Week 4, 5 and 6 – SS3 Second Term Financial Accounting Notes

 WEEK FOUR – SIX
TOPIC: PUBLIC SECTOR ACCOUNTING
CONTENT

• Meaning of Public Sector Accounting
• Differences between Public Sector Accounting and Private Sector Accounting
• Government sources of revenue
• Accounting procedures for revenue allocation/illustration
• Cost budget preparation and illustration

 Meaning of Public Sector Accounting
Public Sector Accounting is the process of recording the financial transactions concerning the receipts and payments of government funds, in a systematic way, as well as their analysis and interpretation so as to guide governments and their agents in various financial decisions.

 Differences between Public Sector Accounting and Private sector Accounting
Public Sector Accounting            Private Sector Accounting
1.    Accounting procedure is based on        It is based principally on profit
    provision of services                maximization
2.    It does not show creditors            It shows creditors for goods
3.    Revenues are derived from tax, fees,        Revenues are derived from sales of goods
    fines, etc.
4.    The cost of assets are written off in         The cost of assets are spread over the useful
    one year                    life of the assets
5.    It is prepared on cash basis            It is prepared on accrual basis
6.    Public sector accounting is based on        It is governed by the companies and Allied
    the constitution of the country            Matters Act.
7.    Public sector accounting report is to        Private sector accounting report is to the
    the general public                shareholder.

 Governments Sources of Revenue
Government revenue means the total income accruing to the government of a country. This can be classified under different tiers of government.
a.    Federal Government: At the Federal level revenue sources are:

1. Direct and indirect taxes: e.g Personal income tax, withholding tax, corporation tax, capital gains tax, capital transfer tax, petroleum tax, tax export duties, tariffs, sales tax, purchase tax, excise duties etc.
2. Mining: Royalties, sales of crude oil, rent on oil wells, quarrying licenses
3. Fees and Licenses: Visa fees, passport fees, court fees, club registration, church and mosque registration, company registration etc.
4. Income from investments and dividends from corporate organization
5. Rent from government properties
6. Revenue from armed forces external assignment, armed forces equipment rentage etc.

b.    State Government: A state’s major sources of revenue are:

1. Statutory allocation
2. Investment earnings
3. Rent on government properties
4. Rent of government offices, vehicles etc
5. Special grants
6. Personal income tax
7. Fees from hospitals schools, courts
8. Licences, motor, sales of liquors, patent medicine and motorcycle

1. Local Government: A local Government’s major sources of revenue are:
   1. Statutory allocation
   2. Special grant
   3. Radio and televsion license
   4. Tenement rates
   5. Fines
   6. Licences on sign post, market stall and liquors
   7. Loan from state
   8. Income from street naming etc.

 Accounting procedures for revenue allocation
Statutory allocation is the grant from Federal Government to the States and Local Governments. Apart from the statutory allocation various formulae have been devised on various occasions to ensure fair sharing of the total revenue among the three levels of government. The principle usually adopted are:

1. Derivation basis
2. Equality basis
3. Population basis
4. Independent revenue

 Illustration
The government of Nigeria approved N18,000,000 to six local government areas. The allocation was distributed as follows:

1. Equity basis 75%
2. Population basis 25%

Local government             Population
A                    6,000,000
B                    4,000,000
C                    7,000,000
D                    1,000,000
E                    3,000,000
F                    2,000,000
                 23,000,000
B. Local government generated the following additional revenue:
                     N
Radio and television licences    100,000
Court fines                250,000
Liquor licences            400,000
Sign post                20,000
Tenement rates            50,000
Expenses salaries            1,150,000
Transport                20,000
Repairs                200,000
Maintenance of cars            60,000
Stationery                25,000
Medical expenses            15,000
Medical expenses            7,600
Park Fees                60,000

 You are required to prepare:

1. A statement showing the allocations made to each local government
2. Receipts and payments accounts of B Local Government for the year ended 31^st December 1999.

 Solution
Statement of Allocation of Fund

1. Equity Basis 75% = 75% x 18,000 = N13,500,000

   Equity allocation = 13,500,000 = 2,250,000
                   6
   Therefore each of the local government will receive N2,250,000
   

2. Population Basis 25% = 25% x 18,000,000

   = 4,500,000
   

     Local government A     = A’s Population x 4,500,000 =600,000 X 4,500,000
                 Total population 23,000,000
                    =    N1,173,913
Local government B        =    B’s population x 4,500,000
                = Total population
                =    4,000,000 x 4,500,000
                    23,000,00
                =    N782,609
Local government C        =    C’s population x 4,500,000 = 7,000,000 x 4,500,000
                    Total population         23,000,000
                            =    N1,369,565    
Local government D        =    D’s population x 4,500,000 = 1,000,000 x 4,500,000
                    Total population         23,000,000 = N586,957
Local government E        =    E’s population x 4,500,000 = 3,000,000 x 4,500,000
                    Total population     1     = 23,000,000 = N5586,957
Local government F        =    F’s population x 4,500,000 = 2,000,000 x 4,500,000
                =    Total population          = 23,000,000 = N391,304
Statement of allocation of Fund
Local            Population Basis     Equity Basis         Total
Government         
             N             N             N
A            1,173,913        2,250,000        3,423,913
B            782,609            2,250,000        3,032,609
C            1,369,565        2,250,000        3,619,565
D            195,652            2,250,000        2,445,652
E            586,957            2,250,000        2,836,957
F            391,304            2,250,000        2,641,304
            4,500,000        13,500,000        18,000,000

 B. Local Government Receipt and payments Account
Receipts         N            Payments         N
Allocation        3,032,609        Salaries            1150,000
Radio and TV        100,000            Transport        20,000
Tenement rates    50,000                Electricity        200,000
Court            250,000            Repairs            60,000
Liquor            400,000            Maintenance        25,500
Sign post        20,000            Stationery        15,000
Park fees        60,000            Medical expenses    7,600
                        Balance c/d        2,434,509
3,912,609                    3,912,609

EVALUATION
1.    List eight sources of revenue available to a state government.
2.    State five differences between private sector accounting and public sector accounting.

 PREPARATION OF PERSONNEL COST BUDGET
Budget: A budget is quantitative statement of income and expenditure.
The personnel cost budget is prepared to show the analysis of the basic salary and allowances of the staff members of each government ministry department in a particular year.

 PROCEDURES FOR PREPARING THE COST BUDGET

1. Identification of different positions in the ministry or parastatals
2. Calculation of the number of staff in each post
3. Identification of grade level.
4. Calculation of the basic salary, allowances, etc.

 ANNUAL INCREMENTAL RATE

1. If the officers are not on first step of their salary; the formula below will be used for calculating staff total emolument

Formula (new stop 1 ) incremental rate) + basic salary
Illustration
Position             No        Grade Level        Salary
Director General        1            17        300,000 x 50,000
Director            4            16        200,000 x 30,000
Assume the staff are on step 3
Solution
Director general:    =    (New step – 1) incremental rate + basic salary
            =    (3 – 1) 50,000 + 300,000
            =    2(50,000) + 300,000
            =    N400,000
4 Director        =    (New step – 1) incremental rate + basic salary
            =    (3 -1) 30,000 + 200,000
            =    2(30,000) + 200,000
            =    60,000 + 200,000
            =    N260,000

 2.    When employees are on step one
Illustration: The following information was extracted from the ministry of finance on 31/10/99.
Post             Grade Level        No. in post            Rate
DG            17            1                40,000 x 4000 – 60,000
Directors        16            3                32,000 x 3600 – 53,600
Chief Accountant    14            4                28,000 x 2400 – 44800

 Additional information
Grade Level             Housing        Transport
12 and above            8400 P.A        6250 P.A
07 and 11            3600 P.A        2500 P.A.

 Workings
One DG’s Basic salary    = 40,000
Housing allowance        = 8400
Transport allowance        = 6250
3 Directors’ basic        =    32000 x 3 = 96,000
Housing allowance         =    8400 x 3 = 25,200
Transport allowance        =    6250 x 3 = 18,750
4 Chief Accountants
Accounts’ Basic Salaries    =    28,000 x 4 = 112000
Housing allowance        =    8400 x 4= 33,600
Transport allowance        =    6250 x 4 = 25,000

 Solution
PERSONNEL COST BUDGET
Post Grade            No        Basic        Housing     Transport     Total
                        N        N        N        N
Director General    17    1        40,000    8400        6250        54650
Directors        16    3        96000        25200        18750        139950
Chief Accounts    14    4        112,000    33600        25,000    170,600
                        248,000    67,200    50,000    365,200

 Total Personnel Emolument = N365,200

 Evaluation

1. Define Public sector accounting
2. List seven items of government expenditure.

 GENERAL EVALUATION QUESTIONS

1. What is depreciation?

1. Explain the following methods of calculating depreciation (i) staight line (ii) reducing balance (iii) sum of the years digit
   1. What is the difference between depreciation and amortization?
   2. State ten uses of the general journal
   3. Explain the principle of double entry system.

 READING ASSIGNMENT

1. Essential Financial Accounting by O.A. Longe, Pages 376-388
2. Simplified Bookkeeping and Accounting by Femi Olatunji, Pages 489-513

 WEEKEND ASSIGNMENT

1. Public sector accounting is done on ————-basis (a)credit (b)cash (c)hire purchase (d)installmental payment
2. Government parastatal accounting system is on ————-basis (a)cash (b)accrual (c)General (d)all of the above
3. Public sector accounts reports are to the ————-(a)shareholders (b)directors (c)public (d)customers
4. The chief accounting officer to the government ministries is (a)auditor general (b)minister of finance (c)secretary to the federal government (d)accountant general of the federation
5. The formula for calculating emolument where employees are on step 4 is
   1. (4-1) x salary (b)(4+1) x salary (c) (4-1) incremental rate (d) (4-1) incremental

   rate + basic salary.

 Theory

1. State the formula to apply for (i) calculating emolument when employees are step 1 and (ii) when employees are on step 3
2. State seven differences between the public and private sector accounting