Model Panchayat Accounting Manual GOVERNMENT OF INDIA. Ministry of Panchayati Raj. Part 1 Accounting System and Treatments. Part

Transcription

1 Part 1 GOVERNMENT OF INDIA Ministry of Panchayati Raj Model Panchayat ing Manual Part 1 ing System and Treatments (August 2012) Infrastructure Professionals Enterprise (P) Ltd. New Delhi, India

2 G O V E R N M E N T O F I N D I A M I N I S T R Y O F P A N C H A Y A T I R A J Model Panchayat ing Manual Developed by : INFRASTRUCTURE PROFESSIONALS ENTERPRISE P LTD A-10,2 nd Floor, Green Park, Main AurobindoMarg, New Delhi , Ministry of Panchayati Raj, Government of India

3 TABLE OF CONTENTS 1 Introduction... 1 Background... 1 Administrative Tiers of Panchayats... 2 Zilla Parishad... 2 Block Panchayat... 3 Gram Panchayat... 3 Current ing System in PRIs... 3 The Model ing System... 4 Thirteenth Finance Commission... 5 PRIASoft... 5 The Model Panchayat ing Manual (MPAM)... 5 Our Approach... 5 Structure of the MPAM... 6 Linkages with PRIASoft... 7 Users of the MPAM... 7 Applicability of MPAM... 8 Acknowledgements Basics of the ing System... 9 What is accounting?... 9 Need for ing Basic ing Principles Method of ing Double Entry ing System Single Entry ing System Double Entry ing Process Vouchers and Books of s ing s ing s in the Model ing System Overall Structure First Tier Classification: Major Head Second Tier Classification: Minor Head Second Tier Sub-Classification: Sub-Head Third Tier Classification: Object Head Ministry of Panchayati Raj, Government of India Page ii

4 Composite Head ing for Receipts Receipts by Panchayats Tax Receipts Non-Tax Receipts Shared Taxes Capital Receipts Other Receipts and Rule ing Process and Controls Records for Receipt ing Daily Collection Register (Form PRI 20) Register of Loans (Form PRI 29) ing for Payments Payments by Panchayats and Rule ing for Establishment Expenses ing for Non Establishment Expenditures Capital Payments Advance Payments Records and Procedure for Non Establishment Expenses: Sanction of Expenditure Receipt of Bills Scrutiny of Bills Passing of Bills Internal Controls on ing of payments ing for Grant Receipt & Payment Types of Grants ing Policies for Grants ing Records & Procedures for Grants ing of Grants received and Rule for Grant Received Grants received in Kind Transfer of Grants to other PRIs and Rule for Grants Transfer Ministry of Panchayati Raj, Government of India Page iii

5 Utilisation of Grants and Rule for General Grants Utilisation and Rule for Specific Grants Utilisation Using Multiple Grant Sources Recognition of Capital Assets State Government meeting PRI costs directly Adjustment of Grants by State Government Refund / Return of Grant Internal Controls Contra and Adjustment Entries Contra Entries and Rule Error Adjustment Entries and Rule Examples of Error Adjustments Adjustment Entries after s are Closed Other Adjustment Entries Adjustment of Advances Adjustment of Earnest Money Deposit Receipt Rectification Entry Period End Procedures Daily Procedures Balancing of Cash/Bank Book Physical verification of cash balance Deposit of Collections in the Bank Checking Postings to Ledger accounts Updation of Demand & Collection Books Monthly Procedures Bank / Treasury Reconciliation Rectification Entries Monthly s Compilation Annual Procedures Physical Verification of Stores Physical Verification of Capital Assets Reconciliation and updation of all advances Ministry of Panchayati Raj, Government of India Page iv

6 Closing of Ledgers Reconciliation Procedures Reconciliation of Bank / Treasury / PO Balances Procedure for Bank Reconciliation Format of BRS Reconciliation Of Advances Given Advance to Contractors/Suppliers Reconciliation of loans / advance given to Employees Reconciliation of balances with Government and other PRIs Financial Statements Contents of Financial Statements Periodicity of Preparation Comparative Figures Approval of Financial Statements Process of Preparation of Financial Statements Carry out Control Checks Prepare Trial Balance Tallying the Trial Balance Receipts & Payments Income & Expenditure Statement of Assets & Liabilities Benefits of a Statement of Assets and Liabilities ing Policies and Notes to s Significant ing Policies Model Significant ing Policies Notes to s Contingent Liabilities Closing Entries Budgetary Control Budgeting Objectives Recommended Budgeting System Budget formats Variance Analysis Transparency Enhancement Linkages with PRIASoft Ministry of Panchayati Raj, Government of India Page v

7 13 Panchayat Audits Statutory Audit Financial Statements Audit Report of the Financial Statements Auditor Additional Matters to be reported Timeline for financial statements audit Other Audits SpecialTransactions Opening Statement of Assets & Liabilities Principles and Process Subsequent Information Received Change / Merger of PRIs Sample Transaction Entries DEFINITIONS, ACCOUNTING CONCEPTS & ACCOUNTING CONVENTIONS (A) DEFINITIONS Ministry of Panchayati Raj, Government of India Page vi

8 Chapter 1 1 Introduction 1.1. Subsequent to the 73rd Constitutional Amendment, 1992, Panchayats have now become an integral part of the national government structure. The Panchayati Raj system is based on the principle of village self-governance, where the people form their own organization, take decisions and act for their interests collectively Panchayati Raj Institutions (PRIs) being closest to the citizens, are best positioned to understand the local issues, identify possible solutions and work for the overall development of rural areas. With increasing functions, funds and functionaries being devolved to PRIs, there is a need to strengthen their system and capacity for governance. One of the key aspects of this improvement is in the area of financial accounting, reporting and accountability of PRIs M/s INFRASTRUCTURE PROFESSIONALS ENTERPRISE (P) LTD. (IPE) have been retained by the Ministry of Panchayati Raj, Government of India, to develop a Model Panchayat ing Manual which could be used by state governments and PRIs to adopt standardized systems across the country. This is the FIRST version of the document released as in January Background 1.4. The Constitutional (73rd Amendment) Act, 1992, was a water-shed in the history of local self-government in India since it gave a constitutional mandate to state governments to strengthen and restructure rural local bodies in accordance with constitutional obligations The amendment facilitated: Creation of three tier system of rural local government - Gram Panchayat at the village level, Block Panchayat at the block level and Zila Panchayat at the district level, with sufficient powers and functions contained in schedule XI of the Constitution; Ministry of Panchayati Raj, Government of India Page 1

9 Creation of State Election Commission to ensure free, fair and timely Panchayat elections every 5 years; and Creation of State Finance Commission after every 5 years to recommend devolution of financial resources from the state government to local bodies and also suggest measures for strengthening their financial position With states increasingly adopting these aspects, PRIs have a rising number of schemes to implement, increasing public funds to spend and greater transparency requirements of their performance. This manual intends to facilitate this process, helping to guide PRIs with sound methods and practices for better financial accounting and management. Administrative Tiers of Panchayats 1.7. The administrative set up of Panchayats consists of A Village Panchayat or Gram Panchayat for a Village or group of Villages; An Intermediate or Block Panchayat for each Block; and A District Panchayat or Zilla Parishad for each District Although the terminology used for each of the tiers differs across states (see table below), we will use Gram Panchayat, Block Panchayat and Zilla Parishad to refer to these levels in the manual. State Village Block District Andhra Pradesh Gram Panchayat Mandal Praja Parishad Zilla Parishad Arunachal Pradesh Gram Panchayat Anchal Samiti Zilla Parishad Gujarat Gram Panchayat Taluka Panchayat Zilla Panchayat Haryana Gram Panchayat Panchayat Samiti Zilla Parishad Karnataka Grama Panchayat Taluk Mandal Panchayat Zilla Parishad Kerala GramaPanchayat Block Panchayat Zilla Panchayat Madhya Pradesh Gram Panchayat Janpad Panchayat Zilla Panchayat Zilla Parishad 1.9. Zilla Parishad is the rural local government body at the district level in India. It looks after the administration of the rural area of the district and its office is generally at the district headquarter. Zilla Parishad members include the directly elected members as well as heads of its constituent Block Panchayats. Zilla Parishads are the interface of the rural governments with the state government with most grants and scheme funds for PRIs flowing through the Zilla Parishads. Ministry of Panchayati Raj, Government of India Page 2

10 Block Panchayat The Block Panchayat is the rural local government body at the Block or tehsil level in India. The Panchayat Samiti is the link between the Gram Panchayat and the district administration. There are a number of variations of this institution in various states. It is known as Mandal Praja Parishad in Andhra Pradesh, Taluka Panchayat in Gujarat, Mandal Panchayat in Karnataka, Panchayat Samiti in West Bengal and so on. Block Panchayats are responsible for development works in the Block area utilizing funds received through the Zilla Parishad and channelizing funds to the Gram Panchayats. Gram Panchayat Gram Panchayat is rural local government at the village level in India. A Gram Panchayat can be set up in villages with minimum population of 300. Sometimes, when individual villages population are less, two or more villages are clubbed together to form the Gram Panchayat. Gram Panchayats are authorised to levy and collect taxes including property, professional tax, taxes on pilgrimage etc. In addition, they also collect user charges and implement development schemes through grants received from the State and National Governments though the Block and Zilla Parishads. Current ing System in PRIs The major source of revenue for PRIs are funds from central / state schemes as well as share of state government funds released on recommendations of the State Finance Commission. Zilla Parishads and Block Panchayats generally have limited revenue from own sources viz. rent of shops/ Dak bungalows / Inspection Bungalows, lease rent of land, settlement of Ghats, Ferries and Bus Stand etc. Gram Panchayats are authorized to levy and collect taxes but current levels of such selfgenerated revenue are minimal. The broad process of fund below at various levels is briefly illustrated below: Ministry of Panchayati Raj, Government of India Page 3

11 1.13. PRI expenditure is largely on account of development scheme works apart from some maintenance and establishment costs The current system of accounting for both revenue and expenditure is through manual single-entry record-keeping using a host of registers and forms. Transactions are recorded only on actual receipt or payment of amounts i.e. on cash basis. The major document for financial approvals is the annual budget which, after approval by the elected leaders, forms the basis of spending by the PRI. In addition, state accounting rules for PRIs usually prescribe maintenance of several manual records such as Assets Register, Grant Register etc. at every level of PRIs However, due to increasing activities and limited skilled manpower, PRIs are generally unable to ensure up-to-date maintenance of these records. Further, since the records are manually maintained, their updating, reconciliation and regular review becomes difficult. The Model ing System Another issue in the current accounting process is the absence of standardization of accounting codes and practices across states for PRIs. In view of this and the increasing responsibilities envisaged for PRIs, the Eleventh Finance Commission made specific recommendations for strengthening the accounting and financial systems of PRIs in In response to this, The Comptroller & Auditor General of India (C&AG) prescribed standardized formats for preparation of budget and accounts by PRIs in 2002 but its implementation was limited. In 2008, the Technical Committee on Budget and ing Standards for PRIs proposed the need for a simplified accounting system for PRIs. Accordingly, a simplified Model ing System for Panchayats was prepared and approved by the Technical Committee in January The salient features of this system are: Each institution i.e. Zilla Parishad / Block Panchayat / Gram Panchayat is a separate accounting entity; The accounts are to be kept on cash basis i.e. recording shall be done only when the amounts are received and paid, not on their becoming due; A detailed chart of accounts has been prescribed using a three tier structure i.e. Functions, Programmes or Schemes and Object. The chart of accounts shall be used both for budgeting and accounting to ensure a link between them with proper budgetary control; The system prescribes maintenance of 8 formats with certain additional records in subsidiary formats; Ministry of Panchayati Raj, Government of India Page 4

12 The system requires preparation of Receipts & Payment incorporating both revenue and capital transactions for every financial year ending on 31st March. Thirteenth Finance Commission The Thirteenth Finance Commission reviewed the recommendations of earlier commissions and proposed, inter-alia that PRIs should adopt the Model ing System for Panchayats prescribed by C&AG and Ministry of Panchayati Raj from 1 April They further specified that of the total grant to PRIs proposed, upto one percent would be a performance-based component which will be available only to those states who comply with the recommendations of the Finance Commission Since implementation of Model ing System by PRIs is now a prerequisite to access funds under the Finance Commission, more states are expected to move for its adoption and hence will need appropriate guidance and support. PRIASoft In order to facilitate computerized accounting, the Ministry of Panchayati Raj is developing, in association with National Informatics Centre (NIC), a Panchayati Raj Institutions ing Software (PRIASoft). PRIASoft is a centralized webbased application which allows PRIs at various levels to enter their financial transactions online It uses a simple user interface screen allowing non-finance personnel to use it without having to worry about the accounting aspects which are handled at the backend. The software is expected to streamline accounting, facilitate better financial management, promote transparency and lead to a strengthened and credible PRI accounting environment in the country. The project has been operational since The Model Panchayat ing Manual (MPAM) The purpose of this Model Panchayat ing Manual (MPAM)is to give a clear understanding of the ing system which needs to be followed in PRIs. It provides a policy base as well as practical guidance to PRIs in implementing an effective accounting and financial management system. It also provides the accounting codes and the accounting formats for different transactions The MPAM is based on the Model ing System but uses the GAAPs to create a scalable, robust financial accounting system which can be enhanced to include modern accounting techniques in future. It also provides linkages to PRIASoft the online accounting software for computerizing Panchayat accounts. Our Approach Our approach to development of the MPAM has been to: Ministry of Panchayati Raj, Government of India Page 5

13 Base it on the C&AG recommended Model ing System following cash basis and double entry method of accounting; Understand and appreciate current practices in various states of India and capacity at various levels to implement the new system; Incorporate good practices from International Public Sector ing Standard (IPSAS) on Financial Reporting under the Cash Basis of ing to the extent feasible; Keep the operational aspects as simple as possible but provide rigour in its framework and structure so that the system can be enhanced later; Align with the progress that has been made in PRIASoft; The IPE team conducted field visits to six states i.e. Madhya Pradesh, Punjab, Orissa, Andhra Pradesh, Maharashtra and Assam to study the current accounting practices and effort required to migrate to new model accounting system. Comprehensive discussions were held at State, Zilla, Block, and Gram Panchayat level with concerned functionaries, to discuss various accounting and implementation issues and their suggestions were also undertaken Further, draft versions of the Manual were circulated at the national level and feedbacks have been incorporated in this version. Structure of the MPAM The MPAM has been designed to facilitate day-to-day usage by functionaries and has three Parts as below: Part 1 Part 2 Part 3 ing System and Treatments ing s ing Formats Part 1 ing System and Treatments (This Document): Part 1 deals with the accounting treatment of common PRI transactions. It is a policy guide as well as a repository of transaction entries that need to be passed in case of various PRI activities. This Part is the central document of the Manual. Ministry of Panchayati Raj, Government of India Page 6

14 Part 2 ing s: Part 2 documents in detail the coding system and the standard list of accounts which shall be used for PRI accounting in India. This Part will need to be referred for identifying the exact head of account to which a transaction referred to in Part 1 needs to be debited / credited. Part 3 ing Formats: Part 3 contains all the forms and formats which have been referred to in Part I of the Manual. Linkages with PRIASoft Since development of PRIASoft started before the need for the MPAM was conceived, it followed the Model ing System guidelines as its starting point. Subsequently, when the manual was being developed, IPE has had several interactions with NIC and suggested a standard general ledger accounting engine for double entry accounting in PRIASoft. Similarly, several aspects of the manual were adapted to make them compatible with PRIASoft including the voucher formats, screen information etc The manual is also expected to serve as a guide to develop / enhance robust software (PRIASoft) based on a core accounting engine and modules ensuring that they follow generally accepted accounting practices in India. Users of the MPAM The users of MPAM are expected to be: State governments who will adapt the manual requirements to their state s PRI needs; Panchayat functionaries who will use this manual to carry out their transaction recording and reporting; Elected leaders of PRIs who would use it to interpret data for decision making purposes; Local Fund Auditors and C&AG who could use this document for an understanding of the system and a base for auditing PRI accounts; National Informatics Center (NIC) to understand the architecture behind the transactions that will be recorded in PRIASoft or similar accounting software for PRIs; National Government to interpret and understand the information generated by PRIs by following the system including fund releases, tracking etc. Ministry of Panchayati Raj, Government of India Page 7

15 Applicability of MPAM The Model Panchayat ing manual is a standard document released by the Ministry of Panchayati Raj and is recommendatory and advisory in nature. State governments are free to adopt it and / or customize it to enable their PRIs to prepare standard accounts in accordance with the Model ing System. Acknowledgements IPE has been privileged to be associated with this important assignment. We would like to acknowledge with thanks the help and support received from the following institutions and their officials in developing this Manual: The Secretary, Joint Secretary and Consultant of the Ministry of Panchayati Raj, Government of India; Other officials of the Ministry of Panchayati Raj, Government of India, associated with the project; The officials of the Comptroller & Auditor General of India (C&AG) who actively participated in the discussion and development of the manual; The officials of the Controller General of s (CGA) who actively participated in the discussion and development of the manual; The officials of National Informatics Centre, New Delhi, who are closely working on PRIASoft and its linkages with the Manual; Officials of the Panchayati Raj Departments of the Governments of Madhya Pradesh, Punjab, Orissa, Andhra Pradesh, Maharashtra and Assam where field visits were conducted; Officials of the Zila Parishads, Block Panchayats and Gram Panchayats visited in these 6 states for understanding the PRI accounting system; Officials of the Panchayat Training Institutes in these six states which have been involved in training PRI officials on accounting aspects; The members of the Technical Committee for the Model Panchayat ing Manual. Ministry of Panchayati Raj, Government of India Page 8

16 Chapter 2 2 Basics of the ing System What is accounting? 2.1. ing is the art of recording, classifying and summarizing in significant manner and in terms of money transactions events which are, in part at least, of a financial character and interpreting the results thereof The process involved in making a financial record of transactions and the preparation of financial status and performance of an entity is termed as ing. These processes can be broken down into four interconnected phases recording, posting, reconciling and reporting. These are briefly explained below: The first phase is meant to record the economic events or transactions - depending upon their occurrences, chronologically in the books of accounts - called journals. This process is known as journalizing. In the next phase of ledger posting, the transactions are synthesized accountwise so that the accumulated balance of each of those accounts can be determined. The process of ledger posting is vital as it helps in ascertaining the net effect of various transactions during a given period. In the subsequent stage, the balances of ledgers aggregated into debit and credit balances are drawn into a trial balance. This activity part of the reconciliation process to ensure that entries have been properly made and that accounts are balanced. Finally, in the last phase, reporting is done by measuring the operational performance through a statement of income and expenses and a statement of financial status at the end of the accounting period. Ministry of Panchayati Raj, Government of India Page 9

17 Need for ing 2.3. The need for timely and relevant financial information for proper decision making cannot be denied. In the context of Panchayats, their increasing role, funds and enhanced accountability require that they spend and record public money with utmost care. Hence, PRIs need to follow good practices of management viz. better planning, sound decision-making and regular monitoring In the financial context, these aspects can be achieved only if the financial recording and reporting systems are well established and functional. These should facilitate accuracy and timely recording of information with efficiency and effectiveness, leading to better planning, controlling / monitoring and decision making. This is illustrated below: Recording of Financial Transactions Basic ing Principles 2.5. Although there are several traditionally accepted accounting principles, we lay out here the impact of these principles on PRIs: The accounts are to be prepared for each accounting entity separately i.e. each PRI unit shall have a separate set of accounts; The account of PRIs shall be maintained using the double entry method of accounting. In this, the dual aspect i.e. debit and credit is recognized for each transaction and in the final analysis, the debits and credits should be equal representing the fact that Assets = Liabilities + Fund Balance; Although in general, revenues and expenses can be recognized even without receipt / payment as long as the right is established, this manual mandates that the cash basis of accounting be followed for PRIs i.e. transactions shall be recognized only when amounts are received or paid. Ministry of Panchayati Raj, Government of India Page 10

18 Although the generally accepted system of matching revenue against expenditure will not be applicable in PRIs due to the cash basis of accounting, the distinction between revenue i.e. operational receipt /payment and capital i.e. long term receipt / payment shall be maintained; The accounts of PRI units shall be prepared assuming that they shall continue in perpetuity. Hence, value of assets shall be recorded at the original cost and not revalued from time to time; The financial statements i.e. statement of performance and financial status for each PRI unit shall be prepared regularly and definitely at the end of every financial year i.e. as on 31 March; The accounts shall only record the transactions which can be measured in monetary terms; Method of ing 2.6. Two common methods for recording financial transactions are the doubleentry and the single-entry system. These are discussed below: Double Entrying System 2.7. As mentioned in the principles above, Double Entry ing System recognizes every transaction with a dual effect. If one account is debited, any other account must be credited. Every transaction affects at least two accounts in opposite directions. It may, however, be noted that double entry does not mean that a transaction is recorded twice. It actually means that at least two accounts are affected by a transaction, one account receiving a benefit and other account yielding a benefit. It is because of dual aspect principle that two sides of Balance Sheet are always equal. Single Entry ing System 2.8. Single Entry accounting refers to any system other than the double entry accounting system. In this, the dual aspect of every transaction is not maintained and entries are recorded in 1, 2 or more registers as needed The primary record in single-entry bookkeeping is the cash-book with separate records / registers for amounts payable, receivable and other transactions such as inventory and assets etc. The current system of accounting in PRIs is the single entry method while the proposed Model ing System and this manual recommend moving to the double entry method of accounting. Ministry of Panchayati Raj, Government of India Page 11

19 Chapter 3 3 Double Entry ing Process Vouchers and Books of s Double Entry System 3.1 Double Entry ing System recognizes that every transaction has a dual effect. There are two sides of every transaction. If one account is debited, any other account must be credited. Every transaction affects at least two accounts in opposite directions. It may, however, be noted that double entry does not mean that a transaction is recorded twice. It actually means that at least two accounts are affected by a transaction, one account receiving a benefit and other account yielding a benefit. It is because of dual aspect principle that two sides of Balance Sheet are always equal and the following accounting equation will always hold good at any point of time. Assets = Liabilities + Capital (or net worth) Or Capital (or net worth) = Assets-Liabilities 3.2 Whenever, a transaction is to be recorded, it has to be recorded in two or more accounts to balance the equation. If a transaction affects (increases or decreases) the one side of equation, it will also affect (increase or decrease) the other side of equation or increase one account and decrease another account on the same side of equation. Ministry of Panchayati Raj, Government of India Page 12

20 3.3 Advantages of Double Entry System It is possible to keep a full record of dual aspect of each transaction. Transactions are recorded in a scientific and systematic manner, thus providing reliable information for controlling the organization efficiently and effectively. Since the total under this system be equal to total, arithmetical accuracy of the books can be tested by means of trial balance. An income and expenditure accounts can be prepared to know the excess income/expenditure during a particular period and to know how such excess income/expenditure has arisen. The financial position of organization can be readily ascertained by preparing a balance sheet. Frauds are prevented, because alternation in accounts becomes difficult and discovery of irregularities is facilitated. 3.4 Disadvantages of Double Entry System It is complex in nature It is more expensive than Single Entry ing System. It requires professionally trained persons Classification of s 3.5 An account is a summary of the relevant transaction at one place relating to a particular head. It records not only the amount of transaction but also their effects and direction. Traditional classification of accounts 3.6 The classification of accounts according to Traditional Approach is given below: Type of Meaning Example Personal These accounts relate to natural Natural: Mr. Raman s account person, artificial person and Artificial: M/s Raman & Co. representative person. Real Nominal These accounts relate to the tangible or intangible real assets These accounts relate to expenses, income, gains, and loss Tangible: Cash, Bank Balance, Investments, Land, Building Machinery etc. Intangible: Trademarks, Goodwill Expense: Salary, wages. Office Expenses, Purchase Income: Taxes, Fees, Grants, and Loss: Loss by fire theft etc. Gains: Profit on disposal of stores/scraps Ministry of Panchayati Raj, Government of India Page 13

21 ing Equation Based Classifications of s 3.7 The classification of accounts accounting to ing Equation approach is given below: Type Asset Liability of Capital Fund Meaning These accounts relate to tangible and intangible real assets These accounts relate to the financial obligations of an organization towards outsiders. These account relate to owners of the organization Example Tangible: Land, Building, Machinery, etc. Intangible: Trademarks, Goodwill Salaries payable, creditors, outstanding expenses, bank overdrafts, long term loans etc. PRI funds Golden Rules of & 3.8 Traditionally s are written on the left side of the accounts and s on the right side of the account. The golden rules of debit and credit are as under:- In case of traditional accounts: Type of Personal Benefit Receiver Benefit Giver Real s Which comes in Which goes out Nominal Expenses and Losses Incomes and Gains In case of Equation accounts: Type of Capital Decrease Increase Liability Decrease Increase Assets Increase Decrease Ministry of Panchayati Raj, Government of India Page 14

22 Important Things To Remember When Recording Receipt Or Payment Transactions Real 3.9 The accounting process under Cash Based Double Entry ing System starts when a financial transaction takes place i.e. money is either received or paid by the accounting entity. Therefore, every financial transaction shall have effect on the Real. The following thumb rule may be followed for recording receipts and payments. For every receipt the Head 8671 Panchayat Balance shall be debited and relevant Receipt Head will be credited. For every payment made, the Head 8671 Panchayat Balance shall be credited and relevant Expense Head will be debited. Why Factor 3.10 Effect of the financial transaction on Real has been explained above. Now to complete the equation other account has to be identified. To choose between the Personal and Nominal it is important to apply Why? factor. This is done by identifying the reason for receipt or payment of money. If the reason is known then Nominal will be affected. If the reason is not known in that case Personal will be affected. This is explained in following examples. Example 1: Rs. 5000/- paid to Mr. X on account of salary: Date Amount Amount s Affected xx-xxxxxx Salary A/c 5000/- Nominal ( Why factor known) Bank A/c 5000/- Real Example 2: Rs. 5000/- paid to Mr. X : Date s Amount Amount Affected xx-xxxxxx Mr. X 5000/- Personal ( Why Understanding s & s factor not known) Bank A/c 5000/- Real Golden Rule Expenses which goes out Golden Rule the Benefit Receiver which goes out Ministry of Panchayati Raj, Government of India Page 15

23 3.11 The term debit should not be taken to mean favorable things. It may represent favorable or unfavorable, increase or decrease depending on the nature of an account. Similarly, term credit may represent favorable or unfavorable, increase or decrease depending on the nature of the concerned account. In the case of assets and expenses, debt means increase; credit means decrease in assets and expenses. In the case of liabilities capital and incomes, debit means decrease and credit represents increase Some basic things to remember about and are: s and s can be considered as pluses (+) and minuses (-). Hence debiting an account means increasing the pluses while crediting an account means increasing the minuses; Every financial transaction will affect at least two accounts they will be debited and credited such that the debits will be equal to the credits. In other words, the sum of pluses and minuses will be zero; Some accounts are plus or debit nature accounts. In order to increase them, they must be debited. Examples include cash, bank, payments and asset accounts. For ex. If Rs.100 is received in cash, the cash account is to be debited to increase the cash balance; Other accounts are minus or credit nature accounts. Here, in order to increase them, the account must be credited. Examples include various income and liability accounts. Hence, if the Rs.100 received above is on account of house tax, the House Tax account is to be credited to record the increase in income. As a result of this, debit = credit i.e. the entry is complete; Plus nature accounts can be credited to reduce their balance and similarly, Minus nature accounts can be debited to reduce their balance. For ex. if Rs.30 is paid as wages out of the Rs.100 received above, the accounts affected are i) wages account (payment type, which is a plus account) and ii) cash account (asset type, which is also a plus account). However, since cash is going out, the cash account needs to be reduced by credit and wage account needs to be increased by debit of Rs.30 each thus completing the entry; The balance at the end of each period is calculated by netting all the debits and credits of each account. If the debits are more it is called a debit balance and Ministry of Panchayati Raj, Government of India Page 16

24 similarly if credits are more it is called a credit balance account. For ex. in the above example, cash account will have a net debit balance of i.e. Rs.70, House Tax will have a credit balance of Rs.100 and Wages will have a debit balance of Rs.30. In sum, all the debits (Rs.100) = all the credits (Rs.100); In the context of PRIASoft, users need not worry about the mechanics of s and s as these pluses and minuses will be happening automatically at the back end. What is need is correct identification of account heads by the users. ing Process under Cash Based Double Entry ing System 3.13 The accounting process under Cash Based Double Entry ing System starts when a financial transaction takes place i.e. money is either received or paid by the accounting entity or money is deposited in the bank or money is withdrawn from the bank or any adjustment is made. The standard double entry accounting system starts a voucher and ends with the financial statement. The recording, classifying and reporting are the three basic steps involved in the creation of financial statements which ascertain and communicate results in any organization. The following diagram explains the standard process of cash based double entry accounting system. Ministry of Panchayati Raj, Government of India Page 17

25 ing Process under Double Entry ing System Ministry of Panchayati Raj, Government of India Page 18

26 Vouchers 3.14 A Voucher is the source document that provides an evidence of a transaction. When these documentary evidences are collected, recorded and maintained in a systematic manner it is referred to as voucher system. After initial analysis of a financial transaction, accounting voucher is prepared giving details of accounts to be debited and credited. A standard voucher format is given below. No. Date: Rs. P. Total Total ant s Signature Approved by.. Received by 3.15 A serial number is put on each voucher and the relevant source documents are attached with the voucher. The vouchers are properly filed according to their serial number so that auditors may easily vouch them and these may also serve as documentary evidence in future. In general there are four types of vouchers: Receipt Voucher Payment Voucher Contra Voucher Journal Voucher Ministry of Panchayati Raj, Government of India Page 19

27 Receipt Voucher (Form PRI 9) 3.16 A Receipt Voucher is used to record or capture the details of any inflow of funds for the Panchayat. It is important to remember that since we are following cash bases of accounting, only amounts that are received (in cash / cheque / Treasury / Post Office etc.) are to be recorded. In the context of PRIASoft, the Receipt Voucher has further been divided into different sub vouchers which are explained as: Direct Receipt (Form PRI 9.1) such as taxes received, grants from state government, user charges received; Transfer Receipt (Form PRI 9.2) i.e. money transferred to them by other PRIs. For example amount of funds transferred to Block Panchayat by Zilla Parishad out of grant received from state government; Advance Receipt (Form PRI 9.3) received from any agency for certain works. For ex. funds transferred by Block Panchayat to Gram Panchayat for constructing a primary school on behalf of the Block Panchayat; Refund of Advance (Form PRI 9.4) i.e. any amount received back from advance paid earlier. For example, the Block Panchayat receives Refund of Advance for the excess amount for construction of the primary school; Cancellation of Cheque(Form PRI 9.5) i.e. when a cheque is drawn for payment but has to be cancelled, this is recorded through a contra (reverse) entry by passing a receipt voucher for the purpose. Refund of Excess Payment (Form PRI 9.6) i.e. any amount paid in excess of due amount from an earlier payment made, received back; Refund of Opening Balance Advance (Form PRI 9.7) i.e. any amount received back from an earlier advance payment made prior to preparation of Opening Balance Sheet; Payment Voucher (Form PRI 10) 3.17 A Payment Voucher is used to record the details of any outflow of funds from the Panchayat. It is important to remember that since we are following cash basis of accounting, only expenditures that are paid (by cash / cheque / treasury / Post Office etc.) are to be recorded. In the context of PRIASoft, the Payment Voucher has further been divided into different sub vouchers which are explained as: Expenditure incurred (Form PRI 10.1) by the Panchayat i.e. either revenue expenditure i.e. relating to the operations of the Panchayat such as salary, travel etc. or capital expenditure i.e. purchase of office equipment, Ministry of Panchayati Raj, Government of India Page 20

28 construction of building etc. Further, some of these expenditures may pertain to schemes in which case they shall be recorded against the scheme funds only. Transfer of Funds (Form PRI 10.2) to other Panchayat(s) such as transfer of scheme funds from a Block Panchayat to the Gram Panchayat; Payment of Advance(Form PRI 10.3) to other Panchayat(s), Line Departments, Agencies or Employees. Receipt Cancellation (Form PRI 10.4) for cancellation of any receipt. Contra Voucher (Form PRI 11) 3.18 A Contra Voucher is used to record any transactions which relates exclusively to the cash and its equivalent accounts such as bank/ treasury / post office. For example, withdrawal of cash from bank or treasury, transfer of cash from one post office account to another, deposit of cash to treasury etc. Here, no other (expenditure or revenue) head should be involved. Journal Voucher (Form PRI 12) 3.19 A Journal Voucher is used to record any book adjustment (from one Head to another Head) i.e. an entry in which no bank / cash / Post office / Treasury account is involved. For example, if an accounting entry is wrongly passed by debiting A instead of B, it can be adjusted by debiting B and crediting A through a Journal Voucher. Common cases where Journal Entries are needed are: Receipt Rectification (Form PRI 12.1) i.e. where a receipt is recorded to the wrong head of account for ex. to House Tax instead of Pilgrimage Tax ; Payment Rectification (Form PRI 12.2) i.e. where a payment is recorded to the wrong head of account for ex. to Salaries instead to Travel Expenses ; Advance Rectification(Form PRI 12.3i.e. an advance paid adjusted against a wrong head and needs to be rectified etc.; Adjustments (Form PRI 12.4) ) i.e. advance has been given and now needs to be booked against its specific account heads such as travel, wagesetc; Deductions(Form PRI 12.5) such as Tax deducted at Source from salaries or contractors. When the amount is remitted to bank, it will be done through a payment voucher The Vouchers to be used in PRIASoft are summarized as under: Ministry of Panchayati Raj, Government of India Page 21

29 a) Receipt Voucher b) Payment Voucher Direct Transfer Advance Receipt Refund of Advance Cancellation of Cheque Refund of Excess Payment Refund of Opening Balance Advance. Expenditure Transfer Advances Receipt Cancellation c) Journal Voucher d) Contra Voucher Receipt Rectification Expenditure Rectification Advance Rectification Advance Adjustments Deductions Withdrawing Cash from Bank / Treasury / Post office etc. Depositing Cash in Bank / Treasury / Post Office etc. Ministry of Panchayati Raj, Government of India Page 22

30 Vouchers to be passed for Different Transactions 3.21 Some examples of the Vouchers to be passed under PRIASoft for different financial transactions along with explanations on golden rules of debit/credits are given below: Receipt Vouchers Example Transaction Type Type of Voucher No. Voucher to in be prepared PRIASoft (Form PRI No.) 1 Rs. 5000/- received as income from own sources i.e. fee from market rent. 2 Rs.20000/- received as general grant from State Government, Rs.15000/- is own share and Rs. 5000/- needs to be transferred to Block Panchayat 3 Rs. 5000/- received from PHED as an advance for installation of hand pump. 4 Amount of Rs. 1200/- received back from an agency against advance paid earlier 5 Cheque amounting to Rs /- prepared for payment to a contractor for laying water supply line is cancelled. 6 An amount of Rs. 2500/- is received back from an agency against advance made earlier in excess for drilling of tube well 7 Rs /- received back from any agency against outstanding advance given for supply of materials prior to preparation of the Opening Balance Sheet. Direct 9.1 Transfer 9.2 Advance Receipt Refund of Advance Cancellation of cheque Refund of Excess payment Refund of Advance - Opening Balance Amount Ministry of Panchayati Raj, Government of India Page 23

31 Example 1:Rs. 5000/- received as income from own sources i.e. fee from market rent in cash Panchayat Balances-Cash To Market and Fairs- Receipts from Market Rent (Dr)/ (Cr) Golden Rule Dr Real which comes in Cr Nominal Income and Gains Example 2: Rs.20000/- received as general grant from State Government, Rs.15000/- is own share and Rs. 5000/- needs to be transferred to Block Panchayat, the entries will be as under:- First Entry will be as under (treating the amount received as liability as it contains both own share and other PRI share) Panchayat Balance-Bank To Cash remittance and adjustments between Panchayat (Dr)/ (Cr) Golden Rule Dr Real which comes in Cr Liability - Increase The second entry will be as under (treating own share as income): Cash remittance and adjustments between Panchayat To Grants from State Government (Dr)/ (Cr) Golden Rule Dr Liability decrease Cr Nominal - Income and Gains Ministry of Panchayati Raj, Government of India Page 24

32 The third entry when the amount of Rs.5000/- is remitted to the Block will be as under: Cash remittance and adjustments between Panchayat To Panchayat Balance-Bank (Dr)/ (Cr) Golden Rule Dr. 5000/- Liability decrease Cr. 5000/- Real - Which goes out Example 3: Rs. 5000/- received from PHED as an advance for installation of hand pump Panchayat Balance-Bank To Other Deposits - Deposit Works (Dr)/ (Cr) Golden Rule Dr. 5000/- Real which comes in Cr. 5000/- Liability - Increase Example 4: An amount of Rs. 1200/- received back from an agency against advance paid earlier: Panchayat Balance-Bank To Advance to agencies for works & supplies (Dr)/ (Cr) Golden Rule Dr. 1200/- Real which comes in Cr. 1200/- Asset - Decrease Example 5: Cheque amounting to Rs /- prepared for payment to a contractor for laying water supply line is cancelled. (Dr)/ Golden (Cr) Rule Panchayat Dr /- Real Ministry of Panchayati Raj, Government of India Page 25

33 Balance-Bank which comes in To Water Supply and Sanitation- Laying of water supply line Cr /- Nominal - Income and Gains Example 6: An amount of Rs. 2500/- is received back from an agency against advance made earlier in excess of due amount for drilling of tube well Panchayat Balance-Bank To Water Supply and Sanitation- Drilling of tube well (Dr)/ (Cr) Golden Rule Dr. 2500/- Real which comes in Cr. 2500/- Nominal - Income and Gains Example 7: Rs /- received back from any agency against outstanding advance given for supply of materials prior to preparation of the Opening Balance Sheet Panchayat Balance-Bank To Advance to agencies for works & supplies (Dr)/ (Cr) Golden Rule Dr /- Real which comes in Cr /- Asset - Decrease Ministry of Panchayati Raj, Government of India Page 26

34 Expenditure Vouchers Example Transaction Type Type of Voucher Form PRI No. 1 Rs /- paid as salary expenses under MNREGS. 2 An amount of Rs. 5000/- received as grant from Central Government under NRHM to be transferred to other PRI. 3 An amount of Rs. 5000/- paid to an agency for certain work 4 Receipt issued for Rs. 5000/- against amount received as market rent cancelled. Example 1: Rs /- paid as wages under MNREGS. Direct 10.1 Transfer 10.2 Payment of Advances Receipt Cancellation (Dr)/ (Cr) Golden Rule Dr /- Nominal expenses Cr /- Real which goes out. Example 2: An amount of Rs. 5000/- received as grant from Central Government under NRHM to be transferred to other PRI Poverty Alleviation Schemes- Central Government- MGNREG- Salary To Panchayat Balance-Bank Cash remittance and adjustments between Panchayat To Panchayat Balance-Bank (Dr)/ (Cr) Golden Rule Dr. 5000/- Liability Decrease Cr. 5000/- Real which goes out. Ministry of Panchayati Raj, Government of India Page 27

35 Example 3: An amount of Rs. 5000/- paid to an agency as an advance for certain work Civil Advances -Advances to agencies for work and supplies To Panchayat Balance-Bank (Dr)/ (Cr) Golden Rule Dr. 5000/- Asset Increase Cr. 5000/- Real which goes out. Example 4: Receipt issued for Rs. 5000/- against amount received as market rent cancelled Contra Vouchers Market and Fairs- Rent from Market To Panchayat Balance-Bank (Dr)/ (Cr) Golden Rule Dr. 5000/- Nominal expenses Cr. 5000/- Real which goes out. Example Transaction Type Type of Voucher Form PRI No. 1 An amount of Rs. 5000/- withdrawn from the Bank for day to day expenses 2 An amount of Rs. 2000/- received from Market Rent in Cash was deposited in the Bank. Contra Voucher Contra Voucher Example: An amount of Rs. 5000/- withdrawn from the Bank for day to day expenses (Dr)/ (Cr) Golden Rule Ministry of Panchayati Raj, Government of India Page 28

36 Panchayat Balances -Cash To Panchayat Balance-Bank Dr. 5000/- Real which comes in Cr. 5000/- Real which goes out. Example 2: An amount of Rs. 2000/- received from Market Rent in Cash was deposited in the Bank. The first entry on receipt of rent will be : (Dr)/ Golden (Cr) Rule Panchayat Balance -Cash To Receipts from Market - Market Rent The second entry when cash deposited into Bank : Dr. 2000/- Real which comes in Cr. 2000/- Real which goes out. (Dr)/ Golden (Cr) Rule Panchayat Balance -Bank To Panchayat Balance -Cash Dr. 2000/- Real which comes in Cr. 2000/- Real which goes out. Ministry of Panchayati Raj, Government of India Page 29

37 Journal Voucher Example Transaction Type Type of Voucher Form PRI No. 1 Funds of MGNREGS and IAY are kept in same bank account. An amount of Rs. 50,000/- received under IAY is wrongly booked under MGNRGES. On detection of error a Journal Voucher will be passed where Incorrect account i.e. MGNRGES will be debited and Correct account i.e. IAY will be credited 2 Amount of Rs. 5000/- was paid to Mr. Ram as wages under SGRY. However, the payment should have been made under MGNREGS. of both the schemes is kept in single Bank. A Journal Voucher will be passed by crediting the Incorrect scheme i.e. SGRY and debiting the Correct scheme i.e. MGNEGRS Receipt Rectification Expenditure Rectification An amount of Rs.5000/- was given as advance to agency for drilling of bore well under ARWSP. The firm has completed the work but the amount was wrongly adjusted in MGNREGS. 4 An amount of Rs.5000/- was given as advance to agency for repair of road under PMGSY. The firm has completed the work and advance is to be adjusted. 5 M/s Soni Const. has executed work for construction of road and Gross Amount of his bill is Rs /- under PMGSY. An amount of Rs. 6000/- is deducted as TDS from his bill. His net payment will be Rs.44000/- which will appear in the Cash Book. The amount of TDS will be remitted later on to Income Tax Department. A Journal Voucher will be passed for Rs. 6000/- debiting the Const. of Road- PMGSY and crediting Suspense -Tax Deduction at Source Advance Rectification Advance Adjustments Deductions 12.5 Ministry of Panchayati Raj, Government of India Page 30