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ProprietaryFund

Total Assets

Accounting

In the statement, the sums required to meet expenditure chargedupon the Consolidated Fund of India or the Consolidated Fund ofState, or the Consolidated Fund of Union Territory and the sumsrequired to meet other expenditure are shown separately. Thebudget shows receipts and payments of the government under threeheads :

1. Consolidated Fund

2. Contingency Fund

3. Public Account

The budget comprises of (i) Revenue Budget and (ii) Capital budget.

Question 2Consolidated 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 receiptsclassified as revenue, certain capital receipts by way of deposits,advances and expenditure therefrom are classified and accountedunder Consolidated fund.

Accounting for the Central Government and State Government isdone separately i.e., consolidated fund of India for the CentralGovernment and a separate consolidated fund for each state andUnion Territory. The two main sub-divisions under the consolidatedfund 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 owners contribution tototal fund application/assets.

Proprietary ratio =

Proprietary Fund includes both share capital equity, preferencecapital and reserves and surplus minus losses. However, for thispurpose only free reserves should be counted. The ratio indicatesthe share of proprietary fund against each rupee of investment. Thisratio also helps to analyse the strength of the company.

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A high proprietary ratio will indicate less utilization of externalfunds. It will also indicate the high internal funds utilization of thecompany. The optimum proprietary ratio to be maintained by acompany will depend on the industry to which it belongs.

Question 4

Peculiarity of Government Accounting. (5 marks)[IntermediateMay 1999]

Answer

The main objective of government accounting is to forecast withpossible accuracy what is expected to be received or paid during the

year and whether the former together with the balance of past yearis sufficient to cover the latter. Similarly in the complete accounts ofthe year, Government is concerned to see to what extent theforecast was justified by facts and whether it has surplus or deficitbalance as a result of years transactions.

Accordingly, government accounts are designed to determine howmuch money it has to mobilize in order to maintain its necessaryactivities at the proper standard of efficiency. On the basis ofbudgets and accounts, government determines (a) whether to curtailor expand its activities and, (b) whether it can and should increaseor 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 entrysystem. A statement of its estimated annual receipts andexpenditures is prepared by each government and presented to itslegislature. A Union Territory presents statement to its legislaturewith the previous approval of the President. This annual statement iscommonly known as budget. In this statement, the sums required tomeet the expenditure charged upon the Consolidated Fund of Indiaor of State or of Union Territory and the sums required to meet other

expenditure are shown separately. The budget shows receipts andpayments of the government under three heads :

1. Consolidated Fund

2. Contingency Fund

3. Public Account.

The budget comprises of revenue budget and capital budget. Thusone of the most distinctive features of the system of governmentaccounts in India is the minute elaboration with which the financial

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transactions of government under both receipts and payments, aredifferentiated and classified.

Question 5

Whether government accounting is totally different from commercialaccounting ? State your opinion with reasons. (5 marks)[Intermediate Nov. 1999]

Answer

The primary objective of commercial accounting is to ascertain thegain or loss of an enterprise for a given period and to find out theposition of assets and liabilities at the end of the accounting period.

Against this, government accounts are designed to enablegovernment to determine how much money it needs to mobilize inorder to maintain its necessary activities at the proper standard ofefficiency. It is thus clear that the purpose of governmentaccounting is totally different from that of commercial accounting.

The other broad differences between government accounting andcommercial accounting can be enumerated as follows :

1. Financial Statements : Every commercial enterprise prepares aprofit and loss account and a Balance Sheet. But in case ofgovernment accounting, following two statements are generallyprepared:

(i) Government account to show the net result of all incomesand expenditure including expenditure on capital account ;

(ii) Statement of balancing accounts to show whether thegovernment owes or has to receive money.

2. Method of accounting : Government accounts are maintained oncash basis as against commercial accounting in which accountsare normally maintained on mercantile basis.

3. System of accounting : In commercial accounting, double entrysystem of book keeping is followed. On the other hand, mass ofthe government accounts are kept on single entry. There is,however, a portion of accounts which is maintained on doubleentry basis.

4. Classification of accounts : In commercial accounting,accounts are broadly classified into (i) personal (ii) real,and (iii) nominal accounts. Government accounts are keptin three parts : Part 1 Consolidated fund ; Part II Contingency fund ; and Part III Public account.

5. Classification of financial transactions : One of the mostdistinctive features of the system of government accounts

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in India is the minute elaboration with which the financialtransactions of government under both receipts andpayments, are differentiated and classified. Governmentexpenditure in India is classified into a five tier system :Sectors, Major heads, Minor heads, Sub-heads andDetailed heads of accounts. In case of commercialaccounting, no such elaborate details are provided.

Question 6

Briefly explain Treasury system and the functions entrusted toTreasury in Government Accounting. (4 marks) (IntermediateMay2000 & Nov. 2000, PE-IINov. 2003, Nov. 2007)

Answer

Under the treasury system, district treasury is the basic unit and thefocal point for the primary record of financial transactions ofgovernment in the district with sub-treasuries under it at the Taluksand Tehsils level.

The Treasuries are of two kinds - (1) Banking (ii) Non-banking. Abank treasury means a treasury, the cash business of which isconducted by the Reserve Bank of India or its branches or agenciesauthorised to conduct Government business and non-bankingtreasury 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 forcredit to government.

(ii) Payment of claims against Government on bills or cheques orother instruments presented by departmental drawing anddisbursing officers or pensioners or others authorised to do so.

(iii) Keeping initial and subsidiary accounts of the receipts andpayments occurring at them and rendering statements of suchtransactions 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 withthe treasuries.

(v) Custody of opium and other valuables because of the strongroom facility provided at the treasury.

(vi) Custody of cash balances of the State Government andconducting cash business of Government at non-bankingtreasuries.

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Question 7

Treasury System used for the primary record of FinancialTransactions of the Government.

(4 marks) [Intermediate May 2001]

Answer

In the treasury system, there are treasuries which receive and paymoney on behalf of the government. Under this system, districttreasury 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 systemwas evolved more than a century ago Treasuries 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 branchesor authorized agencies. A non-banking treasury conducts the cashbusiness itself.

Apart from receiving and paying cash on behalf of government,treasury keeps initials and subsidiary accounts of receipts andpayments occurring at it and renders statements of transactions tothe Accountants General for detailed compilation and consolidation.

It acts as a banker in respect of funds of local bodies, zila parishadsetc. Treasury also keeps custody of opium and other valuablesbelonging to the government in its strong room.

Question 8

What are the main principles of allocation between Capital andRevenue accounts on a Capital scheme? (4 Marks) (PE-II May2005)

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 constructionand equipment of a project as well as charges for intermediatemaintenance of the work while not yet opened for service. Itwould also bear charges for such further additions andimprovements as may be sanctioned under rules made bycompetent authority.

(ii) Subject to (iii) below, revenue account should bear allsubsequent changes for maintenance and all working expenses.

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These embrace all expenditure on the working and upkeep of theproject and also on such renewals and replacements and suchadditions, improvements or extensions as prescribed byGovernment.

(iii) In the case of works of renewal and replacement whichpartake both of a capital and revenue nature, the allocation ofexpenditure should be regulated by the broad principle thatrevenue should pay or provide a fund for the adequatereplacement of all wastage or depreciation of property originallyprovided out of capital grants and that only the cost of genuineimprovements, whether determined by prescribed rules or

formulae or under special orders of Government, should bedebited to capital account. Where under special orders ofGovernment, a Depreciation or Renewals Reserve Fund isestablished for renewing assets of any commercial departmentor undertaking, the distribution of expenditure on renewals, andreplacements between capital account and the fund should be soregulated as to guard against over-capitalisation on the onehand and excessive withdrawals from the fund on the other.

(iv) Expenditure on account of reparation of damage caused byextraordinary calamities such as flood, fire, earthquake, enemyaction, should be charged to capital account or to revenue

account or divided between them in such a way as may bedetermined by Government according to the circumstance ofeach case.

(v) Capital receipts in so far as they relate to expenditure previouslydebited to capital heads, accruing during the process ofconstruction of a project, should be utilised in reduction ofcapital expenditure. Thereafter, their treatment in the accountswill depend on circumstances, but except under a special rule ororder of Government, they should not be credited to the revenueaccount of the department or undertaking.

Question 9

Write short note on Appropriation Act with reference toGovernment 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

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legislature for all moneys required to meet (a) the grants made bythe 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? (2Marks) (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

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