Chapter

14 Budgetary Accounting in China

Editor(s):
A. Premchand
Published Date:
June 1990
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Author(s)
WANG SONG NIAN and TANG YUNWEI 

Accounting for the public sector in the People’s Republic of China is termed budgetary accounting. It is designed to record, report, and supervise the implementation of the state budget and to provide information for budgetary control. China is a socialist country whose economy is characterized by public ownership. The budget system bears some unique features that have a significant impact on budgetary accounting. An understanding of the public finance and budget system is necessary before going into accounting issues.

PUBLIC FINANCE AND BUDGET SYSTEM

In China, the majority of business enterprises are owned by the state. The state acts both as a political power to levy taxes and as the owner of numerous business enterprises to claim profits. The dual function of the state complicates the public finance and budget system.

Unlike in western countries, public finance in China is more involved with social production and distribution of national income. That is, it involves directly the allocation of production factors and the distribution of the financial results of state-owned enterprises. Through the taxation and profit remittance system1 the state gathers a large portion of national income (financial revenue) and then uses it for capital construction investment, appropriation of working capital, and a renovation fund for the state-owned enterprises, and for maintaining state functions in a planned manner (financial expenditure). On the other hand, finances for fixed assets and current assets of state-owned enterprises come from state appropriations.

The other part of financial resources comes from retained earnings that may, according to the new tax law, be used for special purposes such as expanding production, developing new products, and providing welfare. The remainder is financed from debt.

In addition to state-owned enterprises, collectively owned and privately owned enterprises are now allowed to develop in China. The relationship between the state and those enterprises is similar to that in western countries, that is, the state levies taxes on their net income. As for joint ventures with Chinese and foreign investment, the state not only levies taxes but also enjoys relevant portions of their profits.

Viewed from the perspective of the whole economy, the social products may be classified according to their final use into three categories of funds: compensation fund, consumption fund, and accumulated fund. Currently the major part of the accumulated fund and a small part of the compensation fund are realized through the distribution of public finance. The national income that is distributed through the state budget accounts for approximately one third, and for the other two thirds, a small part of the accumulated fund and a major part of the consumption fund (mainly personal consumption) are realized through the initial distribution taking place within the state-owned, collectively owned, and other kinds of enterprises.

STATE BUDGET AND OFF-BUDGETARY RESOURCES

The state budget is part of the public finances centrally handled by the state. It is an important tool by which the state effectively carries out its functions and distributes financial resources under its control. Furthermore, it serves as the basic financial plan within China’s comprehensive financial plan, and through it an endeavor is made to apply the country’s limited resources effectively to socialist construction.

The state budget comprises the receipts and allocations of budgetary resources. At present, the state budgetary receipts consist of seven categories.

  • Receipts from enterprises. This category includes profits from enterprises to which the profit remittance system is still applicable; “contract fees” and “rents” from enterprises to which the contract responsibility system applies; and “adjustment taxes” from enterprises for their high level of profits.
  • Income tax from state-owned enterprises. These receipts are actually a combination of income tax and profit claimed by the state.
  • Obligatory contribution to the state fund for the development of energy and communication. This is a partial levy and an off-budgetary fund.
  • Various types of taxes. This group includes tax on transactions (product tax, value-added tax, excise tax, tariff), on natural resources, for special purposes (construction tax, civic construction maintenance tax, etc.), utility tax (property tax, land utilization tax, etc.), and agricultural tax. These taxes yield more than income tax receipts and have become the primary source of budgetary receipts.
  • Receipts from debt such as that from other countries, international agencies, and treasury bills.
  • Special type of receipts such as pollution penalty charges.
  • Other receipts.

The allocation of budgetary funds is directly related to implementing state policies, developing socialist constructions, and improving the people’s lives materially and spiritually. Budgetary expenditures may be classified into capital construction appropriations, extra appropriations for current funds, expenditure on supporting agriculture, operating expenses in branches of industry, transportation, communication, and commerce, expenditures on social services, culture, education and science, state administration, and state reserves of physical assets.

Budgetary control is exercised through unified leadership and decentralized management, in keeping with the character of a planned economy. Unified central leadership and comprehensive planning are deemed necessary for managing the national economy in a balanced and planned way. However, the fact that China is a country with a vast territory and with different economic bases and natural endowments necessitates decentralized management at all levels of the budgetary structure and administrative divisions. Corresponding to the four levels of the state power structures and administrative divisions (that is, central government; provinces (autonomous regions and municipalities under the direct control of the central government); counties (cities, autonomous counties, and municipal districts); and townships (towns)), the state budget can be divided into two parts, central and local. The central budget includes the budgets of all central departments and the financial budgets of key enterprises under the direct control of the central government. The local budget (including provincial, city, and county budgets) consists of the budgets of local units and the financial budgets of local enterprises as well as summarized subordinate local budgets. Because the local budget incorporates the budgets of all local units and summarized subordinate local budgets, it is called the “overall budget.” In charge of drawing up and carrying out the overall budgets, financial administrations at all levels act as state budgetary units. Correspondingly, administrative and institutional units at different levels are responsible for the respective unit budgets.

Based on the public ownership of the means of production, the state budget of China has the following five characteristics:

  • It is required to carry out the tasks and policies set up by the Chinese Communist Party and the state.
  • It acquires and allocates budgetary resources according to a plan for the balanced development of the national economy.
  • It accumulates the funds necessary for socialist construction through self-reliance, and at the same time it utilizes foreign capital as much as possible to enhance the capability of self-reliance.
  • It applies the greater part of budgetary funds to socialist construction and to improve the people’s material and spiritual life, reflecting the basic economic law of socialism.
  • It adheres to the principle of keeping receipts and expenditures in balance, which is required by the comprehensive balance of the socialist national economy.

Another important part of the public financial system is off-budgetary funds, which are not collected and distributed through the state budget; instead, they are under the direct administration of local governments and units. Because of the varying economic developments in different areas and divisions, the state budget cannot take into account all their financial needs and related allocations. These resources are received and expended by the administrative units according to their needs. Off-budgetary funds are thus necessary supplements of the state budget. They include off-budgetary funds managed by local government, including various kinds of surtaxes; off-budgetary funds managed by administrative institutions, including various kinds of operating revenues; special item funds managed by enterprises and their supervisory units, including replacement and renovation funds, and overhaul funds; and various loans raised by the authorized institutions.

Off-budgetary funds have been increasing rapidly in recent years. In many provinces and cities, they have exceeded budgetary funds. Although not managed by the central government, they are nevertheless brought into the state plan. The state prescribes the definition, the criteria used in collection and expenditure, and the scope and purposes of such funds. Special measures are taken to prevent budgetary funds from transferring into off-budgetary funds. To that extent, off-budgetary resources are still the subject of budgetary accounting.

BUDGETARY ACCOUNTING—AN OVERVIEW

Budgetary accounting is deemed an integral part of budgetary control. Its structure therefore corresponds with budgetary structure. Following the structure of the state budget, accounting is also classified into overall budgetary accounting and unit budgetary accounting.

An Outline of the Budgetary Accounting System

Both the overall budgetary accounting system and the unit budgetary accounting system are centrally prescribed by the Ministry of Finance. The budgetary accounting system involves the following aspects:

  • Tasks fulfilled by budgetary unit accounting;
  • Accounting organizations and personnel;
  • Account titles, accounting documents, account books, and their usage;
  • Accounting for budgetary receipts and expenditure, and off-budget revenue and expenditure;
  • Verification of physical assets;
  • Accounting statements and their preparation;
  • Auditing, its content and method;
  • Procedures for turning over work to successors;
  • Maintenance of accounting files.

Structure of Budgetary Accounting

Budgetary accounting is designed to account for movement of both budgetary and off-budgetary resources. Budgetary accounting comprises two aspects previously referred to: (a) overall budgetary accounting, which is conducted by the Ministry of Finance at the central level and by financial administrations at the local level; and (b) unit budgetary accounting or accounting for administrative and institutional units, which is implemented by individual units such as government agencies, judicial and related organs, universities, and scientific research institutes.

Overall budgetary accounting concentrates on the collection and the allocation of budgetary funds, whereas unit budgetary accounting is carried out to handle appropriations received and their use. Organizationally, overall budgetary accounting can be divided into three corresponding levels. They are (1) the Ministry of Finance at the central level; (2) bureaus of finance at the provincial level; and (3) departments of finance at the county level.

In addition, the following four categories of accounting can be considered, in a broad sense, as integral parts of overall budgetary accounting: (1) accounting for the national treasury administered by the People’s Bank of China; (2) accounting for capital construction appropriation used by the People’s Construction Bank of China; (3) accounting for agricultural fund appropriation used by the Agriculture Bank of China; and (4) accounting for tax resources used by tax authorities. These kinds of accounting must be used (in close cooperation with the overall budgetary accounting conducted by financial administrations at all levels) to record, report, and supervise comprehensively overall budgetary performance and result.

According to the structure of governmental institutions and the regulations for withdrawing and reimbursing budgetary funds, there are three kinds of administrative and institutional units at different levels that draw up the unit budget and carry out independent unit budgetary accounting, that is, top-authority level, second-level, and basic accounting units. Top-authority level accounting units draw and reimburse their budgetary funds from financial administrations at the same level; second-level accounting units are under the top-authority level accounting unit and have their own subordinate accounting units; and basic accounting units are independent accounting units at the lowest level responsible to a top-authority level or second-level accounting unit. All these units at the three different levels make use of budgetary accounting and have responsibility for funds under their charge. Chart 1 presents a framework of the budgetary accounting system.

Chart 1.Framework of Budgetary Unit Accounting1

1 Units between broken lines are the participants of overall budgetary accounting.

Functions of Budgetary Accounting

Units at all levels are obliged to carry out the state budget both effectively and efficiently, but since each level has different tasks, the contents of overall and unit budgetary accounting differ somewhat. In general, budgetary unit accounting performs three functions in recording, reporting, and supervising the acquisition, disposal, and balance of budgetary funds. In carrying out these functions due attention is to be paid to the following purposes of budgetary control.

First, to provide reliable data used in budgetary control. Budgetary accounting employs systematic methods to account for budgetary activities and to prepare financial statements so as to reflect the status of government finances. These data are used by different levels of government to analyze the developments in the execution of the budget, to find problems, and to take the necessary corrective measures.

Second, to observe financial discipline. The budgetary accounting units are responsible for carrying out financial policy and disciplines set up by the state. Through an examination of documents and accounts, physical inventory, and periodic checks to ascertain any noncompliance with the law, or the existence or emergence of waste and extravagance, these units are expected to safeguard the state assets.

Third, to secure budgetary revenues and expenditures. By participating in collecting revenues and in their spending, the budgetary accounting units reveal the gaps in the fulfillment of budgetary expectations. They enable the department responsible to supervise the utilization of budgetary funds.

Characteristics of Budgetary Accounting

Compared with business accounting, the characteristics of budgetary accounting can be summarized in terms of the following three aspects.

  • More uniformity and wider coverage

To collect information on countrywide implementation of the state budget, it is necessary to have highly unified procedures, methods, and targets for budgetary accounting, even though different sectors and branches exist. The broad coverage of budgetary accounting is well reflected in its scope. Budgetary accounting deals not only with budgetary receipts and expenditures in the service sectors, it also involves profits, taxes and appropriations for capital construction, and sources of current funds for the production of materials.

  • Cash basis accounting

By applying the cash basis, budgetary accounting is more helpful in determining and reconciling budgetary revenues, expenditures, and balances. It also facilitates the preparation of accounting statements and analysis of the impact of budgetary operations on the economy.

  • Calculation of profit or loss

Generally speaking, budgetary accounting does not calculate profit or loss. Those units charging their products and services provided, however, are required to calculate profit and loss to enhance their economic effectiveness. The accounting procedures used may be somewhat simpler than those used in business accounting. In determining profit and loss for budgetary units, the accrual basis has to be adopted.

OVERALL BUDGETARY ACCOUNTING

Overall budgetary accounting is an important component of the system of public finance. It is designed to calculate, report, and supervise the execution of the state budget, and to promote its fulfillment. The basic tasks of overall budgetary accounting conducted by the Ministry of Finance and financial administration at all levels are

  • To handle regularly such accounting events as budgetary revenue, national treasury deposit, budgetary appropriation, budgetary expenditure, current transaction budgetary circulation fund, and off-budget revenue and expenditure, and to organize periodic examinations of financial administrations, taxing authorities, and the national treasury. These tasks are to provide timely, reliable, and accurate financial information.
  • To prepare and summarize ten-day, monthly, and quarterly accounting statements; to participate in reporting the performance of the state budget to financial administrations at higher levels and the People’s Government at the same level; to be in charge of carrying out and examining the final accounts for state budgetary units and administrative and institutional units.
  • To supervise and encourage, in cooperation with the receiving agencies responsible for providing budgetary receipts, the task of timely and complete remittance; to help all units that receive budgetary appropriations to make reasonable and economical use of their budgetary funds; to arrange budgetary funds carefully and skillfully according to the seasonal nature of budgetary revenue and expenditure so as to resolve the contradictions between the potential of financial resources in the treasury and the need to use them to ensure that all funds for socialist construction are appropriated according to the budget.
  • To assist the national treasury in receiving budgetary funds on time, allocating them among the different levels, and turning over the required portions to higher authorities; to assist in having functional departments within a financial administration provide the national treasury with plans, rules, and regulations concerning the implementation of the state budget.
  • To formulate the overall and unit budgetary accounting systems and the detailed rules for enforcement according to state policies, laws, decrees, and regulations; to cooperate with the People’s Bank in drawing up national treasury regulations for enforcement.
  • To guide and supervise unit budgetary accounting at the same level and at the lower level.

Overall budgetary accounting routinely records, reports, and supervises the receipts and allocations of budgetary funds on the basis of documents, accounts, and statements.

The original documents used in overall budgetary accounting can be classified into the following four formats: (1) daily reports and supporting documents concerning budgetary revenue obtained from the treasury, such as documents of returning budgetary revenue and notices of payment and correction; (2) documents of budgetary appropriations and transfer vouchers of receipts, including authorization for the bank to pay and the advice of remittance; (3) monthly statements of payment for capital construction from the People’s Construction Bank of China; and (4) other documents in support of other accounting transactions.

To clarify the sources of different funds, the accounts of overall budgetary accounting are divided into two parts: budget and off-budget. Under the conditions of receipts/payments bookkeeping required by budgetary unit accounting, all accounts, whether in-budget or off-budget, must be classified into fund source, fund application, and fund balance. Table 1 shows these items.

Table 1.China: Trial Balance of General Ledger Account
ReceiptPayment
ClassificationAccountsSideSideBalance
Budgetary

fund
Sources and

application of

funds
Budgetary revenue

Appropriations received
Subsidies received
Suspense deposit
Budgetary expenditure
Appropriations given
Suspense payment
Total
Fund balanceDeposit in treasury
Receipts and payments
in transit
Total
Off-budgetary

fund
Sources and

application of

funds
Off-budgetary revenue

Suspense deposit

Off-budgetary
appropriation
Off-budgetary
expenditure
Suspense payment
Total
Fund balanceOther deposit

The relationship among the three sorts of accounts mentioned above can be stated in the following equation: the sum of the receipt-side balances of all fund source accounts less the sum of the payment-side balances of all fund application accounts equals the sum of the receipt-side balances of all fund balance accounts.

In view of this equation, both the budgetary and the off-budget funds should be in equilibrium.

According to the overall budgetary accounting system, four corresponding fund source accounts are usually set up to reflect budgetary receipts from different sources: budgetary receipts turned over to the national treasury; budgetary grants appropriated from financial administrations at a higher level; budgetary receipts from financial administrations at a lower level; and budgetary funds transferred from off-budget funds.

Because overall budgetary accounting does not involve the transaction of purchasing goods or paying cash, there are no such accounts as “fixed asset,” “material,” or “cash.”

The overall budgetary accounting of financial administrations at all levels can check budgetary performance at any time through vouchers and accounts. However, to grasp, analyze, and assess budgetary performance during a certain period, a summary needs to be made on the basis of the prescribed target system and the routine accounting information that comprises the following three types of overall budgetary accounting statements: (a) a statement of final accounts for budgetary receipts and disbursements and a statement showing the status of budgetary funds, including a summary statement of final accounts for budgetary receipts and disbursements, a supporting schedule of final accounts for budgetary revenue, a supporting schedule of final accounts for budgetary disbursements, a statement showing different levels of final accounts for budgetary receipts and disbursements, and a statement showing the status of budgetary funds at the end of the year; (b) a statement of basic data showing such norms as organization and personnel spending standards and the operational achievements of administrative and institutional units; and (c) other supplementary statements prepared as explanatory material on the above-mentioned final accounting statements, whose contents depend on features of annual budgetary performance and requirements for analyzing final accounts.

UNIT BUDGETARY ACCOUNTING

Unit budgetary accounting is employed by administrative and institutional units to record, report, and supervise the performance and result of a unit budget. Administrative units refer to all authorities that bear responsibility for managing state affairs, such as the Standing Committees of the People’s Congress at all levels, the People’s Government at all levels, judicial and procuratorial organs, political parties and groups, and people’s communities. Institutional units are concerned with all organizations that are not engaged in the production and circulation of material goods but that are necessary for socialist construction, such as cultural establishments, institutions of education and scientific research, medical and health institutions, and units of economic construction.

Unit budgetary accounting plays an important role in unit budgetary control systems by carrying out the following basic tasks:

  • To use budgetary appropriations reasonably and economically, according to the approved budget, and to organize operational revenues according to prescribed policies.
  • To perform such routine jobs as calculating, record-keeping, checking, closing, and reporting, and to prepare accounting statements required by the unit budgetary accounting system.
  • To carry out accounting supervision to safeguard state resources in accordance with state policies, laws, decrees, and regulations.
  • To aid budgetary control, accountants must regularly evaluate and analyze the execution of the budget by frequently examining the experience of budget execution and ascertaining why the budgetary units fail to fulfill their tasks.
  • To draw up supplementary regulations and rules and to direct and supervise the accounting practices of subordinate units with the guidance of higher authorities and according to one’s own needs.

Unit budgetary accounting can be classified further into three categories depending on the funds provided and the type of budgetary controls exercised. Units may be full budgetary units, differential budgetary units, or self-reliant budgetary units. The features of the accounting systems of these units are considered below.

Accounting for Full Budgetary Units

Under the pattern of full budgetary control, all revenues and expenditures of administrative and institutional units should be brought into the state budget, which means that their expenditures are completely covered by the state budgetary appropriations and their revenues (except off-budget revenues retained with the approval of the state) are completely turned over to the state. This approach is particularly suitable for administrative and institutional units that have very few revenues of their own and that are dependent on state appropriations for such expenditures. Educational institutions, libraries, etc., belong to this category. Following the approach of overall budgetary accounting, unit budgetary accounting classifies all accounts in terms of sources, application, and balance. The balance equation in this respect is the same as shown in Table 1.

Budgetary units are required at the beginning of each quarter to make their quarterly plans on a monthly basis for the approved yearly budgets. After these plans are reviewed and approved, they will receive their appropriations through banks from financial administrations at the same level, or budgetary units at a higher level. Thus, no appropriations can be given without approved budgets.

Budgetary appropriation is one side of the fund movement, and disbursement, reflecting actual expenses, is the other side. Disbursements are used as a basis for assessing the performance of the unit budget and therefore need to be properly classified and charged to the correct account. Supplementing this are more detailed accounts. According to the current unit budgetary accounting system, full budgetary units can have such detailed expenses as wages, fringe benefits, employees’ welfare, retirement payments, stipends, general office expenses, equipment investment, repair charges, and operational expenses. Following the conventional principles involving scrutiny of the legality of transactions and the availability of funds, the system ascertains that payments are made after norms and spending standards have been verified.

Accounting for physical assets has its own features distinct from those of business accounting. Since there is no perceived need to calculate cost, unit budgetary accounting does not handle depreciation but only uses “fixed assets” and “fixed assets fund” to deal with the increase and decrease of fixed assets. Two kinds of conditions for consumable materials exist, however. Those institutions that consume a lot of materials maintain certain reserves to meet their needs. To account for these materials properly, it is necessary to establish the “materials” account charged at purchase and written off at use.

In the meantime, full unit budgetary accounting should cover also off-budget events to reflect the movements of both budgetary and off-budget funds. On the basis of routine accounting, different statements must be prepared, including one showing movements of unit budgetary funds, one showing the increase and decrease in appropriations, one showing the final accounting for appropriations used, a supporting schedule of current accounts, a statement of final accounting for off-budget revenues and expenditures, and a statement of basic data.

Accounting for Differential Budgetary Units

Adopting the pattern of differential budgetary control, budgetary units should compensate their expenditures with their own revenues. The differences between expenditure and revenue will be made up by a state budgetary appropriation if the former is larger than the latter, or turned over to the state if the former is smaller than the latter. This pattern can be adopted by those units that have regular revenues such as hospitals, theaters, and gymnasiums.

Three approaches to differential budgetary control are in use: (a) subsidies for specific items (such as wages, fringe benefits, and employees’ welfare) can be covered by subsidies appropriated, and other needs must be met by the budgetary units’ own revenues. At the end of the year, no additional subsidies are available, and any surplus revenues are retained for the units’ future use; (b) normal subsidies, that is, the yearly subsidies granted to differential budgetary units, are calculated according to specific norms, such as subsidies per hospital bed. Once the subsidies are approved, budgetary units will neither receive additional subsidies nor turn their surplus revenues over to the state, regardless of the deficit or surplus; and (c) the amounts of subsidies or surpluses to be turned over to the state are determined by financial administrations on the basis of the units’ expenditures and revenues. Once these determinations are made, the units are expected to remit or receive funds regardless of the final budgetary outcome of a surplus or deficit.

Accounting for Self-Reliant Units

Self-reliant units are those with regular and stable operational revenue, and usually a surplus will exist after meeting operational expenses. To encourage these units to enhance their effectiveness and operation, and to permit them to enjoy more autonomous power they are allowed to retain the remaining surplus to expand their operations. Aside from this, they are subject to the same control as full budgetary units. Examples of self-reliant units are some scientific research institutes and forestry operations.

In comparison with full budgetary unit accounting, accounting for the differential budgetary unit and the self-reliant unit have some distinctive characteristics. First, in these two kinds of units, all revenues are used to cover expenses. Hence, no distinction is made between budgetary and off-budgetary funds. Second, operational revenue and expense are specifically accounted for. Operational revenues are the fees received from the sale of their services and are the main source of receipts. Operational expense is the expenditure made to obtain operational revenue. Specific accounts—“operational revenue” and “operational expense”—are set up to handle the transaction. Third, physical assets are accounted for in the same manner as in business enterprises.

Current Issues in Budget and Budgetary Accounting

Reform of the economic structure is well under way in China. A highly centralized planned economy is gradually giving way to a planned commodity economy. Local governments are being given autonomous power to handle public finances. Different forms of ownership are allowed to develop while public ownership still prevails. Ownership is separated from management in state-owned enterprises. Enterprises tend to finance their activities from different sources. These and many other factors have a significant impact on the budgetary accounting system. Several issues have already emerged in this field: one such area is the contractual budget.

In recent years many local governments have signed contracts with financial administrations at a higher level, which has set the budgetary surplus that must be turned over by local governments. This procedure creates many accounting problems. Accountants are asked to participate in the negotiations determining the budgetary obligation that involves the estimation of budgetary revenues and expenses. The proportion by which the budgetary surplus is allocated, including the proportion that can be used as a bonus, must be determined in advance. The internal control system aimed at protecting the state assets has to be designed. Many principles of budgetary accounting originally applicable become subject to change.

Inflation accounting is another area. For a long time, China adhered to the policy of keeping budgetary receipts and expenditures in balance and favored a slight surplus. This policy has been changed somewhat as reform of the economic structure has proceeded to allow a deficit to emerge. As a result, significant budget deficits showed up in consecutive years. Debate is continuing among economists about the desirability of such financing. Some criticize it as the source of inflation and prefer a tight policy, while others hold that it helps the economy so long as it is within controllable limits. This continuing controversy has some impact on budgetary accounting, in particular in terms of adjusting to inflation.

A third area relates to the off-budgetary fund problem. Off-budgetary funds are not centrally handled but must be channeled through budgetary accounting. These funds, as noted earlier, are increasing rapidly and have well exceeded budgetary funds. Maintaining control of these funds is difficult and complex. Since these funds are managed by individual units, a strong tendency exists to stipulate that they be used for capital construction. Such construction might have contributed to the overheating of the national economy. Experience shows that it is difficult to curb this trend. According to one of the surveys, a large part of the funds is not used efficiently. Many projects are duplicated, thereby contributing to a waste of scarce resources.

Budgetary funds that are prescribed for a special purpose are sometimes transferred into off-budgetary funds. Although budgetary accounting is required to report and supervise such lapses, it is difficult to do in practice. Government auditors are naturally concerned about the numerous cases of this type that they have uncovered. One of the steps taken recently in auditing to prevent the recurrence of such transfers is that the auditors are empowered to impose direct penalties and can confiscate budgetary funds unlawfully retained by the budgetary units. Although this step is welcome, it is not clear whether it is adequate: it seems that there is much that needs to be done in this regard.

Another area relates to the introduction of concepts and procedures of business accounting into budgetary accounting. The new budgetary accounting system effective January 1, 1989 includes a category dealing with “accounting for cost and expense.” Any budgetary unit that sells products or charges for their services is required to account for product costs and expenses. The accrued basis is usually adopted to replace the cash basis, depreciation is calculated on fixed assets, and inventory flow assumptions of different kinds are made. Profit is calculated and distributed according to a predetermined arrangement. Some techniques of management accounting have also been introduced.

1

Reform of the income tax system is underway. In the past, all state-owned enterprises were provided with production inputs by the state, and profits were remitted to the state. This profit remittance system has been replaced by an income tax system under which the enterprises turn over the income tax on profit earned, while retaining profit after income tax to be used for different purposes.

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