Why Government Accounting Must Shift from Cash to Accrual
Finance Minister Nirmala Sitharaman briefs media on GST Council decisions! (Image PIB India)
Moving from cash-based to accrual-based accounting could transform India’s public finances—offering a truer picture of spending, liabilities, and revenue collection.
By P SESH KUMAR
New Delhi, November 10, 2025 — If India’s government accounts were a piece of music, they would be somewhere between a classical symphony and a Bollywood remix—traditional in rhythm but sprinkled with modern beats.
Contrary to popular belief, the Indian government does not run its finances on a pure single-entry system. Nor has it embraced the fully double-entry accrual model used by modern governments like the UK or New Zealand. Instead, India operates a predominantly double-entry system—but on a cash basis, with a few selective notes borrowed from accrual accounting. It is an intriguing hybrid—part old-world, part modern ledger.
To understand this blend, one must first separate two distinct dimensions of accounting: basis and method. The basis determines when transactions are recognized —cash basis means “when money actually changes hands.”
The method determines how transactions are recorded — single or double entry decides whether every debit has a corresponding credit.
India’s public accounts, governed by the Comptroller and Auditor General’s Accounting Rules, (Duties, Powers and Conditions of Service) Act, 1971 and the General Financial Rules, follow a cash basis of accounting but record transactions using the double-entry method.
Every transaction has its twin: when the Ministry of Defence pays ₹10 crore to Hindustan Aeronautics Limited (HAL) for aircraft parts, there’s a debit to “Expenditure—Defence Services” and a credit to “Cash in Treasury.” When a citizen pays income tax, the entry debits “Cash” and credits “Revenue Receipts-Direct Taxes.” That’s as double-entry as it gets-except that it stops right there.
What’s missing is the accrual element. The government recognizes the transaction only when cash flows. If HAL delivers the aircraft in March but is paid in April, the expense shows up next year. Similarly, a tax assessed but not yet collected does not appear in the books. There is no “Accounts Payable” or “Tax Receivable” ledger. It’s like watching a movie with every alternate frame missing-we get the story, but not the motion.
Yet, India has flirted with accruals in pockets. The Public Account of India, for example, records transactions that belong neither to the Consolidated Fund nor the Contingency Fund- such as provident funds, deposits, and advances—many of which inherently recognize liabilities and assets. The balances in employee GPF accounts are treated as government liabilities; investments made from these funds in special securities appear as assets. Similarly, departments like Defence, Railways, Posts, and Telecommunications maintain commercial-style accounts for their manufacturing or service units, adopting accrual principles for inventories, payables, and receivables. The Indian Railways Finance Code is a textbook in itself on how accrual features coexist with cash-based government reporting.
A vivid Illustration of this duality can be seen in how the Government of India handles depreciation. Suppose a government printing press buys new equipment worth ₹2 crore. Under the cash-based system, the full amount is booked as expenditure in that year. But the asset continues to serve for ten years, producing value. To capture this, departments maintaining commercial accounts provide depreciation schedules-an accrual feature-so internal managers know the true cost of operations.
However, these do not appear in the official Finance Accounts. The national balance sheet remains silent on how much the government’s assets have worn out or how much it owes beyond visible payables.
This hybrid structure offers a comfort zone: the cash basis ensures fiscal control-no spending without cash-while the double-entry system preserves the discipline of balanced books. But it also conceals India’s true financial position.
Without accrual data, liabilities like pension obligations, unpaid subsidies, or pending contractor bills do not feature until the money actually goes out. The result: an illusion of fiscal prudence and under-reported obligations.
Recognizing this gap, the Government Accounting Standards Advisory Board (GASAB) under the CAG has been nudging ministries (for the last 22 years) towards greater transparency. It has recommended/issued Indian Government Accounting Standards (IGAS) and Indian Government Financial Reporting Standards (IGFRS) that gradually introduce accrual features—for example, disclosure of outstanding guarantees, commitments, and contingent liabilities. Pilot projects in states like Tamil Nadu, Karnataka, and Andhra Pradesh are experimenting with accrual-based accounting at local body levels, inching India toward a complete transition.
In short, India’s accounting system today is a hybrid creature: Double-entry in method-each transaction is balanced by its counterpart.
Cash in basis-entries are recognized only when money moves.
Accrual in parts-for provident funds, railways, defence factories, and select pilot projects.
It is a bridge that connects the discipline of the past with the demands of the future, but it stops mid-river. Until India crosses fully into accrual territory, its public accounts will remain half-seen portraits-meticulously balanced but not completely revealed.
With double-entry backbone, march ahead
The next logical leap is clear: keep the double-entry backbone but move from cash to accrual recognition across government accounts. That would mean knowing not just how much was spent, but how much is owed; not just how much was earned, but how much remains collectible. Only then will India’s fiscal mirrors show its true face—transparent, accountable, and complete.
(This is an opinion piece, and views expressed are those of the author only)
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