DOUBLE ACCOUNT SYSTEM

INTRODUCTION: Public utility undertakings supplying or controlling electricity, gas, water, power, railways, etc., which operate under special acts of parliament enjoy monopolistic rights in their business of rendering service to the community. These undertakings require huge amount of fixed or long term capital and most of it raised by public issue of shares and debentures. This makes them responsible to provide information to the public on what amount of fixed capital has been raised by them from the public. For that, the public utility undertakings split their balance sheet in to two parts viz., i. receipts and expenditure on capital account disclosing the amount of fixed capital raised from the public and the manner in which the fixed capital has been invested on fixed assets, and ii. the general balance sheet disclosing the other liabilities and assets

This system of representing balance sheet in two parts is called double accounting system. In other words, its an alternative system of presenting final accounts. It was originally adopted in England. SPECIAL FEATURES OF DOUBLE ACCOUNTING SYSTEM: The following are the special features of the double accounting system: (i) (ii) (iii) It is not a system of maintaining accounts, but only a system of presenting the final accounts. It is generally adopted by public utility concerns formed under special acts of parliament. As indicated earlier, under this system, the balance sheet is bifurcated in to two parts viz., (i) receipts and expenditure on capital a/c and (ii) general balance sheet.

(iv)

The main purpose of the system is not to reveal the financial position of the public utility concern as on the last date of the accounting year, but to reveal the fixed capital raised from the public and the manner in which the fixed capital has been utilized in the acquisition of the fixed assets.

(v)

Under this system, the account prepared for disclosing the expenses and incomes of a public utility concern is called revenue account and not profit and loss account.

(vi) (vii)

The account created for disclosing the appropriations of profit is called net revenue account and not profit and loss appropriation a/c Under this system, interest on debentures and loans is shown on the debit side of the net revenue account as an appropriation. Similarly, received/receivable is also shown on the credit side of the net revenue a/c

(viii)

Under this system, the fixed assets are shown in the capital account at cost but not at depreciated value. The depreciation on fixed assets is, usually, debited to revenue account and credited to and credited to depreciation reserve or fund account which appears in the general balance sheet.

(ix)

Discount and premium on issue of shares and debentures are permanently retained as capital items. The discount on issue of shares and debentures is not shown separately in the capital account. Instead, it is deducted from the proceeds of issue of shares and debentures and only net proceeds after such deduction is shown in the capital account.

(x) (xi) (xii)

Loans and debentures are treated as capital and shown in the capital account. General reserve, investment fluctuation reserve, and other reserves are shown in the general balance sheet on the liabilities side. Renewals are provided out of the current revenue.

Double account system Vs Double Entry system The double account system is entirely different from the double entry system. The double entry system is a system of maintaining records in the books of accounts, whereas the double accounting system is a system of presenting the final accounts of the public

utility concerns. However they go together as the double account system is maintained under the double entry system. Double Account System Vs single account system The main differences between the single and double account system can be summarized as follows: Single account system 1. it is usually maintained by non-public utility undertakings 2. the financial affairs of a concern are shown through a single balance sheet 3. the main object of preparing the balance sheet is to show the financial position of the concern the profit earned during the year 5. A profit & loss appropriation a/c is prepared to indicate the various appropriations of profits. 6. Interest paid/payable and interest received/accrued are shown in the profit and loss a/c. 7. Fixed assets are shown at depreciated value. 8.discount on issue of shares and debentures is shown separately in the balance sheet under the head, miscellaneous expenses and losses 6. Interest paid/payable and interest received/accrued are shown in the net revenue a/c 7. Fixed assets are shown at original cost in capital a/c and depreciation fund is on the liabilities side of general balance sheet. 8. discount on issues of shares and debentures is subtracted from the share or debenture capital in the capital account. Double account t system 1. it is generally maintained in public utility undertakings 2. the financial affairs of a concern are shown through two statements viz., (i) capital a/c and general balance sheet 3. the main object of preparing two statements is to show how capital is raised and how it is invested in final assets current years profit. 5. a net revenue a/c is prepared to disclose the appropriations of profits.

4. a profit & loss a/c is prepares to calculate 4. A revenue a/c is prepared to ascertain the

9. When an old fixed asset is replaced by a new fixed asset, the fixed asset is completely written off in the books.

9. When an old fixed asset is replaced by a new fixed asset, the original cost of the old asset continues exist in the books even after replacement.

Advantages of double account system The important advantages of double account system are as follows: (i) (ii) The presentation of accounts in the prescribed form enables the state to that the undertaking is rendering efficient service at reasonable cost. The capital account readily discloses the sources of funds and the manner in which they are utilized thereby enabling an outsider to know whether the concern is over-capitalized or under-capitalized. (iii) As depreciation fund is compulsory under double account system, it helps the undertaking to replace any fixed asset without any depletion of the cash resources of the company. (iv) (v) The segregation of income statement in to revenue account and net revenue account ensures the ascertainment of pure operational results of the concern. The publication of accounts in prescribed form enables the undertakings to complete many statistical returns reflecting the services rendered to the public. Disadvantages of double account system: The chief limitations of double account system are as follows: (i) (ii) The revenue account fails to exhibit the true and fair view of the result of the business as interest paid or received is not shown in the revenue account. The balance sheet also fails to exhibit the true and fair view of the position of the company on a particular as the assets are shown in the capital account at cost price and depreciation is credit to the depreciation fund whish appears as a liability in the general balance sheet.

(iii)

Moreover, some of the assets of short duration are taken to account and are continued to be shown at cost price even after they have been reduced to scrap value.

(iv) (v)

Calculations regarding how much to be charged to revenue a/c towards replacement of assets, is confusing and not easily understandable. The system cannot be understood by the general public easily.

Final Accounts under Double Accounts system: From the above discussion, it is clear that the final accounts prepares under the double account system consist of: (i) (ii) (iii) (iv) (i) A revenue a/c A Net revenue a/c A capital a/c i.e., Receipts and expenditures on capital a/c, A General balance sheet.

revenue a/c: It is in the nature of profit and loss a/c. all the expenses are shown on the debit side of this account and all the incomes are shown on the credit side of this account. The balance found in this account represents either profit or loss which will be transferred to Net revenue a/c.

(ii)

Net revenue a/c: It is similar to ordinary profit and loss appropriation a/c. this account starts with the balance of the Net revenue a/c brought forward from the previous year. The balance disclosed by the revenue a/c of the current year is shown in this account. All interests paid are entered on the debit side and all interests received are entered on the credit side of this account. In the case of railway companies, even the rent paid on leased lines and rent charges and chief rent (i.e., rent paid on leasehold properties) are entered on the debit side of this account. All appropriations of profits such as transfer to any reserve, income

tax on profits, interim dividends and final dividend are entered on the debit side. Government subsidy (i.e., Govt. grant) and not government loan, is entered on the debit side. The balance of this account is transferred to the general balance sheet. (iii) Capital A/c (or) Receipts and Expenditure A/c on capital A/c: This account is mainly prepared to show as to how much fixed or long term capital has been raised by a public utility concern and how it has been utilized. The account is usually prepared on a three columnar form on either side. On the left side is recorded the capital expenditure and on the right side capital receipts. The first column is meant for recording the receipts or expenditure, as the case may be, of the items pertaining to the previous financial year. In the second column items relating to the current financial year are recorded and the last column is meant for the total of the first two columns. The balance of the account is carried down and shown as a separate item in the General balance sheet. In case of electricity supply companies, the total capital receipts and the total capital expenditure are shown in the General balance sheet. If the total of credit side of capital account is more than the total of the debit side, balance is transferred to the liabilities of the General balance sheet; and when total of debit side of this account is more than total of credit side, the balance is transferred to the assets side of the general balance sheet. (iv) General Balance Sheet: In the general balance sheet, the balance of the capital account, the current assets and liabilities are recorded. As usual on the left side various funds created and other current liabilities are recorded such as depreciation fund general fund, sinking fund, investment fluctuation funds creditors etc. on the right side, the current and floating assets and other debit balances are recorded.