Double Account System

• Double account system presents the financial statements of public utility concerns.
• It applies to electricity supply, gas distribution, railways, and water distribution companies.
• It applies when these companies are owned and operated by registered companies.
• The balance sheet is split into two parts: receipts and expenditure on capital account and the general balance sheet.

Salient Features of Double Account System

• The balance sheet is presented in two parts: receipts & expenditure on capital account and the general balance sheet.
• A revenue account replaces the profit and loss account.
• A net revenue account replaces the profit and loss appropriation account.
• The capital account shows the total expenditure to date on assets, regardless of their existence on the closing date.
• Depreciation on fixed assets is credited to the depreciation fund account.
• Fixed assets are shown at cost in the capital account.
• Interest on debentures and loans is shown as an appropriation out of profit in the net revenue account.
• Premiums on the issue of securities are permanently retained as capital items.
• Replacement costs of fixed assets at old capacity are charged to the revenue account, not debited to the asset.
• Preliminary expenses are considered capital expenditure and shown in the capital account.

Advantages of Double Account System

• It serves as a tool of control due to prescribed formats, especially for public utilities with government-granted monopolies.
• The capital account clearly shows the sources of capital, its utilization, and whether there is under or over capitalization.
• The revenue account discloses the regular results of the company's operating activities.
• It provides funds for asset replacement because depreciation is credited to a depreciation fund account instead of the asset.
• Standard financial statement formats allow for easier interfirm comparison within similar service sectors.

Disadvantages of Double Account System

• Assets are shown at cost, so the true current value or position is not shown.
• Assets that no longer exist may still be shown in the capital account.
• Varying charges for replacement can distort the results across different years.
• Calculating the revenue charge for asset replacement can be difficult.
• The accounts may not be easily understood by the public.
• The capital account doesn't represent a true assets and liabilities position because items remain at their original cost.

Single Account System

• The single account system presents all assets and liabilities in one statement called the balance sheet.
• It distinguishes itself from the double account system by integrating all financial elements into a single view.

Differences Between Single and Double Account Systems

• A single account system has only one balance sheet, and a double account system splits it into capital and general balance sheets.
• A single account system uses a profit and loss account and profit and loss appropriation accounts.
• A double account system uses a revenue account and net revenue account.
• In a single account system, assets not in existence are not included in the balance sheet.
• In a double account system, even non-existent assets are included in the capital account.
• In a single account system, depreciation deducts from the cost of fixed assets.
• In a double account system, depreciation is shown as a depreciation fund in the general balance sheet.

Final accounts under the double account system

• Revenue account
• Net revenue account
• Capital account (receipts and expenditure on capital account)
• General balance sheet

Revenue Account

• The revenue account is similar to the profit and loss account of a trading or manufacturing concern.
• It is debited with expenses and credited with incomes.
• Depreciation on fixed assets is charged by debiting the revenue Account and crediting the Depreciation Fund Account.
• Expenses are shown under broad headings: cost of generation, distribution, public lamps, rent, rates, taxes, management and law charges, depreciation, and special charges.
• Incomes are grouped as sale of energy for lighting and power, sale of energy under special contracts, public lightings, rental of meters, rent receivable, and transfer fees.

Net Revenue Account

• The net revenue account is comparable to the profit and loss appropriation account in other businesses, but treats interest on debentures and loans as appropriation of profits.
• Ordinarily, interest is treated as a charge against profits.
• The balance of the net revenue account is shown in the general balance sheet.

Capital Account

• Columned form with three columns on each side.
• Left hand side: first column indicates expenditure up to the end of previous year, column two expenditure during the year, and column three total expenditure to the end of the current year.
• Right hand side: first column indicates receipts up to the end of the previous year, column two receipts during the year, and column three total receipts to the end of the current year.
• Premium received on issues of securities is separately shown on the receipts side.
• Only net proceeds are shown in cases of issuing securities at a discount.
• Expenditure on assets (existing or not) is presented.
• Preliminary expenses are shown as a capital expenditure.
• The account’s balance is carried down; in the general balance sheet both totals are shown separately.

General Balance Sheet

• A component of the Double Account System, it adheres to conventional formats.
• On the liabilities side, it presents items such as the balance of the capital account, current liabilities, the credit balance of the net revenue account, reserve fund and depreciation fund accounts, and other relevant liabilities.
• On the assets side, it includes the balance of the capital account (representing fixed assets), current assets, and other assets.
• Depreciation is presented through a depreciation fund.

Double Entry System and Double Account System

• Double entry is a standard accounting method, while double account is a specific method for presenting final accounts in public utility companies.

Main Provision of accounts for electricity companies

• Use straight-line depreciation method, up to 90% of asset cost.
• Credit depreciation to a Depreciation Reserve, which may be internally invested or used to repay loans.
• Transfer profit/loss on asset disposal to a contingency reserve; excess unabsorbed loss can be considered part of the capital base.
• Maintain a contingency reserve (between 1/4 and 1/2% of the original cost of fixed assets from Revenue Account) up to 5% of original cost.
• The contingency reserve can cover expenses or profit loss from accidents/strikes, replacement expenses, or compensation under law.
• Transfer amounts equal to income tax and super tax saved on Development Rebate to a Development Reserve Account per the Income Tax Act, 1961.
• Development reserve can be appropriated over five years and invested only in the business.
• Maintain a General Reserve as per Section 67 of the Electricity Act, 1948 (contribution @ 1/2%of original cost of fixed assets up to 8%).
• Create a Tariffs and Dividend Control Reserve from surplus that can be used if profits are less than reasonable.
• It shall transfer to the purchaser if the undertaking is transferred.
• Dividends can only be paid to shareholders if normal depreciation, equated installment for arrears of depreciation, and arrears of depreciation (if any) are accounted for.

Treatment of Surplus

• A public utility should have restriction due to monopoly rights.
• Exploitation of customers for the benefit of shareholders should be restricted.

Practical steps involved in the calculation and treatment of surplus

• Calculation of capital base
• Preparation of statement of reasonable return
• Calculation of clear profit
• Preparation of statement of total surplus
• Preparation of statement of disposal of surplus
• Preparation of statement of disposal of clear profit
• Giving journal entry