Which statement best describes the primary difference between modified accrual accounting and full accrual accounting in state finance?

Which statement best describes the primary difference between modified accrual accounting and full accrual accounting in state finance?

• A. Full accrual recognizes revenues and expenses when earned/incurred regardless of cash; modified accrual recognizes revenues when cash is received and expenditures when cash is paid.
• B. Modified accrual recognizes revenues when available and measurable and expenditures when incurred; full accrual recognizes revenues and expenses when earned/incurred regardless of cash.
• C. Modified accrual and full accrual are identical in recognizing revenues.
• D. Modified accrual recognizes revenue when earned; full accrual recognizes revenue when cash is received.

Answer: (B)

In state finance, the important distinction is when revenues and expenditures are recognized under the two methods. Modified accrual records revenues only when they are measurable and available to pay current obligations, and records expenditures when the related liability is incurred (not when cash is paid). Full accrual, by contrast, records revenues and expenses when they are earned or incurred, regardless of when cash is received or paid. So the statement that modified accrual uses revenues when available and measurable and expenditures when incurred, while full accrual uses revenues and expenses when earned or incurred regardless of cash, captures this key difference. For example, under modified accrual you don’t recognize long-term assets or liabilities on the fund statements the same way you do under full accrual, and you don’t wait to recognize revenues until cash arrives in all cases.

In state finance, the important distinction is when revenues and expenditures are recognized under the two methods. Modified accrual records revenues only when they are measurable and available to pay current obligations, and records expenditures when the related liability is incurred (not when cash is paid). Full accrual, by contrast, records revenues and expenses when they are earned or incurred, regardless of when cash is received or paid. So the statement that modified accrual uses revenues when available and measurable and expenditures when incurred, while full accrual uses revenues and expenses when earned or incurred regardless of cash, captures this key difference. For example, under modified accrual you don’t recognize long-term assets or liabilities on the fund statements the same way you do under full accrual, and you don’t wait to recognize revenues until cash arrives in all cases.