5INTRODUCTION TO GOVERNMENT ACCOUNTS AND

ACCOUNTING FOR AGRICULTURAL FARMS

UNIT 1 : INTRODUCTION TO GOVERNMENT ACCOUNTS

(A) Write short notes on:Question 1Principles of Government Accounting (5 marks) [Intermediate–Nov. 1995]AnswerGovernment 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 Government’s main interest is to forecast with possible accuracy what is expected to bereceived or paid during the year and whether the former together with the balance of the pastyear is sufficient to cover the latter. Similarly in the complete accounts of the year, it isconcerned to see to what extent its forecast was justified by facts and whether it has surplusor deficit balance as a result of year’s transactions.Government accounts are designed to determine how much money it has to mobilise in orderto maintain its necessary activities at the proper standard of efficiency. On the basis ofbudgets and accounts, government determines (a) whether to curtail or expand its activitiesand (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 doubleentry system. A statement of its estimated annual receipts and expenditure is prepared byeach government and presented to its legislature. A Union Territory presents statement totheir legislature with the previous approval of the President. This annual statement iscommonly known as Budget. In the statement, the sums required to meet expenditure chargedupon the Consolidated Fund of India or the Consolidated Fund of State, or the ConsolidatedFund of Union Territory and the sums required to meet other expenditure are shownseparately. The budget shows receipts and payments of the government under three heads :1. Consolidated Fund2. Contingency Fund3. Public AccountThe budget comprises of (i) Revenue Budget and (ii) Capital budget.

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Proprietary FundTotal Assets

Question 2Consolidated Fund (5 marks) [Intermediate Nov. 1996]AnswerIn 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 classifiedand 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 foreach state and Union Territory. The two main sub-divisions under the consolidated fund areRevenue A/c and Capital A/c.Question 3Proprietary ratio. (5 marks) [Intermediate –May 1997]AnswerProprietary ratio is calculated to judge the owner’s contribution to total fund application/assets.

Proprietary ratio =

Proprietary Fund includes both share capital equity, preference capital and reserves andsurplus minus losses. However, for this purpose only free reserves should be counted. Theratio indicates the share of proprietary fund against each rupee of investment. This ratio alsohelps to analyse the strength of the company.A high proprietary ratio will indicate less utilization of external funds. It will also indicate thehigh internal funds utilization of the company. The optimum proprietary ratio to be maintainedby a company will depend on the industry to which it belongs.Question 4Peculiarity of Government Accounting. (5 marks) [Intermediate–May 1999]AnswerThe main objective of government accounting is to forecast with possible accuracy what isexpected to be received or paid during the year and whether the former together with thebalance of past year is sufficient to cover the latter. Similarly in the complete accounts of theyear, Government is concerned to see to what extent the forecast was justified by facts andwhether it has surplus or deficit balance as a result of year’s transactions.Accordingly, government accounts are designed to determine how much money it has tomobilize in order to maintain its necessary activities at the proper standard of efficiency. Onthe basis of budgets and accounts, government determines (a) whether to curtail or expand its

Introduction to Government Accounts and Accounting for Agricultural Farms 5.3

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) Majorheads (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 theaccounts which is kept on double entry system. A statement of its estimated annual receiptsand expenditures is prepared by each government and presented to its legislature. A UnionTerritory presents statement to its legislature with the previous approval of the President. Thisannual statement is commonly known as budget. In this statement, the sums required to meetthe expenditure charged upon the Consolidated Fund of India or of State or of Union Territoryand the sums required to meet other expenditure are shown separately. The budget showsreceipts and payments of the government under three heads :1. Consolidated Fund2. Contingency Fund3. Public Account.The budget comprises of revenue budget and capital budget. Thus one of the most distinctivefeatures of the system of government accounts in India is the minute elaboration with whichthe financial transactions of government under both receipts and payments, are differentiatedand classified.Question 5Whether government accounting is totally different from commercial accounting ? State youropinion with reasons. (5 marks) [Intermediate –Nov. 1999]AnswerThe primary objective of commercial accounting is to ascertain the gain or loss of anenterprise for a given period and to find out the position of assets and liabilities at the end ofthe accounting period. Against this, government accounts are designed to enable governmentto determine how much money it needs to mobilize in order to maintain its necessary activitiesat the proper standard of efficiency. It is thus clear that the purpose of government accountingis totally different from that of commercial accounting. The other broad differences betweengovernment 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 aregenerally 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.

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3. System of accounting : In commercial accounting, double entry system of book keeping isfollowed. 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 classifiedinto (i) personal (ii) real, and (iii) nominal accounts. Government accounts are kept inthree parts : Part 1 – Consolidated fund ; Part II – Contingency fund ; and Part III – Publicaccount.

5. Classification of financial transactions : One of the most distinctive features of the systemof government accounts in India is the minute elaboration with which the financialtransactions of government under both receipts and payments, are differentiated andclassified. 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 ofcommercial accounting, no such elaborate details are provided.

Question 6Briefly explain “Treasury system” and the functions entrusted to Treasury in GovernmentAccounting. (4 marks) (Intermediate–May 2000 & Nov. 2000, PE-II–Nov. 2003, Nov. 2007)AnswerUnder the treasury system, district treasury is the basic unit and the focal point for the primaryrecord of financial transactions of government in the district with sub-treasuries under it at theTaluks and Tehsils level.The Treasuries are of two kinds - (1) Banking (ii) Non-banking. A bank treasury means atreasury, the cash business of which is conducted by the Reserve Bank of India or itsbranches or agencies authorised to conduct Government business and non-banking treasurymeans 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 othersauthorised to do so.

(iii) Keeping initial and subsidiary accounts of the receipts and payments occurring at themand rendering statements of such transactions to the Accountant General for detailedcompilation and consolidation.

(iv) Acting as a banker in respect of funds of local bodies, Zilla Parishads, PanchayatInstitutions etc. who keep their funds with the treasuries.

(v) Custody of opium and other valuables because of the strong room facility provided at thetreasury.

(vi) Custody of cash balances of the State Government and conducting cash business ofGovernment at non-banking treasuries.

Introduction to Government Accounts and Accounting for Agricultural Farms 5.5

Question 7Treasury System used for the primary record of Financial Transactions of the Government.

(4 marks) [Intermediate –May 2001]AnswerIn the treasury system, there are treasuries which receive and pay money on behalf of thegovernment. Under this system, district treasury is the basic unit and the local point for theprimary record of financial transactions of government in the district with sub-treasuries underit at the taluks/tahsils in the district. The system was evolved more than a century agoTreasuries are of two kinds – (i) banking and (ii) non-banking. The cash business of a banktreasury is conducted by the Reserve Bank of India or its branches or authorized agencies. Anon-banking treasury conducts the cash business itself.Apart from receiving and paying cash on behalf of government, treasury keeps initials andsubsidiary accounts of receipts and payments occurring at it and renders statements oftransactions to the Accountants General for detailed compilation and consolidation. It acts asa banker in respect of funds of local bodies, zila parishads etc. Treasury also keeps custody ofopium and other valuables belonging to the government in its strong room.Question 8What are the main principles of allocation between Capital and Revenue accounts on a Capitalscheme? (4 Marks) (PE-II – May 2005)

Answer

The following are the main principles governing the allocation of expenditure on a capitalscheme 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 openedfor service. It would also bear charges for such further additions and improvements asmay be sanctioned under rules made by competent authority.

(ii) Subject to (iii) below, revenue account should bear all subsequent changes formaintenance and all working expenses. These embrace all expenditure on the workingand upkeep of the project and also on such renewals and replacements and suchadditions, improvements or extensions as prescribed by Government.

(iii) In the case of works of renewal and replacement which partake both of a capital andrevenue nature, the allocation of expenditure should be regulated by the broad principlethat revenue should pay or provide a fund for the adequate replacement of all wastage ordepreciation of property originally provided out of capital grants and that only the cost ofgenuine improvements, whether determined by prescribed rules or formulae or underspecial orders of Government, should be debited to capital account. Where underspecial orders of Government, a Depreciation or Renewals Reserve Fund is establishedfor renewing assets of any commercial department or undertaking, the distribution ofexpenditure on renewals, and replacements between capital account and the fund should

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be so regulated as to guard against over-capitalisation on the one hand and excessivewithdrawals from the fund on the other.

(iv) Expenditure on account of reparation of damage caused by extraordinary calamities suchas flood, fire, earthquake, enemy action, should be charged to capital account or torevenue account or divided between them in such a way as may be determined byGovernment according to the circumstance of each case.

(v) Capital receipts in so far as they relate to expenditure previously debited to capitalheads, accruing during the process of construction of a project, should be utilised inreduction of capital expenditure. Thereafter, their treatment in the accounts will dependon circumstances, but except under a special rule or order of Government, they shouldnot be credited to the revenue account of the department or undertaking.

Question 9Write short note on “Appropriation Act” with reference to Government Accounts.

(4 Marks) (PE-II – Nov. 2006)

Answer

After the demand is passed by the legislature, appropriation bill is introduced to provide for theappropriation out of the Consolidated Fund of India or the State or the Union Territory havingseparate 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 amountshown in the statement previously laid before the legislature. No money can be withdrawnfrom the consolidated fund until the appropriation bill is passed. The sum is authorized in theAppropriation Act or intended to cover all the changes including the liability of past years to bepaid during a financial year or to be adjusted in accounts of the year. Any unspent balancelapses and is not available for utilisation in the following year.Question 10How the Government expenditure in India is classified? (2 Marks) (PE II-May, 2008)

AnswerGovernment 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