Can we look at Cash-basis accounting method to see if we can try to address numerous questions and complains by some concern citizens of Nigeria. Many people are in the opinion that Nigerian government should scrap cash-basis accounting method thereby recommending Accrual basis accounting. Maybe they have forgotten that the objectives of government may not be necessarily to make profit but to render essential services to its people among others.
A similar question was prompted in our last session (session 8) of Corporate Financial Accounting in EMBA 28 class. The reason I choose to write on this topic.
Cash basis accounting is a method of accounting in which revenue and expenses are recorded when cash is received or paid out. In other words, under this method, revenue is recognized only when cash is received, and expenses are recognized only when they are paid. On the other hand, Accrual basis is a method that recognize revenue and expenses in the period in which the transactions occur. Under the accrual basis, companies record transactions that change a company’s financial statements in the periods in which the events occur.
Cash-basis method has largely been adapted for many years in public sectors: Ministries, Departments and Agencies (MDAs, commissions, parastatals etc. However, over the past two decades, a growing number of governments have begun moving away from the pure cash-basis accounting method towards accrual basis due to the recent spread of International Public Sector Accounting Standards (IPSAS), and other similar standards.
Still some people ague that the system provides inaccurate financial information thereby accusing Politicians and political appointees for hiding under the system to misappropriate, mismanage and syphoning of public funds.one can as well ague that same system (Cash basis accounting) is in use in other countries and yet no such corruption allegation.
So, let’s look at other things that may necessarily be the reasons why Politicians prefer Cash-basis accounting method over other accounting (Accruals basis) methods.
It is important to note that not all politicians prefer cash basis accounting over accruals, and the decision to use a particular accounting method may depend on a variety of factors, such as the size of the organization, the nature of the business, and the reporting requirements.
There are a few reasons why politicians or political organizations may prefer cash basis accounting over accruals:
- Simplicity: Cash basis accounting is a straightforward method that is easy to understand and use, even for those who do not have a background in accounting. For political campaigns or organizations that may not have the resources to hire professional accountants, cash basis accounting can be an appealing option.
- Reduced Reporting Requirements: Cash basis accounting requires less reporting than accrual accounting, which can be beneficial for political organizations that may not have the resources to produce comprehensive financial reports. This can also be advantageous for politicians who want to keep their finances private and do not want to disclose the details of their financial transactions.
- Political Expediency: Political campaigns can move quickly, and decisions often need to be made on short notice. Cash basis accounting allows for quick and easy record-keeping, which can be an advantage in a fast-paced political environment.
- Tax Benefits: Cash basis accounting can provide some tax benefits, as businesses can delay the recognition of revenue until the following year to reduce their taxable income. This can be particularly appealing to politicians or political organizations that want to minimize their tax liability.
However, there are also some potential drawbacks to using cash basis accounting in the political arena: - Limited Financial Reporting: Cash basis accounting only records cash inflows and outflows, which can provide a limited picture of a political organization’s financial health. This can make it difficult to make informed decisions and can hinder the ability to monitor financial performance over time.
- Lack of Transparency: Cash basis accounting may not provide a full picture of a politician’s or political organization’s financial activities. This can create an impression of lack of transparency, which can be detrimental to a political campaign or organization.
- Inaccuracy: Cash basis accounting does not account for all the financial transactions that an organization may have undertaken, leading to potential inaccuracies in financial reporting. This can lead to challenges in ensuring financial accountability.
In conclusion, while cash basis accounting can be appealing for political campaigns or organizations due to its simplicity, reduced reporting requirements, and potential tax benefits, it may not provide a full and accurate picture of an organization’s financial activities. As a result, politicians and political organizations may need to weigh the benefits and drawbacks of using cash basis accounting and consider the long-term impact on their financial reporting and transparency.
