ARBAMINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
ACCOUNTING FOR PUBLIC SECTOR AND CIVIL SOCIETY
(AcFn33071)

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Contents page
CHAPTER ONE: OVERVIEW OF FINANCIAL REPORTING GOVERNMENTAL AND
NFP ENTITIES ............................................................................................................................... 6

1.1 Distinguishing characteristics of Governmental and Not- for Profit entities ....................... 6

1.2 Sources of financial reporting for Governmental and NFP entities .................................... 13

1.3 Objectives of financial reporting in NFP entities ............................................................... 15

1.4 IPSAS versus IFRS ............................................................................................................. 19

1.5 The Conceptual Framework for Public Sector Accounting [The IPSASB] ....................... 20

1.5.1 Objectives of financial reporting ................................................................................. 20

1.5.2 Fundamental concepts Recognition, measurement, and disclosure concepts .............. 21

1.6 Financial reporting of governmental entities ...................................................................... 21

CHAPTER TWO : PRINCIPLES OF ACCOUNTING AND FINANCIAL REPORTING OF

GOVERNMENTAL ENTITIES ................................................................................................... 28

2.1. Activities of Government ................................................................................................... 28

2.1.1 Governmental Activities .............................................................................................. 28

2.1.2 Business-Type Activities ............................................................................................. 29

2.1.3 Fiduciary Activities ...................................................................................................... 29

2.2. Summary Statement of Principles ...................................................................................... 29

CHAPTER THREE: INTERNATIONAL Public Sector Accounting Standards [IPSAS] .......... 40

3.1 Scope and Authority of International Public Sector Accounting Standards ....................... 40

3.1.1 Scope of the Standards ................................................................................................. 40

3.2 Disclosure of Financial Information about the General Government Sector [IPSAS 22] .. 44

3.3 Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS 23] ................ 46

3.4 Presentation of Budget Information in Financial Statements [IPSAS 24] .......................... 49

CHAPTER FOUR : BUDGETARY ACCOUNTING & REPORTING ...................................... 57

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 3.1. Overview of budget............................................................................................................ 57

3.1.1. Definition and usefulness of budgeting ...................................................................... 57

3.1.2. Classifications of budgets ........................................................................................... 59

3.1.3. Approaches to budgeting ............................................................................................ 60

4.2 Budgeting system in Ethiopia ............................................................................................. 61

4.2.1 The budget process in Ethiopia .................................................................................... 63

CHAPTER FIVE:ACCOUNTING FOR GENERAL & SPECIAL REVENUE FUND ............. 64

5.1. Nature of General and Special Revenue Funds ................................................................. 64

5.2. Budget and Budgetary Accounts ....................................................................................... 65

5.3 Accounting for subsequent collection of Revenues ............................................................ 69

5.4 Expenditure accounting of financial statements ................................................................. 70

5.5 Accounting for Inter fund Transactions and Transfers ..................................................... 73

CHAPTER SIX:ACCOUNTING CAPITAL PROJECT FUNDS & DEBT SERVICE FUND .. 77

6.1 Accounting for Capital Project Fund .................................................................................. 78

6.1.1 Definitions and purpose of Capital Project Funds ....................................................... 79

6.1.2 Classification of Capital Project Fund ......................................................................... 81

6.1.3 Financial Reporting for Capital Project Fund. ............................................................. 84

6.2 Debt Service Fund............................................................................................................... 87

6.2.1 Characteristics of Debt Service Fund .......................................................................... 87

6.3.2 Types of Long-Term Debts .......................................................................................... 88

6.3.3 Accounting for Debt Service Fund .............................................................................. 89

CHAPTER SEVEN: ACCOUNTING FOR PROPRIETARY FUNDS ....................................... 93

Introduction ............................................................................................................................... 93

7.1. Accounting principles of Proprietary Funds ...................................................................... 94

7.1.1 Internal Service Fund ................................................................................................... 95

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 7.1.2 Enterprise Funds .......................................................................................................... 99

7.3 Financial Statement for Proprietary fund .......................................................................... 106

Chapter Eight: Accounting for fiduciary funds .......................................................................... 110

Introduction ............................................................................................................................. 110

8.1 Agency funds .................................................................................................................... 111

8.2 Trust fund .......................................................................................................................... 112

CHAPTER: NINE: ACCOUNTING FOR NOT- FOR- PROFIT NON-GOVERNMENTAL

ORGANIZATIONS (NGOS) ..................................................................................................... 112

9.3 Accounting for Unrestricted and Restricted Funds ........................................................... 117

9.3.2 Accounting for Restricted Funds ............................................................................... 121

9.4 Financial Statements of Not-for-profit NGOs. ................................................................. 122

Chapter 10: Accounting and Reporting for the Federal Government of Ethiopia ...................... 124

10.1 Historical Overview of Ethiopian Government Accounting System .............................. 124

10.2 FGE Chart of Accounts ................................................................................................... 127

10.3 FGE Budget process ....................................................................................................... 128

10.4 Fundamentals of FGE Program Budget ......................................................................... 131

10.5 Overview of IFMIS and IBEX ........................................................................................ 131

10.6 Budget Ledger Card ........................................................................................................ 133

10.7 Basis of Accounting ........................................................................................................ 133

10.8 Legal Framework of FGE Financial Administration ...................................................... 135

10.9 - MONTHLY REPORTS................................................................................................ 141

10.9.1 SUBMITTING MONTHLY REPORTS TO MOFED ............................................ 142

10.10 Annual Financial Statements ........................................................................................ 143

10.11 Federal Audit in Ethiopia .............................................................................................. 144

Establishment & Evolution .............................................................................................. 145

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CHAPTER ONE: OVERVIEW OF FINANCIAL REPORTING
GOVERNMENTAL AND NFP ENTITIES

Topics to Be Discussed:
✓ Government and Non-Profit Entities
✓ Similarities and Differences Between Governmental and Other NFP Entities
✓ Criteria for Determining NFP as Governmental Entity
✓ Major types of governmental and not-for-profit entities
✓ Similarities and Differences G & NFP Entities and Business Entities
✓ Objectives of financial reporting for G and NFP Entities
✓ Sources of Accounting and Financial Reporting Standards for G & NFP entities
✓ Financial Reporting for State and Local Government
✓ Comparisons of GASB Standard No. 34 Reporting Model with the Old Reporting Model
Learning Objectives:
After studying this chapter, you should be able to:
✓ Identify and explain the characteristics that distinguish governmental and not-for-profit
entities from for-profit entities.
✓ Identify the authoritative bodies responsible for setting GAAP and financial reporting
standardsfor all governmental and not-for-profit entities.
✓ Contrast and compare the objectives of financial reporting for SLG, the federal
government, and not-for-profit organizations.
✓ Explain how management’s discussion and analysis (MD&A), basic financial statements,
and required supplementary information (RSI) of SLG relate to their comprehensive annual
financial reports.
✓ Explain the different objectives, measurement focus, and basis of accounting of the
government- wide financial statements and fund financial statements of SLG.

1.1 Distinguishing characteristics of Governmental and Not- for Profit entities

Accounting and financial reporting for governments and nonprofit organizations are based on
distinctive concepts, standards, and procedures designed to accommodate their environments and
the needs of their financial report users.
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Governments and other nonprofit organizations are unique in that:
✓ They do not attempt to earn a profit − and most are exempt from income taxes − so
typical business accounting, income tax accounting, usually is not appropriate.
✓ They are owned collectively by their constituents; and because ownership is not evidenced
by equity shares that can be sold or traded, residents who are dissatisfied with their
government must await a change in its elected governing body or move elsewhere.
✓ Those contributing financial resources to the organizations do not necessarily receive a direct
or proportionate share of their services. For example, homeowners pay property taxes to
finance public schools even if they do not have children in school or the welfare recipient
(probably) did not pay the taxes from which welfare benefits are paid.
✓ Their major policy decisions, and perhaps some operating decisions, typically are made by
majority vote of an elected or appointed governing body − for example, a state legislature, a
city council, or a hospital board of directors − whose members serve part time, receive
modest or no compensation, and have diverse backgrounds, philosophies, capabilities, and
interests.
✓ Decisions usually must be “in the sunshine” − is meetings open to the public, including the
news media − and most have “open records” laws that make their accounting and other
records open to the public.
G&NP organization exists because a community or society decides to provide certain goods or
services to its group as a whole. Often these goods or services are provided regardless of whether
costs incurred will be recovered through charges for the goods or services or whether those
paying for the goods or services are those benefiting from them. Indeed, many G&NP services
could not be provided profitably through private enterprise. In addition, the community or
society may consider these services so vital to the public well-being that they should be
supervised by its elected or appointed representatives.
The major types of government and nonprofit organizations may be classified as:
1. Governmental: federal, state, county, municipal, township, village, and other local
governmental authorities and special districts.
2. Educational: kindergarten, elementary and secondary schools, vocational and technical
schools, and colleges and universities.

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3. Health and welfare: hospitals, nursing homes, child protection agencies, the American red
Cross, and United Service Organizations (USO)
4. Religious: Young Men’s Christian Association (YMCA), Young Women’s Christian
Association (YWCA), Salvation Army, and other church-related organizations.
5. Charitable: United Way, Community Chest, and similar fund-raising agencies; related
charitable agencies; and other charitable organizations.
6. Foundations: private trusts and corporations organized for educational, religious, or
charitable purposes.
This general classification scheme has much overlap among the classifications. Many charitable
organizations are operated by churches, for example, and governments are deeply involved in
education, health, and welfare activities.
The G&NP Environment
G&NP organizations are similar in many ways to profit-seeking enterprises. For example:
1. They are integral parts of the same economic system and use financial, capital, and
human resources to accomplish their purposes.
2. Both must acquire and convert scarce resources into their respective goods and services.
3. Both must have viable information systems, including excellent accounting systems to
assure that managers, governing bodies, and others receive relevant and timely
information for planning, directing, controlling, and evaluating the sources, uses, and
balances of their scarce resources.
4. Because their resources are scarce, cost analysis and other control and evaluation
techniques are essential to ensure that resources are utilized economically, effectively,
and efficiently.
5. In some cases, both produce similar products. For example, both governments and
private enterprises may own and operate transportations systems, sanitation services, and
electric or gas utilities.
Governmental and not-for-profit organizations differ in important ways from business
organizations. Not surprisingly then, accounting and financial reporting for governmental and
not-for-profit organizations are markedly different from accounting and financial reporting for
businesses. An understanding of how these organizations differ from business organizations is

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essential to understanding the unique accounting and financial reporting principles that have
evolved for governmental and not-for-profit organizations.
Broad generalizations about such a diversified group as G&NP organizations are difficult.
Nonetheless, the major differences arise from differing:
1) Organizational Objectives
Expectation of income or gain is the principal factor that motivates investors to provide
resources to profit-seeking enterprises. But the objective of most governmental and nonprofit
organizations is to provide as much service each year as their financial and other resources
permit. G&NP organizations typically operate on a year-to-year basis—that is, each year they
raise as many financial resources as necessary and expend them in serving their constituencies.
They may seek to increase the number of resources made available to them each year—and most
do—but the purpose is to enable the organization to provide more or better services, not to
increase its wealth.
In sum, private businesses seek to increase their wealth for the benefit of their owners;
G&NP organizations seek to expend their available financial resources for the benefit of
their constituency. Financial management in the G&NP environment thus typically focuses on
acquiring and using financial resources—up on sources and uses of expendable financial
resources (working capital), budget status, and cash flow—rather than on net income or earnings
per share. Even G&NP entities whose external financial reports do not require primary emphasis
on acquisition and use of financial resources emphasize this information for internal reporting
and management decision-making purposes.
2) Sources of Financial Resources
The sources of financial resources differ between business and G&NP organizations, as well as
among G&NP organizations. In the absence of a net income objective, no distinction generally is
made between invested capital and revenue of G&NP organizations. A dollar is a financial
resource whether acquired through donations, user charges, sales of assets, loans, or some other
manner.
The typical non debt sources of financial resources for business enterprises are investments by
owners and sales of goods or services to customers. These sources of financing usually are not
the primary sources of G&NP organization financial resources.

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Governments have the unique power to force involuntary financial resource contributions
through taxation−of property, sales, and income−and all levels rely heavily on this power. Grants
and shared revenues from other governments also are important state and local government
revenue sources, as are charges levied for goods or services provided, such as utilities.
Religious groups and charitable organizations usually rely heavily on donations, although they
may have other revenue sources. Some colleges and universities rely heavily on donations and
income from trust funds; others depend primarily on state appropriations and/or tuition charges
for support. Hospitals generally charge their clientele, although few admit their patients solely on
the basis of ability to pay. Indeed, many G&NP hospitals serve numerous charity patients and/or
have large amounts of uncollectible accounts; and some hospitals rely heavily on gifts and
bequests.
There are other, more subtle, differences in sources of G&NP organization financial resources as
compared with profit-seeking businesses. For example,
• Many services or goods provided by these organizations are monopolistic in nature, and there
is no open market in which their value may be objectively appraised or evaluated.
• User charges, where levied, usually are based on the cost of the goods or services provided
rather than on supply-and demand-related pricing policies common to private enterprise.
• Charges levied for goods or services often cover only part of the cots incurred to provide
them; for example, tuition generally covers only a fraction of the cost of operating state
colleges or universities, and token charges (or no charges) may be made to a hospital’s
patients.

3) Regulation and Control

The operation of most business enterprise is usually regulated by the market; i.e., the interaction
of demand and supply. In the business environment, there exist a direct relationship between the
financial resources each consumer provides and the goods or services that consumer receives
from enterprise essentially dictates the type and quality of goods or services each profit-seeking
enterprise will provide. Firms with responsive management will be profitable and will continue
in the market. Firms with unresponsive management will be unprofitable and ultimately will be
forced out of business. Therefore, the profit motive and profit measurement constitute an
automatic allocation and regulating device in the free enterprise segment of our economy.

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This profit test/regulator device is not present in the usual G&NP situation, and most G&NP
organizations must strive to attain their objectives without its benefits. In addition, as noted
earlier, many G&NP organizations provide goods or services having no open market value
measurement by which to test consumer satisfaction. This problem exists because the goods or
services are unique or are provided to some or all consumers without charge, or at a token
charge. Thus, these consumers have no “dollar vote” to cast.
Evaluating the performance and operating results of most G&NP organizations is
extremely difficult for the several reasons.
1. There is no open market supply and demand test of the value of the goods or services
they provide.
2. The relationship, if any, between the resource contributors and the recipients of the goods
and services is remote and indirect.
3. Such organizations are not profit oriented in the usual sense and are not expected to
operate profitably; thus, the profit test is neither a valid performance indicator nor an
automatic regulating device.
4. Governments can force resource contributions through taxation.
Accordingly, /due to the above reasons, other operating results measures and controls must be
employed to ensure that G&NP organization resources are used appropriately and to prevent
uneconomical or ineffective G&NP organizations from continuing to operate in that manner
indefinitely. Governmental and nonprofit organizations, particularly governments, are therefore
subject to more stringent legal, regulatory, and other controls than are private businesses.
All facets of a G&NP organization`s operations may be affected by legal or quasi-legal
requirements (1) imposed externally, such as by federal or state statue, grant regulations, or
judicial decrees, or (2) imposed internally by charter, bylaw, ordinance, trust agreement, donor
stipulation, or contract. Furthermore, the need to ensure compliance with such extensive legal
and contractual requirements often results in more stringent operational and administrative
controls that in private enterprise.

4) Ownership Interest
G and NP organizations are usually owned collectively by their constituents. Ownership is not
evidenced by equity shares that can be sold or traded. Because of this feature, there is no equity

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interest to be sold or traded. This implies that ownership interest is not clearly defined. In
general, absence of defined ownership interests that can be sold, transferred, or redeemed,
or that convey entitlement to a share of a residual distribution of resources in the event of
liquidation of the organization characterizes most G&NFP organization.
But for profit seeking enterprises, ownership interest is clearly defined which can be sold or
traded or transferred to other parties. A business enterprise might either be owned by a sole
proprietor or partners or stockholders who they do have the right to sell or transfer their
ownership interest to other parties.

5) Cost-Benefit Relationship
Those contributing resources (donors or taxpayers) do not necessarily receive an equivalent or
proportionate share of the government`s or not-for-profit organization`s goods or services.
Someone may contribute more but may receive less or nothing. On the contrary, others may
contribute less or nothing but may earn more. For example, welfare recipient (probably) did not
pay the taxes from which welfare benefit are paid. However, there exist a direct relationship
between costs and benefits in profit-seeking organizations. This implies that those who are
capable of afford (incur) more costs are entitled to get a proportionate more benefits. Moreover,
resource contributors (creditors and owners) can receive equity interest in the net assets of the
organization.

6) Scope of Operations
The scope of operation of G&NFP organizations, especially for governmental organizations, is
mostly diversifies. i.e., they are engaged in a wide area of activity. For example, consider the city
municipality of Hawassa. Its common operations cover health, security, administration,
investments, construction, and others.
Relatively speaking, the operation or area of activity of profit-seeking organizations is more
specific. Based on their activity, we may categorize a given business entity in a service, a
merchandising or a manufacturing classification. Due to the above characteristics and
characteristics, which would be discussed in the subsequent sections, there is a need of complex
accounting treatment for G&NFP organizations as compared to profit-seeking organizations.

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1.2 Sources of financial reporting for Governmental and NFP entities
Figure 1.1 shows the primary sources of accounting and financial reporting standards for
business and not-for-profit organizations, state and local governments, and the federal
government. Specifically, the FASB sets standards for for-profit business organizations and
nongovernmental not-for-profit organizations; the GASB sets standards for state and local
governments, including governmental not-for-profit organizations; and the Federal
Accounting Standards Advisory Board (FASAB) sets standards for the federal government
and its agencies and departments.
Authority to establish accounting and reporting standards for not-for-profit organizations split
between the FASB and the GASB because a sizeable number of not-for-profit organizations are
governmentally owned, particularly public colleges and universities and government hospitals.
The FASB is responsible for setting accounting and reporting standards for the great majority of
not-for-profit organizations, those that are independent of governments. Governmental not-for-
profit organizations follow standards established by the GASB.
The GASB and the FASB are parallel bodies under the oversight of the Financial Accounting
Foundation. The foundation appoints the members of the two boards and supports the boards`
operations by obtaining contributions from business corporations; professional organizations of
accountants, financial analysts, and other groups concerned with financial reporting; CPA firms;
debt-rating agencies; and state and local governments (in the case of the GASB). The federal
Sarbanes-Oxley Act greatly enhanced financial support for the FASB by mandating an assessed
fee on corporate security offerings. Because of the breadth of support and the lack of ties to any
single organization or governmental unit, the GASB and the FASB are referred to as
“independent standards-setting boards in the private sector.”

Figure 1.1: Primary Sources of Accounting and Financial Reporting Standards for
Businesses, Governments, and Not-for-Profit Organizations. (Source: Statement on
Auditing Standards (SAS) 69, amended by SAS 91, April 2000, AICPA Professional Standards,
v.1, Au Sec. 411.)

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 Comptroller General
Director of the Office of
Management and Budget
Financial Accounting
Foundation Secretary of the Treasury

Financial Governmental
Accounting Accounting Federal Accounting
Standards Board Standards Board Standards Advisory Board
(FASB) (GASB)
(FASAB)

Nongovern-
Business State and local Governmental
mental
governmental not-for-profit
(for-profit) not-for-profit Federal government and
organizations organizations
organizations organizations its agencies and
departments

Before the creation of the GASB and the FASB, financial reporting standards were set by groups
sponsored by professional organizations: The forerunners of the GASB (formed in 1984) were
the National Council on Governmental Accounting (1973—84), the National Committee on
Governmental Accounting (1948—73), and the National Committee on Municipal Accounting
(1934—41). The forerunners of the FASB (formed in 1973) were the Accounting Principles
Board (1959—73) and the Committee on Accounting Procedure (1938—59) of the American
Institute of Certified Public Accountants.
Federal statutes assign responsibility for establishing and maintaining a sound financial structure
for the federal government to three officials: the Comptroller General, the Director of the
Office of Management and Budget, and the Secretary of the Treasury. In 1990, these three
officials created the Federal Accounting Standards Advisory Board (FASAB) to recommend
accounting principles and standards for the federal government and its agencies. It is understood
that, to the maximum extent possible, federal accounting and financial reporting standards should
be consistent with those established by the GASB and, where applicable, by the FASB.
In Rule 203 of its Code of Professional Conduct, the American Institute of Certified Public
Accountants (AICPA) has formally designated the GASB, the FASAB, and the FASB as the
authoritative bodies to establish generally accepted accounting principles (GAAP) for state
and local governments, the federal government, and business organizations and
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nongovernmental not-for-profit organizations, respectively. “Authority to establish
accounting principles” is interpreted in practice to mean “authority to establish accounting and
financial reporting standards.”
Users of Financial Reports
Users of G&NP entity accounting information as both internal and external. Major external users
are:
✓ Resource provides (tax payers, donors and potential donors, investors and potential
investors, bond-rating agencies and grant providing organizations).
✓ Legislative and oversight bodies (higher-level governments and regulating agencies)
✓ Service recipients (citizen advocate groups)

1.3 Objectives of financial reporting in NFP entities

In its Concepts Statement No. 1, “Objectives of Financial Reporting,” the Governmental

Accounting Standards Board stated that “Accountability is the cornerstone of all financial
reporting in government. Accountability requires governments to answer to the citizenry − to
justify the raising of public resources and the purposes for which they are used.” The board
elaborated. Governmental accountability is based on the belief that the citizenry has a ’“right to
know,” a right to receive openly declared facts that may lead to public debate by the
citizens and their elected representatives. Financial reporting plays a major role in fulfilling
government’s duty to be publicly accountable in a democratic society.
Table 1.1 shows several ways that state and local governmental financial reporting is used in
making economic, social, and political decisions and assessing accountability. Closely related to
the concept of accountability as the cornerstone of governmental financial reporting is the
concept the GASB refers to as inter period equity. The concept and its importance are
explained as follows:
The Board believes that inter period equity is a significant part of accountability and is
fundamental to public administration. It therefore needs to be considered when establishing
financial reporting objectives. In short, financial reporting should help users assess whether
current-year revenues are sufficient to pay for services provided that year and whether future
taxpayers will be required to assume burdens for services previously provided.

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Accountability is also the foundation for the financial reporting objectives the Federal
Accounting Standards Advisory Board (FASAB) has developed for the federal government. The
FASAB’s Statement of Accounting and Reporting Concepts Statement No. 1 identifies four
objectives of federal financial reporting (see Table 1.1) focused on evaluating budgetary
integrity, operating performance, stewardship, and adequacy of systems and controls.
Table 1.1: Comparison of Financial Reporting Objectives- State and Local Governments,
Federal Government, and Not-for-Profit Organizations
State and Local Federal Government Not-for-Profit Organizations
Governments
Financial reporting is used in Financial reporting should help Financial reporting should
making economic, social, and to achieve accountability and is provide information useful in:
political decisions and in intended to assist report users • Making resource
assessing accountability in evaluating: allocation decisions
primarily to: • Budgetary integrity • Assessing services and
✓ Comparing actual • Operating performance ability to provide services
financial results with • Stewardship • Assessing management
legally adopted budget • Adequacy of systems stewardship and
• Assessing financial and controls performance
condition and results of • Assessing economic
operations resources, obligations, net
• Assisting in resources, and changes in
determining them
compliance with
finance-related laws,
rules, and regulations
• Assisting in evaluating
efficiency and
effectiveness

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Unlike the FASB and the GASB, which base their standards on external financial reporting,
the FASAB and its sponsors in the federal government are concerned with both internal and
external financial reporting. Accordingly, the FASAB has identified four major groups of users
of federal financial reports: citizens, Congress, executives, and program managers. Given the
board role the FASAB has been assigned, its standards focus on cost accounting and service
efforts and accomplishment measures, as well as on financial accounting and reporting.
Financial reports of not-for-profit organizations⎯voluntary health and welfare organizations,
private colleges and universities, private health care institutions, religious organizations, and
others⎯have similar uses. However, as Table 1.1 shows, the reporting objectives for not-for-
profit organizations emphasize decision usefulness over financial accountability needs,
presumably reflecting the fact that the financial operations of not-for-profit organizations are
generally not subject to as detailed legal restrictions as those of governments.
Note that the objectives of financial reporting for governments and not-for-profit entities stress
the need for the public to understand and evaluate the financial activities and management of
these organizations. In order to make informed decisions as citizens, taxpayers, creditors, and
donors, readers should make the effort to learn the accounting and financial reporting standards
developed by authoritative bodies.
Financial Reporting of State and Local Governments
Like the FASB, the GASB continues to develop concepts statements that communicate the
framework within which the Board strives to establish consistent financial reporting standards
for entities within its jurisdiction. The GASB, as well as the FASB, is concerned with
establishing standards for financial reporting to external users⎯ those who lack the authority to
prescribe the information they want and who must rely on the information management
communicates to them. The board does not intend to set standards for reporting to managers and
administrators or others deemed to have the ability to enforce their demands for information.
Figure 1.2 displays the minimum requirements for general purpose external financial reporting
under the governmental financial reporting model specified by GASB Statement No. 34
(GASBS 34). Central to the model is the management’s discussion and analysis (MD&A).
The MD&A is required supplementary information (RSI) designed to communicate in narrative,

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easily readable form the purpose of the basic financial statements and the government’s current
financial position and results of financial activities compared with those of the prior year. The
MD&A should provide an overview of the government’s financial activities and financial
highlights for the year. The MD&A should provide a narrative explanation of the contents of the
CAFR, including the nature of the government-wide and fund financial statements, and the
distinctions between those statements. The remainder of the MD&A should describe the
governments financial condition, financial trends of the government as a whole and of its major
funds, budgetary highlights, and activities affecting capital assets and related debt. Finally, the
MD&A should discuss economic factors and budget and tax rates for the next year.
GASBS 34 prescribes two categories of basic financial statements, government-wide and
fund. Government-wide financial statements are intended to provide an aggregate overview of
a government’s net assets and changes in net assets. The government-wide financial statements
report on the government as a whole and assist in assessing operational accountability⎯
whether the government has used its resources efficiently and effectively in meeting operating
objectives. The GASB concluded that reporting on operational accountability is best
achieved by using essentially the same basis of accounting and measurement focus used by
business organizations: the accrual basis of accounting and flow of economic resources
measurement focus.
(Note: Measurement focus⎯refers the nature of the resources, claims against resources, and
flow of resources that are measured and reported by a fund or other entity. For example,
governmental funds currently measure and report available financial resources, whereas
proprietary and fiduciary funds measure and report economic resources. Basis of accounting
⎯refers the standards used to determine the point in time when assets, liabilities, revenues, and
expenses (expenditures) should be measured and recorded as such in the accounts of an entity).
Fund financial statements, the other category of basic financial statements, assist in assessing
fiscal accountability⎯whether the government has raised and spent financial resources in
accordance with budget plans and in compliance with pertinent laws and regulations. Certain
funds, referred to as governmental funds, focus on the short-term flow of current financial
resources rather than on the flow of economic resources. Other funds, referred to as proprietary
and fiduciary funds, account for the business-type and certain fiduciary activities of the

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government. These funds follow accounting and reporting principles similar to those of
business organizations, although a number of GASB standards applicable to these funds differ
substantially from FASB standards applicable to business organizations.
The notes to the financial statements are considered integral to the financial statements. In
addition, governments are required to disclose certain RSI other than MD&A.
Figure 1.2 Minimum Requirement for General Purpose External Financial
Reporting⎯GASB Statement No. 34 Reporting Model

Management’s discussion and analysis (MD&A)

Government-wide Fund financial

financial statements statements

Notes to the financial statements

Required supplementary information (other than MD&A)

1.4 IPSAS versus IFRS

International Public Sector Accounting Standards (IPSAS) are a set of accounting standards
issued by the IPSAS Board for use by public sector entities around the world in the preparation
of financial statements.
These standards are based on International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB). Authoritative standards for preparation of
general purpose financial statements do not have a primary objective to make profits.

IFRS are internationally recognized, widely adopted and are designed for large profit-orientated
companies. The wide adoption brings about consistency in financial statements which in turn
facilitates cross border comparability and understandability. This makes them particularly
suitable for globally listed companies on public stock exchanges.

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On the other hand, IPSAS are designed for public sector entities whose main objectives are to
provide goods and services to benefit society and to redistribute wealth. They are entities
primarily financed by taxation, not profit. It is fair to say that IPSAS are not currently widely
adopted and finding a definitive number of jurisdictions that have adopted IPSAS is not easy
since IPSAS are often only used as a reference point.

1.5 The Conceptual Framework for Public Sector Accounting [The IPSASB]
The Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities
(the Conceptual Framework) provides the International Public Sector Accounting Standards
Board (IPSASB) with the concepts that will underpin the development of International Public
Sector Accounting Standards (IPSASs) and Recommended Practice Guidelines (RPGs) in the
coming years.

It enables the IPSASB to further improve the consistency of its standard-setting by strengthening
the linkage between IPSASs. Additionally, the transparency of the concepts underpinning the
development of IPSASs and RPGs enhances the IPSASB’s accountability.

The Conceptual Framework also responds to key public sector characteristics in its approach to
elements (the building blocks of financial statements), the measurement of assets and liabilities,
and the presentation of financial reports, while focusing on service recipients’ and resource
providers’ needs for high-quality financial reporting information for both accountability and
decision-making purposes.(Read frame of IPSAS at https://www.ifac.org)

1.5.1 Objectives of financial reporting

The objectives of financial reporting by public sector entities are to provide information about
the entity that is useful to users of GPFRs for accountability purposes and for decision-making
purposes (hereafter referred to as “useful for accountability and decision-making purposes”).
Financial reporting is not an end in itself. Its purpose is to provide information useful to users of
GPFRs. The objectives of financial reporting are therefore determined by reference to the users
of GPFRs, and their information needs.
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1.5.2 Fundamental concepts Recognition, measurement, and disclosure concepts
The selection of a measurement basis for assets and liabilities contributes to meeting the
objectives of financial reporting in the public sector by providing information that enables users
to assess:
✓ The cost of services provided in the period in historical or current terms;
✓ Operational capacity—the capacity of the entity to support the provision of services in
future periods through physical and other resources; and
✓ Financial capacity—the capacity of the entity to fund its activities.
The selection of a measurement basis also includes an evaluation of the extent to which the
information provided achieves the qualitative characteristics while taking into account the
constraints on information in financial reports.
It is not possible to identify a single measurement basis that best meets the measurement
objective at a Conceptual Framework level. Therefore, the Conceptual Framework does not
propose a single measurement basis (or combination of bases) for all transactions, events and
conditions. It provides guidance on the selection of a measurement basis for assets and liabilities
in order to meet the measurement objective.
The following measurement bases for assets are identified and discussed in terms of the
information they provide about the cost of services delivered by an entity, the operating capacity
of an entity and the financial capacity of an entity, and the extent to which they provide
information that meets the qualitative characteristics:
• Historical cost; • Net selling price; and
• Market value; • Value in use
• Replacement cost;

1.6 Financial reporting of governmental entities

Comprehensive Annual Financial Report (CAFR)

Serious users of governmental financial information need much more detail than is found in the
MD&A, basic financial statements, and RSI (other than MD&A). For state and local
governments, much of that detail is found in the governmental reporting entity’s comprehensive
annual financial report (CAFR). Although governments are not required to prepare a CAFR,

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most do so as a matter of public record and to provide additional financial details beyond the
minimum requirements. As such the GASB provides standards for the content of a CAFR in its
annually updated publication Codification of Governmental Accounting and Financial Reporting
Standards. A CAFR prepared in conformity with these standards should contain the following
sections.
Introductory section
The introductory section typically includes items such as a title page and contents page, a letter
of transmittal, a description of the government, and other items deemed appropriate by
management (e.g., list of principal officials, organization chart, location, etc). The letter of
transmittal may be literally that – a letter from the chief financial officer addressed to the chief
executive and governing body of the governmental unit – or it may be a narrative over the
signature of the chief executive. In either event, the letter or narrative material should cite legal
and policy requirements for the report. The introductory section may also include a summary
discussion of factors relating to the government’s service programs and financial matters.
Matters discussed in the introductory section should not duplicate those discussed in the MD&A.
because the MD&A is part of the information reviewed (but not audited) by the auditor, it
presents information based only on facts known to exist as of the reporting date since the
introductory section is generally not covered by the auditor’s report, it may present information
of a more subjective nature, including prospective information such as forecasts or expenditures.
Financial section
The financial section of comprehensive annual financial report should include (1) an auditor’s
report, (2) management’s discussion and analysis (MD&A), (3) basic financial statements,
(4) required supplementary information (other than MD&A), and (5) other supplementary
information, such as combining statements and individual fund statements and schedules.
Items (2), (3), and (4) represent minimum requirements for general purpose external financial
reporting. So, it should be apparent that a CAFR provides additional supplementary financial
information beyond the minimum amount required by generally accepted accounting principles.

The financial section should contain sufficient information to disclose fully and present fairly the
financial position and results of financial operations during the fiscal year. Laws of higher
jurisdictions, actions of the legislative branch of the governmental unit itself, and agreements

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with creditors and others impose constraints over governments` financial activities and create
unique financial accountability requirements.

Governmental financial reporting has evolved to meet the unique needs of citizens and other
financial statement users. It should not be surprising that these financial statements are quite
different from those prepared by business organizations. The basic financial statements, which
are reported in the financial section of CAFR, consist of:

Government-wide Financial Statements

1. Statement of net assets
2. Statement of activities
Fund Financial Statements
1. Balance sheet—governmental funds
2. Statement of revenues, expenditures, and changes in fund balances—governmental funds
3. Statement of net assets—proprietary funds
4. Statement of revenues, expenses, and changes in fund net assets—proprietary funds
5. Statement of cash flows—proprietary funds
6. Statement of fiduciary net assets
7. Statement of changes in fiduciary net assets
Government-wide Financial Statements
The two government-wide financial statements are intended to report on the government`s
operational accountability. As such, the government-wide financial statements are prepared
using essentially the same basis of accounting and measurement focus that is used in business
accounting−that is, the accrual basis of accounting and measurement of total economic
resources.
Fund Financial Statements
By contrast, governmental fund financial statements report on fiscal accountability.
Therefore, these statements report only information that is useful in assessing whether
financial resources were raised and expended in compliance with budgetary and other legal
provisions. Thus, governmental fund statements focus on the flow of current financial
resources−cash and near cash resources that are available for expenditure. Since long-term
obligations do not have to be paid in the current budgetary period, nor do noncurrent assets

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 such as land, buildings, and equipment provide resources to pay current period obligations,
neither is reported in the governmental funds. Both are reported in the Governmental
Activities column of the government-wide statement of net assets.
Modified accrual is the basis of accounting that has evolved for governmental funds. Under
this basis, revenues are recorded only if they are measurable and available for paying
current period obligations. Expenditures are generally recognized when incurred.
The governmental fund statement of revenues, expenditures, and changes in fund balances
reports expenditures, since outlays to acquire goods or services are more relevant than
expenses in measuring the outflow of current financial resources. Expenses, however, are
more relevant at the government-wide level, as they measure the cost of services provided.
Consequently, expenses, classified by program or function, are reported for both
governmental and business-type activities.
Proprietary fund financial statements present financial information for enterprise funds and
internal service funds. Both types of funds operate essentially as self-supporting entities and,
therefore, follow accounting and reporting practices similar to those of business
organizations. Enterprise funds and internal service funds are distinguished primarily by the
kinds of customers they serve. Enterprise funds provide goods or services to the public,
whereas internal service funds mainly serve departments of the same government. For
most governments, the information reported in the Business-type Activities column of the
government-wide statements is simply the total of all enterprise funds information. Because
internal services funds predominantly serve governmental activities, financial information for
internal service funds is typically reported in the Governmental Activities column at the
government-wide level.
The final two required financial statements are those for the fiduciary funds. By definition,
fiduciary funds account for resources that the government is holding or managing for an
external private party, that is, an individual, organization, or other government. Because
these resources may not be used to support the government’s own programs, GASB
standards require that financial information about fiduciary activities be omitted from the
government-wide financial statements; however, the information must be reported in two
fund financial statements: a statement of fiduciary net assets-fiduciary funds and a

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 statement of changes in fiduciary net assets-fiduciary funds. Both statements are prepared
using accrual accounting with the economic resources measurement focus.
Both governmental funds and proprietary funds financial statements must provide separate
columns for each major fund. A fund is classified as major if it is significantly large with
respect to the whole government. “A fund is “major” if
a) Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or
enterprise fund are at least 10 percent of the corresponding total of assets, liabilities,
revenues, expenditures/expenses for all funds of that category or type (total governmental or
total enterprise funds), and
b) Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or
enterprise fund are at least 5 percent of the corresponding total for all governmental and
enterprise funds combined.
The aggregate of non-major governmental and enterprise funds is reported in a single column of
the corresponding statements.
Reporting by major fund meets the information needs of citizens and other report users having a
specific interest in the financial condition and operations of a particular fund. To meet the needs
of individuals having an interest in particular non-major funds, governments should provide
separate combining financial statements for nonmajor governmental and proprietary funds, as
well as for discretely presented component units. Combining and individual fund statements are
not ordinarily audited unless the engagement letter with the auditor extends the scope of the audit
to include these statements. Other supplementary information that may be presented in the
financial section of the CAFR includes schedules necessary to demonstrate compliance with
finance-related legal and contractual provisions and schedules to present comparative data on
items such as tax collections and long-term debt.
Statistical section
In addition to the introductory and financial sections of the CAFR, A CAFR should contain a
statistical section. The statistical section typically presents tables and charts showing social and
economic data, financial trends, and the fiscal capacity of the government in detail needed by
readers who are more than casually interested in the activities of the governmental unit.

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GASB Statement No. 44 indicates that generally the statistical section should present
information in five categories to assist the user in understanding and assessing a government`s
economic condition. The five categories are:
Financial trends information, which provides the user with information that is helpful in
understanding and assessing how a government`s financial position has changed over time.
Schedules in this category are prepared at both the fund level and government-wide level. The
focus is on showing the trend in fund balances and net asset categories, including changes in net
assets and fund balances.
Revenue capacity information, which assists the user with understanding and assessing the
government’s ability to generate its own revenues (own-source revenues), such as property taxes
and user charges. The schedules presented should focus on the governments most significant
own-source revenues. Suggested schedules provide information on the revenue base (sources of
revenue), revenue rates (including overlapping tax rate information), and property tax levy and
collection information.
Debt capacity information, which is useful in understanding and assessing the governments
existing debt burden and its ability to issue additional debt. Four types of debt schedules are
recommended−ratios of outstanding debt to total personal income of residents, information about
direct and overlapping debt, legal debt limitations and margins, and information about pledged
revenues.
Demographic and economic information, which assists the user in understanding the
socioeconomic environment in which the government operates, and provides information that
can be compared over time and across governments. Governments should present demographic
and economic information that will be most relevant to users, such as information on personal
income, unemployment rates, and employers.
Operating information, which is intended to provide a context in which the governments
operations and resources can be better understood. This information is also intended to assist
users of financial statements in understanding and assessing the government’s financial
condition. At a minimum, three schedules of operating information should be presented-number
of government employees, indicators of demand or level of service (operating indicators), and
capital asset information.

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 CHAPTER TWO : PRINCIPLES OF ACCOUNTING AND
FINANCIAL REPORTING OF GOVERNMENTAL ENTITIES

2.1. Activities of Government

Government may involve in three types of activities:
1. Governmental activities,
2. Business-Type Activities, and
3. Fiduciary Activities

2.1.1 Governmental Activities

Most general-purpose governments provide certain core services: those related to protection of
life and property (e.g., police and fire protection), public works (e.g., streets and highways,
bridges, and public buildings), parks and recreation facilities and programs, and cultural and
social services. Governments must also incur costs for general administrative support such as
data processing, finance, and personnel. Core governmental services, together with general
administrative support, comprise the major part of what GASB Concepts Statement No. 1 refers
to as governmental-type activities. In its more recent pronouncements, GASB refers to these
activities as simply governmental activities.

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2.1.2 Business-Type Activities
Governments also engage in business-type activities. These activities include, among others,
public utilities (e.g., electric, water, gas, and sewer utilities), transportation systems, toll roads,
toll bridges, hospitals, parking garages and lots, liquor stores, golf courses, and swimming pools.
Many of these activities are intended to be self-supporting by charging users for the service they
receive.

2.1.3 Fiduciary Activities

Governments often act in a fiduciary capacity, either as an agent or trustee, for parties outside the
government. For example, a government may serve as agent for other governments in
administering and collecting taxes. Governments may also serve as trustee for investments of
other governments in the government`s investment pool, for escheat properties that revert to the
government when there are no legal claimants or hears to a deceased individual’s estate, and for
assets being held for employee pension plans, among other trustee roles.
Under GASBS 34, only private-purpose agency and trust relationships⎯those that benefit
individuals, private organizations, and other governments⎯are reported as fiduciary activities.
Public-purpose agency and trust activities, those that primarily benefit the general public and the
government`s own programs, are treated as governmental activities for accounting and financial
reporting purposes.

2.2. Summary Statement of Principles

Following is a summary statement of accounting and financial reporting principles for state and
local governments, as modified by GASB Statement No. 34.
Principle 1: Accounting and Reporting Capabilities
A governmental accounting system must make it possible both: (a) to present fairly and with full
disclosure the funds and activities of the government in conformity with generally accepted
accounting principles, and (b) to determine and demonstrate compliance with finance-related
legal and contractual provisions. Thus, governmental units are required to prepare two sets of
financial statements. These are:
1) Financial reports in compliance with GAAP (General purpose financial statements)

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 2) Financial reports in compliance with legal requirements. These sets of financial
statements are considered as “special reports” or “supplementary schedules” and are
not the basic general-purpose financial statements.
Principle 2: Fund Accounting System
Governmental accounting systems should be organized and operated on a fund basis.
A fund is formally defined as: A fiscal and accounting entity with a self-balancing set of
accounts recording cash and other financial resources, together with all related liabilities and
residual equities or balances and changes therein, which are segregated for the purpose of
carrying on specific activities or attaining certain objectives in accordance with special
regulations, restrictions, or limitations.
This definition requires that two conditions must be met for a fund, in a technical sense to exist:
1. There must be a fiscal entity⎯assets set aside for a specific purpose, and
2. There must be a double entry accounting entity⎯created to account for the fiscal
entity.
In broader terms a single fund accounting entity is somewhat like a business accounting entity.
Each business accounting entity has a self-balancing set of accounts⎯sufficient to capture all the
reported attributes for the whole business and all its transaction. Likewise, each fund of a
government has a self-balancing set of accounts sufficient to capture all the reported
attributes⎯for a government fund of this type⎯of the portion of a government`s activities and
resources that is accounted for in each particular fund. A key difference is that one accounting
entity is used to account for all the activities and resources of a business, whereas each fund
accounting entity is used to account for only a certain subset of a government`s activities and
resources.
Likewise, each business accounting entity has its own journals, its own ledger, its own trial
balance, and its own financial statements. Similarly, for each fund of a government there are
separate journals and a separate ledger(s) and trial balance; and separate financial statements are
prepared and presented.
Principle 3: Types of Funds
Three categories of activities in which governments engage were described early in this chapter:
governmental, business-type, and fiduciary. There are three closely related categories of funds:

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governmental, proprietary, and fiduciary. Except for the fact that most internal service funds are
treated as part of governmental activities rather than as part of business-type activities for
purposes of government-wide financial reporting, the activity and fund categories are the same.
Governmental Funds
Governmental funds⎯are used to account for activities of a government that are carried out
primarily to provide services to citizens and that are financed primarily through taxes.
The governmental funds category contains five types of funds: the General Fund, special revenue
funds, debt service funds, capital projects funds, permanent funds.
1. The General Fund ⎯to account for all financial resources except those required to be
accounted for in another fund. Every state and local government has one and only one
General Fund, although it may be called by a different name such as general revenue fund,
general operating fund, or current fund. Other governmental funds will be created as needed.
Most departmental operating activities, such as the city manager’s office, finance, personnel,
and data processing, are typically accounted for in the General Fund. Unless a financial
resource required to be accounted for in a different fund type, it is usually accounted for in
the General Fund.
2. Special Revenue Funds (SRF) ⎯to account for the proceeds of specific revenue sources
(other than private-purpose trusts or for major capital projects) when tax or grant revenues or
private gifts are legally restricted for particular operating purposes, such as the operation of a
library or maintenance of roads and bridges, a Special Revenue Fund is created. For example,
a government embarked 25% of current year revenue from value added tax for draught
affected people, SRF may be established to account for this revenue. GASB standards
recommended on the number of special revenue funds that governments could establish are
only the minimum number of funds needed to comply with legal requirements and to provide
sound management. An excessive number of funds creates undue complexity and contributes
to inefficient financial administration.
3. Capital Projects Funds ⎯ to account for financial resources to be used for the acquisition
or construction of major capital facilities (other than those financed by proprietary funds and
trust funds). Governments often engage in capital projects to accommodate a growing
population or to replace existing capital assets. These projects typically involve major

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 construction of items such as buildings, highways or bridges, or parks. To account for tax or
grant revenues, or bond proceeds embarked for a capital project, as well as payments to
architects, engineers, construction contractors, and suppliers, a capital projects fund is
typically created. Multiple capital projects may be created if a government has multiple
capital projects.
4. Debt Services Funds ⎯ to account for the accumulation of resources for, and the payment
of, general long-term debt principal and interest. Governments that have bond obligations
outstanding and certain other types of long-term general liabilities may be required by law or
bond covenants to create a debt service fund. The purpose of debt service fund is to account
for financial resources segregated for the purpose of principal and interest payments on
general long-term debt if available. But Some governments account for all debt service on
general long-term debt in their General Fund
5. Permanent fund ⎯ is used to account for permanent endowments created when a donor
stipulates that the principal amount of a contribution must be invested and preserved but
earnings on amounts so invested can be used for some public purpose. Public purposes
include activities such as maintenance of a cemetery or aesthetic enhancements to public
buildings. If the earnings from a permanent fund can be used to benefit only private
individuals, organizations, or other governments, rather than supporting a program of the
government and its citizenry, a private-purpose trust fund⎯a fiduciary fund⎯is used instead
of a permanent fund. In other words, a permanent fund is a fund to account for financial
resources when an investment`s periodic revenue is used to pay general government
expenditures.
Principle 4: Number of Funds
Governmental units should establish and maintain those funds required by law and sound
financial administration. Only the minimum number of funds consistent with legal and
operating requirements should be established, however, because unnecessary funds result in
inflexibility, undue complexity, and inefficient financial administration.
In sum, the government:
• Must establish and maintain those funds required by law or contractual agreement, just as
it must observe other finance-related legal and contractual provisions.

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 • Should maintain other funds that assist in ensuring effective control over and
accountability for its finances.
However, maintaining too many funds may be as detrimental as maintaining too few funds.
Selecting the specific funds a government needs requires professional judgment, and the funds
in use should be reviewed from time to time to ensure that all funds needed are in use and that no
unneeded funds are in use. In amplifying the fourth principle, the GASB offers the following
guidance to the exercise of professional judgment in determining the fund structure of a state or
local government:
…some governmental units often need several funds of a single type, such as special revenue or
capital projects funds. On the other hand, many governmental units do not need funds of all types
at any given time. Some find it necessary to use only a few of the specified types. For example,
many small governmental units do not require internal service funds. Moreover, (1) resources
restricted to expenditure for purposes normally financed from the general fund may be accounted
for through the general fund provided that applicable legal requirements can be appropriately
satisfied; and (2) use of special revenue funds is not required unless they are legally mandated.
(3) Debt service funds are required if they are legally mandated and/or if financial resources are
being accumulated for principal and interest payments maturing in future years.
The general rule is to establish the minimum number of separate funds consistent with legal
specifications, operational requirements, and the principles of fund classification. Using too
many funds causes inflexibility and undue complexity in budgeting, accounting, and other phases
of financial management, and is best avoided in the interests of efficient and economic financial
administration.
Principle 5: Reporting Capital (Fixed) Assets
A clear distinction should be made between general capital assets and capital assets of
proprietary and fiduciary funds. Capital assets of proprietary funds should be reported in both the
government-wide and fund financial statements. Capital assets of fiduciary funds should be
reported in only the statement of fiduciary net assets. All other capital assets of governmental
unit are general capital assets. They should not be reported as assets in governmental funds but
should be reported in the Governmental Activities column in the government-wide statement
of net assets.
Principle 6: Valuation of Capital (Fixed) Assets
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Capital assets should be reported at historical cost or, if the cost is not practically determinable,
at estimated cost. The cost of a capital asset should include capitalized interest (not applicable to
general capital assets) and ancillary charges necessary to place the asset into its intended location
and condition for use. Donated capital assets should be reported at their estimated fair value at
the time of the acquisition plus ancillary charges, if any.
Estimated cost (at the time of acquisition) is allowed because some governments have not
maintained adequate capital asset records before beginning to report in conformity with generally
accepted accounting principles. This principle (1) allows a government to estimate the original
cost of both general capital assets and specific fund capital assets for which original costs cannot
reasonably be determined but (2) requires that its other capital assets and all capital assets
acquired subsequently be recorded at cost (or estimated value, if donated).
Principle 7: Deprecation of Capital Assets
Capital assets should be depreciated over their estimated useful lives unless they are either
inexhaustible or are infrastructure assets using the modified approach set forth in GASBS 34.
Depreciation expense should be reported in the government-wide statement of activities; the
proprietary fund statement of revenues, expenses, and changes in fund net assets; and the
statement of changes in fiduciary net assets.
Principle 8: Reporting Long-Term Liabilities
A clear distinction should be made between fund long-term liabilities and general long-term
liabilities. Long-term liabilities directly related to and expected to be paid from proprietary funds
should be reported in the proprietary fund statement of net assets and in the government-
wide statement of net assets. Long-term liabilities directly related to and expected to be paid
from fiduciary funds should be reported in the statement of fiduciary net assets. All other
unmatured long-term liabilities of the governmental unit should not be reported in governmental
funds but should be reported in the Governmental Activities column in the government-wide
statement of net assets.
Principle 9: Measurement Focus and Basis of Accounting in the Basic Financial Statements
a. Government-wide Financial Statements
The government-wide statement of net assets and statement of activities should be prepared
using the economic resources measurement focus and the accrual basis of accounting. Revenues,
expenses, gains, losses, and liabilities resulting from the exchange and exchange-like
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transactions should be recognized when the exchange takes place. Revenues, expenses, assets,
and liabilities resulting from nonexchange transactions should be recognized in accordance with
[Codification] Section N50, “Nonexchange Transactions.”
b. Fund Financial Statements
In fund financial statements, the modified accrual or accrual basis of accounting, as appropriate,
should be used in measuring financial position and operating results.
(1) Financial statements for governmental funds should be presented using the current
financial resources measurement focus and the modified accrual basis of accounting.
Revenues should be recognized in the accounting period in which they become available and
measurable. Expenditures should be recognized in the accounting period in which the fund
liability is incurred, if measurable, except for unmatured interest on general long-term
liabilities, which should be recognized when due.
(2) Proprietary fund statements of net assets and revenues, expenses, and changes in fund net
assets should be presented using the economic resources measurement focus and the
accrual basis of accounting.
(3) Financial statements of fiduciary funds should be reported using the economic resources
measurement focus and the accrual basis of accounting, except for the recognition for
certain liabilities of defined benefit pension plans and certain postemployment healthcare
plans.
(4) Transfers between funds should be reported in the accounting period in which the interfund
receivable and payable arise.
The essence of this principle is that, in governmental accounting:
The accrual basis refers to the basis of accounting under which revenues are recorded
when earned and expenditures (expenses) are recorded as soon as they result in liabilities
for benefits received, notwithstanding that the receipt of cash or the payment of cash may
take place, in whole or in part, in another accounting period.
Modified accrual basis⎯under the modified accrual basis of accounting, required for
use by governmental funds, revenues are recognized in the period in which they become
available and measurable, and expenditures are recognized at the time a liability is
incurred pursuant to appropriation authority.

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 1. Revenues must be “available” ⎯collectible within the period or soon enough
thereafter to pay 0liabilities incurred for expenditures of the period, as well as
levied for the period or earned and measurable⎯or must be deferred (recorded as
deferred revenues) and recognized as revenues when “available.” Thus, revenues
may be recognized later in governmental-type funds than in proprietary-type
funds.
2. Expenditures (not expenses)⎯for operations, capital outlays, and debt
service⎯are recognized (1) when operating or capital outlay liabilities to be paid
from governmental-type funds are incurred and (2) when general government debt
service (principal and interest) payments on long-term debt are due.
Transfers of resources among funds (interfund transfers) should be recorded when they
occur⎯when the interfund payable or receivable arise⎯even though cash (or noncash
assets) has not been remitted from one fund to another fund.
The distinction between expenditures and expenses is extremely important in governmental
accounting. Expenses − the measurement focus of proprietary fund accounting− are costs
expired during a period, including depreciation and other allocations, as in business accounting.
Expenditures − the measurement focus of governmental fund accounting − are financial
resources expended during a period for operations, capital outlays, and long-term debt principal
retirement and interest. With the exception of long-term debt principal retirement expenditures,
expenditures reflect the cost incurred to acquire goods or services, whereas expenses reflect the
cost of goods or services used.
Table 2-1 Expenses versus Expenditures
Expenses Expenditures
(Costs (Financial
Expired) Resources
Expended)
Operating (Operating expenses and expenditures often are identical but Salaries, Salaries,
may differ somewhat because of accrual or allocation differences in utilities, etc utilities, etc
expense and expenditure measurement standards)
Capital (the entire cost of capital assets acquired during the period is Depreciation Capital

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accounted for as a capital outlay expenditure, whereas a portion of all outlays
exhaustible capital asset costs incurred to date is allocated to each period
as depreciation expense)
Debt Service (Interest is both an expenditure and an expense, through not Interest Long-Term
necessarily of the same amount. Long-term debt retirement is an Debt
expenditure but not an expense) Retirement
Principle 10: Budgeting, Budgetary Control, and Budgetary Reporting
a. An annual budget(s) should be adopted by every governmental unit. Budget is a plan of
financial operation embodying an estimate of proposed expenditure s for a given period and
the proposed means of financing them.
b. The accounting system should provide the basis for appropriate budgetary control.
Budgetary control ⎯ refers to the control or management of a government or enterprise in
accordance with an approved budget for the purpose of keeping expenditures within the
limitations of available appropriations and available revenues.
c. Budgetary comparisons schedules should be presented as required supplementary
information (RSI) for the General Funds and each major special revenue fund that has a
legally adopted annual budget.
Principle 9 is essentially a bridge between
• Principle 1−which requires that government accounting system make it possible to
determine and demonstrate compliance with finance-related legal and contractual
provisions−such as the annual operating budget(s)−as well as report in conformity with
GAAP; and
• Principle 12−which requires presentation of financial statements on both the budgetary
basis and the GAAP basis, as well as an explanation and reconciliation of the differences
between the budgetary and GAAP basis.
Principle 11: Transfer, Revenue, Expenditure, and Expense Account Classification
a. Transfers should be classified separately from revenues and expenditures or expenses in the
basic financial statements.
b. Proceeds of general long-term debt issues should be classified separately from revenues
and expenditures in the governmental fund financial statements.

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c. Governmental fund revenues should be classified by fund and source. Expenditures should
be classified by fund, function (or program), organization unit, activity, character, and
principal classes of objects.
d. Proprietary fund revenues should be reported by major sources, and expenses should be
classified in essentially the same manner as those of similar business organizations,
functions, or activities.
e. The statement of activities should present governmental activities at least at the level of detail
required in the governmental fund statement of revenues, expenditures, and change in fund
balance-at a minimum by function. Governments should present business-type activities at
least by segment.
Principle 12: Common Terminology and Classification
A common terminology and classification should be used consistently throughout the budget, the
accounts, and the financial reports of each fund.
Principle 13: Interim and Annual Financial Reports
a. Appropriate interim financial statements and reports of financial position, operating results,
and other pertinent information should be prepared to facilitate management control of
financial operations, legislative oversight, and where necessary or desired for external
reporting purposes.
b. A comprehensive annual financial report [CAFR] should be prepared and published,
covering all activities of the primary government (including its blended component units) and
providing an overview of all discretely presented component units of the reporting
entity⎯including introductory section, management`s discussion and analysis (MD&A),
basic financial statements, required supplementary information other than MD&A,
combining and individual fund statements, schedules, narrative explanations, and statistical
sections.
c. The minimum requirements for MD&A, basic financial statements, and required
supplementary information other than MD&A are:
(1) Management`s discussion and analysis
(2) Basic financial statements. The basic financial statements should include:
(a) Government-wide financial statements
(b) Fund financial statements
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 (c) Notes to the financial statements
(3) Required supplementary information other than MD&A.
d. General purpose financial statements [GPFS] of the reporting entity may be issued
separately from the comprehensive annual financial report. Such statements should include
the basic financial statements and notes to the financial statements that are essential to fair
presentation of financial position and operating results of operations (and cash flows of
proprietary fund types and nonexpendable trust funds). These statements are may also be
required to be accomplished by required supplementary information….
e. …the financial reporting entity consists of (1) the primary government, (2) organizations
for which the primary government is financially accountable, and (3) other
organizations for which the nature and significance of their relationship with the
primary government are such that exclusion would cause the reporting entity`s basic
financial statements to be misleading or incomplete. The reporting entity`s government-
wide financial should display information about the reporting government as a whole
distinguishing between the total primary government and its discretely presented component
units as well as between the primary government`s governmental and business-type
activities. The reporting entity`s fund financial statements should present the primary
government`s (including its blended component units, which are, in substance, part of the
primary government) major funds individually and nonmajor funds in the aggregate. Funds
and component units that are fiduciary in nature should be reported only in the statements of
fiduciary net assets and changes in fiduciary net assets.
f. The nucleus of a financial reporting entity usually is a primary government. However, a
governmental organization other than a primary government (such as component unit, joint
venture, jointly governed organization, or other stand-alone government) serve as the nucleus
for its own reporting entity when it issues separate financial statements.

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 CHAPTER THREE: INTERNATIONAL PUBLIC SECTOR
ACCOUNTING STANDARDS [IPSAS]

3.1 Scope and Authority of International Public Sector Accounting Standards

3.1.1 Scope of the Standards

➢ The IPSASB develops IPSASs which apply to the accrual basis of accounting and IPSASs which
apply to the cash basis of accounting.
➢ IPSASs set out requirements dealing with transactions and other events in general purpose
financial reports. General purpose financial reports are financial reports intended to meet the
information needs of users who are unable to require the preparation of financial reports
tailored to meet their specific information needs.
➢ The IPSASs are designed to apply to public sector entities that meet all the following criteria:
a. Are responsible for the delivery of services to benefit the public and/ or to redistribute income and
wealth;
b. Mainly finance their activities, directly or indirectly, by means of taxes and/or transfers from other
levels of government, social contributions, debt or fees; and
c. Do not have a primary objective to make profits.
Authority of the International Public Sector Accounting Standards
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 ➢ Within each jurisdiction, regulations may govern the issue of general purpose financial reports by
public sector entities. These regulations may be in the form of statutory reporting requirements,
financial reporting directives and instructions, and/or accounting standards promulgated by
governments, regulatory bodies and/or professional accounting bodies in the jurisdiction
concerned.
➢ The IPSASB believes that the adoption of IPSASs, together with disclosure of compliance with
them, will lead to a significant improvement in the quality of general purpose financial reporting by
public sector entities. This, in turn, is likely to strengthen public finance management leading to
better informed assessments of the resource allocation decisions made by governments, thereby
increasing transparency and accountability.
➢ The IPSASB strongly encourages the adoption of IPSASs and the harmonization of
national requirements with IPSASs. The IPSASB acknowledges the right of governments
and national standard-setters to establish accounting standards and guidelines for financial
reporting in their jurisdictions. Some sovereign governments and national standard-setters have
already developed accounting standards that apply to governments and public sector entities
within their jurisdiction. IPSASs may assist such standard-setters in the development of new
standards or in the revision of existing standards in order to contribute to greater comparability.
IPSASs are

Impairment of Non-Cash-Generating Assets [IPSAS 21]

Objective
➢ To ensure that non-cash-generating assets are carried at no more than their recoverable
service amount, and to prescribe how recoverable service amount is calculated.
➢ The objective of this Standard is to prescribe the procedures that an entity applies to determine
whether a non-cash-generating asset is impaired, and to ensure that impairment losses are
recognized. This Standard also specifies when an entity would reverse an impairment loss, and
prescribes disclosures.
Definitions. The following terms are used in this Standard with the meanings specified:
An active market is a market in which all the following conditions exist:
(a) The items traded within the market are homogeneous;

(b) Willing buyers and sellers can normally be found at any time; and
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 (c) Prices are available to the public.

➢ Cash-generating assets are assets held with the primary objective of generating a
commercial return. For the purposes of impairment, goodwill is considered a cash-
generating asset.
➢ Costs of disposal are incremental costs directly attributable to the disposal of an
asset, excluding finance costs and income tax expense.
➢ Fair value less costs to sell is the amount obtainable from the sale of an asset in an
arm’s length transaction between knowledgeable, willing parties, less the costs of
disposal.
➢ An impairment is a loss in the future economic benefits or service potential of an
asset, over and above the systematic recognition of the loss of the asset’s future
economic benefits or service potential through depreciation.
➢ Non-cash-generating assets are assets other than cash-generating assets.
➢ Recoverable service amount is the higher of a non-cash-generating asset’s fair value
less costs to sell and its value in use.
➢ Useful life is either:

(a) The period of time over which an asset is expected to be used by the entity; or
(b) The number of production or similar units expected to be obtained from the asset by
the entity.
➢ Value in use of a non-cash-generating asset is the present value of the asset’s
remaining service potential.

Cash-Generating Assets

➢ Cash-generating assets are assets held with the primary objective of generating a commercial return.
An asset generates a commercial return when it is deployed in a manner consistent with that
adopted by a profit-oriented entity. Holding an asset to generate a commercial return indicates
that an entity intends to generate positive cash inflows from the asset (or from the cash-
generating unit of which the asset is a part), and earn a commercial return that reflects the risk
involved in holding the asset.
➢ An asset may be held with the primary objective of generating a commercial return, even though it
does not meet that objective during a particular reporting period.
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➢ Conversely, an asset may be a non-cash-generating asset, even though it may be breaking even or
generating a commercial return during a particular reporting period. Unless stated otherwise,
references to an asset or assets in the following paragraphs of this Standard are references to non-
cash-generating asset(s).

There are a number of circumstances in which public sector entities may hold some assets with the
primary objective of generating a commercial return, although the majority of assets are not held
for that purpose. For example, a hospital may deploy a building for fee-paying patients. Cash-
generating assets of a public sector entity may operate independently of the non-cash- generating
assets of the entity. For example, the deeds office may earn land registration fees independently from
the department of land affairs.

Assets held by commercial public sector entities are cash-generating assets. Public sector entities may
hold assets to generate a commercial return. For the purposes of this Standard, an asset held by a public
sector entity is classified as a cash-generating asset if the asset (or unit of which the asset is a part) is
operated with the objective of generating a commercial return through the provision of goods and/or
services to external parties.

Depreciation: Depreciation and amortization are the systematic allocation of the depreciable amount of
an asset over its useful life. In the case of an intangible asset, the term amortization is generally used
instead of depreciation. Both terms have the same meaning.

Impairment: This Standard defines impairment as a loss in the future economic benefits or service
potential of an asset, over and above the systematic recognition of the loss of the asset’s future
economic benefits or service potential through depreciation (amortization). Impairment, therefore,
reflects a decline in the utility of an asset to the entity that controls it. For example, an entity may
have a purpose-built military storage facility that it no longer uses. In addition, because of the
specialized nature of the facility and its location, it is unlikely that it can be leased out or sold, and
therefore the entity is unable to generate cash flows from leasing or disposing of the asset. The asset
is regarded as impaired, as it is no longer capable of providing the entity with service potential – it
has little, or no, utility for the entity in contributing to the achievement of its objectives.

Identifying an Asset that may be Impaired:

A non-cash-generating asset is impaired when the carrying amount of the asset exceeds its
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recoverable service amount. Identifies key indications that an impairment loss may have occurred.
If any of those indications are present, an entity is required to make a formal estimate of
recoverable service amount. If no indication of a potential impairment loss is present, this Standard
does not require an entity to make a formal estimate of recoverable service amount.

3.2 Disclosure of Financial Information about the General Government Sector

[IPSAS 22]
Objective: The objective of this Standard is to prescribe disclosure requirements for governments
that elect to present information about the general government sector (GGS) in their consolidated
financial statements. The disclosure of appropriate information about the GGS of a government can
enhance the transparency of financial reports, and provide for a better understanding of the relationship
between the market and non-market activities of the government, and between financial statements and
statistical bases of financial reporting.

Scope
a. A government that prepares and presents consolidated financial statements under
the accrual basis of accounting and elects to disclose financial information about the
general government sector shall do so in accordance with the requirements of this
Standard.
b. Governments raise funds from taxes, transfers, and a range of nonmarket and market
activities to fund their service delivery activities. They operate through a variety of entities
to provide goods and services to their constituents. Some entities rely primarily on
appropriations or allocations from taxes or other government revenues to fund their
service delivery activities, but may also undertake additional revenue-generating
activities, including commercial activities in some cases. Other entities may generate
their funds primarily or substantially from commercial activities.
c. Financial statements for a government prepared in accordance with IPSASs provide an
overview of (a) the assets controlled and liabilities incurred by the government, (b) the
cost of services provided by the government, and (c) the taxation and other revenues
generated to fund the provision of those services. Financial statements for a
government, which delivers services through controlled entities, whether primarily

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 dependent on the government budget to fund their activities or not, are consolidated
financial statements.
d. In some jurisdictions, financial statements and budgets for the government, or sectors
thereof, may also be issued in accordance with statistical bases of financial reporting.
These bases reflect requirements consistent with, and derived from, the System of
National Accounts 1993 (SNA 93) prepared by the United Nations and other
international organizations. These statistical bases of financial reporting focus on the
provision of financial information about the GGS. The GGS comprises those non-profit
entities that undertake nonmarket activities and rely primarily on appropriations or
allocations from the government budget to fund their service delivery activities
(hereafter referred to as nonmarket entities or activities). The statistical bases of financial
reporting may also provide information about (a) the corporations sector of government
that primarily engages in market activities (usually characterized as the public financial
corporations (PFC) sector and the public nonfinancial corporations (PNFC) sector), and
(b) the public sector as a whole. The major features of the PFC and PNFC sectors are
outlined at paragraphs 19 and 20 of this Standard.
e. Financial statements consolidate only controlled entities. Such a limitation is not made
in statistical bases of financial reporting. In some jurisdictions, a national government
controls state/provincial and local government entities, and therefore its financial
statements consolidate those levels of government, but in other jurisdictions they do not. In
all jurisdictions, under statistical bases of financial reporting, the GGS of all levels of
government are combined, so in some jurisdictions the GGS will include units that
financial statements do not consolidate. This Standard disaggregates the consolidated
financial statements of a government. Therefore, it prohibits the presentation, as part of
the GGS, of any entity not consolidated within a government’s financial statements.
Disclosures
Disclosures made in respect of the GGS shall include at least the following:
a. Assets by major class, showing separately the investment in other sectors;
b. Liabilities by major class;
c. Net assets/equity;

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 d. Total revaluation increments and decrements and other items of revenue and
expense recognized directly in net assets/equity;
e. Revenue by major class;
f. Expenses by major class;
g. Surplus or deficit;
h. Cash flows from operating activities by major class;
i. Cash flows from investing activities; and
j. Cash flows from financing activities.
➢ The manner of presentation of the GGS disclosures shall be no more prominent than the
government’s financial statements prepared in accordance with IPSASs.
This Standard requires disclosure of the major classes of assets, liabilities, revenues, expenses, and
cash flows reflected in the financial statements. This Standard does not specify the manner in which
the GGS disclosures shall be made. Governments electing to make GGS disclosures in accordance,
with this Standard may make such disclosures by way of (a) note disclosure, (b) separate columns in
the primary financial statements, or (c) otherwise, as considered appropriate in their jurisdiction.
However, the manner of presentation of the GGS disclosures will be no more prominent than the
consolidated financial statements prepared in accordance with IPSASs.
❖ The manner of presentation of the general government sector disclosures shall be no more
prominent than the government’s financial statements prepared in accordance with IPSAS.
❖ Disclosures of the significant controlled entities that are included in the general government
sector and any changes in those entities from the prior period must be made, together with an
explanation of the reasons why any such entity that was previously included in the general
government sector is no longer included.
❖ The general government sector disclosures shall be reconciled to the consolidated financial
statements of the government showing separately the amount of the adjustment to each
equivalent item in those financial statements.

3.3 Revenue from Non-Exchange Transactions (Taxes and Transfers) [IPSAS

23]
Objective: The objective of this Standard is to prescribe requirements for the financial reporting of
revenue arising from non-exchange transactions, other than non-exchange transactions that give
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rise to a public sector combination. This Standard deals with issues that need to be considered in
recognizing and measuring revenue from non-exchange transactions, including the identification
of contributions from owners.
Scope:
An entity that prepares and presents financial statements under the accrual basis of
accounting shall apply this Standard in accounting for revenue from non-exchange transactions.
This Standard does not apply to a public sector combination that is a non-exchange transaction.
❖ This Standard addresses revenue arising from non-exchange transactions. Revenue
arising from exchange transactions is addressed in IPSAS 9, Revenue from Exchange
Transactions. While revenues received by public sector entities arise from both
exchange and non-exchange transactions, the majority of revenue of governments and
other public sector entities is typically derived from non-exchange transactions, such as:
(a) Taxes; and
(b) Transfers (whether cash or noncash), including grants, debt forgiveness, fines, bequests,
gifts, donations, goods and services in-kind, and the off-market portion of
concessionary loans received.
❖ Governments may reorganize the public sector, merging some public sector entities, and dividing
other entities into two or more separate entities. A public sector combination occurs when two or
more operations are brought together to form one reporting entity. These restructurings do not
ordinarily involve one entity purchasing another operation or entity, but may result in a new or
existing entity acquiring all the assets and liabilities of another operation or entity. Public sector
combinations shall be accounted for in accordance with IPSAS 40, Public Sector Combinations.
Definition
❖ Taxes are economic benefits or service potential compulsorily paid or payable to public
sector entities, in accordance with laws and/or regulations, established to provide revenue to the
government. Taxes do not include fines or other penalties imposed for breaches of the law.
❖ Transfers are inflows of future economic benefits or service potential from non-exchange
transactions, other than taxes.
❖ Exchange transactions are transactions in which one entity receives assets or services, or has
liabilities extinguished, and directly gives approximately equal value (primarily in the form
cash, goods, services, or use of assets) to another entity in exchange.
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❖ Non-exchange transactions are transactions that are not exchange transactions. In a non-
exchange transaction, an entity either receives value from another entity without directly
giving approximately equal value in exchange, or gives value to another entity without
directly receiving approximately equal value in exchange.
Measurement of Assets on Initial Recognition
➢ An asset acquired through a non-exchange transaction shall initially be measured at fair value as at
the date of acquisition.
➢ Consistent with IPSAS 12, Inventories, IPSAS 16, Investment Property, and IPSAS 17, assets
acquired through non-exchange transactions are measured at their fair value as at the date of
acquisition.
➢ Transfers include grants, debt forgiveness, fines, bequests, gifts, donations, and goods and
services in-kind. All these items have the common attribute that they transfer resources from one
entity to another without providing approximately equal value in exchange, and are not taxes as
defined in this Standard.
➢ Transfers satisfy the definition of an asset when the entity controls the resources as a result of
a past event (the transfer), and expects to receive future economic benefits or service potential from
those resources. Transfers satisfy the criteria for recognition as an asset when it is probable that the
inflow of resources will occur, and their fair value can be reliably measured. In certain
circumstances, such as when a creditor forgives a liability, a decrease in the carrying amount of a
previously recognized liability may arise. In these cases, instead of recognizing an asset as a result of
the transfer, the entity decreases the carrying amount of the liability.
➢ An entity shall disclose either on the face of, or in the notes to, the general purpose financial
statements:
The amount of revenue from non-exchange transactions recognized during the period by major
classes showing separately taxes and transfers.
The amount of receivables recognized in respect of non-exchange revenue.
The amount of liabilities recognized in respect of transferred assets subject to conditions.
The amount of assets recognized that are subject to restrictions and the nature of those
restrictions.
The existence and amounts of any advance receipts in respect of non-exchange transactions.
The amount of any liabilities forgiven.
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➢ An entity shall disclose in the notes to the general purpose financial statements:
The accounting policies adopted for the recognition of revenue from non- exchange
transactions.
For major classes of revenue from non-exchange transactions, the basis on which the fair value
of inflowing resources was measured.
For major classes of taxation revenue which the entity cannot measure reliably during the period
in which the taxable event occurs, information about the nature of the tax.
The nature and type of major classes of bequests, gifts, donations showing separately major
classes of goods in-kind received.

3.4 Presentation of Budget Information in Financial Statements [IPSAS 24]

Objective
This Standard requires a comparison of budget amounts and the actual amounts arising
from execution of the budget to be included in the financial statements of entities that are
required to, or elect to, make publicly available their approved budget(s), and for which they
are, therefore, held publicly accountable. This Standard also requires disclosure of an
explanation of the reasons for material differences between the budget and actual amounts.
Compliance with the requirements of this Standard will ensure that public sector entities
discharge their accountability obligations and enhance the transparency of their financial
statements by demonstrating
(a) Compliance with the approved budget(s) for which they are held publicly accountable and
(b) Where the budget(s) and the financial statements are prepared on the same basis, their
financial performance in achieving the budgeted results.
Scope
➢ An entity that prepares and presents financial statements under the accrual basis of
accounting shall apply this Standard.
➢ This Standard applies to public sector entities which are required or elect to make their
approved budget(s) publicly available.
➢ This Standard does not require approved budgets to be made publicly available, nor
does it require that the financial statements disclose information about, or make comparisons
with, approved budgets that are not made publicly available.
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➢ In some cases, approved budgets will be compiled to encompass all the activities
controlled by a public sector entity. In other cases, separate approved budgets may be
required to be made publicly available for certain activities, groups of activities, or entities
included in the financial statements of a government or other public sector entity. This
may occur (a) where, for example, a government’s financial statements encompass
government agencies or programs that have operational autonomy and prepare their own
budgets, or (b) where a budget is prepared only for the general government sector of the
whole-of-government. This Standard applies to all entities that present financial
statements when approved budgets for the entity, or components thereof, are made
publicly available.
Definitions
➢ Appropriation is an authorization granted by a legislative body to allocate funds for purposes
specified by the legislature or similar authority.
➢ Approved budget means the expenditure authority derived from laws, appropriation bills,
government ordinances, and other decisions related to the anticipated revenue or receipts for
the budgetary period.
➢ Budgetary basis means the accrual, cash, or other basis of accounting adopted in the
budget that has been approved by the legislative body.
Presentation of a Comparison of Budget and Actual Amounts
Subject to an entity shall present a comparison of the budget amounts for which it is
held publicly accountable and actual amounts, either as a separate additional financial
statement or as additional budget columns in the financial statements currently presented
in accordance with IPSASs. The comparison of budget and actual amounts shall present
separately for each level of legislative oversight:
a. The original and final budget amounts;
b. The actual amounts on a comparable basis; and
c. By way of note disclosure, an explanation of material differences between the budget for
which the entity is held publicly accountable and actual amounts, unless such
explanation is included in other public documents issued in conjunction with the
financial statements, and a cross reference to those documents is made in the notes.
➢ Presentation in the financial statements of the original and final budget amounts and actual
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 amounts on a comparable basis with the budget that is made publicly available will complete
the accountability cycle by enabling users of the financial statements to identify whether
resources were obtained and used in accordance with the approved budget. Differences
between the actual amounts and the budget amounts, whether original or final budget (often
referred to as the variance in accounting), may also be presented in the financial statements for
completeness.
➢ An explanation of the material differences between actual amounts and the budget amounts
will assist users in understanding the reasons for material departures from the approved
budget for which the entity is held publicly accountable.
➢ Management discussion and analysis, operations review, or other public reports that provide
commentary on the performance and achievements of the entity during the reporting period,
including explanations of any material differences from budget amounts, are often issued in
conjunction with the financial statements. In accordance with paragraph 14(c) of this
Standard, explanation of material differences between actual and budget amounts will be
included in notes to the financial statements, unless (a) included in other public reports or
documents issued in conjunction with the financial statements, and (b) the notes to the financial
statements identify the reports or documents in which the explanation can be found.
Presentation and Disclosure
➢ An entity shall present a comparison of budget and actual amounts as additional budget
columns in the primary financial statements only where the financial statements and the
budget are prepared on a comparable basis.
➢ Comparisons of budget and actual amounts may be presented in a separate financial
statement, (Statement of Comparison of Budget and Actual Amounts or a similarly titled
statement) included in the complete set of financial statements as specified in IPSAS 1.
Alternatively, where the financial statements and the budget are prepared on a comparable
basis – that is, on the same basis of accounting for the same entity and reporting period, and
adopt the same classification structure – additional columns may be added to the existing
primary financial statements presented in accordance with IPSASs. These additional columns
will identify original and final budget amounts and, if the entity so chooses, differences between
the budget and actual amounts.

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➢ When the budget and financial statements are not prepared on a comparable basis, a separate
Statement of Comparison of Budget and Actual Amounts is presented. In these cases, to ensure
that readers do not misinterpret financial information that is prepared on different bases, the
financial statements could usefully clarify that the budget and the accounting bases differ, and
that the Statement of Comparison of Budget and Actual Amounts is prepared on the budget
basis.
➢ In those jurisdictions where budgets are prepared on the accrual basis and encompass the full
set of financial statements, additional budget columns can be added to all the primary financial
statements required by IPSASs. In some jurisdictions, budgets prepared on the accrual basis
may be presented in the form of only certain of the primary financial statements that comprise
the full set of financial statements as specified by IPSASs – for example, the budget may be
presented as a statement of financial performance or a cash flow statement, with additional
information provided in supporting schedules. In these cases, the additional budget columns
can be included in the primary financial statements that are also adopted for presentation of the
budget.
Comparable Basis
❖ All comparisons of budget and actual amounts shall be presented on a comparable basis to the
budget.
❖ The comparison of budget and actual amounts will be presented on the same accounting basis
(accrual, cash, or other basis), same classification basis, and for the same entities and period as
for the approved budget. This will ensure that the disclosure of information about compliance
with the budget in the financial statements is on the same basis as the budget itself. In some
cases, this may mean presenting a budget and actual comparison on a different basis of
accounting, for a different group of activities, and with a different presentation or
classification format than that adopted for the financial statements.
❖ Financial statements consolidate entities and activities controlled by the entity. The separate
budgets may be approved and made publicly available for individual entities or particular
activities that make up the consolidated financial statements. Where this occurs, the separate
budgets may be recompiled for presentation in the financial statements in accordance with the
requirements of this Standard. Where such recompilation occurs, it will not involve changes or

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 revisions to approved budgets. This is because this Standard requires a comparison of actual
amounts with the approve budget amounts.
❖ Entities may adopt different bases of accounting for the preparation of their financial
statements and for their approved budgets. For example, a government may adopt the
accrual basis for its financial statements and the cash basis for its budget. In addition, budgets
may focus on, or include information about, commitments to expend funds in the future and
changes in those commitments, while the financial statements will report assets, liabilities,
net assets/equity, revenues, expenses, other changes in net assets/equity, and cash flows.
However, the budget entity and financial reporting entity will often be the same.
❖ Similarly, the period for which the budget is prepared and the classification basis adopted for
the budget will often be reflected in financial statements. This will ensure that the accounting
system records and reports financial information in a manner that facilitates the comparison
of budget and actual data for management and for accountability purposes, for example, for
monitoring progress of execution of the budget during the budget period and for reporting to
the government, the public, and other users on a relevant and timely basis.

Note Disclosures of Budgetary Basis, Period and Scope

➢ An entity shall explain in notes to the financial statements the budgetary basis and classification
basis adopted in the approved budget.
➢ There may be differences between the accounting basis (cash, accrual, or some modification
thereof) used in preparation and presentation of the budget and the accounting basis used in the
financial statements. These differences may occur when the accounting system and the
budget system compile information from different perspectives – the budget may focus on
cash flows, or cash flows plus certain commitments, while the financial statements report cash
flows and accrual information.
➢ Formats and classification schemes adopted for presentation of the approved budget may also
differ from the formats adopted for the financial statements. An approved budget may classify
items on the same basis as is adopted in the financial statements, for example, by economic
nature (compensation of employees, use of goods or services, etc.), or function (health,
education, etc.). Alternatively, the budget may classify items by specific programs (for

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 example, poverty reduction or control of contagious diseases) or program components linked
to performance outcome objectives (for example, students graduating from tertiary education
programs or surgical operations performed by hospital emergency services), which differ from
classifications adopted in the financial statements. Further, a recurrent budget for ongoing
operations (for example, education or health) may be approved separately from a capital budget
for capital outlays (for example, infrastructure or buildings).
➢ IPSAS 1 requires entities to present, in notes to the financial statements, information about
the basis of preparation of the financial statements and the significant accounting policies
adopted. Disclosure of the budgetary basis and classification basis adopted for the preparation
and presentation of approved budgets will assist users to better understand the relationship
between the budget and accounting information disclosed in the financial statements.
➢ An entity shall disclose in notes to the financial statements the period of the approved budget.
➢ Financial statements are presented at least annually. Entities may approve budgets for an
annual period or for multi-year periods. Disclosure of the period covered by the approved
budget, where that period differs from the reporting period adopted for the financial
statements, will assist the users of those financial statements to better understand the
relationship of the budget data and budget comparison to the financial statements. Disclosure
of the period covered by the approved budget, where that period is the same as the period
covered by the financial statements, will also serve a useful confirmation role, particularly
in jurisdictions where interim budgets and financial statements and reports are also prepared.
➢ An entity shall identify in notes to the financial statements the entities included in the
approved budget.
➢ The reconciliation shall be disclosed on the face of the statement of comparison budget and
actual amounts, or in the notes to the financial statements.
➢ Differences between the actual amounts identified consistent with the comparable basis,
and the actual amounts recognized in the financial statements, can usefully be classified
into the following:
a. Basis differences, which occur when the approved budget is prepared on a basis other than the
accounting basis. For example, where the budget is prepared on the cash basis or modified
cash basis and then financial statements are prepared on the accrual basis;

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b. Timing differences, which occur when the budget period differs from the reporting period
reflected in the financial statements; and
c. Entity differences, which occur when the budget omits programs or entities that are part of the
entity for which the financial statements are prepared.
✓ Original budget is the initial approved budget for the budget period.
✓ Approved budget means the expenditure authority derived from laws, appropriation bills,
government ordinances, and other decisions related to the anticipated revenue or receipts
for the budgetary period.
✓ Final budget is the original budget adjusted for all reserves, carry over amounts, transfers,
allocations, supplemental appropriations, and other authorized legislative, or similar
authority, changes applicable to the budget period.
✓ An entity shall present a comparison of budget and actual amounts as additional budget
columns in the primary financial statements only where the financial statements and the
budget are prepared on a comparable basis.
✓ An entity shall present a comparison of the budget amounts either as a separate additional
financial statement or as additional budget columns in the financial statements currently
presented in accordance with IPSAS. The comparison of budget and actual amounts shall
present separately for each level of legislative oversight:
The original and final budget amounts;
The actual amounts on a comparable basis; and
By way of note disclosure, an explanation of material differences between the budget and
actual amounts, unless such explanation is included in other public documents issued in
conjunction with the financial statements and a cross reference to those documents is made
in the notes.
✓ An entity shall present an explanation of whether changes between the original and final
budget are a consequence of reallocations within the budget, or of other factors:
o By way of note disclosure in the financial statements; or
o In a report issued before, at the same time as, or in conjunction with the financial
statements, and shall include a cross reference to the report in the notes to the
financial statements
✓ All comparisons of budget and actual amounts shall be presented on a comparable basis to
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 the budget.
✓ An entity shall explain in notes to the financial statements the budgetary basis and
classification basis adopted in the approved budget, the period of the approved budget, and
the entities included in the approved budget.
✓ An entity shall identify in notes to the financial statements the entities included in the
approved budget.
✓ The actual amounts presented on a comparable basis to the budget shall, where the financial
statements and the budget are not prepared on a comparable basis, be reconciled to the
following actual amounts presented in the financial statements, identifying separately any
basis, timing and entity differences:
o If the accrual basis is adopted for the budget, total revenues, total expenses and net cash
flows from operating activities, investing activities and financing activities; or
o If a basis other than the accrual basis is adopted for the budget, net cash flows from operating
activities, investing activities and financing activities.
o The reconciliation shall be disclosed on the face of the statement of comparison of budget
and actual amounts or in the notes to the financial statements.

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 CHAPTER FOUR : BUDGETARY ACCOUNTING &
REPORTING

3.1. Overview of budget

A budget is a plan expressed in monetary terms, covering a specific period of time, usually one
year. It is a dollar and cents plan of operation for a specified period of time. At a minimum, such
a plan should contain information about the types and amounts of proposed expenditures, the
purposes for which they are to be made, and the proposed means of financing them. The budget
reflects what the government intends to do. The budget has become the powerful instrument for
fulfilling the basic objectives of the government.

3.1.1. Definition and usefulness of budgeting

Budgeting is the process of allocating scarce resources to unlimited demands.
The GASB recognizes the importance of the budget process in principle 9 as:
1. An annual budget should be adopted by every governmental unit.
2. The accounting system should provide the basis for appropriate budgetary control
3. Budgetary comparisons should be included in the appropriate financial statements and
schedules for governmental funds for which an annual budget has been adopted.

We might summarize the process of budgeting into three basic questions.

• How much can we spend?
• Why will we spend it?
• Where will we get the money from?
❖ Budget comprises two major components. These are:

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 1. Estimated revenues – these are revenues to be collected from indirect tax, direct tax,
foreign trade, non tax revenues and borrowed funds.
2. Estimated expenditure – these are expenditures to be paid for some benefits.

Governmental budgeting vs. FP budgeting

Budgeting has a greater role in governmental accounting than in FP accounting. First, consider
budgeting in a profit-seeking enterprise. Budgeting in profit-making enterprise is usually fairly
flexible, and can be changed as conditions changed during the year. In an FP, money is spent for
the purpose of making more money. As long as the FP is profitable, the specific purpose of the
spending doesn’t matter so much, as long as it is helping to contribute to the bottom line.
Similarly, if it is felt that a particular usage of money is not generating additional profits, then
money can cease to be spent on that item. For example, “Orange Crush” soft drink advertises on
television. No doubt its maker has budgeted for this expense. However, if it feels that this
advertising is not helping to increase its sales, it can drop the item from its budget and cancel the
adverting in order to use the money for something more effective in increasing its sales, like
producing a higher quality product. The profit motive provides the guide to employ resources in
the “right” way.
On the other hand, governments have no profit motive to guide the resources represented by their
budgets into the right usage. Therefore, they rely on legal requirements to insure that money is
used for the appropriate purpose. Governmental budgets, once fixed by law for the year, are
generally unchangeable without much effort. Altering or exceeding the budget typically carries
severe penalties for the administrator who dose so.
Given the unchanging nature of government budgets, and the penalties for non-compliance, it
logically follows that the accounting system should support the budget. The accounting system,
at the very least, should give the necessary information for keeping within the budgetary
restrictions.
3.1.1.2. Uses / functions of Budgets
The primary usefulness of FP budgets is planning, i.e. “What resources do we have, and how can
we plan to spend them in order to maximize profit?” In governments also, the budget is also used
for planning, especially in clarifying priority goals. However, government administrators often
overlook the planning aspects of a budget and use the government budget primarily as a control

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device. The government will have certain objectives, and it assigns resources – money,
personnel, etc. – for the accomplishment of those objectives. The budget is a way of controlling
the assigned resources; ensuring that they are used for the intended purpose. In addition to the
primary use of control and the secondary use of planning, the budge provides information to
decision-makers and indicates to the public what decisions have been made about the objectives
of the government.

3.1.2. Classifications of budgets

There are five classifications of budgets. These are:
1. Capital vs. Current budget – capital budgets, obviously, deals with the acquisition of
fixed assets. The legislature will likely approve the acquisitions one year at a time. But
planning for the acquisitions several years in advance (called the Capital Program) is very
helpful to wise management of resources. Current budgets, of course, are concerned with
the current year’s operating expenditures, sometimes called recurring expenditures,
because similar sorts of expenditures are needed year after year.
2. Tentative vs. enacted budget – As the name implies, the tentative budget is still in
process. It has not yet been officially approved. An enacted budget has been officially
approved and is a binding legal document.
3. General vs. Special budget – The names of this classification are not quite as they
sound. A budget prepared for the General, Special Revenue, and Debit Service Funds
referred to as general budget. A budget prepared for any other fund referred to as special
budget.
4. Fixed vs. Flexible - A fixed budget is for a fixed total dollar (or Birr) amount and cannot
be exceeded because of changes in demand for governmental goods or services.
Governmental fund budgets are almost invariably fixed expenditure budgets. A flexible
budget, on the other hand, fixes the cost per unit of goods and services. If more units of
goods and services are desired because of a change in circumstance or need, the dollar

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 amount of a flexible budget can increase. Flexible budgets are more appropriate for
enterprise and internal service funds.
5. Executive vs. legislative budget – Budgets are sometimes categorized by preparer.
Budgets prepared by executive and legislative is called executive and legislative budget
respectively. On the other hand a budget prepared by a joint legislative-executive
committee is referred to as joint budget.

3.1.3. Approaches to budgeting

Uses of budgets are many and varied. Depending on their intended usage, budgets can be
prepared under one of the following approaches.

3.1.3.1. Incremental or object of expenditure approach

The object of expenditure or incremental approach is also known as the traditional approach.
Incremental budgets take the previous year’s budget as a base and add or subtract a percentage to
give this year’s budget. The assumption is that the historical budget allocation reflected
organizational priorities and was rooted in some meaningful justification developed in the past.
This means that the budget for each period is based on the budget for the previous period,
adjusting the previous period’s budget to take account of any expected changes. The changes
may be the annual rate of inflation, or specific adjustments that relate to expected salary increase.

This approach is unlikely to result in the optimum allocation of resources. It tends to perpetuate
inefficient and unnecessary practices, and may result in budget slack, which is unnecessary
expenditure built into the budget.
Incremental budget is simple to apply and leads to continuation of existing programs at
increasing or decreasing level of funds. This approach is low cost but does not provide
information about performance. It does not consider also the effectiveness of programs or the
efficiency which the funds were spent in accomplishing government goals.
3.1.3.2. Zero-Base-Budgeting (ZBB) approach
Zero-based budgeting (ZBB) was developed as an alternative to the incremental approach. ZBB
is one method of continually evaluating programs and services. The primary idea of ZBB is that
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each program must justify its existence every year. No program is assumed to be continuing from
one year to the next. In this approach, the starting point for the budget each year is zero. First the
program itself must be justified, then different ways of carrying out the program are examined
and the best is chosen.

3.1.3.3. Performance budgeting approach

Performance budgeting is a plan for relating resource inputs to the efficient production of
outputs. Performance budgeting focuses on the relation between input and out put of each
organizational unit rather than programs.
3.1.3.4. Planning-Programming-budgeting (PPB)
PPB emphasizes broad policy goals, strategies and objectives, rather than details of spending. In
looking at these broad goals and objectives, it considers long-range plans. In that long-range
plan both ultimate goals and objectives must be explicitly stated. After formulating the long-
range plans, it then evaluates costs and benefits of different ways of meeting the goals and
objectives. It also emphasized the government’s overall program, rather than a specific
department. For instance, both the Ministry of Health and the Ministry of Education might have
some sort of AIDS program – one for treatment and one for education. If the idea of PPB were
adopted, both of these programs would be looked at together to see they complemented each
other in meeting the government’s overall objectives.

4.2 Budgeting system in Ethiopia

Budget structures in Ethiopia
The government budget represents a plan/forecast of its expenditures and revenues for a
specified period. Commonly government budget is prepared for a year, known as a financial year
or fiscal year. In Ethiopia the fiscal year is from July 7 of this year to July 6 of the coming year
(Hamle 1 to sene 30 in Ethiopian calendar).
Budgeting involves different tasks on the expenditures and revenues of government finance. On
the side of expenditure, it deals with the determination of the total deals with the determination
of the total size of the budget (i.e. total amount of money for the year), size of outlays on
different functions, and the magnitude of outlays on various activities, on the revenue side, it
involves the determination of the size of the overall revenue and foreign aid.
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Budget structures are the formats that organize budget data. The budget structures indicate the
full responsibility of spending agency. Budget data could be classified in different ways and for
different purposes. The first classification of the budget is between revenue and expenditure.

A. Revenue budget
Revenue budget represents the annual forecast of revenues to be raised by government through
taxation and other mechanisms.
In Ethiopia, the revenue budget is usually structured into three major sources:
1. Ordinary revenue
2. External assistance and
3. Capital revenue
Hence, the fund expected from these three sources is proclaimed as the annual revenue budget
for the country.
1. Ordinary revenues include both tax and non tax revenues.
The tax revenue includes:
i. Direct tax (personal income tax, rental income tax , business income tax , agricultural
income tax , tax on dividend and chance winning);
ii. indirect taxes ( excise tax on locally manufactured goods, VAT); and
iii. Taxes on foreign trade (customs duty on imported goods and tax on coffee export).

Non-tax revenues include:

- charges and fees
- investment revenue;
- miscellaneous revenue; and so on.
2. The second major item in revenue budget is external assistance. These are grants from
donors for different structural adjustment programs; and technical assistance in cash and
material form.
3. The third items are capital revenue. This could be from domestic (sales of movable
properties and collection of loans), external loans from multilateral and bilateral creditors
mostly for capital projects.

B. Expenditure budget
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Government expenditures for administration and developmental activities are handled through
the expenditures budget. These expenditures are categorized into recurrent and capital budget.
 The recurrent budget, which covers the current expenditures, is financed in principle by
taxation (more broadly by domestic revenue from tax and non tax sources).
 The capital budget, which covers the acquisition of newly produced assets in the
economy is financed through external borrowing and grants.

Line item budget

The budget for both recurrent and capital will be presented by line items (or code of
expenditures). Thus, the budget for the sub agency or department in the case of recurrent will be
prepared by such line items as salaries, office supplies, etc. Similarly, the capital budget for
projects will be prepared by such line items as surveys and designs, equipment and machinery,
operating cost, and so on.

4.2.1 The budget process in Ethiopia

Budgeting from the initial stage of forecasting the annual revenues and expenditures to the final
stage of approval of the annual budget by the Council of Peoples Representatives passes through
a sequential and an iterative process. The annual period over which budgets are prepared is
called budget cycle.
The typical budget cycle (the period each year over which budgets are prepared) will follow the
following procedures or processes or steps:
❖ Preparation of the macro-economic and fiscal framework;
❖ Revenue forecast and determination of expenditure budget ceiling:
❖ allocation of expenditure budget between Federal and Regional governments;
❖ allocation of Federal government expenditure budget between recurrent and capital
budgets:
❖ budget call and ceiling:
❖ budget review by MoFED;
❖ Budget hearing and defense:
❖ Review and recommendation:
❖ Submission of the budget to the council of Ministers:
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 ❖ Submission of the budget to the Council of Peoples‟ Representatives:
❖ Notification and publication of the budget; and
❖ Allotment.
NB: The budget process thus includes all these stages, which obviously are sequential (one after
the other) and iterative.

CHAPTER FIVE:ACCOUNTING FOR GENERAL & SPECIAL

REVENUE FUND

5.1. Nature of General and Special Revenue Funds

The General Fund and Special Revenue Funds are discussed together in this chapter. This is
because the General Fund and Special Revenue Funds typically are used to finance and account
for most general governmental activities which include police and fire protections, central
administration, social services and similar general operating activities of state and local
governments which make the accounting and reporting of the funds to be identical. Therefore,
the chapter illustration would be for the General Fund and similar treatment would be assumed
for special revenue funds.
Special revenue funds are established to account for general governmental financial resources
that are restricted by law or contractual agreements to specific purpose (s) and special revenue
funds are exist for the life of restriction. For example, they may be used to account for federal
(state) grants which are restricted as to purpose or to account operating activities of libraries and
other services supported by special taxes. Another example might be when a tax or other revenue

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source is restricted to a specific purpose by a legislative body; its use assists in demonstrating
compliance with that purpose.
The General Fund account is used for unrestricted resources and exists from inception of the
government throughout the government`s life unlike that of special revenue funds which exist as
long as the government has resources dedicated to specific purposes.
Resources of the General Fund and special revenue funds are expended each year and are
commonly replenished for current operating purposes such as for salaries, supplies, and
contractual services; routine capital outlay such as for vehicles and equipment; and for routine
debt services such as for capital leases and equipment notes payable. Resources which are
significant in amounts which are to be expended for large capital projects or debt services are
usually transferred from the General Fund or special revenue funds to capital projects funds and
debt service funds, respectively and then expended from those funds.

5.2. Budget and Budgetary Accounts

The fact that budgets are legally binding upon administrators has led to the integration of
budgetary accounts into the general ledgers of the General Fund and special revenue funds; and
all other funds required by state laws to adopt a budget. GASBS 34 requires that a budget to
actual comparison schedule be provided for the General Fund and for each major special revenue
fund for which a budget is legally adopted.
GASBS 34 recommends that these schedules be provided as required supplementary information
(RSI), which should be placed immediately following the notes to the financial statements.
GASBS 34 provides the option, however, for governments to report the budgetary comparison
information in a budgetary comparison statement, a statement of revenues, expenditures, and
changes in fund balances ―budget and actual, which would then be part of the basic financial
statements. Thus, according to GASBS 34, a budgetary comparison can be in the form of a basic
financial statement or required supplementary information schedule.
GASB require, at a minimum, the presentation of both the originally adopted and final amended
budgets and actual amounts of inflows, outflows, and balances.
In order to achieve budgetary control, the following budgetary control accounts are needed in the
General Fund (and other funds for which a budget is adopted):

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1. Estimated Revenues- different sources revenue for the governmental unit expected to be
collected during the year. It is an account maintained to show the amount of revenue that will
be collected in future. Major revenue source classes commonly used are:
✓ Taxes
✓ Special Assessments
✓ Licenses and Permits
✓ Intergovernmental Revenues
✓ Charges for Services
✓ Fines and Forfeits
✓ Miscellaneous Revenues (including interest earnings, rents and royalties, contribution in
lieu of taxes from the government`s enterprise fund activities, escheats, and contributions
and donations from private enterprises).
2. Appropriations- An authorization granted by law to make expenditures and to incur
obligations for specific purpose.
3. Encumbrances- An account used to record the estimated amount of purchase orders or
contracts
4. Estimated Other Financing Sources- Number of financial resources estimated to be
received during the period from inter fund transfer.
5. Estimated Other Financing Uses – Amount of financial resources estimated to be disbursed
for other funds.
Subsidiary ledger accounts should be provided in whatever detail is required by law or for sound
financial administration to support each of the control accounts.
The normal balance of Budgetary and Operating Statement Accounts can be summarized as
follows.
Budgetary Accounts Operating Statement Accounts
Account Title Normal Balance Account Title Normal Balance
Estimated Revenues Debit Revenues Credit
Estimated Other Financing Debit Other Financing Credit
Sources Sources
Appropriations Credit Expenditures Debit

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Estimated Other Financing Uses Credit Other Financing Debit
Uses
Encumbrances Debit

Illustrative Journal Entries: Recording Transactions during the Fiscal year

A. Recording the budget
At the beginning of the budget period, the estimated revenue control account is debited for
the total amount of revenues expected to be recognized as provided in the revenue budget
whereas the credit will be fund balance.

Estimated revenue ------------------xx

Fund balance ------------------------xx
The accounting entry to record the legally approved appropriations budget is a debit to
fund balance and a credit to appropriations.
Fund balance -----------------------------xx
Appropriation ----------------------xx
Budgeted inter fund transfer may be recorded as
Fund balance ------------xx
Estimated other financing uses ------------- xx
✓ The estimated revenues account and estimated other financing source accounts may be
considered as pseudo asset account, because it reflects revenues expected to be received
by general fund during the fiscal year.
✓ Appropriations account and estimated other financing use may be considered as a pseudo
liability account, because it reflects legislative body’s commitment to expend.
Illustration: Assume the following are the amounts that have been legally approved as
the budget for the general fund of a certain governmental unit for the fiscal year ending
December 31, 2008.
Estimated revenue Appropriations
Taxes ----------------------------- 882,500 General gov’t ----1,150,000
Intergovernmental revenue ----200,000 Public safety -----212,000
License and permit --------------- 195,000 Total ---------- 1,362,000

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 Total ---------------------1,277,500
Estimated other financing uses (EOFU)
Operating transfer out to other funds ---------------------274,500
Required: Show in general form the entries that would be necessary to record the budget
assume it is legally approved at the beginning of the year; show the subsidiary ledger as
well.
Solution
1. Estimated revenue ----------------------------1,277,500
Fund balance ------------------------------------1,277,500
(To record general ledger)
Revenue ledger (subsidiary ledger): Dr
Tax --------------------------------------------------------882,500
Intergovernmental revenue ----------------------------200,000
License and permit -------------------------------------195,000
2. Fund balance -------------------------------------1362,000
Appropriation -----------------------------------------------------1,362,000
(To record the general ledger)
Appropriation ledger (subsidiary): Cr
General government -------------------------------------- 1,150,000
Public safety --------------------------------------------------212,000
3. Fund balance ------------------------------------274,500
EOFU ---------------------------------------------------------------274,500
(To record the general ledger)
Other financing use ledger (subsidiary): Cr
Operating transfer out to other funds --------------------274,500

4. Combined entry
Estimated revenue ---------------------------------1,277,500
Fund balance --------------------------------------- 359,000
Appropriations ---------------------------------------------------1,362,000
EOFU --------------------------------------------------------------- 274,500
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5.3 Accounting for subsequent collection of Revenues
To establish accountability for revenues and permit budgetary control, actual revenues should be
recognized in the general ledger accounts of governmental funds by credits to the Revenues
account (offset by debits to receivable accounts for revenues that are accrued or by debits
to Cash for revenues recognized when received in cash). The general ledger Revenues
account is a control account supported by Revenues subsidiary ledger accounts kept in exactly
the same details as kept for the Estimated Revenues subsidiary ledger accounts.
When revenues are collected in cash, the journal entry would be:
Cash xxx
Revenues xxx
Revenues from sources such as licenses and permits, fine and forfeits, charges for services, and
certain other sources are often not measurable until received in cash. However, under the
modified accrual basis of accounting, if such revenues are measurable in advance of collection
and available for current period expenditure, they should be accrued by recording a debit to a
receivable and a credit to Revenues.
Assume during fiscal year 2008, the Town of Hawassa has collected revenues in cash from the
sources shown below.
Licenses and permits $100,000
Fines and forfeits 151,000
Charges for services 7,000
Miscellaneous revenues 1,200
The journal entry in General Fund would be:
General Fund:
Cash 259,200
Revenues 259,200
Revenues Ledger:
Licenses and permits $100,000
Fines and forfeits 151,000
Charges for services 7,000
Miscellaneous revenues 1,200

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5.4 Expenditure accounting of financial statements
When enacted into law, an appropriation is a legal authorization for administrators to incur on
behalf of the governmental unit liabilities in the amounts specified in the appropriation ordinance
or statue, for the purposes set forth in that ordinance or statue, during the period of time
specified.
An appropriation is considered expended when the authorized liabilities have been incurred.
Because penalties are imposed by law on an administrator who incurs liabilities for any amount
in excess of that appropriated, or for any purpose not covered by an appropriation, or who incurs
liabilities after the authority to do so has expired, prudence dictates that each purchase order and
each contract be reviewed before it is signed to determine that a valid and sufficient
appropriation exists to which the expenditure can be charged when goods or services are
received. If the review indicates that a valid appropriation exists and it has an available balance
sufficient to cover the amount of the purchase order or contract being reviewed, the purchase
order or contract legally may be issued. When a purchase order or contract has been issued, it is
important to record the fact that the appropriation has been encumbered in the amount of the
purchase order or contract.
The word encumbered is used, rather than the word expended, because the amount is only an
estimate of the liability that will be incurred when the purchase order is filled or the contract
executed. It is reasonably common for quantities of goods received to differ from the quantities
ordered, and it is not uncommon for invoices prices to differ from unit prices shown on purchase
orders. The use of appropriation authority may be somewhat tentative in as much as some
suppliers are unable to fill orders or to perform as stipulated in a contract; in such cases, related
purchase orders or contracts must be canceled.

Note that the issuance of purchase orders and/or contracts has two effects: (1) the
encumbrance of the appropriation (s) that gave the governmental unit the authority to order
goods or services and (2) the starting of a chain of events that will result in the government
incurring a liability when the purchase orders are filled and the contracts are executed. Both
effects should be recorded in the order to help administrators avoid over expending
appropriations and plan for payment of liabilities on a timely basis.

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An encumbrance is an estimated amount recorded for purchase orders or contracts.
Encumbrance accounts are affected when an order is placed and when the goods or services are
received. When the order is placed, the journal entry would be as follows:
Encumbrances xxx
Reserve for Encumbrances xxx
✓ When goods or services for which encumbrances have been recorded are received and the
suppliers` invoices are approved for payment, the accounts should record the fact that
appropriations have been expended, not merely encumbered, and that an actual liability, not
merely an expended liability, exists. The journal entry would be:
Reserve for Encumbrances xxx
Encumbrances xxx

Expenditures xxx
Vouchers Payable xxx
When the actual expenditure is determined, the entities setting up the encumbrance are
reserved and the actual expenditure is recorded. The invoice amount may differ from the
amount of the government units purchase order because of such items as shipping charges,
sales taxes and price changes.
✓ Expenditures and the liability account must both be recorded at the actual amount the
governmental unit agrees to pay the vendors who have filled the purchase orders. The fact
that estimated and actual amounts differ causes no accounting difficulties as long as goods
or services are received in the same fiscal period as ordered.
The encumbrance procedure is not necessary for every type of expenditure transaction. For
example, although salaries and wages of governmental employees must be chargeable
against valid and sufficient appropriations in order to give rise to legal expenditures, many
governmental units do not find it necessary to encumber the departmental personal services
appropriations for estimated payrolls of recurring, relatively constant amounts. Departments
having payrolls that fluctuate greatly from one season to another may follow the
encumbrance procedure to make sure the personal service appropriation is not over
expended. Illustration

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 Assume purchase orders and contracts in the following estimated amounts were issued by
Johnson City:
General government $100,000
Public safety 400,000
Public works 150,000
Total $650,000
Required:
1. Show the necessary entry in general journal form to record the issuance of purchase
orders and contracts. (Show entries in subsidiary ledger accounts as well).
2. Assume all goods and services for which encumbrances have been recorded in the above
example are received in the amounts as shown below in the respective subsidiary ledger.
General government ----------------------------- 105,000
Public safety -------------------------------------- 410,000
Public work ------------------------------------------ 145,000
Prepare the journal entry in the general ledger and subsidiary ledger:
Solution:
1. Encumbrance ------------------------------660,000
Reserve for encumbrance ---------------------------------------660,000
(General ledger)
Subsidiary ledger
General government $100,000
Public safety 400,000
Public works 150,000
Total 650,000
2. Reserve for encumbrance ------------------------ 660,000
Encumbrance ---------------------------------------------------660,000
Expenditure ----------------------------------------- 650,000
Voucher payable ---------------------------------------------------650,000
(General ledger)
Subsidiary ledger
General government $100,000
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 Public safety 400,000
Public works 150,000

5.5 Accounting for Inter fund Transactions and Transfers

1. Quasi external transactions- involve the sales and purchases of goods and services
between two funds. These are transactions result in:
a. Revenues being recognized in the fund financing the provider department and
b. Expenditure being recognized in the fund financing the department receiving the
goods or services.
Example: If a car repair of birr 2,000 was done by internal service fund for which the
general fund was responsible.
The journal entry would be:
GF: Expenditure -------------------------------2,000
Due to ISF ------------------------------------------2,000
ISF: Due from GF -------------------------------2,000
Revenue ----------------------------------------------------2,000
2. Inter fund loans - are sometimes made from one fund to another with the intent that the
amount be repaid. If the loan must be repaid during the current year or soon thereafter,
the lending fund should record a current receivable, and the borrowing fund should
record a current liability.
Example : Assume that the General Fund makes a short-term loan in the amount of $100,000 to
the internal service fund.
General Fund:
Inter fund Loans receivable⎯Current 100,000
Cash 100,000
Internal Service Fund:
Cash 100,000
Inter fund Loans Payable⎯Current 100,000
If this inter fund loan require repayment for more than one year, the word “Noncurrent” should
be used rather than “Current” to signify the noncurrent nature of the loan. As shown in the

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following entries, Noncurrent is added to each of the inter fund loan receivable/payable accounts
to indicate that the loan is not payable during the current year or soon thereafter.
General Fund:
Inter fund Loans receivable⎯Noncurrent 100,000
Cash 100,000
Internal Service Fund:
Cash 100,000
Inter fund Loans Payable⎯Noncurrent 100,000
3. Operating transfers and residual equity transfers: Operating transfers and residual
equity transfers, which were reported in two different ways in governmental fund
operating statements. Under GASBS 34, both types of transfers are described simply as
inter fund transfers and reported in the same manner⎯as other financing sources by the
receiving fund and as other financing uses by the transferring fund.
a. Operating transfers: are recurring or routine transfers of resources from one fund to
other funds. They are not revenue or expenditures but other financing sources for the
receiving fund and other financing use for the paying fund. It is shifting of resources from
one fund to other fund.
Example: assume that the general fund made the budgeted operating transfers to a debt
service fund for the payment of the debit services in the amount of birr 150,000.
Required: prepare the journal entry for general fund and debt service fund.
1. Operating transfer out to DSF --------------- 150,000
Cash -------------------------------------------------------150,000
(For general fund)
2. Cash -------------------------------------150,000
Operating transfer in from general fund --------------------------------150,000
(For debt service fund)
b. Residual equity transfers: are non-routine transfers from an existing to establish a new
fund. The creation of a fund by transfer of assets and/or resources from an existing fund
to a new fund, or transfers of residual balances of discontinued funds to another fund,

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 results in the recognition of other financing sources rather than revenue by the new fund
and other financing use rather than expenditure by the transferor fund.
Example: Assume that the general fund made a permanent transfer of birr 120,000 to establish an
internal service fund.
Required: prepare the journal entry for the general fund and internal service fund.
I. Equity transfer out to ISF ------------120,000
Cash -------------------------------------------------120,000
(For the general fund)
II. Cash ------------------------------120,000
Operating transfer in from GF -----------120,000
(For the ISF)
4 Reimbursements: In certain instances, one fund may record as expenditure an item that
should have been recorded as expenditure by another fund. Often this is the result of an
accounting error. When the second fund reimburses the first fund, the first fund should
recognize the reimbursement as a reduction of its Expenditure account, not as an item of
revenue. The second fund should debit Expenditures and credit Cash, as should have
been done when the transaction initially occurred.
Example: the general fund might pay birr 4,000 for the total facilities used by special
revenue fund.
Required: prepare the entries to record the reimbursement
GF (1st fund): Expenditure --------------4,000
Cash -----------------------------4,000
SRF (2nd fund): Expenditure ---------------4,000
Cash --------------------------------4,000
Reimbursement: Cash ----------------------4,000
Expenditure ------------------4,000
A. Balance Sheet
The interim balance sheet: an interim balance sheet presents a picture of the fund at a point
within the planned year operations. Inclusion of both budgetary (showing the results of budget
transactions) and proprietary (showing actual financial condition or operations) accounts for the

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fund helps the reader analyze the financial position of the fund in a way that would not be
possible without them.
The format of interim balance sheet for X Governmental Unit prepared for the first quarter of
operation is presented below. As we see from the interim balance sheet format, the estimated
revenues figure appears on the debit side and is reduced by actual revenues to date derive the net
amount expected to be earned during the year an estimated "resource." Similarly, the
appropriations figure appears on the credit side reduced by the expenditures and encumbrances
to date; the net figure presents the net unencumbered expenditure authority (unencumbered
appropriations) at the statement date.
X Governmental Unit
General Fund
Interim Balance Sheet on March 31, 20xx

Assets and Estimated Revenues

Cash..........................................................................................................................Br. xxx
Accounts Receivable.........................................................................xxx
Allowance for Uncollectible Account Receivable.......................... (xx) xxx
Estimated Revenues...........................................................................xxx
Less: Revenues.................................................................................. (xx) xxx
Total Assets & Estimated Revenues Br. xxx
Liabilities, Appropriations, Reserves and Unreserved Fund Balance

Liabilities:
Vouchers Payable………………………………………………... xx
Due to Internal Service Fund…………………………………….. xx xxx
Appropriations:
Appropriations...............................................................................xxx
Less: Expenditures..........................................xx
Encumbrances........................................xx (xx) xxx
Reserve for Encumbrances......................................................................................... xxx

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Fund Balance.............................................................................................................. xxx
Total Liabilities, Appropriations, Reserves and Unreserved Fund Balance Br. xxx

CHAPTER SIX: ACCOUNTING CAPITAL PROJECT FUNDS &

DEBT SERVICE FUND
Introduction
The previous unit indicated that long lived assets such as office equipment, government vehicles
and other relatively minor items may be acquired by a governmental unit by expenditures or
appropriations of the general fund or one or more of its special revenue funds. Long – lived
assets used by activities accounted for by a governmental fund type are called General fixed
assets.
Acquisitions of General fixed assets that require major amounts of money ordinarily cannot be
financed from general fund or special revenue fund appropriations. Major acquisitions of

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General fixed assets are commonly financed by the issuance of long-term debt to be repaid from
tax revenues, or by special assessments against property deemed to be particularly benefited by
the long-lived asset. Other sources of financing the acquisitions of long-lived assets include
grants from other governmental units, transfers from other funds, gifts from individuals or
organizations or by a combination of several of these sources.
If money received from these sources is restricted, legally or morally to the acquisition or
construction of specified capital assets, it is recommended that a capital project fund be created
to account for these resources to be used for major construction or acquisition projects. Long
term debts will mature in the future and have to be repaid. The repayments of long-term debts are
accounted in a debt service fund. In general, this chapter will discuss how capital project fund,
debt service fund and permanent funds are accounted.

6.1 Accounting for Capital Project Fund

Capital project Funds account for financial resources to be used for the acquisition or
construction of major capital facilities (other than those financed by proprietary funds & trust
funds). Examples of major capital facilities are Administration Buildings, Civic Centers and
libraries etc. These funds do not account for the acquisition of smaller fixed assets, such as
vehicles, machinery & office equipment which are normally budgeted for & recorded as
expenditure in the General fund. It is also possible that a construction project could simply have
a subsidiary ledger within the General fund, rather than its own distinct fund.
The existence of the capital project fund, as any other fund will depend on the legal requirement
and the need for good financial management. Capital project fund do not account for the fixed
assets acquired only for the construction of the fixed assets. It exists only for the period of
acquisition or construction of the fixed assets. After the acquisition or construction is completed,
the capital projects fund will be abolished.
The fixed assets constructed are accounted for in the general capital asset account at the
governmental wide level. It does not also account for the repayment & servicing of any debt
obligations issued to raise money to finance the acquisition of capital facilities. Such debt &
debt related servicing activities are accounted for in the General long term debt accounts & Debt
service funds. Since the purpose of capital project fund is to account for the acquisition and

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deposition of revenues for specific purpose, it contains balance sheet accounts for only liquid
assets and for the liabilities to be liquidated by those assets.

6.1.1 Definitions and purpose of Capital Project Funds

Capital project funds are usually established on a project by project basis, because legal
requirements may vary from one project to another. So, the existence of capital project fund as
any other fund will depend on the legal requirement & the need for good financial management.
The focus of capital project fund is the entire life of the project. It is by definition an expendable
fund, and all its resources are expected to be used up.
However, capital project funds do not have the same year – by – year focus as the General fund.
Because of the multi – year focus of capital project fund, some accountants prefer not to close a
capital project fund annually, but others do. Whether or not to close the capital project fund
annually will depend on the unique factors of each case & will be strongly influenced by the
requirement of the financing source.
1. Financing Capital Project Funds: Capital projects obviously need large amount of
financing. Typical source of financing includes:
✓ Long term debt issue proceeds
✓ Grants from other governmental units
✓ Transfers from other funds within the governmental entity
✓ Interest income from temporary investments
✓ Gifts from individuals or foundations
✓ Special taxes and A combination of more than one of the above
Intergovernmental grants, gifts, special taxes & investment interests are considered as revenues,
whereas, Inter Fund Transfers & Long-Term Debt issue proceeds are not revenues and are
presented as other financing sources and are presented that way on the statement of changes in
financial position.
Whether to have a separate capital project funds for each project or to account for all capital
project funds in one fund depends in part on what type of financing involved. Different bond
issues & different inter-governmental transfers might well have different legal requirements &
each might require a separate capital project fund. On the other hand, if one bond issue is used to
finance several projects, a single fund may be both permissible and advisable.
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2. Means of Acquisition: Accomplishment of capital acquisition or construction project may be
brought about in one or more of the following ways:
1. Outright purchase from Fund’s cash.
2. By construction, utilizing the governmental unit’s own force.
3. By construction, utilizing the services of private contractors.
4. By capital lease agreement.
3. Costs Included: All expenditures for setting the project ready are put in the capital project
fund, including architect fees, transport costs, damages, etc. Usually, major capital facilities are
constructed by contracted labor. Construction costs incurred are charged to expenditures. At the
completion of the project, the cost of the facility is recorded as a fixed asset in the general capital
asset account at the governmental wide level. Until then, any costs incurred are shown as
construction work in progress in the general capital asset account. Generally, the year – end
closing entry in the capital project fund triggers the recording of an amount in the General capital
Asset Account equal to the credit to the expenditures account.
4. Retained Percentage: It is common in construction contracts for the entity to hold back some
percentage of the last payment of the contract and to require contractor on large scale contract to
give performance bond. This is to prevent the contractor from doing a poor-quality work,
especially in a rush to finish at the end. Basically, the entity will pay part of the final sum, and
then have its own engineers come and inspect the contractor’s work. If the contractor’s work
passes the inspection, the balance of the amount owed is paid. If the engineer finds poor quality
or undone work, the contractor must then correct the problem before the final retained sum is
paid. This amount withhold by the governmental entity is known as retained percentage.
5. Encumbrance: Some governmental units include annual capital budgets as part of their
annual appropriated budget in which case the annual capital is recorded in the general ledgers of
the various capital project funds. However, since the amount involved in a capital project is
usually large, an encumbrance account is highly recommended & it is necessary in case of
multiple subcontractors for a project. Because of this, an encumbrance accounting procedure
alone are usually deemed sufficient for control purposes.
So, recording of the budget in the general ledger might not be necessary. In capital project fund,
encumbrance is also recorded by the same amount in which the construction contract agreement

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is made between the governmental unit and the contractor and also in the same manner as that of
the general and special revenue fund.
6. Treatment of Residual Equity or Deficits: If necessary, expenditures & other financing uses
are planned & controlled carefully, actual does not exceed plans. Revenues & other financing
source of the capital project fund should equal or slightly exceed the expenditures and other
financing uses leaving a residual equity (surplus) and if long term debt had been incurred for the
purpose of the capital project fund and under this case, there are three possible options;
1. The balance could be transferred to the debt service fund, as residual equity transfer for
retiring the debt, which has been incurred for the purpose of the project.
2. If the residual equity were deemed to have come from grants or shared revenues restricted for
capital acquisitions or constructions, legal advice may indicate that any residual equity may
return to its source in proportional amount or;
3. The balance might be retained for future maintenance purpose.
In some situations, in spite of careful planning and cost control, expenditures and other financing
use of a capital project fund may exceed its revenues and other financing source resulting in a
negative fund balance (deficit). If the deficit is small, an additional transfer will probably be
requested from one or more other funds. If the deficit is relatively large and/or intended transfers
are not feasible, the governmental unit may seek additional grants or shared revenues from other
governmental units to cover the deficits. If no other alternative is available, the governmental
unit would need to finance the deficit by issuing bonds. Under these circumstances, a legal or
disciplinary action might have been sought against the project manager, since public money was
being used.
7. Investment: All the money necessary to pay for capital project is usually raised near the
inception (beginning) of the project by issuing bond; but contractors are paid as work in
progresses. Excess cash, therefore, may be temporarily invested in high-quality interest-bearing
securities such as: Treasury bills, Bank notes, Certificates of deposit and government bonds with
short maturities.

6.1.2 Classification of Capital Project Fund

Financial activities such as revenues earned and expenditures incurred for the construction or
acquisition of capital projects are recorded in almost the same manner as that of the General and
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Special Revenue funds. At the end of each fiscal year prior to a completion of a capital project,
the Revenues, other financing sources, Expenditures, other financing uses and encumbrance
ledger accounts of the capital projects fund are closed to the unreserved and undesignated fund
balance account. Upon completion of the project, the entire capital project fund is closed by a
transfer of any unused cash to the Debt Service fund or to the General fund, as appropriate.
The unreserved and undesignated fund balance ledger account of the receiving fund would be for
Residual equity transfer. Any cash deficiency in the capital projects fund probably would be
made up by a general fund. This operating transfer would be credited to the other financing
sources ledger account of the capital projects fund and debited to the other financing uses
account of the general fund.
The assets constructed with the resources of the capital projects fund are not included in that
funds balance sheet. The constructed plant assets are recorded in the governmental unit’s
general capital assets account at the governmental wide level. Furthermore, the bonds issued to
finance the capital projects fund are not a liability of the fund. Prior to maturity date of the bond,
the liability is carried to the General Long Term Debt account and when the bond matures, it will
be transferred to Debt service fund. The following illustration will show how the construction
and related activities are accounted for in a capital projects funds.
Illustration - 6.1: Assume the town of Arba Minch wants to construct a new library on the site
owned by the town. The construction is expected to cost Br.50,000,000. It is expected to be
completed within two years on June 30, year 7. In a special meeting held on July 2, year 5, the
members of the town council approved a Br.30,000,000 issuance of general obligation Bonds
maturing in 20 years. The proceeds of this sale will be used to help finance the construction of
the new library. The remaining Br.20,000,000 will be financed by an irrevocable state Grant that
has been awarded. The following transactions occurred during the fiscal year ended June 30, year
6.
1. The General fund loaned Br.500,000 to the library capital projects fund for Drafting,
Engineering and other preliminary expenses by receiving a note which is later to be settled
from the bond issue proceeds. The journal entry to record this will be:
Cash ----------------------- 500,000
Bond anticipation Notes Payable----- 500,000

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2. Out of the irrevocable grant of Br.20,000,000, the state contributed Br.5,000,000 and the
remaining is deemed to be susceptible to accrual. This will be recorded as
Cash ----------------------- 5,000,000
Due from state grant-------- 15,000,000
Revenue--------- ----------- 20,000,000
3. Preliminary Engineering and Planning costs of Br.320,000 were paid to the contractor. There
had been no encumbrances for this cost.
Construction Expenditure--------- 320,000
Cash ---------------------------- 320,000
4. The Bonds were sold at 101%. The bond indenture agreement requires that any premium to
be set aside in the related Debt Service fund.
Cash [101%*30,000,000] ------------------ 30,300,000
Other Financing source- Bond proceeds ---------- 30,000,000
Due to debt service fund ------------------------------- 300,000
5. The town of Arba Minch library capital project fund invested its Br.10,000,000 bond
proceeds on the federal Government treasury bills.
Short Term Investment – Treasury Bills ---------10,000,000
Cash---------------------------------------- 10,000,000
6. A construction contract for Br.44,270,000 is authorized and signed with the contractor.
Encumbrances ---------------------44,270,000
Fund balance Reserved for Encumbrances ------ 44,270,000
7. Orders were placed for materials estimated to cost Br.550,000.
Encumbrances ------------- 550,000
Fund Balance Reserved for Encumbrances------- 550,000
8. The materials previously ordered (transaction 7) were received at a cost of Br.510,000.
a) Fund balance reserved for Encumbrance ---- 550,000
Encombrante --------------------------------550,000
b) Construction expéditeur------------------------- 510,000
Construction Payable ----------------------------510,000
9. In addition to the construction contract of transaction 6, Br.3,900,000 was incurred for the
services of the architects and engineers; of this amount Br.3,100,000 was paid.
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No Encumbrance was recorded.
Construction expenditure -------------------- 3,900,000
Construction payable --------------------------------- 800,000
Cash ------------------------------------------------- 3,100,000
10. Received cash of Br.1,000,000 from the General fund as an operating transfer.
Cash-----------------------------------------1,000,000
Other financing source- Operating Transfers In----1,000,000
11. A partial payment of Br.10,000,000 was received from the state irrevocable grants and the
General fund loan was repaid with interest amounting to Br.10, 000.
Cash------------------ 10,000,000
Due from state grant ------------------- 10,000,000
Bond anticipation notes payable-------500,000
Interest Expenditure --------------------- 10,000
Cash ---------------------------------- 510,000
12. When the project was approximately half finished, the contractor submitted billing for a
payment of 12,000,000.
Fund balance Reserved for Encumbrance------- 12,000,000
Encumbrances ---------------------------------------- 12,000,000
Construction Expenditures---------------------------12,000,000
Construction payable ---------------------------------12,000,000
13. The contractor’s initial claim was fully verified and paid.
Construction payable---------------------- 12,000,000
Cash---------------------------------------------- 12,000,000

6.1.3 Financial Reporting for Capital Project Fund.

Each capital project fund that meets the definitions of major fund must be reported in a balance
sheet and statement of revenue, expenditure and change in fund balance. These two financial
statements are prepared for the town of Arba Minch after posting and preparing trial balance for
the forgoing transactions as follows:
Town of Arba Minch
Library Capital Project Fund
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Trial Balance
June 30, Year 6
Account Title Debit Credit
Cash Br .20, 870,000
Short term investment – Treasury Bills 10,000,000
Due from state Grant 5,000,000
Construction payable Br.1, 310,000
Due to DSF 300,000
Fund balance Reserved for encumbrance 32,270,000
Unreserved and Undesignated fund balance -
Revenues 20,000,000
OFS – Bond Proceeds 30,000,000
OFS – Operating transfers 1,000,000
Construction Expenditures 16,730,000
Interest Expenditures 10,000
Encumbrances 32,270,000 _________
Total Br.84,880,000 Br.84,880,000

Town of Arba Minch

Library Capital Projects Fund
Statement of Revenues, Expenditures and Changes in Fund Balance
For The Year Ended, June 30, year 6
Revenues:
Irrevocable State grant Br 20,000,000
Expenditures:
Construction Expenditures Br.16,730,000
Interest Expenditure 10,000 16,740,000
Excess of Revenue over Expenditure 3,260,000
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Other financing sources (Uses)
OFS – Bond Issue Proceeds 30,000,000
OFS – Operating transfers in 1,000,000 31,000,000
Excess of Revenue and OFS over Expenditure 34,260,000
Add: Fund balance – July 1, Year 5 _____-____
Fund balance – June 30, year 6 Br.34,260,000

Town of Arba Minch

Library Capital Projects Fund
Balance Sheet
June 30, Year 6
Assets
Cash Br.20,870,000
Short Term Investment – Treasury bills 10,000,000
Due from state Grant 5,000,000
Total Asset Br.35,870,000
Liabilities and Fund Balance
Construction Payable Br.1,310,000
Due to DSF 300,000
Fund Balance:
Reserved for Encumbrance 32,270,000
Unreserved and undesignated 1,990,000
Total Liabilities and Fund balance Br.35,870,000

After preparing the financial reports, some of the accounts which require closure will be closed
as follows:
1. Revenues 20,000,000
Other financing source – Bond Proceeds 30,000,000
Other financing source– Operating Transfer In 1,000,000
Construction Expenditure 16,730,000
Interest Expenditure 10,000
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 Unreserved and undesignated-fund Balance 34,260,000
2. Unreserved and Undesignated – fund balance. 32,270,000
Encumbrance 32,270,000

6.2 Debt Service Fund

Governmental entities might face cash shortage while they carry their regular activities. In such a
case, these Governmental entities may issue general obligation debt in the form of liabilities
usually bonds that are secured by the full faith and credit of the governmental unit. The payment
of the principal and interest should be well planned in advance and made timely. The payment of
principal and interest on debt is called servicing the debt.
This sub topic will discuss how government’s long-term liability is serviced and how such debt
servicing activities are accounted in a separate fund. Thus, debt service funds are used to
accumulate resource that will be used to pay the principal and interest on general obligation
long-term debt. General obligation debt does not include debt that will be serviced from resource
accumulated in proprietary funds and non-expendable trust funds. Accounting for Debt service
fund is similar to those of the General funds and Special revenue funds. However, the budgetary
account of encumbrance is not necessary for Debt service funds.

6.2.1 Characteristics of Debt Service Fund

✓ Debt service fund is used to account for both the repayment of the principal and payment
of interest of the long-term debt when they are due.
✓ Debt service fund are government funds and therefore, are expendable. Debt service
funds are for general long-term debt which has been used to provide resource for one of
the other government funds.
✓ Debt service fund use modified accrual basis. An application of modified accrual basis
has to do with interest payable. Interest payable is not accrued in the debt service fund. It
is only recorded as liability in the period when it becomes due. For example, Interest due
on January 31, 2008 would not be accrued and recorded on December 31, 2008 balance
sheet.
✓ Accounts recommended for use by Debt service fund are almost similar with accounts of
other funds.

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 ✓ The operations of Debt service fund do not involve the use of purchase orders and
contracts for goods and service, so encumbrance accounting is not needed.
✓ Timing of Debt service payment mostly due to both political and financial management
consideration, the payment should be kept consistent. The life of the issue with serial
bond is easy but with term bonds, it takes planning.
✓ Although each issue of long term or intermediate debt is a separate obligation, GASB
standard suggests a single Debt service fund be used to service all debts as much as
possible if not as few numbers of funds as possible.
✓ For convenience of bondholders, the payment of interest and the redemption of matured
bond is handled through banking system.

6.3.2 Types of Long-Term Debts

Bond is a written promise to pay a specified principal sum at a specified future date with interest.
They are typically issued in 1,000 and 5,000 denominations. Most long-term debt of
governmental units consists of one of the following two basic types of bonds:
1. Term Bond: Term bonds are bonding whose principal is repaid in lump sum at their
maturity date. Such lump sum payments are usually made possible through accumulation of
money in the Debt service fund on an actuarial basis over the life of the bond issue in a
sinking fund.
2. Serial bonds: These are bonds which have periodic maturities. The principal of a serial bond
is repaid at various or determined dates over the life of the issue. There are four types of
serial bonds: Regular serial bond, Deferred serial bond, Annuity serial bond and Irregular
serial bond. In addition to bonds, debit service fund may be required to service debts arising
from:
✓ Long term debt which arises because of different activities of governmental unit.
✓ Debt arising from the use of notes or warranty having a maturity period of more than
a year.
✓ Periodic payments required by capital lease agreements.
Source of finance for Debt service fund:
 Special taxes
 Periodic transfer from General fund
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  Investment made for purpose of repaying long term debt.
 Issuing new bond to refinance a matured bond
 Bond premium and accrued interest on bond sold
 Residual equity transfer from other funds

6.3.3 Accounting for Debt Service Fund

As with all government type funds, the measurement focus of Debt service fund is available and
spendable resources. This means that the accounting system centers on the accumulation of
resource and expenditure of those resources. As a result, long lived assets and long-term
liabilities are not found in Debt service fund. The available spendable criteria focus on assets
currently available and the claims due and payable against those assets. The timing of the
recognition of revenues and expenditure is the same for Debt service fund as for all other
governmental type funds-modified accrual bases. Therefore, the rules for recognition discussed
before are applicable to debt service funds. In general, revenues are recorded when they are
measurable and available, and expenditures are recorded when due and payable. The following
examples will illustrate the accounting for Debt service fund.
Illustration 6.2:
Assume that Arba Minch town administration issued Br 5,000,000 serial bonds on Jan 1, 2007
for the construction of recreational park. The bond bear semi- annual interest rate of 5% to be
paid on Jan 1 and August 1 and the face value of the bond is to be retired over 10 years by
making equal installment payments on Jan 1 of each year.
Farther, burden of servicing the debt on the tax payers were distributed evenly throughout the life
of bond. Accordingly, it is determined that tax payers should provide Br 625,000 as revenue in
2007. It is also agreed that the General fund will transfer Br 125,000 to the debt service funds on
July, 2007. Appropriations for the year incurred only one semi-annual interest payment to be
made on August, 2007. The entry to record the legally adopted budget is as follows:
1. Estimated revenue ………………………………… 625,000
Estimated other financing source ……………………125,000
Appropriations (5%X5000, 000) ………………….250, 000
Fund Balance ……………………………………...500,000

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During the year 2007, the debt service fund levied property tax of Br 650,000 of which 3.85%
is estimated to be uncollectible. The entry would be:
2. Property tax- receivable current ………………… 650,000
Allowance uncollectible 3.85% (650,000) ………… 25,000
Revenues ……………………………………………625,000
If cash in the amount of Br 567,000 is realized from the property tax during the current year, the
entry in the debt service fund should be:
3. Cash ……………………………………………575,000
Property tax receivable current……………………….575,000
If Br 1,250 of uncollectible taxes are write-off, the following entries should be passed
4. Allowance for un collectible property tax ……………………1,250
Property tax receivable current ………………………………1,250
To generate asset, in addition to those contributed by the tax payers and the General fund, the tax
receipts are invested in marketable securities. If Br. 500,000 is invested, the entry would be:
5. Investment……………………………… 500,000
Cash……………………………………………. 500,000
When some of the investments are sold for Br. 250,000 of which Br. 25,000 is interest earned on
investments, the following entry should be made:
6. Cash……………………. …………250,000
Investment ……………………………………… 225,000
Revenue (interest on investment) ………………….25,000
For investments due to the town bond holders, checks are issued in August after vouched for the
amount of the semiannual interest. The entries to record the due is as follows:
7. Expenditure- interest ………………………… 250,000
Interest payable……………………………………………250,000
To record the payment of the expenditure
8. Interest payable………………………………… 250,000
Cash……………………………………………….250, 000
To record the issuance of checks for payment of the transfer of Br. 125,000 from the General
fund, classified as an operating transfer in and recorded to the Debt service fund book as follows:
9. Cash …….……………………. 125,000
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 Operating Transfer In ………………………125,000
On Dec 31, 2007, the balance sheet date of the interest earned but not yet received on the
investment amounted to Br. 12,500. This transaction should be recorded as:
10. Interest receivable on investment……………… 12,500
Revenue-interest earned on investment………………. 12,500
If the remaining Br. 275,000 of the marketable securities previously acquired and still held on
Dec 31, 2007 had market value of Birr 287,500, the following journal entries should be passed to
record the increase in value.
11. Investments…………………. …12,500
Revenue from increase in fair market value of investment... 12,500
After posting the above transactions, a pre-closing trial balance for the debt service fund of the
town at the end of the year 2007 is presented as follows:
Arba Minch Town Administration
Debt Service Fund
Pre- closing Trial Balance
As of Dec 31, 2007
Debit Credit
Cash……………………………………… Br. 200,000
Property tax receivable current …………. 73,750
Allowance for uncollectible tax……………………………… Br.23,750
Investments ………………………………. 287,500
Interest receivable………………………… 12,500
Revenue property tax …………………………………………… 625,000
Revenue interest earned…………………………………………. 37,500
Revenue from increase in mkt value of security --------------------- 12,500
Operating transfer in ……………………………………………. 125,000
Expenditure (interest)……………………… 250,000
Estimated revenue………………………… 625,000
Estimated other financial source…………… 125,000
Appropriations……………………………………………………. 250,000
Fund balance……………………………………………………… 500,000
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Total ………………………………… Br.1,573,750 Br. 1,573,750
The statement of revenue, expenditure & change in fund balance and Balance sheet for Arba
Minch town can be prepared from the forgoing transaction as follows:
Arba Minch Town Administration
Debt Service Fund
Statement of Revenues Expenditures and Change in Fund Balance
For the year Ended Dec 31, 2007
Revenues:
Property tax …………………………………. Br.625,000
Interest on investment ………………………. 37,500
Increase in fair mkt value of invest…………... 12,500 ………… Br.675, 000
Expenditures:
Semiannual interest …………………………. …………………… (250,000)
Excess of revenue over expenditure…………………………………… 425,000
Add: Other financing sources:
Operating transfer in ……………………………. 125,000
Less: Other financing uses ………………………. 0……………………125,000
Excess of revenue and other financing sources
Over expenditure and other financing uses…………………………………550,000
Add beginning fund balance……………………………………………… 0
Ending fund balance……………………………………………………Br.550,000

Arba Minch Town Administration

Debt Service Fund
Balance sheet
Dec 31, 2007
Assets
Cash ………………………………………………….…Br. 200,000
Property tax receivable ……………………73,750
Less allowance for uncollectible accounts (23,750) ………. 50,000
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Investments………………………………………………….287,500
Interest receivable…………………………………………… 12,500
Total assets ………………………………………… 550,000
Liabilities …………………………………………………. 0
Fund balance ……………………………………………… 550,000
Total liability & fund equity………………………… Br.550,000
After preparing the different financial statements, the following closing entries will be made:
1. Appropriations …………………………… 250,000
Fund balance ……………………………. 500,000
Estimated revenue ……………………… ….625,000
Estimated other financing source…………. ...125,000
2. Revenue -property tax …………………. 625,000
Revenue-interest on investment …………… 37,500
Revenue increase in mkt value………… 12,500
Other financing source-OTI……………… 125,000
Expenditure ……………………………… 250,000
Fund balance……………………………… 550,000

CHAPTER SEVEN: ACCOUNTING FOR PROPRIETARY

FUNDS

Introduction
All of the funds discussed in previous chapters (General, Special revenue, Capital project, Debt
service and Permanent funds) are classified as governmental funds and owe their existence to
legal constraints placed up on the raising of revenue and/or the use of resources for the provision
of services to the public and the acquisition of facilities to aid in the provision of services. Funds
discussed in the previous units record only current financial resources and liabilities that will be
settled with current financial resources. Fixed assets and long – term debts are not accounted
for in governmental funds, but are presented in government – wide statement. Governmental
funds recognize revenues and expenditures, not expenses. But there are governmental entities

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that operate like business organizations. The activities of these organizations will be accounted in
a Proprietary fund. This chapter is totally devoted to the discussion of proprietary funds.

7.1. Accounting principles of Proprietary Funds

A second fund classification, proprietary funds, describes funds that are used to account for
activities similar to those often engaged in by profit – seeking businesses. That is, users of
goods or services provided by a proprietary fund are charged amounts directly related to the
costs of providing the goods or services.
Thus, in the pure case, proprietary funds are self – supporting. Proprietary funds use the
economic resources measurement focus and the accrual basis of accounting. Because revenues
and expenses (not expenditures) are recognized on the accrual basis, financial statements of
proprietary funds are similar in many respects to those of business organizations. Fixed assets
used in fund operations and long – term debt services from fund revenues are recorded in the
accounts of each proprietary fund. Depreciation of fixed assets is recognized as an expense, and
other accruals and deferrals common to business accounting are recorded in proprietary fund.
Budgets should be prepared for proprietary funds to facilitate management of fund activities, but
GASB standards do not require or encourage budget – actual reporting.
The use of accrual accounting permits financial statement users to observe whether proprietary
funds are operated at a profit or a loss. The accrual basis of accounting requires revenues to be
recognized when earned and expenses to be recognized when incurred.
Two types of funds are classified as proprietary funds: Internal service funds and Enterprise
funds. Internal service funds provide, on a user charge basis, services to other government
departments. Enterprise funds provide, on a user charge basis, services to the general public.
Three financial statements are required for proprietary funds: (1) statement of Revenue, expense
and change in fund net asset, (2) statement of net Assets (or balance sheet) and (3) statement of
cash flows. As is true for governmental funds, enterprise funds are reported by major fund, with
non – major funds presented in a separate column. However, internal service funds are reported
in a single column.

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7.1.1 Internal Service Fund
As governments become more complex, efficiency can be improved if services used by several
departments of funds or even by several governmental units are combined in a single
administrative unit. Purchasing, computer services, garages, janitorial services, and risk
management activities are common examples. Activities that produce goods or services to be
provided to other departments or other governmental units on a cost – reimbursement basis are
accounted for by Internal service funds.
Internal service funds recognize revenues and expenses on the accrual basis. They account for
all fixed assets used in their operations and for long term debt to be serviced from revenues
generated from their operations, as well as for all current assets and current liabilities. Net assets
are to be reported in three categories: Invested in capital assets and net of related debt,
Restricted and Unrestricted
➢ Establishment and Operation of Internal Service Funds
The establishment of an internal service fund is normally subject to legislative approval. The
original allocation of resources to the fund may be derived from a transfer of assets from another
fund, such as the General fund or an Enterprise fund, intended as a transfer not to be repaid by
the Internal service fund over a period of years. Because Internal service funds are established to
improve the management of resources, they should be operated and accounted for on a business
basis.
For example, assume that administrators request the establishment of a fund for the purchasing,
warehousing, and issuing of supplies used by a number of funds and departments. A budget
should be prepared for the internal service fund (but not recorded in the accounts) to
demonstrate that fund management has realistic plans to generate sufficient revenues to cover the
cost of goods issued and such other expenses, including depreciation, that the governing body
intends fund operations to recover. Departments and units expected to purchase goods and
services from internal service funds should include in their budgets, the anticipated outlays for
goods and services.
During the year, as supplies are issued or services are rendered, the internal service fund records
operating revenues (Charges for services is an account title commonly used instead of sales).
Since the customer is another department of the government, a journal entry to record the

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purchase is recorded at the same time the internal service fund records revenue. If the other fund
is a governmental fund, the purchase is recorded as expenditure. Periodically and at year – end,
an operating statement should be prepared for each internal service fund to compare revenues
and related expenses: these operating statements, called statement of revenues, expenses, and
changes in fund net Assets, are similar to income statements prepared for investor – owned
businesses.
Illustrative entry for Internal Service Funds
The following illustration will show the accounting of internal service fund clearly.
Illustration 7.1: Assume that the administrators of the town of Arba Minch obtain approval
from the town council in early 2007 to centralize the purchasing, Storing and issuing functions
and to administer and account for these functions in a supplies fund. A payment of Br. 596,000
cash is made from the General fund which is not to be repaid by the supplies fund. Of the Br.
596,000, Br. 290,000 is to finance capital acquisitions and Br. 306,000 is to finance non capital
acquisitions. Additionally, a long – term advance of Br.200, 000 is made from the water utility
fund for the purpose of acquiring capital assets. The advance is to be repaid in 20 equal annual
installments, with no interest. The receipt of the transfer in and the liability to the water utility
fund would be recorded in the supplies Fund accounts in the following manner:
1. Cash …………………………………. 796,000
Transfers In ……………………………….596,000
Advance from water utility fund …………200,000
To provide some revenue on funds not needed currently, Br.50,000 is invested in marketable
securities:
2. Investment ……………………. 50,000
Cash ………………………………50,000
Assume that early in 2007, a satisfactory warehouse building is purchased for Br.350,000;
Br.80,000 of the purchase price is considered as the cost of the land. Necessary warehouse
Machinery and Equipment is purchased for Br.100,000. Delivery Equipment is purchased for
Br.40,000. If purchases are made for cash, the acquisition of the assets would be recorded in the
books of the supplies fund as follows:
3. Land ……………………………………………. 80,000
Building ………………………………………… 270,000
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 Machinery and Equipment – Warehouse………. 100,000
Equipment – Delivery …………………………. 40,000
Cash …………………………………… 490,000
Supplies are ordered to maintain inventories at a level commensurate with expected usage. No
entry is needed because proprietary funds are not required to record encumbrances. During
2007, it is assumed that supplies are received and related invoices are approved for payment in
the amount of Br.523,500; the entry needed to record the asset and the liability is as follows:
4. Inventory of Supplies ………………………………… 523,500
Accounts Payable………………………………… 523,500
Governmental funds that maintain relatively minor inventories of supplies usually account for
them on the physical inventory basis. The supplies fund, however, should account for its
inventories on the perpetual inventory basis because the information is needed for proper
performance of its primary function. Accordingly, when supplies are issued, the Inventory
account must be credited for the cost of the supplies issued. Because the using fund will be
charged an amount in excess of the inventory carrying value, the Receivable and Revenue
accounts must reflect the selling price.
The markup above cost should be determined on the basis of budgeted expenses and other items
to be financed from net income. If the budget for the town of Arba Minch supplies fund
indicates that a markup of 30 percent on cost is needed, issuance to General fund departments of
supplies costing Br.290, 000 would be recorded by the following entries:
5a. Operating expenses – cost of sales and services … 290,000
Inventory of Supplies………………………………. 290,000
5b. Due from General fund (290,000*130%) ………… 377,000
Operating Revenues – charges for Sales and Services ----- 377,000
During the year, it is assumed that purchasing expenses totaling Br19,000, ware – housing
expenses totaling Br.12,000, delivery expenses totaling Br.13,000, and administrative expenses
totaling Br.11,000 are incurred. The government has chosen to separate operating expenses into
three categories: (1) costs of sales and services, (2) administration, and (3) depreciation. If all
liabilities are vouchered before payment, the entry would be as follows:
6. Operating Expenses – costs of Sales and Service ………… 44,000
Operating Expenses – administration …………………… 11,000
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 Accounts Payable …………………………………….55,000
If collections from the General Fund during 2007 total Br 322,000, the entry would be as
follows:
7. Cash ……………………………………322,000
Due from General fund ………………….322,000
Assuming that payment of vouchers during the year totals Br.567,500, the following entry is
made:
8. Accounts payable …………………………………………….567,500
Cash ……………………………………………………………….567,500
The advance from the water utility fund is to be repaid in 20 equal annual installments;
repayment of one installment at the end of 2007 is recorded as follows:
9. Advance from water utility fund (200,000/20) …………10,000
Cash ………………………………………………………….10,000
At the time depreciable assets are acquired, the warehouse building has an estimated useful life
of 20 years; the warehouse machinery and equipment have an estimated useful life of 10 years;
the delivery equipment has an estimated useful life of 10 years; and non of the assets is expected
to have any salvage value at the expiration of its useful life. Under these assumptions, straight –
line depreciation of the building would be Br 13, 500 per year; depreciation of machinery and
equipment, Br 10,000 per year; and depreciation of delivery equipment, Br.4, 000 per year.
(Since governmental units are not subject to income taxes, there is no incentive to use any
depreciation method other than straight – line.)
10. Operating Expenses – depreciation ……………………. 27,500
Accumulated Depreciation – Building ……………………………13,500
Accumulated Depreciation – Machinery and equipment ………….10,000
Accumulated Depreciation – Equipment – Delivery ……………….4,000
Organizations that keep perpetual inventory records must adjust the records periodically to
reflect shortages, overages, and out of condition stock disclosed by physical inventories.
Adjustments to the inventory account are also considered to be adjustments to the warehousing
expenses of the period. In this illustrative case, it is assumed that no adjustments are found to be
necessary at year end.

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Interest income is earned and received in cash on the investments purchased at the beginning of
the year:
11. Cash …………………………………………………. 3,000
Non operating Revenues – interest ………………. 3,000
Assuming that all revenues, expenses, and transfers applicable to 2007 have been properly
recorded by the entries illustrated, the nominal accounts should be closed as of December 31,
2007:
12. Operating Revenues – Charges for sales and Services ….377, 000
Non-operating Revenues – Interest ………………………. 3, 000
Transfers In ………………………………………………596,000
Operating Expenses – costs of sales and Services ……. 334,000
Operating Expenses – Administration…………………. 11,000
Operating Expenses – depreciation …………………… 27,500
Net Assets – invested in Capital Assets – Net of Related Debt … 272,500
Net Assets unrestricted ……………………………………………331,000
Note that the account, Net Assets, is separated into two components: (1) invested in Capital
Assets net of Related Debt and (2) Unrestricted. The first component of net assets (Br.272,500)
is computed by taking the fixed assets (entry 3 – Br. 490,000) less accumulated depreciation
(entry 10 – Br.27,500) less the amount due to the enterprise fund (entry 1 – Br.200,000 less
(entry 9 – Br.10,000 = Br.190,000). The remaining Br.331, 000 is unrestricted; no restrictions
exist on the remaining funds. The balance sheet, statement of Revenues, Expenses, and changes
in Fund net assets; and statement of cash flows for the supplies fund are included in the
proprietary funds’ statements at the end of this chapter.

7.1.2 Enterprise Funds

Enterprise funds are used by governments to account for services provided to the general public
on a user charge basis. Under GASB Statement No.34, enterprise fund must be used in the
following circumstances:
✓ When debt is backed solely by fees and charges.
✓ When a legal requirement exists that the cost of providing services for an activity
including capital costs be recovered through fees or charges.
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 ✓ When a government has a policy to establish fees and charges to cover the cost of
providing services for an activity.
The most common examples of governmental enterprises are public utilities, notably water and
sewer utilities. Electric and gas utilities, transportation systems, airports, ports, hospitals, toll
bridges, municipal golf courses, parking lots, parking garages, lotteries, municipal sports
stadiums, and public housing projects are examples frequently found.
Enterprise funds are to be reported using the economic resources measurement focus and
accrual basis of accounting. Fixed assets and long – term debts are included in the accounts.
As indicated earlier in this chapter, enterprise funds use accounting and reporting standards
provided for business enterprises issued on or before November 30, 1989 (unless that guidance
conflicts with GASB guidance) and may use guidance by the FASB for businesses issued after
that date. As a result, the accounting is similar to that for business enterprises and includes
depreciation, accrual of interest payable, amortization of discounts & premiums on debt and so
on.
Governmental enterprises often issue debt, called revenue bonds, that is payable solely from the
revenues of the enterprise. These bonds are recorded directly in the accounts of the enterprise
fund. On the other hand, general obligation bonds are often issued for governmental enterprises,
in order to provide greater security by pledging the full faith and credit of the government in
addition to enterprise revenues. If payment is to be paid from enterprise revenues, these general
obligation bonds would also be reflected in the accounts of enterprise funds.
Budgetary accounts should be used only if required by law. Debt service and construction
activities of a governmental enterprise are accounted for within an enterprise fund, rather than by
separate debt service and capital project funds. Thus, the reports of enterprise funds are self –
contained; and creditors, legislators, or general public can evaluate the performance of a
governmental enterprise by the same criteria used to evaluate investor – owned enterprises in the
same industry. By far the most numerous and important enterprise services rendered by local
governments are public utilities. In this subtopic, water utility fund is used to illustrate
accounting for enterprise fund as follows:
Illustration 7.2: It is assumed that the town of Arba Minch is located in a state that permits
enterprise funds to operate without formal legal approval of their budgets. Accordingly, the

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budget is not recorded in enterprise accounts. Assume that as of December 31, 2006, the
accountant for the town of Arba Minch prepared the post-closing trial balance shown below:
Town of Arba Minch
Water Utility Fund
Post-closing Trial Balance
December 31, 2006
Debit Credit
Cash Br 467,130
Customer Accounts Receivable 72,500
Accumulated Provision for uncollectible Accounts Br 2,175
Materials and Supplies 37,500
Restricted Assets 55,000
Utility Plant in Service 4,125,140
Accumulated Provision for Depreciation of utility Plant 886,500
Construction work in progress 468,125
Accounts payable 73,700
Revenue Bonds Payable 2,700,000
Net Assets – Invested in Capital Assets, Net of Related Debt 1,006,765
Net Assets – Restricted for Debt Service 55,000
Net Assets – Unrestricted 501,255
Total Br.5,225,395 Br.5,225,395

It is common for governmental enterprises, especially utilities, to report “restricted assets.” In

this example, the restricted assets include Br.55, 000 set aside for future debt service payments as
required by a revenue bond indenture agreement. When utility customers are billed during the
year, appropriate revenue accounts are credited, assuming that during 2007, the total bills to
nongovernmental customers amounted to Br. 975,300, bills to the town of Arba Minch General
fund amounted to Br.80,000, and all revenue was from sales of water, the following entry
summarized the results.
1. Customer Accounts Receivable ………………………. 975,300

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 Due from General Fund………………………………. 80,000
Operating Revenues – Charges for Sales and Services----1,055,300
If collections from non-governmental customers totaled Br.968,500 for water billings, the
following entry is made:
2. Cash…………………………………………………… 968,500
Customer Accounts Receivable …………………. 968,500
Customers owing bills totaling Br.1,980 left the town and could not be located. The unpaid
balances of their accounts receivable were written off to the accumulated provision for
uncollectible accounts as follows:
3. Accumulated provision for uncollectible Accounts ………. 1,980
Customer Accounts Receivable……………………….1,980
Governments commonly impose impact fees on developers or builders to pay for capital
improvements, such as increased water and sewer facilities that are necessary to service new
developments. Increasingly, governments are using impact fees to limit sprawl and to create
incentives for developers to refurbish existing commercial properties rather than create new
ones. Assume the town of Arba Minch imposes impact fees on commercial developers in the
amount of Br.12,500 and that these fees are not associated with specific projects or
improvements.
4. Cash ………………………………………………………. 12,500
Capital contributions…………………………………… 12,500
Note that capital contributions are a nominal account that will increase net assets but is reported
separately in the statement of revenues, expenses, and changes in fund net assets. Hookup fees
for new customers are not capital contributions but are exchange transactions and are included in
operating revenues. If the impact fees had been restricted to a specific project, the cash would
have been reported as a restricted asset.
During 2007, the town of Arba Minch established a supplies fund, and the Water utility fund
advanced Br.200,000 to the supplies fund as a long – term loan. The entry by the supplies fund
is illustrated in entry 1 in the “Illustration 7.1 of this unit. The following entry should be made
by the Water Utility fund:
5. Long Term Advance to Supplies fund ………………. 200,000
Cash……………………………………………… 200,000
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Materials and supplies in the amount of Br.291, 500 were purchased during the year by the water
utility fund, and vouchers in that amount were recorded as a liability:
6. Materials and Supplies……………………………… 291,500
Account Payable ………………………………. 291,500
When materials and supplies are issued to the departments of the water utility fund, operating
expenses are charged for the cost of materials and supplies. Materials and supplies issued for use
for construction projects are capitalized temporarily as construction work in progress (Numbers
are assumed).
7. Operating Expenses – costs of sales and Services …. 110,400
Operating expenses – administration …………… 60,000
Construction work in progress…………………. 27,600
Materials and supplies …………………… 298,000
Payrolls for the year were chargeable to the accounts in the following entry. Taxes were accrued
and withheld in the amount of Br.90,200, and the remainder was paid in cash.
8. Operating expenses – Costs of sales and services …… 253,600
Operating expenses – Administration…………………. 92,900
Operating expenses – Selling ………………………… 17,200
Construction work in progress………………………… 58,900
Payroll taxes payable ……………………… 90,200
Cash………………………………………… 332,400
Bond interest in the amount of Br.189, 000 was paid:
9. non-operating expenses – interest……………………. 189,000
Cash ………………………………………………189,000
Included in the amount above was bond interest in the amount of Br.17,800 that was considered
to be properly charged to construction:
10. Construction work in progress ………………………. 17,800
Non-operating expenses – interest ………………... 17,800
Construction projects on which costs totaled Br.529,300 were completed and the assets placed in
service. Utility plant in service summarizes the investment in fixed assets used for utility
purposes.
11. Utility plant in service ………………………………. 529,300
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 Construction work in progress …………………… 529,300
Payment of accounts totaled Br.275,600, and payments of payroll taxes amounted to Br.81,200.
12. Accounts payable …………………………………… 275,600
Payroll Taxes payable ………………………………. 81,200
Cash ……………………………………………… 356,800
Near the end of 2007, the water utility fund received Br.10,000 cash from the supplies fund as
partial payment of the long – term advance.
13. Cash ………………………………………………… 10,000
Long term advance to supplies fund ……………. 10,000
During the year, the Water utility fund made a transfer of Br.200,000 to the fire station addition
capital projects fund.
14. Transfer out ………………………………………… 200,000
Cash……………………………………………… 200,000
At year – end, several adjustments are necessary. First, depreciation is recorded as an operating
expense:
15. Operating Expenses…………………………122,800
Accumulated provision for depreciation of utility plant….122,800
Provision is made for bad debts from utility customers. In accord with guides issued by GASB,
the bad debt provision is a revenue deduction, not an expense:
16. Operating Revenues – Charges for sales and services …… 2,200
Accumulated provision for uncollectible accounts …….2,200
In accord with the revenue bond indenture, Br.55,000 was transferred from operating cash to the
restricted assets category. The transfer required a reclassification of net assets.
17. a) Restricted Assets …………………………………………. 55,000
Cash …………………………………………………… 55,000
17 b) Net Assets – unrestricted ………………………………. 55,000
Net Assets – Restricted for Debt service ……………… 55,000
Assuming that the illustrated entries for the transactions have been posted, the following trial
balance shows the water utility funds before closing entries:
The Town of Arba Minch
Water Utility Fund
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 Pre-closing Trial balance
As of December 31, 2007
Debit Credit
Cash Br 124,930
Customer Accounts Receivable 77,320
Accumulated Provision for uncollectible Accounts Br 2,395
Due from general fund 80,000
Materials and Supplies 31,000
Advance to other funds 190,000
Restricted Assets 110,000
Utility Plant in Service 4,654,440
Accumulated Provision for Depreciation of utility Plant 1,009,300
Construction work in progress 143,125
Accounts payable 89,600
Payroll tax payable 9,000
Revenue Bonds Payable 2,700,000
Net Assets – Invested in Capital Assets, Net of Related
Debt 1,006,755
Net Assets – Restricted for Debt Service 110,000
Net Assets – Unrestricted 446,255
Operating revenue- changes for sales and service 1,053,100
Capital contribution 12,500
Operating expense-cost of sales and service 364,000
Operating expense-administrative 152,900
Operating expense-selling 17,200
Operating expense-depreciation 122,800
Non-operating expense-interest 171,200
Transfer out 200,000
Total Br.6,438,915 Br.6,438,915

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Revenues, expenses, transfers, and capital contributions accounts for the year were closed to the
unrestricted net Assets account as follows:
18. Operating Revenues – charges for sales and services 1,053,100
Capital contributions ……………………………………. 12,500
Operating Expenses – costs of sales and services 364,000
Operating expenses – Administration …… 152,900
Operating expenses – selling … 17,200
Operating Expenses – Depreciation …… 122,800
Transfers out…………………………… 200,000
Non-operating Expenses – interest … 171,200
Net Assets – unrestricted ……… 37,500
Each year, it is necessary to adjust the net Assets – Invested in Capital Assets, net of Related
Debt by providing for increases in capital assets, decreases due to depreciation, and increases or
decreases due to debt associated with capital assets. For 2007, the adjustments would be as
follows:
Additions to construction work in progress (Entry 7, 8 &10) Br.204, 300
Deduction – due to increase in Accumulated provision for Depreciation (Entry15) (122,800)
Increase Br.81,500
Entry 11 had no effect on this classification as the Br.529, 300 was a reclassification of capital
asset account. No revenue bonds were sold or redeemed during the year. Accordingly, the
following entry would be made.
19. Net asset – unrestricted-------------------------------- 81,500
Net asset- invested in capital asset, net of related Debt------------- 81,500

7.3 Financial Statement for Proprietary fund

1. Statement of Net asset
While preparing the statement of net asset, GASB requires a classified format where current
assets, noncurrent assets, current liability and noncurrent liabilities are presented separately. The
statement of net asset for the proprietary funds for the town of Arba Minch is presented in the
next page.
Town of Arba Minch
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 Statement of Net asset
Proprietary Fund
December 31, 2007
Business type activity Government activity-
Enterprise fund –water utility Internal service Fund
Assets
Current asset:
Cash Br.124,930 Br.3,500
Investment 50,000
Accounts Receivable (net) 74,925
Due from general fund 80,000 55,000
Materials and supplies 31,000 233,500
Total current asset 310,855 342,000
Non-current asset:
Restricted assets 110,000
Long term advance to supplies
fund 190,000
Capital assets net of acc.
Depreciation 3,788,265 462,500
Total Non-current assets 4,088,265 462,500
Total Asset Br.4,399,120 Br.804,500
Liabilities
Current liability:
Accounts payable 89,600 11,000
Payroll taxes payable 9,000
Total current liability 98,600 11,000
Non-current liability
Advance from water utility fund 190,000
Revenue bonds payable 2,700,000
Total non-current liability 2,700,000 190,000

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Total liability Br.2,798,600 Br.201,000
Net assets
Invested in capital asset net of
debt 1,088,265 272,500
Restricted for debt service 110,000
Unrestricted 402,255 331,000
Total Net asset Br.1,600,520 603,500

2. Statement of Revenue, Expense, and Changes in Fund Net Asset: The statement of
revenues, expenses and changes in fund net asset for the proprietary funds of the town of Arba
Minch presented below. GASB requires that operating revenues and operating expense be
shown separately from and prior to non-operating revenue and expense. Operating revenues
should be displayed by source. Operating expense may be reported by function or may be
reported by object classification such as personal service, supplies, travel, etc. capital
contribution, extraordinary and special items and transfers should be shown separately after non-
operating revenue and expense.
Town of Arba Minch
Statement of Revenue, Expense, and changes in fund net asset
Proprietary Fund
Decmber31, 2007
Business type activity Government activity-
Enterprise fund –water utility Internal service Fund
Operating Income
Charges for sales and service Br.1,053,100 Br.377,000
Operating expenses
Cost of sales and service 364,000 334,000
Administration 152,900 11,000
Selling 17,200
Depreciation 122,800 27,500
Total operating expense 656,900 372,500

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Operating income 396,200 4,500
Non-operating revenue (Expense)
Interest revenue 3,000
Interest expense (171,200)
Total non operating revenue and
expense (171,200) 3,000
Income before contribution and
transfers 225,000 7,500
Capital contribution 12,500
Transfer in 596,000
Transfer out (200,000)
Change in net asset 37,500 603,500
Net asset January 1,2007 1,563,020 0
Net asset December31,2007 Br.1,600,520 Br. 603,500

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Chapter Eight: Accounting for fiduciary funds
Learning Objectives
After studying this chapter, you should be able to:
✓ Explain how fiduciary funds are used to report on the fiduciary activities of a
government.
✓ Distinguish among agency funds and trust funds (private-purpose, investment, and
pension).
✓ Describe the uses for and characteristics of agency funds.
✓ Explain the activities of and accounting and financial reporting for commonly used
agency funds.
✓ Explain the purpose, creation, operation, accounting, and financial reporting for a cash
and investment pool (including an investment trust fund); a private purpose trust fund;
and a pension trust fund.
✓ Describe accounting for other post-employment benefits plans

Introduction
Fiduciary activities benefit other individuals, organizations, or governments, rather than the
reporting government. For this reason, Governmental Accounting Standards Board (GASB)
standards exclude the reporting of fiduciary activities in the government-wide financial
statements. However, fiduciary activities are reported in the fiduciary fund financial statements,
the focus of this chapter.
Fiduciary funds are used to account for those activities in which a government holds assets as an
agent or trustee. To account for these private-purpose fiduciary activities agency funds,
investment trust funds, private-purpose trust funds, and pension trust funds are used. Resources
that are held in trust for the benefit of the government’s own programs or its citizenry should be
accounted for using a governmental fund rather than a fiduciary fund. Such public-purpose trusts
should be accounted for as special revenue funds if the resources are expendable for the trust
purpose or as permanent funds if the trust principal is permanently restricted.

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Trust funds differ from agency funds principally in degree: Trust funds often exist over a longer
period of time than an agency fund, represent and develop vested interests of a beneficiary to a
greater extent, and involve more complex administration and financial accounting and reporting.
Agency funds are used only if a government holds resources in a purely custodial capacity for
others. As noted, specific accounting procedures and limitations depend on the enactment that
brought about creation of a particular trust or agency fund, plus all other regulations under which
it operates. Regulations include pertinent statutes, ordinances, wills, trust indentures, and other
instruments of endowment, resolutions of the governing body, statements of purposes of the
fund, kinds and amounts of assets held, and others. This aggregate of factors helps determine the
transactions in which a fiduciary fund may and should engage.

8.1 Agency funds

Agency funds are used to account for assets held by a government acting as an agent for one or
more other governments or for individuals or private organizations. Assets that are held in an
agency fund belong to the party or parties for which the government acts as agent. Therefore,
agency fund assets are offset by liabilities equal in amount; no fund equity exists. GASB requires
agency fund assets and liabilities to be recognized on the accrual basis. Revenues and expenses
are not recognized in the accounts of agency funds, however.
Accounting for Tax Agency Funds
Taxes levied each year should be recorded in the accounts of the appropriate funds of each
government in the manner illustrated in preceding chapters. Although an allowance for estimated
uncollectible current taxes would be established in each fund, the gross amount of the tax levy
for all funds should be recorded in the Tax Agency Fund as a receivable. Note the receivable is
designated as belonging to other funds and governments, and the receivable is offset in total by a
liability. Assuming total real property taxes certified for collection during 2011 amounted to
$9,468,000, the entry would be as follows:

Tax Agency Fund:

Taxes Receivable for Other Funds
and Governments—Current . . . …… 9,468,000
Due to Other Funds and Governments . . . . . . 9,468,000

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If collections of 2011 taxes during a certain portion of the year amounted to
$4,734,000, the Tax Agency Fund entry would be:
Tax Agency Fund:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,734,000
Taxes Receivable for Other Funds
and Governments—Current . . . ……………………… 4,734,000

8.2 Trust fund

In addition to agency funds, the fiduciary fund classification includes investment trust funds,
private-purpose trust funds, and pension trust funds.
Historically, trust funds have been created to account for assets received by the government in a
trust agreement in which the assets are to be invested to produce income to be used for specified
purposes (generally cultural or educational). The majority of such trusts benefit the government’s
own programs or its citizenry. As discussed and illustrated in Chapter 4, trusts that benefit the
government’s own programs or citizens at large are accounted for as either special revenue funds
or permanent funds. The type of fund used depends on whether the principal of the gift can be
spent for the specified purposes or is permanently restricted for investment, with only the
earnings therefrom available to spend for the specified purposes.

CHAPTER: NINE: ACCOUNTING FOR NOT- FOR- PROFIT

NON-GOVERNMENTAL ORGANIZATIONS (NGOS)
Introduction

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Not-for-profit NGOs are legal and accounting entities that are operated for the benefit of the
society as a whole rather than for the benefit of an individual proprietor or a group of partners or
stock holders. Thus, the concept of net income is not meaningful for a not-for-profit NGOs. In
stead, as does the internal service fund of a government entity described in the previous chapter,
not-for-profit NGOs strive only to obtain revenues sufficient to cover their expense.

Not-for-profit NGOs constitute a significant segment of the Ethiopian economy. These not-for-
profit NGOs includes civic organizations, cultural institutions, fraternal organizations, labor
unions, museums, political parties, private and community foundations, professional
associations, religious organizations, social and country clubs, trade associations, religious
organizations, voluntary health and welfare organizations, universities and hospitals.

The distinction among not-for-profit, for profit and government organizations is not always clear.
Hospitals and universities can be organized as not-for-profit, for profit or government entities.
Whether an organization is not-for-profit, for profit or government depends not on the activity
they perform, but rather on such factors as the resource of their revenue, their intention to earn
profit and their ownership. The accounting for the different not-for-profit organization is almost
the same except a minor difference which arise from the nature of the organizations. There fore,
in this course, we will discuss the accounting for not-for-profit organizations in general,
disregarding their difference.

9.1 Characteristics of Not-for-profit NGOs

Not-for-profit NGOs are in certain respect hybrid because they have some characteristics similar
to those of governmental entities and other characteristics similar to those of business
organizations. Among the features of not-for-profit NGOs that resemble characteristics of
government entities are the following:
1. Service to society: Not-for-profit NGOs often render service to society as a whole. The
members of this society may range from a limited number of citizens in a community to
almost the entire population of a city, state or nations. Similar to services rendered by
governmental entities, the services of not-for-profit NGOs are of benefit to the many
rather than the few.

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 2. No profit motivate: Not-for-profit NGOs do not operate with the objective of earning
profit. Consequently, not-for- profits NGOs generally are exempt from federal and state
income tax.
3. Financing by the citizenry: As with governmental entities, most not-for-profit NGOs
depends on the general population for a substantial portions of their support, because
revenues from charges for their services are not intended to cover all their operating
costs. Exceptions are professional societies and the philanthropic foundations established
by wealthy individuals or families. Where as the citizenry’s contributions to government
revenues are mostly involuntary taxes, their contributions to non profit organizations are
voluntary contributions.
4. Stewardship for resources: Because, a substantial portion of the resources of a not-for-
profit organization is donated, the organizations must account for the resources on a
steward ship basis similar to that of governmental entities. The steward ship requirement
makes fund accounting appropriate for many not-for-profit NGOs, as it is for
governmental entities.
5. Importance of budget: The four preceding characteristics of not-for-profit NGOs cause
their annual budget to be as important as for governmental entities.

Among the characteristics of not-for-profit NGOs that resembles those of business enterprises
are the following:
1. Governance by board of directors: As with business corporations, non profits NGOs
are governed by elected or appointed directors, trustees, or governor. In contrast, the
legislative and executive branches of a governmental entity share the responsibility for
its governance.
2. Measurement of cost expirations: Governance by board of directors means that a not-
for- profit NGO does not answer to a law making body as does a governmental entity.
One consequence is that cost expirations, or expenses, rather than expenditures, are
reported in the statement of activities of most of not-for-profit NGOs. Allocation of
expenses (including depreciation) and revenues to the appropriate accounting period,
thus, is a common characteristic of not – for – profit organization and business
enterprise.

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 3. Use of accrual basis of accounting: Not-for-profit NGOs employ the same accrual basis
of accounting used by business enterprises.
9.2 Types of Fund used by not-for-profit NGOs
The internal accounting unit for many not-for-profit NGOs is the fund, which is an accounting
entity with a self balancing set of accounts recording cash and other financial resources, together
with all related liabilities and residual balances, and changes there in, which are segregated for
the purpose of carrying on specific activities or attaining certain objective in accordance with
special regulations, restrictions or limitations.

Separate funds may be necessary to distinguish between assets that may be used as authorized by
the board of directors and assets whose use is restricted by donors. Funds commonly used by
not-for-profit organizations include the following:

1. Unrestricted Fund: Unrestricted fund includes all the assets of a not-for-profit NGOs that
are available for use as authorized by the board of directors and are not restricted for specific
purposes. Sometimes, it is called unrestricted current fund, general fund or current unrestricted
fund. In many respects, unrestricted fund is similar to the general fund of a government entity.
Thus, similar to the general fund of a governmental entity, unrestricted fund is residual in nature.
2. Restricted Fund: are sometimes called restricted current fund or current restricted fund. Not
for profit organizations establish restricted funds to account for assets available for current use
but expendable only as authorized by the donor of the assets. Thus, a restricted fund of a not-for-
profit organization resembles the special revenue fund of a government entity, because the assets
of both types of funds are expended only for specified purpose.
3. Endowment Fund: An endowment fund of a not-for-profit organization is similar to a non
expendable trust fund of a government entity. A permanent endowment fund is one for which
the principal must be maintained indefinitely in revenue producing investment. Only the
revenues from a permanent endowment fund’s investment may be expended by the not-for-
profit organizations. In contrast, the principal of a Term endowment fund may be expended after
the passage of a period of time or the occurrence of an event specified by the donor of the
endowment principal. A Quasi endowment fund is established by the board of directors of a not-
for- profit organization, rather than by an outside donor. At the option of the board, the principal

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of a Quasi endowment fund later may be expended by the entity that established the fund. The
revenues of endowment funds are accounted for in accordance with the instruction of the donor
or the board of directors. If there are no restrictions on the use of endowment fund income, it is
transferred to the not-for-profit organizations unrestricted fund. Otherwise, the endowment fund
revenues are transferred to an appropriate restricted fund.
4. Agency fund: an agency fund of a not-for-profit organization is used to account for assets by
a not-for-profit organization as a custodian. The assets are disbursed only as instructed by their
owner. For example, JimmaUniversity may act as custodian of cash of a student union. The
university disburses the cash as directed by the appropriate officer of the student’s union. The
undistributed cash of the student union is reported as a liability of the university’s agency fund,
rather than as a fund balance, because the university has no equity in the fund.
5. Annuity Fund: Assets may be contributed to a not-for-profit organization with the stipulation
that the organization pay specified fixed amounts periodically to designated recipients for a
specified time period. An annuity fund is established by the not-for-profit organization to
account for this arrangement. At the end of the specified time period for the periodic payments,
the unexpended assets of the annuity fund are transferred to the unrestricted fund or to a
restricted fund on endowment fund specified by the donor.
6. Life income Fund: is used to account for stipulated payments to a named beneficiary during
the beneficiary’s life time. In a life income fund, only the income is paid to the beneficiary.
Thus, payments to a life income fund’s beneficiary vary from one accounting period to the next,
but payment from an annuity fund are fixed in amount.
7. Loan Fund: A loan fund may be established by any not-for-profit organization, but loan
funds, most frequently are included in the accounting records of colleges and universities.
Student loan funds generally are revolving; that is, as old loans are repaid, new loans are made
from the receipts loans receivables are carried in the loan fund at estimated realizable value;
provision for doubtful loans are debited directly to the fund balance ledger account, not to an
expense account. Interest on loans is credited to the fund balance account, ordinarily on the cash
basis of accounting.
8. Plant Fund: This fund is used to account for Land, Building and Equipment currently in use
in the operation of the organization, together with any associated depreciation and long term

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debt. In addition, it is used to account for resources whose use is restricted to the acquisition
ofland, building or equipment.

9.3 Accounting for Unrestricted and Restricted Funds

9.3.1 Accounting for Unrestricted Funds
I. Revenues for Unrestricted Fund
The revenues and gains of an unrestricted fund are derived from a number of sources. For
example:
1. A hospital derives Unrestricted fund revenues from :
• Patient service
• Educational program
• Research and other grants
• Unrestricted gift and income from endowment fund.
• Contributed materials and sources.
2. A university’s source of unrestricted fund revenues and gains includes:
• Students tuition and fee
• Governmental grants and contracts
• Gifts and private grants
• Unrestricted income from endowment funds
• Income from auxiliary activities such as students residence, food service
and inter college athletics
3. The principal source of voluntary health and welfare organizations unrestricted fund
includes :
• Contribution
• Membership due
• Interest and dividend
• Realized and un realized gains on Investment
4. A non-profit professional society receives revenue from
• Membership dues
• Fees from educational program
• Advertising and sales publication
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In General, the source of revenue to unrestricted fund can be grouped in to the following four
categories:
1. Revenue collected by giving services
A not-for-profit organization’s revenues for service rendered are accrued at full rates, even
though part or all of the revenue is to be waived or reduced.
Illustration – 9.1: Suppose a non profit community hospital’s patient service record for June,
2008 includes the following amounts:
• Gross patient service revenue (before charity
care or contractual adjustment)………………… $ 100,000
• Charity care for indigent patients………………………. 8,000
• Amount to be received from civic welfare, Inc,
as a Partial reimbursement for charity care 3,000
• Contractual adjustment allowed to Red cross……………. 16,000
• Provision for doubtful accounts ………………………….. 12,000
The following journal entries are appropriate for the community hospital unrestricted fund on
June 30, 2008
1. Accounts Receivable ………………….. 92,000
Patient service revenue (100,000 – 8,000) …………92,000
(To record gross patient service revenues exclusive of charity care)
2. Accounts Receivable ………………….. 3,000
Patient service revenue ……………………………. 3,000
(To record amount receivable from civic welfare, Inc. as a partial reimbursement
for charity care)
3. Contractual adjustments………………. 16,000
Accounts Receivable ……………………………..16,000
(To record contractual adjustment allowed to Red Cross for June)

4. Doubtful Account expense ……………. 12,000

Allowance for doubtful account …………………. 12,000
(To provide for doubtful accounts receivable for June)

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2. Contributed Material, Services and Facilities
In addition to cash contribution, not-for-profit organizations often receive contributions of
materials, services and facilities. For example, a hospital may receive free drugs and operating
supplies. The contributed material is recorded in the inventories ledger account at its current
value, with a credit to a revenue account in unrestricted fund. Assume, AtoGemechu contributed
drugs having a current fair value of Br 5,000 to the community hospital mentioned above, the
journal entry to recognize the contribution will be:
5. Inventories ………………………………. 5000
Contribution revenue ………………………….. 5000
(To record contributed drugs at current fair value)

Contributed services are recorded in an unrestricted fund as salary expense, with an off- set to a
revenue account. If the services are rendered to the non profit organization by skilled
individuals, the value assigned to the services is the going rate for comparable employee or
contractors of the entity, less any meals or other living costs absorbed for the donor of the service
by the non profit organization. To illustrate the accounting for contributed services, assume
Sister Zenebech provide a one month free service valued at Br 10,000 to the community Hospital
above and the value of meals provided at no cost to Sister Zenebech in the month was Br 2,000.
This transaction can be recorded as follows:
6. Salary expense…………………….8, 000
Contribution Revenue ………………… 8,000
(To record contributed services at current fair value of Br 10,000 less Br 2,000 value of Meals
provided to the volunteer)

Significant contributed facilities are recorded as revenue at their current fair value offset by a
debit to an asset or an expense account as appropriate. For example, if the fair rental value of the
building used by Aba Jifar primary school, a non profit private elementary school is Br 4,000 a
month, but the building owner waives the rental payment, the primary school records the
following journal entries:

7. Rent expense …………………………….. 4,000

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 Contribution Revenue …………………… 4,000

3. Pledges (promise to give)

Pledge is commitment by a prospective donor to contribute a specific amount of cash or property
to a non profit organization on a future date or installments. Because a pledge is in writing and
signed by the pledgor, it resembles in form the promissory note used in business. However,
pledges are not enforceable contracts. Under the accrual basis of accounting, unconditional
pledges are recognized as receivables and revenues in the unrestricted fund, with appropriate
provision for doubtful pledges. Pledges due in future accounting periods or having restriction as
to their use generally are accounted for in a restricted fund. To illustrate, assume civic welfare,
inc., a voluntary health and welfare organization, received unconditional pledges totaling Br
200,000 in a fund raising. Based on past experience and current economic conditions, 15% of
the pledges are considered to be doubtful collection. The journal entry to record this transaction
is given below.
8. Pledges Receivable ………………………. 200,000
Contribution Revenue ……………………… 200,000
(To record receivable for pledges)
9. Doubtful pledges expense…………………….. 30,000
Allowance for doubtful pledges ……………... 30,000
(To record provision for doubtful pledges = Br 200,000*.15 = Br 30,000)

The write off of uncollectible pledges is recorded by a debit to the allowance for doubtful
pledges ledger amount and a credit to the pledges receivable account.
4. Revenues and Gains from pooled investment
Many of the funds of non profit organizations have cash available for investment. Therefore, the
organization can generate revenue by investing these idle cash in capital and money market.
II. Expense and losses of unrestricted fund
Expenses of a not-for-profit organization may be classified in two groups:
• Program services Expense – are expense for the organizations activities that result in
the distribution of goods and service to beneficiaries, customers, or members that full fill
the purpose or mission of the organization.

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 • Supporting services Expense - are all activities of the organization other than program
services, such as management and general, fund raising, and membership development
activities.
A not-for-profit organization typically recognizes all expenses in its unrestricted fund and loss
may be recognized in other funds as well as in the unrestricted fund. Expenses that are unique to
not-for-profit organizations include fund raising expenses and conditional pledges.
• Fund – raising expense – is an expense incurred to raise revenue and treated just like
that of advertising expense for business organizations.
• Conditional pledges - are promise to make grants to individuals or to other
organizations.
III. Assets and Liabilities of Unrestricted Fund
Most assets and liabilities of a not-for-profit NGOs unrestricted fund are similar to current asset
and liability of a business enterprise. Cash, investments, accounts receivable, from other funds,
inventories and other short term prepayments are typical assets of unrestricted fund. Non profit
organizations that use fund accounting generally account for plant assets in a plant fund. The
liabilities of an unrestricted fund include payables, accruals, and deferred revenue similar to
those of a business enterprise, as well as amounts payable to other funds.

9.3.2 Accounting for Restricted Funds

The assets of restricted funds are not derived from the operation of the non profit organization.
Instead, the assets are obtained from
• Restricted gifts or grants from individuals or government entity
• Revenues from restricted fund investments
• Realized and unrealized gains or investments of the restricted fund.
• Restricted income from endowment fund.
These assets are transformed to the unrestricted fund at the time the designated expenditure is
made, with a credit to an account with a title such as net asset released from restriction.

Illustration – 9.2: Assume that, on July 1, 2008, AtoAbebe donated Br 50,000 to the community
hospital, a non profit organization, for the acquisitions of beds for a new wing of the hospital.

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On August, 2008, the community hospital paid Br 51, 250 for the beds. These transactions and
events are recorded by community hospital as shown below:
I. In a restricted fund:
July 1: Cash ……………………………………………… 50,000
Contribution revenue ………………………………….50, 000
(To record receipts of gifts from AtoAbebe to purchase of beds)

August 1: Net asset released from restrictions ……………50,000

Payable to Unrestricted fund …………………………. 50,000
(To record obligation to unrestricted fund for cost of beds)

II. In unrestricted fund:

July 1: Plant asset ……………………………………………….51, 250
Cash ………………………………………………………….. 51,250
(To record acquisition of beds)

August 1: Receivable from restricted fund …………………. 50,000

Net assets released from restriction………………………..50,000

9.4 Financial Statements of Not-for-profit NGOs.

To lend more uniformity for financial reporting by not-for-profit NGOs without imposing
inflexible standard, FASB issued statement No 117, “financial statements of not-for-profit
NGOs”. Among its provisions were the following:
1. Financial statements of not-for-profit organizations shall be statement of financial
position, a statement of activities, a statement of cash flows and notes to the financial
statement.
2. The statement of financial position shall report the amounts of the organization’s total
assets, total liability, and total net assets.

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 3. The statement of financial position shall report the amount for each of the three classes
of the organizations net assets: permanently restricted, temporarily restricted, and
unrestricted.
4. The statement of activities shall report the amount of change in the organization’s net
assets for the period with a caption such as changes in net assets or changes in equity.
5. The statement of activities shall report the amount of the changes in each of the three
classes of the organizations net asset permanently restricted, temporarily restricted and
unrestricted.
6. The statements of activity shall report gross amounts of revenues and expenses of the
organization, except that investment revenues may be reported net of expenses and gains
or losses on disposal of plant assets may be reported net.
7. The statement of activity or a note there to shall report expenses by functional
classification such as program service and supporting services.

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Chapter 10: Accounting and Reporting for the Federal Government
of Ethiopia

10.1 Historical Overview of Ethiopian Government Accounting System

The Federal Government of Ethiopia accounting system used up to GC 2002 was in service for
more than half a century. Government decided to reform the accounting processes to achieve the
following set of objectives:
1. Simplify the accounting system by changing it from the single entry bookkeeping system to
the double entry bookkeeping system,
2. Expand the current accounting system by changing the basis of accounting from cash basis to
a modified cash basis of accounting.
3. Improve cash and financial management practices by rationalizing the number of bank
accounts and minimizing the amount of idle funds.
4. Improve budget control by introducing procedures to record and monitor commitments
against the available budget prior to the approving expenditure.
5. Produce accurate, timely and complete information and improve the quality of information
provided to Government and its development partners.
6. Enhance transparency by implementing a system that is understandable to key stakeholders
and the automation of the accounting system.

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 Accounting Cycle
The diagram below provides an overview of the accounting cycle used at the federal and regional
levels.
Source Documents

Payment Vouchers Receipt Vouchers Journal Vouchers

Book of Original Entry Transaction Register

Ledgers
General Ledger Budget Ledger/ Expenditure Subsidiary Ledger

Revenue Report
Transfer Report Trial Balance Expenditure Reports
Receivable Report
Payable Report
Monthly Reports

Post Closing Trial balance

Summary Income and Expenditure Statements

Financial Statements
Detailed Income and Expenditure Statements
Cash Flow Statement
Balance Sheet

The above diagram clearly indicates that in addition to the accounting process, the source
documents to capture and approve accounting data, the registers to record accounting data, the
ledgers to analyze accounting data and the reports produced by the accounting system are the
same at the federal and regional levels. The accounting system is designed to have the capability
to record, analyze and report expenditures and revenues for all types of donor funds and other
special funds that are included in the government budget.

Single Pool and Single Treasury System at Zones and Weredas

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The region is organized into different tiers of governments that include jurisdiction zones and
weredas. One feature of the single treasury system is the single pool system.

The single pool system means that at all zones and weredas the accounting staff is located only
one single location - the Finance Office. The accounting staff located at the Finance Office
maintains budget control, disburses payments, collects revenue and maintains the books of
accounts and produces reports on behalf of all the sector offices at the zone or wereda. However,
all expenditures are authorized by individual sector offices but disbursed, accounted and reported
on behalf of the sector office by the single pool of accountants located at the Finance Office.

The benefits of the single pool system are as follows:

❖ Cost savings in terms of the number of accountants required to operate the accounting system
❖ Cost savings in terms of office space and infrastructure
❖ The work is organized to match zone/wereda capacity in terms of availability of qualified
staff and continuous on-the-job training and therefore promotes sustainability
❖ Sector Offices can better focus on their objectives and mission.
❖ Training is more effective and efficient in terms of quality and sustainability because it is
directed at fewer number of locations
❖ Implementation support is directed at fewer locations and therefore more effective and
efficient in terms of sustainability
❖ Reporting is more timely because reports are produced at fewer locations
❖ Risk of failure of new system is minimized because the accounting system operates at fewer
locations

The single treasury system means that each zone and wereda finance office maintains a single
bank account to execute its capital and recurrent budget where the source of financing is
treasury. The benefits of the single treasury system are as follows:

❖ Improved cash management within the region by reduction of bank accounts

❖ Improved control over bank accounts by reducing the operational time and effort required to
manage excessive bank accounts
❖ Reduction in costs of idle funds, borrowings and bank charges.

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Zero Balance System at Federal Level
In 2004, the following key changes were made to the disbursements process:

• Zero balance drawing limit accounts were introduced at the National Bank of
Ethiopia for Public Bodies located in Addis Ababa.

• The responsibility for processing payroll, salary loans and remitting pension
contributions to the pension authority was transferred to public bodies.
MOFED effects the following types of disbursements:
• To public bodies in Addis Ababa using zero balance drawing limits
• To public bodies located outside Addis Ababa using bank transfers
• To transfer recipients using bank transfers
• Disbursement to regions using transfers and overdraft limits for capital subsidies
• Debt repayment - domestic and external debt - principal and interest repayments
using bank transfers
• Contingency and miscellaneous payments using bank transfers

10.2 FGE Chart of Accounts

A chart of accounts is a system of coding used by a financial management system to identify and
classify financial transactions and events. The summary of the account codes for the chart of
accounts is as follows:
• Codes starting from 1000-1799 are reserved for domestic revenue
• Codes starting from 2000-2999 are reserved for external assistance
• Codes starting from 3000-3999 are reserved for external loans
• Codes starting from 4000 up to 4099 are reserved for transfers.
• Codes starting from 4100 up to 4999 are reserved for assets.
• Codes starting from 5000 up to 5599 are reserved for liabilities.
• Codes starting from 5600 up to 5699 are reserved for net assets/equity.
• Codes starting from 6000 up to 6999 are reserved for expenditure

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Revenue, expenditure and transfers are temporary accounts that begin each year with a zero
balance. Assets and liabilities are permanent accounts whose balance at the end of a year
becomes the balance in the account at the beginning of the next year.

10.3 FGE Budget process

The budget process at the federal level follows sequential and iterative steps. These steps can be
explained with the help of the following figure. Let us briefly explain these steps one by one here
under.

Preparation of Revenue forecast & Allocate federal

macroeconomic & expenditure budget & regional
3yrs fiscal frame ceiling expenditures

Budget review by Budget call Allocation of

MoF & MoED &ceiling recurrent &
capital budgets

Budget haring and Review and Submit to council

defense recommendation of ministers

Allotment of
budget Notification & Submit to council
publication of of people’s
budget representatives

Step 1: Preparation of Macro-economic and fiscal framework

The macro-economic and fiscal framework determines the overall level of government
expenditures based on policies related to the role of government in the economy. For the Federal
government the framework is a three years forecast and will be updated each year.
Step II Determination of Federal Government Expenditure and subsidy to Regional
Governments
After the revenue and expenditure of the government are estimated through the fiscal framework,
the shares of Federal Government Expenditures and subsidies to Regional governments is
decided. It is known that, following the decentralization policy, Regional governments took
grants from the Federal government in the form of subsidy.

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Step III Allocation of Federal Expenditure between Recurrent and Capital Budget
The practice in the allocation of recurrent and capital budget is to consider the latter as a residual.
That is, first the amount of budget necessary to cover such recurrent expenditures like pensions,
debt servicing, wages and non-wage operating costs will be determined. The balance will then be
allotted to capital expenditures.
Step IV Budget call and ceiling Notification
This includes two items.
1. Recurrent budget; MoF will release the budget ceiling to the line ministries in a budget
call. The budget call provides each ministry such information as the macro-economic
environment, an aggregate recurrent budget ceiling, and priorities to budget.
2. Capital Budget; MoeED issues detailed capital budget preparation guidelines to spending
public bodies along with the ceilings provided to each line institution. MoED will set the
ceiling for each sector.

Step V budget Review by MoF and MoED

This includes two items.
1. Recurrent Budget; Prior to formal budget hearing, spending public bodies will submit
their budget proposals to the MoF Budget Department. In consolation with spending
public bodies, MOF will prepare an issue paper on major issues at each head level in the
proposed budget.
2. Capital Budget: The sector departments of MoED review the capital budget requests
from different public bodies. At this stage, projects will be screened.
Step VI: Budget Hearing and Defense
This includes two items.
1. Recurrent Budget: Spending public bodies defend their budget submission in a formal
hearing with the MoF. The issue paper will be the basis of the hearing. The hearing
focuses on policies, programs and cost issues, when necessary it might involve discussion
down to line item. Spending public bodies could also challenge the ceiling.
2. Capital Budget: Spending public bodies will be called to defend their projects to a budget
hearing convened by the Prime Minster office which will be chaired by the Prime Minster
or the Deputy Prime Minister of the their economic advisers.
Step VII: Review and Recommendation:

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This includes two items.
1. Recurrent budget: After the hearing is over, the budget committee of the MoF will
review the discussion and make a recommendation. If there is and increase (over ceiling)
this will go to the PMO for approval.
2. Capital budget: After the hearing and defense with the PMO and MoED, sector
departments of MoED will give a final recommendation to the development finance and
budget department of MoED.
Step VIII: Submission to the council of Ministers-for approval
At this stage the two budgets (recurrent and capital) will be consolidated, and MoF will prepare a
brief analysis of the total budget.
1. Recurrent budget: The recommended budget will be submitted to the deputy Prime
Minster for economic affairs. This will first be reviewed by ministers and vise ministers
in economic affairs, and then presented to the Prime Minster along with a brief.
2. Capital Budget: A brief analysis of the capital budget will be prepared by MoED on the
final recommended budget and, along with the consolidated capital budget, will be
submitted to the council of ministers.

Step IX: submission to the council of peoples’ Representatives

Once approved by the council of ministers, the Prime Minster will Present both the recurrent and
capital budget to the council of people’s representatives. The budget will then be debated based
on the recommendation of the budget of the committee.
Step X: Notification and Publication
The approved budget will then get the legal status through the publication in the ‘Negaret
Gazeta’ spending public bodies will then formally be notified of their approved budget by line
items from MoF and MoED for recurrent and capital budgets, respectively. The final stage of the
budgetary process is to request spending public bodies to prepare adjusted work plan and cash
flow for the approved budget. The adjusted work plan and cash flow will be verified by MoF for
the recurrent budget-and by MoED for the capital budget and then will be sent to the treasury
Department of MoF.
Step XI: Supplementary Budget
In the course of the budget year supplementary (additional) budget will be proclaimed when
necessary, following almost the same process as the initial budget preparation.

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10.4 Fundamentals of FGE Program Budget
The name ‘program budget’ is derived from the simple fact that the planning process is
organized by program rather than by department of fiscal input or output. At present, no standard
definition of program budgeting exists. Program budgeting is generally described as a planning-
oriented procedure. Its chief goal, according to Schick, is to rationalize policy-making by
providing (a) data on the costs and benefits of alternative ways of attaining proposed public
objectives and (b) output measurements to facilitate the effective attainment of chosen
objectives.
Program budgeting has passed through several distinct evolutionary periods. The first was the
developmental period, which was borne out of the need for a national budget. As difficult as it
may be to believe, the budget practices of federal institutions were such that it was virtually
impossible for any appropriating body or the public to know where its money was going. The
budgeting practice of lumping expenditures had been consistent with the planned purpose of the
appropriation. Budgeting procedures basically consisted of revising estimates.

10.5 Overview of IFMIS and IBEX

The introduction of Integrated Financial Management Systems (IFMIS) has become a core
component of financial reforms to promote efficiency, security of data management and
comprehensive financial reporting.
IFMIS provide an integrated computerized financial package to enhance the effectiveness and
transparency of public resource management by computerizing the budget management and
accounting system for a government. It consists of several core sub-systems which plan, process
and report on the use of public resources. The scope and functionality of IFMIS can vary across
countries, but sub-systems normally include accounting, budgeting, cash management, debt
management and related core treasury systems. In addition to these core subsystems, some
countries have chosen to expand their IFMIS with noncore sub-systems such as tax
administration, procurement management, asset management, human resource and pay roll
systems, pension and social security systems and other possible areas seen as supporting the core
modules.

What are the Benefits of IFMIS?

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There are a number of ways in which IFMIS can improve public finance management, but
generally IFMIS seek to enhance confidence and credibility of the budget through greater
comprehensiveness and transparency of information.
They seek to improve budget planning and execution by providing timely and accurate data for
budget management and decision making. IFMIS allow a more standardized and realistic budget
formulation across government, while promoting better control over budget execution through
the full integration of budget execution data. They also allow for the decentralization of financial
functions and processes under the overall control of the Ministry of Finance, force financial
discipline, decrease operating costs by reducing administrative tasks and civil servants’
workload.
Integrated Budget and Expenditure System (IBEX)
The Integrated Budget and Expenditure System (IBEX) is a financial information system that has
been designed and developed to automate and support public finance in Ethiopia. It is comprised
of different modules including a Budget, Accounts, Budget Adjustment, Budget Control,
Accounts Consolidation and Administration Module.

The Accounts Module manages the tracking of revenues and expenditures for budgetary
institutions. More specifically, the Accounts Module records the financial transactions of
budgetary institutions, captures the aggregated monthly accounting reports and provides
accounting reports in the form of ledgers, financial statements, management reports and
transaction listings. The functionality of the Accounts Module mirrors that of the procedural
manuals.
This manual describes the Accounts Module’s functionality but does not provide a detailed
explanation of the accounting procedures involved.
The Accounts Module User Manual contains sections about:
• Launching the Module
• User and Administrator Functions
• Managing Financial Transactions and Monthly Reports
• Generating Reports
• Appendix with Settings and Tips.

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10.6 Budget Ledger Card
The purpose of the budget ledger card is to maintain a continuous and updated record for each
budgeted item of expenditure by BI and source of finance with respect to:
- Approved budget. - Amount remaining to be
requested.
- Additions/reductions to the approved budget. - Commitments.
- Balance in the revised budget that is not committed. - Revised budget.
- Payments received for budgeted expenditure.
Completion
The budget ledger card is divided into two parts:
• The top of the card contains information to identify the
o BI,
o Type of budget, and
o Item of expenditure.
o Source of Finance
• The table on the card contains detailed information about each budget transaction.

10.7 Basis of Accounting

A transaction is an economic event that affects the financial position of the government. The
basis of accounting is the basic set of principles and rules employed by the accounting system to
determine when and how to record transactions.
The cash basis of accounting is a basis of accounting that recognizes transactions and other
events when cash is received or paid. The FGE accounting system employs a modified accrual
basis of accounting.
The modified accrual basis of accounting in FGE means that cash basis applies except for
recognition of the following transactions:
• Revenue is recognized when aid in kind is received.
• Interest on salary advances is recognized as revenue when the salary advance is made.
• Expenditure is recognized:
o When payroll is processed.
o At the end of the year when a grace period payable is recognized.

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 o When goods are received or services are rendered if payment for the goods or services
was rendered in advance.
• Intergovernmental transfers are recognized in the absence of actual cash movement.
• Transactions resulting from salary withholdings are recognized in the absence of actual cash
movement.
• Amounts due on treasury bills and direct advances to Government from the National Bank of
Ethiopia are recognized as current liabilities
The modified accrual basis accounting system requires the same temporary accounts as the cash
basis of accounting plus the following permanent accounts: cash and cash equivalents,
receivables, payables and net asset/equity.
The modified accrual basis of accounting is consistent with the budgeting process and produces
information useful for comparing budgeted and actual revenue and expenditure.
The major considerations identified for determining items to include and exclude in the modified
cash basis system is the availability, complexity, practicality and efficiency with which
information can be obtained to include other categories of assets and liabilities within the
accounting system and the need to keep the basis of accounting consistent with the
Government’s budgeting system.
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.
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 accrual basis of accounting can be introduced.
Double-entry bookkeeping requires an understanding of some additional basic accounting
concepts and terms. The most basic are the terms debit and credit. Debit literally means left and
credit literally means right.

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By convention, the rules shown in Table 11.1 are true for each account category used in modified
cash basis of accounting:
Table 10.1 Accounting Rules for Debits and Credits

Account Category Used Normal Increase Decrease

for Modified Cash Basis Balance Recorded as Recorded as
Revenue Credit Credit Debit
Expenditure Debit Debit Credit
Cash and cash equivalents Debit Debit Credit
Receivables Debit Debit Credit
Payables Credit Credit Debit
Transfers Debit or Credit depending on transfer type
Net assets/equity Credit Credit Debit

In a double-entry system, each debit is matched by a credit of an equal amount, and each credit is
matched by a debit of an equal amount.
Because each transaction is entered in the accounting records as debits and credits of equal
amounts, the total debits in all account balances always equals the total credits in all account
balances. For the FGE modified accrual basis of accounting, this means that the equation in
Table 2.2 is always true:
Table 10.2
FGE Basic Accounting Equation
Assets = Liabilities + Net Assets/Equity

Cash & Cash Equivalents + Receivables = Payables + Net Assets/Equity

10.8 Legal Framework of FGE Financial Administration

The accounting system begins with the recording of the approved budget in budget ledger cards.
To understand the accounting system, the structure of financial administration and authority of
government must be understood to the extent that it impacts the system. Although the structure
of financial administration is not standard across all units in government, a general pattern exists.

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This chapter presents an overview of the financial administration system and a general
description of the roles and responsibilities within the assumed administrative structure at the
federal government. The financial administration structure is as follows:
o Ministry of Finance and Economic Development (MOFED)
o Central Accounts Department (CAD)
o Bureau of Finance and Economic Development (BOFED)
o Department of Finance and Economic Development (DOFED)
o Office of Finance and Economic Development (OFED)
o Public Body (PB)/Region Sector Bureau (RSB)
o Budgetary Institution (BI)
o Accounting Unit
o Reporting Unit
o Cashier and Accountant
The functions described for the various institutions relate only to the accounting system and does
not include other functions, such as, planning and budgeting.
Ministry of Finance and Economic Development (MOFED)
MOFED administers the financial system for the federal government and has the highest level of
administrative authority. MOFED consists of a:
• Budget Department that prepares, consolidates and notifies the approved federal budgets and
administers the budget.
• Central Accounts Department that records transactions that are authorized and executed at
MOFED and other implementing agencies, receives monthly reports from Public Bodies and
compiles nation wide financial statements as well as for the federal government. In addition,
CAD produces daily, monthly and quarterly reports on revenues, disbursements, borrowings
and overall cash position of the government and maintains records for all channels and special
funds.
• Treasury Department that receives cash flow requests from Public Bodies and sets drawing
limits at the National Bank of Ethiopia and authorizes the disbursement of cash from central
treasury and special donor funds to transfer recipients, public bodies outside Addis Ababa and
regions.

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• Credit Administration Department that manages the federal government’s external and
domestic borrowings and provides on-lending to public enterprises.
Central Accounts Department (CAD)
The Central Accounts Department performs several functions. The major functions are:
• Maintains a current record of the adjusted budget for all Public Bodies based on the
notified budget
• Entering daily transactions in the FGE general ledger from NBE bank advices and
Treasury Department transfer authorizations;
• Preparing daily, monthly and quarterly reports on revenues, disbursements, borrowings
and overall cash position of the government and undertakes bank reconciliations and
maintaining records for all channels and special funds.
• Requests Public Bodies to submit monthly/annual reports regarding loan disbursements
from external lenders;
• Receiving monthly reports for all Channels and special funds from Public Bodies and
BOFEDs, then preparing and sending reports to donors and liaison with auditors;
• Verifying and entering monthly reports from Public Bodies in IBEX;
• Compares budget versus actual expenditures and obtains justification for over
expenditures.
• Preparing the FGE annual financial statements and submitting them to the federal Office
of Auditor General;
• Consolidating annual reports from Regions with the FGE audited annual financial
statements; and
• Generally overseeing the accounting function at all Public Bodies and solving any
problems that occur in the accounting system and provides technical support.

Public Body (PB)

Public Bodies are the next level of financial administrative authority in the federal government
after MOFED. Public Bodies are the institutions that are entitled to request and receive a budget.
A public body is defined as follows: it is an institution that has a legal mandate, receives a
partial or complete budget directly from the respective finance and planning bodies, submits its

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 final accounts directly to MOFED, and is on the approved list of public bodies issued by the
Office of the Prime Minister.
Each PB is assumed to have the following financial administration:
• Head of the PB.
• Head of Finance Department who oversees:
 Accounts Section with Accountants and Cashiers
 Budget Section.
The figure shows the assumed financial administrative structure.

Head of Public Body

Head of Finance

Budget Section
Account Section

Senior Accountant Disbursements Budget Preparation Budget Control

Disbursement Accountant

Main Cashier
General Fund Special Fund
Accountant Accountant
Assistant Cashier

Budgetary Institution (BI)

For purposes of this manual, the budget process begins with the appropriated budget. The
appropriated budget is the budget approved by the Council of People’s Representatives (CPR).
The appropriated budget is broken down by:
• Recurrent and capital expenditure for the federal government, and
• Subsidy for each regional government.

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The federal government’s portion of the appropriated budget is assigned to projects and sub-
agencies within PBs and broken down by sources of funding (treasury, external assistance and
external loan). This is called the approved budget. The approved budget is published in the
Negarit Gazeta with the appropriated budget.
A PB’s entire approved budget is assigned to projects and sub-agencies under its immediate
administrative control. The budget of a PB is the total budget of its projects and sub-agencies.
Projects and sub-agencies are defined and coded in the chart of accounts. Any unit that receives
an approved budget from a PB's approved budget is called a Budgetary Institution (BI).
Accounting Unit
For cash management, another unit is created: the bank account (BA). The BA does not receive
a budget. However, it is important for cash management and control. The FGE accounting
system includes the BA in the accounting structure.
A PB may administer many BIs and BAs, or a PB may have only one BI and one BA. Each BA
is managed by a chief accountant or accountant and:
• May have many cashiers or have its own cashier or share a cashier with other BAs, or
have no cashier associated with it (like foreign currency bank accounts).
• Handles cash flows for one or more than one BI, from one or more source of finance, and
for more than one type of budget (capital/recurrent).
An accounting unit is the unit that captures and records transactions into the accounting system.
The accounting unit:
- Processes transactions. - Maintains a general ledger.
- Maintains registers. - Prepares monthly reports.
- Maintains subsidiary ledgers for:
o Asset accounts.
o Liability accounts.
One set of general ledger is maintained for the BA, including a ledger card for each item of
expenditure. These reports are consolidated with information from the general ledger into a
monthly report for the BA.
Reporting Unit

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A reporting unit is the unit that sends monthly reports to MOFED. Although the accounting unit
prepares monthly reports, every accounting unit may not send monthly reports directly to
MOFED. The reporting unit may be:
• The accounting unit, or
• A higher level of authority (perhaps a PB or a pool).
Cashier and Accountant
In the accounting system of cash control, the cashier’s and the accountant’s functions are
distinct. The cashier’s function is to maintain and control cash in the safe. The accountant’s
function is to maintain and control cash at the bank and cash in safe. Only the cashier can
receive currency and checks (including check payment orders) and make disbursements in
currency. Daily, the cashier should count cash on hand and reconcile ending cash on hand to the
cashbook.
The cash in safe for operating expenditure is controlled by an impress system. In the impress
system, a balance is established for cash in safe for the Public Body. The accountant issues this
amount of cash to the cashier using a check. If the amount of cash in safe is to be replenished,
the cashier will provide all payment vouchers to the accountant. The accountant will replenish
the cash in safe by issuing a check to the cashier for the total amount of the payment vouchers
that are provided. The replenishment returns the balance of cash in safe to the established level.
When cash is received from other sources, the cashier will:
• Segregate the cash received from cash available to disburse for salary and petty cash,
• Deposit the cash received intact in the bank as soon as practical, usually daily, and
• Surrender copies of all cash receipts and a copy of the bank deposit slip to the
accountant.
The accountant’s responsibility for cash is to maintain a record of the total cash position of the
entity, including cash at the bank and cash in the safe. The accountant records cash movements
that flow through the cashier and cash movements that flow directly through the bank. Direct
cash movements through the bank normally include bank transfers and charges, checks written,
and any other transactions that do not require cash handling by the cashier. When a PB has more
than one cashier, one cashier is designated as the main cashier. The other cashiers are designated
as assistant cashiers. Each PB is responsible for organizing assistant and main cashiers.

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10.9 - MONTHLY REPORTS

The purpose of this Chapter is to describe the monthly reports submitted by a Reporting Unit to
MOFED. The Chapter contains the following sections:
❖ Revenue/Assistance/Loan Report
❖ Recurrent Expenditure Report
❖ Capital Expenditure Report
❖ Transfer Report
❖ Receivables Report
❖ Payables Report
❖ Trial Balance
❖ Submitting Monthly Reports to MOFED

The only monthly reports verified by MOFED are the Transfer Report and the Trial Balance.

The Transfer Report is verified by MOFED to ensure that all disbursements to an Accounting
Unit by MOFED and all disbursements from an Accounting Unit to MOFED are accounted for
within the accounting system to enhance control over cash transfers.

The Trial Balance is verified by MOFED to ensure that the total debits and credits are equal and
that General Ledgers are balanced. Also, the cash balance for the domestic source of finance is
verified and monitored by MOFED from the Trial Balance to enhance cash management
practices.

All other monthly reports that are submitted to MOFED serve as input documents to consolidate
reports and produce financial statements at the Federal Level. The Inspection Department and
the Office of the Auditor General verify these reports.
All monthly reports are prepared in two copies. The original copy is passed to MOFED and the
second copy is retained as a permanent record at the Reporting Unit.

Some Public Bodies receive no funds from Treasury. Instead, their entire budget is financed by
revenue that they collect and retain. Public Bodies that operate entirely on revenue that they
collect, the revenue must report to MOFED quarterly rather than monthly.

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10.9.1 SUBMITTING MONTHLY REPORTS TO MOFED
Monthly reports will be prepared and submitted to a Reporting Unit or MOFED within two
weeks of the last day of the month by all Accounting Units.

All transactions that occur during a month should be recorded daily on the Transaction Register
and into the appropriate General and Subsidiary Ledgers.

The Transaction Register is closed on the last day of each month. Transactions that occur during
the month, but are not recorded in the Transaction Register, are recorded in the next month's
Transaction Register. In other words, reports are prepared each month based on the information
recorded by the end of that month in the Transaction Register.

Ideally, transactions are recorded in the Transaction Register in the same month in which they
occur. However, the monthly reports should not be delayed because all transactions are not
recorded in the proper month. The monthly reports should be prepared on time. At a minimum,
all transfers should be recorded in the proper month.

If there is a Reporting Unit that is distinct from the Accounting Unit, the reports must be sent to
the Reporting Unit before the end of the second week of the month. The Reporting Unit should:
• Verify the mathematical accuracy of all reports.
• Verify that totals in the Revenue/Assistance/Loan Report, Recurrent Expenditure Report,
Capital Expenditure Report, Transfer Report, Receivables Report and Payable Report are
carried forward to the Trial Balance.
• The reconciling items on the bank reconciliation statement are not unusual.
• The Cash at Bank balance shown on the Bank Reconciliation equals the Cash at Bank
balance shown on the Trial Balance.
• All accounts have a “normal” balance
• Visit any Accounting Unit that does not report within two weeks and assist with the
monthly reports.
The Reporting Unit does not consolidate reports. The reports from the Accounting Units are
forwarded to MOFED intact. The Reporting Unit is required to send their monthly reports to
MOFED during the third week of the month.

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Central Accounts Department at MOFED will:
• Verify the mathematical accuracy of all reports.
• Verify that totals in the Revenue/Assistance/Loan Report, Recurrent Expenditure Report,
Capital Expenditure Report, Transfer Report, Receivables Report, and Payable Report are
carried forward to the Trial Balance.
• Reconcile individual transfers recorded on the Transfer Report with its records.
• Visit any Reporting Unit that does not report within three weeks to identify and assist
with monthly reporting.
• Prepare and distribute various reports for FGE.
• Consolidate balances for each account into a FGE Financial Statement.

10.10 Annual Financial Statements

The financial statements presented are intended to meet the needs of users who are not in a
position to demand reports tailored to meet their specific requirements. These users include
stakeholders such as members of the legislature, donors, lenders, tax payers and employees.

The objective of the financial statements is to provide information about the financial position,
performance and cash flows that is useful in making and evaluating decisions about the sources,
allocation and uses of financial resources and about how the activities were financed. In addition,
the financial reporting also provides users with information about whether resources were used
in accordance with the approved budget.
Transparency in government begins with full and fair disclosure of financial information. The
FGE uses the International Public Sector Accounting Standards (IPSAS) issued by the Public
Sector Section of the International Federation of Accountants as a basis for establishing the
financial statements.
The FGE accounting system can produce the following set of financial statements:
• A set of federal-level financial statements that includes:
o Statement of Financial Position
o Statement of Financial Performance
o Statement of Changes in Net Assets/Equity
o Cash Flow Statement

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 o Accounting Policies and Notes to Financial Statements
o Statement of Comparison of Budget and Actual Amounts – Domestic Revenue
o Statement of Comparison of Budget and Actual Amounts – External Assistance
o Statement of Comparison of Budget and Actual Amounts – Expenditure
o Comparison of Original and Adjusted Budget and Actual Amounts
o Statement of Expenditure by Functional Classification
• A set of countrywide financial statements that includes:
o Summary Statement of Domestic and External Revenues
o Summary Statement of Expenditure
o Summary Statement of Expenditure and its Statement.
In addition to the above financial statements, the accounting system also produces detailed
revenue and expenditure schedules that provide detailed information and analysis of the
summary countrywide financial statements.

10.11 Federal Audit in Ethiopia

The main objectives of government auditing are to express opinion on financial statements and
related issues of legality, regularity and fraud as well as examining whether government
institutions are operating economically, efficiently and effectively. To achieve these objectives
every country establishes a supreme audit institution (SAI) whose independence is protected by
law.
Features of independence includes, the legal terms and conditions for appointing and removing
the head of the SAI, reporting freedom, operational and remuneration independence as well as
unlimited access to relevant information.

The existence of independent SAI can enable informed policy analysis, confident and credible
decision making in the process of national economic management. Quite apart from serving as
the basis for policy analysis and decision making, audit also ensures proper accountability and
enhances democracy in the execution of responsibilities conferred at different levels of the
decision making process.
Accountability is the obligation to answer for responsibility entrusted. It is also a relationship
based on the obligation to demonstrate and to be responsible for performance in light of agreed

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expectations. To ensure accountability in government, the relation among the three branches of a
government (i.e. the legislative, the executive and the judiciary) needs management in terms of
control and power sharing.
The legislative approves various budgets. The approved plans and budget is implemented by the
executive body. In order to know whether the approved budget and other planned issues are
properly implemented or not, the legislative needs accurate information. To obtain this
information forming an independent Supreme Audit Institution is very important.
Accordingly, the Ethiopian SAI has been established to discharge the above mentioned
responsibilities though it passed through a lot of ups and downs.
Establishment & Evolution
The history of Ethiopia’s supreme audit institution (SAI) is related to the 1931 constitution,
which stated the importance of the proper collection of the government revenue and the necessity
of setting procedures to control expenditures.

However, the constitution failed to stipulate the need for government auditing and establishing a
SAI. But latter, proclamation No. 69 of 1944 established the first legal audit institution called
Audit Commission.

Under this proclamation the commission was responsible for the audit of the accounts of the
Ministry of Finance, whereas the financial transactions of other ministries were inspected and
controlled by the Ministry of Finance itself.

The Comptroller and Auditor General who headed the commission were reporting directly to the
prime Minster. The main functions of the commission were:
✓ Verification of revenue collection through its inspectors.
✓ Ensuring appropriate implementations of laws regulations and guidance.
✓ Identification and detection of irregularities and fraud.
✓ Initiating legal proceedings against those who were involved in fraudulent activities and
irregularities.
✓ Submitting reports on its findings with recommendations. .
Though the proclamation established sort of the first government audit institution, the
commission was not independent of the ministry as far as its professional freedom is concerned.

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Besides, its audit coverage is limited to only to certain government departments. However, these
short comings were resolved after two years through the amended proclamation No. 79 of 1946.
The amended proclamation centralized the audit of all government accounts under one audit
department called the Audit and Control Department, under the leadership of the Comptroller
and Auditor General reporting to the Prime Minster. Although the power and duties of the
commission were substantially increased the commissioner still lacked independence from the
executive as he was reporting to the prime minister. The Audit and Control Department
continued to operate until it was amalgamated with the Ministry of Finance’s control department
without any legislative provision in 1952. This was a major setback in the process of developing
an independent national audit institution. But after three years, the revised constitution of 1955
established a relatively independent audit institution.
Articles 120 and 121 of the revised constitution of 1955 established a separate and independent
audit entity accountable to the emperor and to parliament. These articles required the auditor
general to report regularly to the emperor and parliament on the financial operations of the
government. The articles also empowered the auditor general to access all books and records
pertaining to government accounts. However, the constitution did not stipulated the detailed
functions and reporting requirements of the Office of the Auditor General until Decree No. 32 of
1958 which articulated the functions of the office including reporting responsibility.

Latter, an amended legislation was issued as proclamation 179/1961. The new proclamation, in
addition to defining powers and duties, it laid down the conditions regarding the appointment
and independence of the auditor general as well as the reporting procedures. The provisions of
this legislation was a mile stone as the office of auditor general has acquired a higher degree
of independence to carry out regularity audits; but the proclamation lacked a mandate for
expanding the scope of the office’s audit to carry out performance or value for money audits.
Accordingly, the office has to wait until proclamation No. 164/1979.

Proclamation N0.164/1979 increased the traditional power and duties of the Office of Auditor
General considerably by empowering the office to conduct efficiency effectiveness
(performance) audits. However, the proclamation failed to incorporate the reporting and
remuneration aspects of independence which are part and parcel of the basic necessities for
effective operation of a SAI.

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