Post date: Mon, Oct 27, 2025
Category: Accrual Accounting
By: Raphael Muya,

Introduction

The Government issued a statement regarding adopting accrual accounting system in all government Ministries, Agencies, and Departments (MDAs) in the fiscal year 2024–2025. In March 2024, it was reported that the Government of Kenya through Treasury sought to create a new accounting plan to end the menace of pending bills and misuse in government. The Cabinet approved a phased three-year transition to a full Accrual Based Accounting system for the country. By implication, the financial statements prepared by the government in the fiscal year 2026/27 must be in the accrual format.

In the wake of these new developments, the IEA-Kenya is keen to track the implementation of the reform in the public sector’s accounting system. Table 1 shows some timelines for the implementation as shared in this report by the Public Sector Accounting Standard Board of Kenya.

How the System works

Accrual accounting is a financial method of accounting where revenues and expenditures are recorded when the transactions occur but usually before money is received or disbursed. The method uses a matching principle which requires that revenues and expenses should be recognized in the same period. Recording an accrual ensures that the transaction is recognised in the accounting period in which it occurred rather than paid. This is a necessity of Generally Accepted Accounting Principles (GAAP) based accounting, and it provides a more accurate and up-to-date assessment of financial status than the cash-basis accounting technique, which records expenses as they are paid. It is common to prepay or pay later for goods and services. Accruals represent money earned or spent but not yet paid for.

The main idea behind accrual accounting is that accounting journal entries are created when a commodity or service is delivered rather than when a payment is made or received. There are additional entries for debts and payments due. This strategy combines current and future cash inflows and outflows to provide a more realistic view of an entity’s (in this case, the government’s) current and long-term financial situation.

In public sector, accrual accounting helps the government understand the full cost of services given as well as the long-term consequences of financial decisions. For example, if a government construct a hospital, accrual accounting records the expense when it is incurred rather than when it is paid for. Similarly, the system records revenue when the responsibility to pay occurs, regardless of when the payment is received. This strategy promotes transparency by allowing stakeholders to examine the sustainability of government programs

Features of Accruals Accounting

In accrual accounting, there are two major categories of accruals: accruing revenues and accrued expenses. These are further differentiated into revenue which is accrued or deferred and expenses which are prepaid or accrued.

a. Deferred Revenue

This account is a liability because the firm has an obligation to deliver the goods or provide the service in the future. When a firm receives payment before the goods are delivered, it creates an account called deferred revenue, also referred to as unearned revenue. This account is a liability because the company has an obligation to deliver the goods or provide the service in the future.

b.  Accrued Revenue

Accrued revenues are earnings obtained from the sale of goods and services but not yet paid by the consumer. Accrued revenue arises when a corporation delivers products or provides a service but has not yet been paid. These accounts are frequently used for long-term projects, milestones, and loans, and at the conclusion of each reporting period, revenue earned but not received should be documented.

c. Prepaid Expenses

A prepaid expense is an item that is paid for in one accounting period but the underlying asset will not be fully consumed until a later period. When a firm pays cash for a product or service before it is delivered, it creates a prepaid expense account. This account is an asset account since it indicates that the firm has the right to receive a good or service in the future.

d. Accrued Expenses

Accrued Expenses are expenses incurred but not paid for during an event in which a firm incurs an expense that has not yet been billed for. Essentially, the firm obtained a good or service for which it will pay later. In the meanwhile, the expense is considered an incurred liability. At the conclusion of each reporting period, accruals should be made for goods received but not yet paid for.

Pros and Cons of Accrual Accounting

The Government of Kenya is shifting from the cash basis of accounting to the accrual basis of accounting in order to improve cash management and financial and fiscal reporting. The accrual accounting method will allow the government to account for all assets and liabilities. The transition to accrual accounting is coordinated by accounting standards (IPSAS 33) and the roadmap developed by the Implementation Steering Committee. All financial assets, including bank accounts, will be recognised during the first year of transition. All other assets, including natural resources, will be recognised during the second and third years of transition.

One of the key benefits of accrual accounting in the public sector is improved transparency and accountability. By recognizing financial events in the period, they happen, governments can better assess the costs of services, the sustainability of programs, and long term-term impact of policy decisions. The method supports more informed decision making and enhances public trust by providing stakeholders with clearer insights into financial health and performance

Accrual accounting is useful because it reveals underlying firm’s transactions, not only those involving cash. The majority of a firm’s transactions are uncomplicated, with payment made at the moment of the transaction. Other, more sophisticated transactions include purchasing and selling on credit, which requires a corporation to account for cash that they will have to pay or receive at a later date. It’s incredibly useful for tracking financial operations and managing a company’s finances. Firm’s use accrual accounting to gain a real-time perspective of how much money is coming in. In addition, firms can forecast future financial results. The accrual accounting approach is very simple to use when preparing cash flow statements and identifying financial trends. It is critical for a firm to be informed of its financial situation.

Despite the accrual method of accounting being more sophisticated compared to cash basis accounting methods, accrual accounting is widely accepted as normal practice in most organizations. Accrual accounting allows organizations to look at both current and prospective cash flows, providing a more realistic picture of their financial health of the organization. Additionally, Accrual accounting increases transparency in a company’s financial condition by showing all cash that will be collected and paid out. This method allows a company’s top management to understand and plan for future periods based on a much more accurate picture of the company’s finances.

Accrual accounting demands recording income and expenses when they are earned or incurred, rather than when currency trades hands, making the process more complex. This can complicate the accounting process, particularly for organizations with a high volume of transactions or complicated revenue recognition criteria. The method also may result in delayed recognition of income, especially for firms that provide goods or services on credit. This can impact a company’s ability to assess its current financial position accurately. Indeed, implementing the full systems and complying with the accompanying rules and regulations can be more costly and time-consuming for firms, particularly small businesses with limited resources.

While accrual accounting offers a more accurate representation of the government’s net worth, it can increase significantly pending bills. As the method records revenues and expenses when they are earned or incurred, the system will consequently capture a more comprehensive view of the governments’ financial obligations and assets at any given time. This means that liabilities such as unpaid bills are recorded immediately, which can cause the reported amount of pending bills to rise. Without careful fiscal management, this accumulation of obligation can strain public finances and obscure the government’s ability to meet its short-term commitments, even if its long-term financial position appears sound.

Governments already applying full accrual accounting standards consistent with IPSAS requirements include: – Australia,Canada,New Zealand,United Kingdom and United States of America. In New Zealand, Guthrie et.al (2005) held that various financial mechanisms built on the accrual accounting base have, over the long term, had adetrimental effect on departmental capability in a manner that has escaped parliamentary understanding and control. International examples of failed accrual accounting system model include Nepal and Indonesia. Fahlevi et al., (2022) found accrual accounting was partly relevant but lacked the benefit for the Indonesian local governments. Further, the study revealed the absence of New Public Management (NPM) spirit unchanged nature and objectives of the local governments, and thus, the preparation of accrual-based financial accounting is merely ceremonial to satisfy the demand of the donor agencies.

Conclusion

 The timing of revenue and expense recognition is determined by the accounting system used. Revenue and costs are recorded when cash is paid or received. Under accrual basis accounting, revenue is recorded when collected and expenses are recognised when incurred. Understanding the distinctions between the cash basis and accrual accounting could be useful for policymakers as they contemplate revising the government’s financial reporting obligations.

The plan by the government of Kenya to shift toward accrual accounting represent a strategic move to enhance transparency, reliability, and comprehensiveness of public financial reporting. This system allows policymakers to assess liabilities and assets more accurately, improving budget credibility and long-term sustainability. Implementing accrual accounting in government can be complex due to the need for robust systems, training personnel, and consistent standards. However, the shift often requires significant investment in infrastructure and capacity building, but long term-benefits in financial management and planning are substantial.

As Kenya continue to strengthen its financial management framework, adopting accrual accounting can support better governance, increased accountability, and more effective service delivery to citizens. Overall, government accrual accounting represents a shift toward more sophisticated and responsible financial practices which aligns the public sector accounting with the private sector norms. The shift will facilitate better intergovernmental equity by recognizing future obligations, and supports fiscal sustainability. As government face increasing demand for efficiency and transparency, accrual accounting serves as a vital tool for modern public financial management.

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