What it means
Businesses account to show profit; governments account to show stewardship. A city does not exist to earn a margin, so its everyday accounts answer a different question: does this year's revenue cover this year's services.
Modified accrual is built for that question. Revenue counts when it is both measurable and available to pay current bills, typically meaning it will arrive soon after year-end, while expenditure counts when the obligation is incurred, not when cash leaves.
The method sits between the poles. Cash accounting would hide unpaid bills and late revenue entirely; full accrual would pull in long-term items like buildings and pensions that say nothing about this year's budget.
Modified accrual takes the useful middle. The standard setter is the Governmental Accounting Standards Board in the United States, whose statements, including Statement 33 on nonexchange transactions such as taxes and grants, define when modified accrual recognises the flows that taxes dominate.
The sixty-day rule illustrates the flavour. Property taxes due after year-end count as current revenue only if they arrive within a short window after it; money expected later belongs to a later year, however certain it is.
Two sets of books result. Governmental funds use modified accrual for budget-style reporting, while government-wide statements use full accrual for a business-like view, and reconciling the two is a routine chore of public finance.
For a business owner, the concept matters when dealing with government: grants, tax assessments and public contracts all live under these rules, and reading a municipality's accounts means knowing that its fund statements deliberately omit the long-term picture that the government-wide statements carry.
In practice
Real-world examples.
Example
A city levies property tax in December for the following year. Under modified accrual, the portion expected to arrive within sixty days of year-end counts as current revenue; the rest is deferred.
Example
A council receives a state grant it can only spend on road repairs. The grant becomes revenue when eligibility conditions are met and the money is available, not when the council first wins the award.
Example
A supplier reading a county's accounts before bidding finds strong fund balances but weak government-wide figures. The difference is modified accrual at work, and the supplier prices for slower payment terms. He wins the bid with terms that survive a slow county payment cycle.
Formula
Calculation
There is no formula, but the recognition test is two-part: revenue counts when measurable and available (usually collectible within the current period or soon after), and expenditure counts when the liability is incurred. Failing either half of the revenue test defers the item.
Worked example: a city levies $1,200,000 of property tax for the year. It collects $900,000 during the year and a further $180,000 within 60 days after year-end, with the remaining $120,000 expected later. Revenue recognised for the year under modified accrual = $900,000 + $180,000 = $1,080,000, while the $120,000 expected later is deferred to a later year. On a full accrual basis, the whole $1,200,000 might be recognised, which is why the two sets of statements show different figures.Case study
Seen in the real world.
In this illustrative fictional case, Dora, newly elected treasurer of a small town, opens her first annual report and finds two contradictory bottom lines. The general fund shows a healthy surplus while the government-wide statement shows a deficit. Her finance officer walks her through modified accrual: the fund surplus excludes the depreciation and pension costs that the full accrual statements include. Dora stops quoting the flattering number in speeches, budgets a pension top-up instead, and later calls the two-column confusion the most useful lesson of her first hundred days.
Dora asks her finance officer to prepare a one-page reconciliation for the council. It shows the fund surplus of the general fund on one line, then adds back the pension and depreciation costs that the government-wide statement includes, ending at the deficit the full accrual statement reports. The council adopts the one-page version as a standard attachment to every annual report, so that residents and lenders can see both figures and understand why they differ.
Watch out
Common mistakes.
- Reading fund surpluses as financial health, when modified accrual deliberately excludes long-term obligations that the government-wide statements reveal. Both numbers are true; they measure different things.
- Recognising tax revenue when levied, when the method requires it to be available for current spending, so late-arriving taxes are deferred.
- Assuming governments account like businesses, when the stewardship purpose, the two sets of statements and the modified accrual rules make public accounts a different dialect.
Questions
People also ask.
How does modified accrual differ from full accrual?
Full accrual recognises all economic events including depreciation and long-term obligations. Modified accrual focuses on current resources: revenue when available and measurable, spending when the liability arises. The two methods answer different questions, which is why governments publish both.
Who uses modified accrual accounting?
State and local governments use it for governmental funds, the budget-style statements. In the United States the Governmental Accounting Standards Board sets the rules, including Statement 33 for taxes and grants. Proprietary funds, such as utilities a government runs commercially, use full accrual instead.
Why do governments publish two sets of numbers?
Fund statements answer the budget question, whether current revenues covered current services. Government-wide statements answer the business question, whether the entity's overall position improved. Modified accrual serves the first; full accrual serves the second. Bond investors read the second; voters usually hear about the first.
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