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(a) In government, there are four basic methods of accounting
that affect the time at which a transaction is recorded in the
accounting system:
- cash accounting. Accounting entries are made when
funds are paid or received, or internal transactions are
recorded.
- commitment accounting. Accounting entries are made
when a contract is entered into or an order is placed for goods
or services; the entries record the amount to be reserved out of
the unencumbered balance remaining in an allotment in order to
honour the commitment.
- accrual accounting. Accounting entries are made when
goods or services are received; the entries record the receipt of
the asset or service and the liability of the government to pay
for these goods and services.
- cost-based accounting. Accounting entries are made
when goods or services are consumed; the entries record the cost
of resources consumed in the accounting period in which the
benefits are received.
(b) Both commitment and cash accounting are required by
statute and form the basis of the traditional system of
government accounting. Commitment accounting is required to
ensure that departments anticipate their expenditures so as not
to exceed appropriation and allotment ceilings, and cash
accounting is required to meet Parliament's needs for complete,
accurate, and informative data on the cash transactions of
government.
(c) Though there is no statutory requirement that accrual and
cost-based accounting be practised in government, departments
should recognize that these methods of accounting may result in
more useful reports for management than reports produced on a
cash basis. Most definitions of accrual accounting incorporate
the concept of cost-based accounting as it is described above.
The distinction made in this guide between cost-based and accrual
accounting is useful for government purposes because it separates
conceptually the recording of accurate costs of resources
consumed from the recording of assets and liabilities. The latter
has less significance in government than in industry because a
government's statement of assets and liabilities is not used to
the same extent for financing purposes. Nevertheless, the
recording of costs in a cost-based system is facilitated by
accrual accounting because accrual accounting ensures that all
transactions that have taken place in the period are reflected in
the accounting system for inclusion in the period's costs when
the related goods or services are consumed.
(a) Cash accounting is the principal method of accounting in
the Government of Canada because it provides financial
information in a form that is most appropriate for requirements
of parliamentary control. For certain administrative agencies it
also provides information that satisfies most requirements of
managerial control. Since the appropriations of the Government of
Canada are provided on a cash basis, departmental accounts must
be maintained in the first instance on a cash basis.
(b) Because the Receiver General is responsible for receipts
into and payments out of the Consolidated Revenue Fund, cash
accounting information is readily available from the central
accounting records of Public Works and Government Services. It is
important for cash transactions to be processed promptly if the
information obtained from these records is to reflect all
transactions that have taken place in a department. Public Works
and Government Services has offices accessible to most
responsibility centres; transactions should go directly from the
nearest financial office that has authority to requisition
payments on behalf of the departmental responsibility centre to
the nearest services office. This will result in more timely and
useful financial reports, as well as in the prompt settlement of
amounts owing to persons or companies rendering services to the
government.
(c) When management has limited short-term control over costs,
and unit costs do not need to be computed on a periodic basis,
cash accounting systems will meet most managerial requirements,
providing the system is functioning efficiently.
(a) Deputy heads have a statutory responsibility to establish
commitment control systems. Departments with excess commitment
authority also have a responsibility for ensuring that total
commitments for current and future fiscal years do not, at any
point in time during the fiscal year, exceed the limit imposed by
Parliament.
(b) While commitment accounting systems may be independent of
the principal departmental accounting system, period-end data on
commitments should normally be input for purposes of financial
reporting. For departments that are using the departmental
financial reporting services of Public Works and Government
Services, totals of commitments can be input to the departmental
reporting system and automatically reversed in the following
month. Commitment information can then be included or excluded
from any reports prepared according to specifications set by each
department.
(c) The system may consist of an open file of commitment
documents. One open file should be maintained for each
subdivision for which allotment control is to be exercised. The
total value of outstanding commitments in this file can be
determined at any time by aggregating the documents in the files.
There should be adequate accounting controls, such as sequential
control of commitment documents or summary cards, to ensure the
completeness, accuracy, and authority of the files.
(d) When particular commitments are outstanding for an
extended period of time or when a continuing total of commitments
is essential, as in the case of capital projects, it is normally
preferable to supplement an open-file system with a simple ledger
or journal that identifies the balance of each undischarged
commitment and the total value of outstanding commitments.
(e) Commitment information must be readily available to
officers who have spending authority and who take actions that
will subsequently result in charges against the appropriation.
The officers must be able to call for this information if there
is any reason to believe that there is a possibility of reaching
full commitment for any allotment.
(f) The standards of completeness, accuracy, and authority
applicable to all information in commitment records are the same
as those applicable to any accounting system. Control procedures
should be documented in the departmental financial manual
accompanied by specific departmental policies on the timing and
methods of recording particular types of commitments, such as
operating expenses, salaries, capital expenditures, multi-year
commitments, expenditures out of imprest accounts, advances, and
grants and contributions.
(a) Departmental accounting systems should be designed to
permit accrual information to be entered into the accounting
records wherever it is necessary to satisfy requirements for
cost-based accounting.
(b) As explained previously, accrual accounting involves
recording the receipt of an asset or service to identify the
liability of the government. As usually defined, it also includes
the deferring of expenses to obtain accurate identification of
costs consumed during an accounting period. This aspect of
accrual accounting is discussed separately in the next section
under the heading of cost-based accounting.
(c) Accrual accounting lays the basis for an accurate
matching, with respect to time, of accounting information with
non-accounting information and of costs against output,
performance data, or revenues. Its purpose is to record all
transactions that have taken place during a specific period of
time, regardless of the timing of cash payments or receipts.
(d) Because of the geographical dispersion of some
departmental programs, prompt disbursement of cash is not always
possible, and input of non-cash transactions may be required to
record transactions pending cheque issue. Moreover, some accounts
may be delayed because of discrepancies or because the
information necessary for the payment to be approved is
incomplete. Through accrual entries, the accounts can be adjusted
to input transactions that would otherwise not have been reported
through the normal cash accounting system. The extent to which
accrual accounting is practised in any department must be
determined by considering the additional cost of accrual
practices as compared with potential benefits in terms of better
cost data.
(e) Accrual accounting must be practised in a manner that does
not interfere with the operation of the cash accounting system,
since financial managers at both the central and departmental
levels in government need complete, accurate, and current cash
information if they are to manage cash appropriations
effectively. This limitation should not be restrictive, because
with the effective use of accounting techniques and financial
reporting systems, departments are able to provide both cash
accounting and accrual accounting information without conflict,
duplication, or misinterpretation. The departmental reporting
services of Public Works and Government Services enable financial
reports to be prepared on both a cash and accrual basis,
according to the needs of the client.
(f) Departmental accounting systems should be designed to
ensure that accounting transactions that have received managerial
approval as at the date of an accounting report are included in
that report. This is a minimum standard for accrual accounting.
If accounting or financial reports do not reflect transactions
that an operating manager knows have taken place and have been
reported to an accounting office, then the financial reports will
not have credibility for the manager and, with some
justification, will not be used. If there is a delay in obtaining
financial authorization or if the transaction cannot be processed
through the cheque issue system in sufficient time, an accrual
entry is required and should be input by financial staff as soon
as the delay is recognized.
(g) Departmental accounting systems should be designed to
enable accruals to be recorded for goods or services that have
been received or provided by the department and for which payment
will occur in the future, even though an invoice or statement may
not have been issued. This standard should be applied to those
individual responsibility centres in a department where the
result of a time difference between the date on which the goods
or services are received and the date on which managerial
approval is granted is likely to have a significant effect on the
content or usefulness of financial reports. If one transaction is
significant in amount the standard may be applied on an exception
basis; if an accumulation of routine transactions is significant
in amount it should be applied on a continuing basis to ensure
the completeness and accuracy of the information reported.
(h) Techniques for accrual accounting are described in
Appendix A.
(a) Departmental accounting systems should be designed to
provide accurate, periodic cost information on the various
activity elements involved in carrying out departmental programs.
A cost-based accounting system must be integrated with the
primary cash accounting system of a department to ensure the
completeness of the cost information and to minimize
duplication.
(b) Costs cannot be overlooked in arriving at decisions in
government. With the increasing delegation of financial authority
to managers at lower levels and the growing emphasis on
performance of managers in attaining program objectives, there is
need for consistently prepared, reliable, and timely cost
information to account for the consequences of decisions. Cost
information can also be used as a basis for preparing future
plans and budgets; as a means of controlling, measuring, or
comparing current operations; as a basis for benefit-cost
analysis and make or buy decisions; and as a means of determining
revenue charges. To monitor the performance of managers, periodic
cost information should be available on the basic components of
departmental operations, such as individual projects, tasks,
services, and products.
(c) Cost-based accounting involves choosing from among a
combination of accounting techniques and methods within the
constraints of certain conventions to produce cost information
that is useful to management. There are many ways of computing
costs, and the term accurate cost has meaning only when the
selected techniques, methods, and conventions are known. Those
who are responsible for preparing cost information must
understand the uses to which the data may be put to ensure that
the cost information is not misleading. Similarly, those who use
cost information must have a knowledge of the basis on which it
was computed. Costs have no intrinsic value; their usefulness
depends wholly upon the action that management is able to take in
the light of the information they reveal. For example, if cost
information is to be used to support a make or buy decision
involving an entirely new operation of government, it is
desirable to include all appropriate overhead in the costs,
whereas if the make or buy decision involves an existing
government operation, sunk costs should be ignored. It is
important to include only those costs which are relevant to
management decisions or to actions which may result.
(d) Consistent application of accounting conventions is of
prime importance and is essential when cost information is to be
used for comparing costs over a period of time or for comparing
two or more alternatives at a given point in time. Frequently, a
record of costs over a period of time, if established
consistently, may be an extremely useful indicator to management
even though, in absolute terms, the costs may not be
complete.
(e) It is primarily the responsibility of financial officers
to identify the needs for cost information in their departments,
to suggest techniques that will satisfy these needs, and, with
the concurrence of management, to implement those techniques.
Operating managers will often recognize the need for cost
information or its potential benefits and usefulness but they
should not be expected to determine or apply the various
techniques to obtain the information they require. However, no
cost data should be developed without the full concurrence of the
appropriate manager, who must know what costs are included, how
accurately they are computed, the degree to which they can be
meaningfully matched with non-financial information such as
performance indicators, and any limitations. Moreover, the
financial officer should normally seek to provide data that have
the confidence of line management, and this can only be done by
utilizing techniques that are based on sound, observable,
objective data, most of which originate with the line
manager.
(f) It is also the responsibility of the financial officer to
support management by analyzing and interpreting cost
information. This includes explaining variances in terms of
price, volume, and efficiency, when this is practical.
(g) Techniques for allocating and identifying costs are
described in Appendix B.
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