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.

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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.

How are cash and accrual deficits measured?    View details More Results Toggle

Cash Deficit

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.", or the cash deficitThe term used in this section to refer to the budget deficit (See budget deficit.), is the federal budget's "bottom line." It represents the actual amount by which total outlaysThe issuance of checks, disbursement of cash, or electronic transfer of funds made to liquidate a federal obligation. exceed receiptsCollections from the public based on the government's exercise of its sovereign powers, including individual and corporate income taxes and social insurance taxes, excise taxes, duties, court fines, compulsory licenses, and deposits of earnings by the Federal Reserve System. Total receipts are compared with total outlays in calculating the deficit or surplus.. The budget is the federal government's primary financial planning and control tool. While it does report historical budget data, it is largely a forward-looking document and helps establish national spending priorities and the allocation of resources. It also helps ensure that the federal government spends taxpayers' money in accordance with applicable laws. The federal budget and budget process largely use obligations-based accounting, which serves as a separate and distinct administrative control through which federal agencies control, monitor and report on the status of funds at their disposal. When an agency creates a legal liabilityIn budgetary terms, an agency can incur a liability (i.e., a claim that may be legally enforced against the government) in a variety of ways, such as signing a contract, grant, or cooperative agreement, or by operation of law., it “obligates” itself to pay and records an obligation against available funds. Recording the obligation effectively sets aside those funds for the actual cash outlay.

For the cash deficit, receipts and outlays are primarily measured on a cash basisThe basis whereby receipts are recorded when received and expenditures are recorded when paid, without regard to the accounting period in which the receipts are earned or the costs are incurred., which means they are recorded when cash is received or paid, similar to keeping a checkbook. In fiscal year 2009, the cash deficit peaked at $1.4 trillion and then slightly decreased to $1.3 trillion for both 2010 and 2011.

In some program areas where cash measurement does not reveal the full extent of a government‘s commitment up front when the commitment is made, the budget records outlays on an accrual basis. For example, areas measured on an accrual basis in the budget include federal credit programs, the cost of purchases and guarantees of certain assets during the financial crisis, and interest on debt held by the public.

Accrual Deficit

The net operating costThe excess of expenses over tax revenue. (See revenue; expenses.), or 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.), is the amount by which expensesOutflow or other use of assets, or incurrence of liability, during an operating period as a result of providing goods, services, or other activities the benefits from which do not extend beyond the present operating period. exceed revenueAs used in federal accounting, an inflow of resources that the government demands, earns, or receives by donation. As used in the congressional budget process, a synonym for governmental receipts.. Net operating cost is found in the Financial Report, which similar to a corporation's annual report, is the federal government's annual general-purpose report of its finances and generally serves as a look-back document reflecting what actually happened in the past year. However, it also captures liabilities that will have an impact on the budget in future years.

For this measure, expenses are recorded on an accrual basisThe basis of accounting whereby revenue is recognized when it is earned and expenses are recognized in the period incurred, regardless of when cash is received or paid., which means they are recorded in the period when goods are used, services are performed, or other relevant events happen that affect the measurement of cost, as opposed to when the resulting cash payments are made. Expenses include estimates of amounts that will be outlays in the future and thus depend on assumptions for interest rates, inflation, and wage growth, among others. Since 2008, the accrual deficit has topped $1 trillion annually, including a surge to $2.1 trillion in 2010.

Most revenues in the Financial Report are recorded on a modified cash basisA term used to describe the federal government's hybrid system for accounting for revenues from taxes and duties. Under a modified cash basis, revenue is recognized when received in cash except for tax receivables (taxes owed from taxpayers but not yet collected) and refunds payable (refunds owed to taxpayers but not yet paid by the federal government), which are both measured on an accrual basis.. This means they are essentially recorded when collected, but there is an accrual adjustment for some taxes due that have not been paid by the taxpayer and refunds due to taxpayers that have not been paid by the government. A modified cash basis of accounting is used in part because of inherent limitations estimating the amount of revenue arising from underlying events (e.g., taxpayers may not know their taxable income until after the underlying event, they may not file returns on their due dates, or they may underpay).

What purpose does each measure serve?    View details More Results Toggle

Cash and accrual measures serve different purposes. The cash deficit closely approximates the federal government's short-term borrowing needs and is a widely used and accepted measure of the government's effect on current financial markets. Accrual measures are useful for understanding the government's annual operating cost, including costs incurred today but not payable for years to come. Accrual measures also add a longer-term focus to the federal government's financial picture by providing more information on longer-term consequences of today's policy decisions, operations, and events. However, they do not include information about the timing of payments and receipts, which can be important.

Therefore, the cash and accrual deficits present complementary information and can be used together to provide a more comprehensive picture of the federal government's financial condition today and over time. Neither measure, however, fully reflects the future fiscal challenges associated with rising health care costs and an aging population. While both the cash and accrual deficits include payments to current beneficiaries for entitlement programs, such as Social Security and Medicare, neither the cash nor accrual deficit reflects future scheduled benefits and estimated receipts.