Double System 534h4s

DOUBLE 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 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 ing system’. In other words, it’s an alternative system of presenting final s. It was originally adopted in England. SPECIAL FEATURES OF DOUBLE ING SYSTEM: The following are the special features of the double ing system: (i)

It is not a system of maintaining s, but only a system of presenting the final s.

(ii)

It is generally adopted by public utility concerns formed under special acts of parliament.

(iii)

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 ing 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 prepared for disclosing the expenses and incomes of a public utility concern is called ‘revenue ’ and not profit and loss .

(vi)

The created for disclosing the appropriations of profit is called ‘net revenue ’ and not profit and loss appropriation a/c

(vii)

Under this system, interest on debentures and loans is shown on the debit side of the net revenue 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 ’ at cost but not at depreciated value. The depreciation on fixed assets is, usually, debited to revenue and credited to and credited to depreciation reserve or fund which appears in the general balance sheet.

(ix)

Discount and 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 . 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 .

(x)

Loans and debentures are treated as capital and shown in the capital .

(xi)

General reserve, investment fluctuation reserve, and other reserves are shown in the general balance sheet on the liabilities side.

(xii)

Renewals are provided out of the current revenue.

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

utility concerns. However they go together as the double system is maintained under the double entry system. Double System Vs single system The main differences between the single and double system can be summarized as follows: Single system 1. it is usually maintained by non-public

Double t system 1. it is generally maintained in public utility

utility undertakings

undertakings

2. the financial affairs of a concern are

2. the financial affairs of a concern are

shown through a single balance sheet

shown through two statements viz., (i) capital a/c and general balance sheet

3. the main object of preparing the balance

3. the main object of preparing two

sheet is to show the financial position of

statements is to show how capital is raised

the concern

and how it is invested in final assets

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

current year’s profit.

5. A profit & loss appropriation a/c is

5. a net revenue a/c is prepared to disclose

prepared to indicate the various

the appropriations of profits.

appropriations of profits. 6. Interest paid/payable and interest

6. Interest paid/payable and interest

received/accrued are shown in the profit

received/accrued are shown in the net

and loss a/c.

revenue a/c

7. Fixed assets are shown at depreciated

7. Fixed assets are shown at original cost in

value.

capital a/c and depreciation fund is on the liabilities side of general balance sheet.

8.discount on issue of shares and

8. discount on issues of shares and

debentures is shown separately in the

debentures is subtracted from the share or

balance sheet under the head,

debenture capital in the capital .

‘miscellaneous expenses and losses’

9. When an old fixed asset is replaced by a

9. When an old fixed asset is replaced by a

new fixed asset, the fixed asset is

new fixed asset, the original cost of the old

completely written off in the books.

asset continues exist in the books even after replacement.

Advantages of double system The important advantages of double system are as follows: (i)

The presentation of s in the prescribed form enables the state to that the undertaking is rendering efficient service at reasonable cost.

(ii)

The capital 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 system, it helps the undertaking to replace any fixed asset without any depletion of the cash resources of the company.

(iv)

The segregation of income statement in to ‘revenue ’ and ‘net revenue ’ ensures the ascertainment of pure operational results of the concern.

(v)

The publication of s in prescribed form enables the undertakings to complete many statistical returns reflecting the services rendered to the public.

Disadvantages of double system: The chief limitations of double system are as follows: (i)

The revenue 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 .

(ii)

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 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 and are continued to be shown at cost price even after they have been reduced to scrap value.

(iv)

Calculations regarding how much to be charged to ‘revenue a/c’ towards replacement of assets, is confusing and not easily understandable.

(v)

The system cannot be understood by the general public easily.

Final s under Double s system: From the above discussion, it is clear that the final s prepares under the double system consist of:

(i)

(i)

A revenue a/c

(ii)

A Net revenue a/c

(iii)

A capital a/c i.e., Receipts and expenditures on capital a/c,

(iv)

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 and all the incomes are shown on the credit side of this . The balance found in this 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 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 . All interests paid are entered on the debit side and all interests received are entered on the credit side of this . 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 . 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 is transferred to the general balance sheet. (iii)

Capital A/c (or) Receipts and Expenditure A/c on capital A/c: This 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 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 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 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 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 , 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.