In accounting for state and local governments, the modified accrual basis is required for which funds?

• A. Governmental funds
• B. Fiduciary funds
• C. Proprietary funds
• D. Internal Service Funds

Answer: (A)

Modified accrual is the basis used for governmental funds to focus on current financial resources. Revenues are recognized when they are measurable and available to finance the current-period expenditures, and expenditures are recognized when the related liability is incurred, with certain near-term debt items recognized only when due. This approach fits the purpose of governmental funds, which are used to monitor resources that are available in the near term to support spending.

Fiduciary funds and proprietary funds, including internal service funds, use the full accrual basis of accounting, which recognizes revenues and expenses when earned or incurred, regardless of cash timing. That’s why governmental funds are the ones that require the modified accrual method.