Accounting Reforms in Indian Railways
of Accounting Reforms
1.
Accrual
Accounting
2.
Outcome
Budget
3.
Performance
Costing
Introduction:
·
Presently
Government accounting in 3 tiers (i.e., Union, States & Local bodies) follows Cash based Accounting system.
·
Source - GFR - General Financial Rules, other
Codes & Manuals
·
It is felt that there is a need for
Financial Reporting to be in sync with the shift in priorities of Public
Finance. In order to achieve this, Accounting systems the world over are being
revisited
·
FRBM Act (Financial Responsibility & Budget
Management Act) and Outcome Budget are the first initiatives of the Accrual
Accounting.
·
Change from Rule based to Standards based. That means change from Cash to Accrual based
system of Accounting.
·
Excerpts from
Budget Speech 2016-17
>
As
a thriving commercial entity,
we also want IR to go a step further and establish an accounting system where
outcomes can be tracked to inputs. This is a structural change which forms the
bedrock of our transformation, as right accounting would determine right
costing and hence right pricing and right outcomes. We intend taking up its
implementation over Railways in a mission (Mission Book Keeping) mode and
complete the entire roll out in next few years.”
·
IR
have initiated several reforms in the area of Accounting systems and reporting
systems, duly launching the Three Pilot Projects i.e., 1.
Accrual Accounting 2. Performance Costing and 3. Outcome Budget.
·
The
above three put together are popularly known as Accounting Reforms.
1.
Accrual Accounting:
Limitations in Cash based system :
·
Profit
& Loss Account and Balance Sheet are not as per the format of Commercial
Accounts.
·
Terminology
used in Financial Statements is not understandable to the Accountants/outsiders
·
Depreciation
is not as per commercial principles
·
Asset
Register is not maintained
·
Earnings & Expenditure are not accounted
as per Accounting year concept
·
Outstanding
expenditure is not captured in the same year.
·
No
segregation of work in progress and finished works under erstwhile Demand No.
16.
Differences between Cash Accounting and Accrual Accounting
|
Basis
|
Cash Accounting
|
Accrual Accounting
|
|
Recording
|
Cash
transactions only
|
Cash &
Credit
|
|
Pre-paid
/Outstanding expenses
|
Not taken
into account
|
Taken into
Profit & Loss Account
|
|
Accrued
Income/ Income recd. In advance
|
Not taken
into account
|
Taken into
Profit & Loss Account
|
|
Recognizes
Revenue
|
When the
Cash is received.
|
When it is
earned
|
|
Recognize
expenses
|
When cash
has been spent
|
When they
are billed (receipt of invoice)
|
|
Bills
Receivables and Bills Payables
|
Not
accounted
|
Accounted
|
|
Profit or
Loss
|
Not
possible to calculate
|
Can
calculate
|
|
Suitable
for
|
Small
businesses
|
Big
businesses
|
|
Technical
knowledge
|
Not
required
|
Required
|
|
Legal
position
|
No
|
Yes.
Recognized by the Companies Act, 2015
|
|
Acceptability
|
No. Because
it does not reveal the correct profit or loss
|
Yes. Because it reveals Correct profit or loss
and financial position at the end of Financial year.
|
Simple understanding of Difference between Cash Accounting
and Accrual Accounting
Example:
·
Mr
Venkat commenced a Business on 01.03.2021 with a capital of Rs. 55,000.
·
He
purchased the Goods worth of Rs. 50,000 by paying Cash and sold all the goods
at an amount of Rs. 60,000 on Credit basis.
·
Business
expenses during the month of March, 2021 are Rs. 2000. (By cash)
·
Accounts are closing at 31st March.
·
Calculate Profit
for the year 2020-21 as per Cash Accounting and Accrual Accounting
|
|
Cash Basis
|
Accrual Basis
|
|
Transaction
|
Cash Book
|
Expenditure
|
Income
|
Liabilities
|
Assets
|
|
Brought Capital into Business
|
+55000
|
|
|
Capital 55000
+ Profit 8000 = 63000
|
|
|
Cash Purchases
|
-50000
|
50000
|
|
|
|
|
Credit Sales
|
-
|
|
60000
|
|
Sundry Debtors 60000
|
|
Expenses (paid by cash)
|
-2000
|
2000
|
|
|
|
|
Closing Balance of Cash/ Surplus
|
3000
|
|
|
|
Cash - 3000
|
|
Profit
|
|
8000
|
|
|
|
|
|
Total
|
60000
|
60000
|
63000
|
63000
|
For Accounting year 2020-21
|
SN
|
Transaction
example
|
Cash Accounting
|
Accrual Accounting
|
|
1
|
Recd. Rs. 5000 as Income
of the 2021-22 year
(i.e., Recd Income in advance i.e.,
2020-21. Example - Advance
Reservation)
|
Recorded Rs. 5000 as current
Year (2020-21) Income in Profit &
Loss A/c
|
1. Recorded Rs. 5000 as Sundry Creditors On Liabilities side of Balance Sheet
Of 2020-21
2. Recorded Rs. 5000 as Income in the year 2021-22 Profit &
Loss Account duly deducting earlier
year Liabilities
|
|
2
|
Outstanding Contractor's payments Rs. One Lakh
for year 2020-21
|
No Recording of Rs. One Lakh in the current year 2020-21 as
Expenditure in Profit & Loss A/c. (Because there is no cash outgo)
|
Recording of Rs. One Lakh in the
current year 2020-21 as Expenditure in Profit & Loss A/c. (Because
expenditure is incurred, though no cash outgo)
|
Accrual Accounting Salient features:
·
Follows Accounting year concept.
·
All
revenues and payments are taken into account whether the same are realized or
paid is immaterial.
·
Excludes payments paid in advance and revenues
recd in advance.
·
Includes
all expenses pertaining to the current year irrespective of the same paid or
not.
·
Records
all income accrued, though realized in the same year or not
·
Converting Financial Statements into Accrual
Accounting format from 2014-15 onwards
·
Profit & Loss Account -
change as - Statement of Income & Expenditure
·
Balance
Sheet - change as - Statement of Financial Position
·
Preparing
FAR - Fixed Asset Register, which is
base for Opening figures for Statement of Financial Position (earlier called as
Balance Sheet)
·
Straight
line method of Depreciation recommended
·
Segregating
CWIP - Capital Works in Progress from Finished works.
·
No
depreciation for CWIP
·
Take
into account the all outstanding bills to Contractors and suppliers (like in
March salaries under DP - Demands Payable) in current year itself and shown
them as Liabilities in Statement of Financial Position.
·
Advance
Incomes such as Reservations to be deduct from Earnings and shown as Liability
in Statement of Financial Position.
·
Introduced
Cash Flow Statement
·
Task
given to ICAI - ARF - Institute of Chartered Accountants of India-Accounting
Research Foundation
·
Two
Pilot projects - NWR and RCF/Kapurthala
·
Changes
in allocations required.
·
At
present, there is no Primary Unit for Depreciation. Once Accrual Accounting implemented, a separate
Primary Unit is required for Depreciation in Finance Code Volume Two
·
Change
in the Software i.e., in IPAS - Integrated Payroll & Accounting System
·
Approvals
from Government and CAG
2. Outcome Budget
|
Conversion
of Financial Outlays into Physical Outcomes
|
|
Check the Table (end of the article) for
clear examples of the conversion
|
Backdrop:
●
The existing
budget system, although involves proper checks and validations at various
levels relies heavily on expenditure figures of previous years which are then
incremented as per the revised requirements in the next year.
●
The present system
consists of comparison of expenditure incurred viz-a-viz budget
estimates/allotment without estimating the final outcome expected to be
achieved.
●
The Performance
Budget was introduced in the year 1969 following the recommendations of the ARC
- Administrative Reforms Commission.
●
For long, a need was felt to address certain weaknesses
in the performance budgeting system, such as lack of a clear relationship
between the financial and performance budgets and inadequate target setting for
the ensuing year.
●
To obviate the
above lacunae, the Outcome Budget was introduced in the year 2005-06 in the
Ministry of Finance.
In Indian Railways:
●
Implemented from
2006-07 onwards in Indian Railways and other ministries.
●
Applicable for all
works of Rs. 5 Crores and above
●
Simply Outcome
Budget means “Converting
Financial Outlays into Physical Outcomes”
●
Mechanism of
“Checks & Balances”
●
It is a Progress
Card on what Railways have done with the amount assigned in the previous annual
Budget.
What is:
●
Measures estimated
outcomes of all Govt projects and checks whether money has been spent for the
purpose it was sanctioned or not.
Method:
●
It is an evolving & dynamic process
●
The actual
physical performance of the Previous Year, Current Year & targeted performance
during the Next Year is analysed.
●
Achieved by
defining Intermediate & Final Outcomes, Standardising Unit Costs, Capacity
building for needed efficiency, ensuring regularisation & adequate flow of
funds.
●
Reviewing every 3
months, benchmarking, effective monitoring & evaluation, identifying areas
where funds to be reallocated.
Advantages:
1. Outcome of the Projects - Not only in monetary terms, but also
physical outcomes
2. Helps Management to control expenses & introduce discipline in
expenditure.
3. Govt projects become more result oriented
4. Reduce costs by identifying Projects that do not contribute enough
outcomes.
5. Fixing the accountability.
Examples:
|
SN
|
Activity
|
Financial Outlay
|
Physical Outcome
|
|
1
|
Earthing of signals to reduce the incidences of
failure due to frequent lightning (in nos.)
|
Rs. 30 Laksh
|
1. Substantially reduced rate of signal failure in the
section from X to X-A
2. Enhanced
throughput of section in terms of GTKM and NTKM of freight trains,
3. Increased coach kilometres / Passenger kilometres
for passenger(PKM) trains
4. Saving monetized in Rs …lacs per month
|
|
2
|
Fitment of fuel efficiency kit in diesel locomotives
(in nos.)
|
45 lacs per kit
|
1. Improved specific fuel consumption from F to F- A
2. Saving of
HSD oil in liters per month
3. Saving
monetized in Rs …lacs per month
|
|
3
|
Development of Goods shed with state of the art
facilities
|
Rs. 50 lacs
|
1. Reduced detention of rake from X to X-A
2. Enhanced
loading in tons
3. Freight
revenue expected to be increased by Rs…. lacs per month
|
|
4
|
Road Over Bridge (ROB)/ Road Under Bridge (RUB) -
Removal of LC gates
|
Rs. 200 lacs
|
1. Elimination of accident at LC gates.
2. Increase in
maximum train speed.
3. Reduction in
train detention.
4. Increase
throughput.
5. Increased
GTKM,NTKM &CKM andEnhanced Traffic Earnings
6. Revenue
expected to be increased by Rs ….lacs per month
|
*****
3. Performance Costing
·
The benefits of Accrual Accounting would accrue
to the system by identifying appropriate cost and profit centres and allocating
costs to them.
·
Establishment of Cost centers, Revenue Centers, Profit
centers and Investment centers
·
A system of
control by delegating and locating responsibility for costs as well as revenues
i.e., fixation of responsibility on Individuals( Sr.DEE, Sr.DCM etc),
Departments (Mech dept. ,Comml. Dept etc).
·
World Bank Team in
1970 year emphasized the need to fully develop a system of Responsibility
Accounting on Railways.
·
The Railway
Convention Committee 1971 commented on the Accounting and
Budgetary exercise as a routine and dogmatic exercise undertaken and produced
by the bureaucratic elite.
·
Consequently,
the revised accounting Classification came into force w.e.f
01-04-1979 which
provides synchronization of Accounting and Budgetary exercises.
Salient Features:
·
Emphasis
division of an Organisation like Indian Railways among different Sub-Units like
Sr.DEE or Accounts dept etc in such a way that each Sub-Unit is the
responsibility of a Manager.
·
Cause and
effect relationship between the Manager’s decisions and actions.
·
Manager should
be held responsible for those activities directly falling under his/her
control.
Pre-Requisites:
·
The area of
responsibility and authority of each centre should be well defined.
·
Each
responsibility Centre should have clear set of Goal for the Manager.
·
The Manager
should participate in establishing such Goals that are going to be achieved.
·
Only the Revenues,
Expenses, Profits and investments that are controllable by the Manager should
be included in the performance report of the Centre.
·
Performance
Report for each Responsibility centre should be prepared highlighting
variances, the items requiring attention of the Manager.
·
In the
Performance Report of Responsibility centre, the Expenses, Revenues and
Investments controlled by the Manager should only fine place.
- Source documents like CO
7, JV and Money Receipt are to coded with specific unit as well as
activity so that cost of each unit and activity can be captured for IPAS
data.
Responsibility Centres
- Four Segments
I.
Cost Centre:
Examples: Electrical Dept/Accounts
Dept/Sr.DEE/Sr.DME/Sr.DFM etc. Efforts are now on hand to identify small
units such as IOW/Signal Inspector/PWI etc. as suggested by the Committee for
identification of Cost Centres and profit Centres by Sri Hassan Iqbal.
·
Is a smaller
segment of area of responsibility for which costs can be accumulated. But
Controllable costs only be selected for this purpose.
II.
Revenue Centre:
Examples: Commercial Dept or
Sr.DCM of a Division.
·
Responsible for generating revenue.
III.
Investment Centre:
Examples: Projects like Doubling, New
Line etc or CAO/CN, Sr.DEN etc.
·
A segment of activity for area held responsible for
both Profit and Investments.
·
The Objective
of Investment Centre is to maximize the Rate of Return on Investment. The
present Rate of Return is 10 %.
IV.
Profit Centre:
Examples: Zonal Railways such as
South Central Railway, Western Rly.etc.
·
An area of
responsibility whereon the expenses and revenue pertaining to a particular
Profit centre i.e., zonal Railway are accumulated; So far zonal Railways
are considering as a Profit Centre.(Profit and Loss Account and Balance sheet
are prepared)
·
Efforts are on the way to propose Divisions such as
Secunderabad Division, vijayawada Division etc as Profit Centres as recommended by the
Committee of Sri Hasan Iqbal.
·
A Pilot project
is being implementing the Sri Hasan Iqbal committee’s recommendation of
Division as profit Centre in Vadodara Division in Western Railway with the help of Railway Staff College, Vadodara.
·
To make
Division as Profit Centre, it is necessary to introduce the Divisionalisation
of Apportionment of Earnings with due weightage or originating earnings
/terminating//transshipping Divisions as an inducement for adopting aggressive
marketing strategies.
*****
