CORPORATE ACCOUNTING ASSIGNMENT

DOUBLE ENTRY SYSTEM

Meaning:
The Double Account System is a method of presenting the annual final accounts/annual financial
statements of public utility undertakings, like Railways, Electricity, Gas, Water Supply, Tramways
etc.
These undertakings are usually incorporated under Special Acts and, as a result, the form of
accounts is prescribed by, special statute.
These public utility undertakings are generally run by Government or by local authorities (except
Electric Supply Companies and Tramways).It should be remembered that accounts of Industrial
undertakings, other than Railways and Electric Supply, are prepared as per Indian Companies Act,
1956. The object of this system is not to show the financial position at a particular date but to
disclose how the capital is being raised and the application of the same, in the acquisition of
different fixed assets. For this purpose two-chamber Balance Sheet is prepared—the first part
being Receipts and Expenditure on Capital Account and the second part being the General
Balance Sheet.

Main Features of Double Account System:

1. The ordinary balance sheet is split up in two parts. One part contains fixed assets and fixed
liabilities. It is called “Receipt and Expenditure on Capital Account.” On each side there are three
columns for amount—one column to show figures up to the beginning of the year, the second
column to show expenditure (assets) or receipts (liabilities) during the year and the third column
to show total. The other part (called General Balance Sheet) contains other assets and liabilities
and the balance of the Receipts and Expenditure on Capital Account. In case of electricity
companies, however, the total of the expenditure as per Capital Account is shown on the assets
side and the total of receipts is shown on the liabilities side.
2. A Revenue Account is prepared which is like the ordinary’ Profit and Loss Account. Also, a Net
Revenue Account is prepared which is like the ordinary Profit and Loss Appropriation Account.

3. Generally, a public utility undertaking needs a large amount of capital which is invested in the
acquisition of fixed assets. Therefore, fixed assets, fixed liabilities and current assets, current
liabilities are to be separately dealt with. Fixed Assets and fixed or long-term liabilities are
recorded in Receipts and Expenditure on Capital Account. Similarly, current assets and current
liabilities are recorded in the General Balance Sheet. c) Normally, no adjustment of asset is made
in the Capital Account.

4.Depreciation is not deducted from the asset concerned but the same is shown as a liability by
way of a fund. And, as such, fixed assets are recorded at book value

5. Any kind of funds and reserve — e.g., Sinking Fund, Depreciation Fund, General Reserve,
Capital Reserve, the Balance of Revenue/Net Revenue Account — are shown in the liabilities side
of the General Balance Sheet.

6. Discount and Premiums are permanently treated as capital items.

7. Loan capital (debentures) Shares and Stocks are treated as capital items.

8.Interest on Loan and Debentures (i.e., all fixed interests) are to be charged against Net Revenue
Account.

The exceptions are as follows:—

(a)Interest in all cases is debited or credited to Net Revenue Account and not to Revenue Account.
In cases of Railways, rent on leased land, etc., is also debited to Net Revenue Account.
(b)Depreciation is debited to Revenue Account and credited to Depreciation Reserve.
Depreciation Reserve appears on the liability side of the General Balance Sheet.
The advantages of Double Account System are:

(a) As Depreciation fund is compulsorily created and invested in outside securities, it helps to
replace an asset without affecting the liquid resources, viz., Cash, of the concern.

(b) Revenue account represents the operating activities which expresses the operating result of
the undertaking while extraneous items are recorded on Net Revenue Account which expresses
the real operational result.

(c) The capital account helps us to understand the source of capital in various forms and the
application of same in the form of various fixed assets. Thus, it can easily be followed by an
ordinary person.

(d) Since these concerns enjoy almost monopoly rights given by the Govt., the Govt, may
understand whether the concern supplies the efficient service at reasonable cost or not after
analysing its prescribed format of accounting.

(e) The undertakings may compile at ease various statistical returns which reflect the service
given to the public since the accounts are published in a standardised form.

Disadvantages of Double Account System:

(a) Capital Account incorporates the value of an asset whose life is very short. Those assets
appear in the account at their scrap value—although these are shown at a higher value.

(b) Since all Assets are recorded at cost and not the written-down value, the Balance Sheet does
not exhibit a real position.
(c) Capital account includes the items like preliminary expenses which are also considered in
Single Account System.

(d) It is not always possible to understand the accounting statements and forms by the ordinary
people.

(e) In order to replace an asset for improved means it may not always be possible to determine
exactly the amount of revenue expenditure items which should be charged.

(f) Since repairs and renewal expenditures are charged to revenue account of the same year,
profit of the undertaking, particularly on that year when no expenditures on repairs and renewals
are incurred, is affected. That is why, in order to overcome this difficulty, some undertakings may
even open a separate account viz., Repair and Renewal Reserve.

(g) Proper distinctions between revenue expenditure and capital expenditure is not possible
under this system.

Accounts of Electricity Companies

1. Depreciation:
Every fixed asset must be depreciated; and for the purpose of depreciation, the life of each asset
is to be taken as stated in the table given in the Seventh Schedule. As regards the depreciation
method that can be applied, the Act makes provision for only two, viz., (a) Compound Interest or
Sinking Fund Method, and (b) Straight Line Method.

2. Contingency Reserve:
Every electricity company is required to maintain a contingencies reserve. Reserve is created by
transferring from the Revenue Account every year an amount equivalent to not less than 1/4 per
cent and not more than 1/2 per cent of the original cost of the fixed assets until it equals 5 per
cent of the original cost of the fixed assets.
3. Development Reserve:
The reserve is created by transfer of an amount equivalent to income-tax and super-tax
(calculated at current rates) saved on account of development rebate allowed by the income-tax
authorities. If in any accounting year the clear profit excluding the special appropriations
together with the accumulations, if any, in the Tariffs and Development Control Reserve fall short
of reasonable return, the appropriations to this reserve can be reduced by the amount of
shortfall.

4. General Reserve:
Section 67 of the Act provides for the creation of a General Reserve. An annual contribution at a
rate not exceeding ½% of the original cost of the fixed asset can be made after providing for
interest and depreciation. This Reserve can be created until the total of such Reserve exceeds 8
per cent of the original cost of the assets.

5. Tariffs and Dividend Control Reserve:

The reserve is created out of profits in excess of the reasonable return earned by an electricity
undertaking. This can be utilised whenever the clear profit is less than the reasonable return. The
balance in the reserve should be handed over to the purchaser in case the business is sold away.

6. Remuneration:
The remuneration given to Managing Agents is, in the first place, a percentage of net profits. This
percentage cannot exceed 10% of the first Rs 5 lacs of such net profits and 7% of all net profits in
excess of Rs 5 lacs. In the second place, the amount paid to Managing Agents is subject to a
minimum payment which should not exceed Rs 2 p.a. for each Rs 1,000 of paid up share and
debenture capital.

7. Reasonable Return:
The Electricity (Supply) Act, 1948, imposes restrictions on electricity undertakings on earning too
high a profit, by means of the concept of reasonable return, which stipulates the following:
1. A yield at the standard rate which is the Bank Rate stipulated by the Reserve Bank of India from
time to time, plus 2% on the Capital Base.

Replacement of an Asset:

Ordinarily, the amount standing in books against an asset is written off when the asset is replaced
by another. The amount spent on the new asset is capitalised. Under the Double Account System,
however, the practice is different. Firstly, the account of the asset which is replaced is not
affected at all. An appropriate amount out of the new expenditure is charged to revenue or
written off and the balance is capitalised. Secondly, the amount to be written off is the amount
which would have been spent had the asset been acquired now.
Suppose, a railway station built in 1980 at a cost of Rs 15,00,000 is replaced, in 2012, by a new
station costing Rs 80,00,000. Suppose further that between 1980 and 2012, prices of materials
have risen to 700%, that labour rates have trebled and that the proportion of materials and
labour in the old station is 4: 6.

The entries to be made are as follows:—

1. Debit Replacement Account with the amount to be written off; Debit Works Account (new)
with the amount to be capitalised; and Credit Bank with the amount actually spent.

2. If any old materials have been used in the new construction:

Debit Works Account
Credit Replacement Account.

3. If any old materials have been sold:

Debit Bank
Credit Replacement Account.

The logic behind the treatment outlined above is firstly, that additional amount should be
capitalised only if there is additional capacity and, secondly, that when an old asset is replaced,
the amount lost is the asset’s present value rather than its historical cost