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Chapter – 2

Government Accounting
Class Notes

Meaning of Government Accounting

Government accounting is the systematic and scientific process of recording, presenting, analyzing,
summarizing, classifying and communicating the financial transaction of the government offices. It is
concerned with keeping a record of government revenue and their proper utilization in different
development and administration work. It presents the receipt and payment position of the public fund. It
reveals how public funds have been generated and utilized for the welfare of the general public.

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Features of Government Accounting

1. Double Entry System: Government accounting is based on the principles and assumptions of
double entry system of book keeping system
2. Fund-based Accounting: governmental accounting encompasses employment of separate funds.
3. Specific system of accounting: It is a specific accounting system which is followed by government
in its departments, offices and institutions.
4. Reporting of utilisation of public funds: The government and its institutions are public institution
and such Government has to reveal how public funds and resources have been used.
5. Government Regulations: Government accounting is maintained according to government rules
and regulations.
6. Budget Heads: All the expenses of government offices are classified into different budget heads
and expenditures.
7. Budgetary Regulation: No government can make expenditure more than the amount allocated in
the budget. As such, government accounting, one can say, gets regulated by the budget.
8. Banking: All government transactions are supposed to be performed through banks.
9. Auditing: books of accounts maintained by government departments, offices or institutions are
audited.
State the Objectives of Government Accounting
1. Recording financial transactions of revenues and expenditure relating to the government
organizations.
2. Making available reliable financial data and information about the operation of public fund.
3. Recording the expenditures as per the appropriate Act, Rules, and legal provisions as set by the
government.
4. Avoiding excess expenditures beyond the limit of the budget approved by the government.
5. Facilitating the auditing by the concerned government department.
7. Preventing misappropriation of government properties/ assets by maintaining the systematic
records.

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8. Estimating the annual budget.

Principles of Government Accounting
 Charges or expenditure on a new project like constructions, new equipment, plant & machinery
installation, maintenance, improvement, and service should be allocated to the capital account
as per the rule made by competent authority.
 Working charges of the project should be allocated to the revenue account.
 In case of renewal and replacement and cost of the genuine replacement should be charged to
capital account.
 In case of damage due to extraordinary calamities, charged should be debited from the capital
account or revenue account or from both. However, it will be determined by the government
according to the case and circumstances.
 Capital receipts during the new project should be credited to the capital account to reduce the
capital expenditure of the project.
Difference between Government and Commercial Accounting
There are following notable differences between the Government accounting and the commercial
accounting −
Headings Govt. Accounting Comm. Accounting
Objective Administration and management of all the Maintain the records of trading and
financial activities of the government. manufacturing of goods or to provide
services to calculate profits.
Date Entry It has single entry system — Govt. does Normally, it has double entry system —
System not work to earn profit; so, it does not need to prepare Trading & Profit & Loss
need cross-check the accounting records. account and Balance Sheet at the end of
the accounting period.
Basis of Accounting statements are also prepared Accounting statements are prepared on the
Accounting on the basis of single entry system. Most basis of double entry system.
statements of the statements are merely statements

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of collections of revenue and

expenditures done, except where the
Government acts like a banker or lender
or borrower.

The General Principles of Government Accounting are highlighted hereunder:

 Classification of expenditures: The Government Expenditures are classified under Sectors,
major heads, minor heads, sub-heads and detailed heads of account.
 Based on budget: government accounting is based on the annual budget of the government.
On the basis of the budget and the accounts, Government determines:
 whether it will be justified in curtailing or expanding its activities; and
 whether it can and should increase or decrease taxation accordingly.
 End products of government accounting: In the field of Government accounting, the end
products are the monthly accounts and the annual accounts. The monthly accounts serve the
needs of the day-to-day administration, while the annual accounts present a fair and correct
view of the financial stewardship of the Government during the year.

 Period of Accounts: The annual accounts of the central, state and union territory government
shall record transactions, which take place during financial year running from 1st April to 31st
March.
 Cash basis of accounting: Government accounts shall represents the actual cash receipt and
disbursement during a financial year.
 Form of Accounts: The accounts of Government are kept in three parts namely, Consolidated
Fund, Contingency Fund and Public Account.

Funds of Government of India

The Indian government’s funds are kept in three parts, which are listed below:
1. Consolidated Fund of India
2. Contingency Fund of India

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3. Public Accounts of India

Consolidated Fund of India

 This is the most important of all accounts of the government.

 This fund is filled by:

 Direct and indirect taxes Loans taken by the Indian government

 Returning of loans/interests of loans to the government by anyone/agency that has

taken it
The government meets all its expenditure from this fund.
The government needs parliamentary approval to withdraw money from this fund.
The provision for this fund is given in Article 266(1) of the Constitution of India.
Each state can have its own Consolidated Fund of the state with similar provisions.
The Comptroller and Auditor General of India audits these funds and reports to the relevant
legislatures on their management.
Contingency Fund of India
 Provision for this fund is made in Article 267(1) of the Constitution of India.

 Its corpus is Rs. 500 crores. It is in the nature of an imprest (money maintained for a specific

purpose).
 The Secretary of, Finance Ministry holds this fund on behalf of the President of India.

 This fund is used to meet unexpected or unforeseen expenditure.

 Each state can have its own contingency fund established under Article 267(2)

Public Accounts of India

 This is constituted under Article 266(2) of the Constitution.

 All other public money (other than those covered under the Consolidated Fund of India)

received by or on behalf of the Indian Government are credited to this account/fund.

 This is made up of:

 Bank savings account of the various ministries/departments

 National small savings fund, defence fund

 National Investment Fund (money earned from disinvestment)

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 National Calamity & Contingency Fund (NCCF) (for Disaster Management)

 Provident fund, Postal insurance, etc.

 Similar funds

The government does not need permission to take advances from this account.
Each state can have its own similar accounts.
The audit of all the expenditure from the Public Account of India is taken up by the CAG
List the sources of Government Revenue.
Response:
Sources of Revenue
 Revenue Receipts
 Tax Revenue
 Sharable with the States
 Non sharable
 Non-Tax Revenue
 Interest
 Dividends
 Receipts of Commercial Departments
 External Grants
 Capital Receipts
 Miscellaneous Capital Receipts
 Disposal of Capital Assets
 Divestment of state-owned enterprise (SOE)
 Repayment of Loans.
Comptroller and Audit General (CAG):
Comptroller and Audit General (CAG) is an independent Constitutional body. Special status has been
given to safeguard his independence and enable him to discharge his duty without fear or favour.

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As per the Article 148 of the Constitution of India, the comptroller and Auditor-General will be
appointed by the President of India. The provision of removal of CAG is the same as of the judges of
the Supreme Court. He can be removed only on the basis of proven misbehaviour or incapacity.
As per the Article 150 of the Constitution of India — the accounts of the Union and of the States shall
be kept in such form as the President may prescribe, on the advice of the Comptroller & Auditor
General.
Article 151 of the Constitution provides that the audit reports of the Comptroller & Auditor General
relating to the accounts of the Union shall be submitted to the President, who shall cause them to be
laid before each House of Parliament.
Discuss CAG‘s role in the context of Government accounting in India.
Response:
Under section 10 of the Comptroller and Auditor General‘s (Duties, Powers and Conditions of Service)
Act, 1971 the Comptroller and Auditor General shall be responsible-
(a) for compiling the accounts of the Union and of each State and
(b) for keeping such accounts
Write a note Committee on Public Undertaking.
The Committee on Public Undertakings exercises the same financial control on the public sector
undertakings as the Public Accounts Committee exercises over the functioning of the Government
Departments. The functions of the Committee are:
i. to examine the reports and accounts of public undertakings.
ii. to examine the reports of the Comptroller & Auditor General on public undertakings.
iii. to examine the efficiency of public undertakings and to see whether they are being managed in
accordance with sound business principles and prudent commercial practices.
Public Accounts Committee.
PAC is one of the parliamentary committees that examine the annual audit reports of CAG, which the
President lays before the Parliament of India. Those three reports submitted by CAG are:
1. Audit report on appropriation accounts

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2. Audit report on finance accounts

3. Audit report on public undertakings
The Public Accounts Committee examines public expenditure. That public expenditure is not only
examined from a legal and formal point of view to discover technical irregularities but also from the
point of view of the economy, prudence, wisdom, and propriety. The sole purpose to do this is to bring
out cases of waste, loss, corruption, extravagance, inefficiency, and nugatory expenses.

Who are the members of the Public Accounts Committee?

The financial committee has 22 members. All the members are taken from the Indian Parliament. Out
of 22 members, 15 are elected from Lok Sabha (Lower House) and 7 members are elected from Rajya
Sabha (Upper House.) (The difference between Lok Sabha & Rajya Sabha can be read in the linked
article.)
The Chairman is appointed by the Speaker from amongst its members of Lok Sabha.

Discuss the structure of Government Accounting Standard Advisory Board Secretariat.

Solution:
The Secretariat of Government Accounting Standards Advisory Board (GASAB) is constituted by
officers of various Accounts and Finance streams belonging to Civil Services .They are listed below:
1. Indian Audit and Accounts Service (IA&AS)
2. Indian Civil Accounts Service (ICAS)
3. Indian Defence Accounts Service (IDAS)
4. Indian Post and Telecom Accounts Service (IP&TAFS)
5. Indian Railway Accounts Service (IRAS)
List the Government Accounting Standards which are already notified by Government.
Solution:
Government Accounting Standards that are already notified by Government of India
 Guarantees given by Governments: Disclosure Requirements (IGAS1) [Notified by the Govt. of
India]
 Accounting and Classification of Grants-in-aid (IGAS2) [Notified by the Govt. of India]
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 Loans and Advances made by Governments (IGAS 3) [Notified by the Govt. of India}
 Indian Government Accounting Standard 4 on Prior Period Adjustments
List the responsibilities of Government Accounting Standards Advisory Board.
Solution:
Following are the responsibilities of Government Accounting Standards Advisory Board
i. To establish and improve standard of Government accounting and financial reporting in order to
enhance accountability mechanisms.
ii. To formulate and propose standards that improve the usefulness of financial reports based on the
needs of the users.
iii. To keep the standards current and reflect change in the Governmental environment;
iv. To provide guidance on implementation of standards.
v. To consider significant areas of accounting and financial reporting that can be improved through
the standard setting process.
vi. To improve the common understanding of the nature and purpose of information contained in the
financial reports.
Discuss in brief the Standard – setting procedure of Government Accounting Standards Advisory
Board.
Response:
Standard-setting Procedure for Accounting Standards :
(i) The GASAB Secretariat identifies areas for Standard formulation and places them before the
GASAB for selection and approval.
(ii) The GASAB Secretariat thereafter prepares the discussion paper on the selected issues for
consideration of the GASAB.
(iii) For the discussion Paper, the Secretariat studies the existing rules, codes and principles,
pronouncements, Standards issued by other bodies.
(iv) Then on the basis of the Discussion paper and the comments received thereon, the GASAB
finalizes the Exposure Draft.

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(v) The GASAB may constitute Standing Committee and/or Task based Groups from amongst the
Members or their representatives to consider specific areas before finalization.
(vi) The Exposure Draft, as approved for issue by the GASAB, is widely circulated ,forwarded to all
stakeholders and hosted at the website of GASAB. GASAB allows an exposure period of 90 days for
inviting comments on Exposure Draft.
(vii) Based on the comments, the Standards are finalized by the GASAB and forwarded to the GOI for
notification in accordance with the provisions of the Constitution of India.

The meetings are normally chaired by the Chairperson. If Chairperson is unable to attend, the senior-
most member from the Central Government will chair the meeting.
The Comptroller & Auditor General of India will be kept informed of the important developments in the
meetings of GASAB.
The GASAB may meet as often as is deemed necessary but generally not less than four times in a
financial year.
The decisions of the GASAB may preferably be by general consensus.
In case differences persist, the decision shall be on the basis of voting favouring the recommendation.
The dissenting views should also be forwarded to the Government along with the recommendations.

Discuss the structure of Indian Government Accounting Standards Advisory Board.

Response:
Government Accounting Standards Advisory Board (GASAB) consists of the following members:
1. Deputy Comptroller and Auditor General (Accounts) as Chairperson
2. Controller General of Accounts
3. Financial Commissioner, Railways
4. Controller General of Defence Accounts
5. Member (Finance) Telecom Commission, Department of Telecom
6. Additional / Joint Secretary (Budget), Ministry of finance, Govt. of India
7. Secretary, Department of Post
8. Deputy Governor, Reserve Bank of India or his nominee

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9. Director General, National Council of Applied Economic Research (NCAER)

10. President, Institute of Chartered Accountants of India (ICAI) or his nominee
11. President, Institute of Cost and Works Accountants of India or his nominee
12- 15. Principal Secretary (Finance) of four States by rotation
16. Principal Director in GASAB as Member secretary
IGAS – 1 – Guarantees given by Government: Disclosure requirements
1. The objective of this Standard is to set out disclosure norms in respect of Guarantees given by the
Union, the State Governments and Union Territory Governments (with legislature) in their respective
Financial Statements to ensure uniform and complete disclosure of such Guarantees.
2. This Standard applies to preparation of the Statement of Guarantees for inclusion and presentation
in the Financial Statements of the Governments.
3. The Accounting Authority is responsible for inclusion and presentation of the Statement of
Guarantees in the Financial Statements as provided by the Authority in the Government.
4. Disclosure: The Financial Statements of the Union Government, the State Governments and the
Union Territory Governments (with legislature) shall disclose the details of all the guarantees given.

Describe Indian Government Accounting Standard 2 (IGAS - 2).

Response:
1. Indian Government Accounting Standard 2 – deals with Accounting and Classification of Grants-in-
aid
2. The objective of this Standard is to prescribe the principles for accounting and classification of
Grants-in-aid in the Financial Statements of Government both as a grantor as well as a grantee.
3. Grants-in-aid in cash shall be recognised in the books of :
a. the grantor at the time cash disbursements while
b. recognised in the books of the grantee at the time cash receipts take place.
4. Grants-in-aid in kind shall be recognized in the books of the Grantor and Grantee at the time of their
receipt by the grantee.
5. Financial Statements of the grantor shall disclose the details of total funds released as Grants-in-aid
and funds allocated for creation of capital assets by the grantee during the financial year.

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IGAS — 3 Loans And Advances Made By Government

1. The objectives of the Standard is to lay down the norms for Recognition, Measurement, Valuation
and Reporting in respect of Loans and Advances made by the Union and the State Governments in
their respective Financial Statements to ensure complete, accurate, realistic and uniform accounting
practices, and to ensure adequate disclosure on Loans and Advances made by the Governments.
2. A loan shall be recognized by the disbursing entity as an asset from the date the money is actually
disbursed and further, if, loan is disbursed in installments, then each installment, shall be treated as a
separate loan.
3. The loans converted into equity shall be treated as conversion and shall lead to a reduction in the
outstanding loan amount
4. Historical Cost (its original monetary value) measurement shall be the basis for accounting and
reporting on loans and advances made by Governments.
5. As of the last date of accounting period of Financial Statements, the carrying amount of loans shall
undergo revision on account of additional disbursement and repayments or write-offs during the
accounting period.
6. The Financial Statements of the Union and State Governments shall disclose the Carrying Amount
of loans and advances

IGAS — 7 Foreign Currency Transactions and Loss or Gain by Exchange Rate Variation
1. Standard deals with financial effects of changes in FER (Foreign Exchange Rates) on FCT ( foreign
currency transactions) of the Government ( Union and State) and treatment of any loss or gain arising
thereof.
2. A Foreign currency transaction of Government is a transaction which is denominated in or requires
settlement in a foreign currency.
3. All losses or gains on account of exchange rate variations, in respect of Government transactions in
foreign currencies, shall be recognised as revenue loss or gain.
4. This Standard does not deal with disclosure requirements of external guarantees.

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IGAS — 9 Government Investments in Equity

1.The objective of the Standard is to lay down the norms for recognition, measurement, and reporting
of investments of the Government in the Financial Statements
2. This Standard applies to: investments made in different entities by the Government and presentation
in the Financial Statements.
3. Standard applies to investment in equity of the investee entities and not in debt, like debentures,
bonds, and such other instruments.
4. An investment in equity shall be recognised by the Government as an asset from the date on which
the investment details are entered in the books of the entity.
Loans converted into equity and dividends declared but not distributed by the investee entity,
converted into equity shall be treated as equity investments from the date on which such conversion
takes place.
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Initially, investments in equity shall be measured at historical cost of the investment.
Historical cost of Bonus shares is nil as there is no payment of cash.
If, Government acquires equity shares in consideration of any other asset, e.g., land, the historical cost
of such investment shall be the face value of the equity shares.
Where the equity shares are acquired on reinvestment of dividends, the historical cost of such shares
is the amount of dividends.
Historical cost of equity shares acquired on conversion of loans is the amount of the loan outstanding
(principal and interest) against which such shares are allotted.
6. Total market value of the investments will be calculated on the basis of the price quoted on the last
day of the financial year or in case the quoted price is not available on that date, the price on the date
at which it was last quoted before the closing of the financial year.
7. Investments subsequent to initial measurement shall also be reflected in the financial statements at
historical cost.
8. The Financial Statements of the Government shall disclose :

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 The amount of investments at the beginning and at the end of the accounting period showing
additional investments, disinvestments / divestments or retirement /write town of capital /
transfer of share, if any.
 Types of investments
 Acquisitions of investments in terms of exchange of goods/ other assets
 The amount of dividend received shall be reflected as revenue of the period.

IGAS 10 (Public Debt and Other Liabilities of Governments: Disclosure Requirements).

Response:
1. The objective of the IGAS is to lay down the principles for identification, measurement and
disclosure of public debt and other obligation of Union and the State Governments including Union
Territories with legislatures in their respective financial statements.
2.The IGAS shall also cover ‚other obligations‛ but shall not include in its ambit, guarantees and other
contingent liabilities and non-binding assurances.
3. The Public Debt and Other Obligations incurred by Governments shall be accounted and reported
on the basis of Face Value. External debt shall be reported by taking into account changes in FER.
5. Disclosure:
 Opening balance + additions Less discharges during the year
 Servicing of debt : That is:
(a) Interest paid by the governments on public debt, small saving, provident funds, and reserve
funds and on other obligations.
(b) Interest received on loans to State and Union Territory Governments, departmental
Commercial Undertakings, PSUs and other Undertaking including Railways, Post &
Telegraph.
(c) Interest received on other Loans, from investments of cash balances and other items.
 External debt

Indian Government Financial Reporting Standards (IGFRS)

The standards being developed for accrual system of accounting in the Government are called the
Indian Government Financial Reporting Standards (IGFRS).
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Accrual based Accounting Standards, i.e., Indian Government Financial Reporting Standards (IGFRS),
approved by the Government Accounting Standards Advisory Board (GASAB) under consideration of
Government of India:
IGFRS 1: Presentation of Financial Statements
IGFRS 2: Property, Plant & Equipment
IGFRS 3: Revenue from Government Exchange Transactions
IGFRS 4: Inventories
IGFRS 5: Contingent Liabilities (other than guarantees) and Contingent Assets: Disclosure
IGFRS 1: Presentation of Financial Statements IGFRS 1
has prescribed the manner of presentation of financial statements by Government entities that follow
accrual basis of accounting.
IGFRS 5: Contingent Liabilities (other than guarantees) and Contingent Assets: Disclosure
Requirements
1. This standard has laid down the principles for disclosure requirements of Contingent Liabilities (other
than guarantees) and Continent Assets for both the Union and the State Governments including Union
Territories with Legislatures, in their respective Financial Statements in order to ensure uniform and
appropriate disclosure of such liabilities and assets.
2. The purpose of this standard is to provide for disclosure requirements of contingent liabilities (other
than guarantees) and contingent assets of Governments in the financial Statements.

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