The federal government doesn't use accrual accounting?

[Taitertots]

How exactly do they do their accounting?

It seems like the federal government is doing some funky things. They can take money they have and buy bonds from themselves. Then not count that they have a liability of having to pay themselves back, and keep counting the spent money as an asset.

I was under the impression they don't recognize interest until it is due. So the national debt isn't our national current liability, it is how much money we have been lent.

Is the National Debt really 9 trillion, or 9 trillion plus interest?

[galileoreloaded]

1. Actually, they "expand " the balance sheet by literally creating money out of

thin air. That's what QE or quantitative easing means. Adding to the money supply, without the corresponding debt/production that normally would expand the money supply.

Oh, by the way, these things don't end well, unless of course we truly are different than every other society in history.

[FlyingTiger]

3. Erm... no, QE still involves buying bonds (or something else) n/t

[happyslug]

2. First you must understand Accrual Accounting

Accrual Accounting is an attempt to tie in profits with the related cost to produce that profit. The classic Accrual situation is when you sell something you bought the year before. What is your income? In a cash base accounting system (that most people use on a day to day basis) the profit is what you received when the item it sold. You do NOT reduce that profit by the cost of buying the item for it was purchased the year before. In accrual accounting you do NOT write off the cost in the previous year, you hold onto that "cost" and recognize it when the it is sold, and then use that cost to reduce the sale price to produce your "profit".

Notice, most people do NOT use accrual accounting. They do not need to for their "costs" tend to be the same from year to year (The IRS can force someone to do accrual accounting if the IRS determines that the use of Cash Accounting is NOT revealing all the income subject to taxation). Cash accounting is subject to a huge amount of manipulation, buying more items to sell next year, but writing off those purchases this year to reduce taxable income to Zero is the classic tax dodge. Thus most business use accrual accounting for it better ties in profits with costs and thus Income statements are more accurate.

Depreciation is the key to most accrual accounting. A taxpayer can not write off as an expense the cost of a new factory in the year it is built, the taxpayer has to capitalize the factory and depreciate it over the factory expected life time. This better ties in the cost of building that factory to the profits from the factory then if the factory was written off in year one even through the factory is used for 20-30 years.

Government (and non-profits in general) do NOT have to worry about investors or taxing agencies and as such prefer to write off purchases as expenses in the year incurred NOT when the whatever is being purchases is completed (For example, a new Bridge is built, the government building the bridge do NOT wait to recognize the cost of the bridge when it is finished, as a taxpaying business have to, but recognize the costs as the cost are paid, i.e each year it takes to build the bridge). The Government does not care if that something it built is to be used over 20-30 years, Government is worried about its cash outlays today. Thus when the Government builds buildings, even buildings it plan to use for decades, the Government recognize the cost of that building in the year it is built, not over the years it will be used.

Now, much is being made of the lack of Accrual accounting as to Government expenditures, mostly because if you treat Social Security, Pensions etc as a cost to be incurred in the future, some sort of recognition of those future costs must be taken today. At the same time, the same people are treating the various capital purchases that we can use over the next 20-30 years (Parks, highways, ships etc) as items to be expense away this year, even through they will be used for 20-30 (or longer) years. Thus these people are using accrual accounting for our long term payment (Social Security mainly) but then reverting to cash accounting for the various long term items we have built (Parks, Highways etc).

My point is Governments are NOT profit centers, Governments exist do to the fact they are needed. Governments rarely look beyond more then this fiscal year and if something comes up in the future the Government has the power to raise taxes to pay for it (Something Bush II refused to do with the Wars in Iraq and Afghanistan, but that is NOT accrual accounting problem but a general debt and taxation problem). This has both its good and bad points, but the bad points are what the people citing a "Accrual Accounting" are emphasizing. More a talking point then any real issue.

No, I am talking about Accrual accounting vs Non-profit/Government accounting (Which is closer to Cash accounting then Accrual Accounting) NOT the underlying problem of the debt. We have to pay the debt someday, but at present when people are bidding T-Bills so high that they are actually PAYING the Federal Government to hold their money, it is not the time when we have to give the economy a kick to get it restarted. Once the economy is moving, then we can slowly start to pay off the debt, like most other cash based tax payers do. The key is not the debt based on Accrual Accounting (Which includes long term costs like Medicare and Social Security in addition to other Government Pensions) but the total debt outstanding ignoring those ongoing items. Social Security and other ongoing items has to be paid no matter what, that is a cost of running such systems, and in cash accounting can be ignored except in the year the debt comes due. This is how the Government is handling the debt, only recognizing the actual debt owned today NOT what we will have to pay for Social Security over the next 30 years,

Side Note: I notice this big push to sued Accrual Accounting over the last couple of years, no comment before then. Why? The answer is simple, as long as the Federal Government was taking in more Social Security Tax Income then it was paying out as Social Security payments any accrual system would have treated that as an ongoing asset i.e. money being saved for later use. The problem is within the next ten years Social Security will have to go to Congress and say "You know all the money we invested in T-Bonds since 1982 and the Social Security Reforms of Ronald Reagan? While we can no longer buy them and we may need to cash them in to pay Social Security". This seems to be the reason to bring up accrual accounting now, Social Security can be viewed as a debt and since CONGRESS has to raise the money to repay Social Security for the T-bonds the excess Social Security was use to pay for since 1982, this is an increasing debt. Accrual accounting treatment of that Debt NOW, can maximize the stated costs of paying Social Security (In the 1990s, that the Social Security taxes were bring in excess dollars can be ignored today). This is a hidden attack on Social Security, the GOP failed to privatize it under Bush and they are trying one last attack based on the need for Congress to pay back all the money borrowed from Social Security since 1982.

[Taitertots]

4. I know about accrual accounting

Which is why I was confused when I found out the government doesn't do it.


Accrual accounting recognizes interest as it is incurred. Cash based accounting recognizes the interest only when it is due. Does the federal government recognize interest when it is due or when it is incurred? Is the federal debt 9 trillion plus interest? What is the true value of the liabilities of the federal government?

[happyslug]

5. My understanding is the debt is what is do TODAY, not in the past or the Future

Thus it includes interest earned up to today, but NOT future interest in that debt. Again, this is more a Cash Accounting outlook then an accrual outlook.

[Taitertots]

6. That is more an accrual outlook than a cash accounting outlook

An accrual based analysis would include all interest up to today, not future interest on the debt. A cash based accounting outlook would not include the interest until it has to be paid. Neither would include future interest.