CHAPTER ONE

1.1. 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 that there was a need to reform the
accounting processes as an integral part of the Civil Service Reform to achieve the following
set of objectives:
 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.
 Improve cash and financial management practices by rationalizing the number of
bank accounts and minimizing the amount of idle funds.
 Improve budget control by introducing procedures to record and monitor
commitments (Amount of budgeted funds that are reserved for a specific future
expenditure) against the available budget prior to the approving expenditure.
 Produce accurate, timely and complete information and improve the quality of
information provided to Government and its development partners to create 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.

1.2. FGE chart of account

A chart of accounts is a system of coding used to identify and classify financial entities and
events. The current chart of accounts, described in the Budget Reform Manual incorporates
detailed codes for items of:
 Domestic revenue,
 External assistance,
 External loans, and
 Items of expenditure.

This unit completes the FGE chart of accounts by adding detailed codes for
 Transfers,
 Assets,
 Liabilities,
 Letters Of Credit And
 Net Assets/equity.

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The classification of the chart of accounts is structured in a systematic manner and facilitates
the recording of transactions and the reporting of information in accordance with the budget.
The chart of accounts treats all detailed account codes as temporary accounts and permanent
accounts.

Temporary accounts are accounts that begin each year with a zero balance.
Permanent accounts are detailed account codes whose balance at the end of a year becomes
the balance in the account at the beginning of the next year.

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

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.
Although a complete description of the account codes is attached in annex 2, a brief description
of each follows:
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.” The categories of assets in the accounting system are:
 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.
 Receivables: Receivables are amounts owed 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.
 Goods in Transit: Goods in transit are goods that are owned by the government but not
yet in its physical possession.
 Stocks: Stocks are goods that are expected to be consumed within one year.
 Fixed Assets: Fixed assets are physical items that are expected to have a useful life of
longer than one year and have a certain minimum value.
 Loans Receivable: Loans receivables are amounts due from public enterprises over a
period of time exceeding one year.
 Investments: Investments are FGE investments in public enterprises and private
organizations that are held for more than one year.

Liabilities
Liabilities are formally defined by the IPSAS 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."
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The categories of liabilities in the improved and expanded accounting system are:
 Payables: Payables are obligations to pay that are due in less than one year.
Examples of FGE payables are deposits, salary payable, grace period payables and
treasury bills.
 Long-term Debt: Long-term debt is an obligation to pay that is due in more than one
year.

Net Assets/Equity
Net assets/equity is formally defined by the IPSAS 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 FGE.

1.3. FGE Budget process

There are ten major stages in the Budget Cycle/process up to approval:

Stage 1 – Budget preparation by public bodies (PB)

Each public body needs to take the initiative to start budget preparations before they receive
the budget call letter from MOFED with their budget ceilings. There is much preliminary
budget preparation work they can carry out prior to receiving the official budget call letter.
This preliminary work is dominated by the policy and planning aspects of budgeting; that
which differentiates PB from line item budgeting.
Note: public body is an institution that has a legal mandate, receives a partial or complete
budget directly from the respective finance and planning bodies, submits its final accounts
directly to MOFED, and is on the approved list of public bodies issued by the Office of the
Prime Minister.

Stage 2 – Mid-year program review

Regular reviews of organizational performance through PB, are part of normal management
practice. A mid-year review of program performance should be carried out by the end of
January. The review should be conducted in the context of the PB measurement framework;
the economy of inputs, the efficiency of outputs and the effectiveness of impact. This will
apply to the integrated nature of capital and recurrent expenditure, in the PB format.

Stage 3 – Work plan preparation – redefined as program construction

In PB terms, a work plan is something that is prepared after the budget is approved. That is to
say, the budget defines the total amount of expenditure. The subsequent work plan defines ‘for
what’ and ‘when’ the expenditure will be incurred within the year, monthly! The work plan
therefore takes on two roles.
First is project management – when things will be implemented, plus its monthly expenditure.
Secondly is the quarterly budget review role, through variance analysis. With this principle
accepted, Stage 3 of the budget cycle concerns program construction; introduced, from a policy
perspective.

Program construction
The core task in budget preparation is program construction. Program construction concerns
both capital and recurrent expenditure. Programs specify in detail, the targeted outputs, the
activities to achieve them, the inputs required, and their resource requirements.

Note: Program is the main objective of a PB as stated in its establishment law.

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Stage 4 – Notification of annual funding
funds
Using the approved subsidy formula, MOFED prepares the budget for the subsidies to
regional governments and administrative councils. MOFED will notify each regional
government and administrative council of their annual subsidy by February 8.

Stage 5 – Issue of the budget call

The Budget Call is a letter from MOFED sent to all public bodies which provides them with
the following:
1. Their ceiling for program expenditure for the coming fiscal year;
2. The deadline for submitting their budget request;
3. A review of the policies that affect the expenditure of public bodies;
4. General guidelines for the preparation of the program budget submission; and
5. Detailed instructions and formats for preparing the request for the program budgets.

The Budget Call informs public bodies not only what their ceilings are and how and when to
prepare their budget requests but also, the formats for submitting these requests. MOFED will
issue the Budget Call letter to all public bodies by February 8 of each year.

Stage 6 – Budget Requests

The ‘budget request’ stage of the budget cycle begins when public bodies receive the Budget
Call. The central task for public bodies during the request stage is to fit their request within the
budget ceiling issued in the Budget Call. To “fit” the request, two tasks have to be completed
by public bodies:
1. Adjust their PBs to the budget ceiling notified; and
2. Complete the necessary forms for submitting their PB requests to MOFED.

Stage 7 - Budget Hearings

Having received the budget requests from public bodies, and before preparing a draft
recommended budget, MOFED will conduct ‘budget hearings’. These hearings are designed to
respond to any issues raised during MOFED’s initial review of any public body’s PB. Officials
from each public body will be questioned about their budget requests, and sometimes invited to
submit additional supporting information. The information obtained from these budget
hearings enables MOFED to proceed to the preparation of a draft recommended budget.

Stage 8 - Preparation of the draft recommended budget

The draft recommended budget is the consolidated budget that MOFED prepares and submits
to the Council of Ministers. In turn, the Council reviews it and recommends it to the Council of
Peoples’ Representatives. MOFED prepares the draft recommended budget based on the
budget requests it has received from all of the public bodies, and from up to date information
on resources that will be available to fund expenditures. During this stage, the budget requests
from public bodies are reviewed, adjusted and consolidated into a single budget for capital and
recurrent expenditure; the new consolidated PB format.

The draft recommended PB budget will be finalized by MOFED and printed from the (revised)
computerized budget system. MOFED is required to submit its draft recommended budget to
the Council of Ministers by May 23.

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Stage 9 - Recommended budget reviewed by council of ministers
The Council of Ministers receives the draft recommended budget from MOFED, and carries
out its own review of that draft recommended budget. The Council of Ministers will carry out
its review from the 3rd week of May to the first week of June (15 days). The Council of
Ministers may ask MOFED to make adjustments or revisions to the draft recommended budget
before the Council ‘recommends’ it to the House of Peoples’ Representatives. MOFED will
make these changes using the computerized budget system, and then provide the Council of
Ministers with the recommended budget.

The recommended budget must be submitted by the Council of Ministers to the House of
Peoples’ Representatives no later than June 7.

The recommended budget is now ready for review, approval and appropriation by the House of
Peoples’ Representatives.

Stage 10 – Legislative approval and appropriation of the budget

The recommended budget will be presented in a Budget Speech by the Minister of Finance, to
the House of Peoples’ Representatives (HPR), on a designated date. After consideration, HPR
will send the budget document to the Permanent Budget Committee (PBC) for further scrutiny.
PBC, in the presence of MOFED officials, will then invite selected stakeholders to finalize
consultation on the annual budget. Once approved by the House of Peoples’ Representatives,
the ‘recommended budget’ becomes the ‘approved budget’. However, the expenditures
proposed in the approved budget cannot be implemented until an appropriation law is also
proclaimed by the House of Peoples’ Representatives.

It is important to distinguish between the approved budget and the annual appropriations. The
budget that is approved by the House of Peoples’ Representatives is a detailed budget.
However, the appropriations are at a more aggregate or global level. An appropriation is a legal
mandate to spend money out of the consolidated fund.

The House of Peoples’ Representatives is required to vote on the annual appropriations for the
approved budget no later than July 7. The appropriation Proclamation will specify the
following; first, for government as a whole:
1. Total revenue source; both domestic and external;
2. Total federal recurrent expenditure;
3. Total federal capital expenditure;
4. Total of all subsidies to regional governments and administrative councils; and
5. The total subsidy for each regional government and administrative councils.

Then, for each public body:

1. Total budget for each public body;
2. Total budget for each program;
3. Total budget for each output; and
4. Source of funding for each output.

The approved budget includes the appropriation Proclamation, as well as more detailed
schedules of the budgeted allocations to and within each public body, and of forecast revenue
collections by each public body. The approved budget and the annual appropriations can now
be referred to as the Proclaimed Budget, and is published in the Negarit Gazeta – ready for

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implementation. Copies are distributed to all public bodies and made available of the MOFED
website.
1.4. Fundamentals of FGE program Budget

Purpose of PB
The essence of Public Body is to allocate resources to outputs, in a program structure.
The program structure is the analytical core of Public Body.
It is the key to linking not only planning and budgeting but also, capital and recurrent
expenditure.
The program is also the means for delivering and measuring the results, ultimately, of
infrastructure and service provision.
In many countries, PB is known as performance budgeting. In this view, program budgeting is
the analytical core of the wider performance budgeting concept.

Scope of Public Body

Infrastructure and services are delivered through specific organizations. Thus, programmers are
analyzed at the practical level of the organization: the federal public body (and ultimately, the
regional state and individual woredas (district councils)). Thus, PB is pursued through the
sovereignty of each federal public body (the budgeting organization of either a ministry or an
independent executive agency), in order to ensure practical infrastructure and service delivery.

Development
The demand for infrastructure and services confronts every government in the developing
world. Such governments are therefore faced with the enormous challenge of finding ways to
provide infrastructure and services, within their eternal financial constraints. The fundamental
importance of access to infrastructure and services, as a means of supporting both economic
development and poverty reduction, is now accepted as common understanding. PB has the
advantage of not only ‘measuring’ such provision but also, encouraging sound practice in its
‘delivery’.

Measurement and accountability

Public Body measures performance. This is through the economy, efficiency and effectiveness
of infrastructure and service delivery. Therefore, it also supports public accountability.
Ultimately, PB can encourage program managers to be more accountable for expenditure to
achieve results. PB can therefore be seen as the foundation for individual performance
assessments.

Infrastructure and service delivery

Infrastructure and services are delivered through specific organizations. Thus, programs are
analyzed at the practical level of the organization:
 The federal public body;
 The regional state;
 The individual woreda.
For this to be done successfully, we need to embrace the principles of Public Body, captured
in its checklist.

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Budget Classification scheme, Budget Categories and their standardized codes

There are eleven budget categories in the budget classification scheme presented below. The
presentation of codes in the budget begins with the "head" class of accounts that are assigned to
the budget categories of:
 Functional classification,
 Sub-functional classification, and
 Public body.
Public Bodies have the discretion to code their programs, sub-agencies, sub-programs and
projects. Each Public Body in consultation with MOFED does the coding of these budget
categories

Table 1.1
Budget Classification Scheme
Budget Class of Code
Category Account (#Of digits, Standardized
or Discretionary codes)
Jurisdiction 2, Standardized
Type of Budget 1, Standardized
Functional classification 1, Standardized
Sub-Functional classification Head 1, Standardized
Public body Head 1, Standardized
Programs Head 2, Discretionary
Sub-Agency S-Head 2, Discretionary
Sub-Program S-S-Head 2, Discretionary
Project S-S-S-Head 3, Discretionary
Item of Expenditure S-S-S-S-Head 4, Standardized
Source Finance Item Source 4, Standardized

The eleven budget categories listed in the table above are defined as follows and the codes for
the categories that are standardized are to be discussed and listed below.
 Jurisdiction: Jurisdiction is the government level to which the budget applies. There
are twelve jurisdictions that include
 The Federal Government.
 Nine Regions.
 Two Administrative Councils (Addis Ababa and Dire Dawa).
The code for jurisdictions is a standardized two-digit code.
 Type of Budget: There are two types of expenditure budgets: recurrent and capital.
The code is one digit and standardized.
 Functional classification: Functional classifications are the broad areas of expenditure
that are used for analysis and national accounts.

There are four functional classifications of expenditure:

 Administrative and General,
 Economic,
 Social, and Other.

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 The "Administrative and General" functional classification covers expenditures for
the following services:
 Executive,
 Legislative,
 Judicial,
 Financial and fiscal affairs,
 Defense, public order,
 General services (personnel management, and standards)."
The "Economic" functional classification covers expenditures that directly deliver
economic services or provide services that enable economic services.
The "social" functional classification covers expenditures that deliver social services and
includes the sub-areas of :
 Education,
 Culture and
 Sport and health.
The "Other functional classification covers expenditures that are not classified by the other
three categories and includes transfers.
The Functional classification code is one digit and standardized.
The Other functional classification coded with the 400 series includes four sub-functional
classifications:
 Transfers- Transfers include the subsidies to regions.
 Debt- debt includes domestic and external obligations.
 Contingency- contingency covers past commitments and write-offs.
 Miscellaneous can include items such as duty drawbacks and capital contributions.

The functional classification is the first digit of the three-digit head code. For example,
A. The functional classification code for economic expenditure is 200.
B. The second digit of the three digit code is the sub-functional classification and
C. The third digit is the public body code.
 Sub-Functional classification: The four functional classifications are further divided
into sub-functional classification of expenditure. Sub-functional classification is the
second digit of the three-digit "head" code.
Public bodies are assigned a unique three-digit head code under the budget
classification scheme presented in the above table.
The first digit of the head code identifies the public body's functional classification,
The second digit identifies the sub-functional classification, and
The third digit is a unique number for public body within the sub-functional
classification. The second table provides the current list of federal public bodies and
their head codes.
 Programs: A public body may have programs that are broad objectives of expenditure.
Programs are a sub-head class of account and are coded with one digit assigned by the
public body in consultation with the MOFED.
 Sub-Agencies: A public body is often divided into administrative units of sub-
agencies. Sub-agencies are usually the departments of a public body. Sub-agencies
are a sub-sub-head class of account and are coded with a unique two-digit number
assigned by the public body in consultation with the MOFED.

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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 or 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.
 Balance in the revised budget that is not committees.

Completion
The budget ledger card is divided in to two parts:
 The Top of the card contains information to identify the
BI,
Type of budget, and
Item of expenditure.
 The table on the card contains detailed information about each budget transaction
Table 4.1 Indicates the field in the budget ledger card, the source documents used to fill each
field and the timing for completion of each field.

The Budget section maintains a budget ledger card for each individual item of budgeted
expenditure by BI and source of finance. The appropriate budget ledger card is updated each
time a transaction occurs.

The format of the budget ledger card is provided in figure 1.1

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 BUDGET LEDGER CARD
Page No:
Name of Public Body Code:
Name of Program: ______ Code:
Name of Sub Agency: ___ Code: Type of Budget: Code:
Name of Sub program: Code: Item of Expenditure: Code:
Name of Project: ______ Code:
Source of Finance ______ Code:

No Date Description Reference Approved Addition to Reduction to Revised Payment Unpaid Commitment Balance
No Budget Budget Budget Budget Received Balance not
committed
Purpose of Each Field in the Budget card

Top of the Budget Ledger Card

 Name of Public Body and Public Body Code: The field is to identify the PB to which the
budgeted expenditure is related.
 Name of program and program code: The field is identify the program to which the
budgeted expenditure is related.
 Name of sub Agency & Sub program Code: The field is to identify the PB to which the
budgeted expenditure is related.
 Name of sub program and sub program code: The field is identify the sub program to
which the budgeted expenditure is related.
 Name of project & project Code: The field is to identify the BI to which the budgeted
expenditure is related
 Source of Finance & code: The field is to identify the source of funding that is recorded
on the ledger card.
 Page Number: The field identifies the page number of the budget ledger card.
 Type of budget and Code: The field is to identify whether the item of expenditure is a part
of the recurrent or capital expenditure budget.
 Item of Expenditure & code: The field is to identify and describe the item of expenditure
by its budget code.

Table on the Budget ledger card

Number: The sequential number of the transaction.
Date: The date of the transaction.
Description: A brief narrative of the description of the transaction.
Reference Number: The reference number of the source document to the transaction.
Approved Budget: The field identifies the amount of original approved for the item of
expenditure.
Additions /Reductions to Approved Budget: The fields are used to track changes to the
approved budget and provide information to computer the revised budget.
Revised budget: The field contains the approved budget adjusted for any additions or
reductions. The revised budget is key for budget control. An item of expenditure must not
exceed its revised budget.
Payment received for Budgeted Expenditure: The field is used to record payments
received (whether as cash or non-cash) from the appropriate source of funding and assists
in keeping track of the amounts of money received for item of expenditure.
Unpaid Balance: The field is the different between the revised budget and the amount of
funds received (whether as cash or non-cash) to meet the budget expenditure and assists
in keeping track of the remaining amounts of money that may be requested for an item of
expenditure.
Commitment: The field is used to record current commitments and assists in identifying
the balance available in the budget for expenditure.
Balance not commitment: The field contains the difference between the revised budget
and the commitments. The balance not commitment is the available budget for future
spending. Once the uncommitted balance is reduced to zero, the Budget Section will
approve no further spending.
Examples of typical transaction

A set of six transactions is detailed below to illustrate the process of completing the budget
ledger card for each transaction. The examples are not intended to be comprehensive or include
all possible types of transactions, but only to serve as an illustration for users.

Transaction # 1: MOFED is notified of its approved recurrent budget on Me/Be/Ma 4 at the

beginning of a fiscal year. The Me/Be/Ma 4 dated July 14, 2001 contains the following
information for the sub-agency Administration & General Service:
 The reference number of Me/Be/Ma 4 is N/94
 The name of the public body is MOFED-code 152 and the sub-agency code is 01
 The approved budget for stationery is Birr 250,000
 The item of expenditure if office supplies-code 6212
 The source of funding is treasury-code 1800
This information is used to complete the identification information required at the top of a
budget card, and to record the first transaction in the table on a budget card.
Transaction # 2: The procurement section approves a purchase order No. PO/1/94 dated August
2001 for Birr 150,000 for purchase of stationery. The approved purchase order is taken to the
budget section for recording the commitment.
Transaction # 3: On 1 September the BI requests Birr 150,000 for stationery from MOFED
from the request for the unused balance of stationery stocks from the previous year. The actual
payment received by the BI is Birr 130,000.
Note: The BI will record the payment received as Birr 130,000 for the actual cash received the
non-cash transfer of Birr 20,000
Transaction # 4: The procurement section approves a purchase order No. PO/2/94 dated 2
September 2001 for Birr 100,000 for purchase of stationery from another supplier. The approved
purchase order is taken to the Budget section for recording the commitment.
Transaction # 5: On September 10, the procurement sections cancel purchase order no. PO/2/94
dated 2 September 2001 for Birr 100,000 for purchase of stationery. The purchase order is
marked VOID by the procurement section and is taken to the Budget section for canceling the
commitment.
Transaction # 6: Notification of a budget supplement is made on Me/Be/Ma 6 dated 15
September 2001 with reference number RC/1/94. The notification adds Birr 50,000 to the
stationery budget.

Required: Prepare Budget ledger card.

1.6. Overview of IBEX and IFMIS

1.6.1. Overview of 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, Disbursement and Administration Module.
Budget Module
This module executes all the budget preparation activities performed by government financial
offices.
Accounts
This module executes all the budget execution activities of government budgetary institutions.
More specifically, the accounts module records the financial transactions of the budgetary
institutions, records the aggregated monthly accounting reports and provides accounting reports
for ledgers, financial statements, management reports, transactions, expenditures and revenues.

Accounts Consolidation
This module consolidates the budget and accounting data for the entire country. This module
allows for the generation of regional and national consolidated reports.

Budget Control
This module manages the activities of recording budget commitments and disbursement
payments in order to enable budgetary control over expenditures.

Budget Adjustment
This module provides the functionality to address changes to the approved budget during budget
execution. It specifically enables the recording of budget transfers and budget supplements and
the subsequent production of the adjusted budget.

Disbursement
This module manages the public treasury functions associated with cash management and
disbursing funds between public financial institutions.

Administration Module
This module provides an interface to manage users and user’s profiles that interact with the
IBEX system.

In general IBEX is not a system for an auditor general to perform their own task, but they can get
raw data from the system for their analysis and verification purpose.

1.6.2. Overview of IFMIS

The Integrated Financial Management Information System (IFMIS) is an integrated public

financial management system being implemented by Federal Government of Ethiopia (FGE) to
improve the public expenditure management processes, enhance greater accountability and
transparency across Federal Ministries, Agencies, Regions, City Administrations, Zones and
Woredas.

It is designed to make use of modern information and communication technologies. The IFMIS
implemented by FGE is the latest version of Oracle E-Business Suite (EBS) comprising the
following 9 modules.
 Oracle E – Business Suite
IFMIS
HRMS
Financials Supply Chain Mgt.
Budget (PSB) Procurement Payroll
General Ledger Inventory
Cash Management
Accounts Payable
Fixed Asset

General Ledger

The objective of IFMIS implementation include

 Standardizing the processes across all Ministries on the financial accounting and
reporting
 Enables all Federal Public Bodies and Regions to use a single system with extensive
reporting facility from the same physical source
 Facilitate fast and quality reporting procedures within and across the ministries
 Enable quick consolidation mechanism
 Pave a platform to prepare the current budgeting system to output based budgeting
methods
 Provides interfaces with other systems in Banks, Customs and Revenue, Debt and Aid
Management, or other available systems at Pilot Sites
 Provide orientation and facilitation to the other Ministries which are not under pilot sites
to become part of Future IFMIS.

1.7. 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.

Cash, Modified Cash, Modified Accrual and Accrual Basis of Accounting

  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.

 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.

 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.
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.

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.

 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.

 Base of Accounting used by FGE

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. 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:
A. When payroll is processed.
B. At the end of the year when a grace period payable is recognized.
C. 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 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.

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.
The FGE accounting system employs a combination of temporary and permanent accounts.
All account balances at the end of the year may not have a zero balance. So, a process is
necessary that distinguishes temporary accounts and sets them to zero. The process of setting the
balance in temporary accounts to zero is called closing the accounts, and the process is
performed by a closing entry. The closing entry is an accounting activity that takes place at the
end of each budget year. This process requires a net assets/equity account.

All assets and liabilities are not recognized in the modified cash basis accounting system. Only
those receivables and payables included in the chart of accounts are included in the system. The
modified cash basis accounting system produces financial information that is reported in a
Statement of Changes in Cash Position and a Statement of Budgeted versus Actual Expenditure.
Asset and liability accounts other than cash, receivables, payables, and letters of credit are
included in the chart of accounts to allow institutions that have the capacity to maintain
accounting records of all assets and liabilities. These other assets and liabilities are recorded
using the cost method. The cost method values assets at their original cost and liabilities at the
amount still due.

Recording these other assets and liabilities is an option for the future in the FGE accounting
system.

1.8. Legal Framework of FGE Financial Administration

To describe the FGE accounting system, its operations, and roles and duties within the system,
the structure of financial administration and authority in the federal government must be
understood to the extent that it impacts the accounting system. Although the structure of
financial administration is not standard across all units in the federal government, a general
pattern exists.

Through this course the following structure of financial administration under MOFED is
assumed.

Ministry of Financial 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 and distributes notification of approved federal budgets
and administers the budget.
 Central Accounts Department that records transaction that the authorized and executed at
MOFED, receives monthly reports from public Bodies, and compiles financial statements
for the federal government.
 Treasury department that receives and distributes cash from central treasury.
 Credit Administration Department that manages the federal government’s debt.
This is not a complete description of MoFED or of these departments. This is a description of
their roles and responsibilities within the accounting system.

Central Accounts Department (CAD)

The central Accounting Department performs several functions. The major functions are:
 Entering daily transactions in the FGE general ledger from NBE bank advices and
Treasury Department transfer authorizations;
 Preparing daily cash reports;
 Preparing and sending information to public Bodies regarding loans from external
lenders;
 Receiving monthly report for SSDP Programs from public Bodies and regions, then
preparing and sending reports to donors;
 Verifying and entering monthly report from public Bodies in the FGE general ledger;
 Preparing the FGE annual financial statements and submitting them to the federal Office
of Auditor general;
 Consolidating annual reports from regions with the FGE annual financial statements; and
 Generally Overseeing the accounting function at all public Bodies and Solving any
problems that occur in the accounting system

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 entitles to request and receive a budget.
A public body is defined as follows: it is an institutions that has a legal mandate, receives a
partial or complete budget directly from the respective finance and planning bodies, submits its
final accounts directly to MoFED, and is on the approved list of public bodies issued by the
office of the prime Minister.

FIGURE 1.1 shows this administrative structure.

FIGURE 3.1 STRUCTURE OF FINANCIAL ADMINISTRATION WITHIN A PUPLIC BODY

Head of Public Body

Head of Administration and Finance

Head of Budget and General Service

Accounts

Budget Section
Accounts Section

The remaining sections in this chapter include an overview of the roles and responsibility of
MoFED and PBs in the FGE accounting system.

Programs
Accountant Cashier
Programs
Planning is conceived in terms of programs and encompasses periods of up to three years. A

Sub-Program is a subset of a program. Programs are the main objectives of Public (bodies)
PBs) as stated in its establishment law.

Programs and PB are not the same. More than one PB may share any single program, and any
single PB may have more than one program. Although codes for Program and sub program are
included in the chart of accounts, neither receives a budget. A code for PB is part of the chart of
accounts. PBs receive budget.

To obtain financial information about a program the total of expenditures incurred by the various
budgetary units involved in the program must to be consolidated. The FGE accounting system
employs the programs and sub-program code for consolidation and reporting purposed only.
Programs and sub-programs have no administrative, Role in the accounting system.

Budgetary Institution (BI)

For purpose of this part, 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 regional government.

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 (domestic, assistance and 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.

Project and sub-agencies are defined and coded in the chart of accounts. Any entity that receives
an approved budget from a PB’s approved budget is called a budgetary Institution (BI) in the
manual. Generally:
 PBs are ministries, authorities, and commission
 BIs are projects and sub-agencies.
 BIs are administered by PBs.
 The entire approved budget of a PB is assigned to BIs.

Figure 1.2 Shown the structure of financial administration in the budget process.

Figure 1.2: SRTUCTURE OF FINANCIAL ADMINISTRATION IN

THE BUDGET PROCESS

Ministry of Finance and Economic Development

Public Body

ACCOUNTING UNIT Budgetary Institution: Project

or Sub-Agency
For cash management, another entity 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 BAs, or a PB may have only one BI and BA. Each BA:
 Is managed by an accountant
 May
Have many cashiers,
Have its own cashier,
Share a casher with other BAs, or
Have no cashier associated with it (like foreign currency bank accounts).
 Handles cash flows:
For one or more than BI,
From one or more source of finance, and
For more than one type of budget (capital/Recurrent)

Accounting unit is the unit initially captures and records transactions in to the accounting system.
If a BA handless cash for only one BI (BI/BA), the accounting unit:
 Processes transactions for the BI/BA.
 Maintains registers for the BI/BA.
 Maintains a general ledger for the BI/BA.
 Maintains subsidiary ledgers for:
 Asset accounts.
 Liability accounts.
 Prepares a monthly report for the BI/BA.

A complete set of accounts and a general ledger is maintained for each BI by BA because:
 Each sources of funding is budgeted distinctly, and
 Cash from each source is physically separated in distinct BAS.

Each month, a monthly report is prepared from the general ledger for the BA.
Cash ledger cards in the general ledger control the cash balances in the bank in the safe.

If more than BI shares a single BA, the accounting unit:

 Processes Transactions for all BIs.
 Maintains a register for the BA.
 Maintains a general ledger for the BA.
 Maintains subsidiary ledgers for:
 Items of expenditures by BI and type of budget.
 Asset accounts.
 Liability accounts.
 Prepares a monthly expenditure report for each BI.
 Prepares a consolidated monthly Trial Balance for the BA.

One general ledger is maintained for the BA, including a ledger card for each item of
expenditure. The only records maintained for each BI are accounts in subsidiary ledgers for
items of expenditure recorded in the general ledger. Monthly, the subsidiary ledger information
is used to prepare an expenditure report for each BI. These reports are consolidated with
information from the general ledger into a monthly report for the BA.
The balances of cash in safe and cash in bank are maintained on ledger cards in the general
ledger for the BA.

Reporting Entity
A reporting entity is the entity that sends monthly report to MoFED. Although the accounting
unit prepares monthly reports, every accounting unit may not send monthly reports directly to
MoFED. The reporting entity may be:
 The accounting unit, or
 A higher level of authority (Perhaps a PB)
Each of the following is possible:
 A reporting entity may be an accounting unit, and an accounting unit may consist of only
one BI. Therefore, a single BI may be a reporting entity.
 A reporting entity may be a PB that receives the monthly reports from several accounting
units.
In this manual, whoever sends the reports to MoFED is the reporting entity. Therefore, the
reporting entity is not, necessarily, an accounting unit.

Cashier and Accountant

In the FGE accounting system of cash control, the cashier’s function and the accountant’s
function are distinct. Cash consists of currency and checks. The cashier’s function is maintained
and control cash in the safe. The accountant’s function is to maintain and control cash at the hand
to the cash book.

Only the casher 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 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. When cash is disbursed, the cashier will issue a receipt voucher. If the
amount of cash in safe is to be replenish, the cashier will surrender all payment vouchers to the
for the total amount of the payment vouchers that are surrendered. The replenishment should
return the balance of cash in safe to the established level.

When cash is received from sources other than the accountant, the cashier will:
 Issue cash receipt.
 Segregate the cash received from cash available to disburse,
 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 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 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. However, some general principles apply.
Assistant cashiers are responsible for:
 Collecting cash
 Issuing deposit and/or receipt vouchers
 Setting deposits
The main cashier is responsible for:
 Reconciling cash and vouchers for each assistant cashier
 Depositing cash in the bank
 Disbursing cash for the proper functioning of the PB
 Managing the petty cash
To accomplish these responsibilities these responsibilities, most Public Budget with multiple
cashiers are organized as follows:
 Each assistant cashier:
 Collects revenue and issues receipt vouchers
 May summarize receipt vouchers on Model 16
 Sends a copy of receipt vouchers and Model 16 to accounts
 Sends cash to main cashier
 Receives Model 64 as receipt from main cashier
 The main cashier:
 Collects cash from cashiers
 Verifies cash with accounts
 Verifies the amount on receipt vouchers equals cash received
 Verifies amount for each revenue account
 Completes Model 64
 Gives a copy of model 64 to assistant cashiers
 Deposits cash in bank
 Attaches the deposit slip to model 64
 Gives the copy of Model 64 with the deposit slip to accounts
 The accountant:
 Receives receipt vouchers and Model 16 from assistant cashier
 Verifies accounts and amounts to main cashier
 Provides accounts and amounts to main cashier
 Receives Model 64 with deposit slip attached from main cashier
 Records Model 64 in the transaction register and ledgers