The article discusses how using accrual accounting in financial reporting and budgeting can improve public sector financial management. Many developed countries have shifted towards accrual basis to focus on outcomes rather than just cash inputs. In Croatia, there has been a transition to modified accrual accounting, but budgeting still happens on a cash basis. The paper suggests that aligning reporting and budgeting on accrual basis can lead to better management and performance measurement in the government sector. This change could help Croatia keep up with international trends in public sector reforms.