Let us make an in-depth study of the meaning, features, advantages and disadvantages of double account system.
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:
The main features of Double Account System are:
(a) 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.
(b) Revenue Account and Net Revenue Account are prepared instead of Profit and Loss Account and Profit and Loss Appropriation Account.
(c) Normally, no adjustment of asset is made in the Capital Account.
(d)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.
(e) 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.
(f) Discount and Premiums are permanently treated as capital items.
(g) Loan capital (debentures) Shares and Stocks are treated as capital items.
(h) Interest on Loan and Debentures (i.e., all fixed interests) are to be charged against Net Revenue Account.
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.
Some of the disadvantages of Double Account System are presented below:
(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.