Session 4 & 5
Session Title
Government Accounting System in India,
Government Accounting – Principles & Practices,
Deficiencies and limitations in present government
accounting system, Accrual Basis of Accounting,
Advantages of Accrual Accounting System, and
Difference between cash based single entry system
and accrual based double entry system. Budgeting
in Government (i) Present system of budgeting (ii)
What will be possible nature of budgeting if it is
prepared on accrual basis?
Session overview:

The cash basis of accounting has been traditionally
followed by the Government because it has the advantage
of focusing Government’s attention on its financing
constraints, which are viewed as its most binding priority.

There has been, however, growing dissatisfaction with
the system. This stems from various deficiencies in and
limitations with the system.

Due to global economic integration, public demand
that government should be fully accountable to the
community for the resources entrusted, forced the
countries to adopt:
• Radical economic reforms including involvement of private
sector in delivery of public services;
• Radical changes in the management tools, information
technology, ways of decision-making, performance
measurements,
accounting
procedures,
accounting
systems etc.
Session overview: (continued…)
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
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The International Monetary Fund’s Second Edition of the
Government Finance Statistics manual, 2001 (GFS) aims at improving
Government accounting and transparency operations, envisages
accrual accounting, balance sheet and complete coverage of
Government’s economic and financial activities to meet the new
requirements of formulating and evaluating Governments Fiscal
policies.
The GFS system uses the accrual basis in preference to the cash
basis of accounting primarily because the time of recording matches
the time of actual resource flow.
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 of recording will not diverge from the time of economic
activities and transactions to which they relate.
The accrual basis provides the most comprehensive information.
Several international accounting agencies (Internal Federation of
Accountants, International Public Sector Accounting Standards board)
also suggest that all Governments should adopt the accrual basis.
However, the move to accrual basis for public sector financial
reporting has yet to gain universal acceptance.
Session overview: (continued…)
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12th Finance Commission (TFC) recommended adoption of
accrual basis for the Government accounting.
The recommendations have been accepted by the Government of
India in principle.
Migration to accrual accounting has been accepted by
Government of India and most of the State Governments.
The 13th Finance Commission also endorsed the adoption of
accrual basis of accounting in India.
Pursuant to the decision of the Government of India, the
Government Accounting Standards Advisory Board (GASAB) was set up
in August 2002, in the office of the Comptroller & Auditor General of
India.
The GASAB has suggested an operational framework and
roadmap for migration to accrual accounting. GASAB shall have to set
itself to the task of providing distinctive set of accounting policies
including those on income and liability recognition, depreciation and
valuation of assets.
GASAB has to issue accounting standards in the Indian context. It
would consistently reconsider, refine and amend the standards
Session Structure:
1.Government Accounting System in India
(i) What is accounting?
(ii) Basis of Accounting – Cash Based and Accrual Based Accounting System.
(iii) Book Keeping methods – Single entry system and double entry system
2. Government Accounting – Principles & Practices
(i) Basis of Government Accounting in India
(ii) Features of Government Accounting
(iii) Structure of Budget and Accounting.
(iv) Form of Accounts
(v) Suspense Accounts
(vi) HCGA and HCB Account
(vii) Financial Reporting – Appropriation and Finance Accounts
3. Deficiencies and limitations in present government accounting system.
4. Dr C. Rangarajan Committee report on effective management of Public Expenditure.
4. Accrual Basis of Accounting
(i) Main Features of Accrual Accounting.
(ii) Advantages of Accrual Accounting System
(iii) Difference between cash based single entry system and accrual based double
entry system.
5. Budgeting in Government
(i) Present system of budgeting
(ii) What will be possible nature of budgeting if it is prepared on accrual basis?
Exercise and Group discussion.
GOVERNMENT
INDIA:
ACCOUNTING
SYSTEM
IN
Though this is a vast area, in this session we will discuss only the important aspect
of Government Accounting.
What is Accounting?
1. Accounting is the recording and reporting of
transactions and events of an entity/ government
which involves:
(a) Decision regarding WHAT to account i.e. which
transactions are amenable to accounting treatment:
(i) Material, Measurable, Reasonably estimable.
(ii) Compliance to rules and laws of the land.
(iii)
Budgetary
requirements
and
legislative
compliance.
(b) Decision regarding WHEN and HOW to account & report?
•
(i) Recognition
It is a process of incorporating in the accounts (Balance sheets or income
statement) an item which can be measured reliably and is material.
 Regarding transactions or events in the books of account at which point of
time.
o When actually paid or incurred
o When actually received or due
• Recording a transaction or events in the books of account for which period of time
• Recording which type of transactions/events?
 Only cash receipts and payments and cash balances, or
 Revenue/expenses
 All events, liabilities, and commitments including non-cash transactions
(ii) Measurement
• 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 measurement
including:
o Historical cost- cost paid/amounts received.
o Fair value at the time of acquisition
o Current cost – cost to be paid for acquiring same or an equivalent item or cost
to settle the obligation currently.
o Fair value/ market value
o Realizable cost- amounts that could be obtained on disposal/ settlement value
o Nominal cost
(iii) Classifications
• Recognition of transactions and events
as per standard classification.
 Revenue
 Expenses
 Assets
o Physical assets, financial assets, billspayable,
provisions
o Contingent liabilities/ assets & commitments,
etc.
(iv) Disclosure
(v) Reporting
Whose accounts we are talking about?
Union
Departments/ Ministries
•Civil
Ministries/Departments
•Defence
•RailwayDepartments
State
Departments
•All Departments
including Works, Forest &
Irrigation s
•Posts
Autonomous Bodies
Autonomous Bodies
PSUs
PSUs
Union Territories
Local Bodies
Bases/Models of Accounting:
•
Cash
•
Modified Cash
•
Accrual
•
Modified Accrual
Book Keeping Methods:
(i) Single entry
(ii) Double entry
Government Accounting (Principles and
Practices)
Form of Accounts:
1. Article 150 of the Constitution of India, reads “The
Accounts of the Union and of the States shall be kept in
such form as the President may, on the advice of the
Comptroller and Auditor General of India, prescribes”
2. Form of Accounts: As per Article 150, the Form of accounts
of government are:
(i) Division and structure of accounts
(ii) Classification of transactions
(iii) Basis of accounting
(iv) Format of financial reporting
(v) Principles of recognition, measurement, classification and
disclosure.
Basis of Government Accounting in India
1.
2.
3.
4.
5.
6.
7.
8.
Accounting Rules provides Cash Basis (Government Accounting Rules 21
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
general or special orders issued by the Central Government on the advice of
the Comptroller and Auditor General of India, the transactions in the
Government accounts shall represent the actual cash receipts and
disbursements during the financial year as distinguished from amounts due
to or by Government during the same period.”
Accounts are designed to focus mainly on expenditure control vis-à-vis
budget allotment, i.e more tuned to financial integrity rather than efficient
resource allocation and utilization.
These do not reveal accrued assets and liabilities but mere cash
transactions over the years.
The budget preparation is on cash basis consistent with the basis of
accounting. The Finance Accounts, the Government’s annual financial
statements, present the accounts of receipts and disbursements of the
Government for the year.
The Appropriation accounts for the year for the grants and charged
appropriations supplement these accounts.
Appropriations and expenditures are inter-related and only the amounts,
which are legally authorized, are supposed to be spent during the year.
Appropriations remaining unused lapse at the end of the fiscal year and are
not available for the next year. Appropriations for the next year include the
un-discharged liabilities as well.
“Cash Basis” has the advantage of focusing Government’s attention on its
financing constraints, which are viewed as its most binding priority.
Features & principles of Government
Accounting:
1. Budgetary accounting
(i) The steps are: Budget  Appropriation  Sanction 
Expenditure  Accounting
(ii) Accounts follows budget and budgetary and accounting
classification are similar.
(iii) Cash based budgeting and accounting
(iv). Uniform accounting at Union and State level.
•
Chart of Accounts
•
Government Accounting Rules
•
Reporting Formats
(v) Accounting based on codes & manuals containing accounting
principles
(vi) Rule based accounting and absence of explicit government
accounting standards unlike the commercial accounting.
Structure of Budget & Accounts:
Government Account
Consolidated Fund of India
Revenue Account
Receipts
Contingency Fund of India
Capital Account
Receipts
Tax Revenue
Non-Tax Revenue
Grants-in-aid &
Contributions
Public Account of India
Small savings
Expenditure
General Services
Social services
Deposits & Advances
Reserve Funds
Suspense & Misc.
Economic Services
Remittances
Grants-in-aid &
Contributions
Cash Balance
Expenditure
General services
Social Services
Economic Services
Grants-in-aid & Contributions
Public Debt
Loans & Advances
Form of Accounts: Division of Accounts: Divisions of government
accounts are as follows:
Divisions  Sections  Sectors  Sub-Sectors  Functions 
Programmes  Schemes  Object (PUA)
Six-Tier Classification Schemes:
Major Head (4 digit)
Functions of the Government
Sub- Major Head (2
Digit)
Sub-Functions
Minor Head (3 Digit)
Programmes
Sub-Head (2 Digit)
Schemes
Detailed Head (2 digit) Sub-Scheme
Object Head (2 Digit)
Primary unit of Appropration (PUA)
Reporting Requirements:
Expenditure Classifications:
(i) Capital & Revenue
(a) Revenue & Others (Art.112)
(ii) Charged and Voted (Art. 112)
(iii) Planned and Non-Planned (Statutory
Requirements- Heads of Development)
Cash Balance:
Cash Balance – Union Government
Proforma
balancesRailways
Proforma
balancesDefence
Proforma
balancesP&T
Note: Cash Balance of State Government has no such Concepts
Ledger
balancesCivil
Ministries
Plan & Non- Plan Expenditure Heads of Development:
Plan
►
►
►
►
Investment outlays to replace
worn out or over-aged capital
stock
New development programmes
or projects or schemes on
capital account which involves
creation of assets
New development programmes
or projects or schemes on
capital account
Spill over schemes or previous
plan to be completed.
Non-Plan
►
►
All expenditure connected with
the
maintenance
of
development
schemes
completed during the Five Year
Plan period
All expenditure connected with
the maintenance of existing
institutions and establishments
Suspense Accounts:
1. Suspense in Public Accounts is adjusting heads.
2. Operated as means to account transactions
(receipt and payments) ‘temporarily” awaiting
final accountal in respective functional heads.
3. While adjusting to final heads of account, initial
Cr/Dr as the case may e, is cleared from the
Suspense Head by minus credit/minus debit.
4. As a matter of account being giving true & fair
view, suspense balance should be adjusted by the
end of the year.
5. Huge balances remaining gives a distorted view of
the accounts.
Head Close to Government Accounts (HCGA) &
Heads Close to Balances (HCB):
In Government accounting, distinction is made between
certain heads which close every year and whose
balances are not carried forward.
These heads do not represent transactions whereby
Government has receivables and payables and they close
to ‘Government Account’.
Government Accounts –
►
►
►

►
Represents cumulative deficit and surplus of the past under
heads whose balances are not carried forward.
There are certain other heads which close to balances
and their balances as represent receivables and
payables.
Continued….
►
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Heads under the following sectors close to Government
Account
Receipt Heads (Revenue Account)
Receipt Heads (Capital Accounts) [4000]
Expenditure Heads (Revenue Account)
Expenditure Heads (Capital Account)
Inter State Settlement (7810)
Misc (Net)
► Appropriation to the Contingency Fund(7990)
► Reserve Bank Deposits (RBD)
► Misc. Government Account (8680)
Adding Opening balance of last year and net effect of
Prior Period of Adjustment Account to the above
balances, the debit and credit of the Government
Account is reached.
Heads under Debt, Loans, Deposit, Advances, Suspense
and Remittances heads close to balance.
Adding to Government Account, the balances of heads
closing to balances and the Contingency Fund, net
amount of closing cash balance at the end of the year is
reached.
Financial Reporting:
► Objectives of Financial Reporting:
► 1. It provides information to
► Primarily legislature and its committees, budget and decision makers, auditing and
government agencies.
► And also to other stakeholders such as lending bodies, credit rating agencies, research
and academic institutions, media, tax payers and public at large.
► 2. It determines
► Whether the Government did what it said, it would do and the cost of its activities.
► 3. Helps the reader in understanding
► The nature and scope of government activities
► Financial position and how it finances its activities.
► Effect of its activities on the economy, development and other sectors.
► 4. Typical Financial Reporting includes:
► Compliances and accountability reporting

Ensures executive accountability to legislature
►
►
e.g. Appropriation Accounts provides information on compliance with budget approved (excess and
savings, rush of expenditure, unnecessary appropriations).
General purpose financial reporting


Information on all aspects of government activities and finances and effect of government
operations
Finance Accounts exhibit the following:
e.g. how much expenditure on health, defence, education, social welfare, etc, and how much on capital
expenditure.
► Source wise receipts of governments – tax and non-tax
► Debt and financial assets of government.
►
Appropriation Accounts:
• It is the Grants-wise report on the expenditure showing
excess/saving.
• Corresponds with Appropriation Act.
• Exceptional Report viz. Excess/savings
• It is Budgetary compliance mechanism and not a financial
reporting tool
• Does report on Public Account.
• Prepared upto detailed heads.
• Civil, Defence, Postal and Railways prepared their
appropriation accounts separately.
Reconciliation between Appropriation & Finance
Accounts:
Finance Accounts is on net basis while Appropriation Accounts
is on gross basis.
Total Expenditure (AA) – Total Recoveries = Net Total (FA)
Indicators and Parameters: Summary of Operations
Disbursements
Receipts
Revenue Expenditure (RE) Revenue Receipts (RR)
Ratios/ Indicators/
Parameters
Revenue Deficit = RE-RR
Capital Expenditure (CE)
Misc. Capital Receipts
Head 4000 (CR)
Loans and Advances
Recovery of Loans
Total Expenditure (TE)
Total Non-Debt Receipts
(TNDR)
Public Debt
Public Debt
Total CF (1)
Total CF (2)
Surplus in CF= 1-2
Total Public Account (PA)
Total Public Account (PA)
Deficit/ Surplus in Public
Account
Opening Cash
Opening Cash
Increase in Cash
Fiscal Deficit=TE-TNDR
Revenue Expenditure/ Total Non Debt Receipts = Operational Sustainability (also
Interest Payments/ Total Expenditure)
Capital Expenditure/ Public Debt = Percentage use of borrowings for asset
creation
Total Expenditure/ Public Debt = Intergenerational Equity.
Financial Statements of Government:Financial Reporting (Union
& States):
State Details
ment
No.
Remarks
1.
Summary of Transactions
Receipt and Payment Accounts/
Statement of Cash Flows
2.
Capital Outlay- Progressive Capital
Outlay (to the end of the year)
Statements of Progressive Capital
Expenditure
3.
Financial Results of Irrigation Works
Only State
4.
Summary of Debt Position
•Statement of Borrowings
•Other obligations
•Service of Debt
Statement of liabilities
5.
Loans and Advances by Union/ State Financial Assets of the Governments
Government
•Statement of Loans and Advances
•Recoveries in arrears (Disclosures)
Financial Statements of Government:Financial Reporting (Union
& States): Continued….
State Details
ment
No.
Remarks
6.
Guarantees given by Governments
Disclosure of Contingent Liabilities
7.
Cash balances and investment of
Cash Balances
Cash balance of Account
8.
Summary of Balances under
Consolidated Fund, Contingency
Fund and Public Account
Statement of Financial Position
9.
Statement of Revenue and
Analytical Statements
Expenditure for the year expressed
as percentage of total revenue/ total
expenditure
10
Statement showing distribution
between Charged and voted
expenditures
Statement to comply with
constitutional requirements
Financial Statements of Government:Financial Reporting (Union
& States): Continued….
State Details
ment
No.
Remarks
11
Detailed Account of Revenue by
Minor Head (Revenue Heads)
Statement of Revenue
12.
Detailed Account of Expenditure by
Minor Heads
Statement of Expenditure
13.
Detailed statement of Capital
Expenditure during and to the end
of the year
Statement of Assets
14.
Statement showing details of
Investments of Government
Government Financial Assets
15.
Statement showing Capital and
other Expenditure (outside Revenue
Account)
----
Financial Statements of Government:Financial Reporting (Union
& States): Continued….
State Details
ment
No.
Remarks
16.
Detailed statements of Receipts,
Fund wise details
Disbursements and Balances under
Position of NSSF- OB, Receipts,
heads of account relating to Debt,
Payments & Investments
Contingency Fund and Public
Account.
Note: Statement showing position of
NSSF (UNION)
17.
Detailed Statements of Debt and
Other Interest Bearing Obligations
of Government
18.
Detailed Statement of Loans and
Advances made by Government
Financial Assets
19.
Statement showing details of
earmarked balances (States)
Statement of Balances in Reserve
Fund/Deposits
Statement of Liabilities
Deficiencies in the present Government Accounting
System:
1. Cash transactions do not capture timing of the action or the impact of
the economy. Revenues and expenses are recognized when received or
paid respectively without regard to which period they apply.
2. Non-monetary flows are not recorded because the focus is on cash
management rather than resource flow.
3. The accounts do not include receivable or payables and the financial
statements give revenue receipts rather than revenue earned and
expenses paid rather than expenses incurred.
4. There is no information on receivable and payables unless a separate
compilation is made.
5. No information about capital work-in-progress like dams, power plants,
roads and bridges etc., is available.
6. Unit cost and total cost of services provided by the Government
departments like health, education, water supply, transportation etc., is
not ascertainable (as depreciation, interest etc., are not apportion
able).
7. It gives wrong pictures about advance tax, as advance tax receipts are
recognized as income.
Deficiencies in the present Government Accounting
System:
8. Assets constitute the money raised by Government which has been
used for assets formation purposes and whose ownership vests with
the Government.
9. These assets are shown at book value and do not take into account
depreciation in their value as per current market rates. Assets and
liabilities are not integrated with the accounts.
10. No disclosure is made about contingent assets and liabilities which
may turn into committed ones on account of guarantees given or letter
of comforts issued by the government.
11. No information is provided about existing net liabilities of public
enterprises and agencies outside the government, although the later
cannot escape such liabilities.
12. It provides room for fiscal opportunism e.g., tax revenues can be
collected in excess during a particular period followed by high
incidence of refunds together with interest, payments can be easily
deffred and passed on to the next financial year, revenue due in the
future could be compromised by providing for one time payments.
Deficiencies in the present Government Accounting
System:
14. The main shortcomings of Government Accounting System
are :
(i) The Hidden liabilities: there may be opportunity to manipulate
the deficit.
(ii) It does not provide the total cost of services as it is based
only on cash elements. As a result:
• It is not cost effective (the depreciation and interest costs are
not accounted for while these costs are important for
performance evaluation, control, public contracts policy and
price fixing policy, and to measure the efficiency and the
effectiveness of the governmental entities)
• Inadequate for control and comparison purposes.
• No performance measurement possible.
(iii) The total value of stocks is not disclosed because the
accounts are not concerned with recording the usage; they are
rather concerned with the cash outflow, which has been paid
for purchases.
• Strong potential for over-spending.
Deficiencies in the present Government Accounting
System:
(iv). Of the seven objectives identified by Public Sector Committee (PSC)
of the International Federation of Accountants (IFAC), only the first
three objectives are met by a cash-based government accounting
system:
• Indicating whether resources were obtained and used in accordance
with the legally adopted budget.
• Indicating whether resources were obtained and utilized in
accordance with legal and contractual requirements, including
financial limits established by appropriate legislative authorities.
• Providing information about how the government or unit financed its
activities and met its cash requirements.
• Providing information about the sources, allocation and uses of
financial resources.
• Providing information that is useful in evaluating the government’s
or unit’s ability to finance its activities and to meet its liabilities and
commitments.
• Providing information about the financial condition of the
government or unit and changes in it.
• Providing aggregate information useful in evaluating the
government’s or unit’s performance in terms of costs, efficiency and
accomplishments.
Deficiencies in the present Government Accounting
System:
15. Deficiencies in present financial reporting are as follows:
(i) The present Accounting and financial reporting of Government
is cash based.
• Expenditures and receipts are recognized and reported when
actually paid or received and not when due or accrued.
(ii) The Finance Account is considered as a complete document,
but at the same time it does not contain all relevant
information.
• Voluminous but information on object level, such as salaries
and non-salaries (maintenance, work-in-progress, and asset
creation), commitments (supply against purchase order
received), subsidies etc, are not readily available in accounts.
• Due to certain expenditure kept under suspense, the figures of
expenditure are distorted.
• There are no disclosures of accounting policies on the basis of
which Financial Statements are prepared.
(iii) While any informed individual can draw reasonable
conclusions from a company’s Balance Sheet and Profit and
Loss Account, this is not always possible from government
financial statements.
Deficiencies in the present Government Accounting
System:
(iv). Present system of financial reporting does not
report:
• Accrued expenses and revenues , e.g., expenditure
incurred but payment not made or revenue earned
but not received (e.g., bills payable, tax in arrears,
non-tax revenue due)
• Actual position of assets (Current assets including
receivables, inventories etc) and liabilities ( e.g.,
current such as payables and pension liability).
• Depreciation (erosion in physical assets, financial
assets) and appreciation (land) not available.
• No comprehensive information is available about
government liabilities (Pensionary commitments,
interest due, bills payable, depreciation for
replacement of assets etc.)
• Provisions against future liability not available.
Dr. C. Rangarajan Committee Report on
Effective Management of Public Expenditure:
The main features are as follows:
► Prime Minister’s Economic Advisory Council (PMEAC) Chairman C Rangarajan,
who head a high level committee set up by the Planning Commission
suggested measures for effective management of Public Expenditure.
► The committee consisted of 18 members and mainly focused on the anomalies
and inconsistencies that arise out of the present classification of expenditure
into Plan and Non Plan expenditure categories. Other members of the
committee included the Planning Commission Secretary, a Reserve Bank of
India deputy governor and expenditure secretary, among others. National
Institute of Public Finance and Policy Director M.G.Rao and Icrier Honorary
Professor Nitin Desai was also the part of the committee.
► The expert committee has submitted its report to the Prime Minister. The full
Planning Commission under the chairmanship of the Prime Minister approved
the draft paper on August 20,2011.
► The committee has suggested the abolition of the “age-old distinction between
Plan and Non-Plan expenditure, thereby a fundamental shift in the approach of
public expenditure management from segmental view to a holistic view of
expenditure, from input-based budgeting to the budgeting linked to outputs
and outcomes.
Dr. C. Rangarajan Committee Report on
Effective Management of Public Expenditure:
►
►
►
►
The committee also recommended that there should be just two
classifications of expenditure --- capital and revenue. Capital will
account for all the developmental expenditure like investment.
Expenditure on salary for government employees, interest payments
and subsidy outgo will be placed under revenue expenditure.
The committee also suggests the need to classifying revenue
expenditure by endues for the purpose of Fiscal Responsibility and
Budget Management (FRBM).
The committee recommended amendments to the FRBM Act, that
lends some rigidity to the concept of revenue deficit, to provide scope
for adjustment. An ‘adjusted revenue deficit’ may be considered for
FRBM compliance, adjusting the revenue deficit to the extent of grants
for creating assets.
The committee also suggest a proper framework for taking a
comprehensive view of the total transfer of resources from the Centre
to the States, including ensuring its accounting and reporting in a
uniform manner.
ACCRUAL BASIS OF ACCOUNTING:
Main features of accrual accounting:
1. The main basis of book keeping in accrual accounting is ‘double entry’
system rather than single entry system as adopted in cash basis of
government accounting.
2. Accrual based double entry accounting system provides correct and
real financial position of the entity and is helpful to provide correct
information to all the concerned parties. Therefore, accrual based
double entry accounting system may be appropriate for the
Government.
3. In accrual accounting, a transaction is accounted for when it is earned
and when incurred ( in cash basis, transaction is accounted for when
cash is received or payment is made). Some examples of accrual
accounting are:
• Tax assessed but not received will be accounted for (unlike in cash
system)
• Licence fee/ royalty due but not received will be accounted for.
• Liabilities accrued but not paid will be accounted for.
4. Accrual accounting reflect assets and liabilities adequately, for
example
• Short term and long term liabilities
• Pensionary liabilities
• Depreciation cost etc.
ACCRUAL BASIS OF ACCOUNTING:
4. In case of reporting in accrual basis of accounting,
it can be categorized as follows:
(i) Statement of Operating Performance is the
financial performance.
(ii) It exhibits the financial position in the form of
‘Statement of Asset and Liability’.
(iii) The Cash Flow Statement shows
• Operating, financing and investing activities.
• Receipts and Payments
(iv). The reporting in accrual basis of accounting helps
executive in assessment of:
• Financial Performance in recognition of transactions
comprehensively including depreciation.
• Financial position of complete record of asset and
liability.
Treatment of Elements of Accounting in present Cash Basis and
Accrual Basis: This can be summarized as follows:
Elements
Present Cash Basis
New Accrual Basis
Expenditure
Due and paid:
•Cash
•Cheque
•Book Adjustments
Due but not paid:
•Bills payable
•Accrued liability
Revenue
Due and received:
•Cash receipts
•Book adjustments
Due but not received:
•Tax assessed but not received
•Licence fee/ royalty due- not
received
Liability
•Debt
All liability:
•Long terms
•Current
•Pension
Assets
•Capital
only depicted
expenditure
progressive
All assets:
•Capital
•Depreciation
ADVANTAGES OF ACCRUAL SYSTEM OF ACCOUNTING:
1. Recognition:
(i) Revenue is recognized when it is earned and the income constitutes both revenue
received and receivable. Thereby it is assisting decision maker in taking correct financial
decision.
(ii) Expenditure is recognized as and when the liability for payment arises and thus it
constitutes both amounts paid and payable.
2. Matching:
(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 the operation
conducted in that period.
(ii) A distinct difference is maintained between items of revenue nature and capital nature,
this helps in proper presentation of the financial statement.
(iii) In Accrual Based accounting system also the accuracy of the accounting can be
established, through the device of the Trial Balance.
3. Comparison:
(i) The surplus and deficit during a period can be ascertained together with details. It helps
in assessment of financial performance by correctly reflecting surplus/deficit as all
expenses weather paid or not and all income weather received or not are duly accounted
for.
(ii) The financial position of the Entity concerned can be ascertained at the end of each
period by preparation of a Balance Sheet.
(iii) The system permits accounts to be kept in as much details as necessary and provides
significant information for the purpose of controls etc.
(iv) Results of one year can be compared with those of previous years and reasons for the
change can be ascertained.
ADVANTAGES OF ACCRUAL SYSTEM OF ACCOUNTING:
5. Adequacy to meet short term and long term liability:
(i) It gives information on weather income streams are adequate to meet short
and long term liabilities so that their early payment keeping in view their
payment period (short term and long term) and nature (cheap or costly loan)
can be better managed.
6. Ascertaining future sustainability of the programmes:
(i) It provides comprehensive information on expenses which helps in knowing the
cost consequences of policies and enables comparisons with alternative
policies. Also information about calculation of subsidy can be extracted from
the accounts, which helps in its rationalization. This ensures the adoption of
best policy, which in turn assures optimal use of scarce resources. It also helps
in ascertaining the future sustainability of programmes.
7.Impact of Financial Performance:
(i) Since information relating to both cash flow as well as non-cash flow
transactions are recorded, the impact of transactions where cash has not been
received or paid can be ascertained.
(ii) Since full information are recorded on expenses, it helps in knowing the cost
consequences of policies and we can compare with alternative policies.
(iii) Implicit subsidy from the accounts helps in rationalization of subsidy policy.
ADVANTAGES OF ACCRUAL SYSTEM OF ACCOUNTING:
8. Financial Position of Current Stock of Assets and Liabilities:
(i) Comprehensive information on current stock of assets and liabilities are 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 outgo or inflow
but their impact on:
• The asset and liability position of the Government.
• Future sustainability of the programmes.
• Future funding requirements of the asset maintenance and replacement
• Planning the repayment of liabilities.
9. Under the accrual basis of accounting, the financial transactions are recorded,
when they occur, even though actual receipts or payments of money may not
have taken place at that time. Hence, the major difference between accrual
accounting and cash accounting is in timing of recognition of revenues,
expenses, gains and losses.
10. 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 received.
Therefore, Accrual basis of accounting is a scientific system for reporting income
and expenditure and also the preparation of financial statements.
11. Under accrual basis of accounting system, financial performance and financial
results are obtained from two important financial statements noted as below:
(i) Income and Expenditure Statement: to determine the financial performance of
the entity.
(ii) Balance Sheet: To assess the financial status of the Entity.
Why Transition to Accrual Accounting System considered
Inevitable?
1. Due to shortcomings of cash based accounting system and advantages of accrual
system as discussed in previous paragraphs.
2. Due to global economic integration resulting in public demand that government
should be fully accountable to the community for the resources entrusted forced
the countries to adopt:
Radical economic reforms including involvement of private sector in delivery of
public services;
Radical changes in the management tools, information technology, ways of decisionmaking, performance measurements, accounting procedures, accounting
systems etc.
3. The International Monetary Fund’s Second Edition of the Government Finance
Statistics manual, 2001 (GFS) aims at improving Government accounting and
transparency operations, envisages accrual accounting, balance sheet and
complete coverage of Government’s economic and financial activities to meet the
new requirements of formulating and evaluating Governments Fiscal policies.
The GFS system uses the accrual basis in preference to the cash basis of
accounting primarily because the time of recording matches the time of actual
resource flow.
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 of recording will
not diverge from the time of economic activities and transactions to which they
relate.
Why Transition to Accrual Accounting System considered
Inevitable?
5. The accrual basis provides the most comprehensive information. Several
international accounting agencies (Internal Federation of Accountants,
International Public Sector Accounting Standards board) also suggest
that all Governments should adopt the accrual basis. However, the move
to accrual basis for public sector financial reporting has yet to gain
universal acceptance.
6. In India, the 12th Finance Commission (TFC) recommended adoption of
accrual basis for the Government accounting. The recommendations
have been accepted by the Government of India in principle and
migration to accrual accounting has been accepted by Government of
India and most of the State Governments. 13 th Finance commission has
also endorsed the recommendation of 12th Finance commission.
7. Pursuant to the decision of the Government of India, the Government
Accounting Standards Advisory Board (GASAB) was set up in August
2002, in the office of the Comptroller & Auditor General of India. The
GASAB has suggested an operational framework and roadmap for
migration to accrual accounting. GASAB shall have to set itself to the
task of providing distinctive set of accounting policies including those on
income and liability recognition, depreciation and valuation of assets and
in due course, issue accounting standards in the Indian context. It would
consistently reconsider, refine and amend the standards.
Difference between cash based single entry system and accrual
based double entry system:
Basis of
Distinction
Single Entry Cash Based
Accounting
Double Entry Accrual
Based Accounting
Recognition of the
transactions
All cash receipts and payments
during the Accounting Period
are recorded whether or not
the
transactions
actually
belong to that accounting
period.
All income and expenses
relating to the Accounting
period are recorded, whether
or not received or paid.
Accounts
Only personal accounts and Personal, Real and Nominal
cash book are prepared.
accounts are prepared.
Accuracy of results Accuracy of transactions
cannot be verified since the
transactions are recorded on
single entry basis and no trail
balance is prepared
As all the transactions are
recorded based on double
entry system of book keeping,
a Trial Balance is prepared to
check the arithmetical
accuracy of the transactions.
Difference between cash based single entry system and accrual
based double entry system:
Basis of
Distinction
Single Entry Cash Based
Accounting
Double Entry Accrual
Based Accounting
Financial
Performance
Financial Performance cannot
be ascertained as Income and
Expenditure Account is not
prepared
Financial Performance of an
entity can be ascertained as
Income
and
Expenditure
Statement is prepared.
Financial Position
Only a statement of affairs is
prepared which does not give
the true and fair state of
affairs.
A Balance Sheet is prepared
on going concern basis which
gives a true and fair picture of
financial status.
Authenticity
This system is not considered
authentic by the Financial
Institution, lending agencies
and other outside bodies.
This system of accounting is
well accepted by the Financial
Institutions, lending agencies
and all other outside bodies.
Budgeting in Government:
(A). Present System of Budgeting:
1. It is the Annual Financial Statements which is a
constitutional responsibility under Article 112 & 202 of
Constitution of India.
2. Annual Financial Statement is a statement of estimated
receipts and expenditure of the Government of India,
which is laid before the Parliament in respect of every
financial year. Similar is the case with State Governments.
3. It shows receipts and payments of the Government.
4. Revenue Budget consists of the revenue receipts of the
Government (tax revenues and other revenues) and the
expenditure (or rather payments) met from these
revenues.
5. Capital budget consists of capital receipts and payments.
Budgeting in Government:
(B). What will be the possible nature of budgeting if it is
prepared on Accrual Basis?
1. It becomes a full set of forecast financial statements, including
assumptions used in preparing those statements.
2. Formal budget appropriations (cash) to be consistent or linked with
forecast financial statements.
3. In accrual budgeting, estimates would reflect the complete liability
based on expenditure for the year; ideally the difference should be
minimal.
4. Similarly in case of receivables, the entire revenue relating to the year
is accounted in accrual budget and not merely the amount
collected/collectible.
5. It requires shifting the budgeting from cash flows (money received and
payments made) to revenues earned and liabilities incurred.
6. The most important aspect is that the accrual basis would align
budgeting and financial reporting and both would be on the same
accounting basis.
However, implementing reforms simultaneously in both accounting and
budgeting system is very complex, and the task of managing the
change is extremely difficult, but needs to be continued to its logical
conclusion.
Budgeting in Government:
Is accrual budgeting a pre-condition for accrual accounting?
1. It is feasible to report in terms of accruals and the budget on a cash
basis.
2. If budgeting were continued on the cash basis, financial reports would
be analytic tools in accrual basis.
3. If budgeting were shifted to the accruals, accounting principles would
become decision rules in budgeting.
4. Financial reports are subject to audit; budget are not.
5. Full benefits of accrual accounting can be gained only when it goes
hand in hand with accrual accounting.
6. In public sector accounting cannot be divorced from budgeting.
7. There would be on-going initiatives with regard to asset Registers
(needs change in GFR & Budget Speech)
8. It is ideal when we migrate to accrual accounting, accrual budgeting
should also follow.
Budgeting in Government:
(C) Accrual Accounting: Some disclaimers
Accrual Accounting in Government:
(i) Is not a Private Sector Accounting which uses certain
commercial principles to meet its own objectives?
(ii) It is a mean or tools for decision making and not and end.
(iii) It provides more comprehensive, accurate and reliable
financial information.
(iv) It is not entirely novel.
(v) It is to be adapted to the requirements of social policy
and commitments of the government, public goods,
budgetary requirements and government as going concern.