Governmental fund financial statements demand the accrual basis of accounting as well as the focus on financial resources at the time. In addition, governmental funds such as general funds and special revenue funds are financed with aids, taxes, and other sources. In this case, there is no possibility of matching revenues and services offered, which implies that budgets are essential. The adoption of modified accrual basis for governmental funds is critical since it has features of cash accounting and the consideration of the time when transactions took place. Furthermore, the consideration of cash and other liquid assets in the method ensures that the focus is short-term. However, it still takes into consideration the long-term debt and acquisition of tangible assets that are recorded in the operating statement.
Another reason that makes governmental funds adopt a modified accrual basis of accounting is the fact that their revenues are recognizable as long as they are measurable and available. Therefore, the accounting method enables the available financial resources to be accounted at the period. Through this process, the revenue and expenditure transactions are accounted for appropriately.
Contrary to the basis of accounting for governmental funds, the government-wide level uses the accrual basis of accounting. This is attributed to the fact that government-wide financial statements are based on activities rather than funds. For this reason, government activities and business-related activities are covered in the financial statements. Nevertheless, there are some relationships between the funds and activities of the government. The relationship between governmental funds and activities is portrayed by the inclusion of some funds within activities like internal service funds. This implies that the methods for adjusting the accrual statements are applicable during the preparation of modified accrual statements. Consequently, it shows that the two types of financial statements are related in some ways.