Measuring the Deficit: Cash vs. Accrual
In recent years, public debates and media reports have focused on the country's financial position. This debate has historically focused on the budget deficitThe amount by which the government's outlays exceed the sum of its receipts for a given period, usually a fiscal year. Also called "cash deficit.", which was $1.3 trillion in fiscal year 2011, near the dollar record of $1.4 trillion set in 2009. Because the budget deficit is primarily measured on a cash basis, it is called the cash deficitThe term used in this section to refer to the budget deficit (See budget deficit.) . However, another measure—referred to as the accrual deficitThe term used in this section to refer to the net operating cost as reported in the Financial Report. (See net operating cost.)—also provides a useful perspective on the federal government's financial condition. While the cash deficit closely approximates the federal government's annual borrowing needs, the accrual deficit generally provides additional information on the longer-term implications of the government's annual operations. Neither measure, however, is intended to capture the expected future costs of Social Security, Medicare, and other social insurance benefits for the aging population.
The cash and accrual deficits are based on the same underlying activities, but the differences arise due to the timing of when the costs of certain activities are recognized.
- For the cash deficit, costs are recorded when cash payments are made for goods received or for services performed.
- For the accrual deficit, costs are recognized when goods are used or services are performed, regardless of when payment is made.
For some program areas, the timing difference is small. For others, such as military employee benefits and veterans compensation, the timing differences can amount to billions of dollars each year. The Differences in Key Programs section provides examples of the differences. These differences can cause the cash and accrual deficits to send different signals about the potential costs of individual programs, whether the federal government is in surplus or deficit, and the direction in which the government's financial condition is heading. The figure below shows that in 2001 the budget was running a cash surplus, while the accrual measure showed a large deficit. In 2010, although both measures were in deficit, the cash deficit decreased from the previous year while the accrual deficit sharply increased. Then in 2011, the two measures were fairly close to one another.
Source: Unaudited Department of the Treasury data from the Financial Reports.
Accrual and Cash Deficits 2001-2011 data: txt
The following sections have been put together to answer key questions about the measures of fiscal position shown in the federal budget (which shows the cash deficit) and consolidated financial statements (which shows the accrual deficit and reconciliation from accrual deficit to cash deficit) of the U.S. government such as how the two measures are similar, how they are different, and what drives changes in the two measures.
Throughout the following sections, we report data from the Financial Report of the United States Government, referred to here as the Financial Report, which is prepared annually by the Department of the Treasury (Treasury) in coordination with the Office of Management and Budget (OMB) and includes the consolidated financial statements of the U.S. government. We also refer to data captured in the President’s Budget of the U.S. Government, referred to here as the budget, which is prepared annually by OMB. The President submits the budget to Congress each February and the Treasury reports the budget results in October after the end of the fiscal year.
One should not focus on the precise amount of the accrual deficits, its components, or their change from year to year because significant issues regarding the reliability and presentation of the federal government's financial information still need to be addressed. GAO is responsible for auditing the consolidated financial statements of the U.S. government and has been unable to render an opinion on the accrual-based consolidated financial statements because the federal government could not demonstrate the reliability of significant portions of the financial statements or that the reconciling differences between accrual and cash deficits were complete. Financial accounting standards are intended to result in the provision of financial information that will be useful for decision making. Once the information reported in the financial statements is deemed materially consistent and reliable, it would provide integrity to related information in the financial statements and in the budget, including actual receipts and outlays.