Government Accounting Systems in Nepal: Double-Entry, Cash, and Accrual-Based
Introduction to Government Accounting
Government accounting involves recording financial transactions in accordance with prevailing laws, maintaining physical and electronic records, ledgers, books, and supporting documents. It encompasses recording, archiving, preparing financial statements, communicating, publishing, auditing, and evaluating financial activities to ensure transparency and accountability.
Basic Accounting Principles
Accounting measures transactions in monetary units and is guided by principles that ensure accuracy and reliability. These principles include:
- Economy: Minimizing resource wastage.
- Efficiency: Optimizing resource use for maximum output.
- Effectiveness: Achieving intended outcomes.
- Transparency: Ensuring open and clear processes.
- Neutrality: Avoiding bias in reporting.
- Matching: Aligning revenues with related expenses.
- Fair Presentation: Providing accurate and unbiased financial statements.
- Responsibility and Accountability: Ensuring answerability for actions.
- Understandability: Making records clear to stakeholders.
- Accuracy: Ensuring precise data.
- Completeness: Capturing all relevant transactions.
- Going Concern: Assuming ongoing operations.
- Timeliness: Recording and reporting promptly.
- Validity: Adhering to legal frameworks.
- Materiality: Focusing on significant transactions.
- Relevance: Providing useful information.
- Reliability: Ensuring trustworthy records.
- Consistency: Applying uniform methods over time.
- Comparability: Enabling comparisons across periods or entities.
Principles of Government Accounting
In addition to general principles, government accounting in Nepal adheres to specific principles:
- Compliance with prevailing laws.
- Legal supremacy in financial operations.
- Dual accounting (central and operational levels).
- Accounting for government funds.
- Budget control to ensure fiscal discipline.
- Objective classification of revenue and expenditure.
- Based on double-entry accounting principles.
Accounting Systems
An accounting system comprises methods, procedures, and practices for recording, analyzing, preserving evidence, reporting, and presenting financial transactions. It is shaped by principles, laws, institutions, and practical applications, ensuring systematic management of financial activities.
Types of Accounting Bases
Internationally, accounting systems are classified into four types based on their basis:
1. Cash-Based Accounting System
In cash-based accounting, transactions are recorded only when cash is received or paid. Revenue is recognized upon cash receipt, and expenditure upon cash payment. This system is simple but does not account for receivables or payables.
Example: Office 'A' purchases office supplies worth NPR 15,000, paying NPR 10,000 in cash with NPR 5,000 pending. In cash-based accounting:
| Account Head | Description | Debit (NPR) | Credit (NPR) |
|---|---|---|---|
| 22311 | Budget Expenditure (Office Supplies) | 10,000 | - |
| XXXXXX | Consolidated Fund Account | - | 10,000 |
| Total | 10,000 | 10,000 |
Note: The pending NPR 5,000 is not recorded.
2. Modified Cash-Based Accounting System
This system records cash transactions within a fiscal year and includes assets earned but not received and liabilities incurred but not paid. It provides a broader view than cash-based accounting.
Example: Using the same scenario as above:
| Account Head | Description | Debit (NPR) | Credit (NPR) |
|---|---|---|---|
| 22311 | Budget Expenditure (Office Supplies) | 15,000 | - |
| XXXXXX | Consolidated Fund Account | - | 10,000 |
| XXXXXX | Pending Payment Account | - | 5,000 |
| Total | 15,000 | 15,000 |
3. Modified Accrual-Based Accounting System
This hybrid system records revenue when it is available and measurable, and expenditure when a liability is incurred. Capital assets are recorded as assets, but at the fiscal year-end, they are fully written off, unlike in full accrual accounting where depreciation is applied.
Example: Office 'A' purchases furniture worth NPR 15,000, with NPR 5,000 pending and NPR 2,500 depreciation at year-end:
| Account Head | Description | Debit (NPR) | Credit (NPR) |
|---|---|---|---|
| 22311 | Budget Furniture Expenditure | 15,000 | - |
| XXXXXX | Consolidated Fund Account | - | 10,000 |
| XXXXXX | Pending Payment Account | - | 5,000 |
| Total | 15,000 | 15,000 |
Year-End Write-Off:
| Account Head | Description | Debit (NPR) | Credit (NPR) |
|---|---|---|---|
| 22311 | Write-Off Expenditure | 15,000 | - |
| XXXXXX | Furniture Account | - | 15,000 |
| Total | 15,000 | 15,000 |
4. Accrual-Based Accounting System
Accrual-based accounting records transactions when they occur, recognizing receivables, payables, assets, and liabilities immediately. Capital assets are depreciated over time rather than fully written off.
Example: Using the same furniture purchase scenario:
| Account Head | Description | Debit (NPR) | Credit (NPR) |
|---|---|---|---|
| 22311 | Budget Furniture Expenditure | 15,000 | - |
| XXXXXX | Consolidated Fund Account | - | 10,000 |
| XXXXXX | Pending Payment Account | - | 5,000 |
| Total | 15,000 | 15,000 |
Depreciation:
| Account Head | Description | Debit (NPR) | Credit (NPR) |
|---|---|---|---|
| 22311 | Depreciation Expenditure | 2,500 | - |
| XXXXXX | Furniture Account | - | 2,500 |
| Total | 2,500 | 2,500 |
Comparison: Cash-Based vs. Accrual-Based Accounting
| Aspect | Cash-Based Accounting | Accrual-Based Accounting |
|---|---|---|
| Recording Time | When cash is received or paid | When transaction occurs (rights or liabilities arise) |
| Receivables/Payables | Not recorded | Recorded as rights or liabilities |
| Scope | Reflects only cash flow | Reflects cash flow, rights, and liabilities |
| Complexity | Simple, usable by non-experts | Requires accounting knowledge |
| Reporting | Incomplete (excludes receivables/payables) | Comprehensive (includes all rights/liabilities) |
| Suitability | Non-profits, government offices | Large commercial organizations |
| International Recognition | Limited | Widely accepted, scientific |
| Cost Reflection | May not reflect true cost | Accurately reflects true cost |
Nepal’s Government Accounting System
Nepal’s government accounting system is primarily cash-based but incorporates elements of accrual-based principles for specific purposes:
- Double-Entry Principle: As per the Financial Procedures Regulations, 2064 BS, all offices must maintain appropriation, revenue, deposit, in-kind, and other records in formats approved by the Auditor General, reflecting dual effects.
- Cash-Based System: Transactions are recorded only upon cash receipt or payment, excluding credit transactions.
- Modified Accrual Elements: Annual reports include liabilities and receivables, partially adopting accrual principles. The Income Tax Act, 2058 BS mandates cash-based accounting for individuals and accrual-based for businesses.
- Move Toward Accrual: Studies recommend adopting accrual-based accounting or modified accrual systems. Foreign aid and project accounting partially use accrual methods, and the Nepal Accounting Standards Board is advancing this transition.
Steps to Adopt Accrual-Based Accounting
To transition to an accrual-based system, Nepal can implement:
- Develop infrastructure for comprehensive data management.
- Align Nepal Public Sector Accounting Standards (NPSAS) with International Public Sector Accounting Standards (IPSAS).
- Update laws and accounting systems.
- Enhance capacity of staff and institutions.
- Revise accounting and reporting formats.
- Strengthen auditing institutions.
- Enhance Financial Management Information Systems (FMIS).
- Increase government commitment and administrative efficiency.
Recent Reforms in Nepal’s Accounting System
Nepal has introduced reforms to align with international standards:
- Adoption of NPSAS for financial statements.
- Inclusion of assets and liabilities in chart of accounts.
- Implementation of Line Ministry Budget Information System (LMBIS).
- Operation of FMIS for integrated financial reporting.
- Treasury Single Account (TSA) for fund management.
- Computerized Government Accounting System (CGAS) for expenditure.
- Revenue Management Information System (RMIS) for revenue.
- Public Asset Management System (PAMS) for assets.
- Provincial LMBIS (PLMBIS), Provincial TSA (PTSA), and Sub-National Treasury Regulatory Application (SuTRA) for local levels.
- Updates to financial regulations and forms.
- Formation of task forces for reform recommendations.
- Electronic accounting and reporting systems.
- Establishment of Nepal Accounting Standards Board and Auditing Standards Board.
- Mandatory reporting from local and provincial levels to the federal government.
- Regular accounting training programs.
Challenges in Nepal’s Accounting System
Despite reforms, challenges persist:
- Cash-based system fails to reflect pending transactions (receivables/payables).
- Inability to account for credit-based transactions.
- No balance sheet preparation, obscuring true assets and liabilities.
- Limited adoption of international accounting standards.
- Incomplete implementation of accounting standards.
- Outdated forms and lack of timely updates.
- Non-integration of all foreign aid (cash, technical, in-kind) into the system.
- Treating advances as expenditure, distorting budget reporting.
- Lack of clear criteria for classifying recurrent vs. capital expenditure.
- Underutilization of electronic accounting and FMIS.
- Limited transparency due to confidentiality practices.
- Insufficient training for accounting personnel.
- Inability to apply depreciation for in-kind assets.
- Complex auction processes for asset disposal.
Recommendations for Improvement
To enhance Nepal’s government accounting system:
- Align with international accounting standards.
- Adopt accrual-based or modified accrual systems where feasible.
- Integrate all foreign aid into the accounting system.
- Expand use of electronic accounting and integrated FMIS.
- Simplify and update accounting and reporting forms.
- Record only actual expenditures, not advances.
- Establish clear criteria for recurrent and capital expenditure.
- Streamline in-kind asset management with depreciation rules.
- Fully implement Nepal Accounting and Financial Reporting Standards.
- Ensure coordination among federal, provincial, and local levels.
- Enhance transparency in line with governance principles.
- Provide capacity-building and ethics training for staff.
- Formulate and implement a unified, scientific accounting policy.
Conclusion
Nepal’s government accounting system, rooted in cash-based and double-entry principles, is evolving toward international standards. By addressing challenges and adopting accrual-based methods, Nepal can enhance transparency, accuracy, and efficiency in public finance management, supporting sustainable development.
References
- Financial Procedures Regulations, 2064 BS (2007).
- Income Tax Act, 2058 BS (2002).
- Nepal Public Sector Accounting Standards (NPSAS).
- International Public Sector Accounting Standards (IPSAS).
- Ministry of Finance, Government of Nepal.