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Treasury Board of Canada Secretariat - Government of Canada
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1. Directives and Guidelines
2. Introduction
3. Financial Systems
4. Timing and Recording of Transactions
5. Mechanics of Coding Systems
6. Controls in Financial Systems
7. Enquiries
Appendix A
Appendix B
Appendix C 
Appendix D

Other Related Documents

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Financial Systems and Controls

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4. Timing of Recording of Transactions

(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.

4.1 Cash Accounting

(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.

4.2 Commitment Accounting

(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.

4.3 Accrual Accounting

(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.

4.4 Cost-based Accounting

(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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