Modified Accrual Accounting

How It Works

Modified accrual is a hybrid between cash accounting (recording transactions only when cash changes hands) and full accrual accounting (recording when economic events occur regardless of cash timing). Under GASB standards for governmental funds (general fund, special revenue, capital projects, debt service, permanent), revenues are recognized when both measurable and available, with "available" typically defined as collectible within the current period or soon enough thereafter to pay current-period liabilities (usually within 60 days, though some jurisdictions use 30 or 90 days). Property taxes received after the availability window are deferred as "unavailable revenue" rather than recognized as revenue. Expenditures are recognized when the fund liability is incurred, except for debt service, compensated absences, claims and judgments, and certain long-term obligations, which are recognized only when due and payable. Capital outlays are recorded as expenditures in the governmental fund (not capitalized), and debt proceeds are recorded as "other financing sources" rather than liabilities. Modified accrual provides a near-term focus appropriate for governmental budgeting, where the key question is: how much current financial resource is available to spend? It aligns with legal budget compliance and the concept of "current financial resources measurement focus." Enterprise funds, proprietary funds, pension trust funds, and government-wide financial statements use full accrual accounting under the "economic resources measurement focus," which captures all assets, all liabilities (including long-term), depreciation of capital assets, and all expenses regardless of cash timing. GASB Statement 34 requires reconciliation between modified accrual fund statements and full-accrual government-wide statements, with differences such as capital asset capitalization, long-term debt recognition, and accrued liabilities reconciled in the ACFR. Understanding the difference is essential for reading municipal financial statements and interpreting Census ASG finance data used in the CitySpend Fiscal Health Score.

Related Terms

• Generally Accepted Accounting Principles (GAAP), The standardized accounting rules that governments follow when preparing financial statements, as promulgated by the Governmental Accounting Standards Board (GASB).
• Governmental Accounting Standards Board (GASB), The independent organization that sets accounting and financial reporting standards for U.S. state and local governments.
• Comprehensive Annual Financial Report (CAFR/ACFR), A city's official annual financial report, audited by independent accountants, containing detailed financial statements, statistical data, and management discussion.