the fund is accountability are they meeting the accountability are they meeting what they are promise promise to meet so here the focus is different the focus is not economic resources we don't care about all the government assets all the government liabilities what we care about is their current financial resource measurement current means current assets and current liabilities we want to see how well you are utilizing how well you are using your current assets and current liabilities so we're going to report on the inflow and outflow of current financial resources which are what cash and other items expected to be converted to cash during the period supplies inventory account receivable converted means also burned used now the purpose is you don't care about the overall assets you want to measure physical accountability are they meeting their legal and budgetary needs that's what i'm looking at okay this is why we used modified accrual so when we are measuring governmental fund we don't care about economic resources think about a government even your local government your municipality what is their assets they they might have roads streets bridges we don't care about those yes that's a great that's those assets might generate a future revenue i don't care about them i'm a citizen you set a budget i want to see how well you are using the money that's coming in how well you are spending this money current financial measurement focus versus when you look at a company you're looking at the economic resource measurement you're looking at everything so the budget the budget that matters for a government for the funding for the government funds not everything so you would ignore the long-term assets long-term liabilities when you are using modified accrual now you say so what do we do with those don't worry we're gonna look at few examples explain how the difference between the two but we don't report them on the financial statements of the fund so let's summarize basically what we just did so far i kind of i'm gonna ignore cash because we don't care about the cash basis let's talk about for full accrual under the full accrual basis remember the measurement basis everything full accrual all assets all liabilities are simply put accrual the measurement focus we call it economic resources we're looking at the old economic resources who uses this type of entities well regular businesses but also proprietary funds which are government funds that remember proprietary fund our business life fund fiduciary funds they use full accrual which is economic resources and you're gonna we're gonna learn later about government-wide financial statements they use full accrual ignore the cash basis modified accrual the modified accrual the measurement basis you're looking at short-term assets short-term liabilities the measurement focus is current financial resources current financial resources that's what i'm looking to do type of entities that uses modified accrual well governmental fund statement what's which one are the governmental fund statement which we talked about when we talked about fund accounting the general fund which we have won we could have many debt funds capital project funds special revenue funds permanent funds those are governmental fund statements and those funds uses modified accrual again what is modified accrual it's how we measure revenues how do we measure expenses how do we record them not how we measure and measure them how do we record them but the best way to illustrate this is to look at an example or two or go to farhat lectures and look at additional multiple choice true false and also additional examples that's going to help you understand this understanding modified accrual is the basis for governmental accounting it's an accounting method that you have to be familiar with it's a new method modified accrual don't worry you'll you'll get comfortable with it whether you are taking a governmental accounting course CPA exam i can help you understand this inside out good luck study hard and invest in yourself