Sample Material of Public Administration Study Kit (Paper - I)
Financial Administration: Accounts and audit
Accounts
Francis Oakey defines the term as “Accounting is the science of producing promptly and presetting clearly the facts relating to financial conditions and operations that are required as a basis of management.” In the words of L. D. White “The primary functions of a system of accounts are to make a financial record) to ‘protect those handling funds to reveal the financial condition of the organisation in all its branches or purposes at any time to facilitate necessary adjustments in rate of expenditure, to give information to those in responsible positions on the basis of which plans for future financial and operating programmes can rest, and to aid in the marking of an audit.”
Accounting means maintaining a proper record of the finances of the organisation. Maintenance of accounts is the function of the spending authorities or the executive. Proper maintenance of accounts also show the legal use of funds, and on the basis of Account report, the spending officers justify expenditure to the superiors. Through a proper system of accounting wrongful use of funds can be prevented. Accounting has to ensure that funds have been legally used for the purpose for which the Parliament sanctioned it. Accounts should furnish data regarding the financial operations and should also secure fidelity on the part of spending authorities. The spending authorities should produce receipts or vouchers concerning every penny which they spend.
Thus, Accounting has a dual function to perform:
First is the determination of the fidelity of all officers who handle the fund.
Second is the furnishing of information needed regarding financial condition and operation of policy-determination and administrative purposes.
Types of Accounting System
The important systems of accounting followed at present are:
1. Double-entry Book-keeping: It is the system of accounting in which every item of expenditure is entered at two places. One entry remains with the operating service while another is sent to the Accounts Office if there is a separate department of the Government or to the controlling officer of the same service.
2. Cost Accounting: It is the determination of inclusive costs per unit. It may be applied in production, e.g., the unit cost of commodity manufactured in a government factory. This system is mostly made use of in the Public Works Department because this Department had a reputation for extravagance.
By this system costs may be compared in a single institution or a single operation over successive periods of time and the comparative costs of similar operations in different agencies or in different jurisdictions may be determined.
3. Cash System: The cash system of accounts records transaction only when cash has been actually received or disbursed, while the accrual system records transactions at the time of commitment is made. Thus cash system disregards all operations of the actual type and seeks to record only those operations in which an actual transfer of cash has taken place. It gives us no information regarding the accrual of assets and liabilities but gives data regarding liquidation alone. Government mostly make use of the cash accounting system because it is simple.
4. Accrual Accounting System: It is that system of accounting by which the right to a receipt, or the obligation to make a payment, is established or is technically called, accrues. Under this system appropriate entry is made in the account books of all actions having for their result an undertaking with the right to an asset or placing it under an obligation to pay. This system is followed in France.