Modified Accrual Accounting

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DEFINITION of 'Modified Accrual Accounting'

An accounting method commonly used by government agencies that combines accrual-basis accounting with cash-basis accounting. Modified accrual accounting recognizes revenues when they become available and measurable and, with a few exceptions, recognizes expenditures when liabilities are incurred. This system divides available funds into separate entities within the organization to ensure that the money is being spent where it was intended.

INVESTOPEDIA EXPLAINS 'Modified Accrual Accounting'

The Government Accounting Standards Board, which is recognized as the official source of generally accepted accounting principles (GAAP) for state and local governments, establishes modified accrual accounting standards. To distinguish government accounting from business accounting, modified accrual accounting uses some different terminology than other accounting methods. For example, it uses the terms "excess" or "deficiency" instead of "net income", and "expenditures" instead of "expenses". The idea that government agencies need a different type of accounting system is accepted because the purpose of government organizations is significantly different from the purpose of both for-profit businesses as well as not-for-profit non-governmental organizations.

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