Accrual vs Cash Accounting in Government
Accrual vs Cash Accounting in Government
Monday, 7 September 2026
Key takeaways
- Under the cash accounting method, revenue is recorded (or recognised) when received and expenses when paid. In contrast, accrual accounting records them when income is earned or expenses incurred, regardless of when cash changes hands
- Australia was among the first countries to adopt accrual accounting in government, with the transition occurring through the 1990s and accrual budgeting adopted at the Commonwealth level in 1999-2000
- The shift made government financial statements more useful and transparent by revealing liabilities, depreciation and the true cost of delivering services
- Accrual accounting operates under the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and Australian Accounting Standards issued by the AASB
- Public sector finance professionals in Australia need to understand accrual principles to read government financial statements, manage budgets and meet reporting obligations
Accrual accounting records revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid. Cash accounting records them only when money actually changes hands. The distinction sounds technical, but in government it changed how entire budgets are constructed, how assets are managed and how the public understands what its government owns and owes. Australia was one of the first countries in the world to adopt accrual accounting across its public sector, with the transition running through the 1990s and accrual budgeting introduced at the Commonwealth level in 1999-2000. The shift gave Australians a fundamentally different picture of their government’s financial position, one that made long term liabilities, infrastructure depreciation and the full cost of service delivery visible for the first time.
What is the difference between cash and accrual accounting?
Under cash accounting, a government records revenue when tax payments or fees arrive in the bank account and records expenses when cheques are issued or payments leave the account. A contract signed in June but not paid until August appears in August’s figures. An asset purchased for $10 million appears as a $10 million expense in the year it is paid for, then disappears from the financial statements entirely. The method is simple and verifiable, but it produces a picture that is incomplete. It tells you how much cash moved. It does not tell you what the government owns, what it owes or whether its financial position is improving or deteriorating.
Under accrual accounting, that same contract is recorded when the obligation is created, not when the payment clears. The $10 million asset appears on the balance sheet at purchase and is depreciated over its useful life, so the cost is spread across the years it delivers value.
Employee leave entitlements are recognised as a liability when they accrue, not when they are paid out. Superannuation obligations appear on the balance sheet in full, even though the cash will not be paid for decades. The Australian Accounting Standards Board (AASB) develops the standards that govern how these transactions are recorded across both the private and public sectors in Australia.
Why did Australian governments switch to accrual accounting?
Before the 1990s, most Australian government entities used cash or modified cash accounting. Government Business Enterprises were the exception, already reporting on a full accrual basis because they operated in commercial environments. For departments and agencies, the cash basis meant that financial statements showed how much money was spent but not what was achieved with it. There was no systematic reporting of assets, no recognition of depreciation and no visible record of long term liabilities such as unfunded superannuation.
The reform was driven by a recognition that cash accounting created perverse incentives. Under cash, deferring maintenance on a bridge costs nothing in the current year’s accounts. Under accrual, depreciation forces the cost of asset wear to appear every year whether maintenance is performed or not. Cash accounting also created a bias against capital investment, because the full cost of purchasing an asset hit the budget in a single year even though the asset would deliver value over twenty or thirty years. The ANAO’s assessment of Commonwealth financial management reform described the adoption of accrual budgeting in 1999-2000 as the most significant step in cementing the benefits of the accrual transition.
The shift also reflected a broader international movement. The International Federation of Accountants (IFAC) and the Chartered Institute of Public Finance and Accountancy (CIPFA) have tracked the global adoption of accrual accounting. Their joint index shows that about 30 per cent of governments worldwide were reporting on an accrual basis by the end of 2020, with a forecast that 50 per cent would have transitioned by 2025. Australia, New Zealand, the United Kingdom and Canada were among the earliest adopters.
What did the transition actually change?
The most immediate change was the introduction of a balance sheet for the government. Under cash, governments reported a statement of receipts and payments. Under accrual, they report a comprehensive set of financial statements including a balance sheet (statement of financial position), an income statement (statement of comprehensive income), a cash flow statement and a statement of changes in equity. This gives parliamentarians, auditors and the public a view of what the government owns (infrastructure, buildings, financial assets), what it owes (debt, employee entitlements, provisions) and whether its net financial position is strengthening or weakening over time.
The second change was visibility of the true cost of services. Under cash, the cost of running a hospital was the cash spent on salaries, supplies and utilities in a given year. Under accrual, that cost also includes the depreciation of the building, the accrual of employee leave entitlements and any provisions for future obligations such as remediation or warranty claims. Accrual accounting revealed that many government services cost more than cash figures suggested, because long term obligations were accumulating without being reported.
The third change was better asset management. When depreciation appears in the accounts, there is a visible reminder that assets are losing value and will eventually need to be renewed. This removed the incentive under cash accounting to defer maintenance indefinitely, because deferred maintenance had no financial consequence in the cash based accounts even though the asset was deteriorating. Today, Australian government financial statements report infrastructure assets at fair value and track their condition over time, a discipline that was not possible under cash accounting.
What framework governs government accounting in Australia today?
Commonwealth entities report under the Public Governance, Performance and Accountability Act 2013 (PGPA Act), which replaced the Financial Management and Accountability Act 1997 and the Commonwealth Authorities and Companies Act 1997. The PGPA Act establishes the duties of accountable authorities, the requirements for annual financial statements and the governance framework for Commonwealth entities. Financial statements must comply with Australian Accounting Standards issued by the AASB, which align with International Financial Reporting Standards (IFRS) for the private sector and draw on International Public Sector Accounting Standards (IPSAS) for public sector specific guidance.
State and local governments operate under their own legislative frameworks but apply the same AASB standards. AASB 1049 (Whole of Government and General Government Sector Financial Reporting) governs how government financial statements are prepared, requiring accrual based general purpose financial reports that show assets, liabilities, revenue, expenses and cash flows.
Why does this matter for public sector professionals?
Understanding accrual accounting is not optional for anyone who works with government budgets, financial statements or performance reporting. A budget manager who does not understand depreciation will underestimate the true cost of the services their unit delivers. A contract manager who does not recognise a provision will miss a liability building in the accounts. A senior executive who reads only the cash flow statement will have an incomplete picture of whether their entity is financially sustainable.
The capability gap is common because many professionals enter government from non-financial backgrounds. Government financial statements carry additional complexity: appropriation accounting, administered versus departmental items and the interaction between the budget framework and the financial reporting framework all require specific knowledge.
How can professionals build public finance capability?
AcademyGlobal (AG), the Chartered Institute of Procurement & Supply (CIPS) Centre of Excellence for Australia, New Zealand and Southeast Asia, is also the exclusive Australian partner for the Chartered Institute of Public Finance and Accountancy (CIPFA). AG’s Analysing Financial Statements program is designed for professionals who need to read, interpret and act on financial information in government and organisational settings. It builds the practical skills to understand accrual based financial statements, assess an entity’s financial position and use financial data to inform operational decisions. For professionals seeking an internationally recognised qualification in public financial management, AG’s CIPFA Study Centre delivers the CIPFA qualifications pathway in Australia, covering the full spectrum of public finance disciplines including financial reporting, asset management, governance and accountability.
Accrual accounting gave Australian governments a more complete and honest picture of their financial position. The professionals who can read that picture clearly are the ones who make better decisions about how public resources are used.
Frequently asked questions
What is the difference between cash and accrual accounting?
Cash accounting records transactions when cash is received or paid. Accrual accounting records them when revenue is earned or expenses are incurred, regardless of when cash changes hands. Accrual produces a more complete picture of an organisation’s financial position because it includes assets, liabilities and non cash obligations.
When did Australian governments adopt accrual accounting?
The transition occurred through the 1990s. The AASB issued accrual standards for federal, state, territory and local governments during that decade. Accrual budgeting was adopted at the Commonwealth level in 1999-2000, which was the step that fully embedded accrual principles into the budget framework.
What legislation governs Commonwealth financial reporting?
The Public Governance, Performance and Accountability Act 2013 (PGPA Act) is the primary legislation. It establishes the duties of accountable authorities, the requirements for annual financial statements and the governance framework for Commonwealth entities. Financial statements must comply with Australian Accounting Standards issued by the AASB.
Why does accrual accounting matter for asset management?
Accrual accounting requires the recognition of depreciation, which makes the cost of asset wear visible in the accounts every year. This removed the incentive under cash accounting to defer maintenance indefinitely. It also enabled government balance sheets to show the value of infrastructure assets and track their condition over time.
Where can I learn to read government financial statements?
AcademyGlobal’s Analysing Financial Statements program builds the practical skills to interpret accrual based financial reports in government and organisational settings.
References
1. CPA Australia, “Cash to Accrual: What Does the Global Public Sector Shift Mean?” INTHEBLACK, https://intheblack.cpaaustralia.com.au/accounting/cash-to-accrual-what-does-global-public-sector-shift-mean
2. ANAO, “Financial Management in the Public Sector,” CPA Australia Conference, 2006, https://www.anao.gov.au/sites/default/files/McPhee_financial_management_in_the_public_sector_2006.pdf
3. Australian Accounting Standards Board, “General FAQs,” https://aasb.gov.au/research-resources/general-faqs/
4. Department of Finance, “Foundations for Financial Statements,” RMG 125, https://www.finance.gov.au/government/managing-commonwealth-resources/commonwealth-entities-financial-statements-guide-rmg-125/1-foundations-financial-statements
5. AASB, “How the AASB Sets Accounting Standards for the Australian Public Sector,” https://frc.gov.au/sites/frc.gov.au/files/2014/01/Paper-accounting-standards-2012.pdf