Introduction

• The principles of Commercial and Government Accounting differ in certain essential points. The difference is due to the fact that, while the main function of a commercial concern is to take part in the production, manufacture or inter-change of goods or commodities between different groups or individuals and thereby to make profit, Government is to govern a country and, in connection therewith, to administer the several departments of its activities in the best way possible. The government accounting system in India is largely cash based while the 2nd ARC recommended a switch towards accrual based accounting.
• Shift from Cash based accounting to accrual based accounting system will shift the focus from short term goals to long term goals of the organization. A lot of countries like US, New Zealand, Australia, France, Russia, etc. have already transitioned to Accrual based accounting system. With this improved accounting system it would be possible to track outcome with the outlays.
• Lets get to know these systems in a little detail;

• The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. This method does not recognize accounts receivable or accounts payable.
• Many small businesses opt to use the cash basis of accounting because it is simple to maintain. It’s easy to determine when a transaction has occurred (the money is in the bank or out of the bank) and there is no need to track receivables or payables.
• The cash method is also beneficial in terms of tracking how much cash the business actually has at any given time; you can look at your bank balance and understand the exact resources at your disposal.
• Also, since transactions aren’t recorded until the cash is received or paid, the business’s income isn’t taxed until it’s in the bank.

• Under the accrual basis, revenues and expenses are recorded when they are earned, regardless of when the money is actually received or paid. This method is more commonly used than the cash method.
• The upside is that the accrual basis gives a more realistic idea of income and expenses during a period of time, therefore providing a long-term picture of the business that cash accounting can’t provide.
• The downside is that accrual accounting doesn’t provide any awareness of cash flow; a business can appear to be very profitable while in reality it has empty bank accounts. Accrual basis accounting without careful monitoring of cash flow can have potentially devastating consequences.

In fact, discussions on adoption of the accrual system of accounting in the government has been on-going for quite some time. Even the Committee on Fiscal Responsibility Legislation, July 2000 was in favour of introduction of accrual accounting system and was inclined to make it a part of the Fiscal Responsibility and Budget Management Act, as it felt it would be an instrument of fiscal control. Its Report stated that:

“The Union Budget should progressively move towards greater disclosure on accrual basis

of all contractual liabilities, explicit contingent liabilities, revenue demands raised but not

realized, committed responsibility in respect of major works and supply contracts in progress,

hidden subsides by way of below cost supply of goods and services etc”

International experience

However, it needs to be pointed out that International experience also indicates various complexities and risks involved. For example:

1. Many countries have attempted to move towards accrual accounting but success has not been widespread. For example, even among the OECD countries, Germany and Italy are yet to decide on the transition. The Netherlands has retracted its steps because of the costs involved. Japan has decided not to go for it, at least for the present. South Africa has reverted back after actively pursuing it.
2. Even in countries where the system has been implemented, the cost of implementation has been high and the system has stabilized in about a decade. However, it has not conclusively been shown that the information provided by accrual accounting system is being used in decision making.
3. Different countries have followed different approaches to adopting accrual accounting. In Australia, accrual accounting was first implemented at the provincial level and later at the national level. In the U.K, although departments prepare accrual based accounts, there is no consolidation of these accounts at the national level.

Feasibility in India

The Twelfth Finance Commission stated that “The change over to the accrual based system of accounting will place considerable demands on the accounting personnel in various government organizations, particularly at the lower and middle levels of accounting hierarchy, consisting of accounts clerks, accountants, assistants, treasury officials and others.” As mentioned earlier, to be able to derive meaningful inferences from the new system of accounts and to see through window dressing exercises, all the stake holders involved in the decision making process in the government including Parliament and public at large would have to be aware of the intricacies involved.

Realizing this, the Twelfth Finance Commission also observed that “however, the transition would occur in stages, as this is a time consuming process. While we are in favour of a change over to the accrual based system of accounting in the medium term, we suggest that in the interim, some additional information as mentioned below in the form of statements should be appended to the present system of cash accounting to enable more informed decision making. An illustrative list of statements, which could be included are:

• a statement of subsidies given, both explicit and implicit;
• a statement containing expenditure on salaries by various departments / units;
• detailed information on pensioners and expenditure on government pensions;
• data on committed liabilities in the future;
• statement containing information on debt and other liabilities as well as repayment schedule;
• accretion to or erosion in financial assets held by the government including those arising out of changes in the manner of spending by the government;
• implications of major policy decisions taken by the government during the year or new schemes proposed in the budget for future cash flows; and
• statement on maintenance expenditure with segregation of salary and non-salary portions

Conclusion

Accounting Reforms is a massive project and is not just confined to accounting conversion from cash to accrual accounting but it is an integrated project on management accounting, cost accounting and management information systems. The system should aim at linking the outlays to outputs and outcomes and should lead to ‘accounting for accountability’. Right Accounting would lead to right costing, right pricing and thus right outcomes.