Subject: Financial Management

SUBJECT: FINANCIAL MANAGEMENT

SYLLABUS

1. BOOK KEEPING IN A VOLUNTARY ORGANISATION
2. CASE RECEIPTS AND BANCKING PRACTICES
3. CASH DISBURSEMENTS AND ACCOUNTS PAYABLE
4. ACCOUNTS RECEIVABLE
5. MANAGEMENT OF FINANCIAL RESOURCES
6. PAY-ROLL
7. ACCOUNTS AND AUDITING
8. FINANCIAL REPORTS
9. PUR CHASING ,RECEIVING AND STORES /HOSPITAL
10. INVENTORY CONTROL
11. BUDGETING IN VOLUNTARYORGANIZATION
12. STATISTICS

╬╬╬╬╬╬╬╬

REFERENCE BOOKS

1. DOUBLE ENTRY BOOK KEEPING –BY BATIBOL
2. MANAGEMENT ACCOUNTING – BY MANMOHAN
3. FINANCIAL MANAGEMENT - BY S.C. KUCHAL

╬╬╬╬╬╬╬╬

INTRODUCTION

Mutual aid has been part of society. The incessant desire to help ones fellowmen has been in existencefrom time immemorial though the forms and conditions take different shape from society to society depending upon social,economic and political factors. The voluntary agencies /hospitals have been engaged in a variety of social welfare programme /treatment programmes for the weaker, vulnerable and needy sections of the populations.

These associations were previously financed by private charities. With the socialisation of natural resources and state deciding to undertake health care units/ social welfare programmes, private institutions are rather playing a secondary role in this regard.With the advent of Central Social Welfare Board in 1953, large scale grants-in-aid have been provided by the Government to social welfare agencies and for voluntary health agencies.

Our present study material however, envisages a study of the management of financial resources both in voluntary social welfare agencies and hospitals. With the introduction of large scale grants-in-aids voluntary agencies /hospitals are required to follow certain financial procedures according to the conditions of the grants. There have been so many instances of delay in sanction or release o f grants to these agencies just because of their delay in sending budget estimates, statement of accounts etc. And this is again thanks to the poor knowledge of administrators of these agencies in this field i.e. accounts.

Hence we shall in this study material concentrate in the matters of preparation of budgets, mode of maintenance of accounts methods of reporting, conduct of audit and so on relating especially to the voluntary and social welfare organizations, hospitals and business organizations. Hospital are of three types mainly governments hospitals, hospitals run by grants, and profit making hospitals. Government hospitals being solely financed and controlled by the government are outside the periance of our study. Since there cannot be uniformity in the maintenance of accounts of such self-financed, profit making hospitals, hencewe are left out with aided hospitals which are akin to voluntary agencies. Due to their liabilities of the society and donors their accounts and financial administration must be put to light through we would not fall to mention other two type of hospitals here and there.

We do hope that readers will appreciate the manner of presentation of our work and we should be obliged of we are suggested for the improvement of this study material. You are always welcome to share your difficulties with us, which will be given immediate attention .I wish you all the best.

╬╬╬╬╬╬╬╬

CHAPTER-I

BOOK KEEPING IN A VOLUNTARY ORGANIZATION

We have so far obtained fact knowledge about planning of activities,estimating expenditure to be incurred conforming to lines of activities, estimating requirements of revenue and finally estimating amount available from various sources. Further we have also gone through about getting grants from central or state boards and from community chests too. All these functions would be nullified if there is lack of sound accounting system since it serves following purposes.

a)Accounts inspire public confidence;an audited statement of accounts prepared by a qualified auditor can speak volumes about the genuineness of the agency /hospital though possibilities of manipulation cannot be ruled out.

b)A sound accounting system is the basis of effective business administration.

c)A well defined system of accounting translates the programmes and activities in terms of rupee and paisa.

d) An accounting system enables to show responsibility

1) Of an agency /hospital towards donors.

2) Of an executive towards the committee and

3) Of the staff towards the executive

e) Lastly system of budgeting helps an agency to compare actual figures with the budgeted figures and thereby enables an agency /hospital to correct itself from mistakes. Budgeting techniques do also helps for performance evaluation of an agency by the donors.

Having emphasised and justified the significance of a sound system of accounting in an agency/ hospital we are committed to know some broad principles to be followed in organizing any system of accounting which are listed as under:

a)SIMPLICITY: Any system of accounting should be simple and clear so that it can be read freely by laymen.

b)ACCURACY- Accuracy is important in nay system of accounting since any type of inaccuracy will male suspicions in the minds of the reader.

c)FLEXIBILITY- Sound accounting system should be flexible. One way to achieve this flexibility is through the use of subsidiary ledgers showing the details of some transactions

d)INDUSIVENESS- A sound accounting system must be comprehensive and include all the essential data, translating the welfare programmes into money.

SYSYTEMS OF ACCOUNTING:

How detailed accounts will be and what method will be used depend upon the size of the agency, its resources, volume of transaction and the type of people /agency to which it is answerable. There are however two systems of accounting namely a) cash system ad b) income or actual system in the accountancy horizon.

a)CASH SYSTEM:

The fundamental principle of this system is a recording of actual cash receipts and disbursements during the month in which they are actually paid /received.

Hence if a typewriter is purchased in March and the payment is made in April, under cash system of accounting, the entry for cash of made in April only though the liability accrued in March itself.

Cash system of accounting is generally adoptable and useful to small organisations which do not handle large sums of money and accounts are kept by persons who are not very much experienced in the field.

However, the cash system has a great drawback which should have been noticed by a careful reader. In the above instance an agency following cash system of accounting records the entry of purchase of typewriter only in the month of April. If the accounts are closed in March-31 of the same year, an entryfor purchase of typewriter will be missing in the records though the agency is indebted for the amount of typewriter to the firm who has supplied the typewriter.

Thus, onemay notice, under cash system true picture of agency’s financial position is not revealed despite their simplicity in application. Only because of this reason, this system is not widely used even in small organizations.

b)INCOME OR ACTUAL SYSTEM:

Unlike cash under this system entries are recorded in the records whenever they accrue. This system requires a more complex system of recording and better qualified accountantin the above example, is the liability accrued with the purchase if the typewriter is entered in the month of Marchitself. ‘Income or actual system’ is said to have been followed through entry for cash payment is the cash book will be made in April only (i.e. first month of next financial year).

CLASSIFICATION OF FINANCIAL STATEMENTS:

Classification and presentation of accounting data is guided by the principles of proper disclosure, materiality and consistency. The accounts of an organisation shall disclose sufficient information which are of material interest to the organisation and also fulfil the concerned statutory obligations. Items which are not of material interest may be clubbed into one general account. That (technique) is called materiality principle. Moreover the system once adopted is followed consistently over a number of years so as to help comparison and interpretation.

But the principle of consistency does not imply non-flexibility as not to permit the introduction of improved techniques of accountingto understand the systemof recording the transactions; one should classify the transactions according to certain principles.

Broadly speaking, following types of transactions (rather accounts) are common to every type of organization:

a)The organization may be dealing with the number of persons, and various trading organizations- called PERSONAL ACCOUNTS.

b)The organization may own properties like furniture machinery etc called REAL ACCOUNTS and

c)The organization may be incurring certain expenditure like rent , salaries , allowances etc and may be receiving receipts like grants , donations and other income from the activities carried on called NOMINAL ACCOUNTS.

One could infer from the classification that:

a)Personal accounts represent transactions with any type of persons be it individual property, partnership or company

b)Real accounts represent visible wealth ,being properties of the organization and liabilities of a capital nature and

c)Nominal accounts represent income and expenditure (of revenue nature)

Once the classification between personal, real and nominal accounts is well understood the application of the rules of double entry become virtually simple.

PRINCIPLES OF DOUBLE ENTRY SYSTEM:

Double entry system means that entry will be recorded once as a debit and correspondingly as a credit. The debit and credit of each of transactions completes the principle of double entry.

However we must know what is debit and credit in common parlance.

DEBIT(Dr.) denotes CHARGING and CREDIT(Cr.) denotes GRANTING.

We know that for every outflow there would be a corresponding inflow be it goods , services an d cash .similarly , in accounts, any transactions is viewed from both the aspects , i.e. debit and credit (only in double entry system alone).

Presumably,debit reflects the inflow, the properties hold and expenses and losses and the credit reflects the outflow, the properties sol, income and gains.

Therefore, the rules of debit and credit in this regard are:

a)IN CASE OF PERSONAL ACCOUNT (PARTIES ACCOUNT ):

Debit the receiver DrCr

Credit the giverRs.Rs.

(e.g.) X’s a/c Cr.100

(if Y gives Rs 100/=to X ) to credit Y’s a/c 100/=)

b)IN CASE OF REAL ACCOUNT (TANGIBLE ASSETS):

Debit what comes in DrCr

Credit what goes outRs Rs

(e.g.) typewriter’s a/c Dr.3000

To cash a/c3000

(when we purchase a typewriter , the typewriter ,a tangible asset comes in and hence we debit it .since cash is paid and going out it is credited to the same amount).

c)IN CASE OF NOMINAL ACCOUNTS (INCOME & EXPENDITURE):

Debit expenses and lossesDr.Cr.

Credit income and gainsRs.Rs.

(e.g. ) salary account Dr.10,000

To cash10,000

(When salary to employees is paid in cash salary account is debited being a nominal expenditure and cash account since it is going out.)

It is recommended generally that every agency /hospital/business organizations should keep in accounts on double entry basis. It implies that for every entry, there should be a corresponding credit entry of equal value. This system has the advantage of being self balanced and serves asa safeguard against inaccuracy of book keeping work.

The idea of double entry book-keeping will be clear from the following instance.

We shall take three types of transactions aslisted below:

a)The agency /hospital purchase a typewriter worth Rs 3,000/=

b)The agency /hospital pays staff salary in cash to the extent of Rs 5,000/=

c)The agency /hospital receives fees to the extent of Rs 10,000/=

All these three transactions are under double book keeping posted twice to enable self balancing as shown in the following chart

Dr .cash bookCr.Typewriter A/c

Receipts amt.Payments Amt.

To

Fees 10000 a)cash 3000To

b)salary to staff 5000a) Cash 3000

by balance carried

down 2000

------

1000010000

------

To balance brought down 2,000/=

Dr.Salary account Cr.Dr.Cr.

To cash by

b)5,000c) cash 10,000

------

Receipts and payments account for the year ended.....

------

Toby

Fees 10,000 “ Salary5,000

“ Typewriter3,000

Cash

(closing balance) 2,000

------

10,00010,000

------

Thus a redundant leader may catch idea of double entry book-keeping and its sole purpose of self-balance which is evidenced in the Receipts and Payments shown above tallied both sides.

BOOK KEEPING CYCLE:

G E N E R A L
L E D G E R

This cycle begins with the recording procedure of transactions from the posting media, called journalizing. After journalizing is completed, the information contained in the journal is transferred to the ledger. The process is transfer is referred to as posting or grouping of the information recorded earlier in the journal. After posting is completed, the accounts are periodically summarized and balanced for preparation of financial statements.

EXAMPLE OF POSTING MEDIA
Charges of patients
cash receipts
Suppliers invoices
Cash memos ,bills
Payment vouchers
Cheques
Petty cash slips
Stores requisitions / / TYPES OF JOURNAL
General journal

Cash book
Patients fee journal
Salary register
Stores requisitions
SUBSIDIARY LEDGERS
Patients accounts receivable accounts payable building equipment inventory or stores
FINANCIAL STATEMENTS

BOOK KEEPING CYCLE OF THE VOLUNTARY ASSOCIATION

EXAMPLES OF POSTING MEDIA
Salaries & wages printing & stationary postage and telegrams subscription grants-in –aid donations miscellaneous receipts bank interest / / TYPES OF JOURNAL
Acquaintance register
Petty cash book
Subscription register
Donations
Grants-in-aid files
Bank statements files
F S I T N A A T N E C M I E A N L T
GENERAL
LEDGER

IILUSTRATION= 1-1

BOOK KEEPING RECORDS:

Recording financial transactions and preparing financial statements require many types of business and account records. These records can be divided into three types, Posting media, journals and ledgers.

POSTING MEDIA:

Book keeping work originates with a transaction and these transactions are recorded in cash receipts, supplier’s invoices, cash memos, bills payment vouchers, petty cash vouchers, stores requisitions etc. these papers provide necessary information for posting to journals and ledgers and are frequently referred to as posting media.

Theoretically, the information provided by ‘posting media’ is first recorded in journals, and then is posted in general and subsidiary ledgers. However, journal and subsidiary; ledgers are posted simultaneously. Such posting is made possible by use of special machines and multiple copy forms .preparing multiple copies of ‘posting media’ often help administration in implementing effective internal control.

JOURNALS:

The journal is a book of prime entry i.e. book of original entry and each transaction is recorded chronologically following the double entry principle.

An explanation for each entry is also given and this is called ‘narration’. The recording of transaction in the journal is called ‘journalisation’.

Theoretically, information from the posting media could be entered directly in the general ledger .however, journals serve as a means of classifying and summarizing financial transactions, thus eliminating from the general ledgers, many unnecessary details.

Books of original entry are of two types the general ledger and special journals. in as much as they complement each other, both types usually are used in combination .difference in terminology may create confusion, but terms like cash books, subscription register ,fee register etc. for voluntary agencies and patient fee register ,payment registers etc. for hospitals are used to indicate journals of different types.

THE GENERAL JOURNAL AND SPECIAL JOURNALS:

The ‘General Journal’ format most frequently used provides columns to record (a) The date of entry, (b) Members of account (account numbers) in the general ledgers to which amounts will be posted, (c) Explanation of the entry which also includes names of the accounts involved, (d) Ledger page number where amount is posted and, (e) Debit and credit amounts of entry. The explanation (otherwise called narration) should be detailed enough to substantiate the accuracy and validity of the entry. The general journal is used to record transactions of a type that do not occur frequently enough to warrant their being grouped and recorded together.

A standard type of general journal is illustrated with imaginary transactions and figures, for easy understanding as under: (rules previously explained are strictly followed while making journal entries).

GENERAL JOURNAL

------

DATEACCOUNT NO.EXPLANATIONLEDGERDEBITCREDIT FOLIO

------

(When bank account is opened with Rs .5,000/=)

31.11.84 010bank account Dr.5000.00 To cash 5000.0 (being the opening of a current account with….. Bank vide resolution of governing body …dated…)

(When Grant-in-aid is received in the form of DD) 01.12.84 120 bank account Dr. 5000.00 To grants-in-aid 5000.0 (being the grant received from X-Agency their DD No…. Dated ……)

(When annual subscription received) 03.12.84 140 bank account Dr. 1200.00 to membership fees 1200.0 (being the annual subscription received from the following members 1…2….3..

(When furniture is purchased) 03.12.84 320 furniture and fittings Dr. 5000.00 To cash 5000.0 (being the purchase of table and chairs from…. As per bill No….dated…)

(When a typewriter is purchased) 05.12.84 340 office equipment account Dr. 3500.00 To bank 3500.0 (being the purchase of typewriter from….and as per bill No….dated…)

(When office stationary purchased on credit basis from Y& Co.) 08.12.84 350 printing and stationary account Dr. 1700.00 180 to Y & Co. 1700.0 (being the office stationery purchased from Y & Co…. on credit as per their invoice No….dated…)

(when rent is paid through DD) 10.12.84 050 rent account Dr. 600.00 to bank account 600.0 (being the rent for the month of November 1984 paid to …through DD No…. for the office premises)

(When interest is paid through DD) 12.12.84 060 interest account Dr. 1000.00 to bank account 1000.0 (being the interest paid through DD)

31.12.84065bank account Dr.500.00 to interest account 500.0 (being the interest credited by the back on 31st December 1984)

------

One can see that all three types of account have been involved in the above illustration and the reader is advised to see whether all the rules have been strictly adhered to.

SPECIAL JOURNALS:

The types of special journals which may be used will depend upon the frequency with which like transactions of a particular class occur. A special journal may be set up for any class of book keeping transaction is the volume is sufficient to warrant its use. The most common are patient’s fee journal, member subscription journal (if number of members is fairly large). Pay rolls register and cash receipts and payments journal (commonly known as cash book). Patient’s fee journal and pay roll register will be dealt in the subsequent chapters.

The cash book provides a daily record of all cash and bank transactions in the hospital/agency, both receipts and payments, and our illustration (1-2) shown below, depicts a typical day’s activity. All cash transactions even in special journals (such as patients fee journals, member subscription journal, pay-roll register etc.) are summarized and shown in the cash book so that the cash position of the hospital /agency can be quickly seen at a glance.