training module on · educational and medical institutions. banks, postal services and public...

Training Module on

Management of Revenues, Functional,

Budgeting, Accrual system of accounting

MAY 2015

Supported under

Comprehensive Capacity Building

Programme (CCBP)

Ministry of Urban Development

Government of India

Management of Revenues, Budgeting and Accrual System of Accounting

National Institute of Urban Management 2

Prepared by: Municipal Finance Specialist Team

1. Team Leader: T.Muralidhar

2. Module Coordinator:

Dr. C. Nagaraja Rao

3. Module Preparation Team:

Mr.V.Ramakrushna

Mr.D.Mallikarjuna



CONTENTS

Module #1 – Management Of Revenues ...........................................6

1. Introduction ................................................................................................................................. 6

2. What is Revenue Management: .................................................................................................. 6

3. Significant of Revenue Management .......................................................................................... 6

4. Municipal Finance ...................................................................................................................... 7

Module #2 – Budgeting .....................................................................14

1. What is Budget? ........................................................................................................................ 14

2. Municipal Budget ...................................................................................................................... 14

3. Legal framework for Municipal Budget ................................................................................... 14

4. Budget Sanction ........................................................................................................................ 15

5. How Budget is prepared? .......................................................................................................... 15

6. Stages in the budget process ..................................................................................................... 16

7. Budget Calendar for Municipal Budget .................................................................................... 16

8. Important Terms ........................................................................................................................ 18

9. Sanction of budget by Corporation/Council ............................................................................. 19

10. Enclosures to the Budget....................................................................................................... 19

11. Act, Rules & Government Orders related to budget preparation .......................................... 19

Module #3 – Accrual System Of Accounting ..................................23

1. Introduction ............................................................................................................................... 23

2. Need for updating municipal accounts ...................................................................................... 23

3. Current System of Accounting. ................................................................................................. 23

4. Advantages of double entry accounting system ........................................................................ 24

5. Benefits of Accrual System of Accounting ............................................................................... 25

6. Cash basis Vs Accrual basis of accounting ............................................................................... 26

7. Accrual System of Accounting ................................................................................................. 27



ABREVIATIONS

List of Abbreviations

APMDP Andhra Pradesh Municipal Development Project

APUFIDC Andhra Pradesh Urban Finance & Infrastructure Development Corporation

ARV Annual Rental Value

BPS Building Penalisation Scheme (BPS)

BRGF Backward Regions Grant Fund

CCBP Comprehensive Capacity Building Programme

DCB Demand, Collection and Balance

D&O TRADE D&O trade

MFMA Local Government: Municipal Financial Management Act

GDP Gross Domestic Product

IGFR Inter Governmental Fiscal Relation

IDP Integrated Development Plan

ILCS Integrated Low Cost Sanitation

JNNURM Jawaharlal Nehru National Urban Renewal Mission

LRS Layout Regularisation Scheme (LRS)

MV Tax Motor Vehicle Tax

NOC No Objection Certificate

RAY Rajiv Awas Yojana

SJSRY Swarna Jayanthi Shahari Rozagar Yojana

ULB Urban Local Body

PFMA Public Finance Management Act



Chapter-I

Management of Revenues



MODULE #1 – MANAGEMENT OF REVENUES

1. INTRODUCTION The ever increasing needs of society coupled with changing global scenarios and growing

population size, poses a challenge to Urban Local Bodies (ULBs). This is especially so with

respect to issues such as poverty, inadequate infrastructure etc. These challenges call for more

efficient, effective, transparent and accountable public service and reforms. In order to cope

with these challenges, municipal officials need to be equipped with all the necessary tools.

Revenues and expenditures should be properly identified and planned accordingly. Otherwise,

all of the strategic plans and other derivative plans will be futile. This implies that, municipal

financial management is the most important part of the strategic management process that

requires careful planning.

a) What is Municipal Financial Management?

Municipal financial management involves very important activities of planning, sourcing,

utilizing & disbursing, controlling and reporting.

- Planning: deals with selecting the activities to be financed;

- Sourcing: is about identifying and making necessary arrangements for financing the planned

activities.

- Utilizing & Disbursing : deals with the application of the finance in an economic, efficient

and effective manner.

- Controlling: verifying the proper use of resources in an efficient, economic and effective

manner as per the guidelines and procedures; and action plan put forward so as to prevent or

minimize fraudulent activities, wastage, etc.

- Reporting: is about compiling all the necessary data and producing an informative and timely

report to the management, financiers and other stakeholders.

The aforementioned few points determine the role of municipal financial managers involved

in both the managerial role of allocation, distribution, stabilization and controlling; and the

accounting role of recording transactions, producing reports and analysing the reports.

2. WHAT IS REVENUE MANAGEMENT:

It is a mechanism by which all categories of revenues are properly brought to

assessment/demand

Realization of demand to the full extent

3. SIGNIFICANT OF REVENUE MANAGEMENT

a) Effective discharge of obligations like

a. Provision of basic amenities

b. Maintenance of services

c. Water supply



d. Public health and sanitation

b) Major developmental activities like

a. City beautification

b. Town planning

c. City halls

c) Slums and slum development

d) Welfare of SC, ST, Women and Children

4. MUNICIPAL FINANCE

The sources of revenue to ULBs can be categorised under six (6) major heads:

4.1 TAX REVENUES: Taxes are levied, assessed and collected directly by the ULBs. The taxes levied, assessed and collected

are:

a) Property tax/House tax

b) Vacant Land tax

c) Advertisement tax

d) Tax on carriages and carts

e) Tax on animals, and

f) Agricultural land tax.

So

urc

es o

f R

even

ue

Taxes Revenue

Non-Taxes Revenue

Assigned Revenue

Plan Grants

Non Plan Grants

Loans/Borrowings



4.1.1 PROPERTY TAX

4.1.1.1 RATE OF PROPERTY TAX

The rate of property tax, together with education tax and library cess levied under the relevant law as

shown, below:

Residential Building : 25% of Annual Rental Value (ARV)

Non Residential Building : 33% of Annual Rental Value (ARV)

In Hyderabad, the rate of tax ranges from 17% to 30% of ARV depending upon the rental value of the

building.

4.1.1.2 COMPONENTS OF PROPERTY TAX

Property Tax comprises of the following components:

A Tax for general purpose

A water and drainage tax

A lighting tax

A scavenging tax

Library cess

4.1.1.3 BASIS OF PROPERTY TAX:

Property tax in the State is based on Annual Rental Value (ARV) of property. Tax on buildings and

lands shall be assessed by the Municipal Commissioner based on ARV of buildings and lands. The

ARV of buildings shall be fixed with reference to the following factors:

i. Location of the building

ii. Type of construction of the building

iii. Plinth area of the building

iv. Age of the building

v. Nature of use of the building

4.1.1.4 ZONING BASED ON LOCATION

The entire municipal area shall be divided into convenient territorial zones for the purposes of

assessment of taxes based on the following factors. Namely -

Civic amenities like water supply, street lighting, roads and drains

Markets and shopping centers

Educational and medical institutions.

Banks, postal services and public offices, and

Factories and industrial areas.

4.1.1.5 CLASSIFICATION OF BUILDINGS

After division of Municipality into territorial zones, the buildings situated in each zone are to be

classified into six categories based on nature of construction as follows:

RCC posh buildings

RCC ordinary buildings

Madras Terraced or Jack Arch roofed or stone slabs or slate roofed buildings

Mangalore tile roofed or Asbestos roofed or G.I roofed buildings

Country tiled buildings

Huts



4.1.1.6 USE OF BUILDINGS

After classification of buildings based on their type of construction, they will be further classified based

on the nature of use into the following categories:

Residential

Shops/Shopping complexes

Public Use

Office complexes, public and private offices, and banks

Hospitals and Nursing Homes

Educational Institutions

Commercial purposes

Hotel, Lodges, Restaurants

Godowns and other business establishments

Industrial Purposes i.e., factories, mills, workshops and other industries

Cinema theatres or places of public entertainment

NGOs homes and other uses not covered above.

4.1.1.7 DEDUCTIONS AND EXEMPTIONS

4.1.1.7.1 ALLOWANCES FOR REPAIRS

The following deductions are allowed from the ARV attributable to the building in lieu of all allowances

for repairs.

Age of Building Deduction allowed

25 years and below 10% of ARV

Above 25 years and up to 40 years 20% of ARV

Above 40 years 30% of ARV

4.1.1.7.2 REBATE TO OWNER-OCCUPIED RESIDENTIAL BUILDINGS

A rebate of 40% of the ARV is allowed in respect of the residential buildings occupied by the owner

inclusive of the deduction permissible towards the age of building.

Exemptions:

The following buildings and lands are exempt from payment of property tax.

Places set apart for public worship.

Choultries

Recognized educational institutions including hostels, libraries and playgrounds.

Ancient monuments not used as residential quarters or public offices.

Charitable hospitals and dispensaries

Hospitals and dispensaries maintained by railway institutions

Burial and burning grounds

Buildings and lands belonging to the municipality

Irrigation works vested with Government.

4.1.1.7.3 OWNER-OCCUPIED RESIDENTIAL BUILDINGS

The owner occupied residential buildings are exempt from property tax by a resolution of the

Council, if the ARV does not exceed in respect of



Municipal Corporations Rs.900/-

Selection and Special grade municipalities Rs.450/-

Other municipalities Rs.300/-

4.1.1.7.4 HOUSES CONSTRUCTED FOR THE URBAN POOR

In respect of the houses constructed through the agencies of State Government under Weaker Section

Housing Programmes, the municipality has to collect one rupee per every half-year towards property

tax.

4.1.2 LEVY OF PROPERTY TAX ON LANDS: VACANT LAND TAX – VLT

In respect of lands which are not used exclusively for agricultural purposes, property tax shall be levied

at the rate of 0.50% of the estimated capital value of the lands in Municipal Corporations and at the rate

of 0.20% of the estimated capital value of the lands in Municipalities.

4.1.3 ADVERTISEMENT TAX

The advertisement tax is generally a neglected tax in the ULBs. But, with the increased commercial

activities in the urban areas, advertisement tax needs to be exploited fully. Under this tax, ULBs in the

State can levy taxes on advertisements as well as hoardings separately.

4.2 NON-TAX REVENUES:

Non-taxes are the fees and charges levied and collected by the ULBs for specific services. They

are administered by various sections in the ULB and broadly consist of:

S.No Section Taxes

1 Revenue Section i. Market Fee

ii. Slaughter Fee

iii. Rent from shopping/commercial

complexes

iv. Rent from municipal quarters

v. Parking Fee

vi. Mutation Fee

vii. Sale of forms

2 Health Section i. D&O trade license fee

ii. Fee on birth and death certificates

iii. Sale proceeds of swept material and

compost

iv. Burial ground charges

v. Fee for issue of NOCs

3 Engineering Section i. Contribution to water supply

connections

ii. Water charges for

residential/commercial/industrial

purposes



iii. Contribution to sewerage connections

iv. Sewerage connection charges

v. Road cutting charges

4 Town Planning Section i. Building license fee

ii. Layout fee

iii. Development charges

iv. Betterment charges

v. Compounding fee (on unauthorized

constructions)

vi. Encroachment fee

vii. Building Penalisation Scheme (BPS) /

Layout Regularisation Scheme (LRS)

4.3 ASSIGNED REVENUES:

Assigned revenues are collected by government departments on behalf of ULB and assigned

to ULB. They are:

i. Entertainment tax: 90% of Entertainment tax collected by Commercial Tax

Department is assigned to ULBs on quarterly basis.

ii. Surcharge on Stamp duty: Surcharge on Stamp Duty is levied @ 1.5 % of the value

of the instrument and collected by Registration Department; and assigned to ULBs. It

is assigned to ULBs on quarterly basis.

iii. Profession tax: 95% of Profession Tax collected by Commercial Tax Department is

assigned to Greater Hyderabad Municipal Corporation (GHMC), Greater

Visakhapatnam Municipal Corporation (GVMC) and Vijayawada Municipal

Corporation (VMC) through budget allotment. Remaining ULBs are not getting

profession tax as salaries of these ULBs are paid from Government treasury.

iv. Magisterial Fines: The Magistrates levy fines on violation of municipal laws and

collect at their level. The fines are transferred to ULBs once in a quarter by the Judicial

Department.

4.4 NON-PLAN GRANTS:

The non-plan grants consisted

i. Per capita grant

ii. M.V. tax compensation

iii. Octroi compensation

iv. Property tax compensation

After Government started paying salaries of municipal employees directly through

Government Treasury on par with state government employees, they discontinued releasing

non-plan grants to ULBs. The salaries are paid by the Government in lieu of the non-plan grants

from 1-4-2009.



4.5 PLAN GRANTS:

The Governments, both Central and State, release plan grants to the ULBs for specific purpose

and the grants must be utilised for the said purpose only duly keeping the grant amount in

separate accounts. Some of the Plan Grants are:

i. Jawaharlal Nehru National Urban Renewal Mission (JNNURM)

ii. Andhra Pradesh Municipal Development Project (APMDP) – World Bank Project

iii. Swarna Jayanthi Shahari Rozagar Yojana (SJSRY)

iv. Indira Kranthi Padham (Urban)

v. Central Finance Commission

vi. State Finance Commission

vii. Integrated Low Cost Sanitation (ILCS)

viii. Rajiv Awas Yojana (RAY)

ix. Backward Regions Grant Fund (BRGF)

4.6 LOANS/BORROWING:

ULBs borrow loans from financial institutions for undertaking projects and repay the loan

amount in annual instalments with interest over a period. The Andhra Pradesh Urban Finance

& Infrastructure Development Corporation (APUFIDC) is acting as an intermediate

organisation in between ULBs and lenders and is getting loans from lenders, giving to ULBs,

recovering from ULBs and repaying to the lenders. Borrowed for creation of Infrastructure

such as:

• Construction of Flyover Bridges

• Construction of Underground

• Drainage

• Construction of Shopping complexes

• Construction of Stadium

• Extension of water supply mains



Chapter-II

BUDGETING



MODULE #2 – BUDGETING

1. WHAT IS BUDGET? A budget is a statement of the estimated receipts and expenditure of an institution for a financial

year. It is prepared before the commencement of the year with the object of enabling the

authorities to watch that the revenue anticipated is fully realised and to exercise control over

the expenditure to ensure that it is kept within the authorised allotment. It is a forecast to show

what will be received and what will have to be paid during a financial year and whether the

receipts would be sufficient to meet the expenditure. From the perspective of a public

institution, it is a summary of anticipated expenditure along with proposals as to how to meet

them for a financial year.

Budget is prepared not only by public and private (corporate) institutions, but also by

individuals. While the budget of public institutions is service-oriented, the corporate budget is

profit-oriented. However, the personal (individual) budget is basically savings-oriented.

2. MUNICIPAL BUDGET A municipal budget is a traditional and conventional exercise emphasizing accountability of

the Executive to the Municipal Council. It plays an important role in planning and controlling

operations of the municipalities/urban local bodies (ULBs). It reflects the principles, policies,

priorities and programmes of the ULBs. Budget is a tool for optimal deployment of limited

resources for the best possible utility and achievement of its felt needs. It communicates the

financial objectives and resource requirements to its officers, administrators, elected

representatives and the public in order to secure their support for planned allocation of

resources and for performance of objectives. The budget is viewed as a transparent show piece

of the objectives and targets of the ULB in achieving the goals set by itself. Above all, it is a

legal authorization for expenditure during the budgetary period.

A realistic budget acts not only as a tool for financial planning and control, but also as a most

significant instrument to steer the development of the ULB for achieving the aspirations of the

people. The budget of a ULB can be used as an effective management tool for promotion of

accountability in service delivery and provision of infrastructure.

3. LEGAL FRAMEWORK FOR MUNICIPAL BUDGET The ULBs are statutorily responsible to prepare budget every year. Section 126 and 127 of the

Andhra Pradesh Municipalities Act, 1965 and the Andhra Pradesh Municipalities Preparation

of Budget Allotment and Transfer of Funds Rules (Budget Rules) issued in GO Ms.No.619

MA dated7-10-1967 govern the preparation of budget in the Municipalities.

Recently, in 2008, Government of Andhra Pradesh has approved and published the Andhra

Pradesh Municipal Budget Manual.



Objectives of the Budget:

To keep local authorities solvent (expenditure well covered by revenue and reserves),

realistic revenue estimation and also tap loans which can be obtained and repaid.

Establishes priorities for plans and services.

Resource allocation to different activities to set level and direction of each work during

budgetary period.

Legal authorization for expenditure during budgetary period.

4. BUDGET SANCTION In the Municipal Corporation, the Commissioner prepares the annual budget in accordance

with the Act and the Rules and places before the Standing Committee. The Standing Committee

forwards the budget to the Municipal Corporation and the Municipal Corporation approves the

budget.

In the Municipalities, the Commissioner prepares the annual budget and places before the

Municipal Council for approval. If it is not approved in the Council meeting, it would be

referred again to the Council for approval. In case the budget is not approved even in the second

meeting, the Chairperson would forward the budget to the Government for approval

The budget sanctioned by the Corporation/Council will authorise the Commissioner to strictly

adhere to the realization of revenue and controlling the expenditure as per the budgetary

allocations.

5. HOW BUDGET IS PREPARED?

Budget preparation process is initiated and monitored by the Commissioner. Bottom-up

approach would be followed in budget preparation. Estimates would be made from the lowest

unit and then consolidated at Commissioner’s level. Basis for preparation of budget is the actual

performance of the ULB for the last couple of years, information from section heads,

government directions to take up specified activities and requirements proposed by the elected

representatives.

Estimates would be made for each of the accounting subject under every budgeting centre.

Hence a budget code is defined as a combination of budget centre and account code. The

codification structure for this is defined in Andhra Pradesh Municipal Accounts Manual

(APMAM).

Budget would reflect estimated revenue income and expenditure, revenue surplus/deficit,

inflows and outflows and opening and closing balances for capital heads.



6. STAGES IN THE BUDGET PROCESS

7. BUDGET CALENDAR FOR MUNICIPAL BUDGET The budget preparation and monitoring process follows a budget calendar. The budget calendar

provides milestones by which officials in the ULB need to prepare the budget and place before

the concerned authorities. Various stages of budget preparation and approval should be within

the time limits stipulated in this regard by the relevant Acts/Rules.

7.1 BUDGET CALENDAR FOR MUNICIPAL CORPORATIONS

Budget Activity Not later than

Commissioner to convene section heads meeting to initiate budget

process 25th September

Circular from the Commissioner to section heads to prepare budget

estimates 1st October

Preparation of budget estimates for sections by the section heads

(functionaries) 10th October

Compilation of budget at accounts section 25th October

Budget finalisation by the Commissioner and placing before the

Standing Committee 10th November

Review and approval of budget by the Standing Committee to be

placed before the Corporation 10th December

Preparation of

the ward wise

and section

Review by the

section in-charge

at the location

Review by the

section head for

budget

Review by the

Commissioner

and finalization

Review of the

complied

budget w.r.t

Compilation of

budget at the

accounts section

Review by Standing

Committee, in case of

Corporations

Sanction by Council /

Corporation

Budget copy sent

to the

Government

S

t

a

g

e

-

S

t

a

g

e

-

S

t

a

g

e

-



Circulation of budget booklets to the ward members/corporators 15th December

Sanction of budget by the Corporation 20th February

Submission of approved budget to the State Government for

information 1st March

Budget copy to Examiner of Accounts and Auditors Within 15 days of

sanction

Re-appropriation to the Corporation by the Commissioner As and when

necessary

Additional allotment information to Corporation by the

Commissioner

As and when

necessary

7.2 BUDGET CALENDAR FOR MUNICIPALITIES

Budget Activity Not later than

Commissioner to convene section heads meeting to initiate budget

process

25th September

Circular from the Commissioner to section heads to prepare budget

estimates

1st October

Preparation of budget for sections by section heads (functionaries) 10th October

Compilation of budget at accounts section 25th October

Budget finalisation by Commissioner to place before the Council 7th November

Circulation of budget booklets to the ward members/councillors (at

least seven days before the budget meeting of the Council)

8th November

Budget approval in the Council 15th November

Budget approval (again by the Council), if the Council fails to

approve the budget with or without modification in the first

meeting

22nd November

In case budget is not approved by the Council in two meetings, it would be forwarded

by the Chairperson to Government for approval

Submission of approved budget to the State Government for information through the

Collector and Commissioner & Director of Municipal Administration (CDMA)

Submission to Collector (by municipality) 31st December

Forwarding of budget by Collector to CDMA 15th January

Forwarding of budget by CDMA to State Government 5th February

Copy of approved budget to Auditors 31st December

Observations if any made by Government to be placed before

Council

After receipt from the

Government

Budget additional allocation / re-appropriation to Council by

Commissioner

As and when

necessary

Any expenditure during the course of a year shall be regulated in accordance with the

allotments made in the budget for the year, as sanctioned by the Corporation/ Council.



Additional budget needs, if necessary, would be made by additional allotment or re-

appropriation. The Budget calendar facilitates the ULB to complete the budgeting process

before commencement of financial year and smooth roll over to the new financial year.

8. IMPORTANT TERMS In this connection, it is necessary to understand some of the important terms in budget

preparation.

8.1 BUDGET ESTIMATE

It is a statement of the estimated receipts and expenditure of an ULB for a financial year. It is

prepared before the commencement of the year with the object of enabling the authorities to

ensure that the revenue anticipated is fully realized and to exercise control over the expenditure.

8.2 REVISED ESTIMATE

A revised estimate is an estimate of the probable receipts and disbursements for a year framed

in the course of the year with reference to the transactions already recorded. The revised

estimate for the current year and budget estimate for the ensuing year have to be framed

simultaneously.

8.3 APPROPRIATION

Appropriation means the amount provided in the budget estimate under a regular head of

account.

8.4 RE-APPROPRIATION

Re-appropriation means transfer of funds from the appropriation made in one budget head to

that of another budget head. It becomes necessary when the allotment made in a budget head

is exhausted and additional amount is required; or an allotment made in a budget head has

become unspent and can be made use in another budget head. A re-appropriation would result

in a fall in the budgetary allocation for the transferor budget head and an increase in the

budgetary allocation for the transferee budget head. Re-appropriation would not result in any

change in the closing balance of sanctioned budget.

8.5 ADDITIONAL ALLOTMENT

An additional allotment arises when any amount over and above the amount already allocated

is sought to be added in the budget originally allocated. This is different from re-appropriation.

Whenever additional allotment is sought, the source must also be indicated. As such additional

budget would result in an enhancement in the budgetary allocation under one or more budget

heads. However, it should be noted that such sanction of additional budget does maintain

minimum working balance of 5% of estimated receipts (statutory closing balance).



9. SANCTION OF BUDGET BY CORPORATION/COUNCIL Rule 6 of the Corporation Budget Rules as well as Rule 7 of Municipalities Budget Rules

specify that the budgets would be sanctioned by the Corporation or the Council, only after

they are satisfied that the following requirements are met.

- that the estimate of receipts is exhaustive and cautious

- that the recommendations of the officers (section heads) have been duly considered

- that due provision has been made for all obligatory charges

- that provision has been made for discharge of all liabilities in respect of loans taken

by the Council

- that provision has been made for all commitments

- that the working balance is not less than five percent of estimated receipts

excluding those from government grants, advances and deposits

After these commitments only, provision has to be made for capital works such as construction

of new roads and buildings, provision of street lighting and improvements to water supply and

sewerage etc.

10. ENCLOSURES TO THE BUDGET The budget should be accompanied by the following documents

- Explanatory Note (G.O.Ms.No.619 M.A dated 10-6-1967)

- Statement showing the revenue income and expenditure for the last three years

(Govt. Memo No.1349/72 M.A dated 7-12-1974)

- Proforma showing the amounts provided for the benefit of SCs, STs, and Women

and children (GO Ms No.41 MA dated 24-1-1997)

- Proforma showing 40% of the net funds to be spent in slum areas, priority being on

provision of water supply and sanitation (GO Ms No.265 MA dated 19-7-

2004)

- Proforma showing the amounts allocated for development works (G.O.Ms.No.626

M.A dated 12-11-1986)

- D.C.B. Statement (G.O.Ms.No.2593 M.A. dated 29-11.1944)

- Statement showing the rates of taxation (G.O.Ms.No.1844 M.A.

dated 16-4-1934)

- Special grant accounts for capital works

- Loan account

- Statement showing the financial position (G.O.Ms.No.2503 M.A. dated 29-11-

1944)

- Annual Accounts for previous year

- Council Resolution approving the budget

11. ACT, RULES & GOVERNMENT ORDERS RELATED TO BUDGET

PREPARATION Some important provisions relating to budget preparation are detailed below:



11.1 ANDHRA PRADESH MUNICIPALITIES (PREPARATION OF BUDGET AND

TRANSFER OF FUNDS) RULES, 1967

Rule 2 The Engineer, Health Officer, Town Planning Officer and Education

Officer shall prepare the estimate of receipts and expenditure

concerning their departments and furnish the same to the

Commissioner for incorporation in the budget estimate

Rule 3 The working balance to be provided in the budget shall be not less

than five percent of estimated receipts of the year excluding those

from endowments, government grants and debt heads

Rule 5(1) The budget prepared in the manner prescribed shall be circulated to

the councillors at least seven days before the date fixed for

consideration of the budget by the Council

Rule 7 The Council shall after satisfying itself on the following points

approve the budget with such modifications as it may deem

necessary

(i) that the estimate of receipts is exhaustive and cautious

(ii) that the recommendations of the officers referred in Rule 2 have

been considered

(iii) that due provision has been made for discharge of obligatory

charges

(iv) that due provision has been made for discharge of all loan

liabilities

(v) that working balance is not less than the minimum referred in

Rule 3

11.2 ANDHRA PRADESH (ANDHRA AREA) PUBLIC HEALTH ACT, 1939

Sec. 127 Every municipality has to earmark not less than 30 percent of its

income from all sources other than Government grants for

expenditure on public health activities. This amount has to be

worked out and provision has to be made accordingly

11.3 GOVERNMENT ORDERS

GO Ms No.41

MA dated 24-

1-1977

15%, 7.5% and 5% of the developmental expenditure has to be

earmarked in the budget estimate for the development of schedule

castes areas, scheduled tribes areas, and welfare of women and

children respectively

GO Ms No.265

MA dated 19-

7-2004

40% of the net funds available shall be spent in slum areas, priority

being on provision of water supply and sanitation



GO Ms No.157

MA dated 8-4-

1986

Allocation of funds for capital/developmental works:

Sl Particulars Allocation

% age

1 Water supply 20%

2 Drainage 13%

3 Roads 19%

4 Street Lights 7%

5 Recreation facilities 10%

6 Markets, parks, building, community halls,

latrines, urinals etc.,

17%



Chapter-III

Accrual System of Accounting



MODULE #3 – ACCRUAL SYSTEM OF ACCOUNTING

1. INTRODUCTION A good accounting system can provide confidence the Municipal resources are being used

properly and assure the public that the funds have been spent in keeping with adopted budgets

with no misuse of public funds.

Account-keeping is a system of recording the effect of each financial transaction under

appropriate accounts, for purposes of easy comparison with past performances and for

comparison to project for future development or improvement. The combined effect of all such

transactions of a period is to arrive at the net result of the activities or services rendered to the

public by the Municipality and to ascertain promptly the accurate financial position.

2. NEED FOR UPDATING MUNICIPAL ACCOUNTS Accurate preparation of municipal accounts within the stipulated time is of vital importance in

the overall functioning of urban local bodies (ULBs), among others, for the following reasons.

1. To ensure collection of revenues due to ULBs.

2. To present true picture of the financial position of the ULBs

3. To ensure utilisation of funds strictly in conformity with financial standards.

4. To prepare Budget Estimates and Administration Report.

5. To detect misappropriation and misapplication of funds, frauds and errors

6. To ensure timely conduct of audit and to initiate appropriate measures on the audit

reports, and ultimately

7. To ensure good governance.

3. CURRENT SYSTEM OF ACCOUNTING. The accounts of the ULB have traditionally maintained on cash based single entry of

accounting. Some of the major implications have been

Full picture of Assets & Liabilities are readily not available in one statement

Inadequate managerial attention. e.g. on speedily collection of receivables due to lack

of information or delayed information and on movement of payments/liabilities.

Inadequate cash management.( Several in operative bank accounts )

Expenses not matched with revenues of the period making determination of

surplus/deficit for the period a difficult task.



Certain capital expenditure treated as revenue items. E.g. roads, bridges, drainage etc.

In view of the above, the Government of India has taken a decision to introduce accrual-based

double entry accounting systems in ULBs in consonance with the current national policy of

introducing this system in the local bodies.

Determination of financial performance as well as assessment of financial status can be

accomplished through accrual based accounting system. Accrual based accounting is a method

of recording financial transactions based on accrual, i.e. on occurrence of claims and

obligations in respect of incomes or expenses, assets or liabilities based on happening of an

event, passage of time, rendering of service, fulfilment (partially or fully) of contract,

diminution in value etc., even though actual receipt or payment of money may not take place.

In this system, there is a change in accounting of transactions and reporting of financial results,

so as to provide the municipalities with the financial reports, in the form of two important

financial statements for the purposes noted against each:

Financial Statement Purpose

1 Income and Expenditure

Account

To determine the financial

performance of the ULB

2 Balance Sheet, i e. Statement of Assets and

Liabilities

To assess the financial status

of the ULB

4. ADVANTAGES OF DOUBLE ENTRY ACCOUNTING SYSTEM The following are the advantages of double entry accounting system over single entry

accounting system:

a) Recording of transactions in their entirety: Both the debit and credit aspects of a

transaction are recorded to ensure the completeness of a transaction.

b) Accuracy of financial statements: As the debit and credit elements of a transaction

are recorded, the accuracy of the financial statements is established. Errors in recording

of transactions can be detected and rectified with ease.

c) Indicator of financial position: The Income and Expenditure Statement discloses the

income earned or losses incurred during the financial year under report. The Balance

Sheet discloses the financial health of the organization on a given date. This is not

possible in the case of single entry system of accounting.

d) Reliability of MIS Reports: The reports generated from the books of account based

on the double entry system of accounting give a reliable picture of the situation, as

arithmetical accuracy is ensured. Thus, the status of the accounts of the customers,

suppliers, assets and liabilities can be known with higher degree of reliability.



5. BENEFITS OF ACCRUAL SYSTEM OF ACCOUNTING The accrual basis of accounting helps in determination of correct income and expenditure of

the municipal bodies. The main benefits of accrual based accounting system are enumerated

below:

a) Revenue is recognised as it is earned and thus “Income” constitutes both revenue

received and receivable. The accrual basis not only records the actual income, but also

highlights the level and efficacy of revenue collection, thereby assisting decision

makers in taking financial decisions.

b) Expenditure is recognized as and when the liability for payment arises and thus it

constitutes both amount paid and payable. In accrual basis of accounting, expenditure

incurred on repairs and maintenance shall be recognised as expense of the period in

which they are incurred and, if not paid for during the year, shall be treated as a liability

(payable) and be disclosed as such in the Balance Sheet.

c) Expenses are matched with the income earned in that year. Thus, it provides a very

effective basis to understand the true performance of the organization for the operations

that are conducted in that year.

d) A distinct difference is maintained between items of revenue nature and capital nature.

This helps in correct presentation of financial statements, viz., the Income and

Expenditure Statement and the Balance Sheet.

e) The surplus or deficit as shown at the year-end represents the correct financial position

of the organization arising out of the various transactions during that year.

f) It facilitates proper financial analysis and reporting.

g) It captures “full” cost of servicing and helps in identifying financial viability of

rendering services.

h) It helps in providing timely, right quality and nature of information for planning,

decision-making and control at each level of management.

i) It assists in effective follow-up of receivables by the municipal body and proper

ascertainment of payables by the municipal body.

j) One of the distinct advantages of adopting accrual accounting system is ease in financial

appraisals by the financial institutions. It also facilitates credit rating through approved

Credit Rating Agencies, which is a pre-requisite for mobilising funds in the financial

markets through debt instruments.



k) It presents a true picture of the financial position of an organisation and helps in better

financial management.

Thus, accrual basis of accounting results in recording of transactions and events on the basis

of their substance, rather than merely when cash is received or disbursed, and thus, enhances

their relevance, neutrality, timeliness, completeness and comparability.

DEABAS Vs SECBAS

Method of

Book Keeping

Single Entry Double Entry

Method of

Accounting

Cash Based

Accounting

System

Accrual Based

Accounting

System

6. CASH BASIS VS ACCRUAL BASIS OF ACCOUNTING Cash basis of accounting differs from accrual basis of accounting in terms of the following:

S.No Cash Basis of accounting Accrual Basis of accounting

Statement of receipts and payments

made based on entries recorded in the

Cash Book

Income and expenditure account is

prepared.

Only one entry is made for a transaction

(either receipt or payment)in the books

of Accounts

Two entries are made for each

transaction in the books of account

Receipts and payments represent the

amounts actually received and payments

actually made

Income includes revenues actually

received and receivable and

expenditure includes both payments

made or payable

The receipts and payments statement Income and expenditure account is



commences with the opening balance –

both cash on hand and cash at bank.

confined to the year of accounting only

and it will not include the items of

income and expenditure relating to past

or future years

The difference between the two sides –

receipt and payment will indicate the

cash balance at the end of the period.

The difference between the two sides –

debit and credit – will indicate the net

surplus/deficit.

The statement need not necessarily be

accompanied by a statement of assets

and liabilities

The system shall, necessarily, have the

Balance Sheet, ie statement of assets

and liabilities.

7. ACCRUAL SYSTEM OF ACCOUNTING

The rules of debit and credit in respect of the above accounts are:

i) Personal Accounts: Debit the receiver and Credit the giver

ii) Property or Real Accounts: Debit what comes in and Credit what goes out

iii) Nominal or Fictitious Accounts: Debit expenses and losses and credit gains and income

7.1 ACCOUNTING RULES

The basic rules of accounting flow from the accounting equation:

Assets = Own Funds + Liabilities

An increase in the asset,

e.g., Vehicle can be

brought about by

A decrease in the asset, e.g., Cash may result in:

Decrease in another

asset, e.g. Bank

Account

Increase in liability,

e.g., Loans or Payables.

Increase in another asset, e.g. Medical

Equipment

Decrease in liability, e.g. Payment of Loans or

payment of suppliers outstanding

Decrease in own funds through expenditure.

It is customary to use the term “Debit” and “Credit” to communicate the above

phenomenon. The rules of debits and credits are as follows:

Type of Account Debit Signifies Credit Signifies

Asset Accounts Increases Decreases

Liability Accounts Decreases Increases

Own Funds Decreases Increases



An Accounting Entry would be a combination of a single debit and a single credit or a

set of debits and a set of credits, as may be appropriate. Following the accounting

equation of Assets = Claims, the debits will always equal credits.

If we were to expand on the above, the following will be the rules applicable to incomes,

expenditures, grants, etc.

Type of Account Debit Signifies Credit Signifies

Income (which will

increase Own Funds)

Decreases Increases

Expenditure (which will

decrease Own Funds)

Increases Decreases

Grants Received Decreases Increases

7.2 ACCOUNTING PROCESS:

Accounting Process

Vouchers

Day BookCash Book

Journal Book

Ledger

Trail Balance

Financial Stat.

The following steps are involved in the accounting process.

Step 1 : Preparation of Voucher

Step 2 : Analysis of Transaction & Classification of Accounts

Step 3 : Preparation of Cash Book & Journal Proper

Step 4 : Ledger

Step 5 : Balancing of Accounts

Step 6 : Trial Balance



Step 7 : Final Accounts

7.3 VOUCHER AND SOURCE DOCUMENT

7.3.1 VOUCHERS

Is a written document that "vouches" the occurrence of a transaction

Is not complete until all the requisite ‘Support / Source Documents’ are attached.

7.3.2 TYPES OF VOUCHERS

• Receipt Voucher

• Payment Voucher

• Contra Voucher

• Journal Voucher

7.3.3 SOURCE DOCUMENT

• Source document are the primary documentary evidence of the transaction taking

place.

• They provide information about the nature of the transaction, the date, the amount and

the parties involved in it.

7.4 BOOKS OF ACCOUNTS

The main books of account under the double entry system are

Cash book

Journal book;

Ledger.

7.4.1 CASH BOOK

It is a book of original entry recording transactions involving cash and/or bank. It has two sides,

‘receipt’ and ‘payment’. All collections shall be recorded on the ‘receipt’ side and all payments

on the ‘payment’ side. Separate cash books shall be maintained in respect of each bank account.

Similarly, separate books be maintained for separate Fund Accounts.



Cash Book Format -

7.4.2 JOURNAL BOOK

It is a book of original entry for recording all transactions other than those involving cash and/or

bank. A non-cash/bank transaction is first recorded in the journal book by dividing into its debit

and credit aspects, from which a posting is made in the relevant ledger account. Recording of

income in respect of property tax bills raised; or recording of liability on receipt of suppliers’

bills are examples of transactions, which shall be first recorded in the journal book.

Journal Proper Format

Date Particulars LF Debit Credit

Rs Rs



7.4.3 LEDGER

It is a book containing all the accounts in the Chart of Accounts. The ledger has two sides, viz.,

‘Debit’ (Dr.) and ‘Credit (Cr.). The head of account which is ‘debited’ while recording an

accounting entry in the Journal book or which is recorded on ‘payment’ side of the cash book

shall be posted on the ‘debit’ side of the Ledger. Similarly, the head of account which is

‘credited’ while recording an accounting entry in the journal book or which is recorded in the

‘receipt’ side of the cash book shall be posted on the ‘credit’ side of the Ledger. Each entry in

the cash book and the journal book shall have a posting in the Ledger.

Dr Cr

Date Particulars JF Amount Date Particulars JF Amount

Rs Rs

Format for Ledger

7.4.4 BALANCING OF ACCOUNTS

Balance is the difference between the total debits and the total credits of an account.

Significance of Balancing:

Debit Balance

Credit Balance

Nil Balance

7.5 FINANCIAL STATEMENTS

After completing the annual procedure and other reconciliation activities, the ULB shall

prepare the Financial Statements. The Financial Statements consists of:

1) Balance Sheet

2) Income and Expenditure Account

3) Statement of Cash Flows

4) Receipts and Payments Account

5) Notes to Account

6) Financial Performance Indicators



7.5.1 TRIAL BALANCE

• Preparation of Trial Balance precedes preparation of Financial Statements.

• Trial Balance is a list of closing balances in all accounts in the Ledger and Cash

Book(s).

• Trial Balance generates a basic summary of accounts to facilitate preparation of

financial statements.

7.5.2 INCOME AND EXPENDITURE STATEMENT

• Discloses financial performance of ULB.

• Shows income and expenditure of ULB, and excess of income over expenditure or

vice-versa.

• Income means, income earned, i.e., actually received or not.

• Expenditure incurred means, whether actually paid or not.

• Income and expenditure statement is drawn from TB.

• Various heads of income and expenditure are posted from TB to Income and

Expenditure Statement.

21

HOA Head of Account Schedule CY PY

Income

1-10 Tax Revenue 1-1

… ….

1-80 Miscellaneous Income 1-9

A Total Income

Expenditure

2-10 Establishment Expenses 1-10

… …

2-72 Depreciation 1-17

B Total Expenditure

(A) – ( B) Gross surplus/deficit

2-80 Add Prior-period items 1-18

2-90 Less Transfer to Reserve Funds

Net balance surplus/deficit

Income and Expenditure Statement

7.5.3 BALANCE SHEET

• A statement which reflects the financial position of ULB on a particular day.

• It presents assets, liabilities and reserves on a particular day.



• Balance Sheet is also drawn from TB.

• Assets, Liabilities and Reserve Heads are posted from TB.

23

Head of Account

Code

Head of Account Schedule

(details)

Current Year

amount (Rs.)

Previous Year

amount (Rs.)

1 2 3 4 5

Liabilities

3-10 Municipal (General) Fund B 1

… ….

… …

3-60 Provisions B 10

Total Liabilities

Assets

4-10 Fixed Assets B 11

… …

… …

4-60 Loans, advances and deposits B 18

4-61 Less: accumulated provision

against loans, advances and

deposits

Total current assets, loans and

advances

4-70 Other assets B 19

4-80 Misc. expenditure ( to the extent

not written off)

B 20

Total Assets

Balance Sheet

7.5.4 RECEIPT AND PAYMENT ACCOUNT

• Shows sources of funds and application of funds.

• Prepared from Balance Sheet, Income and Expenditure Statement, Ledgers and Cash

Book.

25

Account

Code

Head of

Account

Current

period

amount

(Rs.)

Corresponding

Previous period

amount (Rs.)

Account

Code

Head of Account Current

period

amount

(Rs.)

Corresponding

Previous period

amount (Rs.)

Opening

Balance

Operating Receipts Operating Payments

1-10 Tax

Revenue

2-10 Establishment

Expenses

… … … …

1-80 Other

Income

2.60 Revenue grants,

contributions and

subsidies

4-30 Purchase of

stores

Non 0perating receipts Non operating payments

3-30 Loans

received

payables

… … 4-10 Acquisition &

purchase of fixed

assets

3-50 Revenue

collected

in advance

.. ..

Other

receipts

4-60 Other loans &

advances

Closing Balance

Grand

Total

Grand Total

Receipt and Payment Account



7.6 SCHEDULES

Various schedules to support the financial statements.

7.7 NOTES TO ACCOUNT

• Disclosure of significant accounting principles.

– Basis of accounting.

– Recognition of revenue.

– Recognition of expenditure.

– Fixed assets.

– Borrowing cost.

– Inventories.

– Grants.

– Employee benefits.

– Investments.