Professional Documents
Culture Documents
Accounting For Public Sector and Civil Society 2022 Latest
Accounting For Public Sector and Civil Society 2022 Latest
FAC
FACULITY OF BUSINESS
DEPARTMENT OF ACCOUNTING AND FINANCE
August,
August 2022
Addis Ababa
CHAPTER ONE
INTRODUCTION TO ACCOUNTING & FINANCIAL REPORTING FOR
GOVERNMENTAL AND NOT-FOR-PROFIT ENTITIES
INTRODUCTION
Welcome to the strange new world of accounting for governmental and not-for-profit organizations!
Initially, you may find it challenging to understand the many new terms and concepts you will need
to learn. Moreover, if you are like most readers, you will question at the outset why governmental
and not-for-profit organizations find it necessary to use accounting practices that are very
different from those used by for-profit entities.
What Are Governmental and Not-for-Profit Organizations?
First it is necessary to know that Organizations are generally classified as
1) For profit (commercial, or business) organizations, and
2) Non profit (Not-for-Profit) organizations.
Generally speaking NFP entities are
Organizations, which basically arise to provide goods, and services, which are not
commercially feasible or illogical to be provided by profit seeking organizations.
an entity whose principal objective is not the generation of profit
Organizations exist because the community or society considers it necessary to provide
certain goods or services to its group as a whole.
Non-Profit-Organization Is Also Classified as:-
1. Government organizations which include
Federal Offices, Regional Offices, Municipalities, and other
governmental organizations
Educational: Schools, Colleges and Universities
Health and Welfare: hospitals, child protection agencies, clinics etc
Religious: Associations and other religion related organizations
2. Nongovernmental organizations (NGOs) which include religious organization, voluntary
health and welfare organizations, charitable organizations, etc.
Different countries do have varying criteria so as how to count an entity as a non-for profit.
For Example
In Canada, the criteria include lack of transferable ownership and lack of financial return
from the NFP entity by resource provider.
In the U.S.A, the criteria include contributions of significant amounts of resources from
resource providers who do not expect commensurate or proportionate pecuniary return,
operating purposes other than to provide goods or services at a profit, and absence of
ownership interests like those of business enterprises. In New Zealand, it means
organizations like charities, humanitarian trusts, welfare agencies, churches and sports
organizations are generally considered.
3. Sources of Financial They raise resources from sales, They raise resources from grants,
Resources debt transactions, and capital shared revenues, and members’
stock. contribution. Taxation is unique
source of revenue to government.
4. Accounting and Financial Accounting and reporting Accounting & reporting focus on
Reporting focuses on netincome budgets and appropriations and funds
and fund accounting, etc
The objectives state that financial reporting by non business organizations should provide
information that is useful to present and potential resource providers and other users in making
rational decisions about the allocation of re- sources to those organizations.
Financial reporting should assist users in evaluating the operating results of the governmental entity
for the year by: Providing information about sources and uses of financial resources. Providing
information about how it financed its activities and met its cash requirements.
GASB Concepts Statement No. 1,“Objectives of Financial Reporting,” states that accountability.
“Accountabilityis the cornerstone of all financial reporting in government. Accountability requires
governments to answer to the citizenry—to justify the raising of public resources and the purposes
for which they are used.” The board elaborated:Governmental accountability is based on the belief
that the citizenry has a “right to know,” a right to receive openly declared facts that may lead to
public debate by the citizens and their elected representatives. Financial reporting plays a major role
in fulfilling government’s duty to be publicly accountable in a democratic society.
Comparison of Financial Reporting Objectives—State and Local Governments, Federal
Government, and Not-for-Profit Organizations
Objectives of Financial Reporting For State and Local Governments
Financial reporting is used in making economic, social, and political decisions and in assessing
accountability primarily by:
Comparing actual financial results with the legally adopted budget.
Assessing financial condition and results of operations.
Assisting in determining compliance with finance-related laws, rules, and regulations.
Assisting in evaluating efficiency and effectiveness.
Objectives of Financial Reporting For FederalGovernment
Accountability is also the foundation of Federal Government financial reporting. In addition to
accountability, Federal Accounting Standards Advisory Board (FASAB) identifies the following
financial reporting objectives for Federal Government and its agencies:
To assist users in evaluating budgetary integrity
To assist users in evaluating Operating Performance
To assist users in evaluating Stewardship
To assist users in evaluating adequacy of systems and control
Objectives of Financial Reporting for NFPEntities
Financial reporting should provide information useful in:
Making resource allocation decisions.
Assessing services and ability to provide services.
Assessing management stewardship and performance.
Assessing economic resources, obligations, net resources, and changes in them.
Comprehensive Annual Financial Report (CAFR)
General purpose financial reporting includes not financial statements but also all other means of
communicating information that relate directly or indirectly to the information provided by the
accounting system. In addition to the minimum financial information, GASB Standards state:
“Every governmental entity should publish, as a matter of public record, a comprehensive annual
financial report (CAFR). A CAFR includes
CAFR: IntroductorySection
Introductory section includes such items as
Title page
Contents page
Letter of transmittal – a letter from the chief finance officer addressed to the chief executive
and governing body of the governmental unit or it may be a narrative over the signature of
the chief executive. The letter or narrative material should cite legal and policy requirements
for thereport
Other (as desired by management)
1) CAFR: Financial Section (GASB Statement No.34)
The financial section of a CAFR should include:
Auditor’s report
management’s discussion and analysis (MD&A
basic financial statements
required supplementary information (other than MD&A
Combining statements and individual fund statements and schedules.
2) CAFR: StatisticalSection
A CAFR should contain a statistical section. The statistical section typically presents tables and
charts showing and charts showing social and economic data, financial trends and the fiscal capacity
of thegovernment in detail needed by readers who are more than casually interested in the activities
of the government unit.
GENERAL PURPOSE FINANCIAL STATEMENTS
What are General Purpose Financial Statements? General purpose financial statements are
those financial statements released to a broad group of users. These statements include the
income statement, balance sheet, statement of cash flows, statement of shareholders' equity, and any
accompanying disclosures.This set of financial statements is called “general purpose” because it
consists of the basic financial statements that can be used by a broad group of people for a broad
range of activities
GPFR are issued throughout the year to aid investors and creditors in their decision making
process. A set of general-purpose financial statements includes a balance sheet, income
statement, statement of owner’s equity/retained earnings, and statement of cash flows.
Companies use this set of financial statements as a form of financial reporting to
communicate company performance with the people outside of the organization.
More specific financial reports like production flow processes and market analyses are not
included in a set of general-purpose financial statements. These types of reports are only
available to company management.
The primary users of general purpose financial reporting are present and potential investors,
lenders and other creditors, who use that information to make decisions about buying, selling or
holding equity or debt instruments, providing or settling loans or other forms of credit.
Even though your GPFS is not required to be audited, we recommend you keep evidence
to demonstrate your GPFS has been prepared in accordance with Australian Accounting
Standards or CAAP where required
Users of Financial Reports
Users of G&NP entity accounting information as both internal and external; Major external
users are:
Resource provides (tax payers, donors and potential donors, investors and potential investors,
bond-rating agencies and grant providing organizations).
Legislative and oversight bodies (higher-level governments and regulating agencies)
Service recipients (citizen advocate groups)
THE CONCEPTUALFRAMEWORK FOR GENERAL PURPOSE FINANCIAL
REPORTING BY PUBLIC SECTOR ENTITIES (IPSASB)
TheConceptualFrameworkforGeneralPurposeFinancialReportingbyPublicSector:
Exclusively to accounting information produced on an accruals basis and presented in the
form of “accounts” or “financial statements
The conceptual framework does not apply to other documents including accounting
information, such as budget reports, management reports, cost accounting reports on the
sustainability of public policy or public sector performance indicators, even if these
documents are based entirely or partly on accrual accounting information..
Establishesandmakesexplicittheconceptsthataretobeappliedindeveloping International
Public Sector Accounting Standards (IPSASs) and Recommended Practice Guidelines
(RPGs)applicable to the preparation and presentation of general purpose financial
reports(GPFRs)of public sector entities.
The Accrual Basis of Accounting
The Conceptual Framework deals with concepts that apply to general purpose financial reporting
(financial reporting) under the accrual basis of accounting.
Thus, IPSASB is currently in the process of developing the Conceptual Framework. Although all
the components of the Conceptual Framework are interconnected, the Conceptual Framework
project is being developed in 1 and 2 p h a s e s .Phase1 has now been completed. It comprises
Chapters1–4of the Conceptual Framework. These Chapters deal with:
Chapter1: Role and Authority of the Conceptual Framework
Chapter2: Objectives and Users of General Purpose Financial Reporting
Chapter3: Qualitative Characteristics
Chapter4: Reporting Entity
The other Phases of the Framework being developed deal with:
Phase2―The definition and recognition of the elements of financial statements
Phase3―The measurement of the elements that are recognized in the financial statements
Phase4―The presentation of information in general purpose financial reports
Chapter 1: Role and Authority of the Conceptual Framework
Role of the Conceptual Framework
To establishes the concepts that under pin general purpose financial reporting (financial
reporting) by public sector entities that adopt the accrual basis of accounting. The
International Public Sector Accounting Standards Board (IPSASB) will apply these concepts
in developing International Public Sector Accounting Standards (IPSASs) and
Recommended Practice Guidelines (RPGs) applicable to the preparation and presentation of
general purpose financial reports (GPFRs)of public sector entities.
Identifies the concepts that the IPSASB will apply in developing IPSASs and RPG s in
tended to assist preparers and others in dealing with financial reporting issues. IPSASs
specify authoritative requirements
The Conceptual Framework under pin s the development of IPSASs. Therefore, it has
relevance for all entities that apply IPSASs. GPFRs prepared at the whole-of-government
level in accordance with IPSASs may also consolidate all governmental entities whether or
riot those entities have complied with IPSASs in their GPFRs.
To assist IASB in setting and revising standards
Authority of the Conceptual Framework
Does not establish authoritative requirements for financial reporting by public sector entities
that adopt IPSASs, nor does it override the requirements of IPSASs or RPGs. Authoritative
requirements relating to the recognition, measurement and presentation of transactions
and other events and activities that are reported in GPFR s are specified in IPSASs.
To provide guidance in dealing with financial reporting issues not deal t with by IPSASs or
RPGs .In these circumstances, preparers and other scan refer to and consider the
applicability of the definitions, recognition criteria, measurement principles, and other
concepts identified in the Conceptual Framework.
Chapter 2: Objectives and Users of General Purpose Financial Reporting
Objectives of Financial Reporting
Provide financial information about the reporting entity that is useful to existing and
potential investors, lenders and other creditors in making decisions about providing
resources to the entity”
Users of General Purpose Financial Reports
Governments, The legislature (or similar body) and members of parliament(or a similar
representative body), service recipients, Citizens are primary users of GPFRs.
In addition to internal users, and citizens and their representatives, who are clearly primary users of
accounting information, information users are:
Service recipients;
Resource providers (taxpayers or lenders) ;
Social partners ;
Supervisory bodies ;
Parties contracting with public entities;
Foreign and international public entities that deal with French government units.
Chapter 3: Qualitative Characteristics
The qualitative characteristics of information included in GPFRs of public sector entities are
relevance,faithfulrepresentation,understandability,timeliness,comparability,andverifiability.
RELEVANCE
Relevance is the capacity of accounting information to make a difference to the external decision
makers who use financial reports. If certain information is disregarded because it is perceived to
have no bearing on a decision, it is irrelevant to that decision. Financial and non-financial
information is capable of making a difference when it has confirmatory value, predictive value, or
both. Thus, Relevance can be evaluated according to three qualitative criteria,
a) Timeliness – means available to decision makers before it loses its capacity to influence
their decisions. Accounting information should be timely if it is to influence decisions, like
the news of the world, state financial information has less impact than fresh information.
b) Predictive value – Accounting information should be helpful to external decision makers by
increasing their ability to make predictions about the outcome of future events. Decision
makers working from accounting information that has little or no predictive value are merely
speculating. For example, information about the current level and structure of asset holdings
help users to assess the entity’s ability to exploit opportunities and react to adverse situations
c) Feedback value: Accounting information should be helpful to external decision makers who
are confirming past predictions or making updates, or corrections to predictions.
RELIABILITY
Reliability means that users can depend on accounting information to represent the underlying
economic conditions or events that it purports to represent. Reliability of information is a necessity
for individuals who have neither the time nor the expertise to evaluate the factual content of
financial statements. It is especially important to the independent audit process. Like relevance,
reliability must meet three qualitative criteria.
a) Representational faithfulness – Accounting information should represent what it purports to
represent and should ensure that the selected method of measurement has been used without
error or bias. This attribute is sometimes called Validity: - Information must give a faithful
picture of the facts and circumstances involved. Accounting information must report the
economic substance of transactions, not just their form and surface appearance.
b) Verifiability:- Verifiability pertains to maintenance of audit trials to information source
documents that can be checked for accuracy. It also pertains to the existence of alternative
information sources as backing. Verification implies a consensus and implies that
independent measures using the same measurement methods would reach substantially the
same conclusions.
c) Neutrality: - Accounting information must be free from bias regarding a particular view
point, predetermined result, or particular party. Accounting information cannot be selected to
favor one set of interested parties over another. Neutrality in financial reporting is the
absence of bias.It should be factual and truthful.
Completeness
The information in the financial statements must be complete, to the extent that an omission
can cause the information to be false or misleading.
Comparability: - Information that has been measured and reported in a similar manner for
different enterprise in a given year, or for the same enterprise in different years, is considered
comparable. Comparability is not a quality of an individual item of information, but rather a
quality of the relationship between two or more items of information.
For information to be comparable, it must be:
Measured and reported in a similar manner for different enterprises.
Useful in the allocation of resources to the areas of greatest benefit.
Useful to users in identifying real differences between enterprises
Understandability
Understandability is the quality of information that enables users to comprehend its meaning.
Understandability is enhanced when information is classified, characterized, and presented clearly
and concisely. Comparability also can enhance understandability.
Chapter 4: Reporting Entity
A public sector reporting entity is a government or other public sector organization,
program or identifiable area of activity (hereafter referred to as an entity or public sector
entity) that prepares
GPFRs.A public sector reporting entity may comprise two or more separate entities that
present GPFRs as if they are a single entity—such a reporting entity is refer red to as a
group reporting entity.
It is an entity that raises resources from, or on behalf of, constituents and/or use
resource to undertake activities for the benefit of, or on behalf of, those constituents.
Phase 2 Elements of financial statements
Phase 3 Recognition
The conceptual framework distinguishes recognition criteria from those included in the definition of
the elements. Recognition is the second logical step in accounting. As it takes place after
identification of an element, it enables any related uncertainties to be considered:
An element is recognized when it meets the two following combined criteria:
1. The element satisfies definition
2. It can be reliably measured.
The recognizing event criterion varies according to the type of element.
Recognition of asset
An asset is recognized when the government unit obtains control.
Recognition of a liability
A liability specific to public action is recognized when it is enforceable by the creditor on the
government unit.
A non-specific liability is recognized when it is a present obligation which can only be settled by an
outflow of resources.
Recognition of revenue
Revenue is recognized in the surplus/deficit statement when it is earned by the government unit.
Recognition of an expense
The recognizing event for an expense is the performance of the service
In the case of intervention expense, the service is considered to be performed when the beneficiary
has fulfilled, or continues to fulfill during the current accounting period, all the conditions necessary
to establish entitlement to the benefits
Phase 4 Measurement
The measurement bases determine the amount at which elements are stated on initial recognition and
at each subsequent reporting date.
Measurement is the process of determining monetary amounts at which elements are recognised and
carried
Phase 5 presentation of financial statement
The conceptual framework is concerned with the separate financial statements of government units
and the possible combinations of these accounts. Financial statements prepared on an accruals basis
are presented at least once a year. They make up an in dissociable set comprising:
A statement of financial position
A statement of profit or loss / A surplus/deficit statement
A statement of changes in equity for the period
A statement of cash flows for the period
Notes, comprising
A summary of significant accounting policies
Other explanatory information
CHAPTER TWO
PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING FOR STATE AND
LOCAL GOVERNMENTS (SLGS
Introduction
Principles are guidelines that should be followed by professionals in a particular field of study. In
the profession of accountancy there are financial accounting GAAPs such as valuation, matching,
continuity, monitory, revenue realization, and entity principles or concepts that are applied in profit
seeking.
They are developed and monitored by Financial Accounting Standard Board (FASB). Similarly,
there are twelve GAAPs that are used by governmental units. Thus, to record, classify, summarize,
and report accounting data properly, governmental entities should follow or implement their GAAPs
appropriately.
Activities of government are classified as:-
1. Governmental-type activities such as Core governmental services, together with
general administrative support, comprise the major part of what GASB Concepts
Statement .Eg Protection of life and property, police and fire protection, Public works
(streets and highways, bridges, and public building, etc
2. Business-type activities such as These activities include, among others, public utilities (e.g.,
electric, water, gas, and sewer utilities), transportation systems, toll roads, toll bridges,
hospitals, parking garages and lots, liquor stores, golf courses, and swimming pools
3. Fiduciary activities such as a government may serve as agent for other governments in
administering and collecting taxes. Governments may also serve as trustee for
investments of other governments in the government’s investment pool, and for assets
being held for employee pension plans, among other trustee roles.
The twelve GAAPs used by governmental units are developed by Governmental Accounting
Standard Board (GASB) and briefly discussed as follows:
Principle # 1 Accounting & Reporting Capabilities
A government accounting system must make it possible both to:
a) To present fairly & with full disclosure the financial operation of the funds & account groups of
the governmental unit in conformity with generally accepted accounting principles (GAAP)
b) To determine & demonstrate compliance with finance-related legal and contractual provisions.
In some governmental units however under such circumstances where the laws require following
practices not consistent with GAAP, Governmental units may prepare two sets of financial
statements.
1. One set in compliance with legal requirements,
2. One set in conformity with GAAP
For, example the government regulation may state that revenue should be recognized either on cash
basis. Whereas GAAPs of governmental unit states that revenue should be recognized either on
accrual or modified accrual basis. But, if there are no difference between legal requirements and
GAAP, one set of financial statement satisfies both requirements. This option is generally true in
business organizations.
Principle # 2 Fund Accounting System (Fund defined)
Governmental accounting systems should be organized & operated on a fund basis.
“A fund is defined as a fiscal & accounting entity with a self balancing set of accounts recording
cash & other financial resources, together with all related liabilities & residual equities and
balances, & changes there in, which are segregated for the purpose of carrying on specifies
activates or attaining certain objectives in accordance with special regulations, restrictions or
limitations.”
- The word FUND is given special definition as it relates to Fund Accounting. The narrow definition
of Fund as used in ordinary conversation is a “resource of money”. However in this course it is
given the special definition above. It has key phrases indicating the following points; It is by itself
is an entity, having its own accounting existence and a self balancing set of books (double entry
system). That set of books is established for recording a specific financial activity. The
establishment of the fund will attain a specific objective and will have regulations, restrictions or
limitations.
Example
Two examples follow to illustrate the concept of fund.
First the ministry of education operates several colleges. Although all are part of the MINISTRY as
a whole each one is treated as a fund. Each college will be given money that is specifically for its
operations, is not to be mixed up with other institutions. Therefore each college will keep its own set
of books, and issue its own Financial Reports, irrespective of the performance of other individual
institutions or the ministry as a whole.
Or take the case of Nongovernmental organizations. For instance, a single NGO will likely have
several projects; it may have the following different projects, which are funded by different donors.
1. Construction of a Dam in region 1
2. Water development project in region 2
3. Cattle development project in region 3
Under this case the donor for each project will not necessarily be given the financial statement of the
NGO as a whole. The donor for a cattle development project will want financial statements for only
the project, which he is funding. There for, each project will have its own set of books & produce its
own financial statements. So each project will be a separate distinct fund. The very reason of setting
up of funds accounting in governmental entity is that of legal requirement & good financial
management.
Principle #3 Types of Funds
To accomplish different purposes of the government unit, the unit establishes a variety of funds. The
governing bodies or other internal parties may assess the financial performance of each fund in the
fulfilment of the specific purpose for which it was established.
Governmental entities use seven types of funds, which are generally classified in to three major
categories based on the similarity of accounting and reporting methods used.
I. Governmental funds: Includes
Governmental funds account for everything else. This is where the bread-and-butter services can be
found—police, fire, social services, sanitation, and so on. There are five types of governmental
funds:
1. The General Fund
2. Special Revenue Funds
3. Capital Project Fund-
4. Debt Service Funds
5. Permanent Fund
The difference between Expenses and Expenditure must be known properly to understand the
distinction between NFP and FP accounting. In the dictionary these words have almost exactly the
same meaning. However in fund accounting, they have been given specialized meanings.
1. An Expense is a current period consumption of resources.
2. Expenditure is a decrease in the fund financial resources.
For example in a profit making accounting a car would be considered as an asset and depreciation
would be recorded as an expense as the car is “used up” or “wears out”. In a governmental fund, the
car would be considered as expenditure at the time of purchase.
Principle# 10 Budget and Budgetary Accounting
i. An annual budget (s) should be adopted by every governmental unit.
ii. The accounting system should provide the basis for appropriate budgetary control.
iii. Budgetary comparison schedules (statements) should be included (as a supplementary
information) in the appropriate financial statements and schedules for governmental
funds for which an annual budget has been adopted . The budgetary
comparison should present: (i) the original budget(s), (ii) the final appropriated budge
t(s) for the reporting period and (iii) the actual in and out flows and the balances
1. Budgeting is the process of allocating of resource to meet unlimited demands. There are
three primary questions to ask when preparing a budget.
Q, How much will we spend?
Q, Why will we spend it?
Q, Where will we get the money?
Principle #11 Budgetary Reporting
Budgetary comparison schedules should be presented for the General Fund and each major special
revenue fund that has a legally adopted budget as part of therequired supplementary information
(RSI). Governments may elect to presentthe budgetary comparisons as part of the basic financial
statements.
Principle #12 Classification and Terminology
Transfer, Revenue, Expenditure, and Expense Account Classification
a. Transfers should be classified separately from revenues and expenditures or expenses in the basic
financial statements.
b. Proceeds of general long-term debt issues should be classified separately from revenues and
expenditures in the governmental fund financial statements.
c. Governmental fund revenues should be classified by fund and source. Expenditures should be
classified by fund, function (or program), organization unit, activity, character, and principal classes
of objects.
d. Proprietary fund revenues should be reported by major sources, and expenses should be classified
in essentially the same manner as those of similar business organizations, functions, or activities.
e. The statement of activities should present governmental activities at least at the level of detail
required in the governmental fund statement of revenues, expenditures, and changes in fund
balance—at a minimum by function. Governments should present business-type activities at least by
segment.
Principle #13 Financial Reporting
Interim financial reports
A. Appropriate interim financial statements & reports of financial position, operating results & other
pertinent information should be prepared to facilitate management control of financial operations,
legislative oversight & where necessary or desired for external reporting purpose.
Comprehensive Annual Financial Reports (CAFR)
The five combined statements that comprise the GPFS and that must be included in the financial
section of a CAFR are
1. Combined balance sheet- all fund types and account groups
2. Combined statement of revenues, expenditures and changes in fund balances- all governmental
fund types.
3. Combined statement of revenues, expenditures and change in fund balances- budget and actual-
general and special revenue fund types
4. Combined statement of revenue, expenses, and changes in retained earnings (or equity)- all
proprietary fund types.
5. Combined statement of cash flows- all proprietary fund types and non-expendable trust funds.
The notes to the financial statement are also an integral part of the GPFS.
SUMMARY
1. Government –wide financial statements
Statement of net asset
Statement of activities
Fund Financial statement
1. Governmental funds
A. Balance sheet
B. Statement of Revenue, Expenditure and change in fund balance
2. Proprietary fund
A. Statement of net asset
B. Statement of Revenue, Expense and Retain Earning
C. Statement of cash flow
3. Fiduciary fund
A. Statement of fiduciary net asset
B. Statement of changes in fiduciary net asset
The following examples are presented to help illustrate the difference between cash generating and
non-cash-generating assets.
11.1 Example 1
The primary objective of a public school within the Education Department is toprovide educational
services to students with no fee. However, a dedicated sectionis used as a bookshop to sell
educational books and materials at current market prices with the intention to generate profits.
Since the assets held by this bookshop are primarily employed to an activity that generates a
commercial return, being cash inflows from the sale of educational books and materials at current
market prices, IPSAS 26 will apply to these assets of the dedicated section.
Example 2
Mater Dei Hospital is primarily used by non-fee paying patients who use its wards, services and
facilities. However, an MRI machine at Mater Dei can generate cash flows when used by non-EU
resident patients since they need to pay for using such service.
Since the primary objective of Mater Dei is not to generate profits, in this case IPSAS 21 will
apply in the case of the MRI machine even if a fee is charged to non EU resident patients.
Example 3
The Ministry for Finance has a hall used for events organized by governmental departments. No fees
are charged for using such venue. However, occasionally same hall is rented out to third parties for
private events since they specifically request the use of such hall to enjoy its historical surroundings.
In such case, the ministry charges a rental fee at a commercial rate for the use of this hall.
Given that this hall generates a commercial return in the form of rental income is incidental and it
is mainly used for administration purposes, thus IPSAS 21 will apply.
Example 4
The Government Printing Press meets all the printing requirements of Government, ministries,
departments and other entities. Prices charged to customers for printing work are intended to cover
the costs incurred by the press but not to generate profits.
Since the objective is not to earn a commercial return but to accommodate the printing needs of
government ministries/departments, and since the prices charge dare not at market rates, the assets
of the government printing press are non-cash generate in gussets. IPSAS 21 will apply
EFFECT OF IMPAIRMENT LOSS
Impairment loss indicates that the company has overstated its earnings by not recognizing
enough depreciation/amortization expense in past. The impairment loss has the following effect on
various financial statements and ratios:
Book value/carrying amount of the asset is reduced on the balance sheet.
Net income is reduced on the income statement.
Since it reduces the book value of the fixed assets, the fixed asset turnover ratio and the debt-to-total
assets ratio will improve.
Basis Impairment Depreciation
Meaning Permanent reduction/decline in value of Asset Distributing the cost of the asset over its
useful life.
Reason Due to customer preference, Natural disaster, legal, Due to normal wear and tear or the use of
economic or operational reasons the asset for day-to-day operations or
obsolescence
Treatment Treated As Loss Treated as Expense
Duration Not recurring in nature Recurring in nature
method Subtract the fair value of an asset from its book There are many methods to calculate
value depreciation, such as straight-line method,
diminishing balance method.
Types of Asset Tangible, Intangible and natural resource Only Tangible asset
A government that prepares and presents consolidated financial statements under the accrual
basis of accounting and elects to disclose financial information about the general government sectors
shall do so in accordance with the requirements of this Standard.
Segment Reporting
IPSAS18, Segment Reporting, requires the disclosure of certain information about the service
delivery activities of the entity and the resources allocated to support those activities for
accountability and decision-making purposes. Unlike the sectors reported under statistical
bases of financial reporting, segments reported in accordancewithIPSAS18 are not based on a
distinction between market and non market activities.
The disclosure of information about the GGS does not replace the need to make disclosures
about segments in accordance with IPSAS 18. This is because information about the GGS
alone will not provide sufficient detail to enable users to evaluate the entity’s past
performance in achieving major service delivery objectives, when those objectives are
achieved through non- GGS entities.
Statistical Bases of Financial Reporting
The objectives of financial statements prepared in accordance with IPSASs and those
prepared in accordance with statistical bases of financial reporting differ in some respects.
The objectives of financial statements prepared in accordance wi t h IP S AS s are to provide
information useful for decision
Disclosure of information about the GGSis consistent with enhanced transparency of financial
reporting, and will assist users of the financial statements to better understand:
(a) There sources allocated to support the service delivery activities by the GGS, and the
government’s financial performance in delivering those services; and
(b) The relationship between the GGS and the corporation sectors, and the impact each has on
overall financial performance.
PRESENTATION OF BUDGET INFORMATION IN FINANCIAL STATEMENTS [IPSAS
24]
IPSAS 24, Presentation of Budget Information in Financial Statements, requires that financial
statements include a comparison of budget and actual amounts on a basis consistent with that
adopted for the budget. Where government budgets are prepared for the GGS rather than the
government as whole, financial information about the GGS disclosed in accordance with this
Standard will be relevant to the comparisons required by that IPSAS.
Definitions
The following term issued in this Standard with the meaning specified: The General Government
Sector comprises all organizational entities of the general government as defined in statistical
bases of financial reporting.
Accounting Policies
Financial information about the GGS shall be disclosed inconformity with the accounting policies
adopted for preparing and presenting the consolidated financial statements of the government, except
as required byparagraphs24 and25.
In presenting financial information about the GGS, entities shall not apply the requirements of
IPSAS6, Consolidated and Separate Financial Statements, in respect of entities in the PFCs and
public NFCS sectors.
The GGS shall recognize its investment in the PFC and public NFCS sectors as an asset, and shall
account for that asset at the carrying amount of the net assets of its investees.
Disclosures
Disclosures made in respect of the GGS shall include at least the following:
(a) Assets by major class, showing separately the investment in other sectors;
(b) Liabilities by major class;
(c) Net assets/equity;
(d) Total revaluation increments and decrements and other items of revenue and expense
recognized directly in net assets/equity;
(e) Revenue by major class;
(f) Expenses by major class;
(g) Surplus or deficit;
(h) Cash flows from operating activities by major class;
(i) Cash flows from investing activities; and
(j) Cash flows from financing activities.
CHAPTER FOUR
BUDGETING AND PERFORMANCE REPORTING
Budgeting is a process of looking at a business’ estimated incomes (the money that comes into the
business from selling products and services) and expenditures (the money that goes out form paying
expenses and bills) over a specific period in the future. It allows a business to see if they will be able
to continue operating at their expected level with these projected incomes and expenditures.
Budgeting is the process of allocating scarce resources to unlimited demands. More specifically, it
can be defined as a plan of financial operation embodying an estimate of proposed expenditures for
a given time and the proposed means of financing them. Budget is a statement that shows the
financial plan for accomplishment of an operation. It is plan stated in terms of money. When we
assigned/estimate resources required for a certain task on our plan that is called budgeting.
We might summarize the process of budgeting into three basic questions.
Where will we get the money from?
How much can we send?
Why will we spend it?
Uses of Budgets
The purpose of a budget is to plan, organize, track, and improve your financial situation. In
other words, from controlling you’re spending to consistently saving and investing a portion of your
income, a budget helps you stay on course in pursuit of your long-term financial goals.
In FP, the primary usefulness of budgets is planning.
In governments –management plans and laws
Control the activities authorized to carry out plans
Prepare statement that permit comparison of actual results with budget and evaluation of variances
Planning is a special concern for the following reasons:
1. The type, quantity and quality of governmental goods and services provided are not normally
evaluated and adjusted through the open market mechanism
2. Governmental goods/services (education, health, police etc) are often among the most critical to
the public interest
3. The immense scope and diversity of modern government activities make comprehensive,
thoughtful and systematic planning a pre-requisite to orderly decision making
4. Government planning and decision making is generally a joint process involving its citizens
Assumptions about GF Budget
Annual budget adopted on modified accrual (GAAP) basis
Appropriations are made for operating expenditures by function and for capital outlay and debt
service expenditures made directly in GF
Budget does notinclude appropriations for interfund transfers –assumes interfund transfers are
separately authorized
Classifications of budgets
States and local governments typically prepare and utilize several types of financial plans. It is
therefore important to distinguish among the various types of budgets, to understand the phases
through which each may pass and to be familiar with commonly used budgetary terminology. There
are five classifications of budgets and two types within each classification.
Capital or Current
Sound governmental fiscal management requires continual planning for several periods in to the
future. Most governments are involved in programs to provide certain goods and services
continuously and/or for acquisition of capital items. Multi-year schedule for acquisition of capital
items is called capital program. At the beginning of each year the balance that fall in the current
period will be included in the capital budget.
Capital budgets deal with the acquisition of fixed assets. The legislature will likely approve the
acquisitions one year at a time. But planning for the acquisitions several years in advance (called the
Capital Program) is very helpful to wise management of resources.
Typically used for acquisitions requiring several yearsTypically contains portion for current year
and for future years
Current budgets are concerned with the current year‘s operating expenditures, sometimes called
recurring expenditures, because similar sorts of expenditures are needed year after year.
Also known as operating budget
Contains proposed expenditures for current operations, debt service, & estimates of expendable
resources to be available during the year
Tentative or enacted
One key distinction among budgets is their legal status. Various documents may be called budgets
prior to approval by the legislative body. As the name implies, the tentative budget is still in process.
It has not yet been officially approved. An enacted budget has been officially approved and is a
binding legal document.
General or Special
The names of this classification are not quite as they sound. Budgets of governmental activities
commonly financed through the General, Special Revenue, and Debit Service Funds are referred as
General budges.
General budget is typically used for general governmental activities financed through General
Fund, Special Revenue Funds, & Debt Service Funds
A budget prepared for any other fund is Special. Special budgets are commonly limited to Capital
project funds, though Enterprise and Internal service funds do sometimes formally budgeted.
Special Budget is a budget enacted for any other type of activity
Fixed or Flexible
Fixed budgets are for a fixed total dollar (or Birr) amount and cannot be exceeded. The allocated
amount should not be exceeded. A flexible budget, on the other hand, fixes the cost per unit of goods
and services. If more units of goods and services are desired because of a change in circumstance or
need, the dollar amount of a flexible budget can increase.
Approaches to Budgeting
There are different types of budgetary approaches which differ to each other in their emphasis on
planning, control and evaluation. These approaches fall in to two categories: Modern and Traditional
Approaches
Modern (Rational) Approaches to budgeting
The modern approaches to budgeting are sometimes called rational. That is because they all
advocate thinking carefully about the relationship of inputs, with a special concern for the outputs.
Outputs are the goods or services actually provided; inputs are the resources that go in providing
those goods or services. Thinking carefully also involves analyzing the costs and benefits of
alternative methods of achieving objectives. The ―big-picture is the idea that lawmaking bodies
should focus on broad policy objectives rather than details of spending for particular departments is
emphasized. Long term, ultimate goals are stressed rather than annual budget requests. Attention is
directed to continual evaluation of services which are being performed. The different modern
approaches are considered; each one is explained briefly, below.
Performance Budgeting
Performance budget is a budget that bases expenditures primarily up on measurable performance of
activities and work programs. It focuses on the outputs generated by the department or
organizational unit, rather than looking primarily at the cost of the inputs. In this type budgets
attempt will be made to relate the input of governmental resources to the output of governmental
services. To provide the legislative body with a reasonable justification for its budget requests, each
department must do some clear thinking about what it is trying to do and how best to do it.
Under, PB, budgeted expenditures are based on a standard cost of inputs multiplied by the number
of units of an activity to be provided in that time period. The total budget for an organization is the
sum of all the standard unit costs multiplied by the units expected to be provided
The performance budget is mainly concerned with only one year at a time. Basically, the process of
making the budget may be summarized as follows:
1. The governmental entity decides what type of services to offer.
4. The budget is determined by multiplying units of service by the cost per unit.
Advantage
1. It emphasis on inclusion of narrative description of each proposed activity within the proposed
budget
2. Organization of the budget by activities, with requests supported by estimates of costs and
accomplishments in the quantitative terms and
2. It assumes that all programs are to be evaluated annually, so that poor ones may be weeded out
and new ones added
2. Concentrate the attention of officials on the costs and benefits of services 3. Cause a search for
new ways of planning and evaluation 4. provide better justification for the budget 5. Improve the
decisions of executives and legislative bodies
LIMITATIONS
1. It requires a great deal of paper work, staff time and effort to identify and rank decision units and
packages
2. It is difficult to obtain the data to compute costs of alternative methods of achieving objectives
and of alternative levels of services
TRADITIONAL APPROACH TO BUDGETING
For the reasons stated above, the modern approaches have not been adopted as widely as might be
expected. The traditional approach, called object-of-expenditure (OOE) is still the most widely used.
The objective of the OOE budget has an expenditure control orientation. It is to simply list expected
expenditures, and then say how much is required for each one. This approach involves three facets:
1. First, subordinate agencies submit budget requests to the chief executive in terms of the type of
expenditures to be made. These requests include the number of people to be hired in each specified
position and salary level and the specific goods or services to be purchased during the upcoming
period.
2. Next, the chief executive compiles and modifies the agency budget requests and submits an
overall request for the organization to the legislature in the same object – of - expenditure terms
3. Finally, the legislative body usually makes line - item appropriations, possibly after revising the
requests, along object - of – expenditure lines.
Advantages
1. It is simple for preparation and understanding
2. It allows a great deal of control over expenditure, and
3. It fits with practical realities.
Limitations
1. It is overly control centered, to the detriment of the planning and evaluation process
2. It provides only list of proposed personnel to be hired or goods to be purchased for decision
makers. It is only decision makers that are familiar with the departments function and activities do
understand the justification
3. It is long range planning, program justification, and outputs achieved are not necessarily formally
considered. In other words, it doesn‘t encourage asking of the questions, “Why are we really
spending this money?” or, “What are we getting for the money we are spending?” or, “Could this
objective be better met by another means?”
BUDGETS AND OUTTURN REPORTING (IPSAS 24)
Outturn reports are used to report to the Department any variations between the reported cargo
and the cargo that was actually unloaded from the ship or aircraft including surplus or short
landed cargo.
Outturn Reports means a detailed report prepared by a terminal to record discrepancies in the form
of over, shortand damaged cargo as manifested, and cargo checked at a time and place
of handling of ship. Outturn Reports is a collective term used to refer to a number of specific reports
designed to track and control the movement of cargo throughout the supply chain.
Examples of Outturn Reports in a sentence
It is an abbreviated message that is based on Advance Cargo Notices received by SARS, but stripped
of all consignor/consignee data, which is sent to licensees of Container Depots and licensees of De-
grouping Depots to enable those parties to timeously complete the Outturn Reports that they must
submit to SARS in respect of the cargo received at their premises. The focus now moves on to the
completion of the Annual Accounts and the Final Out-turn Reports, which will be the main priority
until June. The range of projections are based on increases in fares of between 0% and 6.25%.20
Labor market statistics: Scotland, Office for National Statistics, July 2011.21 Efficient Government
Efficiency Outturn Reports, Scottish Government, November 2009 and October 2010.22 Improving
public sector efficiency, Audit Scotland, February 2010
PERFORMANCE BUDGETING AND REPORTING
Budget Performance Report is the comparison of planned budget and actual performance. It
allows comparing the actual account transactions in a specific period with the budget figures of the
same periods. A performance report is a report on the performance of something. They are
routinely produced by government bodies which, being financed by public money, are required to
show that the money was spent efficiently and usefully. A performance report should compare
results in relation to prior years' results in order to show whether performance is stable, improving or
declining. Purpose: To better contextualize the performance information in relation to
historical performance and targets or goals that might have been set.
CHAPTER FIVE
GENERAL FUND & SPECIAL REVENUE FUNDS
General Fund is
Used for general governmental activities such as police, administration and the like.
Account for all financial resources for which a separate fund is not required. All
governmental entities have a general fund(GF). Although it may be called the operating fund,
the current fund or something similar, the general fund will exist as long as the entity exists.
Used to account for all financial resources except those required to be accounted for in
another fund.
General fund refers to revenues accruing to the state from taxes, fees, interest earnings,
and other sources which can be used for the general operation of state government
Special Revenue Fund
Special revenue funds are established to account for general governmental financial
resources that are restricted by law or contractual agreements to specific purpose (s) and
special revenue funds are exist for the life of restriction. For example, they may be used to
account for federal (state) grants which are restricted as to purpose or to account operating
activities of libraries and other services supported by special taxes. Another example might
be when a tax or other revenue source is restricted to a specific purpose by a legislative body;
its use assists in demonstrating compliance with that purpose.
Special revenue fund (SRF) in contrast to GF is used to account for resources, which are
collected for a specified purpose. Fees for rubbish collection, state taxes on diesel fuel that is
required to be used only for road maintenance, tax on hotel rooms to be used to improve
tourist facilities, traffic violation fines are examples of governmental units revenues that may
be accounted for in a separate special revenue fund.
A special revenue fund is an account established by a government to collect money that
must be used for a specific project.
The general fund and the special revenue funds have different purposes, but they are both revenue
funds, and the accounting and reporting procedure is the same for both.
They differ in that the General fund accounts for revenues and other financing sources raised to
provide for all day-to-day-operating activities, whereas Special Revenue Funds are used to
account for a specific revenue source that must be used only to finance a specified activity
Special revenue funds provide an extra level of accountability and transparency to taxpayers that
their tax dollars will go toward an intended purpose.
ACCOUNTING CHARACTERISTICS
Fixed assets are not capitalized in either fund. Their purchase is considered as expenditure, the same
as for salaries or utilities. Such fixed assets are not accounted for by these funds, because, they are
not normally converted into cash. Similarly the same categories of funds account for only those
liabilities incurred for normal operations that will be liquidated by use of fund assets.
GOVERNMENTAL FUND BALANCE SHEET AND OPERATING STATEMENT
ACCOUNTS
BALANCE SHEETACCOUNTS
General fund, special revenue funds, and all other governmental funds account for:-
Only financial resources (cash, receivables, marketable securities and, if material, prepaid
items and inventories).
Economic resources, such as land, buildings, and equipments utilized in fund operations, are
not accounted for by these funds because they are not normally converted in to cash.
Similarly, these categories of funds account for only those liabilities incurred for normal
operations that will be liquidated by use of fund assets. General capital assets and general
long term liabilities are reported in the statement of net assets at the governmental wide
level.
The Arithmetic Difference between the amount of financial resource and the amount of
liabilities recorded in the fund is the Fund Equity. Residents of the governmental unit have
no legal claim on any excess of liquid assets over current liabilities; there for, the fund
equity not analogous to the capital accounts of investors owned entity. Accounts in the fund
equity category of general funds and special revenue funds consists of reserve accounts
established to disclose that portion of the equity are not available for appropriations; the
portion of equity available for appropriation is disclosed in an account called Fund Balance
(also referred to as Unreserved Fund Balance).
OPERATING STATEMENTACCOUNTS
The General Fund and special revenue funds account for financial activities during a fiscal year in
operating statement accounts classified as Revenues, Other Financing Source, Expenditures, and
Other Financing Uses.
Revenue: - is the increase in the fund financial resources other than from inter fund transfers & debt
issue proceeds.
Other financing sources- are classified as an increase in the fund financial resources as a result of
operating transfers into a fund and debt issue proceeds received by a fund. It represents operating
transfers in from other funds and proceeds of long-term borrowing.
OFS is amount of financial resources estimated to be received during the period from inter fund
transfer.
Expenditure is defined as decrease in fund financial resources other than through inter fund
transfers, operating transfers out of a fund that are classified as other financing uses. It is a term
which replaces both the terms costs and expenses used in accounting for profit seeking entities.
Other Financing uses - a decrease in the fund financial resources as a result of operating transfers
out of a fund. It is an amount of financial resources estimated to be disbursed for other funds.
Budgeted inter fund transfers and debt issue proceeds may be recorded in Estimated Other
Financing Sources and Estimated Other Financing Uses control accounts supported by subsidiary
accounts as needed.
Both revenues and other financing sources are temporary accounts that increase fund balance at
year-end when closing entries are made. Similarly, expenditures and other financing uses are
temporary accounts that decrease fund balance when closing entries are made. GASB standards
emphasize, however, that other financing sources (uses) should be distinguished from revenues and
expenditures
BUDGETARY ACCOUNT
The two classifications of budget for governmental units are the same as those for business
enterprises. Annual budgets include the estimated revenues & appropriations for expenditures for a
specific fiscal year of the governmental unit. Annual budgets are appropriate for the general fund &
special revenue funds.
Three general ledger control accounts are needed to provide budgetary control; Estimated Revenue,
Appropriations and Encumbrances.
Budgetary Accounts include Estimated Revenues, Appropriation, Encumbrance, Estimated OFSs,
and Estimated OFUs
Estimated Revenues– different sources revenue for the governmental unit expected to be collected
during the year. It is an account maintained to show the amount of revenue that will be collected in
future. Major revenue source classes commonly used are:
• Taxes
• Special Assessments
• Licenses and Permits
• Intergovernmental Revenues
• Charges for Services
Appropriations – is both an authorization to spend and limitation of spending.Appropriation could
be further subdivided- by month or other periods; these subdivisions are called Allotments.
Encumbrances – Purchase orders (P.O.) in governmental entities have the function of keeping track
of coming expenditures so that the budget is not exceeded. This is done by actually recording the
P.O in the ledger account as an Encumbrance.
Encumbrance is an account used to record the estimated amount of purchase orders or contracts
An encumbrance differs from expenditure in the following perspectives.
The encumbrance is an estimate of liability to be incurred while expenditure is an
actual liability which has been incurred. The reason that encumbrance is only an
estimate is that invoiced amounts sometimes differ from purchase order amounts.
Encumbrance denotes amount stated on the purchase order, which is subject to
change whereas, expenditure is the actual amount of money a governmental unit
should pay up on delivery. This may be equal or greater/less than the encumbered
amount. For example a particular item may be out of stock, and either backordered,
or substituted by a similar item.
The normal balance of Budgetary and Operating Statement Accounts can be summarized as follows.
Budgetary Accounts Normal Balance Operating statement Normal balance
Appropriation xxx
June 30,2007 Debit/credit Fund Balance xxx
Estimated Revenue xxx
To Close Budget at the end of fiscal period
Example Assume a budget with Estimated Revenues of 500,000 Birr and Appropriations of 480,000
Birr on june 1,2002
a) Record Budget on July1,2002
b) Record Budget on June 30,2002
Solution a)
July 1,2002 Estimated Revenues 500,000
Appropriations 480,000
Fund Balance 20,000
To Record Budget at the beginning of the fiscal period
b)
june 30,2002 Appropriations 480,000
Fund Balance 20,000
Estimated Revenues 500,000
To Close Budget at the end of fiscal period
1) Property taxes were billed in the amount of 7,200,000 of which 140,000 was ofdoubtful
collect ability.
2) A total of 6,500,000 amount of Property tax were collected and a total of 1,020,000 amount
of cash from other revenue sources like licenses and permits, fines and forfeits,
miscellaneous sources were also collected
3) Property tax in the amount of 130,000 was identified to be uncollectible.
4) Purchase orders for office equipment were issued to outside suppliers in the total amount of
3,600,000.
5) 5. Invoice for services and supplies received from enterprise fund and internal service fund
totaled 300,000 and 200,000 respectively.
6) Cash payments on vouchers payable totaled 7,700,000. Cash payment to the Enterprise fund
and the internal service fund were 250,000 and 140,000 respectively.
7) Previous orders were received and the invoice totaled $4000,000
8) Approved budgets by the town council for the fiscal year ended on June 30, year6.
Estimated revenues:
- General property taxes.......................... 7,000,000
- Licenses and permits .......................... 400,000
- Charges for services ......................... 500,000
- Fines and for fits ............................... 300,000
- Miscellaneous revenues ........................ 200,000 8,400,000
Estimated other financing sources (transfer from EF) 100,000
Appropriation:
- General government .......................... 4,700,000
- Public safety .......................... 1,900,000
- Health and welfare .......................... 1,100,000
- Culture and recreation ...................... 400,000 8,100,000
Estimated other financing uses (transfer to DSF) 100,000
9) Assuming that the total (Actual) revenue and Expenditure for the Adis Abeba citytown is
composed of the following sources,
Revenues:
General Property Tax 7,060,000
Licenses and Permits 450,000
Charges for Services 470,000
Fines and Forfeits 310,000
Miscellaneous Revenue 190,000
Expenditure
General Government 4,590,000
Public safety 2,000,000
Health and Welfare 1,200,000
Culture and Recreation 210,000
Estimated other financing uses 110,000
The following trail balance and balance sheet data is available for Adis Abeba city as of
June30,2006
Addis Abeba city town General fund
Trial Balance
June 30, 2006
Account title Debit Credit
Cash 1,420,000
Taxes Receivable- Delinquent 560,000
Inventory of Supplies 500,000
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service Fund 60,000
Reserved Fund Balance 1,670,000
Budgetary Fund Balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
Appropriations 8,100,000
Estimated Other Financing Uses 100,000
Revenues 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Encumbrances 50,000 .
Total 19,150,000 19,150,000
Required
a) Prepare necessary journal entry
b) Preparestatement of revenue expenditure and change in Fund balance
c) Prepare Balance sheet
SOLUTION a)
1. Property tax receivable- current 7,200,000
Allowance for uncollectible prop. taxes -current 140,000
Revenue 7,060,000
2. Cash 7,520,000
Property taxes receivable-current 6,500,000
Revenue 1,020,000
3. Allowance for uncollectable Property taxes – current 130,000
Property taxes receivable- current 130,000
4. Encumbrances 3,600,000
Reserved for Encumbrances 3,600,000
5. Expenditures 500,000
Payable (Due) to Enterprise fund 300,000
Payable (Due) to Internal Service fund 200,000
6. Vouchers payable 7,700,000
Payable to Enterprise fund 250,000
Payable to Internal service fund 140,000
7. Reserve for encumbrance 3,600,000
Encumbrance 3,600,000
Expenditure 4000,000
Vouchers payable 4000,000
Cash 8,090,000
8Estimated revenues 8,400,000
Estimated other financing sources 100,000
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
Closing Entries for a General Fund
Appropriations 8,100,000
Estimated other financing uses 100,000
Budgetary fund balance 300,000
Estimated Revenues 8,400,000
Estimated Other Financing Sources 100,000
9 Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
Revenue 8,480,000
Other Financing Sources 100,000
/ To close Revenues, Expenditures, Other Financing Sources and Uses
Revenue 8,480,000
Other Financing Sources 100,000
Expenditures 8,000,000
Other Financing Uses 110,000
Unreserved and undesignated Fund Balance 470,000
b) Adis Abeba City General fund
Statement of Revenues, Expenditures and Change in Fund Balance
For the Year ended June 30, 2006
Budget Actual Variance
Favourable
Revenues:
Assets Dr Cr
Cash 1,420,000
Property Taxes Receivable- Delinquent 560,000
Inventory of Supplies 500,000
Total Assets 2,480,000
Liabilities and Fund Balance
Liabilities
Vouchers Payable 700,000
Payable to Enterprise Fund 50,000
Payable to Internal Service fund 60,000
Total Liabilities 810,000
Reserved Fund Balance 1,670,000
Total Liabilities and Fund Balance 2,480,000
The distinguishing feature of a special revenue fund is that its revenues are obtained primarily from
tax and non-tax sources not directly related to services rendered or facilities provided for use.
Separate special revenue funds are established by governmental units as mandated by legislative
enactments.
Illustration
To illustrate the accounting for a Special Revenue Fund, Assume that on July 1, 2006, The town
council of the Adis Abeba citytown authorized the establishment of a special Revenue Fund- its
first such fund- to account for Special Assessment against certain residents of the neighboring
village of Gute.
1) The town council adopted a budget for the special revenue fund for the year ending June 30
2007, providing for estimated revenues (from the special Assessments) of 800,000 and
appropriations for reimbursement to the General fund for expenditures made by that fund for
the services provided to the village of gute residents) of 750,000.
2) Special Assessments tax totaling 820,000 were levied which are to be paid in full in sixty
days.
3) Cash Receipts from Special Assessment Taxes of 820,000 were collected in full.
4) Out of the cash receipts, 630,000 was invested in Treasury bills with face amount of
650,000. The treasury bills mature on June 30 , 2007 and were redeemed in full on that date.
5) Billings from the Adis Abeba City General fund, requesting reimbursement of expenditures
of that fund, totaled 760,000; of that amount, 620,000 was paid to the General Fund by June
30, 2007
REQUIRED
Revenues:
Special Assessments 800,000 820,000 20,000
Expenditures
Reimbursement of General Fund- expenditures 750,000 760,000 (10,000)
Cash 220,000
Total Asset 220,000
Liabilities and Fund Balance
Payable toGeneral fund 140,000
Fund Balance Designated for Reimbursement of General fund 80,000
Total Liabilities and Fund Balance 220,000
Cash 50,000
Due to the General fund 50,000
(To record a loan from the general fund)
Inter fund loans and advances are not increases or decreases in f und net assets. On the
creditor fund‘s books they only move resources from one current asset (cash) to another
(Due from…). On the debtor fund‘s books, they increase a current asset (cash) by increasing a
current liability (Due to..). In both cases, the effect on net assets is zero. As such inter fund loans and
advances are not closed at the end of the year
2) Quasi –external transaction
These are transactions that would be treated as revenues, expenditures, or expenses if they
involved organizations external to the governmental unit.
They are the only type of inter fund transaction which is considered as revenue and
expenditure within the entity. These transactions are typically between an internal service fund
and the general or a special revenue fund. The fund giving the service recognizes revenue;
the fund receiving the service recognizes expenditure. An example of a quasi-external
transaction is a shared garage for the governmental unit which repairs any of its cars regardless of
which fund is responsible for it. The garage will charge the respective fund for work done,
and recognize revenue from it. The fund which is responsible for the vehicle recognizes expenditure.
The quasi-external transactions are recognized as revenue and expenditure only on the individual
and (sometimes) combining fund statements. These transactions are eliminated on the combined
statement of the government unit, and not included as revenue or expenditure for the unit as a whole.
GF
Expenditure xxx
Due to ISF xxx
SRF
Due from GF xxx
Revenues xxx
If a car repair of 1,000 Birr was done to a vehicle the general fund was responsible by internal
service fund, the following entries would be needed
On the books of the General Fund
Expenditures 1,000
Due to Internal service Fund 1,000
On the books of the Internal service fund
Due from the General fund 1,000
Revenues 1,000
The revenues and expenditures arising from quasi-external transactions are closed simply as part of
closing the other revenues and expenditures for the year. Due From accounts are not closed, because
they are balance sheet accounts.
3) Reimbursements
Expenditures made by it on behalf of another fund i.e. one fund pays a bill on behalf of
another & is then reimbursed.
Reimbursement is money you get back from a previous transaction you have made while
buying something for yourself or making a payment on behalf of a third party.
Expenditure xxx
Cash xxx
= To record payment of bill on behalf of ---
Cash xxx
Expenditure xxx
= To record reimbursement
For example, the Ministry of Health operates clinic in Addis Ababa and South Omo. The Addis
Ababa Clinic, for convenience, might pay a bill of 3000 Birr for medicine on behalf of South Omo
clinic. The South Omo clinic would then reimburse the AA clinic. The AA clinic would charge
expenditure at the time of purchase, and then credit expenditures to zero (0). Payment of the
reimbursement would then create expenditure for the South Omo clinic.
On the books of the AA Clinic
Expenditure 3,000
Cash 3,000
(To record payment of bill on behalf of south Omo clinic)
Cash 3,000
Expenditure 3,000
(To record reimbursement from south Omo clinic)
On the books of the South Omo Clinic
Cash 3,000
Expenditure 3,000
(To reimburse the AA clinic for medicine purchase)
Any expenditures arising from reimbursement transactions are closed simply as part of
closing the other revenues and expenditures for the year. No special attention is given to
reimbursements in the year-end closing process.
4) Residual Equity transfers
Residual Equity transfers are non-recurring or non-routine transfers of equity between funds made in
connection with the formation, expansion, contract or discontinual of a fund. not only are they not
Revenues or Expenditures, they are not Other Financing Sources or Uses, even though they are
technically increase / decreases in fund financial resources.
Equity transfer out xxx
Due to ISF xxx
Due from GF xxx
Equity transfer in xxx
For example, the GF might transfer the amount of 10,000 Birr to an internal service fund to open a
central supply store.
On the books of the General Fund
Equity Transfers Out 10,000
Due to Internal Service fund
10,000
On the books of the Internal Service Fund
Due from the General Fund 10,000
Equity transfers In
10,000
5) Operating transfers
Operating transfers are made in connection with the normal operation of the recipient fund. They are
legally authorized transfers from a fund, which receives revenue to the fund through which the
resources are to be expended. These transfers are other financing source of the receiving fund, other
financing uses of the paying fund.
Other Financing Uses-Operating Transfers Out xxx
Due to DSF xxx
Due from GF xxx
Other Financing Sources-Operating Transfers In xxx
For example, the general fund may make an annual transfer of 8,000 Birr to a Debit service Fund for
payment of interest on a general long-term debit. At time the transfer is authorized, the following
entries are needed:
On the books of the General Fund
Operating Transfers Out 8,000
Due to Debt Service fund 8,000
(To record a transfer to the debit service fund)
On the books of the Debit service fund
Due from General fund 8,000
Operating Transfers In 8,000
(To record a transfer from the general fund)
These transfers are similar to (residual) equity transfers in that they increase the net assets of the
receiving fund, and decrease the net assets of the giving fund. Therefore, they also must be closed to
fund balance at the end of the year
- 4 & 5 are properly called transfers& 1,2,3 are merely transfers.
CHAPTER SIX
CAPITAL PROJECT FUNDS
Capital Projects Funds (CPF) account for financial resources to be used for the acquisition or
construction of major capital facilities (other than those financed by proprietary funds & trust funds).
CPF do not account for the fixed assets acquired only for the construction of the fixed assets.
It exists only for the period of acquisition or construction of the fixed assets. After the
acquisition or construction is completed, the Capital Projects Fund will be abolished.
The Fixed Assets constructed are accounted for in the GFAAG.
It does not also account for the repayment & servicing of any debt obligations issued to raise
money to finance the acquisition of capital facilities. Such debt & debt related servicing
activities are accounted for in the General Long Term Debt Account Group (GLTDAG) &
Debt service fund (DSF).
Capital projects funds differ from the General Fund and special revenue funds in that the
latter categories have a year-to-year life, whereas capital projects funds havea project-life
focus
Since the purpose of capital projects fund is to account for the acquisition and deposition of
revenues for specific purpose, it contains balance sheet accounts for only liquid assets and
for the liabilities to be liquidated by those assets.
Establishment & operation
C.P.F are usually established on a project-by-project basis, because legal requirements may
vary from one project to another. So the existence of the C.P.F as any other fund will depend
on the legal requirement & the need for good financial management.
The focus of the CPF is the entire life of the project. It is by definition an expendable fund,
and all its resources are expected to be used up. However, CPFs do not have the same year-
by-year focus as the G.Fbecause of the multi-year focus of CPFs, some accountants prefer
not to close a CPF annually, but others do. Whether or not to close the CPF annually will
depend on the unique factors of each case & will be strongly influenced by the requirement
of the financing source.
The decision to use budgetary accounts will also depend on the features & financing source
of the particular CPF. The decision to use or not to use budgetary accounts is influenced by
factors such as.
The number of projects in the C.P.F
The amount of detail in the C.P.F budget
The use of an annual budget (rather than a project life budget) in the CPF
General capital assets acquired are not recorded in the General capital assets acquired Under
governmental Fund. Fixed asset is not capitalized government funds are recorded at the
depreciation Is not recognized government-wide level.
Recognize only current liabilities. depreciation Is recognized as expense
Debit expenditure and credit cash/AP when fixed asset is Recognize both current Long term
acquired liabilities.
Property Taxes Receivable is recorded Debit purchased fixed asset eg. Building
purchase orders are reported and recorded and credit cash(A/P) when fixed asset is
Budget entries are t reported and recorded acquired
Record Other Financing Uses and Other Financing Property Taxes Receivable is recorded
source purchase orders are not reported
Use Expenditure Budget entries are not reported
did not Record Other Financing Uses
and Other Financing source
Use expense
Table 1. Measurement Focus and Basis of Accounting for Financial Statements
Financial Statements Measurement Focus Basis of Accounting
Government wide Financial Statements Economic Resources Accrual
Governmental Funds Financial Current Financial
Modified Accrual
Statements Resources
Proprietary Funds Financial Statements Economic Resources Accrual
Fiduciary Funds Financial Statements Economic Resources Accrual
1. The General fund loaned 500,000 to the library Capital Projects Fund for defraying
Engineering and other preliminary expenses by receiving a note which is later to be settled from
the bond issue proceeds.
Cash 500,000
Notes Payable 500,000
2. Out of the Irrevocable grant of 20,000,000, the state contributed 5,000,000 and the
Remaining is supposed to be susceptible to accrual
Cash 5,000,000
Due from State Grant 15,000,000
Revenue 20,000,000
3. Preliminary engineering and planning costs of 320,000 were paid to the contractor.
There had been no encumbrances for this cost.
Construction Expenditure 320,000
Cash 320,000
4. The Bonds were sold at 101 the bond indenture agreement requires that any premium to be set
aside in the related Debt Service Fund.
Cash 30,300,000
OFS-Bond proceeds 30,000,000
Due to DSF 300,000
5. The town of X library CPF invested its 10,000,000 bond proceeds on the Federal Government
treasury bills.
Short Term Investment-Treasury Bills 10,000,000
Cash 10,000,000
6. A construction contract for 44,270,000 is authorized and signed.
Encumbrances 44,270,000
Fund Balance Reserved for Encumbrances 44,270,000
7. Orders were placed for materials estimated to cost 550,000.
Encumbrances 550,000
Fund Balance Reserved for Encumbrances 550,000
8. The materials previously ordered (Transaction 7) were received at a cost of 510,000.
a) Fund Balance reserved for Encumbrance 550,000
Encumbrance 550,000
b) Construction expenditure 510,000
Construction Payable 510.000
9. In addition to the construction contract of transaction 6; 3,900,000 was incurred for the services
of the engineers; of this amount 3,100,000 was paid.
Encumbrances 3,900,000
Fund Balance Reserved for Encumbrances 3,900,000
Fund Balance Reserved for Encumbrance 3,900,000
Encumbrance 3, 900,000
Construction Expenditure 3, 900,000
Construction Payable 3, 900,000
Construction Payable 3,100,000
Cash 3,100,000
10. Received cash of 1,000,000 from the General fund as an operating transfer.
Cash 1,000,000
OFS- Operating transfers in 1,000,000
11. A partial payment of 10,000,000 was received from the state irrevocable Grants and also
the General Fund loan was repaid with interest amounting to 10,000.
Cash 10,000,000
Due from State Grant 10,000,000
Notes Payable 500,000
Interest Expenditure 10,000
Cash 510,000
See transaction No 5 and 1 respectively
12. When the project was approximately half finished, the contractor submitted billing for a payment
of 12,000,000.
Fund Balance Reserved for Encumbrance 12,000,000
Encumbrance 12, 000,000
Construction Expéditeur 12, 000,000
Construction Payable 12, 000,000
13. The contractors initial claim was fully verified and paid.
Construction Payable 12,000,000
Cash 12,000,000
Town of X library Capital Projects Fund
Statement of Revenues, Expenditures and Changes in Fund Balance
For the year ended June 30, year 6
Revenues:
Irrevocable State Grant 20,000,000
Expenditures:
Construction Expenditures 16,730,000
Interest Expenditure 10,00016,740,000
Excess of Revenue over Expenditure 3,260,000
Other Financing Sources(Uses)
OFS- Bond Issue Proceeds 30,000,000
OFS- Operating transfers in 1,000,00031,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
Add: Fund Balance - July 1, Year 5 -
Fund Balance - June 30, Year 6 34,260,000
The appropriations budget of a DSF must provide for the payment of all interest on General long-
term debt that will become legally due during the budget year, and for the payment of any principal
amounts that will become legally due during the budget year. GASB standard currently require DSF
accounting to be on the same basis as is required for general and Special Revenue Funds. *** One
peculiarity of the accrual basis used by the governmental fund types which only relates to DSF is
that, interests on long term debt is not accrued. For Example: If the fiscal year of a governmental
units ends on December 31, 20x5 and the interest on its bond is payable on January 1 and July 1of
each year, the amount payable on January 1, 20x6 would not be considered a liability in the Balance
sheet of The Debt Service Fund prepared as of December 31, 20x5. The rationale for this
recommendation is that the interest is not legally due until January 1, 19x6. The same reasoning
applies to principal amounts that mature on the first day of the fiscal year. They are not liabilities to
be recognized in statements prepared as of the day before. In the events 20x5 appropriations include
January 1, 20x6 interest and /or principal payments, the appropriations expenditures (and resulting
liabilities) should be recognized in 20x5.
Persons budgeting and accounting for DSF should seek competent legal advice on the permit table
use of both premium on debt sold & residual equity transfer. In the some cases, one or both of these
items must be held for eventual debt repayment and may not be used for interest payments. In other
cases both Premium Revenue and Residual Equity Transfer- In may be used for interest payments.
ACCOUNTING FOR DEBT SERVICE FUNDS
Illustration The Following information is Available Town of X Serial Bond Debt Service Fund
on June 30,2008
The town of X uses a Serial Bond Debt Service Fund to pay off matured bonds and - -Interest
payable amounts. Information about the Bond issue is as follows;
- Principal Amount ----------------- 1,000,000
- Interest Rate ---------------------- 10% semi annually
- Bonds Dated ---------------------- January 1, 20x6
- Interest Payable--------------------- January 1 and July 1, beginning July 1, 20x6
- Bonds mature serially at the rate of 100,000 a year starting January 1, 20x7.
- The Fiscal Period runs from July 1, 20x7 - June 30, 20x8.
1. The Revenue Budget for Serial Bond Debt Service Funds for 20x8 consists of estimated Revenues
of 330,000 to be raised from Debt Service Tax Levy and Estimated Revenues of 50,000 from
earnings on investments. Appropriation Budget includes matured interest payable and matured
bonds payable i.e ;
Interest for July 1 and January 1 = 900,000 x 5% x 2 = 90,000
Bonds payable mature January 1 = 100,000
1) Taxes receivable amount of 340,000 and estimated uncollectable taxes in the amount of
10,000 are recorded.
2) Half of the gross levy of taxes is collected in cash.
3) Interest payable on July 1, 20x7 is recorded as a liability is birr 45,000
4) Taxes in the amount of 160,000 are collected.
5) Cash of 100,000 is invested in short term notes which bear interest of 10%
6) Interest on investment is received for the four months 100,000 x 10% x 4/12 = 3333.33
7) Interest on Investment is received for three months 100,000 x 10% x 3/12 = 2,500
REQUIRED
1. Prepare a necessary journal entry Under the book of debt service Fund
2. Prepare statement of Revenue, Expenditure and change in Fund Balance
3. Prepare Balance sheet
Solution
a) Journal entries
1. Estimated Tax Revenue 380,000
Appropriations 190,000
Budgetary Fund Balance 190,000
2.Taxes Receivable- current 340,000
Allowance for uncollectable current taxes 10,000
Revenues 330,000
3. Cash 170,000
Tax Receivable-current 170,000
4. Expenditure 45,000
Interest Payable 45,000
5. Cash 160,000
Tax Receivable- Current 160,000
6. Short Term Investment- Note 100,000
Cash 100,000
7. Cash 3333.33
Revenue 3333.33
8. Cash 2,500
Revenue 2,500
b) Town of X Serial Bond Debt Service Fund
Trial Balance
June30, 20x8
Cash 44,333.33
Short term Investment- Note 100,000
Interest Receivable 1,666.67
Tax Receivable 10,000
Allowance for Uncollectable Current Taxes 10,000
Unreserved and Undesignated Fund Balance -
Tax Revenue 330,000
Investment Revenue 7,500
Expenditure 191,500
Estimated Tax Revenue 330,000
Estimated Investment Revenue 50,000
Appropriation 190,000
Budgetary Fund Balance . 190,000
Total 727,500 727,500
INTRODUCTION
Internal Service Fund (ISF) and Enterprise Fund (EF) are both classified by the GASB as
Proprietary funds. Internal service funds, as indicated on the principles of governmental accounting,
are used to account for services provided by one department or Agency of a governmental unit to
other department or agencies, or to other governmental units on a user charge basis. Enterprise
Funds are used by governmental units to account for services provided to the general public on a
user charge basis. Proprietary funds differ from Governmental funds in that they are not required by
GASB standard to record the budget in their accounting system, which is treated as a managerial
control device rather than a legislative control tool.
Proprietary funds use the economic resources measurement focus and the accrual basis of
accounting. Because revenues and expenses (not expenditures) are recognized on the accrual basis,
financial statements of proprietary funds are similar in many respects to those of business
organizations.
Fixed assets used in fund operations and long-term debt serviced from fund revenues are recorded in
the accounts of each proprietary fund. Depreciation on fixed assets is recognized as an expense,
Agency Fund for Special Assessment Debt Service - A Special Assessmentis a compulsory levy
made against a certain property to defray part or all of the cost of a specific improvement or service
that is presumed to be of general benefit to the public and a particular benefit to the property against
which the special assessment is levied. GASB’s standard specify that a governmental unit which has
no obligation to assume debt service on special assessment debt in the event of property owners’
default, but does perform the functions of billing property owners for the assessments, collecting
instalment of assessments and interest on the assessment, and from the collections, paying interest
and principal on the special assessment debt, should account for those activities by use of an Agency
Fund. if the special assessment debt is special-special assessment debt, then the government acts
only as an agent to collect the special assessment and pay the creditors. The government as a whole
does not take responsibility for the debt. The collections and payments of it should therefore be
accounted for in an Agency Fund.
Tax Agency Funds - An agency relationship that does, logically, result in creation of an agency
fund is the collection of Taxes, or other Revenues, by one governmental unit for the several of the
funds it operates and for other governmental units.
To record the assessment of the taxes, the collecting fund may deduct a fee (often a percentage of
the amounted collected) in order to cover its cost of collecting the taxes:
Mailing bills, Receiving Payments, bookkeeping, etc... (This is Revenue for the collecting fund). If
the fee deduction is assumed to be a certain percentage, the remaining percentage balance amount
will be payable to the funds for which the taxes are collected.
Cash and Investment Pools- Earnings on pooled investments and gains or loses on sales of
investments are allocated to the funds having an equity in the pool in proportion to their relative
contributions to the pool. To ensure an equitable division of earnings, gains and losses, it is
customary to revalue all investments in the pool, and all investment being brought into the pool or
removed from the pool, to market value as of the time that investments of a fund are being brought
into or removed from the pool. (Some pools carry investments at market, revaluing them daily).
TRUST FUNDS
Trust funds differ from agency funds primarily in degree. Frequently a trust fund is in existence over
a longer period of time than an agency fund; it represents and develops vested interest to a greater
extent and it involves more complex administrative and financial problems.
An important reasons as to why governmental units accept assets in trust is that the donation of
assets to be used to produce income for some cultural or educational purpose. The donations are
sometimes made at the death of a person, as part of the will. Other times, they are made while the
person is still living. For example, suppose a wealthy elderly person wants his name to be
remembered long after his death, he could make a large donation to an organization, insisting that
the donation be invested in an income generating Investment. Each year the income could be used
for different humanitarian or other developmental activity, while the principal is reinvested to earn
income for the years, which follow. These types of donations are called Endowment Funds.
The basic idea of an Endowment Fund is that the principal must be held intact, either forever or for a
predetermined length of time, so that it continually produces income for the desired purpose. The
principal is therefore Nonexpendable. The income generated by the principal is to be used
according to the trustor’s purposes, so it is Expendable. Since the nature of the principal and the
income is different, accounting treatment in separate fund is required. The Nonexpendable
principal should be accounted for like a Proprietary Fund, the Expendable income like a
Governmental Fund.
Pension Trust Funds on the other hand are expendable for a specified purpose in both principal and
income, retirees may be paid from both. They are account for like a proprietary fund. Pension Trust
Funds are sometimes called - Public Employee Retirement Systems (PERS) when a pension trust
fund is considered to be part of the governmental reporting entity, its financial data are included in
the combined financial statements and the combining financial statements prepared for fiduciary
funds accounted for on the full accrual basis.
Accounting for pension trust Funds should be distinguished from the governmental unit’s
responsibility as an employer to account for Expenditures, Expenses and liabilities related to
Pension plans, and to disclose in the notes to the financial statements a long list of items specified in
GASB’s statements. Reporting requirements are complex and are in a process of change. Further,
reporting requirements vary depending on whether the plan is administered by a unit of the reporting
entity or by another entity. The GASB’s disclosure standards are based on the conclusions that the
primary objectives of pension disclosures by Pension Trust Funds and governmental employers is to
provide users with information needed to assess:
A. Funding Status of a Pension Trust Fund on a Going-concern Basis,
B. Progress made in accumulating sufficient Assets to pay Benefits when due,
C. Whether Employers are making actuarially determined contributions.
CHAPTER 10
Introduction to Federal Government of Ethiopia Accounting and Financial
Management
Introduction
Accounting is mainly governed by conventional concepts and principles. As information
processing system of an organization accounting is affected by various factors such as its
environment and characteristics. Accounting provides critical information for good financial
administration system of organizations. Government money is a public resource which the
government has to spend as per clear directives and procedures. The accounting system has to
control this resource through a budget control. Thus, the overall objective of this course is
therefore to capacitate students on understanding basic concepts and principles of FGE
accounting and reporting system, budget preparation financial reporting and control mechanisms.
Historical overview of Federal 1Government Accounting System
The federal government of Ethiopia has been undertaking various reforms in the management of
government affairs service delivery, under the broad umbrella of
The Public Sector Capacity Building Program (PSCAP), which is a large national program
planned to be implemented by different government offices in different government structures.
The MoFED which is responsible for the disbursement of program fund to the different
beneficiaries and for the eventual gathering of financial reports, consolidating them and
preparation of financial reports to the government, donors and other stakeholders.
The FGE accounting system, as explained in the budget manual which is prepared by ministry of
Finance and Economic Development and in the financial law of Ethiopia, is applicable in all
Public bodies (PB). Public Bodies are those government institutions which have got legal
responsibilities (mandates), receive their partial or full budget from the government to discharge
their responsibilities. These Public Bodies are also required to submit their reports to ministry of
Finance and Economic Development and respective Finance or Planning both at Federal and
Regional states.
Similarities and Differences of FGE accounting system with business organizations
There are many similarities between the accounting for business and not-for-profit government
organizations. A double entry system of accounting is recommended for both. The general
mechanics for record keeping are the same: documents from the basic record, books of original
entry (journals) are kept and posted to general ledgers and subsidiary ledgers, trial balances are
drawn to prove the equality of debits and credits, a chart of accounts properly classified and
properly fitted to the organization's structure is essential to good accounting, and of course,
uniform terminology is highly desirable in both fields. Both prepare financial statements, closing
entries, etc.
In most of the operations, government budgetary institutions are not concerned with profit
measurement, but only to assure continuity and/or improvement of services to the public, and the
need to ensure compliance with extensive legal requirements often results in government
organizations having more stringent operational and administrative controls than in commercial
organizations. But the market in which they operate regulates commercial businesses. If the
management is not responsive to the market demand and fails to provide the quality of services
demanded by the market, the commercial organization will ultimately be forced out of business.
Accountability
• Imploring a general ledger system. Each accounting unit maintains a general ledger for
each source of funding, so each unit maintains a balanced and continuous record of its
responsibilities and performance. A set of financial reports can be produced from any
single general ledger or from any combination of general ledgers.
• Creating the ability to record and report on any assets and liabilities using a cost method
of valuation. The FGE accounting system included a simplified process for recording
any assets and liabilities in a set of registers and in a general ledger that is independent of
accounting for transactions using a modified cash basis of accounting.
A chart of accounts is a system of coding used to identify and classify financial entities and
events. The current chart of accounts, described in the Budget Reform Manual incorporates
detailed codes for items of domestic revenue, external assistance, external loans, and items of
expenditure. This sub section completes the FGE chart of accounts by adding detailed codes for
transfers, assets, liabilities, letters of credit and net assets/equity.
The classification of the chart of accounts is structured in a systematic manner and facilitates the
recording of transactions and the reporting of information in accordance with the budget.
The chart of accounts treats all detailed account codes as temporary accounts and permanent
accounts. Temporary accounts are accounts that begin each year with a zero balance.
Permanent accounts are detailed account codes whose balance at the end of a year becomes the
balance in the account at the beginning of the next year.
Chart of Temporary Accounts
Revenue, expenditure and cash transfers are temporary account code categories. Account codes
in these categories:
• are always treated as temporary accounts, and
• Begin each year with a zero balance.
The Budget Manual created account codes for the FGE chart of accounts as follows:
• Items of domestic revenue using account codes 1000-1799,
• External assistance using account codes 2000-2999,
• External loans using account codes 3000-3999,
• Transfers using code numbers 4000 through 4099, and
• Items of expenditure using account code 6000-6999.
Chart of Permanent Accounts
Assets, liabilities and net asset/equity are permanent account code categories. Account codes in
these categories:
• are always treated as permanent accounts, and
• begin each year with the account balance as long as they had at the end of the
previous year. In other words, these accounts are not closed.
The Accounts Reform Team under the Expenditure Management and control Sub-Program of the Civil
Service Reform designed codes for detailed coding of:
• Assets using code numbers 4100 through 4999.
• Liabilities using code numbers 5000 through 5499.
• Letters of Credit using code numbers 5500 through 5599.
• Net Assets/Equity using code numbers 5600 through 5699.
Assets: Assets are resources controlled by an entity as a result of past events and from which
future economic benefits or service potential are expected to flow to the entity. The categories of
assets in the FGE accounting system are: cash and cash equivalents, receivables, goods in
transit, stocks, fixed assets, loans receivable, investments, liabilities, letters of credit, and net
assets/equity.
Cash and cash equivalents: Cash is cash on hand and cash at bank. Cash equivalents are short-
term, highly liquid investments that are readily convertible to known amount of cash and which
are subject to an insignificant risk of change in value.
Receivables: receivables are amounts owed to (given to) a government unit by another
government unit, a person, or a non-government entity except public enterprises. Salary
advances to employees and advances to suppliers are two examples of receivables commonly
occurring in FGE transactions.
Goods in transit: Goods in transit are goods that are owned by the FGE but not yet in the FGE's
possession. Typically, these are goods that are purchased overseas using a letter of credit.
Stocks: Stocks are goods that are consumed in less than one year.
Fixed assets: Fixed assets are physical items that are expected to have a useful life of longer
than one year and have a certain minimum value.
Loans receivable: Loans receivable are amounts due from public enterprises over a period of
time exceeding one year.
Investments: Investments are FGE investments in public enterprises and private organizations
that are held for more than one year.
Liabilities: Liabilities are formally defined by the Institute of Public Sector Accounting
standards as "present obligations of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits or
service potential." Liabilities are better defined by example. The categories of liabilities in the
improved and expanded accounting system are:
• Payables. Payables are obligations to pay that are due in less than one year.
Examples of FGE payables are deposits, grace period payables, treasury bills, and
retention on contracts.
• Long-term debt. Long-term debt is an obligation to pay that is due in more than one
year.
Letters of Credit: A letter of credit represents a guarantee to pay suppliers with cash set aside in
bank account restricted for that purpose.
Net assets/equity: Net assets/equity is formally defined by the Institute of public sector
accounting standards as "the residual interest in the assets of the entity after deducting all its
liabilities." Net assets/equity is the balance remaining after liabilities are deducted from assets.
This balance represents the equity interest of Regional and Federal Governments
Basis of Accounting
The basis of accounting is the basic set of principles and rules employed by the accounting
system to determine when and how to record transactions. The cash basis of accounting is a
basis of accounting that recognizes transactions and other events when cash is received or paid.
Although organization's earnings and related operating activities are continuous, they are
reported at specific intervals (i.e. an accounting period or budget year) in order to provide useful
information for decision-making on a timely basis. Some activities may begin and end during
the accounting period, while others may require two or more accounting periods for completion.
Budget year for FGE is from Hamiel to Sene 30.
In summary, accrual accounting is based on cash flows but reports transactions and other events
with cash consequences at the time the transactions occur rather than at the time cash is received
or paid. Accrual accounting is also superior to cash-basis accounting from the standpoint of
measuring financial statement elements.
The FGE accounting system employs a modified cash basis of accounting. Modified cash basis
of accounting is a compromising basis of accounting between the two extreme bases of
accounting. It adopts features from both bases of accounting. Most transactions are recorded
using cash basis of accounting and some transactions are recorded using accrual basis of
accounting.
The modified cash basis of accounting in FGE means that cash basis applies except for
recognition of the following transactions:
• Revenue and expenditure are recognized when aid in kind is received.
• Expenditure is recognized:
When payroll is processed.
At the end of the year when a grace period payable is recognized.
When goods are received or services are rendered if payment for the goods or
services was rendered in advance.
When cash moves from an unrestricted to a restricted bank account to meet
the requirements of a letter of credit. When cash moves out of the restricted
account, no expenditure is recognized.
• Intergovernmental transfers are recognized in the absence of actual cash movement.
• Transactions resulting from salary withholdings are recognized in the absence of
actual cash movement.
The modified cash basis of accounting is consistent with the budgeting process and produces
information useful for comparing budgeted and actual revenue and expenditure. The modified
cash basis accounting system requires the same temporary accounts as the cash basis of
accounting plus the following permanent accounts: cash and cash equivalents, receivables and
payables.
The FGE accounting system employs a combination of temporary and permanent accounts. All
account balances at the end of the year may not have a zero balance. So, a process is necessary
that distinguishes temporary accounts and sets them to zero. The process of setting the balance in
temporary accounts to zero is called closing the accounts, and the process is performed by a
closing entry. The closing entry is an accounting activity that takes place at the end of each
budget year. This process requires a net assets/equity account.
All assets and liabilities are not recognized in the modified cash basis accounting system. Only
those receivables and payables included in the chart of accounts are included in the system. The
modified cash basis accounting system produces financial information that is reported in a
Statement of Changes in Cash Position and a Statement of Budgeted versus Actual Expenditure.
Asset and liability accounts other than cash, receivables, payables, and letters of credit are
included in the chart of accounts to allow institutions that have the capacity to maintain
accounting records of all assets and liabilities. These other assets and liabilities are recorded
using the cost method. The cost method values assets at their original cost and liabilities at the
amount still due.
The FGE accounting system uses double-entry bookkeeping. Double-entry bookkeeping means
that both aspects of each transaction are recorded in the accounting records with at least one
debit and one credit so that the total amount of debits and the total amount of credits are equal to
each other.
The advantages of double-entry bookkeeping are numerous, including:
• All aspects of the transaction are properly recorded in accounts.
• The accounts are self-controlling because the total of all debits must equal the total of
all credits; therefore, many errors are easily detected and corrected.
• Modified cash basis of accounting can be introduced.
Double-entry bookkeeping requires an understanding of some additional basic accounting
concepts and terms. The most basic are the terms debit and credit. Debit literally means left and
credit literally means right. By convention, the rule for increases for Letter of Credit and Net
Asset /Equity is Credit which is used in modified cash basis of accounting.
Transfer Accounts:
• If cash is sent by transfer, Transfer account is debited.
• If cash is received by Transfer, Transfer account is credited
In a double-entry system, each debit to cash is matched by a credit to another account of an
equal amount, and each credit to cash is matched by a debit to another account of an equal
amount. For FGE modified cash basis of accounting, the basic accounting equation always
applies.
Cash & Cash Equivalents + Receivables = payables + Letters of Credit + Net Assets/Equity
In a double-entry bookkeeping system, the book of original entry is the register. A register is a
chronological listing of transactions and serves as the book of original entry into the accounting
system. Information regarding transactions is taken from various documents (invoices, receiving
reports, etc.) and recorded in the accounting system for the first time on the register. The
transactions in the register are in chronological order.
Each transaction entered on the register in the double-entry system affects at least two accounts.
One is a debit and the other is a credit, but both accounts are affected by the same amount.
Therefore, for each transaction that is recorded in the double-entry register, the amount recorded
as a debit equals the amount recorded as a credit. The total of debits recorded in the register will
always equal the total of all credit in the register.
In the double-entry system, a ledger card is created and kept for all accounts. All transactions
entered in the register must be transferred to ledger cards. The process of transferring
transactions information from the register to the ledger cards is called posting.
The set of all ledger cards is called a general ledger. Two postings are made for each transaction
in the general ledger of equal amounts in different accounts, but one is entered as a debit and one
as a credit. Therefore, the total debit amount on all ledger cards must equal the total credit
amount on all ledger cards.
The general ledger contains a ledger card for each account. The ledger card contains the running
balance in that account. If postings to the ledger cards from the register are up-to-date, monthly
reports are easily prepared by taking the balance from each account's ledger card. Mistakes are
easily identified if the total debt balances on all ledger cards do not equal the total credit balance
on all ledger cards. If a general ledger is kept, a set of self-balancing accounts (total debits
equals total credits) is maintained and a report of financial information is available. Financial
reports can be prepared from general ledgers.
Some accounts in a general ledger do not provide sufficient detailed information for control
purposes. The account "Advances to Employees" is an example. The account in the general
ledger maintains the total balance in the account, but identifying each individual and the amount
each owes is important.
A control account is an account in a general ledger that maintains the total balance of all related
accounts in a subsidiary ledger. For each control account, a subsidiary ledger is kept. A
subsidiary ledger is a ledger separate from the general ledger that contains a group of related
accounts. The control account is part of a general ledger. Any account in the general ledger that
requires more detail than simply the amount in the account becomes a control account with a
subsidiary ledger. An example of a subsidiary ledger is presented here. Suppose advances are
provided to three employees. The account code in the general ledger for Advances to staff is
4203. A subsidiary ledger for account code 4203 is created where each advance is assigned an
account code as follows:
No Empioyee Subsidiary
Account code
1 Abebe 4203-01
2 Kidane 4203-02
3 Hassen 4203-03
The specific advance provided, for example, to Kidane for example, is maintained in account
code 4203-02 in the subsidiary ledger. The total of all advances is the total of all account
balances in the subsidiary ledger and is the balance recorded in control account code 4203 in the
general ledger.
1.5 Legal framework of FGE Financial Administration
The financial administration in FGE mainly involves Ministry of Finance and Economic
Development (MOFED) and Regional Finance and planning offices and a Public Body. The
specific Federal and Regional government administrative authorities and the required
organizational structure in public bodies are illustrated in the following Figure 2.1 and Figure 2.2
below
Figure 2.1
Structure of Financial Administration in the Budget Process
Ministry of Finance and Economic Development
Public
Body
Budgetary
Institution: Project
or Sub-Agency
Budgetary
Institution:
Sub-Project or Sub-Sub-
Agency
Figure2.2: Structure of financial administration within public Body
Head of Budget
and Accounts General Services
& Administration
Accounta Cashier
nt
The following are responsibilities of MOFED, Budgetary Institutions, Accounting unit,
Reporting Entity, Cashier and Accountant in the financial administration in the Budget process
and within the Public Body
Budgetary Institutions are defined as those institutions that are fully or partially financed by
Government. The budget process assumes the appropriation of budgets. The appropriated budget
is the budget approved by the Council of people's Representatives (CPR). The appropriated
budget is broken down by:
Each month, a monthly report is prepared from the general ledger for the Bank Account (BA).
Cash ledger cards in the general ledger control the cash balances in the bank and in the safe. If
more than one BI shares a single BA, the accounting unit:
The balances of cash in safe and cash in bank are maintained in ledger cards of general ledger for
the BA.
Reporting Entity
A reporting entity is the entity that sends monthly reports to MOPED. Although the accounting
unit prepares monthly reports, every accounting unit may not send monthly reports directly to
MOPED. The reporting entity may be the accounting unit or a higher level of authority (perhaps
a PB).
• A reporting entity may be an accounting unit, and an accounting unit may consist of
only one BI. Therefore, a single BI may be a reporting entity.
• A reporting entity may be a PB that receives the monthly reports from several
accounting units.
Whoever sends the reports to MOPED is the reporting entity. Therefore, the reporting entity is
not, necessarily, an accounting unit.
In the PGE accounting system of cash control, the cashier's function and the accountant's
function are distinct. Cash consists of currency and checks. The cashier's function is to maintain
and control cash in the safe. The accountant's function is to maintain and control cash at the
bank.
Only the cashier can receive currency and checks and make disbursements in currency. Daily,
the cashier should count cash on hand and reconcile ending cash on hand to the cash book.
The cash in safe is controlled by an impress system. When cash is received as per the budget or
other sources, the cashier will:
The accountant's responsibility for cash is to maintain a record of the total cash position of the entity,
including cash at the bank and cash in the safe. The accountant records cash movements that flow
through the cashier and cash movements that flow directly through the bank. Direct cash movements
through the bank normally include bank transfers and charges, checks written, and any other
transactions that do not require cash handling by the cashier.
When a PB has more than one cashier, one cashier is designated as the main cashier. The other cashiers
are designated as assistant cashiers. Each PB is responsible for organizing assistant and main cashiers.
However, some general principles apply.
The word budget was originally derived from French word "bougette" which means "small bag" or the
public purse which serves as a container for revenues and expenditures of the state. Budget is the most
important tool for the government to manage the public resources of the nation economy. It serves as an
instrument to allocate the scarce resources among the different computing unlimited needs of the
society. It is a document Containing planned program which planned ahead to reach objectives and
targets. A budget may be stated in terms of quantity, money or both and is prepared for definite time
period. A budget is a time bounded financial program systematically worked out and ready for execution
in the ensuing fiscal year.
Fundamental of FGE budget program (Classifications of budget)
The structure of government budget constitutes the formats in which the budget data are
organized and classified for different purposes. The government budget in Ethiopia is classified into: -
1.revenue budget 2. Expenditure budget
issues, when necessary it might involve discussion down to line of items. Presenting the hearing
will be ministers and/or vice ministers, head of public bodies and the mofed.
8. Review and recommendation- Each sector of MOPED review the budget that requested by public
bodies and after review of the requested budget MOPED send the consolidated and submit to prime
minister's office then submitted to council of ministers. The budget committee of the MOPED
will review the discussion and make recommendation. If there is an increase (over ceiling) this
will go to PMO for approval.
9. Submission to the council of ministers:-
At this stage the two budgets (recurrent and capital) will be consolidated and MOPED will
prepare a brief analysis of the total budget. Pirst reviewed by ministers and vice ministers in an
economic affairs and then presented to the prime minister along with brief. The prime
minister may or may not make amendments and then will be sent to the council of ministers for
discussion. MOPED defend the budget in the council, the council of ministers may make some
adjustments.
10. Submission of budget to house of people representatives:-
Once approved by the council of ministers, the prime minister will present both budget to
HPR.the budget then will be debated based on recommended of the budget of the committee and
approved.
11. Notification and publication
The approved budget will then get the legal status through the publication in the" Negarit gazeta'.
Spending public bodies will then formally be notified of their approved budget by line of items
from MOPED for recurrent and capital budgets, respectively. MOPED will notify spending public
bodies.
12. Supplementary budget: - in the course of budget year, supplementary (additional) budget will be
proclaimed when necessary. Pollowing almost same process as the initial budget preparation.
Likewise budget reallocation will be made mainly based on performance.
The IBEX system developed under the DSA project of Harvard University together with six
Ethiopian IT engineers and other American IT experts
Sinc1998Ec (2006Gc) IBEX has begun its operation by the budget module then after the 5 other
module added to the system, I,e
Account
Account consolidation
Budget control
Budget adjustment
Disbursement IBEX has now been implemented and use in all regions
(We have 11 regions).
IPMIS is automated system that is used for financial management that interlinks planning,
budgeting, expenditure management and control, accounting, auditing and reporting.
IPMIS works very well in both national and country governments. The system was first rolled out to
government ministries in March 2003. It was latter rolled out to all the 47 countries in March 2013
following the establishment of developed government.
Questions
1. What is IPMIS role in public financial management?
2. How has the national treasury built capacity of IPMIS users?
3. How Does the IPMIS system support auditing?
4. Does the IPMIS system capture data on personnel and wages?
5. What is the role of IPMIS in procurement and payment?
• Approved budget
• Revised budget
• Payments received for budgeted expenditure.
• Amount remaining to be requested.
• Commitments
• Balance in the revised budget that is not committed. The
budget ledger card is divided into two parts:
A. The top of the card contains information to identify the
• BI,
• Type of budget, and
• Item of expenditure.
• The table on the card contains detailed information about each budget transaction.
B. The Budget Section maintains a budget ledger card for each individual item of budgeted
expenditure by BI and source of finance. The appropriate budget ledger card is updated
each time a transaction occurs. Pigure 3.1 shows the Budget Ledger Card
N Additi Baiance
0 Refe Appro on to Reducti on Revise d Paym Un Not Committe
renc e ved Budge t to Budget Budge t ent Recei pai d d
Date Descri Com
No. Budge t ved Bai
ption mitm
anc e
ent
(Source: MOPED&DSA Project manual, December 2002)
Purpose of Each Fieid in the Budget Card
• Page Number: the field identifies the page number of the budget ledger card.
• Type of Budget and Code: the field is to identify whether the item of expenditure is a part
of the recurrent or capital expenditure budget.
• Item of Expenditure & Code: the field is to identify and describe the item of expenditure
by its budget code.
Lower Part of the Budget Ledger Card
• Number, Date, Description & Reference Number: the purpose of these fields is to
respectively identify:
The sequential number of the transaction.
The date of the transaction.
A brief narrative of the description of the transaction.
The reference number of the source document to the transaction.
• Approved Budget: the field identifies the amount of the original approved budget for the
item of expenditure.
• AdditionsIReductions to approved Budget: the fields are used to track changes to the
approved budget and provide information to compute the revised budget.
Page 1
• Revised Budget: the field contains the approved budget adjusted for any additions or
reductions. The revised budget is key for budget control. An item of expenditure must
not exceed its revised budget.
• Payment Received for Budgeted Expenditure: the field is used to record payments
received (Whether as cash or non-cash from the appropriate source of funding and assists
in keeping track of the amounts of money received for the item of expenditure.
• Unpaid Balance: the field is the difference between the revised budget and the amount of
funds received (whether as cash or non-cash) to meet the budgeted expenditure and
assists in keeping track of the remaining amounts of money that may be requested for an
item of expenditure.
• Commitment: the field is used to record current commitments and assists in identifying
the balance available in the budget for expenditure.
• Balance not committed: the field contains the difference between the revised budget and
the commitments. The balance not committed is the available budget for future spending.
Once the uncommitted balance is reduced to zero, the Budget Section will approve no
further spending.
Page 2
This unit is made up of three main sections. In the first part a complete description of ledgers is
presented. How the ledgers are structured and organized as general and subsidiary ledgers are also
discussed.
The unit mainly describes the purpose and format of each ledger and the process of recording entries in
ledgers. The processes used in posting to the general ledger and in the subsidiary ledgers from all FGE
Registers are the same regardless of whether the transactions involve domestic or foreign currency. For
simplicity, in this unit, the term Register means local currency transaction register and foreign currency
transaction register.
After you complete this unit, you will be able to:
• Analyze the relationship that exists between controlling and subsidiary ledger
• Explain how ledgers in FGE accounting system are structured into general and
subsidiary ledger
• Identify the ledgers in FGE accounting system easily based on its organization
• List the activities in finance section at the end of the month and the budget year.
Description of Ledgers
A ledger is the entire group of accounts maintained by an accounting unit. The ledger
summarizes transactions by accounts. The ledgers summarize the transaction information from registers
in the form of accounts that facilitate reporting of financial results. Transactions are recorded in the
register, but reports are produced from the ledgers. Two types of ledgers are maintained in the FGE
accounting system: General Ledgers and Subsidiary Ledger.
General Ledger
A ledger card is maintained for every account code recorded in the register. Every amount that is entered
as either a debit or credit on the Register is also entered to the corresponding debit or credit column of
the appropriate ledger card. The aggregate of all such ledger cards is the general ledger. The general
ledger is a set of self-balancing ledger cards because at all times the total debits and the total credits
recorded in the general ledger are equal. The general ledger is maintained to classify information
reported in the Register by respective account codes. All transaction amounts recorded in the Register
are entered on ledger cards in the general ledger.
The balances for all individual accounts are maintained in the general ledger. Because the general
ledger serves as a basis to prove that the net cumulative debit and credit balances of all accounts are
equal, the general ledger simplifies and improves the report generation process.
Subsidiary Ledger
The accountant maintains a general ledger for each register. Where more than one BI shares the
Page 3
same bank account, the accounting unit maintains one Register and one general ledger for the bank
account. A system of control accounts in the general ledger and supporting subsidiary ledgers is used to
maintain sufficient account balance detailed to facilitate management reporting requirements. A control
account is an account in the general ledger that maintains the total balance of all related accounts in
a subsidiary ledger. A subsidiary ledger is a ledger that is separate from the general ledger and contains
transaction details of each control account in the general ledger. Any account in the general ledger that
requires more detail than simply the total account balance becomes a control account with a Subsidiary
Ledger.
A ledger card is maintained for every control account code recorded in the general ledger. Either every
amount that is entered as a debit or credit on a control account's ledger card in the general ledger is also
entered to the corresponding debit or, credit column in the subsidiary ledger card. The aggregate of all
subsidiary ledger cards for a single control account is the subsidiary ledger. For example, expenditure
account code 6111 salary expense has a ledger card in the general ledger that contains all salary
expenses recorded in the transaction register .A set of subsidiary cards, one for each BI, also is
maintained for expenditure account code 6111.At all times, the net cumulative balance of debits and
credits recorded in the subsidiary ledger is equal to the respective net cumulative balance of debits
and credits of the corresponding control account in the general ledger (MOFFED and DSA Project
manual, December,2002).
A subsidiary ledger is not a set of self-balancing accounts. A subsidiary ledger's total debits and credits
equal the balance in the corresponding control account in the general ledger. The purpose of control
accounts and subsidiary ledger accounts is to facilitate the report generation process, minimize the size
of the general ledger, and maintain sufficiently detailed records regarding account balances to assist
proper financial management. For example, total of advances to staff is a control account in the
general ledger, but the amount owed by each staff member is a subsidiary ledger account in the
subsidiary ledger. Total of advances to staff is a control account
in the general ledger because the reporting requirements require only the total amount of the advances to
staff (rather than the amount owed by each staff member). In addition, it is likely that the number of
staff members who owe advances is significant, and it may be cumbersome to maintain the amounts
owed by each staff member in the general ledger. However, the accounting unit will
maintain a record of the amount owed by each staff member in a subsidiary ledger in order to monitor
repayment of the amounts owed from each staff member. The accountant maintains a set of subsidiary
ledger cards for each control account in the general ledger. However, a subsidiary ledger is not
Page 4
maintained for all accounts in the general ledger. Subsidiary ledgers are only maintained for
accounts within the general ledger that requires more detail than simply the total account balance
(MOFFED and DSA Project manual, December, 2002).
Structures and Organization of Ledgers
This section presents the structure of ledgers, which is presented to discuss about recurrent
Expenditure, revenue, and other accounts, trans!ers, cash and cash equivalents, receivables, payables,
and letters o! credit. In this section, organization of ledgers in FGE accounting system will also be
discussed. Structure is about the relationship that exists between general and subsidiary ledger and
organization is about the systematic grouping in general ledger. You will study this issue in the next
presentations.
Structure of Ledgers
This section describes when an account in the general ledger is treated as a control account. Two criteria
define whether an account code is a control account with a related subsidiary ledger:
• Monthly reporting requirements
• Management and control of the account balance
Recurrent and Capital Expenditure
An accounting unit is required to report recurrent and capital expenditures at the level of each BI
managed by it. Expenditure control accounts are maintained in the general ledger for each item of
expenditure and type of budget. The control account contains information whose detail is shown in the
subsidiary ledger. In order to also track and report actual expenditure at the level of each BI managed by
the accounting unit, a subsidiary ledger is maintained for each expenditure control account by BI.
Accounts in the subsidiary ledger provide information on total
expenditures by type of budget and item of expenditure for each BI managed by the accounting unit
(MOPED and DSA Project manual, December, 2002).
Revenue
An accounting unit is required to report revenue at the level of the accounting unit and not the level of
each BI managed by it. In order to record and report actual revenue at the level of the accounting unit,
an account should be maintained in the general ledger for each item of revenue by account code. The
general ledger provides information on total revenues by item of revenue for the accounting unit as a
whole. Since there is no reporting requirement at the level of each BI, a subsidiary ledger is not
maintained for items of revenue (MOPED and DSA Project manual, December, 2002).
Page 5
Other Accounts
Other categories of accounts maintained in the general ledger include:
• Transfers
• Cash and Cash Equivalents
• Receivables
• Payables
• Letters of Credit
• Net Assets/Equity
An accounting unit is required to report on accounts in these categories at the level of the accounting unit
only and not at the level of each BI managed by it. However, some of these account categories contain
control accounts with Subsidiary Ledgers.
Transfers: Transfers accounts typically are not control accounts and have no related Subsidiary
Ledgers.
Cash and Cash Equivalents: Cash and Cash Equivalents accounts typically are not control accounts
and have no related Subsidiary Ledgers. If the accounting unit controls more than one safe, a Subsidiary
Ledger is needed for each safe under the general ledger control account for Cash in Safe(MOPED&DSA
Project,December,2002) .
Receivables, Payables, and Letters of Credit: Receivables, payables, and letters of credit accounts
typically are control accounts with related Subsidiary Ledgers. Accounts in the
Subsidiary Ledgers identify individual items under the control account (MOPED and DSA
Project, December, 2002).
Organization: The general ledger is organized into seven broad categories comprising:
• Revenue, Assistance or Loan accounts in sequence of the account codes
• Expenditure accounts in sequence of the account codes
• Transfer accounts in sequence of the account codes
• Asset accounts in sequence of the account codes
• Liability accounts in sequence of the account codes
• Letters of Credit accounts in sequence of the account codes
• Net Asset/Equity account
The subsidiary ledger is organized by the related control account maintained in the General
Ledger (MOPED and DSA Project manual, December, 2002).
Page 6
Recording Entries in Ledgers
In this section, you will study the formats of ledgers. The type of information that each entry in
the ledger requires from a transaction register is also the focus of your study in the section. Try
to get the ledger formats from government institutions found in your area and ask people
working in finance section to get clear and practical experience in addition to your reading.
Recording Transactions into the Ledger Card of the General Ledger
Each transaction recorded in a register is also recorded in the related general ledger. Each
transaction is recorded in two separate ledger cards because two accounts are affected by each
transaction. Each account is recorded on its appropriate ledger card in the general ledger
immediately after it is recorded in the register. The only source document to the general Ledger
is the register.
Figure 3.1: Ledger Card
Page 7
Project Code
account Code
Reference from
Register Balance
Date Month Page Item Date Description Debit Credit Debit Credit
no
Page 8
• Debit and Credit contains the amount from the Register for the transaction. Every
amount that is entered as a debit (or credit) on the register is entered in a corresponding
debit (or credit) column of a ledger card in the general ledger.
• Balance is the net cumulative balance of the account. After every transaction is recorded
in the debit or credit column of the ledger card in the general ledger, the net cumulative
balance of the account is derived by appropriately adding or subtracting the amount of the
current transaction from the previous net cumulative debit or credit balance. The purpose
of the monthly net cumulative debit and credit balances is to record the net balance in the
monthly reports and Trial Balance.
Recording Transactions into the Foreign Currency Cash Account Ledger Card
The cash account ledger card for Account Code 4102 "cash at bank in foreign currency" requires
a special format. This account code, and only this account code, maintains a balance in Birr and
in foreign currency denomination. The same information is recorded in the foreign currency
transaction Register.
The foreign currency cash account ledger card is shown in figure 3.2. The foreign currency cash
account ledger card is identical to any other ledger card, except that the amount of each
transaction recorded from the foreign currency transaction register is recorded on the card twice:
once in Birr and once in foreign currency. In addition, the net cumulative balance of the account
is kept in both currencies.
Figure 3.2: Foreign Currency Cash Account Ledger Card
ME/HE/18
THE FEDERAL DEMOCRATIC REPUBLIC OF
ETHOPIA MINISTRY OF FINANCE &
ECOMOCIS DEVELOPMENT
Foreign Currency Cash Account Ledger Card
Page
Public Body Code_
Bank Account No. Code Account Code 4102
Code
Donor/lender
Page 9
Date Reference fromRegister Descrip Cash at Bank Balance Cash at Balance
tion (birr) Bank(PC)
Month Page Item Date Debit Credit Debit Credit Debit Credit Debit Credit
no Credit Credit Credit Credit
Page
10
ledger with net balance in the control account in the general ledger and to produce accurate
monthly reports for expenditure (MOPED and DSA Project, December 2002).
Summary
Transactions are recorded in the register, but reports are produced from the ledgers. Two types of
ledgers are maintained in the PGE accounting system: General ledgers and subsidiary ledgers.
Because the general ledger serves as a basis to prove that the net cumulative debit and credit
balances of all accounts are equal, the general ledger simplifies and improves the report
generation process. The general ledger is organized into seven broad categories comprising in
PGE accounting systems.
Any account in the general ledger that requires more detail than simply the total account balance
becomes a control account with a subsidiary ledger. The purpose of control accounts and
subsidiary ledger accounts is to facilitate the report generation process, minimize the size of the
general ledger, and maintain sufficiently detailed records regarding account balances to assist
proper financial management.
Based on two criteria that define whether an account code is a control account with a related
subsidiary ledger, structure of ledgers in PGE accounting system is summarized as follows:
Page
11
Ethiopian Government
Accounting
Transfers No Not applicable
Receivables Yes By individual item
Payables Yes By individual item
Letters of Credit Yes By individual item
Net Assets/Equity No Not applicable
Transfer account is a nominal account and will be closed at the end of the year. The
transfer account is used to record monthly transfer of money. The agency which transfers the
money credits its bank account and debit transfer account, and the receiving agency debits its
bank accounts and credits the transfer account.
3.1. Cash Transfers
Cash transfers are cash movements among government units. Cash transfers may be made
in the form of currency, checks or direct cash movement between bank accounts.
Example: Assume a public Body receives from MOPED a transfer of Birr 100,000 for
Capital expenditure and also further assume that you are an accountant in both the PB and
MOPED
Transaction Register of MOFED:
No Description TB Account Others Cash at bank
Number 4105
Dr Cr Dr Cr
1 Cash transfer to PB -- 4004 100,000 100,000
Transaction Register of Public Body:
No Description TB Account Others Cash at bank
Number 4103
Dr Cr Dr Cr
1 Cash transfer from MOPED - 4004 100,000 100,000
At MOPED, although a transfer authorization to one bank account may include funds for
more than one BI, the entire transfer is one. Therefore, only one entry should be made for the
total of the transfer in the Transaction Register maintained at MOPED. The BI code for the
entry should be the BI code of the Reporting Entity.
Page 12
Ethiopian Government
Accounting
Cash Transfers: Between Bank Accounts at Public Bodies and MOFED: From Public
Bodies to MOFED at federal level
Cash transfers from bank accounts of public Bodies to MOPED bank accounts are
recorded:
By MOPED, as a debit to Cash at Bank4105 and a credit to the appropriate transfer
code, and
By the Public Body, as a debit to the appropriate transfer code and a credit to Cash
at Bank 4103.
Example: A Public Body collected revenue of Birr 60,000. The cash is transferred to
MOPED.
Transaction Register of MOFED
No Description TB Account Others Cash at bank
Number 4105
Dr Cr Dr Cr
1 Cash transfer from PB - 4009 60,000 60,000
Some public Bodies deposit cash directly into a MOPED bank account when revenue is
collected. If revenue is deposited directly to a MOPED bank account, the entry in the
Transaction Register of the public Body is a debit to the appropriate transfer account code
and a credit to the appropriate revenue account code.
Cash Transfers: Within Public Body
In the same Manual prepared by MOPED&DSDA Project, it is indicated that some public
Bodies maintain branch bank accounts. The public Body may transfer cash from one bank
account to another bank account of its branch. These transfers are done in form of: Checks,
and Direct bank transfers evidenced by bank advices. Cash transfers within a public body
from bank Account #1 to bank Account #2 are recorded:
By the accounting unit for bank Account #1, as a debit to transfer code (transfer
between financial bureau and wereda finance/ district finance/ office) 4011 and a
credit to cash at Bank 4103, and
By the accounting unit for bank account #2, as a debit cash at bank 4103 and a
credit to transfer code 4011.
After both transactions are recorded in the consolidated general ledger of the public body,
the net effect of the internal transfer is zero (the balance in transfer code 4011 is zero).
Por control purposes, if the public body transfers to more than one branch bank account, a
subsidiary ledger should be maintained by the main bank account. Each branch bank
account that receives or sends a transfer using account code 4011 should have its own
Page 13
Ethiopian Government
subsidiary ledger card under transfer code 4011. This will aid consolidation in the general
Accounting
ledger of the public body and improve cash control within the public Body.
Example: Bank Account #1 transfers Birr 80,000 to Bank Account #2
Non-Cash transfers are used to record a transfer when cash does not actually move. The
authorization for a non-cash transfer usually is a letter from MOPED.
Page 14
Ethiopian Government
Accounting
Transaction Register of Public Body:
No Description TB Account Others Cash at bank
Number 4103
Dr Cr Dr Cr
1 Office supplies paid in 6212 50,000 50,000
cash
Page 15
Ethiopian Government
Accounting
Transaction Register of MOFED:
No Description TB Account Others Cash at bank
Number 4105
Dr Cr Dr Cr
1 Transfer to MOPED 4009 2,000 2,000
3.5. Salary
Public Bodies pay salaries to employees every month. This section describes the
accounting for:
Payment of
salary Unpaid
salary
Unearned
salary
Page 16
Ethiopian Government
Accounting
Payment of Salary
The salary payment transaction is complex. The public body must record the gross salary
amount and government's portion of pension as expenditure to maintain budget control,
but only the net salary amount is transferred to, and paid by the public body.
After the salary request is approved, MOPED transfers the net salary amount to the public
body and the total pension amount, employee and government contribution, to the pension
Authority. Although cash for pension is transferred directly to the pension authority,
MOPED records the cash transfer as if the cash was transferred to the public body. At
MOPED, two transfer entries to the public body are recorded in the transaction register:
A debit to transfer coder 4001 and a credit to cash at bank 4105 for the net salary
amount.
A debit to transfer coder 4001 and a credit to cash at bank 4105 for the total
pension amount sent to the pension Authority.
Each transfer amount is reported to the public Body separately on Ge/Be/We 12/1 with
Model 33. When the public Body receives Ge/Be/We 12/1, the public Body prepares:
A receipt voucher for the total amount of cash received. The entry is a debit to cash
at bank 4103, a debit to pension payable account code 5003 for the amount of cash
paid to the pension Authority and a credit to transfer code 4001.
A journal voucher to record salary and pension expense. The entry is a debit to
salary expense code 6111 (6112 for military) for the gross salary amount, a credit
to salary payable code 5004 for the net salary amount, a credit to pension payable
code 5003 for the amount of each paid to the pension Authority, a credit to income
tax code 1101 for tax withheld from salary, and a credit to any other withholding
amounts.
Example: Assume the Ministry of Agriculture (MOA) requests salary for the month of
July 2001 with the following details and also assume that you are the accountant in MOA
and MOPED.
Gross salary 40,000
Deduction: salary advance 1,200
Pension expense - 6% 2,400
Penalty for absenteeism 500
Employee pension - 4% 1,600
Net Salary payable 32,700
Income tax 4,000
Transaction Register of MOFED:
No Description TB Account Others Cash at bank
Number 4105
Page 17
Ethiopian Government
Accounting
Dr Cr Dr Cr
1 Transfer for PB 4001 36000 36000
2 Transfer to PB 4001 4,000 4,000
Unpaid Salary
Net salary amount is recorded as salary payable when salary expense is recorded (see
above). When salary is paid, salary payable is debited for the amount paid. Any unpaid
salary is the amount remaining in the salary payable account code 5004 after salary is paid.
When unpaid salary is paid, the entry is a debit the salary payable code 5004 and a credit
to cash. After salary is paid, a subsidiary ledger for salary payable account should be
maintained. Each unpaid employee should be an account in the subsidiary ledger.
Unearned Salary
Occasionally, salary is requested and received, but the employee is not entitled to the
entire salary amount received. Por some reason, the employee quits working for the public
Body during the month. When this happens, the salary entry explained above must be
reversed for that employee, and the pension transfer must be corrected. In addition,
MOPED must be notified so that the pension transfer and subsequent months salary can be
adjusted.
Example: Suppose an employee in the Ministry of Agriculture worked only half of July
instead of the whole month. This is discovered after the salary expense entry in the
example above. The amounts of overpayment are:
Gross Salary 1000 Income tax 70
Pension expense - 6% 60 Salary Payable 890
Employee pension - 4% 40
Page 18
Ethiopian Government
Accounting
Pension Expense 01 6131 60
Salary Payable 5004 890
Income Tax 1101 70
Pension Payable 5003 100
A receivable is an amount owed to a public Body that does not have terms of repayment
detailed in a signed agreement. Receivables usually are created when:
Cash is transferred but must be returned unless certain conditions are met.
Advances are given with the understanding that the amount must be repaid or
otherwise accounted for, or goods or services must be delivered.
A payable is amount owed by a public body that is due within one year. Payables usually
are created when:
Cash is received but must be returned unless certain conditions are met.
Goods or services are delivered but payment is not yet made.
Receivables and Payables: With MOFED
In some situations, MOPED advances cash to public Bodies. MOPED records the advance
as a receivable, and the public Body records the advance as a payable. Cash movements
between MOPED and a public Body are recorded as a receivable and a payable, rather
than a transfer, if the funds were not requested by Ge/Be/We 11/xx. Advances must be
repaid to MOPED or otherwise accounted for.
Example Prior to receipt of its budget notification, a public Body requests funds in June
to pay recurrent expenditures. MOPED sends Birr 7,000
When the public Body receives its budget notification, a Ge/Be/We 11/2 is sent to
MOPED for Birr 14,000. This requests includes the 7,000 Birr received as an advance.
MOPED approves the request, reduces the cash transfer by 7,000 Birr, and transfers Birr
7,000 in cash.
Page 19
Ethiopian Government
Accounting
Dr Cr Dr Cr
1 Advance Recurrent 4206 7,000
Transfer - Recurrent 4002 14,000 7,000
Page 20
Ethiopian Government
Accounting
Amounts due to suppliers on the last day of the fiscal year, that are paid during the grace
period from the prior year's budget, are called grace period payables (account code 5001).
Transfers of funds from MOPED to public Bodies, that are used to pay grace period
payables, are given account code 4007.
Example: In the first 30 days of the fiscal year, a public body pays Birr 12,000 for office
supplies that were recorded as grace period payables from the prior year's capital
expenditure.
Transaction #1: Provision for grace period payables last year.
Last Year's Transaction Register of Public Body:
No Description TB Account Others Cash at bank
Number 4105
Dr Cr Dr Cr
1 Office supplies 02 6212 12,000
Grace period payables 5001 12,000
Transaction #2: Transfer of funds for grace period payables this year.
This year's Transaction Register MOFED:
No Description TB Account Others Cash at bank
Number 4103
Dr Cr Dr Cr
1 Transfer - GPP - 4007 12,000 12,000
Page 21
Ethiopian Government
Accounting
Example: The Ministry of Education (MOE) sends Birr 55,000 to Amhara Regional
Education Bureau (AREB). The Amhara Regional Education Bureau returns invoices for
the book totaling Birr 47,000 and cash totaling Birr 8,000 to the Ministry of Education.
A deposit is a payable for a public body. A public body must return the deposit upon
demand of the depositor. A public body should not spend deposit funds. When the deposit
is returned, the payable is cancelled.
Page 22
Ethiopian Government
Accounting
3.9 Aid in Kind
Aid in kind is goods or services (such as technical assistance) provided to a public body by
donors. Aid in kind is received when goods are received or services are rendered, and no
payment is expected. Aid in kind represents two transactions simultaneously: the receipt of
assistance and the expenditure of assistance. Aid in kind should be budgeted and recorded
as both revenue and expenditure. The expenditure should be recorded in the subsidiary
ledger for the budgeted project, using the 4-digit source of funding code assigned to the
project.
Example: Assume aid in kind is received by a public body in which you are working as an
accountant in the form of a motor vehicle with a cost of Birr 200,000 from USAID under
the capital expenditure budget for project code 2356.
Example: A check for Birr 3,000 is written to the cashier for petty cash.
Transaction Register of public Body:
No Description TB Account Cash at bank Cash in safe
Number 4103 4101
Dr Cr Dr Cr
1 Cash withdrawn from - - 3,000 3,000
safe
Page 23
Ethiopian Government
Accounting
Transaction Register of Public Body:
No Description TB Account Cash in Safe Cash at bank
Number 4101 4103
Dr Cr Dr Cr
1 Cash deposited in to bank - - 20,000 20,000
3.13 Cash Imprest Payments to Cashier by Accountant
Each public body should establish the amount of cash to hold in petty cash. The cashier
makes cash payment from the impress fund using cash payment vouchers. When the petty
cash balance is low, the cashier submits the cash payment vouchers to the accountant. The
accountant writes a check to the cashier for the payment vouchers to the Accountant. The
Accountant writes a check to the cashier for the total amount of the cash payment voucher.
The accountant records each cash document for the check is bank payment voucher in the
transaction register. The cashier records the bank payment voucher from the accountant in
the petty cash book as a debit to cash.
Example: The Accountant pays the cashier Birr 4,000 by check using a bank payment
voucher to replenish the petty cash from a cash payment voucher from the cashier for Birr
4,000 paid to an employee for per diem. The cashier records the receipt in the petty
Cashbook. The accountant records the cash and bank payment vouchers in the transaction
register as follows:
Transaction Register of Public Body:
No Description TB Account Others Cash at bank Cash in Safe
Number 4103 4101
Dr Cr Dr Cr Dr Cr
1 Per Diem 01 6231 4,000 4,000
2 Cash to Cashier 4,000 4,000
Me/He is the document prepared as evidence for the transfer of financial documents, such
as expenditure vouchers, between responsible persons in the accounting system.The
purpose of the Pinancial Document Transmittal Voucher is to record the transfer of
financial documents from one responsible party to another.
Page 24
Ethiopian Government Accounting
Figure 3.1: Financial Document Transmittal Voucher
Model 42 Serial No.
Date
THE FEDERAL DEMOCRATIC REPUBLIC OF ETHIOPIA
MINISTRY OF FINANCE & ECONOMIC DEVELOPMENT
FINANCIAL DOCUMENT TRANSMITTAL VOUCHER
No Date Description Reference Type Reference No Amount No. of Attachments Remark
Total
I have received the documents listed above from on the days of the month
year and issued .
Page 14
MONTHLY REPORT
Introduction
1
The purpose of this unit is to describe the monthly reports submitted by a reporting entity to
ministry of finance and Economic development. The reports are highly interrelated. The first
section of this unit deals with Revenue IAssistanceI Loan report which is prepared to provide
information on the year to date revenues of an accounting unit from each source of finance. It
also helps to facilitate consolidation of the actual revenues, assistance and loan collected by the
FGE and to facilitate comparison of budgeted revenues to actual revenues by account category.
The second and third section of this unit deals with Recurrent Expenditure Report, Capital
Expenditure Report respectively and these reports provide information on the year - to - date
expenditures of each BI managed by an accounting unit. Its function is to facilitate consolidation
of the actual expenditures made by the FGE and to facilitate comparison of budgeted expenditure
to actual expenditure.
The fourth section of this unit will describe about Transfer Report whose function is to serve as a
control tool to verify case transfers between MOFED and an accounting unit and vice versa. The
fifth section of this unit deals with Receivables Report, which provides information on the year -
to_ date receivables owed to an accounting unit. This report helps to facilitate consolidations of
the actual receivables owed to the FGE. The sixth section of this unit will present about the
Payables Report. The payables report provides information on the year-to-date payables owed by
an accounting unit. This report facilitates consolidation of the actual payables owed by the FGE.
The seventh section of this unit is about a trial balance, which is the summary of the net
cumulative year -to - date debit, and credit balances contained in the general ledger at the end of
each month for each account code represented by a general ledger card. It proves the arithmetical
accuracy of the general ledger. The total amount of debit column must be equal with the total
amount of the credit column in the trial balance. The trial balance serves as a basis to produce
financial statements.
1.1 Revenue/Assistance/Loan Report
According to MOFED and DSA Project manual, December 2002, the only monthly reports
verified by Ministry of Finance and Economic Development are the transfer report and the Trial
Balance. The transfer Report is verified by Ministry of Finance and Economic Development to
ensure that all disbursements to an accounting Unit by Ministry of Finance and Economic
Development and all disbursements from an Accounting Unit to Ministry of Finance and
Economic Development are accounted for within the accounting system to enhance control over
cash transfers.
2
The Trial Balance is verified by Ministry of Finance and Economic Development to ensure that
the total debits and credits are equal and that general Ledgers are balanced. Also, Ministry of
Finance and Economic Development verify the cash balance for the domestic source of finance
from the trial Balance to enhance cash management practices at federal level.
All other monthly reports that are submitted to Ministry of Finance and Economic Development
serve as input documents to consolidate reports and produce financial statements at the Federal
Level. The Inspection Department and the Office of The Auditor General verify these reports.
All monthly reports are prepared in two copies. The original copy is sent to Ministry of
Finance and Economic Development and the second copy is retained as a permanent record at
the reporting entity. The Revenue/Assistance/Loan Report provides information on the year-to-
date revenues of an accounting unit from each source of finance. The purpose of the
revenue/Assistance/Loan Report is to facilitate consolidation of the actual revenues, assistance
and loan collected by the FGE and Regional State to facilitate comparison of budgeted revenues
to actual revenues by account category (MOFED and DSA Project manual, January, 2002).
The Accountant prepares a revenue/Assistance/Loan report for the Accounting Unit. The source
document to prepare the revenue/Assistance/Loan report is the general Ledger. Each item of
revenue, assistance or loan is identified by account code. The amount from the balance column
in the general ledger card is transcribed into the revenue/assistance/Loan Report. The grand
totals from each revenue/Assistance/Loan report are carried forward to the trial Balance.
Balances in the Revenue/Assistance/Loan Report are normally credits. Each accounting Unit
prepares one revenue/assistance/Loan Report as indicated in figure 1.1 below.
Figure 1.1: Revenue/Assistance/Loan report Format
Me/He 21
Month
Name of Public Body: code:
Name of Program: code:
Name of Sub Agency: code:
Name of Sub Program: _ code:
Name of Project: code:
Bank Account Number:
3
Account YEAR-TO-DATE
Code Account description Revenue
Debit Credit
1101 Tax on wages and salaries
1415 Court fees
1429 Other fees and charges
1465 Interest on loans to government employees
1485 Other miscellaneous revenue
Total (To Trial Balance)
5
Name of Project: code: _000
Bank Account 10645839
Number:_
Account YEAR-TO-DATE
Code Account description Revenue
Debit Credit
1101 Tax on wages and salaries 6750
1415 Court fees 750
1429 Other fees and charges 1000
1465 Interest on loans to government employees
1485 Other miscellaneous revenue 500
Total (To Trial Balance) 9000
6
Name of Project: code:
Source of Finance: code:
Bank Account Number:
Account YEAR-TO-DATE
Code Account Description Expenditure
Debit Credit
Preprinted Preprinted
7
Account YEAR-TO-
Code Account Description DATE
Expenditure
Debit Credit
6111 Salary to permanent staff 67500
6131 Gov't contribution to perm. Staff-pension 4050
6241 Maintenance and repair of vehicles 1950
6257 Electricity charges 1200
6213 Printing 7000
6258 Telecommunication charges 600
6259 Water and other utilities 600
6217 Fuel and lubricants 15000
Total (To Trial Balance) 97900
Prepared by Name an
Signature
1.3 Capital Expenditure Report
Capital expenditure Report, provides information on the year-to-date capital expenditures of each
BI managed by an Accounting Unit. The purpose of the capital expenditure report is to facilitate
consolidation of the actual capital expenditures made by the FGE and state governments and to
facilitate comparison of budgeted expenditure to actual expenditure. The Accountant prepares
the capital expenditure Report for each BI. The source document to prepare the Capital
expenditure Report is the subsidiary Ledger. The amount from the balance column in each
subsidiary Ledger card is transcribed to the appropriate account code in the recurrent expenditure
Report. Balances in the Capital Expenditure Report are normally debits, which are similar to the
capital expenditure. Each Accounting Unit prepares a capital expenditure Report for each BI that
it manages. The format of the report is indicated below.
9
Name of Sub Program: _ code:
Name of Project: code:
Bank Account Number:
Account YEAR-TO-DATE
Code Account Description Balance
Debit Credit
4001 Recurrent salary and allowances
4002 Recurrent operating expenditure
4003 Capital salary and allowances
4004 Capital expenditure
4005 Staff advances
4006 SSDP funds
4007 Grace period payables
4008 Between BI and/or Region
4009 Other cash transfers
4010 Within BI or MOPED
4051 Recurrent salary and allowances: non-cash
4052 Recurrent operating expenditure: non-cash
4053 Capital salary and allowances: non-cash
4054 Capital expenditure: non-cash
4055 Other non-cash transfers
Total (To Trial Balance)
Activity 3 based on the data given in Activity 1, you are required to prepare the Transfer Report
Solution
Transfer Report -
Part 1
Me/He 24 Month May
Name of Public Body: ECSC code: _319
Name of Program: code: 01
Name of Sub Agency: code: 07
Name of Sub Program: _ code: _00
Name of Project : code: _000
Bank Account Number: 10645839
10
Account YEAR-TO-DATE
Code Account Description Balance
Debit Credit
4001 Recurrent salary and allowances 57550
4002 Recurrent operating expenditure 33450
4003 Capital salary and allowances
4004 Capital expenditure
4005 Staff advances 9600
4006 SSDP funds
4007 Grace period payables
4008 Between BI and/or Region
4009 Other cash transfers 2750
4010 Within BI or MOPED
4051 Recurrent salary and allowances: non-cash
4052 Recurrent operating expenditure: non-cash
4053 Capital salary and allowances: non-cash
4054 Capital expenditure: non-cash
4055 Other non-cash transfers 6750
Total (To Trial Balance) 2750 107350
Each cash transfer during the month between the accounting Unit and Ministry of Pinance and
Economic Development is listed individually in Part 2 of the Transfer Report. The information
required for Part 2 is transcribed from the following cash transfer account Ledger cards:
4001: recurrent salary and allowances
4002: Recurrent operating expenditure
4003: capital salary and allowances
4004: capital expenditure
4005: Staff advances
4006: SSDP funds
4007: Grace period payables
1.5. Receivables Report
The receivables report provides information on the year-to-date receivables owed to an
accounting unit. The purpose of the receivables Report is to facilitate consolidation of the actual
receivables owed to the PGE. The accountant prepares a receivables Report for each accounting
unit. The source document to prepare the receivables report is the general ledger. Each item of
receivable is identified by account code. The amount from the balance column in the general
ledger card is transcribed into the receivables report. The grand totals from each receivable
report are carried forward to the trial balance. Balances in the receivables report are normally
debits. One receivables report is prepared for each accounting unit (MOPED and DSA, Project
manual, January 2002).
Figure 1.6: Receivables Report
Me/He 25
Month
Name of Public Body: code:
Name of Program: code:
Name of Sub Agency: code:
11
Name of Sub Program: _ code:
Name of Project : code:
Bank Account Number:
Account YEAR-TO-DATE
Code Account Description Receivables
Debit Credit
4201 Suspense
4202 Cash shortage
4203 Advance to staff
4204 Advance for SSDP
4205 Advance for staff from next year's budget
4206 Advance for recurrent expenditures from next year's budget
4207 Advance for capital expenditures from next year's budget
4208 Advance to regions
4209 Other advances to BI
4210 Other advances within government
4251 Advance to contractors
4252 Advance to consultants
4253 Advance to suppliers
4254 Other advances outside government
4271 Peasant associations
4272 Cooperatives
4273 Individuals and private organizations
4274 Others
Total (To Trial Balance)
12
Account YEAR-TO-
Code Account Description DATE
Receivables
Debit Credit
4201 Suspense
4202 Cash shortage
4203 Advance to staff 9600
4204 Advance for SSDP
4205 Advance for staff from next year's budget
4206 Advance for recurrent expenditures from next year's budget
4207 Advance for capital expenditures from next year's budget
4208 Advance to regions
4209 Other advances to BI
4210 Other advances within government
4251 Advance to contractors
4252 Advance to consultants
4253 Advance to suppliers
4254 Other advances outside government
4271 Peasant associations
4272 Cooperatives
4273 Individuals and private organizations
4274 Others
Total (To Trial Balance) 9600
Prepared by Name and Signature
14
Activity 5 Based on the information given in Activity 1, prepare the Payables report.
Solution
Payables Report
Me/He 26 Month May
Name of Public Body: ECSC Code: _319
Name of Program: Code: 01
Name of Sub Agency: Code: _07
Name of Sub Program: _ Code: _00
Name of Project: Code: _000
Bank Account Number_ 10645839
YEAR-TO-
Account Account Description DATE Payables
Code
Debit Credit
5001 Grace period payables
5002 Sundry creditors
5003 Pension contribution payable
5004 Salary payable 19850
5021 Due to staff
5022 Due to Ministry of Pinance and Economic Development for SSDP
5023 Due to Ministry of Pinance and Economic Development for staff
from next
5024 Due
year'sto Ministry of Pinance and Economic Development
budget
for recurrent
5025 Due to Ministry
expenditures fromofnext
Pinance and
year's Economic Development for capital
budget
expenditures
5026 Due
fromto regions
next year's budget
5027 Other payables to Ministry of Pinance and Economic Development
5028 Other payables within government
5051 Custom deposits
5052 Court deposits
5053 Hospital deposits
5054 Other deposits
5061 Retention on contract
Total (To Trial Balance) 19850
Prepared by Name and Signature
1.7. Trial Balance
The trial balance is the summary of the net cumulative debit and credit balances contained in the
general ledger at the end of each month for each account code represented by a general ledger
card. The trial balance proves the arithmetical accuracy of the general ledger. The total amount
of the debit column must equal the total amount of the credit column in the trial balance. The
trial balance serves as a basis to produce financial statements. The accountant prepares the Trial
balance for each Accounting Unit (MOPED and DSA Project, December 2002).
According to MOPED and DSA Project also, the source documents to prepare the Trial Balance
are:
Revenue/Assistance/Loan Report,
Recurrent Expenditure Report,
15
Capital Expenditure Report,
Transfer Report,
Receivables Report,
Payable Report, and
The General Ledger.
Please note that in profit-making organizations, trial balances are prepared directly form the
general ledger accounts and each account will be listed in the trial balance as long as it has a
balance. However, in PGE system of accounting, the trial balance is prepared from the reports
already produced for it facilitates the process and provide pertinent figures for the period end
reports. In addition to the reports mentioned above, some balance amounts are directly taken
from the general ledger accounts. The account codes that are taken from the general ledger
directly to the trial Balance are:
Letters of Credit - balances in each account should be credits.
Net Assets/Equity - balance should be credit.
Cash and Cash Equivalents - balances in each account should be debits.
Figure 1.8: Trail Balance
Me/He 27
Month
Name of Public Body: Code:
Name of Program: Code:
Name of Sub Agency: Code:
Name of Sub Program: _ Code:
Name of Project: Code:
Bank Account Number
Prepared by Name & Sig. Checked by Name & Sig. Authorized by Name
& Sig.
16
Activity 6 Based on the data given in activity 1, prepare the monthly trial balance.
Solution
Trail Balance
Me/He 27
Month_ May
Name of Public Body: ECSC Code: 319
Name of Program: Code: 01
Name of Sub Agency: Code: 07
Name of Sub Program: _ Code: 00
Name of Project: Code: 000
Bank Account Number 10645839
17
Code Account Description Debit Credit
Revenues/Assistance/Loan: (from Revenue/Assistance/Loan report 9000
Expenditures:
Recurrent expenditure (Total of Recurrent Expenditure Reports) 97900
Capital expenditure (Total of Capital Expenditure Reports)
Transfers: (from Transfer Report) 2750 107350
Receivables: (from Receivables Report) 9600
Payables: (from Payables Report) 19850
Letters of Credit: (by account code-from General Ledger)
5601 Net Assets/Equity (from General Ledger)
Cash and Cash Equivalents (by account code-from General ledger
4101 Cash on hand 22850
4102 Cash at bank in foreign currency
4103 Cash at bank 3100
TOTAL 136200 136200
Case
Assume that you are a finance section head in a reporting entity. Your section has to submit its
monthly report to MOPED during the third week after the end of the month. On one hand, your
section did not finish recording transactions of Hamle to Nehassie 20. On the other hand, your
organization wants to get funds from MOPED for operating expenditures. Do you decide to
delay and complete the report or submit the report on the deadline based on what is recorded?
The objective of the financial statements is to provide information about the financial position,
performance and cash flows that is useful in making and evaluating decisions about the sources,
allocation and uses of financial resources and about how the activities were financed. In addition, the
financial reporting also provides users with information about whether resources were used in
accordance with the approved budget.
18
Transparency in government begins with full and fair disclosure of financial information. The FGE
uses the International Public Sector Accounting Standards (IPSAS) issued by the Public Sector
Section of the International Federation of Accountants as a basis for establishing the financial
statements.
The FGE accounting system can produce the following set of financial statements:
A set of federal-level financial statements that includes:
Statement of Financial Position
Statement of Financial Performance
Statement of Changes in Net Assets/Equity
Cash Flow Statement
Accounting Policies and Notes to Financial Statements
Statement of Comparison of Budget and Actual Amounts – Domestic
Revenue
Statement of Comparison of Budget and Actual Amounts – External
Assistance
Statement of Comparison of Budget and Actual Amounts – Expenditure
In addition to the above financial statements, the accounting system also produces detailed
revenue and expenditure schedules that provide detailed information and analysis of the
summary countrywide financial statements.
The remainder of this chapter describes the format of each financial statement.
GOVERNMENT OF ETHIOPIA
Statement of Financial Position
As at 7 July 20X2
ASSETS (CURRENT)
Cash and cash equivalents l 0 0
Receivables 2 0 0
Total Assets 0 0
LIABILITIES(CURRENT)
19
Current Liabilities – Payables 3 0 0
Total liabilities 0 0
Net Current
Assets/(Liabilities) 0 0
NET ASSETS/EQUITY
Accumulated surpluses/deficits 0 0
20
GOVERNMENT OF
ETHIOPIA Statement of
Financial Performance
For the year ended 7 July 20X2
Ethiopian Birr '000
Notes 20X 20X1
OPERATING 2
ACTIVITIES
Operating Revenue 4 0
Non-tax revenues 5 00 0
Subsidies 6 0 0
Municipality revenues 7 0 0
Other revenue 8 0
Total operating revenue 0 0
0
Operating Expenses
Subsidies 0 0
Personnel services 9 0 0
Goods and services 10 0 0
Fixed assets and construction 11 0 0
Other expenses 12 0
Total operating expenses 0 0
0
Surplus/(deficit) from operating activities 0 0
21
GOVERNMENT OF ETHIOPIA
Statement of Changes in Net Assets/Equity
For the year ended 7 July 20X2
Ethiopian Birr '000
Balance at 7 July 20X1 0
Changes in accounting
policy/Fundamental errors 0
Restated balance 0
Net surplus/(deficit) for the year 0
Balance as at 7 July 20X2 0
GOVERNMENT OF
ETHIOPIA
Cash Flow
Statement
For the year ended 7 July 20X2
Ethiopian Birr '000 20X2 20Xl
1 CASH FLOW FROM OPERATING ACTIVITIES
Tax revenues 0 0
Non tax revenues 0 0
Other income 0 0
Miscellaneous income 0 0
Municipality revenues 0 0
Regional subsidy 0 0
Total Receipts - A 0 0
Personnel services 0 0
Goods and services 0 0
Finance charges 0 0
Subsidies 0 0
Other expenses 0 0
Total Payments - B 0 0
Non Cash Movements
Increase/(Decrease) in payables 0 0
Increase/(Decrease) in receivables 0 0
Total Non Cash Movements - C 0 0
22
Net Cash Flow from Investing Activities 0 0
23
3 CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from external assistance 0 0
Proceeds from external loans 0 0
Total Receipts (A) 0 0
Debt repayments – external Total Payments (B) 0 0
GOVERNMENT OF ETHIOPIA
Accounting Policies and Notes to Financial Statements
Domestic currency
Foreign currency
Budget support
Counterpart funds
SSDP
Cash in transit
Sinking fund
Others
Domestic currency refers to local currency held in a safe as well as in a bank account. Foreign
currency is cash held in a bank account denominated in foreign currency. Budget support
refers to cash from a foreign source held in a bank account available for unrestricted general
budgetary support. Counterpart funds refer to grants held in a bank account reserved for
specific program support.
2 Receivables
Advances
Prepayments Others
24
Advances represent amounts due from government entities and staff. Prepayments represent
amounts due from suppliers, contractors and consultants. Others represent amounts
due from peasant associations, cooperatives, individuals, private organizations and others.
GOVERNMENT OF ETHIOPIA Accounting Policies and
Notes to Financial Statements
Notes to Financial Statements
Ethiopian Birr ‘000
Accounts Payable
Payables within Government
Direct advances
Treasury bills
Deposits
Retentions
Accounts payables represent grace period payables, sundry creditors, pension contributions
payable, salary payable and other payroll deductions. Payables within government represent
amounts due to government entities and staff. Deposits represent customs, court, hospital
bid bond, VAT and other deposits.
4 Tax Revenues
Tax revenues are legally mandated payments to government. Tax revenues represent
taxes on income, profits and capital gains, value added tax and sales turnover tax on
domestically manufactured goods and services, excise tax and foreign trade taxes which
include excise tax, value added tax, customs and export duties. The breakdown of tax
revenues by revenue item is provided in the statement of comparison of budget and actual
amounts – domestic revenue.
25
represents treasury funds transferred by the federal government to regions to execute
their recurrent and capital budgets.
7 Municipality Revenues
Municipality revenue represents different types of municipal taxes, municipal rents and service
charges and sale of goods and municipal services.
8 Other Revenues
Other revenue represents government investment income including dividend income,
residual surplus and capital charges. The breakdown of other revenues by revenue item is
provided in the statement of comparison of budget and actual amounts – domestic revenue.
9 Personnel Services
Personnel services represent government pension contributions made to pension funds and
salaries, wages, allowances/benefits paid to permanent, contracted, externally contracted and
casual staff. The breakdown of personnel services by expense item is provided in the statement
of comparison of budget and actual amounts – expenditure.
13 External Assistance
External assistance represents the amounts contributed by donors as grants and are recognized
as revenue on receipt of funds. The breakdown of external assistance by donor is provided in
the statement of comparison of budget and actual amounts – external assistance.
14 External Loans
External loans represent amounts received from external lenders as loans during the fiscal year
and are recognized as revenue on receipt of funds directly or payments to suppliers on behalf
of the government. The breakdown of external loans by lenders is provided in the statement
of comparison of budget and actual amounts –external loans.
26
15 Capital Revenues
Capital revenue represents proceeds from the privatization of state owned
enterprises, sale of fixed assets, stocks and intangible assets and amounts received from non-
governmental sources for capital purposes. The breakdown of capital revenues by item of
revenue is provided in the statement of comparison of budget and actual amounts –
domestic revenue.
GOVERNMENT OF ETHIOPIA
Accounting Policies and Notes to Financial Statements
27
At the beginning of the year 0 0
Additions 0 0
Amounts written off 0 0
Repayments 0 0
Exchange Differences 0 0
At the end of the year 0 0
The amounts falling due for repayment within the next 12 months amount to Birr
…..
Details of the lenders, date of obtaining loan, amount due in foreign currency and
the period of repayment are detailed below:
GOVERNMENT OF ETHIOPIA
Accounting Policies and Notes to Financial Statements
Maturity Analysis
Due within 1 year 0 0
Due within 2 to 5 years 0 0
Due after more than 5 years 0 0
22 Contingent Liabilities
A list of contingent liabilities, explaining its type, nature and circumstances should be
provided together with a reliable estimate of the probable amount.
23 Other Notes
Any other notes and disclosures that MOPED may decide to include as part of the
financial statements.
28
GOVERNMENT OF ETHIOPIA Accounting Policies and Notes to
Financial Statements
Accounting Policies
The principal accounting policies of the Government, which are set out below, have been applied
consistently throughout the period.
BASIS OF ACCOUNTING
The financial statements have been prepared on the historical cost basis using a modified cash basis of
accounting that recognizes the following non-cash transactions:
Revenue is recognized when:
Aid in kind is received.
Payroll is processed (income tax and employee fines)
Salary advance is made to an employee (interest on salary advances)
Withholding tax is deducted from the amount due to a supplier
Expenditure is recognized when:
Payroll is processed (salary and pension expenses)
Aid in kind is received
Goods are received or services are rendered
At the end of the year, a grace period payable is accounted for.
Intergovernmental transfers are recognized without actual cash movement
Amounts borrowed using treasury bills and direct advances from the
National Bank of Ethiopia are recognized as current liabilities
REVENUE
Revenues are recognized on receipt of amounts except as stated above.
FINANCE COSTS
Finance costs are recognized as an expense in the period in which they are paid.
GOVERNMENT OF ETHIOPIA Accounting Policies and Notes to
Financial Statements
Accounting Policies
CONSOLIDATION
The accounts of controlled entities are not consolidated- for example Ethiopian
Airlines and Ethiopian Telecommunications Corporation.
29
GOVERNMENT OF
ETHIOPIA
Statement of Comparison of Budget and Actual Amounts - Domestic
Revenue
for the year ended 7 July 20X2
Ethiopian Birr '000
20X2 20Xl
Budget Actual Variance Budget Actual
OPERATING Variance
REVENUE Tax
revenues
Tax on income, profit and capital
gains Value Added Tax on goods &
services Excise Tax
Sales turnover tax on goods &
services
Stamp sales and duty
Customs Duty on imported goods
Excise Tax on imported goods
Value Added Tax on imported
goods
Export Duties
Timber Tax
Municipality Tax revenue
Total tax revenues Non-
tax revenues
Administrative fees and
charges
Sales of public goods and
services Miscellaneous revenue
Municipality revenues
Total non-tax revenues
Subsidies
External assistance
External loans
Total operating revenues
Other
revenues
Government investment income
Dividend
income
30
Residual surplus
Interest income and capital
charges Total government
investment income Contribution
to pension funds Capital
revenue
Sale of properties, stock and intangible assets
Privatization proceeds
Capital transfers from non-governmental sources
Collection of principal from on-lending
Municipality capital and investment revenue
Total capital
revenues Total
other revenues
TOTAL
REVENUE
GOVERNMENT OF ETHIOPIA
Statement of Comparison of Budget and Actual Amounts - External Assistance
for the year ended 7 July 20X2
Ethiopian Birr '000
20X2 20Xl
Adjusted Adjusted
Budget Actual Variance Budget Actual Variance
External Assistance
List of donors
0 0 0 0 0 0
Total 0 0 0 0 0 0
GOVERNMENT OF ETHIOPIA
Statement of Comparison of Budget and Actual Amounts - External Loan
for the year ended 7 July 20X2
Ethiopian Birr '000
20X2 20Xl
Adjusted Adjusted
Budget Actual Variance Budget Actual Variance
External Loan
List of lenders
0 0 0 0 0 0
20X2 20Xl
Adjusted Adjusted
Emoluments
Salaries to permanent staff 0 0 0 0 0 0
Total 0 0 0 0 0 0
Allowances/benefits
Allowances to permanent staff 0 0 0 0 0 0
Total 0 0 0 0 0 0
Pension contributions
Cont to permanent staff pensions 0 0 0 0 0 0
Total 0 0 0 0 0 0
Office supplies 0 0 0 0 0 0
Printing 0 0 0 0 0 0
Medical supplies 0 0 0 0 0 0
Educational supplies 0 0 0 0 0 0
Food 0 0 0 0 0 0
32
Fuel and lubricants 0 0 0 0 0 0
Other material and supplies 0 0 0 0 0 0
Miscellaneous equipment 0 0 0 0 0 0
Total 0 0 0 0 0 0
Transport fees 0 0 0 0 0 0
Official entertainment 0 0 0 0 0 0
Total 0 0 0 0 0 0
Infrastructure 0 0 0 0 0 0
Military equipment 0 0 0 0 0 0
Total 0 0 0 0 0 0
Contracted services
Contracted professional services 0 0 0 0 0 0
Rent 0 0 0 0 0 0
Advertising 0 0 0 0 0 0
Insurance 0 0 0 0 0 0
Freight 0 0 0 0 0 0
Electricity charges 0 0 0 0 0 0
Telecommunication charges 0 0 0 0 0 0
Training services
Local training 0 0 0 0 0 0
External training 0 0 0 0 0 0
Stocks of food 0 0 0 0 0 0
33
Stocks of fuel 0 0 0 0 0 0
Other stocks 0 0 0 0 0 0
Total stocks 0 0 0 0 0 0
Military equipment 0 0 0 0 0 0
Total 0 0 0 0 0 0
Construction
Pre-construction activities 0 0 0 0 0 0
Construction of buildings-residential 0 0 0 0 0 0
Const. of building-non-residential 0 0 0 0 0 0
Construction of infrastructure 0 0 0 0 0 0
Total 0 0 0 0 0 0
SUBSIDIES 0 0 0 0 0 0
FINANCE COSTS
Interest & bank charges – ext. debt 0 0 0 0 0 0
TOTAL 0 0 0 0 0 0
OTHER EXPENSES
Principal debt payments
Payment – principal of external debt 0 0 0 0 0 0
Total 0 0 0 0 0 0
Pension payments
Pension payment to permanent staff 0 0 0 0 0 0
Total 0 0 0 0 0 0
Government investment 0 0 0 0 0 0
34
Contingency 0 0 0 0 0 0
Comp. to individuals and institutions 0 0 0 0 0 0
Miscellaneous payments 0 0 0 0 0 0
TOTAL EXPENSES 0 0 0 0 0 0
35
GOVERNMENT OF
ETHIOPIA
Comparison of Original and Adjusted and Actual
Amounts
for the year ended 7 July
20X2
Ethiopian Birr '000
Origina Adjuste
Varianc Actual Variance
l d
e
6100 PERSONNEL SERVICES
6110 Emoluments
6120 Allowances/benefits
6320 Construction
36
GOVERNMENT OF ETHIOPIA
Statement of Expenditure by Functional Classification
for the year ended 7 July 20X2
6120 Allowances/Benefits
37
Administration & General Services Economic Services Social Services Others
Total
100 200 300 400
Code Category and Sub-Category
6320 Construction
TOTAL
38
Summary Statement of Domestic and External Revenues
For the year ended 7 July 20X2
ITEM OF REVENUE
A. ORDINARY REVENUE
Direct Tax
Indirect Tax
Taxes on Foreign Trade
Government Investment Income
Other Revenue
Total Ordinary Revenue
B. EXTERNAL ASSISTANCE
Counter Part Fund Grants
Technical Assistance
Total External Assistance
C. CAPITAL REVENUE
Domestic Sources
Counter Part Fund Credit
External Loan
Total Capital Revenue
D. DOMESTIC BORROWING
GRAND TOTAL
39
Summary Statement of Expenditure
For the year ended 7 July 20X2
Ethiopian Birr ‘000
Particulars Recurrent Expenditure Capital Expenditure Subsidies Total
Administrative & General Service: 100
series of State
Organs
Justice and Security
National Defense
General Services
Others:
Grand Total
40
GOVERNMENT OF ETHIOPIA
Summary Statement of Expenditure and its Financing
For the year ended 7 July 20X2
1. EXPENDITURE
A. Recurrent Expenditure
Administrative and General Service
Economic Service
Social Service Other
Service
Total Recurrent Expenditure
B. Capital Expenditure
Economic Development
Social Development General
Development Other
Development
Total Capital Expenditure
C. Subsidy to Regions
Total Expenditure
2. FINANCING
41