Posted By:Abhijit Ganesh Kulkarni
I had indicated the dimensions to gauge the performance of local government/ municipal bodies in my previous blog - â€œSmart Citiesâ€¦Lets Exploreâ€. One of the dimensions which were mentioned was â€œGovernanceâ€. Quality of governance is driven my several parameters. One such parameter driving quality of governance is the improvement of accounting and financial management systems used by municipal bodies.
Municipalities across India used to follow single-entry cash based accounting system. In cash based accounting, transactions are recorded only on receipt or payment of cash (for income and expenditure respectively) and not when such income or expenses are accrued by the municipality. As a result, a true and fair analysis of the activities of the municipality is not possible as income accrued (but not received) or expenditure incurred (but not paid), are not reflected in the financial statements of the municipality. Hence, Comptroller and Auditor Generalâ€™s Task Force on Accounting Reforms for Urban Local Bodies and the National Municipal Accounts Manual (NMAM) released by the Ministry of Urban Development, Government of India, recommended the use of double entry accrual based accounting system for municipalities.
Accrual system of accounting means a method of recording financial transactions based on accrual, i.e., on occurrence of claims or obligations with respect to incomes or expenditures. Actual receipt or payment of money may not have taken place when the accounting entries were made. The accrual basis of accounting helps in determining income and expenditure for the municipal body correctly. It captures the total cost of servicing and helps in identifying financial viability of rendering the services. Adoption of accrual based accounting facilitates appraisal by the financial institutions. It also facilitates credit rating by Credit Rating Agencies, which is a pre-requisite for mobilizing funds in the financial markets through debt instruments.
Municipalities can make effective use of Information Technology (IT) to implement the NMAM recommendations and realize the benefits mentioned earlier. Integrated accounting software will generate accounting entries for all the financial transactions occurring in the organization. The software will ensure that there is no â€œone leggedâ€ accounting entry done in the system. The software will also ensure that the events resulting in accrual of income or expenditure triggers the respective accounting entries. Adoption of IT by municipal bodies will result in accurate accounting of receipts and expenditure. Also, this will lead to utilization of fewer resources which in turn will result in lower costs.