Accrual Based Double Entry Accounting System

Vijayawada Municipal Corporation , as part of technology and process up-gradation for better utilization of the available resources, up-keep of records and transparency in accounts, has switched-over to Accrual Based Double Entry Accounting System from Cash Based System w.e.f 01-Apr-07. In this regard, VMC entered into agreement with Centre for Good Governance (C.G.G), Hyderabad, who will act as nodal/technology/resource agency and eGov Foundation, Bangalore, a non-profit organization, which will supply the required software free of cost for implementation of the Accrual Based Double Entry Accounting System adopting A.P. Municiapl Accounts Manual. VMC is the second corporation in the state after the HMC to fulfil this reform..

The whole process of change management support and personnel training has been taken up by CGG, while application user training is provided by eGov Foundation. Around 40 VMC personnel have been provided with the basic training in Accrual Based Double Entry Accounting System by CGG at their campus. Second round of "Hands on" training has been imparted to all concerned staff for stabilization of the software system. Full implementation of accounting in accrual based system ensures publication of Balance Sheets and out come budgets as on 31-Mar-08.

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 recognized 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 amounts paid and payable. In accrual basis of accounting, expenditure incurred on repairs and maintenance shall be recognized 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 is 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. Costs which are not charged to Income & Expenditure Account are carried forward and kept under continuous review. Any cost that appears to have lost its utility or its power to generate future revenue is written-off.

f. 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.

g. It facilitates proper financial analysis and reporting.

h. It captures “full” cost of servicing and helps in identifying financial viability of rendering services.

i. It helps in providing timely, right quality and nature of information for planning, decision-making and control at each level of management.

j. It assists in effective follow-up of receivables by the municipal body and proper ascertainment of payables by the municipal body.

k. 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 mobilizing funds in the financial markets through debt instruments.

l. It presents a true picture of the financial position of an organization 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.