In government accounting, which basis of accounting is typically used for governmental funds and why?

• A. Cash basis for governmental funds; accrual basis used for enterprise funds.
• B. Modified accrual for governmental funds to reflect current financial resources; accrual basis used for enterprise funds.
• C. Accrual basis for governmental funds; modified accrual for enterprise funds.
• D. Modified accrual for governmental funds; accrual basis used for enterprise funds.

Answer: (D)

The main idea here is how different fund types in government accounting measure their finances. Governmental funds are focused on current financial resources needed to operate in the near term, so they use a modified accrual basis. This approach recognizes revenues when they are measurable and available to be used in the current period, and records expenditures when the related liability is incurred, focusing on what resources are actually available now.

Enterprise funds, which cover business-type activities like utilities or airports, are accounted for on an accrual basis, similar to private-sector accounting. Revenues are recognized when earned, expenses when incurred, and long-term assets and liabilities (including depreciation) are reflected. This provides a full economic view of the activity over time, not just the near-term resources.

So the pairing that fits GASB practice is: modified accrual for governmental funds and accrual for enterprise funds. Cash basis isn’t used in these governmental contexts because it wouldn’t adequately show current resource availability or long-term obligations, and the other pairings mix these concepts in ways that don’t align with how these funds are intended to report.