Measurement Focus and Basis of Accounting

In order to ensure consistency over time and to ensure comparability across organizations, governments follow certain standards when recording their financial transactions and summarizing them for reporting to individuals outside of government. These standards are known collectively as generally accepted accounting principles (GAAP). Crucial underlying principles are those that prescribe the measurement focus and basis of accounting.

Measurement Focus

Measurement focus refers to the kinds of assets, liabilities, deferred inflows and outflows, and changes in net position (or fund balance) a government should concentrate on when recording transactions. Government uses an economic resources measurement focus for government-wide financial statements, meaning that the government records all financial and capital resources that flow in and out and all changes in net position, regardless of their form, as long as a monetary value can be put on these resources. Therefore, governments must track not only cash that changes hands, but also investments, inventory, equipment, buildings and other property, amounts owed to suppliers and employees, outstanding notes and bonds, long-term leases, and looming judgments and claims.

Basis of Accounting

The basis of accounting describes when to record the assets, liabilities, deferred inflows and outflows, and changes in net position (or fund balance) stipulated by the measurement focus. Government uses the accrual basis of accounting to prepare the government-wide statements. It is the accounting method used by businesses and not-for-profit organizations. When using full accrual, the government reports all transactions that occur and have an effect on the government's finances, regardless of whether cash changes hands, in the yearly financial statements. For example, goods and services provided are recorded regardless of whether cash was received in exchange from a customer or credit was extended to a customer. Similarly, purchases of office supplies are recorded whether paid for in cash or bought with a promise to pay later (by credit card or business account).