Accounts of Electricity Companies: Double Account System

Understand Accounts of Electricity Companies

Key rules to remember

Reasonable return

Reasonable return = Capital base × (Bank rate + stated percentage) ÷ 100

Use the bank rate and the extra percentage given in the question. Textbooks commonly add 2% to the bank rate, but follow the question.

Clear profit

Clear profit = Net profit before interest − interest on debentures and loans − contingencies reserve appropriation (and any other deduction the question states)

Check what the question lists as deductions. Do not deduct dividends, which are appropriations from clear profit.

Excess or shortfall over reasonable return

Excess = Clear profit − Reasonable return (if positive)

Excess is shared or transferred as the question directs. If clear profit is lower, there is no excess.

Capital Account balance

Balance = Total capital receipts − Total capital expenditure

A credit balance appears on the liabilities side of the General Balance Sheet. A debit balance appears on the assets side.

Structure of the double account system

Revenue Account → Net Revenue Account → Appropriation; Capital Account → General Balance Sheet

Revenue items never go into the Capital Account and capital items never go into the Revenue Account.

How to solve Accounts of Electricity Companies questions

1. 1Read the data and sort every item into capital (receipts and expenditure), revenue (income and expenses) or general balance sheet items.
2. 2Prepare the Capital Account first: list capital receipts and capital expenditure, and find the balance to carry to the General Balance Sheet.
3. 3Prepare the Revenue Account: show generation, transmission and distribution income against operating expenses, including depreciation, and find the operating profit.
4. 4Prepare the Net Revenue Account: add other income, deduct interest on debentures and loans, and find the balance available.
5. 5Compute the capital base (from the items the question gives), then the reasonable return using bank rate plus the stated percentage.
6. 6Find clear profit as the question defines it and compare it with the reasonable return. Show the excess or shortfall and apply the stated transfers to reserves.
7. 7Appropriate the remaining profit to dividends and reserves, and prepare the General Balance Sheet using the capital account balance and the other balances.
8. 8Write assumptions and workings as notes under the answer.

Quickest way: Four-line approach for clear profit questions

Common mistakes in Accounts of Electricity Companies

• Treating the double account system as a different kind of bookkeeping from double entry.

  The names sound alike, so students think one replaces the other.

  Fix: Say that double entry is the debit-credit rule, while the double account system is a format that separates capital and revenue statements. Both are used together.

• Putting capital expenditure such as plant purchase into the Revenue Account, or depreciation into the Capital Account.

  Students classify by the item name rather than its nature.

  Fix: Tag every item as capital or revenue before you start. Fixed asset purchases go to the Capital Account. Depreciation is a revenue charge.

• Deducting dividends or the excess transfer while computing clear profit.

  Students confuse deductions for clear profit with appropriations after it.

  Fix: Deduct only the items the question lists for clear profit, such as interest on debentures and loans and the contingencies reserve. Dividends come later as appropriation.

• Using the wrong rate for reasonable return, for example the bank rate alone.

  Students skip the extra percentage or forget which rate applies.

  Fix: Write the rate as bank rate + stated percentage on the first line, then multiply by the capital base.

• Showing the Capital Account balance on the wrong side of the General Balance Sheet.

  Students copy the side on which the balance appears in the Capital Account itself.

  Fix: Receipts exceeding expenditure leave a credit balance, shown on the liabilities side. Expenditure exceeding receipts leaves a debit balance, shown on the assets side.

• Forgetting to show the statutory or required reserve transfers in the appropriation.

  Students stop once they reach the clear profit figure.

  Fix: After comparing clear profit and reasonable return, always write the transfer entries and the balance carried forward.

Worked examples