What does the term “modified accrual basis” refer to in accounting?

The term "modified accrual basis" refers to a combination of cash and accrual accounting, which is specifically utilized in governmental accounting for recording financial transactions. This method recognizes revenues when they are both measurable and available to finance expenditures of the current period, rather than simply when cash is received. Similarly, expenses are recorded when an obligation is incurred, rather than when cash is disbursed.

By employing this hybrid approach, modified accrual accounting offers a framework that ensures the financial reporting reflects the timing of the availability of resources and the actual obligations of the government entity, which is essential for accountability and budgeting within governmental operations. This allows entities to manage their financial resources effectively while still adhering to the principles of accrual accounting when it comes to recognizing expenses.