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Training Module on
Management of Revenues, Functional,
Budgeting, Accrual system of accounting
MAY 2015
Supported under
Comprehensive Capacity Building
Programme (CCBP)
Ministry of Urban Development
Government of India
Management of Revenues, Budgeting and Accrual System of Accounting
National Institute of Urban Management 2
Prepared by: Municipal Finance Specialist Team
1. Team Leader: T.Muralidhar
2. Module Coordinator:
Dr. C. Nagaraja Rao
3. Module Preparation Team:
Mr.V.Ramakrushna
Mr.D.Mallikarjuna
Management of Revenues, Budgeting and Accrual System of Accounting
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CONTENTS
Module #1 – Management Of Revenues ...........................................6
1. Introduction ................................................................................................................................. 6
2. What is Revenue Management: .................................................................................................. 6
3. Significant of Revenue Management .......................................................................................... 6
4. Municipal Finance ...................................................................................................................... 7
Module #2 – Budgeting .....................................................................14
1. What is Budget? ........................................................................................................................ 14
2. Municipal Budget ...................................................................................................................... 14
3. Legal framework for Municipal Budget ................................................................................... 14
4. Budget Sanction ........................................................................................................................ 15
5. How Budget is prepared? .......................................................................................................... 15
6. Stages in the budget process ..................................................................................................... 16
7. Budget Calendar for Municipal Budget .................................................................................... 16
8. Important Terms ........................................................................................................................ 18
9. Sanction of budget by Corporation/Council ............................................................................. 19
10. Enclosures to the Budget....................................................................................................... 19
11. Act, Rules & Government Orders related to budget preparation .......................................... 19
Module #3 – Accrual System Of Accounting ..................................23
1. Introduction ............................................................................................................................... 23
2. Need for updating municipal accounts ...................................................................................... 23
3. Current System of Accounting. ................................................................................................. 23
4. Advantages of double entry accounting system ........................................................................ 24
5. Benefits of Accrual System of Accounting ............................................................................... 25
6. Cash basis Vs Accrual basis of accounting ............................................................................... 26
7. Accrual System of Accounting ................................................................................................. 27
Management of Revenues, Budgeting and Accrual System of Accounting
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ABREVIATIONS
List of Abbreviations
APMDP Andhra Pradesh Municipal Development Project
APUFIDC Andhra Pradesh Urban Finance & Infrastructure Development Corporation
ARV Annual Rental Value
BPS Building Penalisation Scheme (BPS)
BRGF Backward Regions Grant Fund
CCBP Comprehensive Capacity Building Programme
DCB Demand, Collection and Balance
D&O TRADE D&O trade
MFMA Local Government: Municipal Financial Management Act
GDP Gross Domestic Product
IGFR Inter Governmental Fiscal Relation
IDP Integrated Development Plan
ILCS Integrated Low Cost Sanitation
JNNURM Jawaharlal Nehru National Urban Renewal Mission
LRS Layout Regularisation Scheme (LRS)
MV Tax Motor Vehicle Tax
NOC No Objection Certificate
RAY Rajiv Awas Yojana
SJSRY Swarna Jayanthi Shahari Rozagar Yojana
ULB Urban Local Body
PFMA Public Finance Management Act
Management of Revenues, Budgeting and Accrual System of Accounting
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Chapter-I
Management of Revenues
Management of Revenues, Budgeting and Accrual System of Accounting
National Institute of Urban Management 6
MODULE #1 – MANAGEMENT OF REVENUES
1. INTRODUCTION The ever increasing needs of society coupled with changing global scenarios and growing
population size, poses a challenge to Urban Local Bodies (ULBs). This is especially so with
respect to issues such as poverty, inadequate infrastructure etc. These challenges call for more
efficient, effective, transparent and accountable public service and reforms. In order to cope
with these challenges, municipal officials need to be equipped with all the necessary tools.
Revenues and expenditures should be properly identified and planned accordingly. Otherwise,
all of the strategic plans and other derivative plans will be futile. This implies that, municipal
financial management is the most important part of the strategic management process that
requires careful planning.
a) What is Municipal Financial Management?
Municipal financial management involves very important activities of planning, sourcing,
utilizing & disbursing, controlling and reporting.
- Planning: deals with selecting the activities to be financed;
- Sourcing: is about identifying and making necessary arrangements for financing the planned
activities.
- Utilizing & Disbursing : deals with the application of the finance in an economic, efficient
and effective manner.
- Controlling: verifying the proper use of resources in an efficient, economic and effective
manner as per the guidelines and procedures; and action plan put forward so as to prevent or
minimize fraudulent activities, wastage, etc.
- Reporting: is about compiling all the necessary data and producing an informative and timely
report to the management, financiers and other stakeholders.
The aforementioned few points determine the role of municipal financial managers involved
in both the managerial role of allocation, distribution, stabilization and controlling; and the
accounting role of recording transactions, producing reports and analysing the reports.
2. WHAT IS REVENUE MANAGEMENT:
It is a mechanism by which all categories of revenues are properly brought to
assessment/demand
Realization of demand to the full extent
3. SIGNIFICANT OF REVENUE MANAGEMENT
a) Effective discharge of obligations like
a. Provision of basic amenities
b. Maintenance of services
c. Water supply
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d. Public health and sanitation
b) Major developmental activities like
a. City beautification
b. Town planning
c. City halls
c) Slums and slum development
d) Welfare of SC, ST, Women and Children
4. MUNICIPAL FINANCE
The sources of revenue to ULBs can be categorised under six (6) major heads:
4.1 TAX REVENUES: Taxes are levied, assessed and collected directly by the ULBs. The taxes levied, assessed and collected
are:
a) Property tax/House tax
b) Vacant Land tax
c) Advertisement tax
d) Tax on carriages and carts
e) Tax on animals, and
f) Agricultural land tax.
So
urc
es o
f R
even
ue
Taxes Revenue
Non-Taxes Revenue
Assigned Revenue
Plan Grants
Non Plan Grants
Loans/Borrowings
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4.1.1 PROPERTY TAX
4.1.1.1 RATE OF PROPERTY TAX
The rate of property tax, together with education tax and library cess levied under the relevant law as
shown, below:
Residential Building : 25% of Annual Rental Value (ARV)
Non Residential Building : 33% of Annual Rental Value (ARV)
In Hyderabad, the rate of tax ranges from 17% to 30% of ARV depending upon the rental value of the
building.
4.1.1.2 COMPONENTS OF PROPERTY TAX
Property Tax comprises of the following components:
A Tax for general purpose
A water and drainage tax
A lighting tax
A scavenging tax
Library cess
4.1.1.3 BASIS OF PROPERTY TAX:
Property tax in the State is based on Annual Rental Value (ARV) of property. Tax on buildings and
lands shall be assessed by the Municipal Commissioner based on ARV of buildings and lands. The
ARV of buildings shall be fixed with reference to the following factors:
i. Location of the building
ii. Type of construction of the building
iii. Plinth area of the building
iv. Age of the building
v. Nature of use of the building
4.1.1.4 ZONING BASED ON LOCATION
The entire municipal area shall be divided into convenient territorial zones for the purposes of
assessment of taxes based on the following factors. Namely -
Civic amenities like water supply, street lighting, roads and drains
Markets and shopping centers
Educational and medical institutions.
Banks, postal services and public offices, and
Factories and industrial areas.
4.1.1.5 CLASSIFICATION OF BUILDINGS
After division of Municipality into territorial zones, the buildings situated in each zone are to be
classified into six categories based on nature of construction as follows:
RCC posh buildings
RCC ordinary buildings
Madras Terraced or Jack Arch roofed or stone slabs or slate roofed buildings
Mangalore tile roofed or Asbestos roofed or G.I roofed buildings
Country tiled buildings
Huts
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4.1.1.6 USE OF BUILDINGS
After classification of buildings based on their type of construction, they will be further classified based
on the nature of use into the following categories:
Residential
Shops/Shopping complexes
Public Use
Office complexes, public and private offices, and banks
Hospitals and Nursing Homes
Educational Institutions
Commercial purposes
Hotel, Lodges, Restaurants
Godowns and other business establishments
Industrial Purposes i.e., factories, mills, workshops and other industries
Cinema theatres or places of public entertainment
NGOs homes and other uses not covered above.
4.1.1.7 DEDUCTIONS AND EXEMPTIONS
4.1.1.7.1 ALLOWANCES FOR REPAIRS
The following deductions are allowed from the ARV attributable to the building in lieu of all allowances
for repairs.
Age of Building Deduction allowed
25 years and below 10% of ARV
Above 25 years and up to 40 years 20% of ARV
Above 40 years 30% of ARV
4.1.1.7.2 REBATE TO OWNER-OCCUPIED RESIDENTIAL BUILDINGS
A rebate of 40% of the ARV is allowed in respect of the residential buildings occupied by the owner
inclusive of the deduction permissible towards the age of building.
Exemptions:
The following buildings and lands are exempt from payment of property tax.
Places set apart for public worship.
Choultries
Recognized educational institutions including hostels, libraries and playgrounds.
Ancient monuments not used as residential quarters or public offices.
Charitable hospitals and dispensaries
Hospitals and dispensaries maintained by railway institutions
Burial and burning grounds
Buildings and lands belonging to the municipality
Irrigation works vested with Government.
4.1.1.7.3 OWNER-OCCUPIED RESIDENTIAL BUILDINGS
The owner occupied residential buildings are exempt from property tax by a resolution of the
Council, if the ARV does not exceed in respect of
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Municipal Corporations Rs.900/-
Selection and Special grade municipalities Rs.450/-
Other municipalities Rs.300/-
4.1.1.7.4 HOUSES CONSTRUCTED FOR THE URBAN POOR
In respect of the houses constructed through the agencies of State Government under Weaker Section
Housing Programmes, the municipality has to collect one rupee per every half-year towards property
tax.
4.1.2 LEVY OF PROPERTY TAX ON LANDS: VACANT LAND TAX – VLT
In respect of lands which are not used exclusively for agricultural purposes, property tax shall be levied
at the rate of 0.50% of the estimated capital value of the lands in Municipal Corporations and at the rate
of 0.20% of the estimated capital value of the lands in Municipalities.
4.1.3 ADVERTISEMENT TAX
The advertisement tax is generally a neglected tax in the ULBs. But, with the increased commercial
activities in the urban areas, advertisement tax needs to be exploited fully. Under this tax, ULBs in the
State can levy taxes on advertisements as well as hoardings separately.
4.2 NON-TAX REVENUES:
Non-taxes are the fees and charges levied and collected by the ULBs for specific services. They
are administered by various sections in the ULB and broadly consist of:
S.No Section Taxes
1 Revenue Section i. Market Fee
ii. Slaughter Fee
iii. Rent from shopping/commercial
complexes
iv. Rent from municipal quarters
v. Parking Fee
vi. Mutation Fee
vii. Sale of forms
2 Health Section i. D&O trade license fee
ii. Fee on birth and death certificates
iii. Sale proceeds of swept material and
compost
iv. Burial ground charges
v. Fee for issue of NOCs
3 Engineering Section i. Contribution to water supply
connections
ii. Water charges for
residential/commercial/industrial
purposes
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iii. Contribution to sewerage connections
iv. Sewerage connection charges
v. Road cutting charges
4 Town Planning Section i. Building license fee
ii. Layout fee
iii. Development charges
iv. Betterment charges
v. Compounding fee (on unauthorized
constructions)
vi. Encroachment fee
vii. Building Penalisation Scheme (BPS) /
Layout Regularisation Scheme (LRS)
4.3 ASSIGNED REVENUES:
Assigned revenues are collected by government departments on behalf of ULB and assigned
to ULB. They are:
i. Entertainment tax: 90% of Entertainment tax collected by Commercial Tax
Department is assigned to ULBs on quarterly basis.
ii. Surcharge on Stamp duty: Surcharge on Stamp Duty is levied @ 1.5 % of the value
of the instrument and collected by Registration Department; and assigned to ULBs. It
is assigned to ULBs on quarterly basis.
iii. Profession tax: 95% of Profession Tax collected by Commercial Tax Department is
assigned to Greater Hyderabad Municipal Corporation (GHMC), Greater
Visakhapatnam Municipal Corporation (GVMC) and Vijayawada Municipal
Corporation (VMC) through budget allotment. Remaining ULBs are not getting
profession tax as salaries of these ULBs are paid from Government treasury.
iv. Magisterial Fines: The Magistrates levy fines on violation of municipal laws and
collect at their level. The fines are transferred to ULBs once in a quarter by the Judicial
Department.
4.4 NON-PLAN GRANTS:
The non-plan grants consisted
i. Per capita grant
ii. M.V. tax compensation
iii. Octroi compensation
iv. Property tax compensation
After Government started paying salaries of municipal employees directly through
Government Treasury on par with state government employees, they discontinued releasing
non-plan grants to ULBs. The salaries are paid by the Government in lieu of the non-plan grants
from 1-4-2009.
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4.5 PLAN GRANTS:
The Governments, both Central and State, release plan grants to the ULBs for specific purpose
and the grants must be utilised for the said purpose only duly keeping the grant amount in
separate accounts. Some of the Plan Grants are:
i. Jawaharlal Nehru National Urban Renewal Mission (JNNURM)
ii. Andhra Pradesh Municipal Development Project (APMDP) – World Bank Project
iii. Swarna Jayanthi Shahari Rozagar Yojana (SJSRY)
iv. Indira Kranthi Padham (Urban)
v. Central Finance Commission
vi. State Finance Commission
vii. Integrated Low Cost Sanitation (ILCS)
viii. Rajiv Awas Yojana (RAY)
ix. Backward Regions Grant Fund (BRGF)
4.6 LOANS/BORROWING:
ULBs borrow loans from financial institutions for undertaking projects and repay the loan
amount in annual instalments with interest over a period. The Andhra Pradesh Urban Finance
& Infrastructure Development Corporation (APUFIDC) is acting as an intermediate
organisation in between ULBs and lenders and is getting loans from lenders, giving to ULBs,
recovering from ULBs and repaying to the lenders. Borrowed for creation of Infrastructure
such as:
• Construction of Flyover Bridges
• Construction of Underground
• Drainage
• Construction of Shopping complexes
• Construction of Stadium
• Extension of water supply mains
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Chapter-II
BUDGETING
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MODULE #2 – BUDGETING
1. WHAT IS BUDGET? A budget is a statement of the estimated receipts and expenditure of an institution for a financial
year. It is prepared before the commencement of the year with the object of enabling the
authorities to watch that the revenue anticipated is fully realised and to exercise control over
the expenditure to ensure that it is kept within the authorised allotment. It is a forecast to show
what will be received and what will have to be paid during a financial year and whether the
receipts would be sufficient to meet the expenditure. From the perspective of a public
institution, it is a summary of anticipated expenditure along with proposals as to how to meet
them for a financial year.
Budget is prepared not only by public and private (corporate) institutions, but also by
individuals. While the budget of public institutions is service-oriented, the corporate budget is
profit-oriented. However, the personal (individual) budget is basically savings-oriented.
2. MUNICIPAL BUDGET A municipal budget is a traditional and conventional exercise emphasizing accountability of
the Executive to the Municipal Council. It plays an important role in planning and controlling
operations of the municipalities/urban local bodies (ULBs). It reflects the principles, policies,
priorities and programmes of the ULBs. Budget is a tool for optimal deployment of limited
resources for the best possible utility and achievement of its felt needs. It communicates the
financial objectives and resource requirements to its officers, administrators, elected
representatives and the public in order to secure their support for planned allocation of
resources and for performance of objectives. The budget is viewed as a transparent show piece
of the objectives and targets of the ULB in achieving the goals set by itself. Above all, it is a
legal authorization for expenditure during the budgetary period.
A realistic budget acts not only as a tool for financial planning and control, but also as a most
significant instrument to steer the development of the ULB for achieving the aspirations of the
people. The budget of a ULB can be used as an effective management tool for promotion of
accountability in service delivery and provision of infrastructure.
3. LEGAL FRAMEWORK FOR MUNICIPAL BUDGET The ULBs are statutorily responsible to prepare budget every year. Section 126 and 127 of the
Andhra Pradesh Municipalities Act, 1965 and the Andhra Pradesh Municipalities Preparation
of Budget Allotment and Transfer of Funds Rules (Budget Rules) issued in GO Ms.No.619
MA dated7-10-1967 govern the preparation of budget in the Municipalities.
Recently, in 2008, Government of Andhra Pradesh has approved and published the Andhra
Pradesh Municipal Budget Manual.
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Objectives of the Budget:
To keep local authorities solvent (expenditure well covered by revenue and reserves),
realistic revenue estimation and also tap loans which can be obtained and repaid.
Establishes priorities for plans and services.
Resource allocation to different activities to set level and direction of each work during
budgetary period.
Legal authorization for expenditure during budgetary period.
4. BUDGET SANCTION In the Municipal Corporation, the Commissioner prepares the annual budget in accordance
with the Act and the Rules and places before the Standing Committee. The Standing Committee
forwards the budget to the Municipal Corporation and the Municipal Corporation approves the
budget.
In the Municipalities, the Commissioner prepares the annual budget and places before the
Municipal Council for approval. If it is not approved in the Council meeting, it would be
referred again to the Council for approval. In case the budget is not approved even in the second
meeting, the Chairperson would forward the budget to the Government for approval
The budget sanctioned by the Corporation/Council will authorise the Commissioner to strictly
adhere to the realization of revenue and controlling the expenditure as per the budgetary
allocations.
5. HOW BUDGET IS PREPARED?
Budget preparation process is initiated and monitored by the Commissioner. Bottom-up
approach would be followed in budget preparation. Estimates would be made from the lowest
unit and then consolidated at Commissioner’s level. Basis for preparation of budget is the actual
performance of the ULB for the last couple of years, information from section heads,
government directions to take up specified activities and requirements proposed by the elected
representatives.
Estimates would be made for each of the accounting subject under every budgeting centre.
Hence a budget code is defined as a combination of budget centre and account code. The
codification structure for this is defined in Andhra Pradesh Municipal Accounts Manual
(APMAM).
Budget would reflect estimated revenue income and expenditure, revenue surplus/deficit,
inflows and outflows and opening and closing balances for capital heads.
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6. STAGES IN THE BUDGET PROCESS
7. BUDGET CALENDAR FOR MUNICIPAL BUDGET The budget preparation and monitoring process follows a budget calendar. The budget calendar
provides milestones by which officials in the ULB need to prepare the budget and place before
the concerned authorities. Various stages of budget preparation and approval should be within
the time limits stipulated in this regard by the relevant Acts/Rules.
7.1 BUDGET CALENDAR FOR MUNICIPAL CORPORATIONS
Budget Activity Not later than
Commissioner to convene section heads meeting to initiate budget
process 25th September
Circular from the Commissioner to section heads to prepare budget
estimates 1st October
Preparation of budget estimates for sections by the section heads
(functionaries) 10th October
Compilation of budget at accounts section 25th October
Budget finalisation by the Commissioner and placing before the
Standing Committee 10th November
Review and approval of budget by the Standing Committee to be
placed before the Corporation 10th December
Preparation of
the ward wise
and section
Review by the
section in-charge
at the location
Review by the
section head for
budget
Review by the
Commissioner
and finalization
Review of the
complied
budget w.r.t
Compilation of
budget at the
accounts section
Review by Standing
Committee, in case of
Corporations
Sanction by Council /
Corporation
Budget copy sent
to the
Government
S
t
a
g
e
-
S
t
a
g
e
-
S
t
a
g
e
-
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Circulation of budget booklets to the ward members/corporators 15th December
Sanction of budget by the Corporation 20th February
Submission of approved budget to the State Government for
information 1st March
Budget copy to Examiner of Accounts and Auditors Within 15 days of
sanction
Re-appropriation to the Corporation by the Commissioner As and when
necessary
Additional allotment information to Corporation by the
Commissioner
As and when
necessary
7.2 BUDGET CALENDAR FOR MUNICIPALITIES
Budget Activity Not later than
Commissioner to convene section heads meeting to initiate budget
process
25th September
Circular from the Commissioner to section heads to prepare budget
estimates
1st October
Preparation of budget for sections by section heads (functionaries) 10th October
Compilation of budget at accounts section 25th October
Budget finalisation by Commissioner to place before the Council 7th November
Circulation of budget booklets to the ward members/councillors (at
least seven days before the budget meeting of the Council)
8th November
Budget approval in the Council 15th November
Budget approval (again by the Council), if the Council fails to
approve the budget with or without modification in the first
meeting
22nd November
In case budget is not approved by the Council in two meetings, it would be forwarded
by the Chairperson to Government for approval
Submission of approved budget to the State Government for information through the
Collector and Commissioner & Director of Municipal Administration (CDMA)
Submission to Collector (by municipality) 31st December
Forwarding of budget by Collector to CDMA 15th January
Forwarding of budget by CDMA to State Government 5th February
Copy of approved budget to Auditors 31st December
Observations if any made by Government to be placed before
Council
After receipt from the
Government
Budget additional allocation / re-appropriation to Council by
Commissioner
As and when
necessary
Any expenditure during the course of a year shall be regulated in accordance with the
allotments made in the budget for the year, as sanctioned by the Corporation/ Council.
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Additional budget needs, if necessary, would be made by additional allotment or re-
appropriation. The Budget calendar facilitates the ULB to complete the budgeting process
before commencement of financial year and smooth roll over to the new financial year.
8. IMPORTANT TERMS In this connection, it is necessary to understand some of the important terms in budget
preparation.
8.1 BUDGET ESTIMATE
It is a statement of the estimated receipts and expenditure of an ULB for a financial year. It is
prepared before the commencement of the year with the object of enabling the authorities to
ensure that the revenue anticipated is fully realized and to exercise control over the expenditure.
8.2 REVISED ESTIMATE
A revised estimate is an estimate of the probable receipts and disbursements for a year framed
in the course of the year with reference to the transactions already recorded. The revised
estimate for the current year and budget estimate for the ensuing year have to be framed
simultaneously.
8.3 APPROPRIATION
Appropriation means the amount provided in the budget estimate under a regular head of
account.
8.4 RE-APPROPRIATION
Re-appropriation means transfer of funds from the appropriation made in one budget head to
that of another budget head. It becomes necessary when the allotment made in a budget head
is exhausted and additional amount is required; or an allotment made in a budget head has
become unspent and can be made use in another budget head. A re-appropriation would result
in a fall in the budgetary allocation for the transferor budget head and an increase in the
budgetary allocation for the transferee budget head. Re-appropriation would not result in any
change in the closing balance of sanctioned budget.
8.5 ADDITIONAL ALLOTMENT
An additional allotment arises when any amount over and above the amount already allocated
is sought to be added in the budget originally allocated. This is different from re-appropriation.
Whenever additional allotment is sought, the source must also be indicated. As such additional
budget would result in an enhancement in the budgetary allocation under one or more budget
heads. However, it should be noted that such sanction of additional budget does maintain
minimum working balance of 5% of estimated receipts (statutory closing balance).
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9. SANCTION OF BUDGET BY CORPORATION/COUNCIL Rule 6 of the Corporation Budget Rules as well as Rule 7 of Municipalities Budget Rules
specify that the budgets would be sanctioned by the Corporation or the Council, only after
they are satisfied that the following requirements are met.
- that the estimate of receipts is exhaustive and cautious
- that the recommendations of the officers (section heads) have been duly considered
- that due provision has been made for all obligatory charges
- that provision has been made for discharge of all liabilities in respect of loans taken
by the Council
- that provision has been made for all commitments
- that the working balance is not less than five percent of estimated receipts
excluding those from government grants, advances and deposits
After these commitments only, provision has to be made for capital works such as construction
of new roads and buildings, provision of street lighting and improvements to water supply and
sewerage etc.
10. ENCLOSURES TO THE BUDGET The budget should be accompanied by the following documents
- Explanatory Note (G.O.Ms.No.619 M.A dated 10-6-1967)
- Statement showing the revenue income and expenditure for the last three years
(Govt. Memo No.1349/72 M.A dated 7-12-1974)
- Proforma showing the amounts provided for the benefit of SCs, STs, and Women
and children (GO Ms No.41 MA dated 24-1-1997)
- Proforma showing 40% of the net funds to be spent in slum areas, priority being on
provision of water supply and sanitation (GO Ms No.265 MA dated 19-7-
2004)
- Proforma showing the amounts allocated for development works (G.O.Ms.No.626
M.A dated 12-11-1986)
- D.C.B. Statement (G.O.Ms.No.2593 M.A. dated 29-11.1944)
- Statement showing the rates of taxation (G.O.Ms.No.1844 M.A.
dated 16-4-1934)
- Special grant accounts for capital works
- Loan account
- Statement showing the financial position (G.O.Ms.No.2503 M.A. dated 29-11-
1944)
- Annual Accounts for previous year
- Council Resolution approving the budget
11. ACT, RULES & GOVERNMENT ORDERS RELATED TO BUDGET
PREPARATION Some important provisions relating to budget preparation are detailed below:
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11.1 ANDHRA PRADESH MUNICIPALITIES (PREPARATION OF BUDGET AND
TRANSFER OF FUNDS) RULES, 1967
Rule 2 The Engineer, Health Officer, Town Planning Officer and Education
Officer shall prepare the estimate of receipts and expenditure
concerning their departments and furnish the same to the
Commissioner for incorporation in the budget estimate
Rule 3 The working balance to be provided in the budget shall be not less
than five percent of estimated receipts of the year excluding those
from endowments, government grants and debt heads
Rule 5(1) The budget prepared in the manner prescribed shall be circulated to
the councillors at least seven days before the date fixed for
consideration of the budget by the Council
Rule 7 The Council shall after satisfying itself on the following points
approve the budget with such modifications as it may deem
necessary
(i) that the estimate of receipts is exhaustive and cautious
(ii) that the recommendations of the officers referred in Rule 2 have
been considered
(iii) that due provision has been made for discharge of obligatory
charges
(iv) that due provision has been made for discharge of all loan
liabilities
(v) that working balance is not less than the minimum referred in
Rule 3
11.2 ANDHRA PRADESH (ANDHRA AREA) PUBLIC HEALTH ACT, 1939
Sec. 127 Every municipality has to earmark not less than 30 percent of its
income from all sources other than Government grants for
expenditure on public health activities. This amount has to be
worked out and provision has to be made accordingly
11.3 GOVERNMENT ORDERS
GO Ms No.41
MA dated 24-
1-1977
15%, 7.5% and 5% of the developmental expenditure has to be
earmarked in the budget estimate for the development of schedule
castes areas, scheduled tribes areas, and welfare of women and
children respectively
GO Ms No.265
MA dated 19-
7-2004
40% of the net funds available shall be spent in slum areas, priority
being on provision of water supply and sanitation
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GO Ms No.157
MA dated 8-4-
1986
Allocation of funds for capital/developmental works:
Sl Particulars Allocation
% age
1 Water supply 20%
2 Drainage 13%
3 Roads 19%
4 Street Lights 7%
5 Recreation facilities 10%
6 Markets, parks, building, community halls,
latrines, urinals etc.,
17%
Management of Revenues, Budgeting and Accrual System of Accounting
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Chapter-III
Accrual System of Accounting
Management of Revenues, Budgeting and Accrual System of Accounting
National Institute of Urban Management 23
MODULE #3 – ACCRUAL SYSTEM OF ACCOUNTING
1. INTRODUCTION A good accounting system can provide confidence the Municipal resources are being used
properly and assure the public that the funds have been spent in keeping with adopted budgets
with no misuse of public funds.
Account-keeping is a system of recording the effect of each financial transaction under
appropriate accounts, for purposes of easy comparison with past performances and for
comparison to project for future development or improvement. The combined effect of all such
transactions of a period is to arrive at the net result of the activities or services rendered to the
public by the Municipality and to ascertain promptly the accurate financial position.
2. NEED FOR UPDATING MUNICIPAL ACCOUNTS Accurate preparation of municipal accounts within the stipulated time is of vital importance in
the overall functioning of urban local bodies (ULBs), among others, for the following reasons.
1. To ensure collection of revenues due to ULBs.
2. To present true picture of the financial position of the ULBs
3. To ensure utilisation of funds strictly in conformity with financial standards.
4. To prepare Budget Estimates and Administration Report.
5. To detect misappropriation and misapplication of funds, frauds and errors
6. To ensure timely conduct of audit and to initiate appropriate measures on the audit
reports, and ultimately
7. To ensure good governance.
3. CURRENT SYSTEM OF ACCOUNTING. The accounts of the ULB have traditionally maintained on cash based single entry of
accounting. Some of the major implications have been
Full picture of Assets & Liabilities are readily not available in one statement
Inadequate managerial attention. e.g. on speedily collection of receivables due to lack
of information or delayed information and on movement of payments/liabilities.
Inadequate cash management.( Several in operative bank accounts )
Expenses not matched with revenues of the period making determination of
surplus/deficit for the period a difficult task.
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Certain capital expenditure treated as revenue items. E.g. roads, bridges, drainage etc.
In view of the above, the Government of India has taken a decision to introduce accrual-based
double entry accounting systems in ULBs in consonance with the current national policy of
introducing this system in the local bodies.
Determination of financial performance as well as assessment of financial status can be
accomplished through accrual based accounting system. Accrual based accounting is a method
of recording financial transactions based on accrual, i.e. on occurrence of claims and
obligations in respect of incomes or expenses, assets or liabilities based on happening of an
event, passage of time, rendering of service, fulfilment (partially or fully) of contract,
diminution in value etc., even though actual receipt or payment of money may not take place.
In this system, there is a change in accounting of transactions and reporting of financial results,
so as to provide the municipalities with the financial reports, in the form of two important
financial statements for the purposes noted against each:
Financial Statement Purpose
1 Income and Expenditure
Account
To determine the financial
performance of the ULB
2 Balance Sheet, i e. Statement of Assets and
Liabilities
To assess the financial status
of the ULB
4. ADVANTAGES OF DOUBLE ENTRY ACCOUNTING SYSTEM The following are the advantages of double entry accounting system over single entry
accounting system:
a) Recording of transactions in their entirety: Both the debit and credit aspects of a
transaction are recorded to ensure the completeness of a transaction.
b) Accuracy of financial statements: As the debit and credit elements of a transaction
are recorded, the accuracy of the financial statements is established. Errors in recording
of transactions can be detected and rectified with ease.
c) Indicator of financial position: The Income and Expenditure Statement discloses the
income earned or losses incurred during the financial year under report. The Balance
Sheet discloses the financial health of the organization on a given date. This is not
possible in the case of single entry system of accounting.
d) Reliability of MIS Reports: The reports generated from the books of account based
on the double entry system of accounting give a reliable picture of the situation, as
arithmetical accuracy is ensured. Thus, the status of the accounts of the customers,
suppliers, assets and liabilities can be known with higher degree of reliability.
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5. BENEFITS OF ACCRUAL SYSTEM OF ACCOUNTING The accrual basis of accounting helps in determination of correct income and expenditure of
the municipal bodies. The main benefits of accrual based accounting system are enumerated
below:
a) Revenue is recognised as it is earned and thus “Income” constitutes both revenue
received and receivable. The accrual basis not only records the actual income, but also
highlights the level and efficacy of revenue collection, thereby assisting decision
makers in taking financial decisions.
b) Expenditure is recognized as and when the liability for payment arises and thus it
constitutes both amount paid and payable. In accrual basis of accounting, expenditure
incurred on repairs and maintenance shall be recognised as expense of the period in
which they are incurred and, if not paid for during the year, shall be treated as a liability
(payable) and be disclosed as such in the Balance Sheet.
c) Expenses are matched with the income earned in that year. Thus, it provides a very
effective basis to understand the true performance of the organization for the operations
that are conducted in that year.
d) A distinct difference is maintained between items of revenue nature and capital nature.
This helps in correct presentation of financial statements, viz., the Income and
Expenditure Statement and the Balance Sheet.
e) The surplus or deficit as shown at the year-end represents the correct financial position
of the organization arising out of the various transactions during that year.
f) It facilitates proper financial analysis and reporting.
g) It captures “full” cost of servicing and helps in identifying financial viability of
rendering services.
h) It helps in providing timely, right quality and nature of information for planning,
decision-making and control at each level of management.
i) It assists in effective follow-up of receivables by the municipal body and proper
ascertainment of payables by the municipal body.
j) One of the distinct advantages of adopting accrual accounting system is ease in financial
appraisals by the financial institutions. It also facilitates credit rating through approved
Credit Rating Agencies, which is a pre-requisite for mobilising funds in the financial
markets through debt instruments.
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k) It presents a true picture of the financial position of an organisation and helps in better
financial management.
Thus, accrual basis of accounting results in recording of transactions and events on the basis
of their substance, rather than merely when cash is received or disbursed, and thus, enhances
their relevance, neutrality, timeliness, completeness and comparability.
DEABAS Vs SECBAS
Method of
Book Keeping
Single Entry Double Entry
Method of
Accounting
Cash Based
Accounting
System
Accrual Based
Accounting
System
6. CASH BASIS VS ACCRUAL BASIS OF ACCOUNTING Cash basis of accounting differs from accrual basis of accounting in terms of the following:
S.No Cash Basis of accounting Accrual Basis of accounting
Statement of receipts and payments
made based on entries recorded in the
Cash Book
Income and expenditure account is
prepared.
Only one entry is made for a transaction
(either receipt or payment)in the books
of Accounts
Two entries are made for each
transaction in the books of account
Receipts and payments represent the
amounts actually received and payments
actually made
Income includes revenues actually
received and receivable and
expenditure includes both payments
made or payable
The receipts and payments statement Income and expenditure account is
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commences with the opening balance –
both cash on hand and cash at bank.
confined to the year of accounting only
and it will not include the items of
income and expenditure relating to past
or future years
The difference between the two sides –
receipt and payment will indicate the
cash balance at the end of the period.
The difference between the two sides –
debit and credit – will indicate the net
surplus/deficit.
The statement need not necessarily be
accompanied by a statement of assets
and liabilities
The system shall, necessarily, have the
Balance Sheet, ie statement of assets
and liabilities.
7. ACCRUAL SYSTEM OF ACCOUNTING
The rules of debit and credit in respect of the above accounts are:
i) Personal Accounts: Debit the receiver and Credit the giver
ii) Property or Real Accounts: Debit what comes in and Credit what goes out
iii) Nominal or Fictitious Accounts: Debit expenses and losses and credit gains and income
7.1 ACCOUNTING RULES
The basic rules of accounting flow from the accounting equation:
Assets = Own Funds + Liabilities
An increase in the asset,
e.g., Vehicle can be
brought about by
A decrease in the asset, e.g., Cash may result in:
Decrease in another
asset, e.g. Bank
Account
Increase in liability,
e.g., Loans or Payables.
Increase in another asset, e.g. Medical
Equipment
Decrease in liability, e.g. Payment of Loans or
payment of suppliers outstanding
Decrease in own funds through expenditure.
It is customary to use the term “Debit” and “Credit” to communicate the above
phenomenon. The rules of debits and credits are as follows:
Type of Account Debit Signifies Credit Signifies
Asset Accounts Increases Decreases
Liability Accounts Decreases Increases
Own Funds Decreases Increases
Management of Revenues, Budgeting and Accrual System of Accounting
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An Accounting Entry would be a combination of a single debit and a single credit or a
set of debits and a set of credits, as may be appropriate. Following the accounting
equation of Assets = Claims, the debits will always equal credits.
If we were to expand on the above, the following will be the rules applicable to incomes,
expenditures, grants, etc.
Type of Account Debit Signifies Credit Signifies
Income (which will
increase Own Funds)
Decreases Increases
Expenditure (which will
decrease Own Funds)
Increases Decreases
Grants Received Decreases Increases
7.2 ACCOUNTING PROCESS:
Accounting Process
Vouchers
Day BookCash Book
Journal Book
Ledger
Trail Balance
Financial Stat.
The following steps are involved in the accounting process.
Step 1 : Preparation of Voucher
Step 2 : Analysis of Transaction & Classification of Accounts
Step 3 : Preparation of Cash Book & Journal Proper
Step 4 : Ledger
Step 5 : Balancing of Accounts
Step 6 : Trial Balance
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Step 7 : Final Accounts
7.3 VOUCHER AND SOURCE DOCUMENT
7.3.1 VOUCHERS
Is a written document that "vouches" the occurrence of a transaction
Is not complete until all the requisite ‘Support / Source Documents’ are attached.
7.3.2 TYPES OF VOUCHERS
• Receipt Voucher
• Payment Voucher
• Contra Voucher
• Journal Voucher
7.3.3 SOURCE DOCUMENT
• Source document are the primary documentary evidence of the transaction taking
place.
• They provide information about the nature of the transaction, the date, the amount and
the parties involved in it.
7.4 BOOKS OF ACCOUNTS
The main books of account under the double entry system are
Cash book
Journal book;
Ledger.
7.4.1 CASH BOOK
It is a book of original entry recording transactions involving cash and/or bank. It has two sides,
‘receipt’ and ‘payment’. All collections shall be recorded on the ‘receipt’ side and all payments
on the ‘payment’ side. Separate cash books shall be maintained in respect of each bank account.
Similarly, separate books be maintained for separate Fund Accounts.
Management of Revenues, Budgeting and Accrual System of Accounting
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Cash Book Format -
7.4.2 JOURNAL BOOK
It is a book of original entry for recording all transactions other than those involving cash and/or
bank. A non-cash/bank transaction is first recorded in the journal book by dividing into its debit
and credit aspects, from which a posting is made in the relevant ledger account. Recording of
income in respect of property tax bills raised; or recording of liability on receipt of suppliers’
bills are examples of transactions, which shall be first recorded in the journal book.
Journal Proper Format
Date Particulars LF Debit Credit
Rs Rs
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7.4.3 LEDGER
It is a book containing all the accounts in the Chart of Accounts. The ledger has two sides, viz.,
‘Debit’ (Dr.) and ‘Credit (Cr.). The head of account which is ‘debited’ while recording an
accounting entry in the Journal book or which is recorded on ‘payment’ side of the cash book
shall be posted on the ‘debit’ side of the Ledger. Similarly, the head of account which is
‘credited’ while recording an accounting entry in the journal book or which is recorded in the
‘receipt’ side of the cash book shall be posted on the ‘credit’ side of the Ledger. Each entry in
the cash book and the journal book shall have a posting in the Ledger.
Dr Cr
Date Particulars JF Amount Date Particulars JF Amount
Rs Rs
Format for Ledger
7.4.4 BALANCING OF ACCOUNTS
Balance is the difference between the total debits and the total credits of an account.
Significance of Balancing:
Debit Balance
Credit Balance
Nil Balance
7.5 FINANCIAL STATEMENTS
After completing the annual procedure and other reconciliation activities, the ULB shall
prepare the Financial Statements. The Financial Statements consists of:
1) Balance Sheet
2) Income and Expenditure Account
3) Statement of Cash Flows
4) Receipts and Payments Account
5) Notes to Account
6) Financial Performance Indicators
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7.5.1 TRIAL BALANCE
• Preparation of Trial Balance precedes preparation of Financial Statements.
• Trial Balance is a list of closing balances in all accounts in the Ledger and Cash
Book(s).
• Trial Balance generates a basic summary of accounts to facilitate preparation of
financial statements.
7.5.2 INCOME AND EXPENDITURE STATEMENT
• Discloses financial performance of ULB.
• Shows income and expenditure of ULB, and excess of income over expenditure or
vice-versa.
• Income means, income earned, i.e., actually received or not.
• Expenditure incurred means, whether actually paid or not.
• Income and expenditure statement is drawn from TB.
• Various heads of income and expenditure are posted from TB to Income and
Expenditure Statement.
21
HOA Head of Account Schedule CY PY
Income
1-10 Tax Revenue 1-1
… ….
1-80 Miscellaneous Income 1-9
A Total Income
Expenditure
2-10 Establishment Expenses 1-10
… …
2-72 Depreciation 1-17
B Total Expenditure
(A) – ( B) Gross surplus/deficit
2-80 Add Prior-period items 1-18
2-90 Less Transfer to Reserve Funds
Net balance surplus/deficit
Income and Expenditure Statement
7.5.3 BALANCE SHEET
• A statement which reflects the financial position of ULB on a particular day.
• It presents assets, liabilities and reserves on a particular day.
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• Balance Sheet is also drawn from TB.
• Assets, Liabilities and Reserve Heads are posted from TB.
23
Head of Account
Code
Head of Account Schedule
(details)
Current Year
amount (Rs.)
Previous Year
amount (Rs.)
1 2 3 4 5
Liabilities
3-10 Municipal (General) Fund B 1
… ….
… …
3-60 Provisions B 10
Total Liabilities
Assets
4-10 Fixed Assets B 11
… …
… …
4-60 Loans, advances and deposits B 18
4-61 Less: accumulated provision
against loans, advances and
deposits
Total current assets, loans and
advances
4-70 Other assets B 19
4-80 Misc. expenditure ( to the extent
not written off)
B 20
Total Assets
Balance Sheet
7.5.4 RECEIPT AND PAYMENT ACCOUNT
• Shows sources of funds and application of funds.
• Prepared from Balance Sheet, Income and Expenditure Statement, Ledgers and Cash
Book.
25
Account
Code
Head of
Account
Current
period
amount
(Rs.)
Corresponding
Previous period
amount (Rs.)
Account
Code
Head of Account Current
period
amount
(Rs.)
Corresponding
Previous period
amount (Rs.)
Opening
Balance
Operating Receipts Operating Payments
1-10 Tax
Revenue
2-10 Establishment
Expenses
… … … …
1-80 Other
Income
2.60 Revenue grants,
contributions and
subsidies
4-30 Purchase of
stores
Non 0perating receipts Non operating payments
3-30 Loans
received
payables
… … 4-10 Acquisition &
purchase of fixed
assets
3-50 Revenue
collected
in advance
.. ..
Other
receipts
4-60 Other loans &
advances
Closing Balance
Grand
Total
Grand Total
Receipt and Payment Account
Management of Revenues, Budgeting and Accrual System of Accounting
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7.6 SCHEDULES
Various schedules to support the financial statements.
7.7 NOTES TO ACCOUNT
• Disclosure of significant accounting principles.
– Basis of accounting.
– Recognition of revenue.
– Recognition of expenditure.
– Fixed assets.
– Borrowing cost.
– Inventories.
– Grants.
– Employee benefits.
– Investments.
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