Why do governmental funds use modified accrual instead of full accrual?

Question

AcadiFi · Accepted Answer

Governmental funds focus on current financial resources, not total economic resources. Modified accrual is designed to show whether the government raised and used spendable resources in the current period. That is why revenue is recognized when it is measurable and available, and expenditures are recognized when liabilities are incurred if they will use current financial resources. Capital assets and long-term debt are mostly excluded from governmental fund statements because they do not represent current spendable resources.

Example: The City of Red Mesa collects $2,400,000 of property taxes expected for the year, but only $2,250,000 is collected within the availability period. It records $2,250,000 as revenue and treats the remaining $150,000 as deferred inflow if not available soon enough under policy. It also buys fire trucks for $900,000 using bond proceeds. In the general fund, the purchase is an expenditure, not a capital asset. The bonds are another financing source, not a long-term liability on the fund statements.

```mermaid
flowchart TD
  A[Current resources focus] --> B[Available revenue]
  A --> C[Current-period expenditures]
  A --> D[No long-term assets]
  A --> E[No long-term debt]
```

The key FAR mindset shift is that fund statements answer, what current resources came in and went out, not what the government's full net position is. Government-wide statements handle the long-term view using full accrual. Practice more in our CPA FAR question bank.

Why do governmental funds use modified accrual instead of full accrual?

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