Session 4 & 5 Session Title Government Accounting System in India, Government Accounting –...

Session 4 & 5Session 4 & 5Session TitleSession Title

Government Accounting System in India, Government Accounting System in India, Government Accounting – Principles & Practices, Government Accounting – Principles & Practices, Deficiencies and limitations in present Deficiencies and limitations in present government accounting system, Accrual Basis of government accounting system, Accrual Basis of Accounting, Advantages of Accrual Accounting Accounting, Advantages of Accrual Accounting System, and Difference between cash based System, and Difference between cash based single entry system and accrual based double single entry system and accrual based double entry system. Budgeting in Government (i) entry system. Budgeting in Government (i) Present system of budgeting (ii) What will be Present system of budgeting (ii) What will be possible nature of budgeting if it is prepared on possible nature of budgeting if it is prepared on accrual basis? accrual basis?

Session overview:Session overview: The cash basis of accounting has been The cash basis of accounting has been

traditionally followed by the Government because it traditionally followed by the Government because it has the advantage of focusing Government’s has the advantage of focusing Government’s attention on its financing constraints, which are attention on its financing constraints, which are viewed as its most binding priority.viewed as its most binding priority.

There has been, however, growing There has been, however, growing dissatisfaction with the system. This stems from dissatisfaction with the system. This stems from various deficiencies in and limitations with the various deficiencies in and limitations with the system.system.

Due to global economic integration, public Due to global economic integration, public demand that government should be fully demand that government should be fully accountable to the community for the resources accountable to the community for the resources entrusted, forced the countries to adopt:entrusted, forced the countries to adopt:

• Radical economic reforms including involvement of Radical economic reforms including involvement of private sector in delivery of public services;private sector in delivery of public services;

• Radical changes in the management tools, Radical changes in the management tools, information technology, ways of decision-making, information technology, ways of decision-making, performance measurements, accounting performance measurements, accounting procedures, accounting systems etc. procedures, accounting systems etc.

Session overview: (continued…)Session overview: (continued…) The International Monetary Fund’s Second Edition of The International Monetary Fund’s Second Edition of

the Government Finance Statistics manual, 2001 (GFS) aims the Government Finance Statistics manual, 2001 (GFS) aims at improving Government accounting and transparency at improving Government accounting and transparency operations, envisages accrual accounting, balance sheet and operations, envisages accrual accounting, balance sheet and complete coverage of Government’s economic and financial complete coverage of Government’s economic and financial activities to meet the new requirements of formulating and activities to meet the new requirements of formulating and evaluating Governments Fiscal policies.evaluating Governments Fiscal policies.

The GFS system uses the accrual basis in preference to The GFS system uses the accrual basis in preference to the cash basis of accounting primarily because the time of the cash basis of accounting primarily because the time of recording matches the time of actual resource flow. recording matches the time of actual resource flow.

As a result, the accrual basis provides the best As a result, the accrual basis provides the best estimate of the macro economic impact of the Government estimate of the macro economic impact of the Government fiscal policies. In this case, the time of recording will not fiscal policies. In this case, the time of recording will not diverge from the time of economic activities and transactions diverge from the time of economic activities and transactions to which they relate.to which they relate.

The accrual basis provides the most comprehensive The accrual basis provides the most comprehensive information.information.

Several international accounting agencies (Internal Several international accounting agencies (Internal Federation of Accountants, International Public Sector Federation of Accountants, International Public Sector Accounting Standards board) also suggest that all Accounting Standards board) also suggest that all Governments should adopt the accrual basis.Governments should adopt the accrual basis.

However, the move to accrual basis for public sector However, the move to accrual basis for public sector financial reporting has yet to gain universal acceptance.financial reporting has yet to gain universal acceptance.

Session overview: (continued…)Session overview: (continued…) 12th Finance Commission (TFC) recommended 12th Finance Commission (TFC) recommended

adoption of accrual basis for the Government accounting.adoption of accrual basis for the Government accounting. The recommendations have been accepted by the The recommendations have been accepted by the

Government of India in principle.Government of India in principle. Migration to accrual accounting has been accepted by Migration to accrual accounting has been accepted by

Government of India and most of the State Governments.Government of India and most of the State Governments. The 13th Finance Commission also endorsed the The 13th Finance Commission also endorsed the

adoption of accrual basis of accounting in India.adoption of accrual basis of accounting in India. Pursuant to the decision of the Government of India, Pursuant to the decision of the Government of India,

the Government Accounting Standards Advisory Board the Government Accounting Standards Advisory Board (GASAB) was set up in August 2002, in the office of the (GASAB) was set up in August 2002, in the office of the Comptroller & Auditor General of India.Comptroller & Auditor General of India.

The GASAB has suggested an operational framework The GASAB has suggested an operational framework and roadmap for migration to accrual accounting. GASAB shall and roadmap for migration to accrual accounting. GASAB shall have to set itself to the task of providing distinctive set of have to set itself to the task of providing distinctive set of accounting policies including those on income and liability accounting policies including those on income and liability recognition, depreciation and valuation of assets.recognition, depreciation and valuation of assets.

GASAB has to issue accounting standards in the Indian GASAB has to issue accounting standards in the Indian context. It would consistently reconsider, refine and amend context. It would consistently reconsider, refine and amend the standards the standards

Session Structure:Session Structure:1.Government Accounting System in India1.Government Accounting System in India(i) What is accounting?(i) What is accounting?(ii) Basis of Accounting – Cash Based and Accrual Based Accounting System.(ii) Basis of Accounting – Cash Based and Accrual Based Accounting System.(iii) Book Keeping methods – Single entry system and double entry system(iii) Book Keeping methods – Single entry system and double entry system2. Government Accounting – Principles & Practices2. Government Accounting – Principles & Practices(i) Basis of Government Accounting in India(i) Basis of Government Accounting in India(ii) Features of Government Accounting(ii) Features of Government Accounting(iii) Structure of Budget and Accounting.(iii) Structure of Budget and Accounting.(iv) Form of Accounts(iv) Form of Accounts(v) Suspense Accounts(v) Suspense Accounts(vi) HCGA and HCB Account(vi) HCGA and HCB Account(vii) Financial Reporting – Appropriation and Finance Accounts(vii) Financial Reporting – Appropriation and Finance Accounts3. Deficiencies and limitations in present government accounting system.3. Deficiencies and limitations in present government accounting system.4. Dr C. Rangarajan Committee report on effective management of Public 4. Dr C. Rangarajan Committee report on effective management of Public

Expenditure.Expenditure.4. Accrual Basis of Accounting4. Accrual Basis of Accounting(i) Main Features of Accrual Accounting.(i) Main Features of Accrual Accounting.(ii) Advantages of Accrual Accounting System(ii) Advantages of Accrual Accounting System(iii) Difference between cash based single entry system and accrual based (iii) Difference between cash based single entry system and accrual based

double entry system.double entry system.5. Budgeting in Government5. Budgeting in Government(i) Present system of budgeting(i) Present system of budgeting(ii) What will be possible nature of budgeting if it is prepared on accrual basis?(ii) What will be possible nature of budgeting if it is prepared on accrual basis?Exercise and Group discussion. Exercise and Group discussion.

GOVERNMENT ACCOUNTING SYSTEM IN GOVERNMENT ACCOUNTING SYSTEM IN INDIA:INDIA:Though this is a vast area, in this session we will discuss only the important Though this is a vast area, in this session we will discuss only the important aspect of Government Accounting.aspect of Government Accounting.

What is Accounting?What is Accounting?

1. Accounting is the recording and reporting of 1. Accounting is the recording and reporting of transactions and events of an entity/ government transactions and events of an entity/ government which involves:which involves:

(a) Decision regarding WHAT to account i.e. which (a) Decision regarding WHAT to account i.e. which transactions are amenable to accounting transactions are amenable to accounting treatment:treatment:

(i) Material, Measurable, Reasonably estimable.(i) Material, Measurable, Reasonably estimable.

(ii) Compliance to rules and laws of the land.(ii) Compliance to rules and laws of the land.

(iii) Budgetary requirements and legislative (iii) Budgetary requirements and legislative compliance.compliance.

(b) Decision regarding WHEN and HOW to account & report?(b) Decision regarding WHEN and HOW to account & report?(i) Recognition(i) Recognition

• It is a process of incorporating in the accounts (Balance sheets or income It is a process of incorporating in the accounts (Balance sheets or income statement) an item which can be measured reliably and is material.statement) an item which can be measured reliably and is material. Regarding transactions or events in the books of account at which point Regarding transactions or events in the books of account at which point

of time.of time.o When actually paid or incurredWhen actually paid or incurredo When actually received or dueWhen actually received or due

• Recording a transaction or events in the books of account for which period Recording a transaction or events in the books of account for which period of timeof time

• Recording which type of transactions/events?Recording which type of transactions/events? Only cash receipts and payments and cash balances, orOnly cash receipts and payments and cash balances, or Revenue/expensesRevenue/expenses All events, liabilities, and commitments including non-cash transactionsAll events, liabilities, and commitments including non-cash transactions

(ii) Measurement(ii) Measurement• It is a process of determining the monetary value at which an item/element It is a process of determining the monetary value at which an item/element

is carried in the book of accounts and may involve various bases of is carried in the book of accounts and may involve various bases of measurement including:measurement including:o Historical cost- cost paid/amounts received.Historical cost- cost paid/amounts received.o Fair value at the time of acquisitionFair value at the time of acquisitiono Current cost – cost to be paid for acquiring same or an equivalent item Current cost – cost to be paid for acquiring same or an equivalent item

or cost to settle the obligation currently.or cost to settle the obligation currently.o Fair value/ market valueFair value/ market valueo Realizable cost- amounts that could be obtained on disposal/ settlement Realizable cost- amounts that could be obtained on disposal/ settlement

valuevalueo Nominal costNominal cost

(iii) Classifications(iii) Classifications• Recognition of transactions and Recognition of transactions and

events as per standard events as per standard classification.classification. RevenueRevenue ExpensesExpenses AssetsAssets

o Physical assets, financial assets, Physical assets, financial assets, billspayable, provisionsbillspayable, provisions

o Contingent liabilities/ assets & Contingent liabilities/ assets & commitments, etc.commitments, etc.

(iv) Disclosure(iv) Disclosure

(v) Reporting(v) Reporting

Whose accounts we are talking Whose accounts we are talking about?about?

UnionUnion StateState

Departments/ Departments/ MinistriesMinistries•Civil Civil Ministries/DepartmentsMinistries/Departments•DefenceDefence

•RailwayRailwayDepartmentsDepartments•PostsPosts

DepartmentsDepartments•All Departments All Departments including Works, including Works, Forest & Irrigation Forest & Irrigation ss

Autonomous Bodies Autonomous Bodies Autonomous Bodies Autonomous Bodies

PSUs PSUs PSUs PSUs

Union Territories Union Territories Local Bodies Local Bodies

Bases/Models of Accounting:Bases/Models of Accounting:• CashCash• Modified CashModified Cash• AccrualAccrual• Modified AccrualModified Accrual

Book Keeping Methods:Book Keeping Methods:

(i) Single entry(i) Single entry

(ii) Double entry(ii) Double entry

Form of Accounts:Form of Accounts:1. Article 150 of the Constitution of India, reads “The 1. Article 150 of the Constitution of India, reads “The

Accounts of the Union and of the States shall be Accounts of the Union and of the States shall be kept in kept in such formsuch form as the President may, on the as the President may, on the advice of the Comptroller and Auditor General of advice of the Comptroller and Auditor General of India, prescribes”India, prescribes”

2. Form of Accounts: As per Article 150, the Form of 2. Form of Accounts: As per Article 150, the Form of accounts of government are:accounts of government are:

(i) Division and structure of accounts(i) Division and structure of accounts(ii) Classification of transactions(ii) Classification of transactions(iii) Basis of accounting(iii) Basis of accounting(iv) Format of financial reporting(iv) Format of financial reporting(v) Principles of recognition, measurement, (v) Principles of recognition, measurement,

classification and disclosure.classification and disclosure.

Government Accounting (Principles and Government Accounting (Principles and Practices)Practices)

Basis of Government Accounting in IndiaBasis of Government Accounting in India1. 1. Accounting Rules provides Cash Basis (Government Accounting Rules 21 Accounting Rules provides Cash Basis (Government Accounting Rules 21

and General Financial Rules 68) which states that “With the exception of and General Financial Rules 68) which states that “With the exception of such book adjustments as may be authorized by these rules or by any such book adjustments as may be authorized by these rules or by any general or special orders issued by the Central Government on the general or special orders issued by the Central Government on the advice of the Comptroller and Auditor General of India, the transactions advice of the Comptroller and Auditor General of India, the transactions in the Government accounts shall represent the actual cash receipts in the Government accounts shall represent the actual cash receipts and disbursements during the financial year as distinguished from and disbursements during the financial year as distinguished from amounts due to or by Government during the same period.”amounts due to or by Government during the same period.”

2. 2. Accounts are designed to focus mainly on expenditure control vis-à-vis Accounts are designed to focus mainly on expenditure control vis-à-vis budget allotment, i.e more tuned to financial integrity rather than budget allotment, i.e more tuned to financial integrity rather than efficient resource allocation and utilization.efficient resource allocation and utilization.

3. 3. These do not reveal accrued assets and liabilities but mere cash These do not reveal accrued assets and liabilities but mere cash transactions over the years.transactions over the years.

4. 4. The budget preparation is on cash basis consistent with the basis of The budget preparation is on cash basis consistent with the basis of accounting. The Finance Accounts, the Government’s annual financial accounting. The Finance Accounts, the Government’s annual financial statements, present the accounts of receipts and disbursements of the statements, present the accounts of receipts and disbursements of the Government for the year.Government for the year.

5. 5. The Appropriation accounts for the year for the grants and charged The Appropriation accounts for the year for the grants and charged appropriations supplement these accounts.appropriations supplement these accounts.

6. 6. Appropriations and expenditures are inter-related and only the Appropriations and expenditures are inter-related and only the amounts, which are legally authorized, are supposed to be spent during amounts, which are legally authorized, are supposed to be spent during the year.the year.

7. 7. Appropriations remaining unused lapse at the end of the fiscal year and Appropriations remaining unused lapse at the end of the fiscal year and are not available for the next year. Appropriations for the next year are not available for the next year. Appropriations for the next year include the un-discharged liabilities as well.include the un-discharged liabilities as well.

8. 8. “Cash Basis” has the advantage of focusing Government’s attention on “Cash Basis” has the advantage of focusing Government’s attention on its financing constraints, which are viewed as its most binding priority.its financing constraints, which are viewed as its most binding priority.

Features & principles of Features & principles of Government Accounting:Government Accounting:

1. Budgetary accounting1. Budgetary accounting

(i) The steps are: Budget (i) The steps are: Budget Appropriation Appropriation Sanction Sanction Expenditure Expenditure Accounting Accounting

(ii) Accounts follows budget and budgetary and accounting (ii) Accounts follows budget and budgetary and accounting classification are similar.classification are similar.

(iii) Cash based budgeting and accounting(iii) Cash based budgeting and accounting

(iv). Uniform accounting at Union and State level.(iv). Uniform accounting at Union and State level.• Chart of AccountsChart of Accounts• Government Accounting RulesGovernment Accounting Rules• Reporting FormatsReporting Formats

(v) Accounting based on codes & manuals containing (v) Accounting based on codes & manuals containing accounting principlesaccounting principles

(vi) Rule based accounting and absence of explicit (vi) Rule based accounting and absence of explicit government accounting standards unlike the government accounting standards unlike the commercial accounting.commercial accounting.

Structure of Budget & Accounts:Structure of Budget & Accounts:

Government Account

Consolidated Fund of India Contingency Fund of India Public Account of India

Small savings

Deposits & Advances

Reserve Funds

Suspense & Misc.

Remittances

Cash Balance

Revenue Account Capital Account

Receipts Receipts Expenditure

General Services

Social services

Economic Services

Grants-in-aid & Contributions

Public Debt

Loans & Advances

Tax Revenue

Non-Tax Revenue


Expenditure

General services

Social Services

Economic Services


Form of Accounts: Division ofForm of Accounts: Division of Accounts:Accounts: Divisions of Divisions of government accounts are as follows: government accounts are as follows: Divisions Divisions Sections Sections Sectors Sectors Sub-Sectors Sub-Sectors Functions Functions Programmes Programmes Schemes Schemes Object (PUA) Object (PUA)Six-Tier Classification Schemes:Six-Tier Classification Schemes:

Major Head (4 digit)Major Head (4 digit) Functions of the GovernmentFunctions of the Government

Sub- Major Head (2 Sub- Major Head (2 Digit)Digit)

Sub-FunctionsSub-Functions

Minor Head (3 Digit)Minor Head (3 Digit) ProgrammesProgrammes

Sub-Head (2 Digit)Sub-Head (2 Digit) SchemesSchemes

Detailed Head (2 Detailed Head (2 digit)digit)

Sub-SchemeSub-Scheme

Object Head (2 Object Head (2 Digit)Digit)

Primary unit of Appropration Primary unit of Appropration (PUA)(PUA)

Reporting Requirements:Reporting Requirements:

Expenditure Classifications:Expenditure Classifications:

(i)(i) Capital & RevenueCapital & Revenue

(a) Revenue & Others (Art.112)(a) Revenue & Others (Art.112)

(ii) Charged and Voted (Art. 112)(ii) Charged and Voted (Art. 112)

(iii) Planned and Non-Planned (Statutory (iii) Planned and Non-Planned (Statutory Requirements- Heads of Requirements- Heads of Development)Development)

Cash Balance:Cash Balance:

Cash Balance – Union Government

Proforma balances- Railways

Proforma balances- Defence

Proforma balances-

P&T

Ledger balances-

Civil Ministries

Note: Cash Balance of State Government has no such Concepts

Plan & Non- Plan Expenditure Heads of Plan & Non- Plan Expenditure Heads of Development:Development:

PlanPlan

► Investment outlays to Investment outlays to replace worn out or over-replace worn out or over-aged capital stockaged capital stock

► New development New development programmes or projects or programmes or projects or schemes on capital account schemes on capital account which involves creation of which involves creation of assetsassets

► New development New development programmes or projects or programmes or projects or schemes on capital accountschemes on capital account

► Spill over schemes or Spill over schemes or previous plan to be previous plan to be completed. completed.

Non-PlanNon-Plan

► All expenditure connected All expenditure connected with the maintenance of with the maintenance of development schemes development schemes completed during the Five completed during the Five Year Plan periodYear Plan period

► All expenditure connected All expenditure connected with the maintenance of with the maintenance of existing institutions and existing institutions and establishments establishments

Suspense Accounts:Suspense Accounts:1. Suspense in Public Accounts is adjusting heads.1. Suspense in Public Accounts is adjusting heads.2. Operated as means to account transactions 2. Operated as means to account transactions

(receipt and payments) (receipt and payments) ‘temporarily”‘temporarily” awaiting awaiting final accountal in respective functional heads.final accountal in respective functional heads.

3. While adjusting to final heads of account, initial 3. While adjusting to final heads of account, initial Cr/Dr as the case may e, is cleared from the Cr/Dr as the case may e, is cleared from the Suspense Head by minus credit/minus debit.Suspense Head by minus credit/minus debit.

4. As a matter of account being giving true & fair 4. As a matter of account being giving true & fair view, suspense balance should be adjusted by view, suspense balance should be adjusted by the end of the year.the end of the year.

5. Huge balances remaining gives a distorted view 5. Huge balances remaining gives a distorted view of the accounts.of the accounts.

Head Close to Government Accounts (HCGA) Head Close to Government Accounts (HCGA) & Heads Close to Balances (HCB):& Heads Close to Balances (HCB):

► In Government accounting, distinction is made In Government accounting, distinction is made between certain heads which close every year between certain heads which close every year and whose balances are not carried forward.and whose balances are not carried forward.

► These heads do not represent transactions These heads do not represent transactions whereby Government has receivables and whereby Government has receivables and payables and they close to ‘Government Account’.payables and they close to ‘Government Account’.

► Government Accounts – Government Accounts – Represents cumulative deficit and surplus of the past Represents cumulative deficit and surplus of the past

under heads whose balances are not carried forward.under heads whose balances are not carried forward.► There are certain other heads which close to There are certain other heads which close to

balances and their balances as represent balances and their balances as represent receivables and payables.receivables and payables.

Continued….Continued….

► Heads under the following sectors close to Heads under the following sectors close to Government AccountGovernment Account

Receipt Heads (Revenue Account)Receipt Heads (Revenue Account) Receipt Heads (Capital Accounts) [4000]Receipt Heads (Capital Accounts) [4000] Expenditure Heads (Revenue Account)Expenditure Heads (Revenue Account) Expenditure Heads (Capital Account)Expenditure Heads (Capital Account) Inter State Settlement (7810)Inter State Settlement (7810) Misc (Net)Misc (Net)

► Appropriation to the Contingency Fund(7990)Appropriation to the Contingency Fund(7990)► Reserve Bank Deposits (RBD)Reserve Bank Deposits (RBD)► Misc. Government Account (8680)Misc. Government Account (8680)

Adding Opening balance of last year and net effect Adding Opening balance of last year and net effect of Prior Period of Adjustment Account to the above of Prior Period of Adjustment Account to the above balances, the debit and credit of the Government balances, the debit and credit of the Government Account is reached.Account is reached.

Heads under Debt, Loans, Deposit, Advances, Heads under Debt, Loans, Deposit, Advances, Suspense and Remittances heads close to balance.Suspense and Remittances heads close to balance.

Adding to Government Account, the balances of Adding to Government Account, the balances of heads closing to balances and the Contingency heads closing to balances and the Contingency Fund, net amount of closing cash balance at the end Fund, net amount of closing cash balance at the end of the year is reached.of the year is reached.

Financial Reporting:Financial Reporting:► Objectives of Financial Reporting:Objectives of Financial Reporting:► 1. It provides information to 1. It provides information to ► Primarily legislature and its committees, budget and decision makers, auditing Primarily legislature and its committees, budget and decision makers, auditing

and government agencies.and government agencies.► And also to other stakeholders such as lending bodies, credit rating agencies, And also to other stakeholders such as lending bodies, credit rating agencies,

research and academic institutions, media, tax payers and public at large.research and academic institutions, media, tax payers and public at large.► 2. It determines2. It determines► Whether the Government did what it said, it would do and the cost of its Whether the Government did what it said, it would do and the cost of its

activities.activities.► 3. Helps the reader in understanding3. Helps the reader in understanding► The nature and scope of government activitiesThe nature and scope of government activities► Financial position and how it finances its activities.Financial position and how it finances its activities.► Effect of its activities on the economy, development and other sectors.Effect of its activities on the economy, development and other sectors.► 4. Typical Financial Reporting includes:4. Typical Financial Reporting includes:► Compliances and accountability reportingCompliances and accountability reporting

Ensures executive accountability to legislatureEnsures executive accountability to legislature► e.g. Appropriation Accounts provides information on compliance with budget approved e.g. Appropriation Accounts provides information on compliance with budget approved

(excess and savings, rush of expenditure, unnecessary appropriations).(excess and savings, rush of expenditure, unnecessary appropriations).► General purpose financial reportingGeneral purpose financial reporting

Information on all aspects of government activities and finances and effect of Information on all aspects of government activities and finances and effect of government operationsgovernment operations

Finance Accounts exhibit the following:Finance Accounts exhibit the following:► e.g. how much expenditure on health, defence, education, social welfare, etc, and how much e.g. how much expenditure on health, defence, education, social welfare, etc, and how much

on capital expenditure.on capital expenditure.► Source wise receipts of governments – tax and non-tax Source wise receipts of governments – tax and non-tax ► Debt and financial assets of government.Debt and financial assets of government.

Appropriation Accounts:Appropriation Accounts:• It is the Grants-wise report on the expenditure It is the Grants-wise report on the expenditure

showing excess/saving.showing excess/saving.• Corresponds with Appropriation Act.Corresponds with Appropriation Act.• Exceptional Report viz. Excess/savingsExceptional Report viz. Excess/savings• It is Budgetary compliance mechanism and not a It is Budgetary compliance mechanism and not a

financial reporting toolfinancial reporting tool• Does report on Public Account.Does report on Public Account.• Prepared upto detailed heads.Prepared upto detailed heads.• Civil, Defence, Postal and Railways prepared their Civil, Defence, Postal and Railways prepared their

appropriation accounts separately.appropriation accounts separately.Reconciliation between Appropriation & Finance Reconciliation between Appropriation & Finance

Accounts:Accounts:Finance Accounts is on net basis while Appropriation Finance Accounts is on net basis while Appropriation

Accounts is on gross basis.Accounts is on gross basis.Total Expenditure (AA) – Total Recoveries = Net Total Total Expenditure (AA) – Total Recoveries = Net Total

(FA)(FA)

Indicators and Parameters: Summary of Indicators and Parameters: Summary of OperationsOperations

DisbursementsDisbursements ReceiptsReceipts Ratios/ Indicators/ Ratios/ Indicators/ ParametersParameters

Revenue Expenditure Revenue Expenditure (RE) (RE)

Revenue Receipts (RR) Revenue Receipts (RR) Revenue Deficit = RE-Revenue Deficit = RE-RR RR

Capital Expenditure Capital Expenditure (CE) (CE)

Misc. Capital Receipts Misc. Capital Receipts Head 4000 (CR) Head 4000 (CR)

Loans and Advances Loans and Advances Recovery of Loans Recovery of Loans

Total Expenditure (TE) Total Expenditure (TE) Total Non-Debt Total Non-Debt Receipts (TNDR) Receipts (TNDR)

Fiscal Deficit=TE-TNDR Fiscal Deficit=TE-TNDR

Public Debt Public Debt Public Debt Public Debt

Total CF (1) Total CF (1) Total CF (2) Total CF (2) Surplus in CF= 1-2 Surplus in CF= 1-2

Total Public Account Total Public Account (PA) (PA)

Total Public Account Total Public Account (PA) (PA)

Deficit/ Surplus in Deficit/ Surplus in Public Account Public Account

Opening Cash Opening Cash Opening Cash Opening Cash Increase in Cash Increase in Cash

Revenue Expenditure/ Total Non Debt Receipts = Operational Revenue Expenditure/ Total Non Debt Receipts = Operational Sustainability (also Interest Payments/ Total Expenditure)Sustainability (also Interest Payments/ Total Expenditure)

Capital Expenditure/ Public Debt = Percentage use of borrowings for Capital Expenditure/ Public Debt = Percentage use of borrowings for asset creationasset creation

Total Expenditure/ Public Debt = Intergenerational Equity. Total Expenditure/ Public Debt = Intergenerational Equity.

Financial Statements of Government:Financial Reporting Financial Statements of Government:Financial Reporting

(Union & States):(Union & States): StatStatemeement nt No. No.

Details Details RemarksRemarks

1.1. Summary of Transactions Summary of Transactions Receipt and Payment Accounts/ Receipt and Payment Accounts/ Statement of Cash Flows Statement of Cash Flows

2.2. Capital Outlay- Progressive Capital Outlay- Progressive Capital Outlay (to the end of Capital Outlay (to the end of the year) the year)

Statements of Progressive Statements of Progressive Capital Expenditure Capital Expenditure

3.3. Financial Results of Irrigation Financial Results of Irrigation Works Works

Only State Only State

4.4. Summary of Debt PositionSummary of Debt Position•Statement of BorrowingsStatement of Borrowings•Other obligationsOther obligations•Service of Debt Service of Debt

Statement of liabilitiesStatement of liabilities

5.5. Loans and Advances by Union/ Loans and Advances by Union/ State GovernmentState Government•Statement of Loans and Statement of Loans and AdvancesAdvances•Recoveries in arrears Recoveries in arrears (Disclosures) (Disclosures)

Financial Assets of the Financial Assets of the Governments Governments


(Union & States):(Union & States): Continued….Continued….

StatStatemeement nt No. No.


6.6. Guarantees given by Guarantees given by Governments Governments

Disclosure of Contingent Disclosure of Contingent Liabilities Liabilities

7.7. Cash balances and investment Cash balances and investment of Cash Balances of Cash Balances

Cash balance of Account Cash balance of Account

8.8. Summary of Balances under Summary of Balances under Consolidated Fund, Consolidated Fund, Contingency Fund and Public Contingency Fund and Public Account Account

Statement of Financial Position Statement of Financial Position

9.9. Statement of Revenue and Statement of Revenue and Expenditure for the year Expenditure for the year expressed as percentage of expressed as percentage of total revenue/ total expenditure total revenue/ total expenditure

Analytical Statements Analytical Statements

1010 Statement showing distribution Statement showing distribution between Charged and voted between Charged and voted expenditures expenditures

Statement to comply with Statement to comply with constitutional requirements constitutional requirements





1111 Detailed Account of Revenue by Detailed Account of Revenue by Minor Head (Revenue Heads) Minor Head (Revenue Heads)

Statement of Revenue Statement of Revenue

12.12. Detailed Account of Detailed Account of Expenditure by Minor Heads Expenditure by Minor Heads

Statement of Expenditure Statement of Expenditure

13.13. Detailed statement of Capital Detailed statement of Capital Expenditure during and to the Expenditure during and to the end of the year end of the year

Statement of Assets Statement of Assets

14.14. Statement showing details of Statement showing details of Investments of Government Investments of Government

Government Financial Assets Government Financial Assets

15.15. Statement showing Capital and Statement showing Capital and other Expenditure (outside other Expenditure (outside Revenue Account) Revenue Account)

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16.16. Detailed statements of Detailed statements of Receipts, Disbursements and Receipts, Disbursements and Balances under heads of Balances under heads of account relating to Debt, account relating to Debt, Contingency Fund and Public Contingency Fund and Public Account.Account.

Note: Statement showing Note: Statement showing position of NSSF (UNION) position of NSSF (UNION)

Fund wise detailsFund wise details

Position of NSSF- OB, Receipts, Position of NSSF- OB, Receipts, Payments & Investments Payments & Investments

17.17. Detailed Statements of Debt Detailed Statements of Debt and Other Interest Bearing and Other Interest Bearing Obligations of Government Obligations of Government

Statement of LiabilitiesStatement of Liabilities

18.18. Detailed Statement of Loans Detailed Statement of Loans and Advances made by and Advances made by Government Government

Financial Assets Financial Assets

19.19. Statement showing details of Statement showing details of earmarked balances (States) earmarked balances (States)

Statement of Balances in Statement of Balances in Reserve Fund/Deposits Reserve Fund/Deposits

Deficiencies in the present Government Deficiencies in the present Government Accounting System:Accounting System:

1.1. Cash transactions do not capture timing of the action or the Cash transactions do not capture timing of the action or the impact of the economy. Revenues and expenses are recognized impact of the economy. Revenues and expenses are recognized when received or paid respectively without regard to which when received or paid respectively without regard to which period they apply.period they apply.

2.2. Non-monetary flows are not recorded because the focus is on Non-monetary flows are not recorded because the focus is on cash management rather than resource flow.cash management rather than resource flow.

3.3. The accounts do not include receivable or payables and the The accounts do not include receivable or payables and the financial statements give revenue receipts rather than revenue financial statements give revenue receipts rather than revenue earned and expenses paid rather than expenses incurred.earned and expenses paid rather than expenses incurred.

4.4. There is no information on receivable and payables unless a There is no information on receivable and payables unless a separate compilation is made.separate compilation is made.

5.5. No information about capital work-in-progress like dams, power No information about capital work-in-progress like dams, power plants, roads and bridges etc., is available.plants, roads and bridges etc., is available.

6.6. Unit cost and total cost of services provided by the Government Unit cost and total cost of services provided by the Government departments like health, education, water supply, transportation departments like health, education, water supply, transportation etc., is not ascertainable (as depreciation, interest etc., are not etc., is not ascertainable (as depreciation, interest etc., are not apportion able).apportion able).

7.7. It gives wrong pictures about advance tax, as advance tax It gives wrong pictures about advance tax, as advance tax receipts are recognized as income. receipts are recognized as income.


8.8. Assets constitute the money raised by Government which has Assets constitute the money raised by Government which has been used for assets formation purposes and whose ownership been used for assets formation purposes and whose ownership vests with the Government.vests with the Government.

9.9. These assets are shown at book value and do not take into These assets are shown at book value and do not take into account depreciation in their value as per current market account depreciation in their value as per current market rates. Assets and liabilities are not integrated with the rates. Assets and liabilities are not integrated with the accounts.accounts.

10.10. No disclosure is made about contingent assets and liabilities No disclosure is made about contingent assets and liabilities which may turn into committed ones on account of guarantees which may turn into committed ones on account of guarantees given or letter of comforts issued by the government.given or letter of comforts issued by the government.

11.11. No information is provided about existing net liabilities of No information is provided about existing net liabilities of public enterprises and agencies outside the government, public enterprises and agencies outside the government, although the later cannot escape such liabilities.although the later cannot escape such liabilities.

12.12. It provides room for fiscal opportunism e.g., tax revenues can It provides room for fiscal opportunism e.g., tax revenues can be collected in excess during a particular period followed by be collected in excess during a particular period followed by high incidence of refunds together with interest, payments can high incidence of refunds together with interest, payments can be easily deffred and passed on to the next financial year, be easily deffred and passed on to the next financial year, revenue due in the future could be compromised by providing revenue due in the future could be compromised by providing for one time payments.for one time payments.


14. 14. The main shortcomings of Government Accounting The main shortcomings of Government Accounting System are :System are :

(i) The Hidden liabilities: there may be opportunity to (i) The Hidden liabilities: there may be opportunity to manipulate the deficit.manipulate the deficit.

(ii) It does not provide the total cost of services as it is (ii) It does not provide the total cost of services as it is based only on cash elements. As a result:based only on cash elements. As a result:

• It is not cost effective (the depreciation and interest It is not cost effective (the depreciation and interest costs are not accounted for while these costs are costs are not accounted for while these costs are important for performance evaluation, control, public important for performance evaluation, control, public contracts policy and price fixing policy, and to measure contracts policy and price fixing policy, and to measure the efficiency and the effectiveness of the governmental the efficiency and the effectiveness of the governmental entities)entities)

• Inadequate for control and comparison purposes.Inadequate for control and comparison purposes.• No performance measurement possible.No performance measurement possible.(iii) The total value of stocks is not disclosed because the (iii) The total value of stocks is not disclosed because the

accounts are not concerned with recording the usage; accounts are not concerned with recording the usage; they are rather concerned with the cash outflow, which they are rather concerned with the cash outflow, which has been paid for purchases.has been paid for purchases.

• Strong potential for over-spending.Strong potential for over-spending.


(iv). Of the seven objectives identified by Public Sector Committee (iv). Of the seven objectives identified by Public Sector Committee (PSC) of the International Federation of Accountants (IFAC), only (PSC) of the International Federation of Accountants (IFAC), only the first three objectives are met by a cash-based government the first three objectives are met by a cash-based government accounting system:accounting system:

• Indicating whether resources were obtained and used in Indicating whether resources were obtained and used in accordance with the legally adopted budget.accordance with the legally adopted budget.

• Indicating whether resources were obtained and utilized in Indicating whether resources were obtained and utilized in accordance with legal and contractual requirements, including accordance with legal and contractual requirements, including financial limits established by appropriate legislative authorities.financial limits established by appropriate legislative authorities.

• Providing information about how the government or unit Providing information about how the government or unit financed its activities and met its cash requirements.financed its activities and met its cash requirements.

• Providing information about the sources, allocation and uses of Providing information about the sources, allocation and uses of financial resources.financial resources.

• Providing information that is useful in evaluating the Providing information that is useful in evaluating the government’s or unit’s ability to finance its activities and to government’s or unit’s ability to finance its activities and to meet its liabilities and commitments.meet its liabilities and commitments.

• Providing information about the financial condition of the Providing information about the financial condition of the government or unit and changes in it.government or unit and changes in it.

• Providing aggregate information useful in evaluating the Providing aggregate information useful in evaluating the government’s or unit’s performance in terms of costs, efficiency government’s or unit’s performance in terms of costs, efficiency and accomplishments.and accomplishments.


15. 15. Deficiencies in present financial reporting are as follows:Deficiencies in present financial reporting are as follows:(i) The present Accounting and financial reporting of (i) The present Accounting and financial reporting of

Government is cash based.Government is cash based.• Expenditures and receipts are recognized and reported when Expenditures and receipts are recognized and reported when

actually paid or received and not when due or accrued.actually paid or received and not when due or accrued.(ii) The Finance Account is considered as a complete document, (ii) The Finance Account is considered as a complete document,

but at the same time it does not contain all relevant but at the same time it does not contain all relevant information.information.

• Voluminous but information on object level, such as salaries Voluminous but information on object level, such as salaries and non-salaries (maintenance, work-in-progress, and asset and non-salaries (maintenance, work-in-progress, and asset creation), commitments (supply against purchase order creation), commitments (supply against purchase order received), subsidies etc, are not readily available in accounts.received), subsidies etc, are not readily available in accounts.

• Due to certain expenditure kept under suspense, the figures Due to certain expenditure kept under suspense, the figures of expenditure are distorted.of expenditure are distorted.

• There are no disclosures of accounting policies on the basis of There are no disclosures of accounting policies on the basis of which Financial Statements are prepared.which Financial Statements are prepared.

(iii) While any informed individual can draw reasonable (iii) While any informed individual can draw reasonable conclusions from a company’s Balance Sheet and Profit and conclusions from a company’s Balance Sheet and Profit and Loss Account, this is not always possible from government Loss Account, this is not always possible from government financial statements.financial statements.


(iv). Present system of financial reporting does not (iv). Present system of financial reporting does not report:report:

• Accrued expenses and revenues , e.g., Accrued expenses and revenues , e.g., expenditure incurred but payment not made or expenditure incurred but payment not made or revenue earned but not received (e.g., bills revenue earned but not received (e.g., bills payable, tax in arrears, non-tax revenue due)payable, tax in arrears, non-tax revenue due)

• Actual position of assets (Current assets Actual position of assets (Current assets including receivables, inventories etc) and including receivables, inventories etc) and liabilities ( e.g., current such as payables and liabilities ( e.g., current such as payables and pension liability).pension liability).

• Depreciation (erosion in physical assets, financial Depreciation (erosion in physical assets, financial assets) and appreciation (land) not available.assets) and appreciation (land) not available.

• No comprehensive information is available about No comprehensive information is available about government liabilities (Pensionary commitments, government liabilities (Pensionary commitments, interest due, bills payable, depreciation for interest due, bills payable, depreciation for replacement of assets etc.)replacement of assets etc.)

• Provisions against future liability not available.Provisions against future liability not available.

Dr. C. Rangarajan Committee Report on Dr. C. Rangarajan Committee Report on Effective Management of Public Effective Management of Public

Expenditure:Expenditure: The main features are as follows:The main features are as follows: ► Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Prime Minister’s Economic Advisory Council (PMEAC) Chairman C

Rangarajan, who head a high level committee set up by the Planning Rangarajan, who head a high level committee set up by the Planning Commission suggested measures for effective management of Public Commission suggested measures for effective management of Public Expenditure.Expenditure.

► The committee consisted of 18 members and mainly focused on the The committee consisted of 18 members and mainly focused on the anomalies and inconsistencies that arise out of the present anomalies and inconsistencies that arise out of the present classification of expenditure into Plan and Non Plan expenditure classification of expenditure into Plan and Non Plan expenditure categories. Other members of the committee included the Planning categories. Other members of the committee included the Planning Commission Secretary, a Reserve Bank of India deputy governor and Commission Secretary, a Reserve Bank of India deputy governor and expenditure secretary, among others. National Institute of Public expenditure secretary, among others. National Institute of Public Finance and Policy Director M.G.Rao and Icrier Honorary Professor Nitin Finance and Policy Director M.G.Rao and Icrier Honorary Professor Nitin Desai was also the part of the committee.Desai was also the part of the committee.

► The expert committee has submitted its report to the Prime Minister. The expert committee has submitted its report to the Prime Minister. The full Planning Commission under the chairmanship of the Prime The full Planning Commission under the chairmanship of the Prime Minister approved the draft paper on August 20,2011.Minister approved the draft paper on August 20,2011.

► The committee has suggested the abolition of the “age-old distinction The committee has suggested the abolition of the “age-old distinction between Plan and Non-Plan expenditure, thereby a fundamental shift in between Plan and Non-Plan expenditure, thereby a fundamental shift in the approach of public expenditure management from segmental view the approach of public expenditure management from segmental view to a holistic view of expenditure, from input-based budgeting to the to a holistic view of expenditure, from input-based budgeting to the budgeting linked to outputs and outcomes.budgeting linked to outputs and outcomes.

Dr. C. Rangarajan Committee Report on Dr. C. Rangarajan Committee Report on Effective Management of Public Effective Management of Public

Expenditure:Expenditure: ► The committee also recommended that there should be just The committee also recommended that there should be just

two classifications of expenditure --- two classifications of expenditure --- capital and revenuecapital and revenue. . Capital will account for all the developmental expenditure like Capital will account for all the developmental expenditure like investment. Expenditure on salary for government employees, investment. Expenditure on salary for government employees, interest payments and subsidy outgo will be placed under interest payments and subsidy outgo will be placed under revenue expenditure.revenue expenditure.

► The committee also suggests the need to classifying revenue The committee also suggests the need to classifying revenue expenditure by endues for the purpose of Fiscal Responsibility expenditure by endues for the purpose of Fiscal Responsibility and Budget Management (FRBM).and Budget Management (FRBM).

► The committee recommended amendments to the FRBM Act, The committee recommended amendments to the FRBM Act, that lends some rigidity to the concept of revenue deficit, to that lends some rigidity to the concept of revenue deficit, to provide scope for adjustment. An ‘adjusted revenue deficit’ provide scope for adjustment. An ‘adjusted revenue deficit’ may be considered for FRBM compliance, adjusting the may be considered for FRBM compliance, adjusting the revenue deficit to the extent of grants for creating assets.revenue deficit to the extent of grants for creating assets.

► The committee also suggest a proper framework for taking a The committee also suggest a proper framework for taking a comprehensive view of the total transfer of resources from comprehensive view of the total transfer of resources from the Centre to the States, including ensuring its accounting and the Centre to the States, including ensuring its accounting and reporting in a uniform manner.reporting in a uniform manner.

ACCRUAL BASIS OF ACCOUNTING:ACCRUAL BASIS OF ACCOUNTING: Main features of accrual accounting:Main features of accrual accounting:1. The main basis of book keeping in accrual accounting is 1. The main basis of book keeping in accrual accounting is

‘double entry’ system rather than single entry system as ‘double entry’ system rather than single entry system as adopted in cash basis of government accounting. adopted in cash basis of government accounting.

2. Accrual based double entry accounting system provides 2. Accrual based double entry accounting system provides correct and real financial position of the entity and is helpful correct and real financial position of the entity and is helpful to provide correct information to all the concerned parties. to provide correct information to all the concerned parties. Therefore, accrual based double entry accounting system Therefore, accrual based double entry accounting system may be appropriate for the Government.may be appropriate for the Government.

3. In accrual accounting, a transaction is accounted for when it 3. In accrual accounting, a transaction is accounted for when it is earned and when incurred ( in cash basis, transaction is is earned and when incurred ( in cash basis, transaction is accounted for when cash is received or payment is made). accounted for when cash is received or payment is made). Some examples of accrual accounting are:Some examples of accrual accounting are:

• Tax assessed but not received will be accounted for (unlike in Tax assessed but not received will be accounted for (unlike in cash system)cash system)

• Licence fee/ royalty due but not received will be accounted Licence fee/ royalty due but not received will be accounted for.for.

• Liabilities accrued but not paid will be accounted for.Liabilities accrued but not paid will be accounted for.4. Accrual accounting reflect assets and liabilities adequately, 4. Accrual accounting reflect assets and liabilities adequately,

for examplefor example• Short term and long term liabilitiesShort term and long term liabilities• Pensionary liabilitiesPensionary liabilities• Depreciation cost etc.Depreciation cost etc.

ACCRUAL BASIS OF ACCOUNTING:ACCRUAL BASIS OF ACCOUNTING: 4. In case of reporting in accrual basis of 4. In case of reporting in accrual basis of

accounting, it can be categorized as follows:accounting, it can be categorized as follows:(i) Statement of Operating Performance is the (i) Statement of Operating Performance is the

financial performance.financial performance.(ii) It exhibits the financial position in the form (ii) It exhibits the financial position in the form

of ‘Statement of Asset and Liability’.of ‘Statement of Asset and Liability’.(iii) The Cash Flow Statement shows(iii) The Cash Flow Statement shows• Operating, financing and investing activities.Operating, financing and investing activities.• Receipts and PaymentsReceipts and Payments(iv). The reporting in accrual basis of (iv). The reporting in accrual basis of

accounting helps executive in assessment of:accounting helps executive in assessment of:• Financial Performance in recognition of Financial Performance in recognition of

transactions comprehensively including transactions comprehensively including depreciation.depreciation.

• Financial position of complete record of asset Financial position of complete record of asset and liability.and liability.

Treatment of Elements of Accounting in present Cash Treatment of Elements of Accounting in present Cash Basis and Accrual Basis: This can be summarized as Basis and Accrual Basis: This can be summarized as

follows:follows:ElementsElements Present Cash BasisPresent Cash Basis New Accrual BasisNew Accrual Basis

Expenditure Expenditure Due and paid:Due and paid:•CashCash•ChequeCheque•Book Adjustments Book Adjustments

Due but not paid:Due but not paid:•Bills payableBills payable•Accrued liability Accrued liability

Revenue Revenue Due and received:Due and received:•Cash receiptsCash receipts•Book adjustments Book adjustments

Due but not received:Due but not received:•Tax assessed but not receivedTax assessed but not received•Licence fee/ royalty due- not Licence fee/ royalty due- not received received

Liability Liability •Debt only depicted Debt only depicted All liability:All liability:•Long termsLong terms•CurrentCurrent•Pension Pension

Assets Assets •Capital expenditure Capital expenditure progressive progressive

All assets:All assets:•CapitalCapital•Depreciation Depreciation

ADVANTAGES OF ACCRUAL SYSTEM OF ADVANTAGES OF ACCRUAL SYSTEM OF ACCOUNTING:ACCOUNTING:

1. Recognition: 1. Recognition: (i) Revenue is recognized when it is earned and the income constitutes both (i) Revenue is recognized when it is earned and the income constitutes both

revenue received and receivable. Thereby it is assisting decision maker in revenue received and receivable. Thereby it is assisting decision maker in taking correct financial decision.taking correct financial decision.

(ii) Expenditure is recognized as and when the liability for payment arises and (ii) Expenditure is recognized as and when the liability for payment arises and thus it constitutes both amounts paid and payable.thus it constitutes both amounts paid and payable.

2. Matching:2. Matching:(i) Expenses are matched with the income earned in that period, thus it provides (i) Expenses are matched with the income earned in that period, thus it provides

very effective basis to understand true performance of the organization for very effective basis to understand true performance of the organization for the operation conducted in that period.the operation conducted in that period.

(ii) A distinct difference is maintained between items of revenue nature and (ii) A distinct difference is maintained between items of revenue nature and capital nature, this helps in proper presentation of the financial statement.capital nature, this helps in proper presentation of the financial statement.

(iii) In Accrual Based accounting system also the accuracy of the accounting can (iii) In Accrual Based accounting system also the accuracy of the accounting can be established, through the device of the Trial Balance.be established, through the device of the Trial Balance.

3. Comparison:3. Comparison:(i) The surplus and deficit during a period can be ascertained together with (i) The surplus and deficit during a period can be ascertained together with

details. It helps in assessment of financial performance by correctly reflecting details. It helps in assessment of financial performance by correctly reflecting surplus/deficit as all expenses weather paid or not and all income weather surplus/deficit as all expenses weather paid or not and all income weather received or not are duly accounted for.received or not are duly accounted for.

(ii) The financial position of the Entity concerned can be ascertained at the end of (ii) The financial position of the Entity concerned can be ascertained at the end of each period by preparation of a Balance Sheet.each period by preparation of a Balance Sheet.

(iii) The system permits accounts to be kept in as much details as necessary and (iii) The system permits accounts to be kept in as much details as necessary and provides significant information for the purpose of controls etc.provides significant information for the purpose of controls etc.

(iv) Results of one year can be compared with those of previous years and (iv) Results of one year can be compared with those of previous years and reasons for the change can be ascertained. reasons for the change can be ascertained.


5. Adequacy to meet short term and long term liability:5. Adequacy to meet short term and long term liability:(i) It gives information on weather income streams are adequate to (i) It gives information on weather income streams are adequate to

meet short and long term liabilities so that their early payment meet short and long term liabilities so that their early payment keeping in view their payment period (short term and long term) and keeping in view their payment period (short term and long term) and nature (cheap or costly loan) can be better managed.nature (cheap or costly loan) can be better managed.

6. Ascertaining future sustainability of the programmes:6. Ascertaining future sustainability of the programmes:(i) It provides comprehensive information on expenses which helps in (i) It provides comprehensive information on expenses which helps in

knowing the cost consequences of policies and enables comparisons knowing the cost consequences of policies and enables comparisons with alternative policies. Also information about calculation of with alternative policies. Also information about calculation of subsidy can be extracted from the accounts, which helps in its subsidy can be extracted from the accounts, which helps in its rationalization. This ensures the adoption of best policy, which in turn rationalization. This ensures the adoption of best policy, which in turn assures optimal use of scarce resources. It also helps in ascertaining assures optimal use of scarce resources. It also helps in ascertaining the future sustainability of programmes.the future sustainability of programmes.

77..Impact of Financial Performance:Impact of Financial Performance:(i) Since information relating to both cash flow as well as non-cash flow (i) Since information relating to both cash flow as well as non-cash flow

transactions are recorded, the impact of transactions where cash has transactions are recorded, the impact of transactions where cash has not been received or paid can be ascertained.not been received or paid can be ascertained.

(ii) Since full information are recorded on expenses, it helps in knowing (ii) Since full information are recorded on expenses, it helps in knowing the cost consequences of policies and we can compare with the cost consequences of policies and we can compare with alternative policies.alternative policies.

(iii) Implicit subsidy from the accounts helps in rationalization of subsidy (iii) Implicit subsidy from the accounts helps in rationalization of subsidy policy.policy.


8.8. Financial Position of Current Stock of Assets and Liabilities:Financial Position of Current Stock of Assets and Liabilities:(i) Comprehensive information on current stock of assets and liabilities are (i) Comprehensive information on current stock of assets and liabilities are

available in accrual accounting system, hence we are in a position to take available in accrual accounting system, hence we are in a position to take financial decision can be taken not merely from the point of view of cash financial decision can be taken not merely from the point of view of cash outgo or inflow but their impact on:outgo or inflow but their impact on:

• The asset and liability position of the Government.The asset and liability position of the Government.• Future sustainability of the programmes.Future sustainability of the programmes.• Future funding requirements of the asset maintenance and replacementFuture funding requirements of the asset maintenance and replacement• Planning the repayment of liabilities.Planning the repayment of liabilities.9.9. Under the accrual basis of accounting, the financial transactions are Under the accrual basis of accounting, the financial transactions are

recorded, when they occur, even though actual receipts or payments of recorded, when they occur, even though actual receipts or payments of money may not have taken place at that time. Hence, the major money may not have taken place at that time. Hence, the major difference between accrual accounting and cash accounting is in timing of difference between accrual accounting and cash accounting is in timing of recognition of revenues, expenses, gains and losses.recognition of revenues, expenses, gains and losses.

10.10. Under accrual basis of accounting, entries are made on the dates when Under accrual basis of accounting, entries are made on the dates when revenue or expenses fall due and not on the date, when they are paid or revenue or expenses fall due and not on the date, when they are paid or received. Therefore, Accrual basis of accounting is a scientific system for received. Therefore, Accrual basis of accounting is a scientific system for reporting income and expenditure and also the preparation of financial reporting income and expenditure and also the preparation of financial statements.statements.

11.11. Under accrual basis of accounting system, financial performance and Under accrual basis of accounting system, financial performance and financial results are obtained from two important financial statements financial results are obtained from two important financial statements noted as below:noted as below:

(i) Income and Expenditure Statement: to determine the financial (i) Income and Expenditure Statement: to determine the financial performance of the entity.performance of the entity.

(ii) Balance Sheet: To assess the financial status of the Entity.(ii) Balance Sheet: To assess the financial status of the Entity.

Why Transition to Accrual Accounting System considered Why Transition to Accrual Accounting System considered Inevitable?Inevitable?

1.1. Due to shortcomings of cash based accounting system and advantages Due to shortcomings of cash based accounting system and advantages of accrual system as discussed in previous paragraphs.of accrual system as discussed in previous paragraphs.

2.2. Due to global economic integration resulting in public demand that Due to global economic integration resulting in public demand that government should be fully accountable to the community for the government should be fully accountable to the community for the resources entrusted forced the countries to adopt:resources entrusted forced the countries to adopt:

Radical economic reforms including involvement of private sector in Radical economic reforms including involvement of private sector in delivery of public services;delivery of public services;

Radical changes in the management tools, information technology, ways of Radical changes in the management tools, information technology, ways of decision-making, performance measurements, accounting procedures, decision-making, performance measurements, accounting procedures, accounting systems etc.accounting systems etc.

3.3. The International Monetary Fund’s Second Edition of the Government The International Monetary Fund’s Second Edition of the Government Finance Statistics manual, 2001 (GFS) aims at improving Government Finance Statistics manual, 2001 (GFS) aims at improving Government accounting and transparency operations, envisages accrual accounting, accounting and transparency operations, envisages accrual accounting, balance sheet and complete coverage of Government’s economic and balance sheet and complete coverage of Government’s economic and financial activities to meet the new requirements of formulating and financial activities to meet the new requirements of formulating and evaluating Governments Fiscal policies. The GFS system uses the accrual evaluating Governments Fiscal policies. The GFS system uses the accrual basis in preference to the cash basis of accounting primarily because the basis in preference to the cash basis of accounting primarily because the time of recording matches the time of actual resource flow.time of recording matches the time of actual resource flow.

4. As a result, the accrual basis provides the best estimate of the macro 4. As a result, the accrual basis provides the best estimate of the macro economic impact of the Government fiscal policies. In this case, the time economic impact of the Government fiscal policies. In this case, the time of recording will not diverge from the time of economic activities and of recording will not diverge from the time of economic activities and transactions to which they relate.transactions to which they relate.

Why Transition to Accrual Accounting System considered Why Transition to Accrual Accounting System considered Inevitable?Inevitable?

5.5. The accrual basis provides the most comprehensive information. The accrual basis provides the most comprehensive information. Several international accounting agencies (Internal Federation of Several international accounting agencies (Internal Federation of Accountants, International Public Sector Accounting Standards board) Accountants, International Public Sector Accounting Standards board) also suggest that all Governments should adopt the accrual basis. also suggest that all Governments should adopt the accrual basis. However, the move to accrual basis for public sector financial However, the move to accrual basis for public sector financial reporting has yet to gain universal acceptance.reporting has yet to gain universal acceptance.

6.6. In India, the 12th Finance Commission (TFC) recommended adoption In India, the 12th Finance Commission (TFC) recommended adoption of accrual basis for the Government accounting. The of accrual basis for the Government accounting. The recommendations have been accepted by the Government of India in recommendations have been accepted by the Government of India in principle and migration to accrual accounting has been accepted by principle and migration to accrual accounting has been accepted by Government of India and most of the State Governments. 13 th Government of India and most of the State Governments. 13 th Finance commission has also endorsed the recommendation of 12th Finance commission has also endorsed the recommendation of 12th Finance commission.Finance commission.

7.7. Pursuant to the decision of the Government of India, the Government Pursuant to the decision of the Government of India, the Government Accounting Standards Advisory Board (GASAB) was set up in August Accounting Standards Advisory Board (GASAB) was set up in August 2002, in the office of the Comptroller & Auditor General of India. The 2002, in the office of the Comptroller & Auditor General of India. The GASAB has suggested an operational framework and roadmap for GASAB has suggested an operational framework and roadmap for migration to accrual accounting. GASAB shall have to set itself to the migration to accrual accounting. GASAB shall have to set itself to the task of providing distinctive set of accounting policies including those task of providing distinctive set of accounting policies including those on income and liability recognition, depreciation and valuation of on income and liability recognition, depreciation and valuation of assets and in due course, issue accounting standards in the Indian assets and in due course, issue accounting standards in the Indian context. It would consistently reconsider, refine and amend the context. It would consistently reconsider, refine and amend the standards.standards.

Difference between cash based single entry system and Difference between cash based single entry system and accrual based double entry system:accrual based double entry system:

Basis of Basis of Distinction Distinction

Single Entry Cash Single Entry Cash Based Accounting Based Accounting

Double Entry Accrual Double Entry Accrual Based Accounting Based Accounting

Recognition of Recognition of the transactions the transactions

All cash receipts and All cash receipts and payments during the payments during the Accounting Period are Accounting Period are recorded whether or not recorded whether or not the transactions actually the transactions actually belong to that accounting belong to that accounting period. period.

All income and expenses All income and expenses relating to the Accounting relating to the Accounting period are recorded, period are recorded, whether or not received or whether or not received or paid. paid.

Accounts Accounts Only personal accounts Only personal accounts and cash book are and cash book are prepared. prepared.

Personal, Real and Personal, Real and Nominal accounts are Nominal accounts are prepared. prepared.

Accuracy of Accuracy of results results

Accuracy of transactions Accuracy of transactions cannot be verified since cannot be verified since the transactions are the transactions are recorded on single entry recorded on single entry basis and no trail balance basis and no trail balance is prepared is prepared

As all the transactions are As all the transactions are recorded based on double recorded based on double entry system of book entry system of book keeping, a Trial Balance is keeping, a Trial Balance is prepared to check the prepared to check the arithmetical accuracy of arithmetical accuracy of the transactions. the transactions.

Difference between cash based single entry system and Difference between cash based single entry system and accrual based double entry system:accrual based double entry system:

Basis of Basis of Distinction Distinction

Single Entry Cash Single Entry Cash Based Accounting Based Accounting

Double Entry Accrual Double Entry Accrual Based Accounting Based Accounting

Financial Financial Performance Performance

Financial Performance Financial Performance cannot be ascertained as cannot be ascertained as Income and Expenditure Income and Expenditure Account is not prepared Account is not prepared

Financial Performance of Financial Performance of an entity can be an entity can be ascertained as Income and ascertained as Income and Expenditure Statement is Expenditure Statement is prepared. prepared.

Financial Financial Position Position

Only a statement of affairs Only a statement of affairs is prepared which does not is prepared which does not give the true and fair state give the true and fair state of affairs. of affairs.

A Balance Sheet is A Balance Sheet is prepared on going concern prepared on going concern basis which gives a true basis which gives a true and fair picture of financial and fair picture of financial status. status.

Authenticity Authenticity This system is not This system is not considered authentic by considered authentic by the Financial Institution, the Financial Institution, lending agencies and other lending agencies and other outside bodies. outside bodies.

This system of accounting This system of accounting is well accepted by the is well accepted by the Financial Institutions, Financial Institutions, lending agencies and all lending agencies and all other outside bodies. other outside bodies.

Budgeting in Government:Budgeting in Government:

(A). Present System of Budgeting:(A). Present System of Budgeting:11. It is the Annual Financial Statements which is a . It is the Annual Financial Statements which is a

constitutional responsibility under Article 112 & 202 constitutional responsibility under Article 112 & 202 of Constitution of India.of Constitution of India.

2. Annual Financial Statement is a statement of 2. Annual Financial Statement is a statement of estimated receipts and expenditure of the estimated receipts and expenditure of the Government of India, which is laid before the Government of India, which is laid before the Parliament in respect of every financial year. Similar Parliament in respect of every financial year. Similar is the case with State Governments.is the case with State Governments.

3. It shows receipts and payments of the Government.3. It shows receipts and payments of the Government.4. Revenue Budget consists of the revenue receipts of 4. Revenue Budget consists of the revenue receipts of

the Government (tax revenues and other revenues) the Government (tax revenues and other revenues) and the expenditure (or rather payments) met from and the expenditure (or rather payments) met from these revenues.these revenues.

5. Capital budget consists of capital receipts and 5. Capital budget consists of capital receipts and payments.payments.


(B). What will be the possible nature of budgeting if it is (B). What will be the possible nature of budgeting if it is prepared on Accrual Basis?prepared on Accrual Basis?

1. It becomes a full set of forecast financial statements, including 1. It becomes a full set of forecast financial statements, including assumptions used in preparing those statements.assumptions used in preparing those statements.

2. Formal budget appropriations (cash) to be consistent or linked 2. Formal budget appropriations (cash) to be consistent or linked with forecast financial statements.with forecast financial statements.

3. In accrual budgeting, estimates would reflect the complete 3. In accrual budgeting, estimates would reflect the complete liability based on expenditure for the year; ideally the difference liability based on expenditure for the year; ideally the difference should be minimal.should be minimal.

4. Similarly in case of receivables, the entire revenue relating to the 4. Similarly in case of receivables, the entire revenue relating to the year is accounted in accrual budget and not merely the amount year is accounted in accrual budget and not merely the amount collected/collectible.collected/collectible.

5. It requires shifting the budgeting from cash flows (money 5. It requires shifting the budgeting from cash flows (money received and payments made) to revenues earned and liabilities received and payments made) to revenues earned and liabilities incurred.incurred.

6. The most important aspect is that the accrual basis would align 6. The most important aspect is that the accrual basis would align budgeting and financial reporting and both would be on the same budgeting and financial reporting and both would be on the same accounting basis.accounting basis.

However, implementing reforms simultaneously in both accounting However, implementing reforms simultaneously in both accounting and budgeting system is very complex, and the task of managing and budgeting system is very complex, and the task of managing the change is extremely difficult, but needs to be continued to its the change is extremely difficult, but needs to be continued to its logical conclusion.logical conclusion.


Is accrual budgeting a pre-condition for accrual Is accrual budgeting a pre-condition for accrual accounting?accounting?

1. It is feasible to report in terms of accruals and the budget on a 1. It is feasible to report in terms of accruals and the budget on a cash basis.cash basis.

2. If budgeting were continued on the cash basis, financial 2. If budgeting were continued on the cash basis, financial reports would be analytic tools in accrual basis.reports would be analytic tools in accrual basis.

3. If budgeting were shifted to the accruals, accounting 3. If budgeting were shifted to the accruals, accounting principles would become decision rules in budgeting.principles would become decision rules in budgeting.

4. Financial reports are subject to audit; budget are not.4. Financial reports are subject to audit; budget are not.5. Full benefits of accrual accounting can be gained only when it 5. Full benefits of accrual accounting can be gained only when it

goes hand in hand with accrual accounting.goes hand in hand with accrual accounting.6. In public sector accounting cannot be divorced from 6. In public sector accounting cannot be divorced from

budgeting.budgeting.7. There would be on-going initiatives with regard to asset 7. There would be on-going initiatives with regard to asset

Registers (needs change in GFR & Budget Speech)Registers (needs change in GFR & Budget Speech)8. It is ideal when we migrate to accrual accounting, accrual 8. It is ideal when we migrate to accrual accounting, accrual

budgeting should also follow.budgeting should also follow.


(C) Accrual Accounting: Some disclaimers(C) Accrual Accounting: Some disclaimersAccrual Accounting in Government:Accrual Accounting in Government:(i) Is not a Private Sector Accounting which uses (i) Is not a Private Sector Accounting which uses

certain commercial principles to meet its own certain commercial principles to meet its own objectives?objectives?

(ii) It is a mean or tools for decision making and not (ii) It is a mean or tools for decision making and not and end.and end.

(iii) It provides more comprehensive, accurate and (iii) It provides more comprehensive, accurate and reliable financial information.reliable financial information.

(iv) It is not entirely novel.(iv) It is not entirely novel.(v) It is to be adapted to the requirements of social (v) It is to be adapted to the requirements of social

policy and commitments of the government, public policy and commitments of the government, public goods, budgetary requirements and government as goods, budgetary requirements and government as going concern.going concern.

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