CHAPTER 4

FGE ACCOUNTING SYSTEM

1. Historical backgrounds of FGE accounting system

• The Federal Government of Ethiopia (FGE) accounting system used in 1994E.C has been in
service for more than a half a century.

• The system has been revised at various times and the revisions through times have brought
major changes in recording, summarising and reporting of government financial information.

• Thus the government decided that there was need to revise the accounting process as an
integral parts of civil service reform.

• Then the overall strategy of civil service reform for accounts is to move from strictly cash
controls to an emphasis on management and accountability.

• Finally federal government of Ethiopia/FGE/accounting system is installed.

 Historically, single-entry bookkeeping referred to as merchant’s single entry bookkeeping

method was the accounting method used in the business sector (Lee, 1986

 with single entry bookkeeping method, only one account (cash account) with two sides i.e.,
(debit and credit sides) was used.

 In this manner, the cash inflows were recorded on the debit side, while the cash outflows were
recorded on the credit side.

• Goals FGE accounting system

A. Accountability

B. Cash control

C. Budget control

Goals of FGE accounting system

A. Budget control

Budget is a plan of expected spending and income for a period of time.

• FGE budget control is achieved by:-

 The ability of the accounting system to report expenditure consistent with budgetary
principles;

 Including accounting for commitments in system.

  A commitment is an amount of budgeted fund that is reserved for a specific future expenditure

 Commitments are made against the budgeted when a purchase order is approved

 Any committed budgeted funds are no longer available for future commitments.

B. Cash control

Cash is nothing but money in the form of coins or notes or the using of money in coins or notes. In case
of FGE cash can be considered as cash in bank and cash at hand.

• Maintaining the balance of cash at bank and cash in hand in general ledger.

• Clarifying the responsibilities and duties of cashier and the accountant for cash and cash in
safe. The cashier handles cash in safe, While the accountants are assigned overall
responsibility for the check book and cash at bank.

Using an impress system to control cash in safe.

• An impress system the cash in the safe is established for fixed amount.

• Each payment for the safe is documented.

• The cash in the safe periodically reimbursed, based on vouchers, for the exact amount
necessary to restore the original cash balance.

• Any cash collected from sources other than the accountant is deposited in bank intact.

Applying double entry book keeping techniques in the accounting system.

• Double entry book keeping creates a set of self balancing, accounting records are
controlled.

• A cash accounting ledgers in a general ledger, so cash also is controlled by double-

entry book keeping.

Therefore, a running cash balance in the registered and in the general ledger reflects the actual cash
available

C. Accountability

Accountability in FGE accounting system is achieved by:-

 • Employing a general system. Each accounting unit maintains a general ledger for each sources of
funding, So each unit maintains a balanced and continuous record of its responsibilities and
performance.

• Creating the ability to record and report on any assets and liabilities using cost methods of
valuation. The FGE accounting system includes simplified process for recording any assets and
liabilities in set of registers and in general ledger that is independent of accounting for
transactions using a modified cash basis of accounting.

Establishing a system of financial reporting that produces two reports for use by government are a
statement of budget. Actual for revenue and expenditure And a statement of net asset.

1. Chart of Account

• The chart of accounts is a system of coding government uses to identify and classify financial
entities and events. 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 current chart of accounts treats all detailed account codes as temporary accounts. However,
In FGE accounting system permanent accounts also included.
• Temporary accounts are accounts that begin each year with zero balances.
• Revenue, expenditure and transfers are account code categories.

1. Are always treated as temporary accounts

2. Begin each year with a zero balance

• Permanent accounts are detailed accounts codes whose balance at the end of the year
becomes the balance in the account at the beginning of the next year.

Assets, liabilities and net asset/equity are account code categories.

• Are always treated as permanent accounts

• Begin each year with the same account balances that they had at the end of the
previous year. In other words these accounts are not closed.

Descriptions of permanent accounts

A. Assets

Assets are formally defined by the international federation of accountant public sector standards (IPSAS)
as “a resource 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.”
 Cash and cash equivalent:-

 cash is cash on hand and cash at bank. Cash equivalents are short term highly liquid
investments that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of change in value.

 Receivables:-

 Receivables are amounts owed to a government unit by another government unit, a

person, or a non government entity except public enterprise. 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

 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.

 Loan receivable: -

 loans are amounts due from public enterprises over a period of time exceeding
one year.

 Investment:-

 Investment are FGE investment in public enterprises and private organizations

that are held for more than one year.

 Letter of credit:-

 a letter of credit represents a guarantee to pay suppliers with cash set aside in a bank
account restricted for that purpose.

 Net asset/Equity:-

 Net asset/equity is 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 of interest of FGE.
 1. Basis of Accounting
1. 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.

e FGE accounting FGE system employs a modified cash basis of accounting.

The modified cash basis of accounting in FGE means that cash basis applies except for recognition of the
revenue transactions:

Expenditure is recognized
• When payroll is proceeded

• At the end of the year when grace period is payable is recognized

• When goods are received or services are rendered if payment for goods or service was
rendered in advance.

• When cash move from an unrestricted to a restricted bank account to meet the
requirement 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 .

• Transaction resulting from salary withholdings are recognized in the absence of cash
movement.

The FGE accounting system employs a combination of temporary and permanent

accounts.

• All accounts balances at the ends of the year are not set to zero so as a process is nieces
The processes of setting the balance in temporary accounts to zero is called closing
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 year.

• This process requires a net assets/equity/account.

• ary that distinguishes temporary accounts and sets them to zero.

All asset 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 final information is that is reported
in a statement of changes in cash position and statements of budgeted versus actual
expenditures.

• Although it is possible to include all assets and liabilities in the government accounting
system at a future date, the needs of government and the capacity of manpower and
institutions must be considered.

The major considerations identified for determining items to include and exclude in the
modified cash basis system are:-

• Government is interested in knowing total resources available to cover expenditures,

and therefore is primarily interested in cash, receivables and payables.

• The capacity of government accounting staff working at various level may not be able
sufficient to handle complex accounting concepts.
 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 amounts
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 totals of
all credits, therefore, many errors are easily detected and

• Modified cash basis of accounting can be introduced.

Double-entry bookkeeping requires an understandings 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.

• In Double-entry bookkeeping system, the book of original entry is the register.

• A register is a chronological listing of transactions and serve as the book of original entry into
the accounting system.

• Information regarding transactions and services 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 two accounts.

• One account is a debit and the other is credit, but both accounts are affected by the same
amount.

• Therefore, for each transactions that is recorded in the double-entry register, the recorded in
the register will always equal the total of all credits 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 information from the register to the ledger card is called
posting.

In the double entry system, a ledger card is created and maintained for each account Because each
transaction is entered on the register as a debit to one account and credit to another account, each
transaction is posted to two ledger cards.

The set of all ledger card is called a general ledger.

• Two posting are made for each transaction in the general ledger of equal amounts in
different amounts, but one is entered as debit and one as a credit.

• Therefore, the total debit amount on all ledger card must equal the total credit amount
on all ledger cards.

• The 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 a single general ledger or from any combination of
general ledgers