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ETHIOPIAN GOVERNMENT

ACCOUNTING AND FINANCIAL

MANAGEMENT

1
 Course Contents

i. Introduction
ii. General and subsidiary ledgers
iii. Recording common transactions of
FGE
iv. Monthly reports
v.Financial reports and financial
statements
vi. FGE Financial Management
2
Course objectives and Competencies
to be acquired
After successfully completing this course, the
students should be able to:
 Identify the objectives of FGE accounting sym,
 Explains why and how the FGE accounting sym uses modified
cash basis of accounting,
 Record various transactions in government budgetary
institutions,
 Prepare monthly financial reports for a reporting entity,
 Identify budget control mechanisms
 Identify types of ledgers maintained in FGE-system of
accounting
 Define the basic concepts and terminology in government
budgeting 3
 Chapter 1- Introduction

1.1 Historical overview of EGA system

1.2 FGE Chart of accounts
1.3 FGE Budget Process
1.4 Fundamentals of FGE program budget
1.5 Budget ledger card
1.6 Basis of accounting
1.7 Legal Framework of FGE Financial
Administration

4
1.1. Historical overview of Ethiopian
Government Accounting System

• Single entry accounting has been

employed by the FGE till 2002 G.C

• It is a method of bookkeeping relying on a

one sided accounting entry to maintain
financial information.

5
 …Cont’d

Advantages of Single Entry

 Simplicity
 Less expensive

6
 …Cont’d
The most significant problems associated with a single
entry system include:
 Data may not be available to management for effectively planning
and controlling the business,
 inefficient administration and reduced control over the affairs of
the business
 Assets are not tracked, so it is easier for them to be lost or stolen.
 It is impossible to obtain an audit opinion on the financial results
of a business using a single entry system,
 It is much easier to make clerical errors in a single entry system,
as opposed to the double entry system, where separate entries to
different accounts must match.
 Liabilities are not tracked, so you need a separate system for
determining when they are due for payment, and in what amounts.
 There is much less information available upon which to construct
the financial position of a business, so management may not be fully7
aware of the performance of the business.
 Objective of the Reform

• Simplify the accounting system

• by changing it from the single entry bookkeeping system to the double entry
bookkeeping system,
• Improve disclosure of information to stakeholders
• by revising the chart of accounts and enhancing the reports generated by the system
to meet the information needs of Government and its development partners.
• Expand the current accounting system
• by changing the basis of accounting from cash basis to a modified cash basis of
accounting to include the recording and reporting of select current assets and current
liabilities.
• Improve internal controls
• by reviewing the roles and responsibilities of staff working in the accounts
department and introducing enhanced procedures to capture and approve
transactions as well manage and control cash in safe and cash at bank.

8
 …Cont’d
• Improve cash and financial management practices
• by rationalizing the number of bank accounts
• minimizing the amount of idle funds.
• Improve budget control
• by introducing procedures to record and
• monitor commitments against the available budget prior to the approving
expenditure.
• Produce accurate, timely and complete information
• by creating a platform that allows for better decision making based on
timely, accurate and comprehensive information.
• Enhance transparency
• by implementing a system that is understandable to key stakeholders and
meets international standards in terms of the accounting principles and
policies employed and the automation of the accounting system.

9
? Double Entry Accounting System

 Introduction of T account
 T account is an individual accounting record
that shows information about increases and
decreases in one balance sheet or income
statement account.
 T account is so called because it has the
form of letter T.

 Debit is the left side of a T account.

 Credit is the right side of a T account. 10
Definition

 Double-entry accounting is the

foundation of modern-day business
record keeping.

 It sets the rules that corporate

bookkeepers must follow when posting
economic events.

11
 …Cont’d

 Double-entry recording
system provides for the equality of total
debits and total credits.
 It involve two accounts for a single
transaction
Important rules in DEAS
 Assets = Claims (Liabilities and
Owner's Equity)
 Total Debits = Total Credits
12
 Benefits of applying the new
accounting system

 Reduction in the annual backlog of reporting

at federal and regional levels,

 Timeliness, accuracy and

comprehensiveness of monthly reporting
together and

13
Basic Concepts and Financial
Administration in FGE Accounting System

• The Federal Government of Ethiopia (FGE) Accounting System

consists of three parts.
• Part I deals with Basic Concepts and financial
administration in FGE accounting system which is about
• the basic concepts and principles and the rules employed by the
accounting system to determine when and how to record transactions,
• system of coding used by financial management system to classify
financial entities and events and an overview of FGE financial
administrative structure assumed and t
• The general description of the roles and responsibilities of each unit within
the assumed administrative structure
• Part II is dealt about data collection, storing, and
sorting procedures and forms in FGE accounting system.
• Part III describes Monthly reports and analysis of
Transactions
14
FGE Accounting System: Its Environment and
Characteristics.

What is a Public body?

• A Public Body is defined in the Budget Manual of
Ministry of Finance and Economic Development
(MoFED) as:
• An institution that has legal mandate,
• Receives a partial or complete budget directly
from the respective finance and planning
bodies, and
• Submits its final accounting reports directly to
MoFED/respective finance and planning offices .
15
Regulation and Control on Public
Bodies
• Public Bodies are non-profit making entities.
• Public bodies must strive to attain their objectives
without return.
• Unless alternative controls are employed,
1. the absence of the need to operate profitably,
2. the lack of an open market test of the value of the
public body’s output,
3. the ability to force resource contributions via
taxation,
• Public bodies are therefore, subject to more
stringent legal, regulatory, and other
controls than are private businesses.
16
Similarities of Public Bodies Accounting and
Business Organizations Accounting

1. A double entry system of accounting is recommended

for both.
2. The general mechanics for record keeping are the
same:
– documents form the basic record,
– books of original entry (journals) are kept and posted to
general ledgers and subsidiary ledgers,
– trial balances are drawn to prove the equality of debits
and credits,
– a chart of accounts properly classified and properly fitted
to the organization’s structure is essential to good
accounting, and of course,
– uniform terminology is highly desirable in both fields.
3. Both prepare financial statements, closing entries, etc.,

17
Objectives of FGE Accounting System

• The FGE accounting system achieves three

goals:
1. budget control,
• Budget control is achieved by:

• The ability of the accounting system to report expenditure consistent

with budgetary principles, and

• Including accounting for commitments in the system.

• A commitment is an amount of budgeted funds that is reserved for a

specific future expenditure.
18
 …Cont’d

2. Cash control is achieved by:

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

3. Accountability is achieved by:

• Employing a General Ledger system.
• Creating the ability to record and report on any assets and liabilities using a
cost method of valuation.
• Establishing a system of financial reporting that produces two reports for use
by Government and a statement of Changes in cash position for use by
interested parties out side of Government.
• The two reports for use by Government are Statement of Budgeted versus
Actual for Revenues and Expenditure and a Statement of Net Assets/Equity.

20
1.2. Chart of Accounts
It is a system of coding used by a financial
management system to identify and classify
financial transactions and events.
• The chart of accounts used is exactly the same at
the federal and regional levels to record
1. revenues,
2. expenditures,
3. transfers,
4. assets,
5. liabilities and net assets/equity.

21
Chart of Accounts of FGE Accounting
Systems

• Revenue, expenditure and cash transfers

are temporary account code categories.

• Account codes in these categories:

are always treated as temporary

accounts, and begin each year with a
zero balance.
22
 …Cont’d

• Assets, liabilities and net asset/equity are

permanent account code categories.
• Account codes in these categories:
are always treated as permanent accounts, and
begin each year with the account balance as
long as they had at the end of the previous year.
• In other words, these accounts are not closed.

23
 …Cont’d

• Items of domestic revenue using account codes 1000-

1799,

• External assistance using account codes 2000-2999,

• External loans using account codes 3000-3999,

• Transfers using code numbers 4000 through 4099,

and

• Items of expenditure using account code 6000-6999.

24
 Chart of Permanent Accounts
(Ledgers)

The Accounts Reform Team under the Expenditure

Management and control Sub-Program of the Civil Service
Reform designed codes for detailed coding of:

• Assets using code numbers 4100 through 4999.

• Liabilities using code numbers 5000 through 5499.

• Letters of Credit using code numbers 5500 through 5599.

• Net Assets/Equity using code numbers 5600 through

5699.

25
 Assets:

• Assets are formally defined by the International

Federation of Accountants - Public Sector
Accounting Standards (IPSAS) as

• "resources controlled by an entity as a result of

past events and from which future economic
benefits or service potential are expected to flow to
the entity.”

26
Categories of assets in the
accounting system
1. Cash and cash equivalents:
• Cash is cash on hand and at bank.

• Cash equivalents are short-term, highly liquid

investments that are readily convertible to
known amounts of cash and which are subject to
an insignificant risk of change in value.

27
 …Cont’d

2. Receivables:
• receivables are amounts owed to (given to) a
government unit by another government unit, a
person, or a non-government entity except public
enterprises.

• Salary advances to employees and advances to

suppliers are two examples of receivables
commonly occurring in FGE transactions.
28
 …Cont’d
3. Goods in transit: Goods in transit are goods that are owned by the
FGE but not yet in the FGE's possession. Typically, these are goods
that are purchased overseas using a letter of credit.

4. Stocks: Stocks are goods that are consumed in less than one year.

5. Fixed assets: Fixed assets are physical items that are expected to
have a useful life of longer than one year and have a certain
minimum value.

6. Loans receivable: Loans receivable are amounts due from public

enterprises over a period of time exceeding one year.

7. Investments: Investments are FGE investments in public

enterprises and private organizations that are held for more than one
year. 29
Liabilities:

• Liabilities are formally defined by the Institute of

Public Sector Accounting standards as "present
obligations of the entity arising from past
events,

• The settlement of which is expected to result in an

outflow from the entity of resources embodying
economic benefits or service potential.

30
 …Cont’d

• The categories of liabilities in the improved and

expanded accounting system are:
1.Short-term Payables.
• Payables are obligations to pay that are due in less
than one year.
• Examples of FGE payables are deposits, grace
period payables, treasury bills, and retention on
contracts.
2. Long-term debt: It is an obligation to pay debt
that is due in more than one year.
31
 …Cont’d

3. Letters of Credit:

• A letter of credit represents a guarantee to pay

suppliers with cash set aside in bank account
restricted for that purpose.

32
Net assets/equity:

• It is formally defined by the Institute of

public sector accounting standards as
"the residual interest in the assets of the
entity after deducting all its liabilities.
• " Net assets/equity is the balance remaining
after liabilities are deducted from assets.
• This balance represents the equity interest of
Regional and Federal Governments.

33
1.3. FGE Budget Process

What is Budget?
• It is the systematic Classification of the
scarce resources to unlimited wants of
the general public

• It is the monetary expression of the

plan of actions

34
Definition

• A budget process refers to the

process by which governments create
and approve a budget
• Budgeting is the setting of expenditure
levels for each of an organization’s
functions.
• It is the estimation and allocation of
available capital used to achieve the
designated targets of a firm. 35
Types of Budget

• The federal government operates under a dual budget

system, as reflected in the Financial Proclamation and the
Financial Regulations.
• There are two types of budgets: recurrent and capital.

The code is one digit and standardized.

• Recurrent budgets are coded “1” and
• capital budgets are coded “2.”
• Even though expenditures can be coded as recurrent or
capital, the budget classification coding system allows a
single or whole budget to be viewed for any public body
or cost center within the public body.

36
BUDGET CLASSIFICATION

There are many different users of budget information

 National planners,
 Sectoral planners,
 Economists,
 Donors,
 Lenders,
 NGOs and
 civil society groups,
 Managers in public bodies,
 Treasury or cash management officials,
 MOFED budget officials and accounting officials
37
 Ministers, etc.
 …Cont’d

• The information needs of these users vary

significantly.

• For this reason, budget information, whether

planned or actual, needs to be analyzed
and classified from many different viewpoints and
Dimensions.

38
1. Functional Classification

• Functional classifications are the broad areas

of expenditure which are used for analysis and
whole of government or nation wide accounts.

• There are four functional classifications of

expenditure:
i. Administrative and General,
ii. Economic,
iii.Social, and
iv.Other.
39
 …Cont’d

• The Functional Classification code is one digit

and standardized.

• Responsibility for defining the functional

classification for a given public body belongs to
the MOFED Budget Department.

40
1.4. Fundamentals of FGE Program
Budget
• Programs exist within a public body (or
Bureau).
• The naming and coding of programs is
discretionary.
• However, the programs identified should
reflect important medium term objectives
of the government and the public body
• Each public body can have many
programs.
41
 …Cont’d

• A public body may have programs which

are broad objectives of expenditure.
• In the Ministry of Health,
“Improvement of Health Care
Delivery” is an example of a program
for it has a broad
objective of expenditure which is further
divided into sub‐programs and projects.

• Programs are a sub‐head class of account42

Sub‐Programs

• Programs can be further divided into

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

• Projects are one or more activities that have some

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

• A public body is often divided into

administrative units or sub‐agencies.
• For example, many public bodies have as a
first level of organization, departments which in
turn can be divided into divisions that in turn
are often divided into sections.
• Public bodies can also have sub‐agencies
that are relatively autonomous entities such as
hospitals under the Ministry of Health.
• Sub‐agencies are usually the departments
of a public body. 45
1.5. Budget Ledger Card

Purpose
• 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.

• Additions/reductions to the approved budget.

• Revised budget.

• Payments received for budgeted expenditure.

• Amount remaining to be requested.

• Commitments.
46
• Balance in the revised budget that is not committed.
 …Cont’d

• The budget ledger card is divided into two

parts:
• The top of the card contains information to
identify the
• Type of budget, and
• Item of expenditure.
• Source of Finance
• The table on the card contains detailed
information about each budget transaction.

47
 1.6 Basis of Accounting in Government
Operation

• 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.

48
 Basis of Accounting…

• 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 cash basis of

accounting.

49
Cash Basis

• The cash basis of accounting recognizes

transactions and events only when cash is
received or paid.

• FGE changed its basis of accounting from cash

basis to modified cash basis in the fiscal year
1995.

50
Modified Cash Basis
• The modified cash basis of accounting recognizes
transactions and events which have occurred by the
year end and are normally expected to result in cash
disbursement within the specific legal grace period
stipulated by a country’s financial regulations after year
end.

• Payments over this grace period that are related to

transactions of the previous fiscal year are reported as
expenditures of the previous fiscal year.

51
 ….Cont’d
• The modified cash basis of accounting in FGE means that
cash basis applies except for recognition of the following
transactions:
• Revenue and expenditure are recognized when aid in kind
is received.
• Interest on salary advances is recognized as revenue when
the salary advance is made.
• Expenditure is recognized:
• When payroll is processed.
• At the end of the year when a grace period payable is
recognized.
• When goods are received or services are rendered if payment
for the goods or services was rendered in advance.

52
 ….Cont’d
• 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

53
 …Cont’d

• The modified cash basis accounting system requires the

same temporary accounts as the cash basis of
accounting plus the following permanent accounts:

• cash and cash equivalents, receivables, payables and net

asset/equity.

• The modified cash basis of accounting is consistent with the

budgeting process and produces information useful for
comparing budgeted and actual revenue and expenditure.

54
 …Cont’d

• 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.

55
Modified Accrual Basis

• However, the modified accrual basis of accounting recognizes

transactions and events when they occur, irrespective of when cash
is paid.

• There is no deferral of costs that will be consumed in future periods.

• Assets that will provide services in the future are expensed in the
period acquired.

56
 …Cont’d
• Therefore, under the modified accrual basis of accounting assets
and stocks are considered consumed and expensed off as soon
as they are acquired.

• The difference between the modified cash and modified accrual

basis of accounting is whether or not the financial regulations
specify a grace period over which cash payments that are
related to transactions of the previous fiscal year are
reported as expenditures of the previous fiscal year and beyond
that grace period cash payments that are related to transactions of
the previous fiscal year are to be reported as transactions of the
next fiscal year.
57
 …Cont’d

• In Ethiopia, the accounting period includes a

legal grace period of 30 days after the close of the fiscal
year.
• Hence, the modified cash basis of accounting is applied in
Ethiopia.
• The modified cash basis of accounting recognizes
transactions and events which have occurred by the
year end and are normally expected to result in cash
disbursement within the specific legal grace period of
30 days after year end.
• Payments over this grace period that are related to
transactions of the previous fiscal year are reported as
expenditures of the previous fiscal year.

58
Accrual Basis

• The accrual basis of accounting recognizes transactions and

events when they occur irrespective of when cash is paid
or received.

• Revenues reflect the amounts that came during the year,

whether collected or not.

• Expenses reflect the amount of goods and services consumed

during the year, whether or not they are paid for in that
period.

• The costs of assets are deferred and recognized when the

assets are used to provide service. 59
Bookkeeping Method

• The FGE accounting system uses double-entry

bookkeeping.

• Double-entry bookkeeping means that both aspects of each

transaction are recorded in the accounting records with at
least one debit and one credit so that the total amount of
debits and the total amount of credits are equal to each
other.

60
Bookkeeping Method

• The advantages of double-entry bookkeeping are

numerous, including:

• All aspects of the transaction are properly recorded

in accounts.

• The accounts are self-controlling because the total of

all debits must equal the total of all credits; therefore,
many errors are easily detected and corrected. Modified
cash basis of accounting can be introduced.

61
End of Chapter one

62