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Modified accrual accounting is commonly used by government agencies.
Modified accrual accounting borrows elements from both cash and accrual accounting, depending on whether assets are long-term, such as fixed assets and long-term debt, or short-term, such as accounts receivable (AR) and inventory.
Businesses that wish to use this method must do so for internal purposes and then convert transactions recorded under a cash basis to accrual accounting to get them signed off by auditors. The Government Accounting Standards Board (GASB), which is recognized as the official source of GAAP for state and local governments, establishes modified accrual accounting standards.
Modified accrual accounting is used and accepted by governmental agencies because they focus on current-year obligations.
As a result, expenses are recorded in the same period as the revenues they generated.
While the revenue recognition and matching principles are rather straight forward, their application is often subject to seemingly arbitrary rules and requires the use of estimates(Cooper, Lyman, 2002).
Modified accrual accounting is an alternative bookkeeping method that combines accrual basis accounting with cash basis accounting.
It recognizes revenues when they become available and measurable and, with a few exceptions, records expenditures when liabilities are incurred.
Revenue Recognition Principle By matching revenues with expenses the accrual concept became the cornerstone of accounting.
By comparing cash with the cost of generating it an investor can develop an understanding for the profitability of a business.