5. 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 (5 marks) [Intermediate–Nov. 1995]
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 Government’s 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 year’s 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. 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 (5 marks) [Intermediate Nov. 1996]
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. (5 marks) [Intermediate –May 1997]
Answer
Proprietary ratio is calculated to judge the owner’s contribution to total fund application/assets.
Proprietary Fund
Total Assets
Proprietary ratio =
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.
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. (5 marks) [Intermediate–May 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 year’s 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 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 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) (Intermediate–May 2000 & Nov. 2000, PE-II–Nov. 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.
Question 7
Treasury System used for the primary record of Financial Transactions of the Government.
(4 marks) [Intermediate –May 2001]
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 sub-treasuries 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. 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 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 the appropriation out of the Consolidated Fund of India or the State or the Union Territory having separate 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? (2 Marks) (PE II-May, 2008)
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
UNIT 2 : ACCOUNTING FOR AGRICULTURAL FARMS
(A) Write short notes on:
Question 1
Use of Accounting information in agricultural farms.
(5 marks) [Intermediate–May 1996 and PE-II May 2006]
Answer
A properly designed accounting system can be used for extracting the following information:
1. Crop-wise performance and overall performance of the agricultural enterprise.
2. Comprehensive information regarding yield, revenue, input and cost of the enterprise.
3. Financial state of affairs i.e. assets and liabilities of the farm at a particular point of time.
4. Profit/Loss of the farm during a year.
5. Data base for other decisions, namely (a) acquire assets or hire services for ploughing, irrigation, weeding, threshing etc.; (b) replacement of draught animal, machinery and farming technique; (c) selection of crop-mix; (d) choosing farm size; (e) farm diversification, for example adding crop and non-farming activities like processing of agricultural products; (f) divestment decisions whether to discontinue agricultural operations.
6. Supporting data to the lenders including banks and co-operative societies to assess farm’s financial requirements as well as debt servicing ability.
7. Reliable data for farm management survey.
8. Reliable data for assessment of agricultural income tax.
Question 2
Explain, why Accounting in Agricultural operation is not popular. Mention a few peculiar features of Farm Accounting. (7 marks) (Intermediate–Nov. 1996 & PE-II–Nov. 2004)
Answer
The features of farm accounting are as follows:
(i) Agricultural sector in India is unorganized and dominated by small farmers. Most agricultural farms are family oriented and part of the farms produce is consumed by the family members. Level of the education of the average farmers appears to be the principal barrier for adaptation of agricultural accounting system. Farmers are not aware of the technique of using accounting data for the purpose of management decision and usefulness of data base management.
(ii) The family takes part in management and provides labour for the farm. Farmers cannot afford the additional expenses involved in hiring a person to maintain accounts.
(iii) Agriculture is in some cases a seasonal occupation and many farmers have other occupations also. Farming operations are uncertain due to natural calamities.
(iv) There are many divisions in farm accounting. Finished product of one division can become the raw material for another.
(v) Tax authorities do not rigorously insist on maintenance of books of account. Collection of statistics by the government is also not adequate.
Question 3
Compilation of accounting information for agricultural farm. (5 marks) (Q. 1 (i) (b) of May 1999)
Answer
Agricultural activities are carried on mostly in an unorganized manner. The farmer has no office and also does not find time for day by day record keeping. The transactions and events are also not supported by vouchers or other documents in most of the cases. So it is desirable to maintain a Diary to record happenings of the day. This Diary becomes the source document for record keeping.
Seven registers are required for running the accounting system.
1. Cash Book: to record cash transactions.
2. Fixed Assets Register: to record details of fixed assets – description of assets, cost of purchases/construction/generation, disposal, depreciation and balance.
3. Loan Register: to record borrowings from bank, cooperatives and other agencies trade creditors along with interest paid or payable.
4. Stock Register: to record details of input, output and by product – receipts, utilization, wastage and balance.
5. Debtors and Creditors Register: to record credit transactions classified by parties involved.
6. Register for National Transactions: to record transactions between farm and farm household.
7. Cost Analysis Register: to record cropwise input and output inclusive of apportionment of common costs and finding out crop profit.
Question 4
Common costs incurred in agricultural farm and the basis of their apportionment.
(5 marks (6 (b) of Nov. 2000)
Answer
Seed, fertilizer, manure, pesticides, direct wages—notional and actual, land rental—notional and actual can be identified crop-wise. But other costs like irrigation, services of agricultural machinery, implements or animal power, depreciation, interest etc. cannot be classified simply by nomenclature. These costs which can’t be identified cropwise are common costs of the agricultural farms. Common costs should be apportioned among the crop enterprises on the basis of usage, wherever use of assets can be quantified. In other cases length of crop season can be used. An illustrative list of the common costs and apportionment bases is given below:
Apportionment bases of common costs in agriculture
Cost element Apportionment basis
Maintenance of Draught Animal and Depreciation Animal Base
Maintenance of Agricultural Machinery, Implements
and Depreciation Machine Hours
Maintenance of Farm Shed and Depreciation Length of crop season
Interest on Fixed Capital Length of crop season
Interest on Working Capital Working Capital Investment
for various crops
Question 5
What are the information that are extracted from the well designed accounting system in Agricultural Farm? (4 Marks) (PE II- May, 2007)
Answer
A well designed accounting system can be used for extracting the following information:
1. Crop-wise performance and overall performance of the agricultural enterprise.
2. Comprehensive information regarding yield, revenue, input and cost of the enterprise.
3. Financial state of affairs i.e. assets and liabilities of the farm at a particular point of time.
4. Profit/Loss of the farm during a year.
5. Data base for other decisions, namely (a) acquire assets or hire services for ploughing, irrigation, weeding, threshing etc.; (b) replacement of draught animal, machinery and farming technique; (c) selection of crop-mix; (d) choosing farm size; (e) farm diversification, for example adding crop and non-farming activities like processing of agricultural products; (f) divestment decisions whether to discontinue agricultural operations.
6. Supporting data to the lenders including banks and co-operative societies to assess farm’s financial requirements as well as debt servicing ability.
7. Reliable data for farm management survey.
8. Reliable data for assessment of agricultural income tax.
Question 6
List out major cost elements and revenue elements of an Agricultural farm.
(4 marks)(PE II, Nov. 2007)
Answer
In an agricultural farm, major cost elements are:
Seed, Fertilizer, Pesticides, Irrigation, Wages, Running and Maintenance cost of Agricultural Machinery and Implements, Maintenance cost of drought animals, depreciation of fixed assets, Interest on borrowed capital, Notional Rental on owned Land, Notional interest on owner’s capital, Notional Wages of Family Workers.
In an agricultural farm, revenue consists of sale of main products and by-products, value of family consumption of crops and by-products, value of crops and by-products transferred to allied enterprise run by the family (example, use of paddy straw as food of milch animal), value of output exchanged for input.
Question 7
Give names of books required to be maintained in agriculture farm accounting.
(4 Marks) (PE II-May, 2008)
Answer
The following seven books/registers are required in agriculture farm accounting:
i.
Cash book
ii.
Fixed assets register
iii.
Loan register
iv.
Stock register
v.
Debtors and creditors register
vi.
Register for notional transactions
vii.
Cost analysis register
Question 8
Draw a list of direct crop costs and another of common costs in agricultural farming.
(4 Marks) (PE II- Nov. 2008)
Answer
Direct crop costs in agricultural farming are as follows:
¨ Seeds
¨ Fertilizer and manure
¨ Pesticides and insecticides
¨ Wages – notional and actual
¨ Hire charges of animal power
¨ Machinery and implements
¨ Running cost of owned machinery and implements.
¨ Land Rental – notional and actual.
Common costs in agricultural farming are as follows:
¨ Maintenance of draught.
¨ Animal, machinery and implements.
¨ Maintenance of farm shed
¨ Depreciation
¨ Interest on borrowed capital
¨ Notional interest on own capital.