In this article we will discuss about:- 1. Meaning of Social Accounting 2. Objectives of Social Accounting 3. Application of Social Accounting 4. Sector Accounting 5. Social Cost Benefit and its Measurement 6. Analysis of Social Costs and Social Benefits of India.
Meaning of Social Accounting:
The terms “Social Accounting”, or, “Social Responsibility Accounting”, or, “Social Cost-Benefit Analysis”, etc., are of very recent origin and are used interchangeably.
In business activities, we evaluate the success, failure, progress of a business on the basis of annual results of operations (i.e. profit or loss) without making a social-cost benefit analysis of the business. Thus, it presents an incomplete picture. A Complete picture can only be obtained it business activities incorporate the said ‘Social Cost Benefit’ as well.
The definition of ‘Social Accounting’ has been given by eminent accounting authorities and are reproduced below:
According to Ralph and Eates: “Social Accounting is the measurement and reporting, internal and enternal of information concerning the impact of an entity and its activities on societies”.
But, Seidler and Seidler define: “Social accounting is the modification and application of conventional accounting to the analysis and solution of problems of social nature”.
Similarly, National Association of Accountants (NAA) defines:
“Identification, measurement, monitoring and reporting of the social and economic effects of an institution on society. It is intended for both internal, managerial and external accountability purposes and is an out-growth of changing values that have led society to re-define its notion of a corporation’s social responsibility”.
Similarly, K. V. Ramanathan defines social accounting as:
“The procedures of selecting firm level, social performance variables measures and measurement produces, systematically, developing information useful for evaluating the firm’s social performance and communicating such information to concerned society groups, both within and outside of the firm.”
Objectives of Social Accounting:
K.V. Ramanathan pointed out the following objectives:
(i) To identify and measure the periodic net social contribution of an individual firm which must include both internal and external costs and benefits of the firm and society as a whole.
(ii) To determine whether an individual firm’s policies and strategies adversely affect the society or not and the resources and power status etc., of an individual are consistent with the social priorities.
(iii) To make available in an optimal manner to all social constituents, relevant information of a firm’s goal, policies, programmes, performance and contribution to social goals. Here, relevant information includes public accountability along with this allocation of social resources.
Social Performance and its Indicator:
It has been stated above that the performance appraisal, i.e. the result of the operation, of a business unit is measured on the earning capacity which is considered to be the only or primary motive of business activities. Now, the concept has been changed. It is at present recognised that the above measuring rod of performance is considered as a part of the total performances which includes the cost-benefit analysis of the society as a whole.
Prof. Lee Brummet suggests that the measurement of total performance of a business unit is the result of:
(i) Net Income Contributions,
(ii) Human Resource Contributions;
(iii) Contribution to Public;
(iv) Environmental Contributions; and
(v) Product or Service contribution.
The above measures are explained as under:
(i) Net Income Contributions:
It is needless to mention here that fulfilment of social objectives is only possible by a business unit when it has sufficient financial surplus, i.e., adequacy of profits. Thus, no doubt, it is the primary objective of all business units which is the result of many factors viz., producing good products at a reasonable price, creating favourable business environment etc. So, it may be stated that there is a co-relation between the business and the society. That is why it may be said that surplus/income is the result of both business and society.
(ii) Human Resource Contribution:
We all know that the business activities can never be performed without human activities. The human activities consist of recruitment, placement, training and development of job skills, scale of pay, transfer, working environment, welfare and safety measures etc. Thus, the business unit must try to improve the above prerequisites so that measurement of social benefits and cost of staff can earlier be determined.
(iii) Contribution to Public:
It includes the organisational ability of individual (groups) to the business unit. This includes: tax and duties paid to States, to help the Govt. in various social priority schemes (e.g. small development, family welfare programmes etc.), contribution to the religious, charitable and educational institutions etc.
(iv) Environmental Contribution:
Environmental pollution and ecological imbalance created by various industries in the country has been brought to the four front by all quarters. For this purpose, each and every business require to take immediate necessary steps to minimise pollution which is created from the disposition of their various industrial wastes in an unscientific manner.
(v) Product or Service Contribution:
It includes the product or services supplied as per standard, ensuring safety, to supply quality goods and services and also to satisfy the customers not only from the standpoint of marketing the products, but also from the standpoint of customers’ satisfaction. There has to be sincere attempt to supply good products at a reasonable price to the customers and to the society as a whole.
Application of Social Accounting:
In order to measure the National Income, Social Accounting has been used in Economics for a long time. But, the application of Double Entry System for measuring National Income/National Wealth is used at present. It has already been stated earlier that Double Entry System has been applied quite successfully in order to measure private income and private wealth.
As such, at present, it has been suggested that Double Entry System should be applied while measuring the National Income/National Wealth. This was not done in the past due to the economists’ view that there was a doubt about the correctness of the data.
Thus it may be stated that if Double Entry System is followed for measuring National Income by preparing an Income and Expenditure Account (as we prepare in case of non-trading concern) and National Wealth by preparing a Balance Sheet, the task of Planning Commission would be for, easier.
Practically, the Double Entry System was not applied due to the narrow outlook of Accounting practices which depends on personal likings. Social Accounting, on the other hand, should be applied on the basis of broad outlook, and scientific reasoning.
Difficulties in applying Double Entry System:
If we want to apply Double Entry system in Social Accounting, we are to face a number of difficulties.
These are explained below:
(i) For conversion of Single Entry System to Double Entry System, detailed particulars of assets and liabilities, both opening and closing, are required and it is practically impossible to collect such data. Thus, it is not possible to make the opening entry, i.e., all National Assets will be debited and National Liabilities will be credited and also National Net Worth (i.e. the balancing figure) will be credited. In other words, the correctness of the data is quit doubtful.
(ii) National Assets include both tangibles and intangibles from which a nation earns incomes in future as also all claims from other countries. One point must be remembered here that claims of individual/enterprises should reciprocate a corresponding obligation to some others.
That is, at the micro-level, the total claims must be set off against total obligation, i.e., the net result will be Nil (i.e., outstanding payments will be adjusted against outstanding incomes, Bills Payable against Bills Receivables, Book-Debts against Sunday Creditors).
There remains only the surplus of transactions in the form of work-in-progress or finished goods. But difficulties will arise in case of goods which are durable in nature cars, refrigerators, radios etc. But we are to face a great difficulty while valuing National Fixed Assets (e.g. Land and Buildings, Roads, Mines, Bridges etc.) properly.
Thus, the conversion is practically impossible. Moreover if we are not able to ascertain the opening entry correctly, for ascertaining Opening Fund/National Net Worth, we can never prepare the closing National Balance Sheet.
(iii) While preparing accounts of a firm under Double Entry System, day-to-day transactions are recorded. But the same is not possible in Social Accountings to record the day-to-day National transactions.
We know, National Saving = National Income – National Expenditure/Consumption
Again, National Income = Total Wages + Total Rent
Thus, National Saving = National Income – National Consumption
(iv) In accounting, transactions are recorded at current price either for individual or for business units i.e., revenues are matched against cost at current prices, as also the surplus. But as the value of money is constantly fluctuating, measurement of National Income or Wealth becomes impossible.
(v) The frequent fluctuation of money affects the Depreciation Accounting also in the case of private accounting. We know depreciation is always provided on the basis of Historical cost of the assets ignoring the Replacement cost. Thus, in order to measure the Real National Income/Wealth, depreciation should be provided on the basis of Replacement cost which is not provided by the Double Entry System.
(vi) The next difficulty is the problem of Imputed transactions (e.g., domestic services given by the family members in case of a family, services given by the cultivators for cultivating land, services given by the proprietors for their own business etc.
In Private Accounting where Double Entry System is followed, this problem practically does not appear. Because in Double Entry System, no transaction is taken into account which cannot be expressed in terms of money. While measuring the National Income it takes a very significant role for which proper attention must be given.
From the discussion made so far, it becomes clear that Double Entry System cannot be applied in Social or National Accounting.
National Incomes and Its Measurement:
As per economics, National Income may be defined as the sum total factor income (i.e. earning of labour and property) which arises from the current production of goods and services by the economy of the Nation.
There are two methods for measuring the National Income, viz.:
(i) On the basis of total output;
(ii) On the basis of total factor payments.
(i) On the basis of total output:
Gross National Product (GNP):
Gross National product is defined as the total market value of all final goods and services produced in a year. It is nothing but a measure of the current output of economic activity in the country.
The Gross National Product (GNP) is ascertained as under:
(i) At first, estimate the value of end-products of the nation and add up;
(ii) In order to avoid double-counting, any intermediate product, if any, should be excluded;
(iii) Now, Gross National Product is found out.
Net National Product (NNP):
In the production of GNP of a year, we consume some capital (e.g. equipment, machinery etc.). The capital goods like machinery depreciates in value as a result of its consumption in the production process. This consumption of fixed capital or fall in value of capital due to wear and tear is known as depreciation. Now, if we deduct the amount of depreciation from the GNP we get the Net National Product (NNP).
This is shown as under:
Net National Product (NNP) = Gross National Product (GNP) — Depreciation.
(ii) On the basis of total factor payment:
Under this method, the payments for different factor payments should be ascertained and then added.
It is interesting to note that if the calculations are correct, both the methods will produce the same result.
Application of Keynesian Formulae of Savings and Investment and Social Accounting:
The discussion on Social Accounting must not be completed if we do not explain the Keynesian formula of saving and Investments. According to Keynes, Savings and Investments are equal.
The National Income is derived from the production and sale of:
(a) Consumer goods and
(b) Investment goods.
Thus, we get the equation as:
Income = Consumption + Investment
(i) Or Y = C + I
where, Y = Income
C = Consumption
I = Investment.
This is nothing but the production and sales side of income. But income may have another side, i.e. spending side. From this point of view Income is exhausted in Consumption and Savings.
Thus we get,
Income = Consumption + Savings
(ii) or Y = C + S
where, Y = Income
C = Consumption
S = Savings
Bringing equations (i) and (ii) together, we get,
C + S = C + I
or, S (Savings) = I (Investment)
In order to avoid the difficulties that may arise in order to measure the National Income, under Social Accounting Sector Accounting is introduced which is more beneficial.
(i) Business Enterprise Sector;
(ii) Household Sector;
(iii) Govt. Sector; and
(iv) Rest of the World Sector.
These are discussed below:
(i) Business Enterprise Sector:
This sector deals with the producers. A consolidated Profit and Loss Account or an Aggregate Profit and Loss Account is opened. This account is debited with Factor Payments, (e.g. Wages, Interest, Dividend etc.,) imports as against household sector and Govt. sector.
The increase or decrease in stock will also appear in this account (i.e., excess of Opening Stock over Closing Stock on the debit side and excess of closing stock over opening stock on the credit side). Depreciation must also be debited to this account as against Savings & Investment Account. This amount will be credited with Sales to Consumers & Government, Exports etc. The surplus of the account is transferred to Savings and Investment Account.
(ii) Household Sector (or, Personal Sector):
This sector deals with the accounts relating to Consumers. A consolidated Income and Expenditure Account is prepared by consolidating the individual incomes and expenditures. This account is debited with Consumption goods, Imports and Taxes and is credited with Wages, Salaries, Rent, Dividend, Interest, Profit of Business Enterprise Sector, incomes from Govt. Sectors. The surplus of this account is transferred to Savings and Investment Account.
(iii) Government Sector:
It is needless to mention here that Govt. revenues come from taxes (both from the individual and the business community) and it makes payments on consumption by transfer payment to individuals etc. A Receipts and Expenditure Account is prepared for the purpose. The surplus is transferred to Savings and Investment Account.
(iv) Rest of the World Sector:
This sector deals with the transactions relating to outside world by opening an outside World Account. It is nothing but imports and exports, both visible and invisible. This account is debited with export and is credited with imports. The difference represents favourable or unfavourable balance of payments. The balance of this account is transferred to Savings and Investment Account.
It has been pointed out above that the balance of various sector accounts are transferred to Savings and Investment Account. Thus, a Savings and Investment Account must be opened for the purpose. It deals with the changes in National Wealth. The savings are represented by the formation of Capital.
Social Cost Benefit and its Measurement:
The that profit maximisation is the primary objectives of business, particularly in private sector and we measure the performance of a business on the basis of its profit-earning capacity; but this presents an incomplete picture since it is not based on the social cost-benefit analysis.
Of late, the concept of social cost-benefits is applied in the private sector as it utilises the resources of the society in various forms and shape. Thus, it has some moral duty to oblige the society by undertaking some projects which are beneficial to the society as a whole, particularly when the question of Capital expenditure contribution will arise.
In other words, in addition to the business aspect it must consider the related cost and benefits of the society from the project. It may be mentioned here that a project may be found commercially successful but if the same involves a greater amount of social cost, that project must be avoided from the standpoint of social cost-benefit analysis.
For this purpose, a project which is beneficial to the society may be accepted by the Govt. while granting different approvals, circulars etc. Similarly, the Planning Commission, Govt. of India, has decided that the public sector projects must consider and analyse the social rate of return as a whole.
Thus, only those projects which do not go against the interest of the society – but seek to promote public welfare — should be accepted. Such projects should be continued in the wider interest of society.
It has been explained in an earlier paragraph that the data (in terms of money) which are taken from various sources are not reliable to measure the social cost and benefit for a particular project to be undertaken.
Thus, whether a project will be undertaken or will be rejected depends on the judgement as a whole after analysing the various social aspects which are related with the project although it is practically impossible to measure the real costs and benefits of the society in monetary terms. That is why a broad judgement is taken.
However, the following criteria may be used in order to measure the social cost and benefit:
(i) Capital Output Ratio:
This is the ratio between the expected output and the capital employed. Whether a particular project will be undertaken or not depends on this ratio, i.e. on the basis of expected return on capital employed as supply of capital is limited. In other words, that project will be undertaken which will produce a higher output per unit on Capital employed. This is very much applicable in the case of a developing country like India.
(ii) Employment Potential:
It is needless to mention that a project which will provide a greater employment potential, i.e., greater employment opportunities, will be considered and undertaken than a project which provides a comparatively less employment potential. A society is benefited only when all of its people are employed. This is very important in our country where there is acute unemployment problem. Thus, this criteria is very significant in order to measure the social cost-benefit analysis.
(iii) Value Added Capital (Per Unit):
We know that ‘Value Added’ means the expenses or, cost which is incurred (i.e. operating expenses) to make the raw materials into a finished product. In other words, it is the difference between total value of production minus total value of bought-out inputs.
No doubt, this is a superior method than the Capital Output Ratio stated above as it gives emphasis on the net contribution of a business unit towards the society i.e. Nation’s economy as a whole. Naturally, the project which will yield a higher Valued Added Capital will be undertaken.
(iv) Savings in Foreign Exchange:
This is also an important criteria on social cost benefit aspect. Under this criteria, those projects will be given priority which have greater potentiality relating to foreign exchange benefits. This is very important for a developing country like India where foreign exchange resources are limited. Thus whether a project for social cost benefit will be accepted or rejected depends on it as per this criterion.
(v) Social Cost-Benefit Ratio:
This ratio measures the relationship between the total social benefit and the total cost for a particular project. It is needless to say that a project having a lower cost-benefit ratio will be accepted, i.e. the lower the total social cost the higher are the social benefits. Total benefits include all the economic and non-economic benefits which the society will receive and total social costs include all the economic and non-economic factors.
Analysis of Social Costs and Social Benefits of India:
Like Companies Act, 1956, there are no hard and fast rules which are to be followed in preparing the financial statements of social benefits and social costs. It may be mentioned here that some companies in our country, both from private and public sector, have presented some information about the social costs and benefits to their published annual report e.g. Bharat Heavy Electricals Ltd., A.C.C., Minerals and Metal Trading Corporation of India, Cement Corporation of India, etc.
However, we are presenting a hypothetical format as under: