Municipal Accounting System 1.

Cash based accounting

Traditionally, accounting of transactions in municipalities is done on single entry cash basis of accounting. Under this system, receipts and payments are recorded after they are actually received or paid out in cash. All receipts and payments are classified into various heads of account and net closing balance at the year-end is arrived. performance or financial status. Nothing is mentioned about the financial

Advantages of the system Easy to maintain Classification of heads of account are similar for receipts as well as payments Disadvantages of the system Only amounts received are reflected in the accounts; and receivables not reflected Amounts actually paid are reflected; and payables not reflected Amounts received or paid may relate to the current year, or previous years or future years Actual current year performance not reflected Accounts do not reflect assets and liabilities, ie., balance sheet

Municipal functional domain is radically changing from infrastructure provision to regulatory and then commercialisation. The 74th Constitution Amendment Act has enhanced the functional domain and even made the municipality to prepare plans for economic development and social justice. Further, heavy cost of infrastructure made the municipality to go for commercial borrowing/capital market. These factors necessitate that the accounting This paper was submitted for eWORLDFORUM 2011 conference Page 1

system be converted to facilitate determination of financial performance as well as assessment of financial status

2.

Accrual based accounting

Determination of financial performance as well as assessment of financial status can be accomplished through accrual based accounting system. Accrual based accounting system 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 services, fulfillment of contracts, diminution in values 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. Two important financial

statements for the purposes noted against each will be ascertained.

Statement Income & Expenditure Account

Purpose To determine financial performance of municipality

Balance Sheet, ie. Statement of To assess financial status of Assets & Liabilities municipality

The advantages under accrual system are: Income and Expenditure Account prepared It includes all incomes received or receivable; and all expenses paid or payable

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Income and Expenditure Account is confined to the year of accounting only and it will not include the items of income and expenditure relating to past or future years

Receivables and payables are reflected in the accounts to enable effective monitoring

The system shall, necessarily, have the Balance Sheet to indicate the financial status at the end of an accounting period

An accepted form of accounting for credit rating institutions for the purpose of credit rating of the municipality

3.

National Municipal Account Manual (NMAM)

In the year, 2001, the Honble Supreme Court of India directed that all Urban Local Bodies (ULBs) in India should take immediate steps to get their accounts converted from cash basis to accrual basis.

Further, on the recommendations of the Eleventh Finance Commission, Government of India (GoI) issued guidelines to Comptroller and Auditor General of India (CAG) to prescribe formats for preparation of budgets and accounts by local bodies amenable to computerization. During review on the progress of implementing the formats prescribed by CAG, it has been suggested by GoI that CAG may develop National Municipal Account Manual (NMAM)

Accordingly, CAG has developed NMAM and in December, 2004, it was forwarded to State Governments for developing State specific Accounts and Budget Manuals on the lines of NMAM and for adoption in the ULBs

4.

State specific Municipal Accounts Manuals

Some States have developed state-specific municipal accounting manuals and Andhra Pradesh is one such State. This paper was submitted for eWORLDFORUM 2011 conference Page 3

Government of Andhra Pradesh (GoAP) has decided to introduce reforms in accounting and budgeting in all ULBs and requested the Centre for Good Governance (CGG), Hyderabad to develop State specific Accounts and Budget Manual, keeping NMAM guidelines in view.

The CGG has developed (1) Andhra Pradesh Municipal Accounts Manual, (2) Andhra Pradesh Municipal Budget Manual, (3) Andhra Pradesh Municipal Audit Manual and (4) Andhra Pradesh Municipal Asset Management Manual. The manuals have been approved by GoAP and were published in February, 2008.

GoAP Policy Decision

In May, 2002, GoAP has taken a policy decision that the ULBs in the State would adopt accrual based double entry accounting system within their jurisdiction with immediate effect. Due to various administrative and other reasons, the implementation was partial.

Accrual based accounting in municipalities

is

a mandatory reform under

Jawaharlal Nehru National Urban Renewal Mission (JNNURM), a GoI project which addresses various issues of urbanization including implementation of

reform measures that aimed at improving urban local governance and infrastructure service delivery.

The XIII Finance Commission has categorized the grants to local bodies as (a) general grants and (b) performance grants. The release of performance grants is contingent to fulfillment of certain stipulated conditions. One such condition is implementation of double entry accrual based accounting system in all ULBs.

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In view of the above, GoAP recently in GO Rt. No. 287 MA dated 21-2-2011 ordered that accrual based accounting system be implemented in all ULBs of the State from 1-4-2011 and set up a live real time web based online accounting system in all ULBs

Though the system is in implementation in certain ULBs like Hyderabad, Vijayawada and Visakhapatnam, a policy decision has been taken by GoAP to introduce the new system earnestly in all ULBs of the State. Another important part of the decision is to introduce the accounting software developed by CGG. It was decided by the Government that ULBs would start the data entry into CGG software from day one of the reform implementation. A group of Chartered Accountant firms have been identified to support various ULBs in the implementation programme.

6.

Centre for Good Governance

includes accounting software. The accounting

Besides developing the manuals, CGG developed Municipal eGovernance. It is a web based software and

software has been developed on the lines of NMAM and is simple in operation. Any municipal employee who has exposure to computers can enter various transactions in the system. He need not have any knowledge of double entry accounting or accrual based accounting. With very little training, the system can be operated and the ULB can generate the financial statements at the end of the year.

CGG has also developed training module under accrual based accounting system and supports the Government in training municipal employees of various levels and background.

7.

Plan of Action
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The municipal accounting reform covers two aspects a) Migration of accounting system from single entry cash based to double entry accrual based b) Conversion from manual system to computer system

To deal with such a reform oriented programme, few basic requirements have to be considered. a) Mayor/Chairperson and if necessary, members of the local body have to be sensitized about the reform and its advantages in the changed market scenario. Unless there is political support, no programme in a municipality would sustain b) Commissioner is a key authority in municipal administrative set up. He should understand the basic concepts of the new accounting system. Commissioner and other senior officers in ULB need be suitably sensitized c) Key employees in accounts preparation have to be identified and thoroughly trained in the new system d) Since accounts are prepared through software, the employees should be trained in the basics of computers

In addition to the above, it is also necessary to take up the following measures to introduce accounting reforms.

1. Legal backing to the system: Currently, Municipal Acts provide that annual accounts of the municipality have to be prepared on the basis of receipts and payments. If new system has to be This paper was submitted for eWORLDFORUM 2011 conference Page 6

introduced, the Municipal Acts should be amended to enable preparation of financial statements on the basis of income & expenditure and assets & liabilities.

2. Issue of Accounting Rules Under NMAM, various forms and registers have been prescribed for municipal accounting on the basis of income, expenditure, liability and asset. The accounting procedure is also different from the existing system. It is therefore necessary that detailed procedure in the form of rules have to be issued by Government.

3. Notifying effective date for implementing the rules Legally, it is necessary to prescribe a date for implementing the provisions of the Act as well as of the Rules. If Government decides not to implement the reform in one go due to administrative constraints, it may stagger the implementation. In such case, it has to identify various municipalities and their implementation periods.

4. Capacity Building and Training Training is a key component of capacity building. Since it is new system and involve computer based application, municipal employees need theoretical and practical training in new accounting system. All employees in general, and employees involved in accounts preparation in particular should be trained.

5. Engaging Consultants in Accounts and Computers It is necessary to engage consultants in accounts and data entry operators to assist municipalities in implementing new accounting system. The consultants besides preparing accounts initially would simultaneously train the municipal employees in preparing the accounts. This arrangement would last for a couple This paper was submitted for eWORLDFORUM 2011 conference Page 7

of years only and thereafter, municipalities would own the responsibility and prepare accounts on their own. The consultants may be for each municipality or a group of municipalities.

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