Chapter 13: Fund Accounting and Retention Account

PART A: FUND ACCOUNTING

13.1 Concept and Meaning of Fund and Fund Accounting

• What is a Fund?: A Fund is a distinct pool of financial resources (cash and bank balances) set aside and established under constitutional or legal provisions for carrying out specific governmental, developmental, emergency, or welfare activities, together with all revenues received into it and expenditures made from it.
• What is Fund Accounting?: Fund Accounting is an accounting system primarily used by governments and non-profit organizations that tracks financial resources by segregating them into independent, self-balancing Funds (such as the Consolidated Fund, Divisible Fund, Contingent Fund, or Retention Fund) to ensure that public money is spent strictly for its legally authorized purpose rather than for earning profit.

13.2 Types of Government Funds in Nepal

Under Part 10 (Federal Financial Procedures), Part 16 (Provincial Financial Procedures), and Part 19 (Local Financial Procedures) of the Constitution of Nepal and the Inter-Governmental Fiscal Arrangement Act, 2074, government funds in Nepal are classified into three primary categories:

1. Consolidated Fund (Article 116, 204, & 229 of the Constitution)

• Meaning: Except for revenues credited to religious Guthi funds or specific separate funds, all revenues received by the Government of Nepal, all loans raised on the security of revenues, and all money received in repayment of loans granted under the authority of an Act are credited into a single sovereign treasury account known as the Consolidated Fund.
• Three Levels of Consolidated Funds in Federal Nepal:
  1. Federal Consolidated Fund (Article 116)
  2. Provincial Consolidated Fund (Article 204 — one in each of the 7 Provinces)
  3. Local Consolidated Fund (Article 229 — one in each of the 753 Local Levels, managed via SuTRA)
• Rule of Withdrawal: No money can be withdrawn from the Consolidated Fund except through an Appropriation Act (Budget Act) passed by the respective Parliament/Assembly (or for constitutional charges on the fund).

2. Divisible Fund (Inter-Governmental Fiscal Arrangement Act, 2074)

• Meaning: A special fund established to collect shared taxes and natural resource royalties that do not belong exclusively to a single tier of government, and to distribute them transparently among the Federal, Provincial, and Local Governments according to constitutional and legal sharing formulas.
• Types and Sharing Ratios of Divisible Funds in Nepal:
  1. Federal Divisible Fund for VAT and Internal Excise Duty: Value Added Tax (VAT) and Excise Duty on domestic production are deposited into the Federal Divisible Fund at Nepal Rastra Bank and distributed monthly as:
     • 70% to the Federal Consolidated Fund
     • 15% to the Provincial Consolidated Funds (7 Provinces)
     • 15% to the Local Consolidated Funds (753 Local Levels)
  2. Natural Resource Royalty Divisible Fund: Royalties from mountaineering, electricity, forests, mines/minerals, and water are shared as 50% Federal Government, 25% Concerned Provincial Government, and 25% Concerned Local Government(s).
  3. Provincial Divisible Fund: Shares Vehicle Tax and House/Land Registration Fees between the Province and Local Levels.
• Importance/Uses of Divisible Fund:
  • Ensures fiscal federalism and equitable revenue sharing across all three tiers of government.
  • Provides regular monthly financial resources to Provincial and Local governments for development and service delivery.
  • Prevents duplication of taxation and fiscal disputes between Federal, Provincial, and Local levels.

3. Contingent / Emergency Fund (Article 124 of the Constitution)

• Meaning: A permanent fund established by Federal or Provincial Act into which a fixed sum is deposited from time to time to meet unforeseen natural disasters, epidemics, earthquakes, floods, or sudden national emergencies before parliamentary approval can be obtained. The expenditure made from the Contingent Fund must subsequently be reimbursed from the Consolidated Fund.

PART B: RETENTION ACCOUNTING

13.3 Concept and Meaning of Retention / Security Deposit

• What is Retention / Security Deposit?: Retention Money is a refundable cash deposit kept temporarily by a contractor, supplier, bidder, or individual with a government office or court as a financial guarantee to ensure the timely and faithful completion of a contract, construction work, supply of goods, or legal appearance.
  • It is neither government revenue nor government budget expenditure at the time of receipt; it is a trust liability that must be refunded once the obligation is fulfilled, or forfeited into government revenue if the depositor breaches the contract!

Conditions in Which Retention Deposit Should Be Kept

1. Bid Security / Earnest Money: Kept (usually 2% to 3% of estimated cost) when contractors or suppliers submit sealed tenders/quotations so they do not withdraw their bid arbitrarily.
2. Performance Security / Retention Money: Kept (usually 5% deducted from each running bill or deposited at contract signing) to guarantee that construction or supply work is completed on time and meets quality standards during the defect-liability period.
3. Judicial Bail / Court Deposit: Kept by courts or quasi-judicial bodies during legal proceedings or appeals.
4. Lease / Auction / Advance Guarantee Deposit: Kept when leasing government buildings/land or participating in public auctions.

13.4 Forms Used in Retention Accounting (600 Series)

1. Cash Receipt (AGF No. 101) / Bank Deposit Voucher: Used when retention deposit is received.
2. Retention Journal Voucher (AGF No. 601): Primary book of original entry for recording receipt, refund, and forfeiture of retention money.
3. Individual Retention Ledger (AGF No. 602): Separate ledger account maintained for each depositor/contractor to track how much they deposited, how much was refunded, and how much remains.
4. Retention Bank Cash Book (AGF No. 603): Main ledger recording all retention bank receipts, refunds, transfers to revenue, and remaining bank balance.
5. Monthly Statement of Retention (AGF No. 604): Monthly summary report submitted to DTCO within 7 days after month-end.

13.5 Rules & Solved Example of Retention Journal Vouchers (AGF No. 601)

There are three core transactions in Retention Accounting:

Solved Example

Question: Prepare Retention Journal Vouchers (AGF No. 601) for the Road Division Office, Kathmandu:

1. 2083/05/04: Sherpa Construction Pvt. Ltd. deposited Rs. 1,50,000 in the Retention Bank Account as bid security for road construction.
2. 2083/05/10: Himal Suppliers deposited Rs. 40,000 as performance retention for supplying stationery.
3. 2083/05/20: Refunded the retention money of Rs. 40,000 to Himal Suppliers by issuing a payment order after satisfactory supply of stationery.
4. 2083/05/28: Forfeited and transferred Rs. 25,000 of retention money deposited by ABC Builders into the Government Revenue Account as they failed to complete the work within the contract period.

Solution:

13.6 CDC Textbook Exercises & SEE Practice Questions

Group A: Very Short Answer Questions (1 Mark Each)

1. What is a Fund?
2. What is Consolidated Fund?
3. In what ratio are VAT and Internal Excise Duty distributed from the Federal Divisible Fund among Federal, Provincial, and Local governments?
4. What is Retention Money?

Group B: Short Answer Questions (5 Marks Each)

1. What is a Government Fund? Explain the three main types of government funds in Nepal (Consolidated, Divisible, and Contingent Fund).
2. What is a Divisible Fund? Write any four uses/importances of the Divisible Fund in Nepal’s federal system.
3. Define Retention Accounting. Mention any three conditions in which retention deposit should be kept, and list the forms used in Retention Accounting.

Worked answers to these exercises are in Chapter 13 Solutions.