GAAP vs. Cash

The Washington State Auditor’s Office has allowed the choice in accounting methods to be made by local government leaders: GAAP or Cash? GAAP, or Generally Accepted Accounting Principles, refers to the accrual method of accounting where transactions enter the books when they accrue. Cash basis, technically known as Other Comprehensive Basis Of Accounting (OCBOA), measures transactions when they have a financial impact, that is, when payment actually occurs.

GAAP Argument

Many professionals will argue that GAAP should be the preferred method of accounting as it provides much more detailed and sophisticated long term information, thus allowing policymakers to make better decisions. It takes into account the financial impact of future concerns like the corrosion of public infrastructure or the growing liability of compensated absences.

The greater complexity of GAAP accounting comes with increased difficulty and cost. The majority of Washington cities and towns have a population less than 10,000. Are these higher costs worth the benefit on such a small scale? Cash basis accounting provides ample information to make informed decisions about budgetary needs.

Cash Argument

Mike Bailey, Finance Director for the City of Redmond, recently wrote: “Discussions and decisions in smaller Washington local governments are often about making ends meet through the budget period.” He goes on to recommend cash basis: “The reality is most city councils I’ve worked with can do an excellent job of managing their responsibilities and are very comfortable with the cash basis information in the context of the budget.”

The accounting method that will best suit your capabilities and needs can vary. Fortunately, Washington State allows the decision between GAAP and cash to be made locally.

Read Mike Bailey’s full Article here.