CBO IFBW Acct Procudure

ACCOUNTING PROCEDURE FOR INTEREST FREE BANKING WINDOW
Cooperative Bank of Oromia SC
IFBW Accounting Procedure
August 2014
Addis Ababa, Ethiopia
COOPERATIVE BANK OF OROMIA S.C 1

Table of Content
PART – One.................................................................................................................................4
1. General Descriptions of the Procedures.....................................................................4
1.1 INTRODUCTION............................................................................................................4
1.2 BASIS AND PURPOSE OF THE MANUAL..............................................................5
1.3 SCOPE OF THE MANUAL...........................................................................................5
1.4 STRUCTURE OF THE MANUAL................................................................................5
1.5 DISTRIBUTION OF THE MANUAL...........................................................................7
1.6 REVISION OF THE MANUAL.....................................................................................7
PART – Two.................................................................................................................................8
2. ACCOUNTING RECORDS AND FINANCIAL STATEMENTS OF IFBW...............8
2.1 TRANSACTION................................................................................................................8
2.2 SOURCE DOCUMENTS.................................................................................................8
2.3 JOURNALS AND REGISTERS.....................................................................................9
2.4 LEDGERS.........................................................................................................................9
2.4.1 GENERAL LEDGER..................................................................................................9
2.4.2 SUBSIDIARY LEDGER.............................................................................................9
2.5 NORMAL BALANCE OF ACCOUNTS.......................................................................10
2.6 ACCOUNTING ERRORS AND CORRECTING ENTRIES......................................10
2.7 ADJUSTING ENTRIES.................................................................................................10
2.8 CLOSING AT THE END OF THE ACCOUNTING PERIOD...................................11
2.9 FINANCIAL STATEMENTS.........................................................................................11
PART – Three............................................................................................................................13
3. Accounting Descriptions...............................................................................................13
3.1 Accounting Description for Deposit Transactions.............................................13
3.1.1 Wadiah Saving Account........................................................................................13
3.1.2 Hadji-Umraha Saving Account...........................................................................14

3.1.3 Demand Deposit Account.....................................................................................15

3.1.4 Unrestricted Investment Account......................................................................15
3.1.5 Restricted Investment Account...........................................................................16
4. Accounting Description For Financing and Investment Activities...................17
4.1 Financing Products/ Services.................................................................................17
4.1.1 Murabaha and Murabaha to the Purchase Ordered....................................17
4.1.2 Ijarah Based Financings.......................................................................................21
4.1.2.1 Financing Lease...................................................................................................22
4.1.2.2 Operating Lease...................................................................................................23
4.1.3 Salam and Parallel Salam....................................................................................25
4.1.3.1 Salam Financing..................................................................................................25
4.1.3.2 Parallel Salam......................................................................................................27
4.1.4 Istisna'a and Parallel Istisna'a............................................................................29
4.1.4.1 Istisna’a Financing..............................................................................................29
4.1.4.2 Parallel Istisna’a..................................................................................................32
4.1.5 Qard Loan..................................................................................................................34
4.2 Investment Products/Services................................................................................35
4.2.1 Mudarabah Investment.........................................................................................35
4.2.2 Musharaka Investment.........................................................................................38
5. Accounting Description For Trade Service Activities...........................................43
5.1 Trade Services..............................................................................................................43
5.2 Guarantee Services.....................................................................................................47
5.3 Incoming Foreign Remittance..................................................................................48
6. Accounting for Local Money Transfer Services Activities....................................51

PART – One
1. General Descriptions of the Procedures
1.1 INTRODUCTION
The Cooperative Bank of Oromia S.C has been established with vision of
“to be competent, reputable, and socially responsible bank in Africa.”
The Management of the Bank is primarily responsible for planning,

organizing, directing and controlling of the activities of the Bank for the
smooth functioning of its operations. In this connection, Management is
required to ensure that the Bank maintains proper accounting records
and prepares financial statements, which can disclose with reasonable
accuracy the financial position and operating results of its interest free
banking in accordance with the NBE Directives, Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI).
The need for having an up-to-date accounting manual for interest free
banking operational activities with a written description of the general
ledger and subsidiary ledger accounts and other issues can be
summarized with the following points:
 Completeness and effectiveness of the accounting system of the

Bank;
 Providing a record for training new-assigned employees and

reminding existing ones how the accounting system should
operate; and
 Serving as a communication tool in explaining the accounting

system to the Bank’s employees as well as independent auditors.

1.2 BASIS AND PURPOSE OF THE MANUAL

The manual is prepared in a way to be consistent with the various
practices, principles, and procedures of the Bank as specified in different
manuals of the Bank as well as other laws and regulations.
The manual is prepared with a view to facilitate the recording of financial

transactions and other events as well as reporting of financial
information throughout the Bank. More specifically, the manual has the
following purposes:
 To develop and maintain consistency/uniformity in the application

of accounting records with in the Bank;
 To aid in the preparation and processing of accounting

transactions;
 To aid in the understanding and utilization of accounting system;
 To provide control and accountability over financial records; and
 To assist the Bank organs in gathering information needed in

connection with the IFBW financial statements.
1.3 SCOPE OF THE MANUAL

The manual focuses on the structures of the IFBW’s general ledger
accounts, subsidiary ledger accounts along with their accounting
treatment and the major procedural issues to perform the daily and
periodic operational activities of the IFBW. The manual, therefore, shall
be used as a uniform guideline for all IFBW activities.
1.4 STRUCTURE OF THE MANUAL

The manual is organized following the under listed classifications

General Classification Categorization of the Description of the Subsidiary Ledger Accounts

General Classifications
These items include the The general classification is The subsidiary ledger accounts, whereby the actual transactions and
items classified as on- further divided into the other events are recorded in,
balance sheet accounts:- appropriate categories based
Account Description: This clearly describes the nature of the account
on the nature of accounts.
o Assets, and the type of transactions and other events recorded in it.
Basically this categorization
o Liabilities, Events: The events, i.e., the actual transactions that increase or
is used for reporting the
o Equity of Investment decrease a subsidiary ledger account are shown here.
financial statements of the
Account Holders
IFBW and consists of the Accounting/Journal Entries: These are stated following the
o Equity of the IFBW
general ledger accounts of accounting description and events of each subsidiary ledger account.
(Capital);
the IFBW. For those subsidiary ledger accounts affected by only a single event, the
o Income and
respective accounting entries are shown following the account
o Expenses
description; and for those subsidiary ledger accounts affected by more
off-balance sheet
than one event, they are shown right after the listed increase and
accounts,:-
decrease events.
o Memorandums,
and
o Contingencies

1.5 DISTRIBUTION OF THE MANUAL

This manual is designed to be an ongoing reference for the IFBW branches and
other concerned Process. Accordingly, the manual should be assigned to
positions and not to individuals. When an employee vacates a position to which
the manual is assigned, the manual should be left for his/her successor.
The process owners and branch managers are responsible to aware all
concerned employees to read, understand & practice the procedure.
The manual shall be uploaded to individual computer with readable version

only.
1.6 REVISION OF THE MANUAL

This manual shall be revised as and when required.

PART – Two
2. ACCOUNTING RECORDS AND FINANCIAL STATEMENTS OF IFBW
2.1 TRANSACTION
Transactions are one type of business events, which may or may not
necessitate an accounting entry. Examples of transactions that do not require
an accounting entry include hiring an employee, etc. Examples of transactions
that do require an accounting entry include purchasing/selling of goods or
services, payment/receipt of cash, deposit/withdrawal of money, etc. The latter
accounting transactions focus on an exchange of economic value between the
Bank and other parties (vendor, customer, employee, agent, etc.), and they will
result in an update to record accounting records of the IFBW.
2.2 SOURCE DOCUMENTS

Each accounting transaction should be supported by proper documentation.
Source document are the original record of transactions and contain
information crucial to document that an exchange has occurred, including
date, amount, parties (participant), and description of the transaction (reason).
They can be generated internally or by outside parties and may exist in paper
or electronic form.
In exceptional case transaction shall be supported by copied documents, which

will be approved by president, Vice Presidents, Directors and Branch Manager
as the case may be.
Source documents may include invoices, bills, delivery notes, cheques, deposit
slips, withdrawal, issue, receiving vouchers, requisition, debit/credit notes of
organizations, contracts, official letters, memorandums, statements, etc.,
depending on each particular case to support the various transactions.
Source documents shall always be original documents (and no duplicates) and

shall be attached to the relevant transaction ticket to support the
corresponding entries or they should be properly and separately filed for
transaction and documentation purposes.

Each type of source documents shall be checked and approved for their
appropriateness and/or genuineness before the corresponding transaction
entries are passed.
2.3 JOURNALS AND REGISTERS

Journals are chronologically listing of accounting transactions (debits/credits).
Journals and registers are books of primary entries used as intermediate
assembly of records between source documents and their eventual posting to
ledgers. The IFBW’s journal and registers include the general journal, proof
sheet, cash journal, cash books, etc.
2.4 LEDGERS
Ledgers are the basic financial records on which the effects of all business
transactions are classified and summarized. They are used as summarizing
devices to compute the results of business transactions in such a way that
their effects can be more easily interpreted. There are two types of ledgers:
general ledger and subsidiary ledger.
2.4.1 GENERAL LEDGER

The general ledger is a collection of the IFBW’s accounts, which shows the
summary of all transactions of each classification of assets, liabilities, income
and expense accounts. The aggregate balance of each group of subsidiary
ledger accounts should agree with their respective balance of the general
ledger. The number and description of general ledger accounts depend on the
needs of the Management and may take into account the level of details, the
risk involved and the controlling aspect attached to various accounts.
2.4.2 SUBSIDIARY LEDGER

Subsidiary ledgers are subdivisions of general ledger accounts and contain
detailed information for the balances in the general ledger accounts. With
proper and accurate posting, the total figures in the subsidiary ledger accounts
of the same classifications should agree with the balance of the respective

general ledger accounts. Since only the general ledger accounts are used to
prepare financial statements, it is important to make sure that the subsidiary
ledger balances are reconciled to the general ledger before preparing financial
statements. The Bank can use a subsidiary ledger for any general ledger
account where a detailed decomposition of the account is needed to manage its
business.
2.5 NORMAL BALANCE OF ACCOUNTS

The following accounts have a normal debit balance:
 Asset accounts;
 Expense accounts; and
 Memorandum Asset accounts.
The following accounts have a normal credit balance:
 Liability accounts;
 Capital/Equity accounts;
 Equity of Investment Account Holders
 Income accounts; and
 Contingent Liability accounts.
2.6 ACCOUNTING ERRORS AND CORRECTING ENTRIES

If any one account is erroneously debited or credited, a reversing
accounting entry should be made within the fiscal year.
2.7 ADJUSTING ENTRIES

The adjusting entries are necessary is that some events affect more than
one period, and the accrual basis of accounting is founded on the
‘matching’ principle which says that revenues and related expenses
should be recorded in the same period, regardless when cash or its
equivalent is received or paid. Therefore, adjusting entries are required at
the end of the accounting period to bring the accounts up-to-date and to

insure the proper matching of revenues and expenses under the accrual
method.
2.8 CLOSING AT THE END OF THE ACCOUNTING PERIOD

At the end of the accounting period, the year-end balance of all income
and expense accounts (temporary accounts) will be transferred to the
Profit and Loss Account, the Profit and Loss Account transferred to Head
Office accounts at branches, & Profit & Loss account transferred to
Capital, Equity of Investment Account Holders & Payable Accounts at
Head Office.
There by resetting the balances of these nominal/temporary accounts to

zero supports to begin the next accounting period.
2.9 FINANCIAL STATEMENTS

Financial statements are a formal structured representation of the
financial position of IFBW. The objectives of financial statements are to
provide information about the financial position, financial performance,
changes in financial position and cash flows of IFBW that is useful to a
wide range of users in evaluating and making decisions about the
allocation of resources. To meet these objectives, the financial statements
provide information about the IFBW’s assets, liabilities, equity, revenue,
expenses and cash flows.
A complete set of IFBW's financial statements include the following

components:
 Balance Sheet – The balance sheet, which may also be referred to as

the statement of financial position, is a snapshot of the assets,
liabilities, Equity of Investment Account Holders and capital accounts
of IFBW at a single point in time.
Interim balance sheets may be prepared at the end of each month or

as and when required.

 Profit and Loss Statement – The profit and loss statement, which
may also be referred to as the statement of financial performance or
the income statement, reports the revenues, expenses and the
resulting net income/net loss of IFBW for a specific period of time.
Interim Profit and Loss Statements may be prepared at the end of

each month or as and when required.
 Cash Flow Statement – The cash flow statement explains the reasons
for changes in the cash balance, showing sources and uses of cash in
the operating, financing and investing activities of IFBW for a specific
period of time.
Cash Flow Statement may be prepared at the end of each month.
 Statement of Changes in Equity – Shows the changes in the equity

of the IFBW, i.e., paid-up capital, legal reserves, general reserves and
retained earnings for a specific period of time.
Statement of Changes in Equity may be prepared at the end of each

month.

PART – Three
3. Accounting Descriptions
3.1 Accounting Description for Deposit Transactions
3.1.1 Wadiah Saving Account
o Wadiah is amanah (safe custody based on trusts) where IFBW shall be

fully responsible for the deposited amount to be available on demand.
o IFBW cannot mix the asset with its or other customers' conventional
banking deposits;
o IFBW shall offer Wadiah as savings account facility to account holders
who seek safe custody of their funds.
o When customer open Wadiah account, IFBW shall pass the following
entries.
Debit: Cash
Credit: Wadiah Account
o IFBW shall not pay any return for Wadiah account holders but allow
them to deposit or withdraw from and to account any time.
o IFBW may give a gift not promised to the account holders to encourage
them to deposit more money and attract other potential customers to
come in to the banking services.
o When Bank pay/gift to customers who open Wadiah account, IFBW shall
pass the following entries.
Debit: G/Expenses Gift For Wadiah A/C
Credit: Wadiah Account/Cash
o When the customer withdraw/transfer fund from his/her account, IFBW
shall pass the following entries
Debit: Wadiah Account
Credit: Cash/ Wadiah Account/Demand Account

3.1.2 Hadji-Umraha Saving Account
o Hadji-Umraha Saving account is safe custody based on trusts of the

customer to be deposited regularly for the purpose of travelling to Meca
Medina, where IFBW shall be fully responsible for the deposited amount
to be available on demand.
banking deposits;
o When customer opens Hadji-Umraha Saving account, IFBW shall pass
the following entries.
Debit: Cash
Credit: Hadji and Umraha Saving Account
o IFBW shall not pay any return for Hadji and Umraha Saving account
holders but allow them to deposit or withdraw from and to account
any time.
o IFBW may give a gift not promised to the account holders to
encourage them to deposit more money and attract other potential
customers to come in to the banking services.
o When Bank pay/gift to customers who open Hadji-Umraha Saving
account, IFBW shall pass the following entries.
Debit: G/Expenses Gift for Hadji-Umraha Saving A/C
Credit: Hadji-Umraha Saving Account/Cash
o When the customer withdraw/transfer fund from his/her account,
IFBW shall pass the following entries
Debit: Hadji-Umraha Saving Account
Credit: Cash/ Wadiah Account/Demand Account

3.1.3 Demand Deposit Account
o Safekeeping and payments facilitation are the primary motives of the

customers in keeping such accounts with IFBW. Thus, these deposits
are similar to current accounts in conventional banking system.
banking deposits;
o The amounts in this category of deposits are purely the liability of
IFBW. When IFBW receive such type of fund from the customer and
open an account, the following entries shall be passed.
Debit: Cash
Credit: Customer Demand/Checking Account
o When the customer withdraw/transfer/deposit fund from his/her
Checking account, IFBW shall pass the following entries.
Debit: Demand Deposit (Checking) Account
Credit: Cash/Wadiah/customer DD Account
3.1.4 Unrestricted Investment Account
o IFBW shall receive equity of unrestricted investment from the

customer at the time of concluding contractual agreement
o IFBW shall pass the following entries, when the agreement of
unrestricted investment account is concluded with customers;
Debit: Cash/Customer Wadiah or DD Account
Credit: Unrestricted Investment Account (Customer Account)
o When the customer withdraw cash from his/her unrestricted
investment account, IFBW shall pass the following entries
Debit: Unrestricted Investment Account (Customer Account)
Credit: Cash/ Customer Wadiah or DD Account
o IFBW shall allocate profits of an investment jointly financed by
customer and itself in accordance with the agreed ratio of each of the

parties in the jointly financed investment. Share of profit allocated to

parties involved shall be recorded as follows at HO
Debit: Profit/Loss Account
Credit: Customer Account
o IFBW shall present equity of unrestricted investment as an
independent category in the statement of financial position/balance
sheet distinguishing it from liabilities and owners' equity of the bank;
3.1.5 Restricted Investment Account
o In case the IFBW has funds invested in restricted investment

accounts whether from its own equity or from other customer funds,
it shall share in the profits earned on such funds in its capacity as
provider of funds or Mudarib (entrepreneur) as the case appropriate;
o IFBW shall treat assets and liabilities relating to equity of restricted
investment account holders and their equivalent separately from its
own assets and liabilities;
o IFBW shall recognize equity of restricted investment account holders
when it receives the funds for investment and shall pass the following
entry.
Debit: Cash/Customer Account
Credit: Restricted Investment Accounts
o In the case of more than one type of restricted investment accounts in
the form of investment funds or portfolios, IFBW shall recognize the
amount of each type separately;
o IFBW shall measure equity of restricted investment account holders
by the amount received or at historical cost minus amortization of
asset offered by the customer at the time of concluding contractual
agreement;
o IFBW shall allocate profits of restricted investment jointly financed by
customer and itself in accordance with the agreed ratio of each of the
two parties in the jointly financed investment. Share of profit allocated
to holder of equity of restricted investment involved shall be recorded
as follows at HO;
Debit: Profit/Loss Account
o IFBW shall present information on equity of restricted investment
account holders in the statement of changes in equity of investments

account holders and their equivalents or at the foot note of the

statement of financial position.
4. Accounting Description For Financing and Investment Activities
IFBW shall clearly account the accounting transactions of financing

activities which include among other things Murabaha, Ijarah, Istisna, and
Salam from that of Investment activities of Mudaraba and Musharaka.
Accordingly, the financing and investment activities of IFBW shall be
recorded in their unique nature as indicated in the following manner.
4.1 Financing Products/ Services

Interest free banking Window shall undertake all the under listed
financing activity either from unrestricted or restricted investment
account of customers or from Bank’s capital and other deposits of interest
free banking.
4.1.1 Murabaha and Murabaha to the Purchase Ordered
o Murabaha depicts the following characteristics

 The bank buys goods for murabaha sales from the vendor
and pay for it.
 The bank enter in to the murabaha contract with a customer
and delivers the goods
 The customer pays the bank in lump sum or installment
over the contract period.
o IFBW shall treat Murabaha transaction as a cost plus profit sales;
o IFBW shall treat a security deposit of customers for Murabaha
transaction as liability and pass the following entries;
Debit: Customer Account
Credit: Hamish Jidiyyah Account

o Amount paid by IFBW to supplier for purchase of customer requested

goods/service shall be accounted as an advance;
Debit: Advance against Murabaha
Credit: Cash/Supplier Account
o At the time of sale of goods/service on credit to the purchase orderer,
IFBW shall record the sales value at invoiced amount (gross selling
price) and recognize profit at the time of contracting (finalizing sales
deal) for spot cash collection or recognize profit at the time of receiving
the installment when sale is on credit and pass the following entries
If sale is on cash:
Debit: Murabaha Financing
Credit: Advance Against Murabaha/Fixed Asset
Credit: Income from Financing Murabaha Profit
If sale is on credit:
Debit: Murabaha Financing
Debit: Deferred/Profit/ Receivable on Murabaha Financing
Credit: Advance against Murabaha/Fixed Asset
Credit: Deferred Profit Margin From Murabaha Financing
Reversal of Hamish Jiddiyah

Debit: Hamish Jiddiyyah Account
o IFBW shall pass the following entries periodically while collecting the
principal amount and earned profit receivables portion of installment
Murabaha transactions
o
Debit: Customer Account/Cash
Credit: Profit Receivable on Murabaha Financing
Credit: Murabaha Financing
Profit Realization

Debit: Deferred Profit Margin From Murabaha Financing

Credit: Profit from Murabaha
o On maturity of Murabaha transactions, IFBW shall pass the following
entries
Debit: Customer Account/Cash
Credit: Profit Receivable on Murabaha Financing
Profit Realization
Debit: Deferred Profit Margin From Murabaha Financing
Credit: Profit from Murabaha
o Initially, IFBW shall measure and record asset/goods at historical cost,

including all expenses (custom duties, transport, loading and
unloading charges, insurance etc) necessary to bring the asset/goods
in its present location and condition. However, when the asset value
declines below cost due to damage, destruction or from other
unfavorable circumstances, IFBW shall reflect such decline in the
valuation of each asset at the end of financial period;
Debit: Loss on Murabaha Goods
Credit: Advance against Murabaha
o IFBW shall consider the cash equivalent of prevailing market price of

inventories in case the customer failed to fulfill his/her promise to
purchase the asset/goods and shall record goods purchased but
remaining unsold at the balance sheet date as Murabaha Inventory;
If Market price equal to book value:

Debit: Murabaha Inventory
Credit: Advance Against Murabaha
If market price greater than book value



Credit: Gain on Murabaha Goods
If market price less than book value

Debit: Loss on Murabaha Goods
o If a discount is received from the supplier, IFBW shall reduce the
discount amount from cost of goods/asset than considering it as
revenue.
Debit: Cash
o IFBW shall record the profit on portion of Murabaha receivables not
due for payment as Murabaha profit receivables on the balance sheet
with a corresponding income on the income statement as Murabaha
Income;
Debit: Murabaha Profit Receivables
Credit: Income From Financing Murabaha Profit
o IFBW shall recognize profit of credit sale of payment due after the
current financial period by proportionately allocating the profit to the
financial periods;
Debit: Deferred Income From Financing Murabaha Profit
Credit: Unearned Murabaha Profit receivables
o In case of early settlement of Murabaha financing, IFBW shall
immediately recognize Deferred Murabaha Income;
o IFBW shall deduct the amount of actual loss from the security deposit
in case the customer does not fulfill his/her promise to purchase the
asset/goods;
Credit: Advance against Murabaha


Credit: Hamish Jiddiyyah-income
o In case of customer's default, IFBW shall deduct the actual damage

incurred resulting from the overdue installment payment from Hamish
Jiddiyyah or sell the pledged asset without recourse to judiciary and
record any penalty amount received as a liability in the charity fund
account;
o When the amount in the Hamish Jiddiyyah account is sufficient to
cover remaining balance,
Debit: Deferred Income from Financing Murabaha Profit
Credit: : Income From Murabaha Finanacing
o If the amount in Hamish Jiddiyyah account is not sufficient to cover
the overdue installment payment and penalty charge the following
entry shall be passed:
Debit: Cash
Debit: Deferred Income From Financing Murabaha Profit
Credit Income From Finanacing Murabaha Profit
Credit: Zakat/Charity Fund Account

When Zakat/Charity fund is paid:

Debit: Zakat/Charity Fund Account
Credit: Cash

4.1.2 Ijarah Based Financings
o In Ijarah Financing the bank pays to manufacturer/builder the

price of products and the manufacturer delivers the goods to the
bank.
o There are two types of Ijarah financing; lease financing and
operating financing
o In Lease Financing contract of Ijarah, the bank selles the products
at the end of the contract while in Operating Financing contract of
Ijarah, the goods leased for customers and returned back to the
bank to be re-leased or disposed
4.1.2.1 Financing Lease

o IFBW shall classify asset leased out according to its nature (Plant and
Machinery, Vehicle etc) and separate the Ijaraha asset recording from
assets acquired and held for its own use;
o When customer request IFBW for ijarah financing and paid security
fund, the following entry shall be passed;
Credit: Hamish Jiddiyyah Account
o IFBW shall record all Ijarah transactions as Asset Acquired for Ijarah at
sum of all cost incurred in acquiring the asset
Debit: Asset Acquired for Ijarah financing lease
Credit: Cash/ Supplier Account
o When IFBW conclude sales contract with customer on ijaraha based
financing and agreed to transfer the asset to the customer less of
accumulated depreciation balance at the end of lease period and paid
some amounts of money in the form of down payment, the following
entries shall be passed;
Credit: Asset Acquired for Ijarah financing lease

o When IFBW collects installment payments from customer, the following

entries shall be passed;
Credit: Asset Acquired for Ijarah financing lease
Credit: Ijaraha Financing rental income
o IFBW shall record Ijarah assets at cost less accumulated depreciation
using straight-line method and impairment;
Debit: Depreciation Expense- Asset Acquired for Ijarah financing lease
Credit: Accumulated Depreciation- Asset Acquired for Ijarah financing
lease
o IFBW shall recognize rental from Ijarah as income on accrual basis at
the time of closing book of accounts;
Debit: A/Receivable-Ijaraha financing rental Income
Credit: Ijaraha financing rental income
o IFBW shall recognize carrying costs (maintenance, insurance, tax etc),
incurred during the life cycle of the asset that has been rented under
financing lease as an expense;
Debit: Ijaraha financing Expenses (maintenance, insurance, tax …)
Credit: Cash/customer account
o When the customer totally paid the remaining amount and acquire the
Ijaraha financing asset at the end of lease period, IFBW shall pass the
following entries
Debit: Accumulated Depreciation- Asset Acquired for Ijarah financing
lease
Credit: Asset Acquired for Ijarah financing lease (remaining balance of
installment amount)
Credit: Ijaraha financing rental income

4.1.2.2 Operating Lease
o When IFBW purchase Ijaraha asset for operating lease the following
entry shall be passed
Debit: Asset Acquired for Ijarah operating lease
Credit: Cash/supplier account
o IFBW shall record Ijarah assets at cost less accumulated depreciation
using straight-line method and impairment;
Debit: Depreciation Expense- Asset Acquired for Ijarah Operating lease
Credit: Accumulated Depreciation- Asset Acquired for Ijarah Operating
lease
o IFBW (lesser) may collect some portion of Ijaraha operating lease rental
income in advance and enter contractual agreement with the lessee and
pass the following entry
Credit: Deferred rental income ijarah operating lease
o IFBW shall recognize the deferred rental operating lease as an income
when earned.
Debit: Deferred rental income ijarah operating lease
Credit: Ijaraha operating rental income
o When IFBW collects normal ijaraha operating lease rentals, the following
entry will be passed
o IFBW shall recognize carrying costs (maintenance), incurred during the
life cycle of the asset that has been rented under operating lease as an
expense provided that the damage is due to the normal business
circumstance (not due to mismanagement)

Debit: Ijaraha operating Lease Expenses (maintenance)

o At the end of the operating lease period, IFBW shall collect the operating
lease asset and pass the following entry
Debit: Cash/ customer account (the remaining rental amount)
o If the customer is interested to buy the operating lease asset and IFBW
agreed with the customer request the following entry shall be passed
At equal book value:

Debit: Cash/customer account
Debit: Accumulated Depreciation- Asset Acquired for Ijarah Operating
lease
Credit: Depreciation Expense- Asset Acquired for Ijarah Operating lease
Credit: Assets aquired for Ijaraha operating lease
At greater than book value:

lease
Credit: Gain on Ijaraha operating lease asset disposal
At less than book value:
lease
Debit: Loss on Ijaraha operating lease asset disposal

4.1.3 Salam and Parallel Salam
4.1.3.1 Salam Financing
o IFBW shall provide Salam Finance for those customers who are in
need of it against collaterals or insurance coverage as appropriate to
mitigate the risks arising from such financing and record related
transactions in its book of accounts;
o The customer shall deliver the subject matter of Salam financing to
Parallel Salam customer on the maturity date as per the pre
arrangement made between the customer and IFBW;
o IFBW shall present Salam financing transaction in the financial
statement under the heading of Salam Financing.
o IFBW shall recognize Salam financing as a total sum of money that
includes the principal amount and insurance premium, if insurance
guarantee is offered by the customer and pass the following entry
Debit: Salam Financing
Credit: Cash/Customer Account
Credit: Insurance payable Salam Financing
o When IFBW pays the insurance premium to the insurance company,

the following entry will be passed.
Debit: Insurance Payable Salam Financing
Credit: Cash/Insurance Company Account
o IFBW shall pass the following entry when the customer offer collateral
for Salam Financing and disburse the approved amount to the
customer
o In case the customer fails to deliver the subject of Salam Financing in

full or part upon maturity due to negligence and intentional refusal;

IFBW shall pass the following entry related to litigation process and
/or advertisement charges
Debit: Salam financing
Credit: Cash
o Upon collection of cash from proceeds of collateral sales, IFBW shall

If the collateral sold equals book value
Debit: Cash/Customer account (Buyer)
Credit: Salam financing
If the collateral sold greater than book value

Debit: Cash/Customer account (buyer)
Credit: Customer account (defaulter)
Credit: Zakat/Charity Fund Account (penalty charge)
o If collateral sold less than book value and no other claimed property
Debit: Cash/Customer (buyer)
Debit: Loss on Salam financing
o If the customer fails to deliver the goods under insurance guarantee
contract due to force majeure, IFBW shall consider it as total damage
and claim the book value from insurance company and pass the
following entry
Debit: Cash/Insurance company account
Credit: Salam Financing
4.1.3.2 Parallel Salam
o IFBW shall establish Parallel Salam Financing contractual agreement

with other customer who is willing to pay the value of Salam Financing

plus profit and agreed to collect goods of Salam Financing at the time
of maturity.
o IFBW may conclude contractual agreement of Parallel Salam
transactions with customer to collect the agreed amount in advance
and pass the following entry as a liability
Credit: Account Payable-Parallel Salam
o When bank pays to vender/manufacturer, pass the following
transaction

Credit: Cash/Vender Account
o When Salam Financing matures, the parallel Salam Financing
customer collects the goods under contract and pays the agreed
amount. At this time, IFBW shall pass the following entry;
If full amount paid in advance:

Debit: Account Payable-Parallel Salam
Credit: Income-Salam financing Profit
If partial amount paid in advance:

Debit: Account Payable-Parallel Salam
Debit: Account Receivable Salam Financing (remaining balance)
Credit: Income-Salam financing Profit
If there is no advance payment:

Debit: Cash/customer account (buyer)
Credit: Income-Salam financing

o If the collected Salam Financing goods is different in kind and quality

from the agreed goods and sold to either customer of parallel Salam
Financing or any other customer at lower or higher than the book
value of the subject matter of the contract, IFBW shall recognize the
difference as profit or loss and pass the following entries;
Debit: Salam Financing Goods

When market price is equal to book value:
Debit: Cash/Customer account / Account Payable-Parallel Salam
Credit: Salam financing goods
When market value greater than book value:

Debit: Cash/Customer Account/ Account Payable-Parallel Salam
Credit: Salam financing goods
Credit: Gain on Salam Financing
When less than book value and there is no other property to be claimed:
Debit: Cash/Customer account/ Account Payable-Parallel Salam
Debit: Loss on Salam Financing
Credit: Salam Financing Goods
4.1.4 Istisna'a and Parallel Istisna'a
4.1.4.1 Istisna’a Financing
o IFBW may conclude Istisna’a financing contractual agreement with

customer who is willing to pay the agreed amount on installment basis
during work in progress or in lump sum at the completion of the work
or on installment basis following the completion of the work. At this
conclusion of the contract, IFBW shall collect security deposit from the
customer for his/her binding promise of istisna’a financing and pass
the following entry;


Credit: Hamish Jiddiyyah Account
o If the customer pays an advance for Istisna’a financing, IFBW shall
pass the following entry;
Credit: Account payable-Istisna’a financing
o IFBW shall recognize costs incurred in pre contract as deferred costs
and account such costs by transferring it to the Istisna'a Work-in-
Progress Account. Any Istisna'a cost incurred including warranty
during a financial period is also recorded in work-in-progress account
and reported under assets in the statement of financial position;
Debit: Istisna'a Work-in-Progress
Credit: Cash / Manufacturer or builder Account
o IFBW shall recognize Istisna'a profit for each financial period in
accordance with the percentage of work completion method.
Accordingly, IFBW shall allocate and add the portion of the Istisna'a
profit margin recognized during each period to the Istisna'a Work-in-
Progress account and pass the following entry
Debit: Istisna’a work in progress

Credit: Income from Instisna’a financing profit
o When IFBW collects portion of installment payment periodically during
work in progress from the customer, the following entry shall be
passed
Credit: Istisna’a work in progress
o Upon completion of work in progress in accordance with the
specification and time schedule under Istisna’a contract and delivery

of the subject matter by the contractor, IFBW shall pass the following
entry
Debit: Istisna’a Financing
Credit: Istisna'a Work-in-Progress
o When IFBW sale the completed item to the customer(buyer) and
collects the lump sum agreed amount, the following entry shall be
passed
For advance payment:

Debit: Account payable
Credit: Istisna’a Financing
If there is no advance payment:

o When IFBW collects portion of installment payment periodically from
the customer following the completion of work in progress, the
following entry shall be passed

o IFBW shall treat change of orders and additional claims provided that
the cost of change of orders and additional claims are determined by
both contracting parties IFBW pass the following entries;
Debit: Istisna'a Work-in-Progress (additional variation cost)
Credit: Cash/customer account (builder/manufacturer)

o If the customer (ultimate buyer) refuses to accept the subject matter of

Istisna’a financing, IFBW shall collect the amount in the security
deposit account as compensation for not keeping the binding promise
and transfer the amount in Istisna’a financing account to Istisna’a
asset account and pass the following entry and subsequently sale the
subject matter of Istisna’a financing at book value, greater than or less
than book value and recognize gain or loss accordingly
Credit: Hamish Jiddiyyah- income
Debit: Istisna’a asset account
Credit: Istisna’a financing
o If the customer unable to repay the remaining outstanding amount of
Istisna’a financing, IFBW shall sale the Istisna’a asset under financing
at book value, greater than book value, or less than book value and
recognize gain or loss accordingly;
o If the ultimate purchaser refuses to receive the subject matter of
Istisna'a contract due variation of specifications, IFBW shall measure
it at market value or historical cost (book value), whichever is the
lower. IFBW shall recognize any resulting damage related to such
issues as loss in the given financial period and pass the following entry
Debit: Istisna’a assets a/c
Debit: Loss on Istisna’a financing, if any
Credit: Istisna financing.
4.1.4.2 Parallel Istisna’a
o Based on the specification given by the customer for Istisna’a

financing, IFBW shall enter contractual agreement with
builder/manufacturer(contractor) in the form of parallel Istisna’a and
pass the following entry for collected performance bond;
Debit: Cash/Customer account

Credit: Parallel Istisna’a Performance Bond Payable

o In a situation where the percentage and expected cost of completion of
the subject matter of the contract is difficult to estimate, IFBW shall
not recognize any revenue until such time the contract is completed
and keep the accumulated contract cost and carry forward on the
Istisna'a Work-in-Progress account;
o When IFBW pays an advance and/or subsequent payments during
project phase to the contractor, the following entry shall be passed
Debit: Parallel Istisna’a Work in progress
Credit: cash/customer Account
o IFBW shall recognize the expected bill amount of work in progress
from the contractor, which was not paid in advance as a liability and
Debit: Parallel Istisna’a Work in progress
Credit: Accounts Payable Istisna’a Financing
o When the contractor presents the actual bill amount for which an
advance was not taken, IFBW shall pass the following entry
Debit: Accounts Payable Istisna’a Financing
o In the event of applying the percentage of completion method for the
recognition of Istisna'a revenue and profit, IFBW shall measure
Istisna'a work-in-progress at a value not exceeding its cost on the
project and report it in the statement of financial position;
o When contractor fails to honor his/her obligation, IFBW shall
recognize any additional costs incurred by itself to fulfill obligation in
Parallel Istisna'a as losses in valuing the Istisna'a costs, except such
additional costs are expected to be recovered from contractor and pass
the following entries;
When recognized as loss
Debit: Loss on Istsna’a financing


When recovery is expected
Debit: Account Receivable Parallel Istisna’a (contractor)
Credit: Cash/ customer account
o When IFBW recovers the expected amount from the contractor, the
following entry shall be passed
Credit: Account receivable Parallel Istisna’a (contractor)
o If there is delay in the delivery of the subject matter of Istisna'a

contract on the part of builder/manufacturer due to negligence, IFBW
shall take the amount of compensation from performance bonds by
passing the following entry;
Debit: Parallel Istisna’a Performance Band payable

Credit: Other Income Parallel Istisna’a
o If IFBW declined to receive the subject matter of Istisna'a contract due
to nonconformity to specifications and did not recover the entire
amount of progress payments made to the builder/manufacturer, the
balance shall be recorded as follows:
Credit: Other Income Paralle Istisna'a
Debit: Parallel Istisna’a Accounts Receivable
Credit: Parallel Istisna'a Work-in-Progress
o When the builder/manufacturer pays back the outstanding Receivable
balance, IFBW shall pass the following entries;
Debit: Cash/ customer account
Credit: Parallel Istisna’a Accounts Receivable
o If IFBW accepted the subject matter of parallel Istisna'a contract which
does not conform to specifications, such assets deviations shall be

measured at market price and the amount kept under payable shall be
taken as compensation and recorded as follows
Credit: Parallel Istisna'a Work-in-Progress
4.1.5 Qard Loan

o An interest-free loan may be given to potential customers for fulfilling
short-term funding requirements. The borrower is only obligated to
repay back the principal amount of the loan. Qard is a type of
financing that may be given to customer free of charge. A person is
seeking a loan only if he is in need of it, such as pre-shipment.
o When qard loan is approved, the disbursement shall be passed

Debit: Qard Loan (in the name of the customer)
o When the customer settle the qard loan, the following entry will be
passed
Credit Qard Loan
4.2 Investment Products/Services
4.2.1 Mudarabah Investment

o IFBW shall undertake Mudarabaha investment either from
unrestricted or restricted investment account of customers or from
Bank’s Capital and other deposits of interest free Banking;
o IFBW shall establish provision for Mudarabah investment at Head
Office to cover loss that may arise and pass the following entries
Debit: Provision Expenses on Mudarabah investment
Credit: Provisions for Mudarabaha investment

o IFBW shall insure Mudarabaha investment asset by Insurance

company and pass the following entry
Debit: Mudarabaha Insurance Expenses
Credit: Cash/Insurance company account
o IFBW shall consider costs incurred in relation to feasibility study of
Mudarabah investment and other similar activities as part of the
investment and pass the following entry.
Debit: Mudarabah Investment

o When IFBW invests fund pooled for Mudarabaha investment on
feasible projects, the following entries shall be passed;
Debit: Mudarabah Investment
o IFBW shall record profit obtained from Mudaraba investment and pass
the following entries
If profit obtained from Mudarabah investment:
Debit: Mudarabah investment, Company Account
Credit: Head office-IFBW
o When the Head office declares distribution of profit obtained during
operations after deducting its own share of profit and management fee
for handling investment fund, IFBW shall distribute the declared profit
share of Mudarabah profit to each investment account holders as per
the agreed ratio and pass the following entries.
Debit: Head Office- IFBW
Credit: Unrestricted/Restricted investment Account (customer
Account)
o When IFBW incur loss on Mudarabah investment during operational
year, it shall distribute proportionate amount of loss that is left from
provision of loss on Mudarabaha investment to customer account and

Debit: Unrestricted/Restricted investment Account (customer

Account)
Credit: Head Office- IFBW
o If the parties involved in Mudarabah investment decided to liquidate
their business and sell all assets belongs to it, IFBW shall pass the
following entries;
When market price equal to book value:

Credit: Mudarabah Investment
When market price greater than book value

Credit: Gain on Mudarabah Investment
When market price less than book value
Debit: loss on Mudarabah Investment
o When gain obtained from the liquidating investment, IFBW shall
distribute the gain as agreed to the parties involved in Mudarabah
investment and pass the following entry
Debit: Gain on Mudarabah Investment
Credit: Unrestricted/Restricted investment Account (customer
Account)
o IFBW shall deduct Mudarabah provision on loss incurred from
liquidating investment and distribute the remaining amount
proportionately to the parties involved in Mudarabah investment and

Debit: Unrestricted/Restricted investment Account (customer

Account)
Credit: loss on Mudarabah Investment
o IFBW shall present Mudarabah investment account in the financial
statement under the heading of Mudarabah investment;
o If the value of Mudarabah asset invested in kind deviated from its book
value during liquidation, the difference between market value and
book value shall be recognized as profit or loss.
o If the whole Mudarabah investment asset, which has insurance
coverage, is lost by catastrophic event, IFBW shall claim the insurance
company and pass the following entry.
Debit: Account Receivable-Insurance Company
o When the insurance company pays the damage amount, IFBW shall
Debit: Cash/Insurance company account
Credit: Account Receivable-Insurance Company
o If Mudarabah Investment contract is terminated (liquidated) and the
amount of liquidation is not collected before closing book of accounts
or the collection goes beyond a single period without actually getting
the amount, IFBW shall recognize such outstanding amount as a
receivable due from the Mudarib and pass the following entry;
Debit: Account Receivable- Mudarib
Credit: Mudarabah investment
o When IFBW collects the outstanding liquidation amount, the following
entry shall be passed
Debit: Cash/Customer account
Credit: Account Receivable- Mudarib

o IFBW shall collect loss of capital that is occurred due to the Mudarib’s
mismanagement, misconduct or negligence and record such loss as a
receivable due from the Mudarib provided that the mudarib is solvent;
Debit: Account Receivable- Mudarib
Credit: Mudarbaha investment
o When Mudarib settle his/her debt, IFBW shall pass the following entry
Debit: Cash/Mudarib account
Credit: Account Receivable- Mudarib
4.2.2 Musharaka Investment

o IFBW shall measure Musharaka capital contribution made in kind at
the prevailing market price of the assets at the time of investment;
o IFBW shall recognize share of parties involved in the Musharakah
investment when it credit the fund to partners' joint account and pass
Debit: Cash/partner account

Debit: Head Office- IFBW (Musharaka Investment IFBW
Contribution)
Credit: Musharaka investment joint account
o IFBW shall insure the Musharaka investment asset and pays
insurance premium amount and pass the following entry
Debit: Musharaka investment IFBW
Credit: Cash/Insurance Company account
o IFBW shall consider expenses incurred in relation to feasibility study
and other related expenses as Musharaka investment and pass the
following entries;
Debit: Musharaka Investment IFBW

o IFBW shall disburse funds pooled for Musharaka purpose and pass
Debit: Musharaka Investment IFBW
o When the Musharaka investment turns into profits at the end of
financial year, IFBW shall pass the following entries;
o When Head office declared distribution of Musharaka investment profit
obtained during operational year after retaining its share, IFBW shall
pass the following entries in accordance with their agreed ratio for the
partners;
Credit: partner Account
o If the parties agreed to make additional investment in proportion to the
loss incurred on Musharaka investment;
IFBW shall pass the following entries;
Debit: Partners’ Account
Credit: Musharaka investment joint account
o If the parties involved in Musharaka investment decided to liquidate
their business and the valuation of the asset results in difference
between prevailing market price and book value, IFBW shall recognize
such difference as gain or loss and pass the following entries
accordingly;
When market price equal to book value

Debit: Cash/ customer Account
Debit: Musharaka investment joint account
Credit: Musharaka investment IFBW
Credit: Partners' Account

When market price greater than book value

Credit: Gain on disposal of Musharaka investment
When market price less than book value
Debit: Loss on disposal of Musharaka investment
o If the Musharaka investment is terminated ( liquidated) and on the

process of settlement, IFBW shall recognize the uncollected amount of
liquidation as receivable at the time of closing book of accounts and
Debit: Account Receivable-Buyer

Credit; Musharaka Investment IFBW
o When IFBW collects the receivables of Musharakah investment, the
following entries shall be passed;
Debit: cash/Buyer account
Credit: Account Receivable-Buyer
o If one of the parties involved in Musharaka investment is contracted to
acquire share of the IFBW in diminishing Musharaka method and
settle the expected amount, the following entry shall be passed;
Up on periodic payment

Debit: Cash/Partner Account

Upon amount settlement:

Debit: Cash/Partner Account (amount left)
Note: the Company name of Musharaka investment joint account will
be changed in the balance sheet
o IFBW shall exhibit historical cost of diminishing Musharaka

investment in the financial statement after deducting the historical
cost of any share transferred to the partner;
o If the diminishing Musharaka investment is liquidated before complete
transfer is made to the partner, IFBW shall credit the amount
recovered in respect of its share to Musharaka investment Account
and recognize any resulting profit or loss emanated from difference
between the book value and the recovered amount;
Debit: Account Receivable-Buyer

Debit: loss on disposal of Musharaka investment, if any
Credit: Gain on disposal of Musharaka investment, if any
o Up on collection of Receivables, IFBW shall pass the following entry;
Debit: Cash/Buyer account
Credit: Account Receivable-Buyer
o IFBW may also apply the principles of constant Musharaka to
diminishing Musharaka which continues for more than one financial
period, after taking into consideration its declining share of
Musharaka capital and its profit and loss;

o IFBW shall recognize Musharaka losses occurred due to misconduct or

negligence of partner when confirmed by Shariah Advisory Committee
as receivable due from the partner;
Debit: Account Receivables-Partner
Credit: Musharaka Investment IFBW
o Up on collection of Receivables from misconduct Partner, IFBW shall

Debit: Cash/ partner account
Credit: Account Receivables-Partner
o IFBW shall collect the insurance amount in the event of Musharaka

investment damage and pass the following entry;
Debit: cash/ insurance company account
5. Accounting Description For Trade Service Activities
5.1 Trade Services

o When Wakalah (100% cash paid by customer) Letter of Credit opened
Credit: Margin Held Account
Credit: Exchange Commission Payable to NBE
Credit: Service Charge Foreign L/C Opening
Credit: L/C Opening Commission
Credit: SWIFT Charge
Credit: Service Charge Confirmation, if any
o When Wakalah Letter of Credit gets amendment/extension

Credit: Service Charge amendment
Credit: Service Charge extension

o When Wakalah Letter of Credit is cancelled

Credit: Service Charges Cancellation
Debit: Margin Held Account
Debit: Exchange Commission Payable to NBE
o When Wakalah Letter of Credit is settled
Credit: Correspondent Bank
o When Wakalah inward Bills for collections (Cash Against Documents)is
handled
Credit: Correspondent Bank Account
Credit: Exchange commission Payable to NBE
Credit: Service Charges- IBC Foreign
Credit: SWIFT Charges
Credit: Photocopy Charges
o When Murabaha Import Letter of Credit is Opened
Debit: Customer account
Credit: Service Charges foreign L/C Opening
Credit: Service Charge Confirmation, if any
Credit: SWIFT Charges
Credit: Other Income
Debit: Contingent Outstanding Import Murabaha L/C in the name

of customer

Credit: Contingent Correspondent Bank Account,
o When Murabaha Import Letter of Credit is cancelled

Debit: Contingent Correspondent Bank Account,

Credit: Contingent Outstanding Import Murabaha L/C in the name
of customer
o When Murabaha Import Letter of Credit is settled
When payment is made to correspondent bank:
Debit: Murabaha Receivable Import Bills Account
Credit: Correspondent Account
Credit: Contingent Outstanding Import Murabaha L/C in the name
of customer
o When final payment is received from customer:

Credit: Murabaha Receivables on Import Bills
Credit: Profit Margin on Import Bill
Credit: Other income (for photocopy or other charges, if any)
o When Musharakah Import Letter of Credit is Opened
When collecting joint fund of Musharakah:

Debit: IFBW Account for this purpose
Debit: Customer (partner) Account

Credit: Musharakah Import Bills Account
o When establishing L/C opening:

Debit: Musharakah Advance Import Bills Account
Credit: Service Charge L/C Opening
Credit: Confirmation Charge, if any
Credit: SWIFT Charge
Credit: Other Income
Debit: Contingent Outstanding Import Musharakah L/C

Credit: Contingent Correspondent Bank Account,
o When Musharakah Letter of Credit is cancelled
Credit: Musharakah Import Bills Account
Credit: Contingent Outstanding Import Musharakah L/C
o When Musharaka Letter of Credit is settled
Debit: Musharakah Import Bills Account
Debit: Margin Held Account, customer portion
Credit: Correspondent Bank Account

Credit: Contingent Outstanding Import Musharakah L/C
o When Wakalah Export L/C-ODBP (Outward documentary bills

purchased)
Debit: Uncleared Effect-ODBP
Credit: Customer account
Credit: Postage

o When Wakalah Export L/C-ODBP is settled

Debit: Correspondent Bank Account
Credit: Uncleared Effect-ODBP Account
o When Wakalah Export L/C-ODBC is presented
Credit: Postage
o When Wakalah Export L/C-ODBC (Outward documentary bills

collection)
Debit: Memorandum Correspondent Bank Account,
Credit: Memorandum Outstanding Export ODBC
o When ODBC settle,
Debit: Memorandum Outstanding Export ODBC

Credit: Memorandum Correspondent Bank Account,
o When Wakalah CAD (Cash against documents) is handled within the
limit set by NBE, the exporter ship the goods before collecting the
value of goods
Debit: Memorandum Correspondent Bank Account,

Credit: Memorandum Outstanding Export CAD
o When ODBC settle,
Debit: Memorandum Outstanding Export CAD

Credit: Memorandum Correspondent Bank Account,

o When Wakalah Export is handled on Advance payment, the exporter

collects the documents value in advance from importer abroad
o When Wakalah Export is handled on Consignment Basis, the exports
are traded on continues bases
5.2 Guarantee Services

o At time of foreign guarantee issuance:
Debit: Contingent Guarantee issuance-Foreign Contra
Credit: Contingent Guarantee issuance-Foreign
Credit: Stump duty charge
Credit: Service Charge Letter of Guarantee Issues-Foreign
o When foreign guarantee expired:

Debit: Contingent Guarantee issuance-Foreign
Credit: Contingent Guarantee issuance-Foreign Contra
o At time of local guarantee issue against cash collaterals

Credit: Account Payable-Blocked Amount
Credit: Letter of Guarantee Issues-Local
o Upon expire of local guarantee:

Debit: Account Payable-Blocked Amount

o At time of local guarantee issuance against collaterals other than cash

Debit: Guarantee issuance –Local Contra
Credit: Guarantee issuance –Local

Credit: Service Charge on Letter of Guarantee Issues-Local
o Upon expire of local guarantee:
Debit: Guarantee issuance –Local
Credit: Guarantee issuance –Local Contra
5.3 Incoming Foreign Remittance

o Swift
At Trade Service Process:
Debit: Correspondent ledger
o Western Union and Money Gram)
At Branch (Origination):
Debit: A/R Western union
Debit: A/R Money gram
Credit: Cash or Customer Account
At Trade Service Process, when Western Union, Money gram,
Dahbshill, Xpress Money, and other remittance co. credit our
account at correspondent bank):
Debit: Correspondent Account
Credit: A/P Western union
Credit: A/P Money gram
At Trade Service Process, Branches receivables will be
settled through ABB (Any Branch Banking)
Debit: A/P Western union
Debit: A/P Money gram
Credit: A/R Western union
Credit: A/R Money gram

o Cheques
When outward Bills Purchased (OBP):
Debit: U.E Foreign (Outward Bills Purchased (OBP))

Credit: Service charges- Outward Bills Purchased (OBP)
Credit: Photo copy
Credit: Postage
o When outward Bills collected:
Debit: Memorandum Outward Bills for Collection-Foreign

Credit: Memorandum Outward Bills for Collection-Foreign Contra
Debit: Cash
Credit: Postage Charge
Credit: Photocopy Charge
o After completion of the clearance process of OBC:
Debit: Correspondent account

Credit: Service charges-OBC-Foreign
o Outgoing Remittances(Travelers’ Cheques, Demand Draft, other
documents)
Debit: UE Foreign
Debit: Cash or Customer Account
Credit: Exchange payable to NBE
Credit: Service charges Traveler's Cheques, Demand draft foreign
Credit: Swift charges
Credit: Postage

Credit: Photo copy

Credit: Correspondent Bank Charges
Credit: Correspondent account
o Foreign Currency Buying and Selling Transactions

IFBW shall disclose any foreign exchange differences, whether gain or
loss, resulting from transactions in foreign currencies.
o Purchase of FCY
Debit: Cash Foreign Currency (FCY at prevailing buying rate)

Credit: Cash Local Currency
o Sales of FCY
Debit: Cash Local Currency

Credit: Cash Foreign Currency (FCY at prevailing selling rate)
o Gain or loss of foreign currency transaction against
When there is gain:
Debit: Cash Local Currency

Credit: Gain from foreign currency transactions
When there is loss:
Debit: Loss on foreign currency transactions

Credit: Cash local currency
o Advance Payment for Import (Outgoing Transfer)
Debit: Cash/Customer a/c
Credit: Correspondent a/c
Credit: Exchange Commission to NBE
Credit: Service Charge TT Foreign
Credit: Swift Charge
o Advance Payment for Invisible Payment (like, contracts, purchase of
software, transistors, salaries etc)

Debit: Cash/Customer a/c

 Credit: Correspondent a/c
Credit: Exchange Commission to NBE
Credit: Service Charge TT Foreign
Credit: Swift Charge
6. Accounting for Local Money Transfer Services Activities
o Telephone Transfers
At Remitting Branch
Credit: Head Office Account
Credit: Commission Mt's and TT's
Credit: Commission Telephone
At Head Office (HO) when Credit summary received from remitting

branch
Debit: Remitting Branch Account
Credit: Receiving Branch Account
At Receiving Branch
When message received from remitting Branch
Debit: UE TT Received
Credit: A/P TT/Customer Acct
When Payment made to beneficiary
Debit: A/P TT
Credit: Cash
When credit summary received from HO
Debit: Head office account
Credit: UE TT Received
o CPO Issuances
At Issuing Branch:

When CPO issued

Credit: Commission on CPO/cashier payment order/
Credit: A/P CPO issued
When credit summary received from HO Accounts
Debit: A/P CPO Issued
Credit: HO Account
At HO Accounts
Debit: Issuing Branch
Credit: Receiving Branch
At Receiving Branch
When CPO presented
Debit: UE CPO paid
When sending credit summary to HO Accounts
Debit: HO Account
Credit: UE CPO paid

CBO IFBW Acct Procudure

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ACCOUNTING PROCEDURE FOR INTEREST FREE BANKING WINDOW

Cooperative Bank of Oromia SC

IFBW Accounting Procedure

COOPERATIVE BANK OF OROMIA S.C 1

COOPERATIVE BANK OF OROMIA S.C 2

3.1.3 Demand Deposit Account.....................................................................................15

COOPERATIVE BANK OF OROMIA S.C 3

1. General Descriptions of the Procedures

The Management of the Bank is primarily responsible for planning,

 Completeness and effectiveness of the accounting system of the

 Providing a record for training new-assigned employees and

 Serving as a communication tool in explaining the accounting

COOPERATIVE BANK OF OROMIA S.C 4

1.2 BASIS AND PURPOSE OF THE MANUAL

The manual is prepared with a view to facilitate the recording of financial

 To develop and maintain consistency/uniformity in the application

 To aid in the preparation and processing of accounting

 To aid in the understanding and utilization of accounting system;

 To provide control and accountability over financial records; and

 To assist the Bank organs in gathering information needed in

1.3 SCOPE OF THE MANUAL

1.4 STRUCTURE OF THE MANUAL

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General Classification Categorization of the Description of the Subsidiary Ledger Accounts

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1.5 DISTRIBUTION OF THE MANUAL

The manual shall be uploaded to individual computer with readable version

1.6 REVISION OF THE MANUAL

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2. ACCOUNTING RECORDS AND FINANCIAL STATEMENTS OF IFBW

2.2 SOURCE DOCUMENTS

In exceptional case transaction shall be supported by copied documents, which

Source documents shall always be original documents (and no duplicates) and

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2.3 JOURNALS AND REGISTERS

2.4.1 GENERAL LEDGER

2.4.2 SUBSIDIARY LEDGER

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2.5 NORMAL BALANCE OF ACCOUNTS

2.6 ACCOUNTING ERRORS AND CORRECTING ENTRIES

2.7 ADJUSTING ENTRIES

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2.8 CLOSING AT THE END OF THE ACCOUNTING PERIOD

There by resetting the balances of these nominal/temporary accounts to

2.9 FINANCIAL STATEMENTS

A complete set of IFBW's financial statements include the following

 Balance Sheet – The balance sheet, which may also be referred to as

Interim balance sheets may be prepared at the end of each month or

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Interim Profit and Loss Statements may be prepared at the end of

Cash Flow Statement may be prepared at the end of each month.

 Statement of Changes in Equity – Shows the changes in the equity

Statement of Changes in Equity may be prepared at the end of each

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3.1 Accounting Description for Deposit Transactions

3.1.1 Wadiah Saving Account

o Wadiah is amanah (safe custody based on trusts) where IFBW shall be

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3.1.2 Hadji-Umraha Saving Account

o Hadji-Umraha Saving account is safe custody based on trusts of the

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3.1.3 Demand Deposit Account