Ethiopian Government accounting Chapter 1-3.ppt

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1. AcFn3122
ETHIOPIAN GOVERNMENT
ACCOUNTING AND FINANCIAL
MANAGEMENT
1

2. Course Contents
i. Introduction
ii. General and subsidiary ledgers
iii. Recording common transactions of
FGE
iv. Monthly reports
v.Financial reports and financial
statements
vi. FGE Financial Management
2

3. Course objectives and Competencies
to be acquired
After successfully completing this course, the
students should be able to:
Identify the objectives of FGE accounting sym,
Explains why and how the FGE accounting sym uses modified
cash basis of accounting,
Record various transactions in government budgetary
institutions,
Prepare monthly financial reports for a reporting entity,
Identify budget control mechanisms
Identify types of ledgers maintained in FGE-system of
accounting
Define the basic concepts and terminology in government
budgeting
3

4. Chapter 1-Introduction
1.1 Historical overview of EGA system
1.2 FGE Chart of accounts
1.3 FGE Budget Process
1.4 Fundamentals of FGE program budget
1.5 Budget ledger card
1.6 Basis of accounting
1.7 Legal Framework of FGE Financial
Administration
4

5. 1.1. Historical overview of Ethiopian
Government Accounting System
•Singleentryaccountinghasbeen
employedbytheFGEtill2002G.C
•Itisamethodofbookkeepingrelyingona
onesidedaccountingentrytomaintain
financialinformation.
5

6. …Cont’d
Advantages of Single Entry
Simplicity
Less expensive
6

7. …Cont’d
The most significant problems associated with a single
entry system include:
Data may not be available to management for effectively planning
and controlling the business,
inefficient administration and reduced control over the affairs of
the business
Assets are not tracked, so it is easier for them to be lost or stolen.
It is impossible to obtain an audit opinion on the financial results
of a business using a single entry system,
It is much easier to make clerical errors in a single entry system,
as opposed to the double entry system, where separate entries to
different accounts must match.
Liabilities are not tracked, so you need a separate system for
determining when they are due for payment, and in what amounts.
There is much less information available upon which to construct
the financial position of a business, so management may not be fully
aware of the performance of the business.
7

8. Objective of the Reform
•Simplifytheaccountingsystem
•bychangingitfromthesingleentrybookkeepingsystemtothedoubleentry
bookkeepingsystem,
•Improvedisclosureofinformationtostakeholders
•byrevisingthechartofaccountsandenhancingthereportsgeneratedbythesystem
tomeettheinformationneedsofGovernmentanditsdevelopmentpartners.
•Expandthecurrentaccountingsystem
•bychangingthebasisofaccountingfromcashbasistoamodifiedcashbasisof
accountingtoincludetherecordingandreportingofselectcurrentassetsandcurrent
liabilities.
•Improveinternalcontrols
•byreviewingtherolesandresponsibilitiesofstaffworkingintheaccounts
departmentandintroducingenhancedprocedurestocaptureandapprove
transactionsaswellmanageandcontrolcashinsafeandcashatbank.
8

9. …Cont’d
•Improvecashandfinancialmanagement practices
•byrationalizingthenumberofbankaccounts
•minimizingtheamountofidlefunds.
•Improvebudgetcontrol
•byintroducingprocedurestorecordand
•monitorcommitmentsagainsttheavailablebudgetpriortotheapproving
expenditure.
•Produceaccurate,timelyandcompleteinformation
•bycreatingaplatformthatallowsforbetterdecisionmakingbasedon
timely,accurateandcomprehensiveinformation.
•Enhancetransparency
•byimplementingasystemthatisunderstandabletokeystakeholdersand
meetsinternationalstandardsintermsoftheaccountingprinciplesand
policiesemployedandtheautomationoftheaccountingsystem.
9

10. ? Double Entry Accounting System
IntroductionofTaccount
Taccountisanindividualaccountingrecord
thatshowsinformationaboutincreasesand
decreasesinonebalancesheetorincome
statementaccount.
Taccountissocalledbecauseithasthe
formofletterT.
DebitistheleftsideofaTaccount.
CreditistherightsideofaTaccount. 10

11. Definition
Double-entryaccounting isthe
foundationofmodern-daybusiness
recordkeeping.
Itsetstherulesthatcorporate
bookkeepersmustfollowwhenposting
economicevents.
11

12. …Cont’d
Double-entry recording
systemprovidesfortheequalityoftotal
debitsandtotalcredits.
Itinvolvetwoaccountsforasingle
transaction
ImportantrulesinDEAS
Assets=Claims(Liabilitiesand
Owner'sEquity)
TotalDebits=TotalCredits
12

13. Benefits of applying the new
accounting system
Reductionintheannualbacklogofreporting
atfederalandregionallevels,
Timeliness, accuracy and
comprehensiveness ofmonthlyreporting
togetherand
13

14. Basic Concepts and Financial
Administration in FGE Accounting System
•TheFederalGovernmentofEthiopia(FGE)AccountingSystem
consistsofthreeparts.
•PartIdealswithBasicConcepts and financial
administrationinFGEaccountingsystemwhichisabout
•thebasicconceptsandprinciplesandtherulesemployedbythe
accountingsystemtodeterminewhenandhowtorecordtransactions,
•systemofcodingusedbyfinancialmanagement systemtoclassify
financialentitiesandeventsandanoverviewofFGEfinancial
administrativestructureassumedandt
•Thegeneraldescriptionoftherolesandresponsibilitiesofeachunitwithin
theassumedadministrativestructure
•Part II is dealt about data collection, storing, and
sorting procedures and forms in FGE accounting system.
•Part III describes Monthly reports and analysis of
Transactions
14

15. FGE Accounting System: Its Environment and
Characteristics.
What is a Public body?
•APublicBodyisdefinedintheBudgetManualof
MinistryofFinanceandEconomicDevelopment
(MoFED)as:
•Aninstitutionthathaslegalmandate,
•Receivesapartialorcompletebudgetdirectly
fromtherespectivefinanceandplanning
bodies,and
•Submitsitsfinalaccountingreportsdirectlyto
MoFED/respectivefinanceandplanningoffices.
15

16. Regulation and Control on Public
Bodies
•PublicBodiesarenon-profitmakingentities.
•Publicbodiesmuststrivetoattaintheirobjectives
withoutreturn.
•Unlessalternativecontrolsareemployed,
1.theabsenceoftheneedtooperateprofitably,
2.thelackofanopenmarkettestofthevalueof
thepublicbody’soutput,
3.theabilitytoforceresourcecontributionsvia
taxation,
•Publicbodiesaretherefore,subjecttomore
stringent legal,regulatory, and other
controlsthanareprivatebusinesses.
16

17. Similarities of Public Bodies Accounting and
Business Organizations Accounting
1.A double entry system of accounting is recommended
for both.
2.The general mechanics for record keeping are the
same:
–documents form 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.
3.Both prepare financial statements, closing entries, etc.,
17

18. Objectives of FGE Accounting System
•The FGE accounting system achieves three
goals:
1. budget control,
•Budget control is achieved by:
•The ability of the accounting system to report expenditure consistent
with budgetary principles, and
•Including accounting for commitments in the system.
•A commitment is an amount of budgeted funds that is reserved for a
specific future expenditure.
18

19. …Cont’d
2. Cash control is achieved by:
–Maintaining the balance of cash at bank and cash in safe
in a general ledger.
–Clarifying the responsibilities and duties of the cashier
and the account for cash at bank and cash in safe.
–Using an imprest(petty cash) system to control cash in
safe.
–Applying double-entry bookkeeping techniques in the
accounting system.
–Employing a modified cash-basis of accounting when
accounting for transactions.
19

20. …Cont’d
3.Accountabilityisachievedby:
•EmployingaGeneralLedgersystem.
•Creatingtheabilitytorecordandreportonanyassetsandliabilitiesusinga
costmethodofvaluation.
•Establishingasystemoffinancialreportingthatproducestworeportsforuse
byGovernmentandastatementofChangesincashpositionforuseby
interestedpartiesoutsideofGovernment.
•ThetworeportsforusebyGovernmentareStatementofBudgetedversus
ActualforRevenuesandExpenditureandaStatementofNetAssets/Equity.
20

21. 1.2. Chart of Accounts
Itisasystemofcodingusedbyafinancial
management systemtoidentifyandclassify
financialtransactionsandevents.
•Thechartofaccountsusedisexactlythesameat
thefederalandregionallevelstorecord
1.revenues,
2.expenditures,
3.transfers,
4.assets,
5.liabilitiesandnetassets/equity.
21

22. Chart of Accounts of FGE Accounting
Systems
•Revenue,expenditureandcashtransfers
aretemporaryaccountcodecategories.
•Accountcodesinthesecategories:
arealwaystreatedastemporary
accounts,andbegineachyearwitha
zerobalance.
22

23. …Cont’d
•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.
23

24. …Cont’d
•Itemsofdomesticrevenueusingaccountcodes1000-
1799,
•Externalassistanceusingaccountcodes2000-2999,
•Externalloansusingaccountcodes3000-3999,
•Transfersusingcodenumbers4000through4099,
and
•Itemsofexpenditureusingaccountcode6000-6999.
24

25. Chart of Permanent Accounts
(Ledgers)
The Accounts Reform Team under the Expenditure
Management and control Sub-Program of the Civil Service
Reform designed codes for detailed coding of:
•Assetsusing code numbers 4100 through 4999 .
•Liabilitiesusing code numbers 5000 through 5499 .
•Letters of Credit using code numbers 5500 through 5599 .
•Net Assets/Equity using code numbers 5600 through
5699.
25

26. Assets:
•AssetsareformallydefinedbytheInternational
FederationofAccountants -PublicSector
AccountingStandards(IPSAS)as
•"resourcescontrolledbyanentityasaresultof
pasteventsandfromwhichfutureeconomic
benefitsorservicepotentialareexpectedtoflowto
theentity.”
26

27. Categoriesofassetsinthe
accountingsystem
1.Cash and cash equivalents:
•Cashiscashonhandandatbank.
•Cashequivalentsareshort-term,highlyliquid
investmentsthatarereadilyconvertibleto
knownamountsofcashandwhicharesubject
toaninsignificantriskofchangeinvalue.
27

28. …Cont’d
2. Receivables:
•receivablesareamountsowedto(givento)a
governmentunitbyanothergovernmentunit,a
person,oranon-governmententityexceptpublic
enterprises.
•Salaryadvancestoemployeesandadvancesto
suppliersaretwoexamples ofreceivables
commonlyoccurringinFGEtransactions.
28

29. …Cont’d
3.Goodsintransit:Goodsintransitaregoodsthatareownedbythe
FGEbutnotyetintheFGE'spossession.Typically,thesearegoods
thatarepurchasedoverseasusingaletterofcredit.
4.Stocks:Stocksaregoodsthatareconsumedinlessthanoneyear.
5.Fixedassets:Fixedassetsarephysicalitemsthatareexpectedto
haveausefullifeoflongerthanoneyearandhaveacertain
minimumvalue.
6.Loansreceivable:Loansreceivableareamountsduefrompublic
enterprisesoveraperiodoftimeexceedingoneyear.
7.Investments:InvestmentsareFGEinvestmentsinpublic
enterprisesandprivateorganizationsthatareheldformorethan
oneyear. 29

30. Liabilities:
•LiabilitiesareformallydefinedbytheInstituteof
PublicSectorAccountingstandardsas"present
obligationsoftheentityarisingfrompast
events,
•Thesettlementofwhichisexpectedtoresultinan
outflowfromtheentityofresourcesembodying
economicbenefitsorservicepotential.
30

31. …Cont’d
•The categories of liabilities in the improved and
expanded accounting system are:
1.Short-term 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.
2. Long-term debt: It is an obligation to pay debt
that is due in more than one year.
31

32. …Cont’d
3.LettersofCredit:
•Aletterofcreditrepresentsaguaranteetopay
supplierswithcashsetasideinbankaccount
restrictedforthatpurpose.
32

33. Net assets/equity:
•ItisformallydefinedbytheInstituteof
publicsectoraccountingstandardsas
"theresidualinterestintheassetsofthe
entityafterdeductingallitsliabilities.
•"Netassets/equityisthebalanceremaining
afterliabilitiesaredeductedfromassets.
•Thisbalancerepresentstheequityinterest
ofRegionalandFederalGovernments.
33

34. 1.3. FGE Budget Process
What is Budget?
•It is the systematic Classification of the
scarce resources to unlimited wants of
the general public
•It is the monetary expression of the
plan of actions
34

35. Definition
•Abudget processreferstothe
processbywhichgovernmentscreate
andapproveabudget
•Budgetingisthesettingofexpenditure
levelsforeachofanorganization’s
functions.
•Itistheestimationandallocationof
availablecapitalusedtoachievethe
designatedtargetsofafirm.
35

36. Types of Budget
•The federal government operates under a dual budget
system, as reflected in the Financial Proclamation and the
Financial Regulations.
•There are two types of budgets: recurrent and capital.
The code is one digit and standardized.
•Recurrent budgets are coded “1” and
•capital budgets are coded “2.”
•Even though expenditures can be coded as recurrent or
capital, the budget classification coding system allows a
single or whole budget to be viewed for any public body
or cost center within the public body.
36

37. BUDGET CLASSIFICATION
Therearemanydifferentusersofbudgetinformation
Nationalplanners,
Sectoralplanners,
Economists,
Donors,
Lenders,
NGOsand
civilsocietygroups,
Managersinpublicbodies,
Treasuryorcashmanagement officials,
MOFEDbudgetofficialsandaccountingofficials
Ministers,etc.
37

38. …Cont’d
•Theinformationneedsoftheseusersvary
significantly.
•Forthisreason,budgetinformation,whether
plannedoractual,needstobeanalyzed
andclassifiedfrommanydifferentviewpointsand
Dimensions.
38

39. 1. Functional Classification
•Functionalclassificationsarethebroadareas
ofexpenditurewhichareusedforanalysisand
wholeofgovernmentornationwideaccounts.
•Therearefourfunctionalclassificationsof
expenditure:
i.AdministrativeandGeneral,
ii.Economic,
iii.Social,and
iv.Other.
39

40. …Cont’d
•TheFunctionalClassificationcodeisonedigit
andstandardized.
•Responsibilityfordefiningthefunctionalclassifi
cationforagivenpublicbodybelongstothe
MOFED BudgetDepartment.
40

41. 1.4. Fundamentals of FGE Program
Budget
•Programs exist within a public body (or
Bureau).
•The naming and coding of programs is
discretionary.
•However, the programs identified should
reflect important medium term objectives
of the government and the public body
•Each public body can have many
programs.
41

42. …Cont’d
•A public body may have programs which
are broad objectives of expenditure.
•In the Ministry of Health, “Improveme
nt of Health Care Delivery”is an exa
mple of a program for it has a broad
objective of expenditure which is further
divided into sub‐programs and projects.
•Programs are a sub‐head class of account
42

43. Sub‐Programs
•Programs can be further divided into
sub‐programs which group similar activities.
•Sub‐programs tend to be used only within the
capital budget.
•Although the capital budget for some public
bodies is categorized under a sub‐program, the
budget is prepared in respect of the project, not
the sub‐program.
•A sub‐program could have several projects,
each with its own budget.
43

44. Projects
•Projects are one or more activities that have some
type of limits, e.g. the completion of a building project,
the completion of assistance funded capacity building
project.
•Projects usually have a specific objective or set of
objectives and a definable output(s).
•They are managed only within the capital budget.
•Projects can be funded by a combination of various
sources of finance including one or more of Treasury,
Retained Revenue, Assistance or Loan.
•The Budget documents will show the amounts of funding
available from each source of finance, with specific
donors
44

45. Sub‐Agencies
•Apublicbodyisoftendividedintoadministra
tiveunitsorsub‐agencies.
•Forexample,manypublicbodieshaveasa
firstleveloforganization,departments whichin
turncanbedividedintodivisionsthatinturn
areoftendividedintosections.
•Publicbodiescanalsohavesub‐agencies
thatarerelativelyautonomousentitiessuchas
hospitalsundertheMinistryofHealth.
•Sub‐agenciesareusuallythedepartments
ofapublicbody. 45

46. 1.5. Budget Ledger Card
Purpose
•Thepurposeofthebudgetledgercardistomaintaina
continuousandupdatedrecordforeachbudgeteditemof
expenditurebyBIandsourceoffinancewithrespectto:
•Approvedbudget.
•Additions/reductionstotheapprovedbudget.
•Revisedbudget.
•Paymentsreceivedforbudgetedexpenditure.
•Amountremainingtoberequested.
•Commitments.
•Balanceintherevisedbudgetthatisnotcommitted.
46

47. …Cont’d
•The budget ledger card is divided into two
parts:
•The top of the card contains information to
identify the
•Type of budget, and
•Item of expenditure.
•Source of Finance
•The table on the card contains detailed
information about each budget transaction.
47

48. 1.6 Basis of Accounting in Government
Operation
•Atransactionisaneconomiceventthataffectsthefinancial
positionofthegovernment.
•Thebasisofaccountingisthebasicsetofprinciplesand
rulesemployedbytheaccountingsystemtodeterminewhen
andhowtorecordtransactions.
48

49. Basis of Accounting…
•Thecashbasisofaccountingisabasisofaccountingthat
recognizestransactionsandothereventswhencashis
receivedorpaid.
•TheFGEaccountingsystememploysamodifiedcashbasisof
accounting.
49

50. Cash Basis
•Thecashbasisofaccountingrecognizes
transactionsandeventsonlywhencashis
receivedorpaid.
•FGEchangeditsbasisofaccountingfromcash
basistomodifiedcashbasisinthefiscalyear
1995.
50

51. ModifiedCashBasis
•Themodifiedcashbasisofaccountingrecognizes
transactionsandeventswhichhaveoccurredbythe
yearendandarenormallyexpectedtoresultincash
disbursement withinthespecificlegalgraceperiod
stipulatedbyacountry’sfinancialregulationsafteryear
end.
•Paymentsoverthisgraceperiodthatarerelatedto
transactionsofthepreviousfiscalyeararereportedas
expendituresofthepreviousfiscalyear.
51

52. ….Cont’d
•ThemodifiedcashbasisofaccountinginFGEmeansthat
cashbasisappliesexceptforrecognitionofthefollowing
transactions:
•Revenueandexpenditurearerecognizedwhenaidinkind
isreceived.
•Interestonsalaryadvancesisrecognizedasrevenuewhen
thesalaryadvanceismade.
•Expenditureisrecognized:
•Whenpayrollisprocessed.
•Attheendoftheyearwhenagraceperiodpayableis
recognized.
•Whengoodsarereceivedorservicesarerenderedifpayment
forthegoodsorserviceswasrenderedinadvance.
52

53. ….Cont’d
•Intergovernmentaltransfersarerecognizedinthe
absenceofactualcashmovement.
•Transactionsresultingfromsalarywithholdings
arerecognizedintheabsenceofactualcash
movement.
•Amounts dueontreasurybillsanddirect
advancestoGovernmentfromtheNationalBank
ofEthiopiaarerecognizedascurrentliabilities
53

54. …Cont’d
•Themodifiedcashbasisaccountingsystemrequiresthe
sametemporary accountsasthecashbasisof
accountingplusthefollowingpermanentaccounts:
•cashandcashequivalents,receivables,payablesandnet
asset/equity.
•Themodifiedcashbasisofaccountingisconsistentwiththe
budgetingprocessandproducesinformationusefulfor
comparingbudgetedandactualrevenueandexpenditure.
54

55. …Cont’d
•Themajorconsiderationsidentifiedfordeterminingitemsto
includeandexcludeinthemodifiedcashbasissystemis
the availability,complexity, practicality and
efficiencywithwhichinformationcanbeobtainedto
includeothercategoriesofassetsandliabilitieswithinthe
accountingsystemandtheneedtokeepthebasisof
accountingconsistentwiththeGovernment’sbudgeting
system.
55

56. Modified Accrual Basis
•However,themodifiedaccrualbasisofaccountingrecognizes
transactionsandeventswhentheyoccur,irrespectiveofwhencash
ispaid.
•Thereisnodeferralofcoststhatwillbeconsumedinfutureperiods.
•Assetsthatwillprovideservicesinthefutureareexpensedinthe
periodacquired.
56

57. …Cont’d
•Therefore,underthemodifiedaccrualbasisofaccountingassets
andstocksareconsideredconsumed andexpensedoffassoon
astheyareacquired.
•Thedifferencebetweenthemodifiedcashandmodifiedaccrual
basisofaccountingiswhetherornotthefinancialregulations
specifyagraceperiodoverwhichcashpayments thatare
relatedtotransactionsofthepreviousfiscalyearare
reportedasexpendituresofthepreviousfiscalyearandbeyond
thatgraceperiodcashpaymentsthatarerelatedtotransactionsof
thepreviousfiscalyeararetobereportedastransactionsofthe
nextfiscalyear.
57

58. …Cont’d
•InEthiopia,theaccountingperiodincludesa
legalgraceperiodof30daysafterthecloseofthefiscal
year.
•Hence,themodifiedcashbasisofaccountingisappliedin
Ethiopia.
•Themodifiedcashbasisofaccountingrecognizes
transactionsandeventswhichhaveoccurredbythe
yearendandarenormallyexpectedtoresultincash
disbursement withinthespecificlegalgraceperiodof
30daysafteryearend.
•Payments overthisgraceperiodthatarerelatedto
transactionsofthepreviousfiscalyeararereportedas
expendituresofthepreviousfiscalyear.
58

59. Accrual Basis
•The accrual basis of accounting recognizes transactions and
events when they occur irrespective of when cash is paid
or received.
•Revenues reflect the amounts that came during the year,
whether collected or not.
•Expenses reflect the amount of goods and services consumed
during the year, whether or not they are paid for in that
period.
•The costs of assets are deferred and recognized when the
assets are used to provide service.
59

60. Bookkeeping Method
•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.
60

61. Bookkeeping Method
•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.
61

62. End of Chapter one
62