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INTRODUCTION TO GOVERNMENT ACCOUNTS AND ACCOUNTING FOR AGRICULTURAL FARMS

UNIT 1 : INTRODUCTION TO GOVERNMENT ACCOUNTS

(A) Write short notes on: Question 1 Principles of Government Accounting [IntermediateNov. 1995] (5 marks)

Answer Government expenditure in India is classified into a five Tier-system: (i) Sectors (ii) Major heads (iii) Minor heads (iv) Sub-heads (v) Detailed heads of accounts. The Governments main interest is to forecast with possible accuracy what is expected to be received or paid during the year and whether the former together with the balance of the past year is sufficient to cover the latter. Similarly in the complete accounts of the year, it is concerned to see to what extent its forecast was justified by facts and whether it has surplus or deficit balance as a result of years transactions. Government accounts are designed to determine how much money it has to mobilise in order to maintain its necessary activities at the proper standard of efficiency. On the basis of budgets and accounts, government determines (a) whether to curtail or expand its activities and (b) whether it can and should increase or decrease taxation accordingly. The accounts are kept on single entry. However, a portion of the accounts are kept on double entry system. A statement of its estimated annual receipts and expenditure is prepared by each government and presented to its legislature. A Union Territory presents statement to their legislature with the previous approval of the President. This annual statement is commonly known as Budget.

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In the statement, the sums required to meet expenditure charged upon the Consolidated Fund of India or the Consolidated Fund of State, or the Consolidated Fund of Union Territory and the sums required to meet other expenditure are shown separately. The budget shows receipts and payments of the government under three heads : 1. Consolidated Fund 2. Contingency Fund 3. Public Account The budget comprises of (i) Revenue Budget and (ii) Capital budget. Question 2 Consolidated Fund Answer In India Government accounts are kept in three main parts, i.e., consolidated fund, contingency fund and public account. Revenue of the Government arising out of taxation, other receipts classified as revenue, certain capital receipts by way of deposits, advances and expenditure therefrom are classified and accounted under Consolidated fund. Accounting for the Central Government and State Government is done separately i.e., consolidated fund of India for the Central Government and a separate consolidated fund for each state and Union Territory. The two main sub-divisions under the consolidated fund are Revenue A/c and Capital A/c. Question 3 Proprietary ratio. May 1997] Answer Proprietary ratio is calculated to judge the owners contribution to total fund application/assets. Proprietary Proprietary ratio = Fund Total Assets Proprietary Fund includes both share capital equity, preference capital and reserves and surplus minus losses. However, for this purpose only free reserves should be counted. The ratio indicates the share of proprietary fund against each rupee of investment. This ratio also helps to analyse the strength of the company. (5 marks) [Intermediate (5 marks) [Intermediate Nov. 1996]

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A high proprietary ratio will indicate less utilization of external funds. It will also indicate the high internal funds utilization of the company. The optimum proprietary ratio to be maintained by a company will depend on the industry to which it belongs. Question 4 Peculiarity of Government Accounting. [IntermediateMay 1999] Answer The main objective of government accounting is to forecast with possible accuracy what is expected to be received or paid during the year and whether the former together with the balance of past year is sufficient to cover the latter. Similarly in the complete accounts of the year, Government is concerned to see to what extent the forecast was justified by facts and whether it has surplus or deficit balance as a result of years transactions. Accordingly, government accounts are designed to determine how much money it has to mobilize in order to maintain its necessary activities at the proper standard of efficiency. On the basis of budgets and accounts, government determines (a) whether to curtail or expand its activities and, (b) whether it can and should increase or decrease taxation accordingly. Government expenditure in India is classified into a five tier-system : (i) Sectors (ii) Major heads (iii) Minor heads, (iv) Sub-heads, (v) Detailed heads of accounts. The mass of government accounts is kept on single entry. There is, however, a portion of the accounts which is kept on double entry system. A statement of its estimated annual receipts and expenditures is prepared by each government and presented to its legislature. A Union Territory presents statement to its legislature with the previous approval of the President. This annual statement is commonly known as budget. In this statement, the sums required to meet the expenditure charged upon the Consolidated Fund of India or of State or of Union Territory and the sums required to meet other expenditure are shown separately. The budget shows receipts and payments of the government under three heads : 1. Consolidated Fund 2. Contingency Fund 3. Public Account. The budget comprises of revenue budget and capital budget. Thus one of the most distinctive features of the system of government accounts in India is the minute elaboration with which the financial (5 marks)

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transactions of government under both receipts and payments, are differentiated and classified. Question 5 Whether government accounting is totally different from commercial accounting ? State your opinion with reasons. (5 marks) [Intermediate Nov. 1999] Answer The primary objective of commercial accounting is to ascertain the gain or loss of an enterprise for a given period and to find out the position of assets and liabilities at the end of the accounting period. Against this, government accounts are designed to enable government to determine how much money it needs to mobilize in order to maintain its necessary activities at the proper standard of efficiency. It is thus clear that the purpose of government accounting is totally different from that of commercial accounting. The other broad differences between government accounting and commercial accounting can be enumerated as follows : 1. Financial Statements : Every commercial enterprise prepares a profit and loss account and a Balance Sheet. But in case of government accounting, following two statements are generally prepared: (i) Government account to show the net result of all incomes and expenditure including expenditure on capital account ;

(ii) Statement of balancing accounts to show whether the government owes or has to receive money. 2. Method of accounting : Government accounts are maintained on cash basis as against commercial accounting in which accounts are normally maintained on mercantile basis. 3. System of accounting : In commercial accounting, double entry system of book keeping is followed. On the other hand, mass of the government accounts are kept on single entry. There is, however, a portion of accounts which is maintained on double entry basis. 4. Classification of accounts : In commercial accounting, accounts are broadly classified into (i) personal (ii) real, and (iii) nominal accounts. Government accounts are kept in three parts : Part 1 Consolidated fund ; Part II Contingency fund ; and Part III Public account. 5. Classification of financial transactions : One of the most distinctive features of the system of government accounts

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in India is the minute elaboration with which the financial transactions of government under both receipts and payments, are differentiated and classified. Government expenditure in India is classified into a five tier system : Sectors, Major heads, Minor heads, Sub-heads and Detailed heads of accounts. In case of commercial accounting, no such elaborate details are provided. Question 6 Briefly explain Treasury system and the functions entrusted to Treasury in Government Accounting. (4 marks) (IntermediateMay 2000 & Nov. 2000, PE-IINov. 2003, Nov. 2007) Answer Under the treasury system, district treasury is the basic unit and the focal point for the primary record of financial transactions of government in the district with sub-treasuries under it at the Taluks and Tehsils level. The Treasuries are of two kinds - (1) Banking (ii) Non-banking. A bank treasury means a treasury, the cash business of which is conducted by the Reserve Bank of India or its branches or agencies authorised to conduct Government business and non-banking treasury means a treasury, the cash business of which is conducted by itself. The functions entrusted to the treasury are as follows: (i) Receipt of money from the public and departmental officers for credit to government. (ii) Payment of claims against Government on bills or cheques or other instruments presented by departmental drawing and disbursing officers or pensioners or others authorised to do so. (iii) Keeping initial and subsidiary accounts of the receipts and payments occurring at them and rendering statements of such transactions to the Accountant General for detailed compilation and consolidation. (iv) Acting as a banker in respect of funds of local bodies, Zilla Parishads, Panchayat Institutions etc. who keep their funds with the treasuries. (v) Custody of opium and other valuables because of the strong room facility provided at the treasury. (vi) Custody of cash balances of the State Government and conducting cash business of Government at non-banking treasuries.

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Question 7 Treasury System used for the Transactions of the Government. Answer In the treasury system, there are treasuries which receive and pay money on behalf of the government. Under this system, district treasury is the basic unit and the local point for the primary record of financial transactions of government in the district with subtreasuries under it at the taluks/tahsils in the district. The system was evolved more than a century ago Treasuries are of two kinds (i) banking and (ii) non-banking. The cash business of a bank treasury is conducted by the Reserve Bank of India or its branches or authorized agencies. A non-banking treasury conducts the cash business itself. Apart from receiving and paying cash on behalf of government, treasury keeps initials and subsidiary accounts of receipts and payments occurring at it and renders statements of transactions to the Accountants General for detailed compilation and consolidation. It acts as a banker in respect of funds of local bodies, zila parishads etc. Treasury also keeps custody of opium and other valuables belonging to the government in its strong room. Question 8 What are the main principles of allocation between Capital and Revenue accounts on a Capital scheme? (4 Marks) (PE-II May 2005) Answer The following are the main principles governing the allocation of expenditure on a capital scheme between capital and revenue accounts: (i) Capital account should bear all charges for the first construction and equipment of a project as well as charges for intermediate maintenance of the work while not yet opened for service. It would also bear charges for such further additions and improvements as may be sanctioned under rules made by competent authority. (ii) Subject to (iii) below, revenue account should bear all subsequent changes for maintenance and all working expenses. primary record of Financial

(4 marks) [Intermediate May 2001]

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These embrace all expenditure on the working and upkeep of the project and also on such renewals and replacements and such additions, improvements or extensions as prescribed by Government. (iii) In the case of works of renewal and replacement which partake both of a capital and revenue nature, the allocation of expenditure should be regulated by the broad principle that revenue should pay or provide a fund for the adequate replacement of all wastage or depreciation of property originally provided out of capital grants and that only the cost of genuine improvements, whether determined by prescribed rules or formulae or under special orders of Government, should be debited to capital account. Where under special orders of Government, a Depreciation or Renewals Reserve Fund is established for renewing assets of any commercial department or undertaking, the distribution of expenditure on renewals, and replacements between capital account and the fund should be so regulated as to guard against over-capitalisation on the one hand and excessive withdrawals from the fund on the other.

(iv) Expenditure on account of reparation of damage caused by extraordinary calamities such as flood, fire, earthquake, enemy action, should be charged to capital account or to revenue account or divided between them in such a way as may be determined by Government according to the circumstance of each case. (v) Capital receipts in so far as they relate to expenditure previously debited to capital heads, accruing during the process of construction of a project, should be utilised in reduction of capital expenditure. Thereafter, their treatment in the accounts will depend on circumstances, but except under a special rule or order of Government, they should not be credited to the revenue account of the department or undertaking. Question 9 Write short note on Appropriation Government Accounts. Answer After the demand is passed by the legislature, appropriation bill is introduced to provide for the appropriation out of the Consolidated Fund of India or the State or the Union Territory having separate Act with reference to

(4 Marks) (PE-II Nov. 2006)

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legislature for all moneys required to meet (a) the grants made by the legislature; (b) the expenditure charged on consolidated fund but not exceeding in any case the amount shown in the statement previously laid before the legislature. No money can be withdrawn from the consolidated fund until the appropriation bill is passed. The sum is authorized in the Appropriation Act or intended to cover all the changes including the liability of past years to be paid during a financial year or to be adjusted in accounts of the year. Any unspent balance lapses and is not available for utilisation in the following year. Question 10 How the Government expenditure in India is classified? Marks) (PE II-May, 2008) Answer Government expenditure in India is classified into a five tier system: (i) (ii) (iii) (iv) (v) Sectors Major Heads Minor Heads Sub-Heads Detailed Heads of Accounts (2