Allama Iqbal Open University

Level: BS (Accounting & Finance) 2.5

Year
Course: Public Sector Accounting
(5061)
Semester: Autumn, 2024
I,d :19psp05452
Nimra Younas

ASSIGNMENT No: 1

Question No 1:
Differentiate between the following concept with
refrence to the public sector accounting:
Consolidated find
Public Account
Answer:
In the context of public sector accounting the terms
Consolidated Fund and Public Account refer to specific
classifications of government funds, and they have distinct
purposes and uses. Here's a detailed differentiation:
i. Consolidated Fund
1. Definition:
The Consolidated Fund is the primary government fund where
all revenues (such as taxes, borrowings, and grants) are
deposited. It is used to finance the general expenses of the
government.
2. Sources of Income:
- Tax revenues (e.g., income tax, corporate tax, sales tax).
- Non-tax revenues (e.g., interest earnings, dividends from
public sector enterprises).
- Proceeds from borrowings.
3. Usage:
Expenditures from the Consolidated Fund are subject to
legislative approval and are used for:
- Meeting the regular operational and developmental expenses
of the government.
- Paying salaries, pensions, and interest on public debt.
4. Control Mechanism:
 - The withdrawal of money from the Consolidated Fund
requires parliamentary or legislative approval, typically through
the passing of appropriation bills.
5. Examples:
- National budgets in most countries allocate funds from the
Consolidated Fund for defense, education, health, and other
public services.

ii. Public Account

1. Definition:
The Public Account refers to funds that the government holds
in trust on behalf of other entities. These funds do not belong to
the government but are managed by it as a custodian.
2. Sources of Income:
- Provident funds of government employees.
- Small savings collections (e.g., National Savings
Certificates).
- Judicial deposits, savings bank deposits, or other
miscellaneous deposits.
3. Usage:
- These funds are used for specific purposes or obligations,
such as repaying deposits when due.
- Unlike the Consolidated Fund, these funds are not available
for general government expenditure.
4. Control Mechanism:
 - Withdrawals from the Public Account do not require
legislative approval, as these funds are not considered
government revenue.
5. Examples:
- Pension funds held for retired government employees.
- Reserve funds for specific government guarantees or
projects.

Question No 2:
Discuss the following cincepts aas per the manual of
accounting procedures:
i. Modified cash basis of accounting
ii. Expenditures and commitnents
iii. Qualitative characteristics of information
iv. Inter entity transactions

Answer:

i. Modified Cash Basis of Accounting

The Modified Cash Basis of Accounting is a hybrid accounting
method that combines elements of both the cash basis and
accrual basis of accounting.
Features:
- Revenue is recognized when cash is received, similar to the
cash basis.
- Certain expenses and obligations, particularly significant
liabilities, are recorded when incurred, even if cash has not been
paid (similar to the accrual basis).
- Non-cash items such as depreciation or amortization are not
typically recognized.
- Usage in the Public Sector:
This approach provides flexibility for public sector entities by
offering a clearer picture of cash flows while also recognizing
obligations such as unpaid salaries, accounts payable, and long-
term liabilities.
Advantages:
- Ensures accountability for cash transactions while tracking
significant commitments.
- Simplifies reporting compared to full accrual accounting.
ii. Expenditures and Commitments
Expenditures and Commitments refer to the financial obligations
and outflows in public sector accounting:
Expenditures:
 - Actual spending of funds for goods, services, or works.
- Recorded when payments are made or when a liability is
incurred (under the modified cash basis).
- Examples: Salaries, purchases of office supplies, or payments
to contractors.
Commitments:
- Future obligations that arise from contracts or agreements
entered into by the government but for which no payment has
yet been made.
- Recorded to ensure that funds are earmarked and cannot be
spent elsewhere.
Examples: A signed contract to build infrastructure or a
procurement order for goods.
Significance:
- Monitoring both expenditures and commitments is essential
for effective financial management and avoiding overspending
or misuse of public funds.
iii. Qualitative Characteristics of Information
(Financial)
The Manual of Accounting Procedures emphasizes certain
qualitative characteristics that financial information must
possess to be useful and reliable. These include:
1. Relevance:
 - Information must be applicable and helpful in decision-
making, planning, and accountability.
2. Reliability:
- Data should be accurate, free from material error or bias, and
faithfully represent transactions and events.
3. Comparability:
- Financial information should allow users to compare
performance across periods or with other entities.
4. Understandability:
- Financial reports must be clear and easy to comprehend, even
for users with a basic understanding of public sector finances.
5. Timeliness:
- Information should be provided promptly to support effective
decision-making.
6. Verifiability:
- Transactions and events should be documented in a way that
external parties can verify their accuracy and legitimacy.
iv. Inter-Entity Transactions
Inter-Entity Transactions refer to financial transactions between
government entities or departments.
Examples:
- Transfer of assets or resources from one government agency to
another.
- Payments for shared services, such as IT or human resource
support.
- Grants or subsidies transferred from central to local
government units.
Significance:
- Ensures transparency and accountability in the use of public
funds.
- Facilitates accurate recording of resources exchanged between
entities without inflating overall government revenue or
expenditure.
Accounting Treatment:
- Such transactions are recorded by both entities involved to
ensure consistency and prevent duplication or omission in
financial reports.
- Adjustments may be required during consolidation to avoid
double-counting.
By addressing these concepts, the Manual of Accounting
Procedures ensures a comprehensive framework for maintaining
accountability and transparency in public sector financial
management.

Question No 3:
With refrence to manual of accounting principles,
discuss in detail the financial and accounting
responsibilities of:
i. Principal accounting officer
ii. Auditor general of Pakistan
iii. Internal audit officer
iv. Public account committee

Answer:
i. Principal Accounting Officer (PAO)
The Principal Accounting Officer (PAO) is typically the head of
a government department or organization, entrusted with the
primary responsibility for financial management and
accountability within their domain.

Responsibilities:
1. Budget Preparation and Execution:
- Ensure the preparation of realistic and comprehensive budgets
aligned with government policies.
- Oversee the execution of the budget, ensuring expenditures
remain within authorized limits.

2. Financial Control:
- Maintain proper control over public funds and ensure
compliance with rules and regulations.
- Authorize expenditures and ensure that funds are used only for the
intended purposes.
3. Record Maintenance:
- Ensure accurate and timely maintenance of financial records,
accounts, and reports in line with the Manual of Accounting
Principles.
4. Compliance:
- Ensure adherence to financial procedures, laws, and standards
set by the government and the Auditor General.
5. Reporting:
- Submit financial statements and reports to relevant oversight
bodies, including the Auditor General and Public Accounts
Committee (PAC).
6. Accountability:
- Take responsibility for any financial irregularities and provide
explanations to the Public Accounts Committee during audits or
reviews.
ii. Auditor General of Pakistan (AGP)

The **Auditor General of Pakistan (AGP)** is the supreme

audit institution responsible for the external audit of public
sector entities, ensuring transparency, accountability, and
effective use of public resources.
Responsibilities:
1. External Audit:
- Conduct independent audits of all public sector organizations,
including government departments, autonomous bodies, and
state-owned enterprises.
- Examine whether expenditures comply with laws, rules, and
regulations and assess the economy, efficiency, and
effectiveness of public spending.
2. Reporting to Parliament:
- Submit audit reports to the President, who forwards them to the
Public Accounts Committee for examination.
3. Fraud Detection:
- Identify instances of fraud, mismanagement, or financial
irregularities and recommend corrective actions.
4. Advisory Role:
- Advise government entities on improving financial
management systems, internal controls, and compliance with
accounting principles.
5. Oversight:
- Ensure compliance with international public sector accounting
standards (IPSAS) and promote good governance in financial
practices.
iii. Internal Audit Officer
The Internal Audit Officeris an integral part of an organization's
internal control system, providing independent assurance on
governance, risk management, and control processes.

Responsibilities:
1. Evaluation of Internal Controls:
- Assess the effectiveness of internal control systems to mitigate
risks and ensure compliance with policies, laws, and regulations.
2.Risk Assessment:
- Identify potential risks to the organization and recommend
measures to address them.
3. Compliance Monitoring:
- Ensure adherence to the Manual of Accounting Principles,
financial regulations, and relevant policies.
4. Audit Planning and Execution:
- Develop and execute an annual audit plan to review high-risk
areas and report findings to management.
5. Advisory Role:
- Provide recommendations to improve efficiency, effectiveness,
and transparency in operations and financial management.
6. Coordination:
- Liaise with external auditors, such as the Auditor General,
to facilitate comprehensive audit coverage.
iv. Public Accounts Committee (PAC)
The Public Accounts Committee (PAC) is a parliamentary
oversight body tasked with examining public expenditure and
holding government departments accountable for financial
irregularities.

Responsibilities:
1. Examination of Audit Reports:
- Review audit reports submitted by the Auditor General of
Pakistan and scrutinize the financial activities of government
entities.
2. Accountability:
- Call upon Principal Accounting Officers and other officials to
explain discrepancies, irregularities, or inefficiencies highlighted
in audit reports.
3. Recovery of Funds:
- Recommend recovery of funds in cases of unauthorized or
wasteful expenditures.
4. Policy Recommendations:
- Suggest improvements in financial management, internal
controls, and governance practices.
5. Transparency and Oversight:
- Ensure that public funds are used efficiently, effectively, and
transparently, safeguarding the interests of taxpayers.
6. Follow-Up:
- Monitor the implementation of its recommendations and
corrective actions by government departments.

Question No 4:
Discuss in detail the accounting treatment of loans and
advances to be adopted in the public sector accounting
bodies as per the Manual of Accounting Procedures.
Answer:
The Manual of Accounting Procedures provides a detailed
framework for the accounting treatment of loans and advances
in the public sector, ensuring transparency, accountability, and
compliance with established financial rules and principles. Here
is a comprehensive explanation:
Definition of Loans and Advances
Loans: Funds provided by the government to entities or
individuals, repayable over a period with or without interest.
Examples include loans to public sector enterprises, local
governments, and employees.
Advances: Temporary disbursements made to meet immediate
financial needs, repayable within a shorter time frame. Examples
include advances for travel, contingencies, or other specific
purposes.
Accounting Treatment
1. Recognition

- Loans and advances are recognized as assets in the accounts of

the public sector entity providing them, as they represent
amounts receivable.
- The following are key considerations during recognition:
- The principal amount disbursed is recorded as a loan or
advance.
- Any interest income expected to be earned on loans is recorded
as revenue when it becomes due.
2. Classification
Loans and advances are classified into categories based on their
purpose and recipient:
- Loans to Other Governments: For example, loans to
provincial or local governments.
- Loans to Public Sector Enterprises: Financial support to
state-owned corporations or autonomous bodies.
- Loans to Employees: Includes house-building loans, car
loans, or advances for personal expenses.
- Other Advances: Includes advances for travel, project
expenses, or emergency purposes.
3. Measurement
- Initial Measurement: Loans and advances are recorded at the
disbursed amount, which is the face value of the loan or
advance.
- Subsequent Measurement: Adjustments are made to reflect:
- Repayments of principal and interest.
- Any impairments due to non-recoverability or defaults.
4. Interest Recognition
- Interest on loans is recognized as revenue on an accrual basis
(or modified cash basis if applicable). It is recorded in the
financial statements as it becomes due, even if the cash has not
yet been received.
- In the case of concessional loans or interest-free loans, the
value of the concession is disclosed in the financial statements.
5. Repayment and Recovery
Loan Repayments:
- When repayments are received, they reduce the outstanding
loan balance.
- Interest received is recorded as revenue.
Advances Clearance:
- Advances are cleared against actual expenditure or refunded in
full if not utilized.
- Supporting documentation (e.g., invoices, receipts) is required
for adjustments against advances.
6. Default or Non-Recovery
- If a loan or advance becomes doubtful of recovery, the
following steps are taken:
- Provisions are made in the accounts to reflect the potential
loss.
- A write-off may occur if the loan is deemed irrecoverable,
subject to approval from the relevant authority.
7. Disclosure Requirements
The following details must be disclosed in the financial
statements:
- Total loans and advances outstanding at the end of the
financial year.
- Breakdowns by category (e.g., loans to employees, enterprises,
or other governments).
- Interest income accrued but not received.
- Provisions made for doubtful debts or write-offs.

Controls and Oversight

1. Authorization:
- Loans and advances must be approved by the appropriate
authority, such as the Principal Accounting Officer or a
designated committee.
2. Documentation:
- Proper documentation, including loan agreements, repayment
schedules, and records of advances, must be maintained.
3. Monitoring:
- Regular monitoring of repayments is necessary to ensure
timely recovery and identify any potential defaults.
4. Audit:
- Loans and advances are subject to internal and external audits
to ensure compliance with rules and prevent misuse.
Accounting Entries
For Loans Granted:
1. At the time of disbursement:
Dr Loans and Advances Account
Cr Cash/Bank Account
2. For interest accrued:
Dr Interest Receivable Account
Cr Revenue Account
3. On repayment of loan principal:
Dr Cash/Bank Account
Cr Loans and Advances Account
4. On repayment of interest:
Dr Cash/Bank Account
Cr Interest Receivable Account
For Advances Granted:
1. At the time of disbursement:
Dr Advances Account
 Cr Cash/Bank Account
2. On clearance or adjustment:
Dr Expense Account (if utilized)
Cr Advances Account
3. On refund of unused advance:
Dr Cash/Bank Account
Cr Advances Account

Significance in Public Sector Accounting

- Accountability: Tracks public funds lent to various entities,
ensuring they are utilized effectively.
- Transparency: Provides a clear record of outstanding loans
and advances, their terms, and recoverability.
- Financial Planning: Helps government bodies monitor cash
flows and plan budgets effectively.
- Legal Compliance: Ensures adherence to laws and
regulations governing public finances.

This comprehensive approach ensures that loans and advances

are managed responsibly, supporting financial discipline in
public sector entities.
Question No 5:
Discuss in detail the budgetary procedures to be followed
by the public sector accounting bodies as per the Manual
of Accounting Procedures.
Answer:
The Manual of Accounting Procedures outlines comprehensive
budgetary procedures for public sector accounting bodies to
ensure transparency, accountability, and proper allocation of
public resources. These procedures cover the entire budget
cycle, from formulation to implementation and monitoring.
Budgetary Procedures in Public Sector Accounting
1. Budget Formulation
This is the initial stage, involving the preparation of estimates
for revenues and expenditures. The process includes:
Policy Framework:
- Government priorities, policies, and development plans guide
the preparation of the budget.
- Macro-economic indicators, such as GDP growth, inflation,
and fiscal deficit targets, are considered.
Revenue Estimates:
- Projections are made for expected revenues, including tax and
non-tax sources.
- Input is taken from revenue-collecting agencies.
Expenditure Estimates:
- Departments prepare detailed estimates of current (recurring)
and development (capital) expenditures.
- These are classified by function, program, and economic
classification.
Consultations:
- Ministries and departments submit their budget proposals to
the Ministry of Finance.
- Discussions and negotiations are held to finalize allocations,
considering resource constraints and priorities.
Draft Budget Preparation:
- The Ministry of Finance consolidates departmental budgets
into a draft budget document.
2. Budget Approval
Once the draft budget is prepared, it undergoes scrutiny and
approval:
Legislative Review:
- The draft budget is presented to the legislature or parliament,
typically as the Annual Budget Statement.
- Detailed discussions and debates are held, focusing on
allocations, priorities, and fiscal policies.
Appropriation:
- The legislature passes the Appropriation Bill, authorizing
expenditures for various purposes.
- Supplementary grants or adjustments may be proposed if
additional funds are required.
3. Budget Execution
The approved budget is implemented by the public sector
accounting bodies under strict financial control:
Release of Funds:
- The Ministry of Finance issues notifications for the release of
funds in tranches, ensuring cash flow management.
- Funds are disbursed to ministries, departments, and other
government entities based on approved allocations.
Expenditure Control:
- Departments must ensure that expenditures are incurred only
within authorized limits.
- Expenditures must comply with financial rules and policies.
Commitments:
- Commitments for future payments must be recorded to avoid
exceeding budgetary limits.
Procurement Procedures:
- Transparent and competitive procurement methods must be
followed for goods, services, and works.
4. Monitoring and Reporting
Regular monitoring of budget performance ensures
accountability and effective utilization of resources:
Periodic Reporting:
- Departments are required to submit monthly and quarterly
expenditure and revenue reports.
- Variance analysis is conducted to compare actual performance
against the budget.
Mid-Year Review:
- A mid-year budget review is undertaken to assess progress
and address any deviations.
- Adjustments may be made through supplementary budgets if
necessary.
Internal Audit:
- Internal audit units review compliance with budgetary
provisions and report irregularities.
5. Budgetary Control
Effective control mechanisms are crucial for ensuring adherence
to the approved budget:
Cash Flow Management:
- Treasury departments manage cash flows to align
disbursements with available funds.
Virement:
- Re-appropriation or transfer of funds between budget heads is
allowed only with proper authorization.
Financial Rules:
- Expenditures must adhere to the principles outlined in the
financial rules, such as economy, efficiency, and effectiveness.
6. Budget Evaluation and Accountability
At the end of the fiscal year, a comprehensive evaluation is
conducted to review budget performance:
Final Accounts:
- Departments prepare final accounts summarizing revenues,
expenditures, and outstanding liabilities.
Audit and Oversight:
- The Auditor General of Pakistan audits financial statements to
ensure compliance with financial regulations and detect
irregularities.
- Audit reports are submitted to the Public Accounts Committee
(PAC) for review and follow-up actions.
Performance Evaluation:
- Departments assess the outcomes of programs and projects
against set objectives.
- Lessons learned are incorporated into future budget cycles.

Key Features of Budgetary Procedures

1. Classification of Expenditures and Revenues:
- The budget is organized by functional (e.g., health, education)
and economic classifications (e.g., salaries, infrastructure).
2. Transparency and Accountability:
- The process ensures that all stakeholders, including the public
and oversight bodies, have access to budgetary information.
3. Legislative Oversight:
- Parliament and other oversight bodies (e.g., PAC) ensure that
the budget reflects public priorities and holds departments
accountable.
4. Performance-Based Budgeting:
- Increasingly, budgets are linked to performance indicators to
ensure outcomes align with expenditures.
5. Fiscal Discipline:
- The entire process is designed to prevent overspending,
mismanagement, and waste of public resources.
Challenges in Budgetary Procedures
- Resource Constraints: Limited revenues may lead to
challenges in meeting all expenditure needs.
- Implementation Gaps: Delays in fund releases or
procurement processes can hinder execution.
Capacity Issues: Lack of expertise in financial management
within some departments.

By following these budgetary procedures, public sector

accounting bodies ensure effective management of public
resources, alignment with national priorities, and compliance
with established rules and principles. These procedures foster
transparency, fiscal discipline, and accountability in the use of
public funds.