Module Title : Federal Government of Ethiopian Accounting

Introduction

Governmental agencies, Business Organizations, and all other entities of the society use
accounting as a basis for controlling their respective resources and for measuring their
accomplishment. Accounting is equally important to the successful operations of all types of
organizations that is both profit seeking and Not for profit seeking, among others who require
accounting information to perform their operations and to achieve their objectives. To this
end, the course is designed to enrich the managing and controlling devices in relation to the
use of the public resources under Civil Service organization.

The Federal government accounting language is different from that of business organizations
because government organizations differ in important ways from business organizations. The
purpose of this course is, therefore, to teach the accounting for Ethiopian governmental
organizations so that you can participate actively and intelligently in the controlling and
management of Federal government of Ethiopian organizations financial operations.

Federal Government of Ethiopian accounting is one branch or field of accountancy which

develops and communicates accounting information for internal use by management and also
for external use by persons outside the system, such as donors, creditors, economists,
financial analysts, and government agencies. In this course, we will emphasize the
importance of Federal Government of Ethiopia Accounting system.

The course is also intended and designed so as to acquaint learner with the concepts and
principles that are applicable for governmental units and other not for profit organizations.
The course generally emphasizes on the basic concepts of government account and the way
how transactions are recorded and financial reports are prepared by governmental units and
other non-governmental organizations. Moreover, the course reflects the distinction between
legal form of transactions as opposed to the accounting system for business enterprises, and
the substance of transactions with special emphasis to Ethiopian public organizations..

This course is a three-credit hour course that requires you about 48 hours of study times.
Course Number AcFn3122

Module Description

The course will help the students to be acquainted with the FGE Accounting concepts and
practices, in doing so they will differentiate with the expanded (improved) FGE accounting
system and the previous FGE accounting system and the need for improvements.

The course will discuss in detail goals achieved by FGE accounting systems Basic accounting
concepts, over view of FGE financial administration and accounting system and budget
control. It also discusses the transaction registers for local currency and foreign currency and
about general and subsidiary ledgers. It further discusses FGE monthly reports, different
transaction, letters of credit and construction projects. It is also designed to caver areas what
government budgeting is, its roles, the cycle or process of government budgeting, the
managerial apportion to and problems in government budgeting, and accounting and
performance measurement. In light of these theoretical foundations the course will also
discuss the Ethiopian budgeting

Module Objectives

After successfully completing this module, the students should be able to:
 Identify the objectives of FGE accounting system
 Explain why and how the FGE accounting system uses modifies 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
 Describe the nature, roles and significance of government budgeting.
 Recognize basic problems in government budgeting.
 Describe the process involved in the Ethiopian budgeting system.
 perform basic budgeting activities within Ethiopian context at any level of government;
and
 Value the importance of budgeting in the Regional and Federal Governments.
 Chapter 1: Introductions FGE Accounting

Content

1.1. Introduction
1.2. Historical overview of Ethiopian Government Accounting System
1.3. FGE Chart of account
1.4. FGE Budget Process
1.5. Fundamentals of FGE program budget
1.6. Budget ledger card
1.7. Basis of accounting
1.8. Legal Framework of FGE Financial Administration
Chapter 2: General and subsidiary ledgers
2.1. Introduction
2.2. Description of ledger
2.3. Structure and organization of ledgers
2.4. Recording entries in the ledger
Chapter 3: Recording Common entries of FGE
3.1. Introduction
3.2. Cash transfer from MOFEC to Public Bodies – Zero Balance Account
3.3. Non-Cash Transfers
3.4. Community Development Contribution in Cash
3.5. Aid in Cash
3.6. Operating Expenditures
3.7. Operational Expense without Withholding Tax
3.8. Letters of Credit
3.9. Construction Projects
3.10. Salary
Chapter 4: Monthly Reports
4.1. Introduction
4.2. Revenue Assistant Report
4.3. Recurrent expenditure Report
4.4. Capital Expeditor report
4.5. Transfer Report
4.6. Payable Report
4.7. Trial Balance
Chapter 5: Financial statement and Reports
 5.1. Introduction
5.2. Statement of Budgeted Revenue and Expenditure
5.3. Statement of changes in cash position
5.4. The Balance Sheet
5.5. Statement of changes in cash position
5.6. The Balance sheet
Chapter 6: FGE Financial Management
6.1. Introduction
6.2. Objectives of Public Financial Management
6.3. Legal Framework of Public Financial management
6.4. Federal Audit
6.5. Issues of FGE Public Financial Management
Chapter 1: Introductions FGE Accounting
Content

1.1. Introduction
1.2. Historical overview of Ethiopian Government Accounting System
1.3. FGE Chart of account
1.4. FGE Budget Process
1.5. Fundamentals of FGE program budget
1.6. Budget ledger card
1.7. Basis of accounting
1.8. Legal Framework of FGE Financial Administration
1.1. Introduction
Dear learner, now we are beginning the first chapter of the module which deals about
Historical overview of Ethiopian Government Accounting System, FGE Chart of account,
FGE Budget Process, Fundamentals of FGE program budget, Budget ledger card, Basis of
accounting and Legal Framework of FGE Financial Administration

Objective: After completion of this chapter, you will be able to:

 Describe historical development of FGE accounting

 Understand the role of double entry accounting

 Discuss chart of accounting

 Define budget and discuss classification of budget

 Identify basis of accounting

1.2. HISTORICAL BACK GROUND OF ETHIOPIAN GOVERNMENT

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 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.
Accordingly, the reforms to the accounting system was jointly developed, designed and
implemented by the Accounts Design Team and the DSA Project in GC 2002. This system
has since been operating successfully in MOFEC and all public bodies at the Federal level
and at the regional and sub regional levels. The key indicators to measure the success of the
new accounting system include reduction in the annual backlog of reporting at federal and
regional levels, timeliness, accuracy and comprehensiveness of monthly reporting together
and the capacity of the staff that operate the system.
1.3. FGE Chart of Accounting

A chart of accounts 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 revenues, expenditures, transfers, assets, liabilities
and net assets/equity.

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

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.

Brief description of the is discussed as follwos:

A. 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:

i. 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.

ii. 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.

iii. Goods in Transit

Goods in transit are goods that are owned by the government but not yet in its physical
possession.

iv. Stocks

Stocks are goods that are expected to be consumed within one year.

v. 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.

vi. Loans Receivable

Loans receivable are amounts due from public enterprises over a period of time exceeding
one year.

vii. Investments

Investments are FGE investments in public enterprises and private organizations that are held
for more than one year.

B. 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." The categories of liabilities in
the improved and expanded accounting system are:

i. 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.

ii. Long-term Debt

Long-term debt is an obligation to pay that is due in more than one year.

C. 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.

1.2.1 Budget Classification Scheme

The budget classification scheme is how the budget is organized by each budget institution.
For accounting purposes, the budget classification scheme as defined in the government’s
annual budget is tracked to identify expenditure variances between what is budgeted and
what is expended by budget institution. The budget classification scheme to classify budget
institutions is the uniform at the federal and regional levels.
1.2.2 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

General Ledger Budget Ledger/ Expenditure Subsidiary Ledger

Ledgers

Revenue Report

Transfer Report Trial Balance

Expenditure Reports
Receivable Report

Monthly Reports

Post Closing Trial balance

Summary Income and Expenditure Statements

Detailed Income and Expenditure Statements

Financial Statements
Cash Flow Statement

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.
1.2.3. Bookkeeping methods

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 cash 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.

By convention, the rules shown in Table 2.1 are true for each account category used in
modified cash basis of accounting:

Accounting Rules for Debits and Credits

Account Category Used Normal Increase Decrease

for Modified Cash Basis Balance Recorded as Recorded as

1.4. Revenue Credit Credit Debit FGE

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

Budget process
The budget that is appropriated by the Council of People's Representatives (CPR) each year
provides a PB with its authorization to spend money. The purpose of this topic is to describe
the budget control process, and the process of completing a budget ledger card. It has the
following sections:

 Description of common budget terms

 Procedures to achieve budget control
 Budget ledger card
 Examples of typical transactions
1.4.1. Description of common budget terms

a. Approved Budget

The approved budget is the detailed breakdown of the appropriated budget by:

 Sub-agency or project
 Type of budget
 Item of expenditure
 Source of finance.

The BI is notified of its approved budget on Me/Be/Ma 4 Recurrent Budget Notification for
Sub-Agency and Ka/Be/Ma 4 Capital Budget Notification for Project at the beginning of a
fiscal year.

b. Additions/Reductions to Approved Budget

During the year, the approved budget may be revised in two ways:

 Budget supplement. A budget supplement is an additional appropriated budget. The

supplementary amount increases the approved budget. Notification of budget
supplement is made on Me/Be/Ma 6 for recurrent budget and Ka/Be/Ma 6 for capital
budget.

 An addition to one budget item and a corresponding reduction to the budget of

another item of expenditure. There are two processes for accomplishing this:

 Budget transfers, when the addition is made to the budget of one PB/SA/cost
centre and the reduction is made to the budget of another PB/SA/cost centre, and

 Changes, when transfers of budgeted expenditure are made from one item of
expenditure to another within the same BI.

Notification of budget transfers is made on Be/Ma 1.

 c. Adjusted Budget

The adjusted budget means the approved budget adjusted for additions to and/or reductions
from the approved budget. The adjusted budget is the benchmark for budget control, as an
item of expenditure must not exceed its adjusted budget.

1.4.2. Procedures to achieve budget control

a. Budget Control

Budget control has two key elements:

 Expenditure is committed or incurred only if there is an available budget.

 Actual expenditure does not exceed budgeted expenditure.

In addition to other tasks, the Budget Section is tasked with the responsibility of budget
control which is achieved using a system of commitments. The process is described below.

b. Commitment
A commitment is a way of marking off part of the budget that has not yet been spent but that
is obligated for a specified expenditure. A BI may enter into contracts or issue purchase
orders. These obligations to spend money are commitments; that is, before the good or
service is ordered and before the payment is actually made, the amount of the purchase order
is subtracted from the BI’s approved budget.

A commitment is a tool that prevents overspending by identifying amounts committed to pay

for items that have been requested but not yet ordered and to determine the budget that is
available for expenditure.

c. Recording Commitments
Each time a commitment is made, as evidenced by any one of the source documents, it is
taken to the Budget Section to ensure that the commitment is recorded in the budget ledger
card and to obtain confirmation from the Budget Section that there is an available budget to
meet the expenditure.

The Budget Section records the commitment, signs the source document as evidence of
recording the commitment in the budget ledger card, and confirms that budget is available for
spending.

The evidence of a commitment is either one or a combination of the following forms:

 Pro forma invoice

  Purchase Order

 A contract

 A letter or minutes of a meeting

 Journal Voucher

 Payment Voucher
Occasionally, a commitment may be cancelled or revised. In such cases, the Accounts
Section must inform the Budget Section of the changes to ensure that the budget ledger card
is updated to amend the commitment and the uncommitted balance.

If the Budget Section is not informed about a cancelled or revised commitment, the balance
available in the budget will not get updated. Consequently the Budget Section may
disapprove a valid purchase order for want of an available budget.

Example
A BI has an approved budget for Birr 250,000 for stationery. The Procurement Section
approves a purchase order for Birr 150,000 for purchase of stationery. The purchase order of
Birr 150,000 represents a commitment although it has not been paid.

The purchase order is taken to the Budget Section to ensure that the commitment is recorded
in the budget ledger card and to obtain confirmation from the Budget Section that there is an
available budget to meet the expenditure. The Budget Section records the commitment,
updates the remaining budget available for expenditure (uncommitted balance) to Birr
100,000 in the budget ledger card and signs the purchase order as evidence of recording the
commitment and confirmation of an available budget to meet the expenditure.

Further, assume that the Procurement Section cancels the purchase order for Birr 150,000 for
purchase of stationery a week later. The purchase order will be marked “void” to indicate
that it is cancelled.

The cancelled purchase order is returned to the Budget Section to ensure that the commitment
is cancelled in the budget ledger card and the remaining budget available for expenditure
(uncommitted balance) is updated to Birr 250,000 in the budget ledger card.

If the cancelled purchase order is not taken to the Budget Section, the commitment would not
get cancelled and the remaining budget available for expenditure (uncommitted balance)
would incorrectly remain as Birr 100,000 instead of Birr 250,000.
 d. The Expenditure Approval Process
As an additional control measure, when expenditures are to be incurred by a BI, all payment
vouchers are verified by the Budget Section prior to approval of payment by the Accounts
Section. The Budget Section approves all expenditures to verify that expenditure remains
within the budget.

Prior to signing the payment voucher, the Budget Section verifies that:

 The amount of the purchase order for the expenditure has been committed in the
same amount as the actual expenditure, or
 If the amount of the expenditure has not been committed,
o The available (uncommitted) budget is sufficient to cover the expenditure,
o The commitment is recorded, and
o The uncommitted balance is updated.
If the commitment is already recorded, the Budget Section verifies the recording of the
commitment and signs the payment voucher. If the commitment is not already recorded, the
Budget Section records the commitment and signs the payment voucher.

The signature on the payment voucher by the Budget Section indicates that the budget for the
item of expenditure has been recorded as a commitment and that there is an available budget
to meet the expenditure.

1.5. Budget Ledger Card

The Federal Democratic Republic of Ethiopia

Ministry of Finance and Economic Development

Ledger Card

Public Body:         Code  

Program:         Code  
Sub Agency         Code  

Sub-Program         Code  

Project         Code  

Source         Code  

Desc

Bank Account No.        

             
  Reference From Register    

Date         Description Debit

  Month Page Item No Date        

                 

                 

                 

                 

                 

                 

                 

                   

                   

                   

                   

                   
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.
 Balance in the revised budget that is not committed.
1.5.1. 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
o The table on the card contains detailed information about each budget
transaction.

1.5.2. Purpose of Each Field in the Budget Card

 Top of the Budget Ledger Card

A. Name of Public Body and Public Body Code

The field is to identify the PB to which the budgeted expenditure is related.

B. Name of Program and Program Code

The field is to identify the Program to which the budgeted expenditure is related.

C. Name of Sub Agency & Sub Agency Code

The field is to identify the BI to which the budgeted expenditure is related.

D. Name of Sub Program and Sub Program Code

The field is to identify the Sub Program to which the budgeted expenditure is related.

E. Name of Project & Project Code

The field is to identify the BI to which the budgeted expenditure is related.
 F. Source & Code
The field is to identify the source of funds recorded on the ledger card. The code is: 1800 for
Treasury, 1900 for Retained Revenue, the revenue code for donor (2001-2099) or lender
(3001-3099).

G. Page Number
The field identifies the page number of the budget ledger card.

H. 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.

I. 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, Date, Description & Reference Number

The purpose of the fields is to respectively identify the sequential number of the transaction,

date of the transaction, a brief narrative description of the transaction and reference number
of the source document to the transaction.

 Approved Budget
The field identifies the amount of the original approved budget for the item of expenditure.

 Addition/Reduction to Approved Budget

The fields are used to track changes to the approved budget and provide information to
compute the revised budget.

 Adjusted Budget
The field contains the approved budget adjusted for any additions or reductions. An item of
expenditure must not exceed its adjusted budget.

 Payment Received
The field is used to record payments received/drawing limits set from/by MOFEC and assists
in keeping track of the amounts of money received for the item of expenditure.

 Unpaid Balance
The field is the difference between the revised budget and the amount of funds received to
meet the budgeted 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 committed

The field contains the difference between the adjusted budget and total commitments to date.
The balance not committed is the available budget for future spending. Once the
uncommitted balance is reduced to zero, the Budget Section will approve no further
spending.

1.5.3. Examples of Typical transactions

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.

Transaction # 1
MOFEC 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, 2007 contains the following information for the
sub-agency Administration & General Service:

 The reference number of Me/Be/Ma 4 is N/1/00.

 The name of the public body is MOFEC - code 152 and the sub-agency code is 01.
 The approved budget for stationery is Birr 500,000.
 The item of expenditure is office supplies – code 6212.
 The source is treasury – code 1800.

Transaction # 2
The Procurement Section approves a purchase order No. PO/1/00 dated 1 August 2007 for
Birr 300,000 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 300,000 for stationery from MOFEC on Ge/Be/We 11/1
with a reference number PR/1/00. However, MOFEC deducts Birr 40,000 from the request
for the unused balance of stationery stocks from the previous year. The actual payment
received/drawing limit set for the BI is Birr 260,000.

The original 300,000 commitment is reversed, and new commitments consistent with funds
actually received and deducted must be recorded as received and committed.
Note: The BI will record the payment received/drawing limit set as Birr 260,000 for the
actual cash received/drawing limit set and also record the non-cash transfer of Birr 40,000.

Transaction # 4
The Procurement Section approves a purchase order No. PO/2/00 dated 2 September 2007 for
Birr 200,000 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 Section cancels purchase order No. PO/2/00 dated 2
September 2007 for Birr 200,000 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 2007 with
reference number RC/1/00. The notification adds Birr 100,000 to the stationery budget.

1.5.4. Basis of Accounting

The basis of accounting is the basic set of principles and rules employed by the accounting
system to determine when and how to record transactions. 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 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:

o When payroll is processed.

o At the end of the year when a grace period payable is recognized.

 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 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.

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

a. 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.

b. 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.

c. 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.

d. 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.

Summary

 Single entry accounting has been employed by the FGE till 2002 G.C which is a
method of bookkeeping relying on a one sided accounting entry to maintain financial
information
 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 and there is much less information
available upon which to construct the financial position of a business, so management
may not be fully aware of the performance of the business.
 Federal government of Ethiopia changed from single entry system of accounting to
double entry bookkeeping tp simplify the accounting 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.
 FGE also changed 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.
 The system of double entry bookkeeping is intended to 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.
 The FGE accounting system provides the FGE Chart of Accounts which is a system
of coding government uses to identify and classify financial entities and events
 The account codes shall enable the preparation of the detailed budget, accounting for
the transfers from donors and transfers to beneficiaries (receipt from MoFEC),
capturing the transactions that will occur, and preparation of periodic financial reports
and the year-end financial statement.
 The Chart of Account is developed based on the accounts classification and coding
system used in the FGE Accounting system for Modified Cash Basis transactions.
 There are three categories of revenue under FGE Accounting System: the transfer
from central treasury being the Government’s contribution shall be kept in the first
revenue account. Income from External donors or loan providers like International
Development Agencies (IDA) will be a credit and is categorized as external loan. A
separate account shall be maintained for it. Income from other donors can be either
external loan or external assistance. Separate account for each of the donor shall be
kept according to the nature of the transfer, i.e., either loan or assistance
  The expenditure codes have also control account and subsidiary account code system.
Fore example 6200 is the general category for Goods and Services and accounts
from 6210 to 6224 are the subsidiary ledgers. The control account shall be used to
provide summary report by category for the donors’ purpose.
 An appropriate basis of accounting shall be used to account for transactions. There are
four basis of accounting namely cash base, accrual base, modified accrual base and
modified cash basis of accounting. However Ethiopian government is applying
modified cash basis of accounting.

Chapter 2: General and subsidiary ledgers

Content:

2.1. Introduction

2.2. Description of ledger

2.3. Structure and organization of ledgers

2.4. Recording entries in the ledger

2.1. Introduction
Dear learner, hope you learnt a lot from chapter one regarding classification of accounts,
chart of accounts and basis of accounting etc. Now we are transferring to the second chapter
of the module which deals about description of the ledger, structure and organization of the
ledger and recording entries in the ledger.
Objectives: After completion of this chapter you will be able to:
 Define ledger
 Explain structure and organization of the ledger
 Record entries in the ledger
2.2. Description of the ledger
A ledger is the entire group of accounts maintained by an accounting unit. The ledger
summarizes transactions by accounts. The effect of any one transaction is lost in the ledger,
but the total effect of all transactions on account balances is captured. The ledgers
summarize the transaction information from registers in the form of accounts that facilitate
reporting of financial results. Transactions are recorded in the register, but reports are
produced from the ledgers.
Two types of ledgers are maintained in the government accounting system: General Ledgers
and Subsidiary Ledgers. The purpose of this chapter is to describe:
 The purpose and format of each ledger
 The process of recording entries in each ledger
The processes used in the General Ledger and in the Subsidiary Ledgers are the same for all
FGE registers, regardless of whether the transactions involve domestic or foreign currency.
For simplicity in this chapter, the term Register means Transaction Register and Foreign
Currency Transaction Register.
The Chapter contains the following sections:
 Description of Ledgers
o General Ledger
o Subsidiary Ledger
 Structure and Organization of Ledgers
 Recording entries in Ledgers
a. General Ledger
A Ledger Card is maintained for every account code recorded in the Register. Every amount
that is entered either as a debit or credit on the Register is also entered to the corresponding
debit or credit column of the appropriate Ledger Card. The aggregate of all such Ledger
Cards is the General Ledger.
The General Ledger is a set of self-balancing Ledger Cards because at all times the total
debits and the total credits recorded in the General Ledger is equal.
 Purpose
The General Ledger is maintained to classify information recorded in the Register by
respective account codes. All transaction amounts recorded in the Register are entered on
Ledger Cards in the General Ledger. The balances for all individual accounts are maintained
in the General Ledger.
The General Ledger:

 Simplifies and improves the report generation process, and

 Serves as a basis to prove that the net cumulative debit and credit balances of all
accounts are equal.
 Maintenance
The accountant maintains a General Ledger for each Register. Where more than one BI
shares the same bank account, the accounting unit maintains one Transaction Register and
one General Ledger for the bank account.
b. Subsidiary Ledgers
A control account is an account in the General Ledger that maintains the total balance of all
related accounts in a Subsidiary Ledger. A Subsidiary Ledger is a ledger that is separate
from the General Ledger and contains transaction details of each control account in the
General Ledger. Any account in the General Ledger that requires more detail than simply the
total account balance becomes a control account with a Subsidiary Ledger.
A Ledger Card is maintained for every control account in the General Ledger. Every amount
that is entered either as a debit or credit on a control account’s Ledger Card in the General
Ledger is also entered to the corresponding debit or credit column in the Subsidiary Ledger
Card. The aggregate of all Subsidiary Ledger Cards for a control account is the Subsidiary
Ledger.
At all times, the net cumulative balance of debits and credits recorded in the Subsidiary
Ledger is equal to the respective net cumulative balance of debits and credits of the
corresponding control account in the General Ledger.
A Subsidiary Ledger is not a set of self-balancing accounts; all debits in a Subsidiary Ledger
are not equal to all credits in the Subsidiary Ledger. A Subsidiary Ledger’s total debits and
credits equal the balance in the corresponding control account in the General Ledger.
 Purpose
The purpose of control accounts and subsidiary ledger accounts is to facilitate the report
generation process, minimize the size of the General Ledger, and maintain sufficiently
detailed records of account balances to assist proper financial management.
For example, total of advances to staff is a control account in the General Ledger, but the
amount owed by each staff member is a subsidiary ledger account in the Subsidiary Ledger.
Total of advances to staff is a control account in the General Ledger. Reporting requirements
require disclosure of the total amount of the advances to staff (rather than the amount owed
by each staff member). Also, it is likely that the number of staff members who owe advances
is significant, and it may be cumbersome to maintain the amounts owed by each staff member
in the General Ledger. The accounting unit maintains a record of the amount owed by each
staff member in a Subsidiary Ledger in order to monitor repayment of the amounts owed
from each staff member.
However, a Subsidiary Ledger is not maintained for all accounts in the General Ledger.
Subsidiary Ledgers are only maintained for accounts within the General Ledger that requires
more detail than simply the total account balance.
  Maintenance
The accountant maintains a set of Subsidiary Ledger Cards for each control account in the
General Ledger.
Each transaction recorded in a Transaction Register is posted to the related General Ledger.
The General Ledger is organized in sequence of the account codes as follows:

 Revenue – 1000 series

 Assistance – 2000 series

 Loan accounts – 3000 series

 Transfer accounts – 4000 to 4099 series

 Asset accounts – 4100 series

 Liability accounts – 5000 to 5499 series

 Net Asset/Equity account – 5601

 Expenditure accounts –6000 series

2.3. Structure and organization of Ledgers

 Structure
Two criteria that define whether or not an account code is a control account with a related
Subsidiary Ledger are monthly reporting requirements and management and control of the
account balance
2.3.1. Recurrent and Capital Expenditure
An accounting unit is required to report recurrent and capital expenditures at the level of each
BI managed by it.
Expenditure control accounts are maintained in the General Ledger for each item of
expenditure and type of budget. The control accounts keep the General Ledger in balance
and provide a control over the accuracy of the recording in the associated Subsidiary Ledgers.
The control accounts provide information on total expenditures by item of expenditure and
type of budget for the accounting unit.
In order to track and report expenditure at the level of each BI managed by the accounting
unit, a Subsidiary Ledger is maintained for each expenditure control account by BI.
Accounts in the Subsidiary Ledger provide information on total expenditures by type of
budget and item of expenditure for each BI managed by the accounting unit.
To summarize, a Subsidiary Ledger is maintained for expenditure as described in Table 8.1.
Table 8.1
Subsidiary Ledgers for Expenditure Control Accounts
 Source of Sub Items
Funding Ledger
Treasury Yes By BI for each item of expenditure/type of
budget
Loans Yes By BI for each item of expenditure
Assistance Yes By BI for each item of expenditure/type of
budget

 Revenue
An accounting unit is required to report revenue at the level of the accounting unit and not at
the level of each BI managed by it.
In order to record and report actual revenue at the level of the accounting unit, an account is
maintained in the General Ledger for each item of revenue by account code. The General
Ledger provides information on total revenues by item of revenue for the accounting unit as a
whole. Since there is no revenue reporting requirement at the level of each BI, a Subsidiary
Ledger is not maintained for items of revenue. To summarize, a Subsidiary Ledger is not
maintained for revenue.
 Other Accounts
Other categories of accounts maintained in the General Ledger include:
 Transfers
 Cash and Cash Equivalents
 Receivables
 Payables
 Net Assets/Equity
An accounting unit is required to report on accounts in these categories at the level of the
accounting unit only and not at the level of each BI managed by it.
However, some of these account categories contain control accounts with Subsidiary
Ledgers. The purpose of these Subsidiary Ledgers is to maintain sufficiently detailed
information in the accounts for control and management.
 Transfers
Transfers accounts typically are not control accounts and have no related Subsidiary Ledgers.
 Cash and Cash Equivalents
Cash and Cash Equivalents accounts typically are not control accounts and have no related
Subsidiary Ledgers. If the accounting unit controls more than one safe, a Subsidiary Ledger
is needed for each safe under the general ledger control account for Cash in Safe.
 Receivables and Payables
Receivables and payables typically are control accounts with related Subsidiary Ledgers.
Accounts in the Subsidiary Ledgers identify individual items under the control account.
 Net Assets/Equity
Net Assets/Equity account is not a control account and has no related Subsidiary Ledger.
To summarize, a Subsidiary Ledger is maintained as described

Subsidiary Ledgers for Other Accounts

Codes Sub. Items
Ledger

Cash at Bank No Not applicable

Cash in Safe Yes By safe, if accounting unit controls more than one
safe

Transfers No Not applicable

Receivables Yes By individual item

Payables Yes By individual item

Net No Not applicable

Assets/Equity

 Organization
The General Ledger is organized into seven broad categories comprising:

 Revenue, Assistance or Loan accounts in sequence of the account codes

 Expenditure accounts in sequence of the account codes

 Transfer accounts in sequence of the account codes

 Asset accounts in sequence of the account codes

 Liability accounts in sequence of the account codes

 Net Asset/Equity account

The Subsidiary Ledger is organized by the related control account maintained in the General
Ledger.
 2.4. Recording Entries in ledger
Each transaction recorded in a Register is also recorded in the related General Ledger. Each
transaction is recorded in at least two separate ledger cards because at least two accounts are
affected by each transaction. Each account is recorded on its appropriate Ledger Card in the
General Ledger immediately after it is recorded in the Register. The only source document to
the General Ledger is the Register.
The Ledger Card has two parts:

 Top of the form contains information that identifies:

 The General Ledger to which the card belongs, and

 The specific account code and type of budget recorded on the card.

 A table that contains information from the Transaction Register for computing the
balance for the account code/type of budget.
Identifies the fields in the Ledger Card of the General Ledger and provides a description for
each.
Ledger Card

Fields in Ledger Card of the General Ledger

Description
Field
Top of Form:

Left-Side

Public Body & Code Name and code of Public Body to identify
Accounting Unit

Program & Code Name and code of Program if needed to identify

Accounting Unit

Sub Agency & Code Name and code of Sub Agency if needed to identify
Accounting Unit

Sub Program & Code Name and code of Sub Program if needed to identify
Accounting Unit
 Project & Code Name and code of Project if needed to identify
Accounting Unit

Source & Code Source code (1800 is Treasury; 1900 is Retained

Revenue; revenue code for donor (2001-2099) or
lender (3001-3099).

Bank Account No. Number of the bank account to identify Accounting

Unit

Right-Side

Page Serially numbered for each account code/type of

budget to identify unique Ledger Card page

Type of Budget 1 for Recurrent; 2 for Capital to identify Ledger Card

Account Code Indicate appropriate account code to identify Ledger

Card

Description Not used for General Ledger purposes

Table:

Date Date entered in Ledger Card

Reference from Register Required information to identify the Register source:

Month, Page, Item no., and Date of the transaction

Description A brief description of the transaction, if necessary

Debit/Credit Amount from the appropriate column of Register

Balance Net debit/credit balance of all entries from the

Debit/Credit column after each transaction

All information on the left side at the top of the Ledger Card is not needed for all General
Ledger Cards. The information provided on the left side must be sufficient to uniquely
identify the General Ledger from all other General Ledgers. The detail of information
required will vary.
The information on the right side at the top of the Ledger Card is required to uniquely
identify the Ledger Card in the General Ledger, except that the space for description is not
necessary for a Ledger Card in the General Ledger.
In the table on the Ledger Card in the General Ledger,

 Date is the date that the entry is made in the Ledger Card, not the date of the
transaction.

 Reference from Register contains sufficient information to uniquely identify the

Register source of the entry.

 Description is optional. If additional information about the transaction is desired, it

should be written in this column.

 Debit and Credit contains the amount from the Register for the transaction. Every
amount that is entered as a debit (or credit) on the Register is entered in a
corresponding debit (or credit) column of a Ledger Card in the General Ledger.

 Balance is the net cumulative balance of the account. After every transaction is
recorded in the debit or credit column of the Ledger Card in the General Ledger, the
net cumulative balance of the account is derived by adding or subtracting the amount
of the current transaction from the previous net cumulative debit or credit balance.
The purpose of the monthly net cumulative debit and credit balances is to record the
net balance in the monthly reports and Trial Balance.
2.4.1. General Ledger Routines at the Month End
The General Ledger must balance at the end of each month. The total cumulative balances of
all debits and credits on all Ledger Cards in the General Ledger must be equal.
 Verification of Errors
Where the net cumulative debits and credits recorded on all Ledger Cards in the General
Ledger are not equal, an error exists. The following types of errors should be verified to
balance the General Ledger:

 An incorrect amount is transcribed into the Ledger Card from the Register.

 An amount is incorrectly posted into the credit column of a Ledger Card in the
General ledger instead of into the debit column, and vice versa.

 Only one side (either debit or credit) of a transaction is posted into the General ledger
and the other portion (either debit or credit) of the transaction is not posted into the
General ledger.
  An arithmetical error has occurred in the computation of the net debit or credit
balance of a Ledger Card in the General ledger

 Permanent account balances are not carried forward correctly from the previous year.

2.4.2. General Ledger Routines at the Year End

In addition to the monthly routines, at the end of each year, a transfer of the debit or credit
balances to the Net Assets/Equity account is required to close the temporary accounts in the
General Ledger. The temporary accounts are accounts in the following account categories:
 Revenue, Assistance and Loan items comprising account codes 1000 to 3999.
 Expenditure items comprising account codes 6000 to 6999.
 Transfers comprising account codes 4000 to 4099.

The closing entry is the last entry made at the end of the fiscal year after all other transactions
are captured. The closing entry ensures that temporary accounts start each fiscal year with a
zero balance. The General Ledger begins a new fiscal year with carry forward balances in
the permanent accounts from the previous year.
2.4.3. Subsidiary Ledger Routines at the Month End
At the end of each month, the net cumulative debit or credit balance for each Ledger Card in
the Subsidiary Ledger should be calculated. The total net cumulative debit or credit balance
for all Ledger Cards in the Subsidiary Ledger must be equal to net cumulative debit or credit
balance on the respective control account’s Ledger Card in the General ledger.
 Verification of Errors
Where total net cumulative debits or credits balance for all Ledger Cards in the Subsidiary
Ledger is not equal to the net cumulative debit or credit balance on the respective control
account’s Ledger Card in the General ledger, an error exists. The following types of errors
should be verified to balance the Subsidiary and General Ledgers:

 An incorrect amount is transcribed into the ledger from the Register.

 An amount is incorrectly posted into the credit column of a Ledger Card in the
Subsidiary ledger instead of into the debit column, and vice versa.

 An arithmetical error has occurred in the computation of the net debit or credit
balance of a Ledger Card in the Subsidiary ledger

 Permanent account balances are not carried forward correctly from the previous year.
2.4.4. Subsidiary Ledger Routines at the Year End
At the end of each year, the temporary accounts in the General Ledger are closed to the Net
Assets/Equity account as described above.
Any Subsidiary Ledger corresponding to a temporary account in the General Ledger also is
considered closed. A new Subsidiary Ledger is started each year for each temporary control
account. All accounts in the new Subsidiary Ledger begin the year with a zero balance.
Accounts in other account categories are permanent accounts and are not closed each year.
These permanent accounts carry their previous year’s balance forward to the next fiscal year.
Any Subsidiary Ledgers corresponding to permanent accounts in the General Ledger also
carry forward to the next year.
Summary
• A ledger is the entire group of accounts maintained by an accounting unit.
• It summarizes transactions by accounts and the transaction information from registers
in the form of accounts that facilitate reporting of financial results.
• Transactions are recorded in the register, but reports are produced from the ledgers.
• Two types of ledgers are maintained in the government accounting system such as
General Ledgers and Subsidiary Ledgers are maintained to capture or store
accounting data
• A Ledger Card is maintained for every account code recorded in the Register.
• Every amount that is entered either as a debit or credit on the Register is also entered
to the corresponding debit or credit column of the appropriate Ledger Card.
• The aggregate of all such Ledger Cards is the General Ledger.
•  The General Ledger is a set of self-balancing Ledger Cards because at all times the
total debits and the total credits recorded in the General Ledger is equal
• The General Ledger is maintained to classify information recorded in the Register by
respective account codes.
• All transaction amounts recorded in the Register are entered on Ledger Cards in the
General Ledger.
• The balances for all individual accounts are maintained in the General Ledger.
• Simplifies and improves the report generation process,& Serves as a basis to prove
that the net cumulative debit and credit balances of all accounts are equal.
• A control account is an account in the General Ledger that maintains the total balance
of all related accounts in a Subsidiary Ledger.
• A Subsidiary Ledger is a ledger that is separated from the General Ledger and
contains transaction details of each control account in the General Ledger.
• Any account in the General Ledger that requires more detail than simply the total
account balance becomes a control account with a Subsidiary Ledger.
•  A Ledger Card is maintained for every control account in the General Ledger.
 • Every amount that is entered either as a debit or credit on a control account’s Ledger
Card in the General Ledger is also entered to the corresponding debit or credit column
in the Subsidiary Ledger Card

Chapter Three 3: Recording Common entries of FGE

Content
3.1. Introduction
3.2. Cash transfer from MOFEC to Public Bodies – Zero Balance Account
3.3. Non-Cash Transfers
3.4. Community Development Contribution in Cash
3.5. Aid in Cash
3.6. Operating Expenditures
3.7. Operational Expense without Withholding Tax
3.8. Letters of Credit
3.9. Construction Projects
3.10. Salary
3.1. Introduction
Dear learner, now we have reached to chapter three which deals about recording common
entries FGE accounting system. It basically deals with on how to record FGE transactions of
different types. The following major points are to be discussed with sufficient examples of
transactions and their corresponding recordings to the FGE cash register. It includes:
Introduction , Cash transfer from MOFEC to Public Bodies – Zero Balance Account, Non-
cash transfers , Community Development Contribution in Cash, Aid in Cash, Operating
Expenditures, Operational Expense without Withholding Tax, Letters of Credit, Construction
Projects and Salary
Objectives: After completion of this chapter you will be able to:
 Recording cash transfer entries from MOFEC to the Bank into the cash register
 Recording cash transfer entries from Bank to the safe into the cash register
 Recording cash entries from safe to different expenditures
 Recording capital project entries into the cash register
 Recording payroll related transactions into the cash register
3.2. Cash transfer from MOFEC to Public Bodies – Zero Balance Accounts
Cash transfers are cash movements within government institutions or between bank accounts
that do not create obligations to provide further documentation or repayment.
For public bodies located in Addis Ababa, MOFEC authorizes funds by setting drawing
limits at the National Bank of Ethiopia against which the public bodies’ draws funds up to
the maximum of the specified drawing limit.

The drawing limits so established determine the amount of cash that can be utilized by a
public body. The Public Body issues checks to effect payments for good and services and
the checks issued determine the balance of unutilized drawing limits. The NBE issues
advices daily for all checks presented for encashment.

The bank advice is the supporting document for the Public Body to record transfers from
MOFEC. Any unutilized drawing limit by a Public Body is carried forward to the next
period.

Cash Register

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr
Example: The Ministry of Health issues a check for Birr 150,000 for purchase of fuel, 10,000
for stationery, 5,000 for tiers and 120,000 for medical supplies. It records each check as
expenditure when issuing the check. A Drawing Limits Register as described in Chapter 5 is
also maintained by the PB to identify the balance of the drawing limits.

The Ministry of Health receives one bank advice at the end of each day from the Bank for the
all checks issued during that particular day. It uses the bank advice to record the transfer.

Transaction Register of Public Body

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

RV Cash transfer from MOFEC - 4017 285,000 285,00

0

Transaction Register of PB

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Fuel - 6217 150,000 150,000

BPV Stationery 6212 10,000 10,000

BPV Tyres 6241 5,000 5,000

BPV Medical Supplies 6214 120,000 120,000

MOFEC also receives a copy of the single bank advice of Birr 285,000 from the Bank relating
to the checks issued by the Ministry of Health. It uses the bank advice to record the transfer of
the cash utilization by the PB from the Zero Balance Bank Account.

Transaction Register of MOFEC

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BA Cash transfer to Public Body - 4017 285,000 285,000

3.2.1. MOFEC to Public Bodies - Non Zero Balance Accounts

For public bodies located outside Addis Ababa, MOFEC disburses funds by transfer of funds to
the Public Bodies bank account. At MOFEC, although a transfer authorization to one bank
account may include funds for more than one BI, the entire transfer is one. Therefore, in the
Transaction Register maintained at MOFEC, only one entry is made for the total transfer. The
BI code for the entry is the BI code of the Reporting Entity.

Example: Hawassa University receives from MOFEC a transfer of Birr 150,000 for capital
expenditure.

Transaction Register of MOFEC:

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BA Cash transfer to PB - 4004 150,000 150,000

Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

RV Cash transfer from MOFEC - 4004 150,000 150,000

 If the bank charges a service charge for the transfer:

 The service charge should be recorded as a debit to account code 6256.

 Cash at bank 4103 should be debited for the amount of cash actually received.
 The appropriate transfer account code should be credited for the gross amount
Example: MOFEC transfers of Birr 150,000 to a Public Body for capital expenditure. The
bank deducts 20 birr as a service charge; the Public Body receives Birr 149,980.

Transaction Register of MOFEC:

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BA Cash transfer to PB - 4004 150,000 150,000

Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

RV Bank Service Charge 02 6256 20

Cash transfer from MOFEC - 4004 150,000 149,980

3.2.2. Public Bodies to MOFEC

Cash transfers from bank accounts of Public Bodies to MOFEC bank accounts are recorded:

 By MOFEC, as a debit to Cash at Bank 4105 and a credit to 4009 transfer code, and
 By the Public Body, as a debit to 4009 and a credit to Cash at Bank 4103.
Example: A Public Body collected revenue of Birr 15,000 that is transferred to MOFEC.

Transaction Register of MOFEC:

Account Cash at Bank

Ref Description TB Number Others 4105

 Dr Cr Dr Cr

RV Cash transfer from PB - 4009 15,000 15,000

Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Cash transfer to MOFEC - 4009 15,000 15,000

At the end of the year balances in blocked bank accounts at Public Bodies are transferred to
MOFEC based on standing instructions. The bank transfers the balance from the account at the
PB immediately to MOFEC, but the balance is not credited to MOFEC’s bank account for
weeks. The transaction should be recorded as follows:

 By the Public Body on the last day of the year, as a debit to transfer code 4009 and a
credit to Cash at Bank 4103, and

 By MOFEC on the last day of the year, as a debit to Deposit in Transit 4114 and a
credit to transfer code 4009, and, when the cash is received in the bank account, as a
debit to Cash in Bank 4105 and a credit to Deposit in Transit 4114.
Example: A Public Body transferred Birr 10,000 is transferred but not credited to MOFEC.

Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Cash transfer to MOFEC - 4009 10,000 10,000

Transaction Register of MOFEC:

Ref Account Cash at Bank

Description TB Number Others 4105

 Dr Cr Dr Cr

JV Cash transfer from PB - 4009 10,000

4114 10,00
0

3.2.3. Public Bodies to Region Sector Bureaus

Federal Ministries may transfer donor funds directly to RSB and such payments to a region
from the federal level budgeted as part of the federal budget. The responsibility for the
budgeted expenditure remains with the Federal Ministry, although the expenditure is executed
by the RSB. Since a settling of the funds is expected, the receipt of funds is recorded as a
payable by the RSB, and the return of invoices and/or cash is recorded as an elimination of the
payable.

Example: The Ministry of Education sends Birr 50,000 to the Regional Education Bureau for
training.

 Transaction #1: Cash is received from the Ministry of Education to deliver

training
Transaction Register of PB

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Due from RSB 4210 50,000 50,000

 Transaction #2: The Regional Education Bureau delivers raining at a cost of Birr
47,000 and sends the cost documents to the PB and refunds the balance of Birr 3,000..

Transaction Register of PB

Account Cash at Bank

Re Description TB Number Others 4103

f
 Dr Cr Dr Cr

JV Settlement of dues 6271 47,000

4210 47,00
0

RV Refund of balance due 3,000

4210 3,000

3.2.4. Bank Accounts within a Public Body – Same Source of Finance

 Example: Bank Account #1 transfers Birr 150,000 to Bank Account #2 using the same
SOF.

Transaction Register Public Body

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Cash transfer to BA #2 - 4103-1 150,000

4103-2 150,00
0

3.2.5. Bank Accounts within a Public Body – Different Sources of Finance

 Example: Bank Account #1 transfers Birr 150,000 to Bank Account #2 using a

different SOF.

Transaction Register Public Body – Bank Account # 1

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr
 BPV Cash transfer to BA #2 - 4010 150,00 150,00
0 0

Transaction Register of Public Body - Bank Account #2:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

RV Cash transfer from BA #1 - 4010 150,000 150,000

Bank Accounts within a Public Body – Transfer to Branch

 Example: Bank Account #1 transfers Birr 150,000 to Bank Account #2 to a branch
office.

Transaction Register Public Body – Bank Account # 1

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Cash transfer to BA #2 - 4008 150,00 150,00

0 0

Transaction Register of Public Body - Bank Account #2:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

RV Cash transfer from BA #1 - 4008 150,000 150,000

3.2.6. Inter Bank Transfers

Cash may be transferred between bank accounts of MOFEC

 Example: MOFEC transfers Birr 150,000 from Bank Account # 1 to Bank Account #
2.
 Transaction Register of Bank Account #1

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BA Cash transfer - 4008 150,000 150,000

Transaction Register of Bank Account #2

Account Cash at Bank

Re Description TB Number Others 4105

f

Dr Cr Dr Cr

RV Cash transfer - 4008 150,000 150,000

3.2.7. Bank to Safe

The Accountant writes a check to the cashier to put cash into the safe for petty cash. The
source document is a Bank Payment Voucher for the Transaction Register.
 Example: A check for Birr 5,000 is written to the cashier for petty cash.

Transaction Register of Public Body:

Account Cash at Bank Cash in Safe

Ref Description TB Number 4103 4101

Dr Cr Dr Cr

BPV Cash withdrawn for safe - - 5,000 5,000

3.2.8. Safe to Bank

The cashier transfers cash from the safe to the bank by depositing the cash in the bank. The
cashier brings the bank deposit slip to the Accountant, who prepares a Receipt Voucher. The
Accountant records the Receipt Voucher in the Transaction Register and the Cashier records
the Receipt Voucher in the Cash Book.

 Example: The Cashier deposits Birr 15,000 into the depositary bank.
 Transaction Register of Public Body:

Account Cash at Bank Cash in Safe

Ref Description TB Number 4103 4101

Dr Cr Dr Cr

RV Cash deposited into bank - - 15,000 15,000

3.2.9. Cash Imprest Payments

Each Public Body should establish the amount of cash to hold in petty cash. The Cashier makes
cash payment from the imprest fund using Cash Payment Vouchers. When the petty cash
balance is low, the Cashier submits the Cash Payment Vouchers to the Accountant together
with the Petty Cash Summary Sheet as described in Chapter 9. The Accountant writes a check
to the Cashier for the total amount of the Cash Payment Vouchers in the Petty cash Summary
Sheet to reimburse the imprest fund.

Example: The Accountant pays the Cashier Birr 2,000 by check to replenish the petty cash for
cash paid to an employee for per diem of Birr 2,000. The Cashier records the receipt in the
Petty Cash Book. The Accountant records the Cash and Bank Payment Vouchers in the
Transaction Register as follows:

Transaction Register of Public Body:

Account Cash at Bank Cash in Safe

Ref Description TB Number Others 4103 4101

Dr Cr Dr Cr Dr Cr

CPV Per Diem 01 6231 2000 2,000

BPV Cash to Cashier 2,000 2,000

3.2.10. Check Deposits into Bank

 Example: Assume that a check of Birr 500 received as court deposit is deposited in
the depositary bank by the Cashier. The accountant will first issue a receipt voucher to
the Cashier for the court deposit.
 Transaction Register of Public Body:

Account Cash at Bank Cash in Safe

Ref Description TB Number Others 4103 4101

Dr Cr Dr Cr Dr Cr

RV Deposit 5052 500 500

The Cashier will record the receipt of the check in the cash book as a receipt and on deposit of
the check in the bank will record it as a payment in the cash book.
3.2.11. Transfers to Revolving fund – Staff Loans

An employee can receive a staff loan under appropriate conditions. A request is made by the
Public Body for approval to MOFEC and setting of drawing limits to include the staff loan. The
Public Body issues a check to withdraw cash from the zero balance bank account and pays the
staff loan to the employee. When a long-term salary advance is processed, interest is charged
and withheld from the advance.

Refund of the staff loans by deductions from the employee’s salary is transferred to a revolving
fund that is intended to fund future staff loans.

Transaction 1: MOFEC approves Birr 2,000 as staff loans to a Public Body from the zero
balance bank account based on the approved list of employees eligible for staff loan.

Transaction Register of Public Body on withdrawal of cash:

Account Cash at Bank

Ref Description TB Number 4101 4103

Dr Cr Dr Cr

BPV Cash withdrawal 1,900 1,900

Transaction Register of Public Body on payment of staff loan:

Account Cash in Safe

Ref Description TB Number Others 4101

Dr Cr Dr Cr

BPV Staff loan 4203 2,000

 Interest 1465 100 1,900

Transaction Register of Public Body on receipt of bank advice:

Ref Account Cash at Bank

Description TB Number Others 4103

Dr Cr Dr Cr

RV Revolving fund transfer - 5035 1,900 1,900

Transaction Register of MOFEC on receipt of bank advice:

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BA Cash transfer to PB - 4209 1,900 1,900

3.3. Non-Cash Transfers

Non-cash transfers are used to record a transfer when cash does not actually move. Non cash
transfers include payments made by MOFEC on account of Public Bodies, adjustments for
opening stock of supplies, opening cash in safe and opening balance of receivables.

The example below details customs payments made by MOFEC on behalf of a Public Body
when the source of finance is not domestic. For domestic source of finance, Public Bodies will
pay the customs duty directly to the Customs Authority.

Example: The Ministry of Health (MOH) requests MOFEC to pay customs duty amounting to
Birr 150,000 on its behalf to the Customs Authority (CA) for motor vehicles from its capital
expenditure budget.

Transaction Register of MOFEC:

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr
 JV Customs duty - MOH - 4054 150,000

Customs duty - CA - 4055 150,000

Transaction Register of Ministry of Health:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

JV Purchase of motor vehicles 02 6311 150,000

Customs duty - MOFEC– - 4054 150,000

Transaction Register of Customs Authority:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

JV Transfer to MOFEC - 4055 150,000

Duty on Motor Vehicles - 1301 150,000

3.3.1. REVENUE/ASSISTANCE/LOAN

Public Bodies are authorized to collect revenue on behalf of the FGE. In addition, Public
Bodies may receive funds for assistance and loan directly from donors and lenders. Account
codes for Domestic Revenue are 1000-1999, External Assistance are 2000-2999 and for
External Loan 3000-3999.

3.3.2. Domestic Revenue

The source document for collection of revenue is a Receipt Voucher.

Revenue/Assistance/Loan receipts are reported monthly on Me/He 21.

Example: The Ministry of Foreign Affairs collects Birr 50,000 in fees for visas.
 Transaction Register of Ministry of Foreign Affairs:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

RV Revenue - 1411 50,000 50,000

3.3.3. Direct Deposit of Revenue into MOFEC Bank Account

Some Public Bodies deposit revenues directly into a MOFEC bank account. In such cases the
Public Body records a debit to transfer code 4009 and a credit to the revenue code.

Example: Inland Revenue deposits Birr 100,000 from the collection of agricultural income tax
directly into a MOFEC bank account.

Transaction Register of Public Body:

Account Cash at
Bank
Ref Description TB Number Others
4103

Dr Cr Dr Cr

RV Agricultural Revenue 1107 10,000

Transfer 4009 10,000

When MOFEC receives the bank advice, MOFEC records a debit to Cash in Bank 4105 and a
credit to transfer account code 4009.

Transaction Register of MOFEC:

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

RV Transfer from Inland Rev - 4009 100,000 100,000

 3.4. Community Development Contribution in Cash

In Addis Ababa, the Community Development Committee collects cash from residences to
construct schools and health posts. The committee deposits such cash collections to the
community development bank or to the cashier.

Example: Birr 15,000 is collected by the Community Development Committee in Addis Ababa
from residences as contribution for construction of secondary schools.

Account Cash in Safe

Ref Description TB Number Others 4101

Dr Cr Dr Cr

SRV Public contribution - 1792 15,000 15,000

3.4.1. Community Development Contribution in Kind

In Addis Ababa contribution in kind represents contribution of goods or services or materials

by the community that are used in the construction of schools, health posts and conference
halls. These contributions should be accounted to accumulate the project costs.

3.4.2. Scenario 1 Material Contribution

Residences contribute sand stone and cement estimated Br. 7,500 for a school project. A
Model 19 is prepared.

Account Cash in Safe

Ref Description TB Number Others 4101

Dr Cr Dr Cr

JV Material contribution 2 6323 7,500

1792 7,500

3.4.3. Scenario 2 Labor Contribution

Residence contributes Br. 2,500 in the form of labor for the school project. Time sheets are
approved.
 Account Cash in Safe

Ref Description TB Number Others 4101

Dr Cr Dr Cr

JV Lab our contribution 2 6323 2,500

1792 2,500

3.4.4. Aid in Kind

Aid in kind is goods or services (such as technical assistance) provided to a Public Body by
donors. Aid in kind is received when goods are received or services are rendered, and no
payment is expected. Aid in kind represents two transactions simultaneously: the receipt of
assistance and the expenditure of assistance. Aid in kind should be budgeted and recorded as
both revenue and expenditure. The expenditure should be recorded in the subsidiary ledger for
the budgeted project, using the 4-digit Source of Funding code assigned to the project.

Example: Aid in kind is received by a Public Body in the form of a motor vehicle with a cost of
Birr 150,000 from USAID under the capital expenditure budget.

Transaction Register of the Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

JV Motor vehicles 02 6311 150,000

Assistance 2284 150,000

3.5. Aid in Cash

Aid in cash can be made by donors. Aid in cash is recognized if a cash or check deposited or
transfer made by the donors. If aid in cash was not budgeted, a budget supplement should be
requested and approved.
Accountants should receive a copy of deposit slip or credit advice or receipt voucher. Aid in
cash represents two transactions simultaneously: the receipt of assistance and cash.

Example: Cash in kind is received from Japan Government of Birr 150,000 by check for school
construction under the capital expenditure budget.
Transaction Register of Public Body

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Assistance 2 2287 150,000 150,00

0

3.6. Operating Expenditures

Public Bodies are authorized to make cash expenditures from funds budgeted for that purpose.
Expenditures from the recurrent budget and capital budget are reported monthly on separate
monthly reports. The Public Body should maintain a subsidiary ledger for each expenditure
account code if the Public Body handles more than Budgetary Institution. Each Budgetary
Institution should be an account in the subsidiary ledger.

3.6.1. Subsidies to Regions by MOFEC

Payments by MOFEC to Regions are budgeted expenditures of the federal government.

Example: A subsidy payment of Birr 32,400,000 is made to a region.

Transaction Register of MOFEC:

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BA Region subsidy 6411 32,400,000 32,400,000

3.6.2. Payments to Transfer Recipients by MOFEC

Payments by MOFEC to Transfer Recipients (Functional classification 400-499) are budgeted
expenditures of the federal government.
Example: A payment of Birr 32,000 is made to the Red Cross.
Transaction Register of MOFEC:

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BA Region subsidy 6412 32,000 32,000

3.6.3. Cash Payment by Public Body to Region as part of Specific Purpose Grant

Occasionally, Public Bodies make cash payments to regions. Usually a sector line ministry
receives funds from a donor through Channel 2. Some of the funds are intended for sector
bureaus in the regions. When a Public Body pays cash to regions, the payment is part of the
region’s subsidy. The Public Body should record the payment as a subsidy payment.

Example: The Ministry of Health sends Birr 50,000 to a region as part of HSDP.

Transaction Register –Ministry of Health:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Region Subsidy - 6411 50,000 50,000

3.7. Operational Expense without Withholding Tax

Example: An accountant pays by check an amount of Birr 1,500 for office supplies.

Transaction Register of Public Body:

 Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Office supplies paid in cash 6212 1,500 1,500

3.7.1. Operational Expense Requiring Withholding of Tax

The tax authority requires that a tax must be paid on specified purchases over a certain amount.
The purchaser collects the tax as a withholding from the purchase price. The tax is paid to the
appropriate authority, federal or regional government, depending on the location of the
supplier.

The supplier can reclaim the withholding tax. The tax authority creates a special tax receipt
that is issued to the supplier when the tax is withheld. This receipt is not an accounting
document and should not be referenced in any accounting record. If a regional tax authority
has not issued a special tax receipt, the federal special tax receipt should be used.

The withholding tax does not reduce the cost of the goods to the Public Body. The withholding
tax is a reduction to the payment made to the supplier; the payment is made to the appropriate
government instead. When a purchase is made that requires the withholding of tax, a Bank
Payment Voucher is prepared that indicates:

 The expenditure account code with a debit for the full purchase price.

 The tax deducted is payable account code 5006 to federal or region tax authority for the
amount of the tax. The region or federal tax authority will record the withholding tax as
revenue code 1103 or 1104 (depending of whether the supplier is an individual or a
corporation) when they receive the cash from the public body.

 Cash at Bank 4103 with a credit for the actual amount paid to the supplier.
3.7.2. Operational Expense Requiring Withholding of Ta

Example: A Public Body buys office supplies from a corporation for Birr 100,000 from its
recurrent expenditure budget – Birr 98,000 relates to the cost of the office supplies and Birr
2,000 is the withholding tax. The supplier is federal tax payer.

 Transaction #1: Payment effected to supplier

Transaction Register of Public Body:
 Ref Account Cash at Bank

Description TB Number Others 4103

Dr Cr Dr Cr

BPV Office Supplies 01 6212 100,00

0

Withholding tax payable 5006 2,000 98,000

 Transaction # 2: Transfer of Withholding Tax to Federal Inland Revenue

Authority
Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Transfer to IRA 5006 2,000 2,000

Transaction Register of Inland Revenue Authority:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

RV W. tax revenue 1103 2,000 2,000

3.8. Letters of Credit

A Public Body may need to open a Letter of Credit as part of an international purchase
agreement. Opening a Letter of Credit means putting cash in a bank account dedicated to
payment of the purchase price when appropriate conditions are met. When a Public Body
opens a Letter of Credit, cash is paid from the Zero bank account of the Public Body to a bank
account at the CBE. The amount of the letter of credit represents a receivable – advance from
the supplier.
  Example: The Ministry of Health (MOH) opens a letter of credit for the purchase of
medical supplies valued at birr 45,000.

Transaction Register of Ministry of Health: On opening letter of credit

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Letter of Credit 4251 45,000 45,000

Transaction Register of Ministry of Health: On receipt of bank advice from NBE

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Transfer from MOFEC 4017 45,000 45,00

0

Transaction Register of MOFEC: On receipt of bank advice from NBE

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BPV Transfer from MOFEC 4017 45,000 45,000

Transaction Register of Ministry of Health: On receipt of medical supplies

Account Cash at
Bank
Ref Description TB Number Others
4103

Dr Cr Dr Cr

JV Purchase of medical supplies 2 6311 45,000

4251 45,00
0
 3.9. Construction Projects

Long-term construction projects involve complicated financial arrangements. Several

accounting entries are necessary over the life of the project. In general, when a construction
contract is signed, there are several steps in the payment process. At each step, an accounting
entry is required. The general steps are:

 Payment of an advance. Usually the contract calls for an advance payment to the
contractor that is proportionately deducted from future payments to the contractor.
 Progress payments based on payment certificates. Usually the contract calls for
partial payment of the total contract price as the construction reaches agreed-upon
percentages of completion. A payment certificate is evidence that the agreed-upon
completion percentage is reached.
 Payment of the retention. Usually a percentage of the payment is retained and not
paid until final acceptance of the completed construction
 Deduction of withholding tax on the works completed
Example: Assume the following:

 A contract is signed to construct a building for 1,000,000 birr.

 Terms of contract are:
o Initial advance of 20% = 200,000 birr.
o Advance adjusted proportionately with each payment certificate approval.
o 2% withholding tax on work certified as completed
o Retention of 10% withheld from each payment certificate & paid after final approval.
Steps in payment are:
1. Payment of 20% advance.
2. Payment certificate when 40% complete.
3. Payment certificate when 80% complete.
4. Payment certificate when 100% complete.
5. Payment of retention with final approval.

 Transaction #1: Payment of 20% advance:

Accountant prepares a check for 200,000 birr.

Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

 Dr Cr Dr Cr

BPV Advance to contractor 4251 200,000 200,000

 Transaction # 2: Payment certificate when 40% complete.

Accountant prepares a check for 272,000 birr as follows:

o 400,000 payment certificate request
o 80,000 adjustment to advance
o 40,000 retention
o 8,000 withholding tax
Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Construction – 02 6323 400,000

Building

Advance to contractor 4251 80,000

Retention on contract 5061 40,000

W/holding tax payable 5006 8,000 272,000

 Transaction # 3: Payment certificate when 80% complete.

Accountant prepares a check for 272,000 birr as follows:

o 400,000 payment certificate request
o 80,000 adjustment to advance
o 40,000 retention
o 8,000 withholding tax

Transaction Register of Public Body:

 Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Construction – 02 6323 400,000

Building

Advance to contractor 4251 80,000

Retention on contract 5061 40,000

W/holding tax payable 5006 8,000 272,000

 Transaction # 4: Payment certificate when 100% complete.

Accountant prepares a check for 136,000 birr as follows:

o 200,000 payment certificate request
o 40,000 adjustment to advance
o 20,000 retention
o 4,000 withholding tax
Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Construction – 02 6323 200,000

Building

Advance to contractor 4251 40,000

Retention on contract 5061 20,000

W/holding tax payable 5006 4,000 136,000

 Transaction #5: Payment of retention after final approval of project:

Accountant prepares a check for 100,000 birr.

 Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Retention on contract 5061 100,000 100,000

 Transaction #6: Payment of withholding tax to Inland Revenue Authority.

Accountant prepares a check for 20,000 birr.

Transaction Register of Public Body:

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Settlement of W/H tax 5006 20,000 20,000

The retention withheld from the contractor is paid at the end of the project life – usually after a
few years. The cash withheld on account of retention is transferred to MOFEC and is not kept
with the Public Body. Prior to repayment of the retention the amount of retention should be
proclaimed in the budget to allow MOFEC to approve transfer of the retention amount to the
Public Body. The Budget Department at MOFEC should review the process of how such
amounts should be budgeted and proclaimed to allow for disbursement to the Public Body.

3.10. Salary

3.10.1. Salary Expenditure

The Public Body must record the gross salary amount and government’s portion of pension as
expenditure to maintain budget control. The Public Body is paid the total amount including the
pension contributions - employee and government but excluding the amount deducted for
income tax.
MOFEC will record in its Transaction Register a debit to transfer code 4017 and a credit to
Cash at Bank 4105 on receipt of debit advice. The Public Body will prepare a Receipt Voucher
for the total amount of cash utilized upocn the receipt of credit advice. The entry is a debit to
Cash at Bank 4103, and a credit to transfer code 4017.

Example: A BI requests salary with the following details:

Gross salary 20,000 Deduction: salary advance 600

Pension expense – 11% 2200 Fine 250

Employee pension - 7% 1400 Net Salary Payable 13,350

Income tax 2,000

Transaction Register of PB
Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

JV Salary Expense 1 6111 20,000

Pension Expense 1 6131 2,200

Salary Payable 5004 13,350

Income Tax 1101 2,000

Staff Advance 4203/ 600

XX

Fine 1489 250

Pension Payable 5003 3600

3.10.2. Withdrawal of Cash from Bank to Pay Salary

Transaction Register ocbf PB

Account Cash in Safe Cash at Bank

Ref Description TB Number 4101 4103

 Dr Cr Dr Cr

BPV Cash transfer for salary 13,350 13,350

The Cashier records Birr 16,350 as a receipt in the cashbook

3.10.3. Payment of Pension by PB

Transaction Register of PB

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Pension Authority 5003 36000 3600

3.10.4. Record Debit Advice for Transfer at MOFEC

Transaction Register of MOFEC

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BPV Transfer to PB 4017 18,350 18,350

3.10.5. Record Credit Advice for Transfer at PB

Transaction Register of PB

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Transfer from MOFEC 4017 18,350 18,350

 3.10.6. Settlement of Salary

Transaction Register of PB
Employees sign Model 33 to evidence receipt of salary from the Cashier. After salary period is over,
the Model 33 is used to prepare one CPV for the total salary paid.

Account Cash in Safe

Ref Description TB Number Others 4101

Dr Cr Dr Cr

CPV Salary Payable 5004 14,350 14,350

The Cashier records the CPV for Birr 15,350 in the Cashbook. Birr 1,000 remains unpaid.

3.10.7. Deposit of Staff Loan Recovered into Depositary Bank Account

Transaction Register of PB
Employees sign Model 33 to evidence receipt of salary from the Cashier. After salary period is over,
the Model 33 is used to prepare one CPV for the total salary paid.

Account Cash in Bank Cash in Bank

Ref Description TB Number 4103/1 4103/2

Dr Cr Dr Cr

CPV Salary Payable 5004 600 600

The Cashier records the CPV for Birr 14,350 in the Cashbook. Birr 1,000 remains unpaid.

3.10.8. Deposit of Unpaid Salary into Depositary Bank Account

Transaction Register of PB
Account Cash in Safe Cash at Bank

Ref Description TB Number 4101 4103

Dr Cr Dr Cr

CPV Deposit - Unpaid salary 1,000 1,000

3.10.9. Record Debit Advice for Transfer at MOFEC
Transaction Register of MOFEC

Account Cash at Bank

Ref Description TB Number Others 4105

Dr Cr Dr Cr

BPV Transfer to PB 4017 600 600

3.10.10. Record Credit Advice for Transfer at PB

Transaction Register of PB

Account Cash at Bank

Ref Description TB Number Others 4103

Dr Cr Dr Cr

BPV Transfer from BOFED 4017 600 600

3.10.11. Payment of Unpaid Salary

Cash is first withdrawn from the depositary bank account to pay unpaid salary.

Transaction Register of PB
Account Cash in Safe Cash at Bank

Ref Description TB Number 4101 4103

Dr Cr Dr Cr

CPV Deposit - Unpaid salary 1,000 1,000

Payment of unpaid salary

Transaction Register of PB

Account Cash in Safe

Ref Description TB Number Others 4101

Dr Cr Dr Cr
 CPV Salary Payable 5004 1,000 1,000

3.10.12. Salary adjustment - Unearned Salary

Occasionally, salary is requested and received, but the employee is not entitled to the entire
salary amount received. For some reason, the employee quits working for the Public Body
during the month. When this happens, the salary entry must be reversed for that employee, and
the pension transfer must be corrected. In addition, the pension payment for the next month’
salary should be adjusted.

Example: Suppose an employee in the Ministry of Agriculture worked only half of July instead
of the whole month. This is discovered after the salary expense entry in the example above.
The amounts of overpayment are:

Gross salary 500 Income tax 35

Pension expense – 11% 55 Salary Payable 375

Employee pension - 7% 35

Transaction Register of MoA:

Ref Account Cash at Bank

Description TB Number Others 4103

Dr Cr Dr Cr

JV Salary Expense 01 6111 500

Pension Expense 01 6131 55

Salary Payable 5004 375

Income Tax 1101 35

Pension Payable 5003 90

Summary
The accounting cycle for FGE starts when money is received in the special accounts from
MOFEC as well as development partners and ends when report of expenditures is presented
to the MOFEC and MOFEC is closing the accounts.
The Government Ethiopian Budget calendar is used for planning, budgeting and reporting
purposes.
MOFEC shall ensure that adequate internal controls are put in place and that the controls are
adhered consistently. The internal control system should ensure that all transactions are
recorded, and that the recorded transactions have substance. It also ensures that transactions
are recorded at correct amounts in the correct period in the correct accounts and that they are
posted and summarized correctly, among others.
The accounting system at the Federal, Regional and Woreda level employs a modified cash
basis of accounting. The modified cash basis of accounting means that cash basis of
accounting applies except for recognition of the following accounts:
 Revenue and expenditure are recognized when aid in kind is received.
 Expenditure is recognized:
 When payroll is processed.
 When goods are received or services are rendered if payments for the goods or
services were rendered in advance
 Transactions resulting from salary withholdings, VAT and profit tax withholding
from suppliers are recognized in the absence of actual cash transaction.
 All other revenues and expenditures are recognized as per cash basis of accounting i.e
revenues and expenditures are recognized, when cash is received and paid
respectively.

CHAPTER 4: MONTHLY REPORTS

Content
4.1. Introduction
4.2. Revenue/Assistance/Loan Report
4.3. Recurrent Expenditure Report
4.4. Capital Expenditure Report
4.5. Transfer Report
 4.6. Receivables Report
4.7. Payables Report
4.8. Trial Balance and Submitting Monthly Reports to MOFEC
4.1. Introduction

The purpose of this Chapter is to describe the monthly reports submitted by a Reporting Unit
to MOFEC. The Chapter contains the following sections: Introduction,
Revenue/Assistance/Loan Report, , Recurrent Expenditure Report , Capital Expenditure
Report, Transfer Report , Receivables Report, Payables Report, Trial Balance and
Submitting Monthly Reports to MOFEC
Objectives: After completion of this chapter, you will be able to:
 List and discuss types of report
 Understand Meaning of report
 Analyze objective of the report
 Prepare reports
The only monthly reports verified by MOFEC are the Transfer Report and the Trial Balance.
The Transfer Report is verified by MOFEC to ensure that all disbursements to an Accounting
Unit by MOFEC and all disbursements from an Accounting Unit to MOFEC are accounted
for within the accounting system to enhance control over cash transfers.
The Trial Balance is verified by MOFEC 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 MOFEC from the Trial Balance to enhance cash
management practices.
All other monthly reports that are submitted to MOFEC 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 MOFEC 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 retained
revenue must report to MOFEC quarterly rather than monthly.
4.2. REVENUE/ASSISTANCE/LOAN REPORT
4.2.1. Meaning:
The Revenue/Assistance/Loan Report provides information on the year-to-date revenues of
an Accounting Unit from each source of finance.

4.2.2. Purpose
The purpose of the Revenue/Assistance/Loan Report is to facilitate consolidation of the
actual revenues, assistance and loan collected and comparison of budgeted revenues to actual
revenues by account category.
4.2.3. Preparation & Source Documents
The Accountant prepares a Revenue/Assistance/Loan Report for the Accounting Unit. The
source document to prepare the Revenue/Assistance/Loan Report is the General Ledger.
Each item of revenue, assistance or loan is identified by account code. The amount from the
balance column in the General Ledger Card is transcribed into the Revenue/Assistance/Loan
Report. The grand totals from each Revenue/Assistance/Loan Report are carried forward to
the Trial Balance.
Balances in the Revenue/Assistance/Loan Report are normally credits.
Each Accounting Unit prepares one Revenue/Assistance/Loan Report.
4.2.4. Format
Fields in the Revenue/Assistance/Loan Report

Field Description

Top of Page:

Name Name of Public Body to identify Accounting Unit

Code Code of Public Body to identify Accounting Unit

Bank Account Number Number of the bank account to identify Accounting Unit

Month/Year Month and year of the report

Table

Account Code Account code from the Ledger Card (the three most common
are preprinted)

Account Description Description of the account code (the most common are
preprinted)

YTD Revenue (Dr/Cr) Balance for the account from the Ledger Card
 Total /To Trial Balance/ Calculate the grand total and transfer to the Trial Balance

Bottom of Page:

Prepared by Signature of accountant preparing the report

Verified by Signature of accountant verifying the report

4.3. RECURRENT EXPENDITURE REPORT

4.3.1. Meaning

The Recurrent Expenditure Report provides information on the year-to-date recurrent

expenditures of each BI managed by an Accounting Unit.
4.3.2. Purpose
The purpose of the Recurrent Expenditure Report is to facilitate consolidation of the actual
recurrent expenditures and comparison of budgeted expenditure to actual expenditure.
4.3.3. Preparation & Source Documents

The Accountant prepares the Recurrent Expenditure Report for each BI.

The source document to prepare the Recurrent Expenditure Report is the Subsidiary Ledger.
The amount from the balance column in each Subsidiary Ledger Card is transcribed to the
appropriate account code in the Recurrent Expenditure Report.
Balances in the Recurrent Expenditure Report are normally debits.
The Recurrent Expenditure Report has two pages.
Each Accounting Unit prepares a Recurrent Expenditure Report for each BI that it manages.

Fields in the Recurrent Expenditure Report

Field Description

Top of Page:

Left-Side

Public Body & Code Name and code of Public Body to identify Accounting
Unit
 Program & Code Name and code of Program if needed to identify
Accounting Unit or BI

Sub Agency & Code Name and code of Sub Agency if needed to identify
Accounting Unit or BI

Sub Program & Code Name and code of Sub Program if needed to identify
Accounting Unit or BI

Project & Code Name and code of Project if needed to identify

Accounting Unit or BI

Source & Code Source code (1800 is Treasury; 1900 is Retained

Revenue; revenue code for donor (2001-2999) or lender
(3001-3999).

Bank Account Number Number of the bank account to identify Accounting

Unit

Right-Side

Month/Year Month and year of the report

Table

Account Code Account code from the Ledger Card (all are preprinted)

Account Description Description of the account code (all are preprinted)

Expenditure Current Month Expenditure for the month

YTD Expenditure (Dr/Cr) Balance for the account from the Ledger Card

Total /To Trial Balance/ Calculate the grand total and transfer to the Trial
Balance

Bottom of Page:

Prepared by Signature of Accountant preparing the report

Verified by Signature of Accountant verifying the report

4.4. CAPITAL EXPENDITURE REPORT

 4.4.1. Meaning

The Capital Expenditure Report provides information on the year-to-date capital expenditures
of each BI managed by an Accounting Unit.

4.4.2. Purpose

The purpose of the Capital Expenditure Report is to facilitate consolidation of the actual
capital expenditures and comparison of budgeted expenditure to actual expenditure.
4.4.3. Preparation & Source Documents
The Accountant prepares the Capital Expenditure Report for each BI.
The source document to prepare the Capital Expenditure Report is the Subsidiary Ledger.
The amount from the balance column in each Subsidiary Ledger Card is transcribed to the
appropriate account code in the Recurrent Expenditure Report.
Balances in the Capital Expenditure Report are normally debits.
The Capital Expenditure Report has two pages.
Each Accounting Unit prepares a Capital Expenditure Report for each BI that it manages.
Fields in the Capital Expenditure Report

Field Description

Top of Page:

Left-Side

Public Body & Code Name and code of Public Body to identify
Accounting Unit

Program & Code Name and code of Program if needed to identify

Accounting Unit or BI

Sub Agency & Code Name and code of Sub Agency if needed to
identify Accounting Unit or BI

Sub Program & Code Name and code of Sub Program if needed to
identify Accounting Unit or BI
 Project & Code Name and code of Project if needed to identify
Accounting Unit or BI

Source & Code Source code (1800 is Treasury; 1900 is Retained

Revenue; revenue code for donor (2001-2999) or
lender (3001-3999).

Bank Account Number Number of the bank account to identify

Accounting Unit

Right-Side

Month/Year Month and year of the report

Table

Account Code Account code from the Ledger Card (all are
preprinted)

Account Description Description of the account code (all are

preprinted)

Expenditure Current Month Expenditure for the month

YTD Expenditure (Dr/Cr) Balance for the account from the Ledger Card

Total /To Trial Balance/ Calculate the grand total and transfer to the Trial
Balance

Bottom of Page:

Prepared by Signature of Accountant preparing the report

Verified by Signature of Accountant verifying the report

4.5. TRANSFER REPORT

4.5.1. Meaning
The Transfer Report consists of two parts:

 Part 1 summarizes transfer account balances from the General Ledger.

 Part 2 provides information on each monthly cash transfer between the

Accounting Unit and MOFEC. Transfers made between other units of government
 using transfer account code 4017 are reported on Part 1 of this report, but details
are not reported on Part 2.
4.5.2. Purpose
The purpose of the Transfer Report is to serve as a control tool to verify cash transfers
between MOFEC and an Accounting Unit and vice versa.
4.5.3. Preparation & Source Documents
The Accountant prepares a Transfer Report for each Accounting Unit. The source documents
to prepare the Transfer Report are the General Ledger Cards.
Balances in the Transfer Report are debits or credits depending on the nature of the transfer
account.
One Transfer Report is prepared for each Accounting Unit.
a. Part 1
The amount from the Balance Column in the General Ledger Card is transcribed into the
Transfer Report - Part 1. The grand totals from each Transfer Report - Part 1 are carried
forward to the Trial Balance.
Fields in the Transfer Report - Part 1

Field Description

Top of Page:

Left-Side

Name of Reporting Unit Name of Reporting Unit

Bank Account Number Number of the bank account to identify Accounting Unit

Right-Side

Month/Year Month and year of the report

Table

Account Code Account code from the Ledger Card

Account Description Description of the account code

YTD Balance (Dr/Cr) Balance for the account from the Ledger Card

Total to Trial Balance Calculate grand total and transfer to the Trial Balance

Bottom of Page:
 Prepared by Signature of Accountant preparing the report

Verified by Signature of Accountant verifying the report

b. Transfer Report - Part 2

Each cash transfer during the month between the Accounting Unit and MOFEC is listed
individually in Part 2 of the Transfer Report. The information required for Part 2 is
transcribed from the following cash transfer account Ledger Cards:
 4001: Recurrent salary and allowances
 4002: Recurrent operating expenditure
 4003: Capital salary and allowances
 4004: Capital expenditure
 4005: Staff Advances
 4006: SSDP funds
 4007: Grace period payables
 4009: Other Transfers
 4017: Zero Balance transfers
Any other transfer code used during the month to transfer funds to/from MOFEC
Columns are pre-printed for transfer codes 4001 through 4007. If other transfer codes are
used during the month, a blank column is provided. The appropriate transfer code should be
written at the top of the column.
Columns are identified by account code. The date and amount of each transaction recorded
in the account code's Ledger Card during the month are transcribed in the corresponding sub-
column of the Transfer Report. Each transaction is recorded in a separate row. Transfers
received from MOFEC are credits. Transfers of cash to MOFEC are debits.
Debit and credit sub-columns are totaled and the total is recorded in the total row.
The difference between the totals in the debit and credit sub-columns for each account code is
calculated. If the total of debits is greater than the total of credits, the difference is recorded
in debit sub-column of the Net Activity row. If the total of credits is greater than the total of
debits, the difference is recorded in credit sub-column of the Net Activity row.
The balance from the account code's Ledger Card at the beginning of the month is recorded
in the beginning of month (BOM Balance) row.
The amount is the Net Activity row is combined with the amount in the BOM Balance row
and recorded in the end of month (EOM Balance) row. The EOM Balance must equal the
balance in the account code's Ledger Card at the end of the month, which equals the balance
recorded for the account code in Part 1 of the Transfer Report.
Fields in the Transfer Report - Part 2

Field Description

Columns

Account Code Account code from the Ledger Card

Sub-Columns:

Date Date of the transfer taken from the Ledger Card

Debit/Credit Amount of the transfer taken from the Ledger Card

Rows

[Blank] Each transfer for the month is recorded in a separate row

Total The total for the debit and credit sub-columns is recorded here.

Net Activity The difference between the totals for the debit and credit sub-
columns is recorded here. If the total of debits is greater than
the total of credits, the difference is recorded in debit sub-
column. If the total of credits is greater than the total of debits,
the difference is recorded in credit sub-column.
BOM Balance The balance at the beginning of the month from the Ledger
Card of the appropriate account code is recorded here.

EOM Balance The amount in the Net Activity row is combined with the
amount in the BOM Balance row and recorded here. The EOM
Balance must equal the balance in the Ledger Card of the
appropriate account code at the end of the month, which equals
the balance recorded for the account code in Part 1 of the
Transfer Report.
 4.6. Receivable Report
4.6.1. Meaning
The Receivables Report provides information on the year-to-date receivables owed to an
Accounting Unit.
4.6.2. Purpose
The purpose of the Receivables Report is to provide information on the year-to-date
receivables owed to an Accounting Unit and facilitate consolidation of receivables owed to
the FGE.
4.6.3. Preparation & Source Documents
The Accountant prepares a Receivables Report for each Accounting Unit. The source
document to prepare the Receivables Report is the General Ledger. Each item of receivable is
identified by account code. The amount from the Balance Column in the General Ledger
Card is transcribed into the Receivables Report. The grand totals from each Receivables
Report are carried forward to the Trial Balance.
Balances in the Receivables Report are normally debits.
One Receivables Report is prepared for each Accounting Unit.
Fields in the Receivables Report

Field Description

Top of Page:

Left-Side

Name Name of Public Body to identify Accounting Unit

Bank Account Number Number of bank account to identify Accounting Unit

Right-Side

Code Code of Public Body to identify Accounting Unit

Month/Year Month and year of the report

Table
 Account Code Account code from the Ledger Card

Account Description Description of the account code

YTD Receivables (Dr/Cr) Balance for the account from the Ledger Card

Total to Trial Balance Calculate the grand total and transfer to Trial Balance

Bottom of Page:

Prepared by Signature of Accountant preparing the report

Verified by Signature of Accountant verifying the report

4.7. Payable Report

4.7.1. Meaning
The Payables Report provides information on the year-to-date payables owed by an
Accounting Unit.
4.7.2. Purpose
The purpose of the Payables Report is to provide information on the year-to-date payables
owed by an Accounting Unit and facilitate consolidation of the actual payables owed by the
FGE.
4.7.3. Preparation & Source Documents
The Accountant prepares a Payables Report for the Accounting Unit. The source document
to prepare the Payables Report is the General Ledger. Each payable item is identified by
account code and the amount from the Balance Column in the General Ledger Card is
transcribed into the Payables Report. The grand totals from each Payables Report are carried
forward to the Trial Balance.
Balances in the Payables Report are normally credits.
One Payables Report is prepared for each Accounting Unit.
Fields in the Payables Report

Field Description

Top of Page:

Left-Side

Name Name of Public Body to identify Accounting Unit

 Bank Account Number Number of the bank account to identify Accounting Unit

Right-Side

Code Code of Public Body to identify Accounting Unit

Month/Year Month/year of the report

Table

Account Code Account code from the Ledger Card

Account Description Description of the account code

YTD Payables (Dr/Cr) Balance for the account from the Ledger Card

Total to Trial Balance Calculate the grand total and transfer to the Trial Balance

Bottom of Page:

Prepared by Signature of Accountant preparing the report

Verified by Signature of Accountant verifying the report

4.8. Trial Balance

4.8.1. Meaning

The Trial Balance is the summary of the net cumulative year-to-date debit and credit balances
contained in the General Ledger at the end of each month for each account code represented
by a General Ledger Card.

4.8.2. Purpose
The Trial Balance proves the arithmetical accuracy of the General Ledger. The total amount
of the Debit Column must equal the total amount of the Credit Column in the Trial Balance.
The Trial Balance serves as a basis to produce financial statements.
4.8.3. Preparation & Source Documents
The Accountant prepares the Trial Balance for each Accounting Unit. The source documents
to prepare the Trial Balance are:

 Revenue/Assistance/Loan Report,

 Recurrent Expenditure Report,

  Capital Expenditure Report,

 Transfer Report,

 Receivables Report,

 Payable Report, and

 The General Ledger.

The account codes that are taken from the General Ledger directly to the Trial Balance are:

 Net Assets/Equity – balance could be debit or credit.

 Cash and Cash Equivalents – balances in each account should be debits.

One Trial Balance is prepared for each Accounting Unit.

Trial Balance

Fields in the Trial Balance

Field Description

Top of Page:

Left-Side

Name Name of Public Body to identify Accounting Unit

Bank Account Number Bank account number to identify Accounting Unit

Right-Side

Code Code of Public Body to identify Accounting Unit

Month/Year Month and year of the report

Table

Account Code Account code, if applicable

Account Description Description of the account code, if applicable

Debit/Credit Balance for the account from the Report or from the
Ledger Card
 Total Calculate the total of each column. The column totals
must equal.

Bottom of Page:

Prepared by Signature of Chief Accountant

Checked by Signature of person checking Trial Balance

Approved by Signature of Head of Public Body and Seal

4.9. Bank Reconciliation for Zero Balance and Separate Bank Account

The process of comparing the bank statement with the books of account is known as
reconciling the bank account, and the schedule that is prepared to demonstrate the results of
the comparison is called bank reconciliation. The balance shown on the bank statement may
not agree to the bank balance in the general ledger. Causes of differences include:

 Checks issued but not presented to the bank

 Deposits made that do not appear on the bank statement

 Transactions that have not yet been recorded in the books

 Record keeping errors by either the Reporting Unit or the bank.

4.9.1. Meaning and Purpose
The bank reconciliation provides proof that all bank related transaction errors are identified
and provides the basis to take corrective action to eliminate errors. The bank reconciliation is
submitted to MOFEC
4.9.2. Preparation and Source Documents
The Finance Service Head prepares the Bank Reconciliation. The source documents to
prepare the Bank Reconciliation are:

 Monthly Bank Statements received from the bank

 Drawing Limits Register/Transaction Register/General Ledger, and

 Detailed information in documents accompanying the bank statement, the checkbook.

Steps required in preparing bank reconciliation include:

1. When the bank statement is received, verify that items from the prior reconciliation
are recorded on the statement by the bank.
 2. Compare the check numbers listed on the bank statement to entries in the Transaction
Register, noting errors and outstanding checks.

3. Compare deposits on the bank statement with entries in the Transaction Register,
noting differences.

4. List other items on the bank statement that are not recorded in the accounts and items
in the accounts that are not on the bank statement.

5. Prepare the bank reconciliation.

Items on the bank side of the bank reconciliation must either be corrected by the bank or will
automatically be adjusted when the transaction reaches the bank.

A bank reconciliation format is presented below for the separate bank account:

BALANCE PER BANK STATEMENT Birr 2,350.70

ADD:

Deposits in Transit 1,355.20

Amount incorrectly charged by the bank 51.75

TOTAL: 3,757.65
LESS:

BALANCE PER CASH ACCOUNT Birr 2,051.96

ADD:

Credit advises 1,015.00

Error on 17 Sene 1998 Deposit

Submitting Monthly Reports to BoFED 54.00

TOTAL: 3,120.96

LESS:

A bank reconciliation format is presented below for the zero balance bank account:

BALANCE PER BANK STATEMENT Birr 0.00

LESS:

Outstanding Checks

BALANCE PER GENERAL LEDGR Birr (1037.49)

 4.10. SUBMITTING MONTHLY REPORTS TO MOFEC

Monthly reports will be prepared and submitted to a Reporting Unit or MOFEC 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.

 Verify that the EOM Balance in Part 2 of the Transfer Report is carried forward to
Part 1 of the Transfer Report.
 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 MOFEC intact. The Reporting Unit is required to send their monthly reports to
MOFEC during the third week of the month.
Central Accounts Department at MOFEC 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.

 Verify that the EOM Balance in Part 2 of the Transfer Report is carried forward to
Part 1 of the Transfer Report.

 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.

Summary

MoFEC shall be responsible for the preparation of consolidated financial reports.

 Reporting from implementation agencies shall be on the pooled account in general

without a need to identify the source of the fund.

 The source of income shall be identified at MoFEC level based on bank transactions and
income ledger account. The regular reporting period will be monthly. The monthly report
pack shall include an

 The basic reporting period. Quarterly, semi-annual or annual reports can all be prepared
on the basis of the monthly reports.

 The format to be used for monthly reporting determines the formats to be used for
Quarterly, semester and annual reports.

 It is advantageous to use similar formats for all.

 Under double entry accounting system this shall include, Capital Expenditure Report,
Transfer Report, Receivable Report, Payables Report and the Trial Balance.
 No modification will be necessary on the supporting schedules that will accompany the
monthly Trial Balance. However, the Trial Balance that will be used for PSCAP is a
modified version of the Trial Balance in the Government Accounting System. This is
done to enable BoFEDs to prepare one Trial Balance for all the sub-programs that are
important

CHAPTER 5 : FINANCIAL STATEMENTS & REPORTS

Content
Chapter 5: Financial statement and Reports

5.1. Introduction to Financial Reporting

5.2. Responsibility
5.3. Financial Statement Reporting standards
5.4. Interim Financial Reports
5.5. Balance Sheet
5.6. Statement of Special (Designated) Accounts /FUND FLOW/
5.7. Fund Flow Statement of Pooled Bank Account
5.8. Fund Utilization Report
5.9. Consolidated Expenditures Summary
5.10. A statement of cash forecast or requirement covering for six months period.
5.11. Notes and Explanations
5.12. Other Supporting Schedules and Documents
5.13. Replenishment of Pooled Account at Federal-level
5.14. Verification on Reports
5.15. Reporting Flow / Procedures
Summary

Introduction

Dear learner, hope you have gain some knowledge on how to prepare monthly financial
statement for governmental organization. Very interesting, now we are going to learn on how
to prepare yearend financial statement for governmental organizations. To this end the
following statements are to be learned. It includes Responsibility, Financial Statement
Reporting standards, Interim Financial Reports, Balance Sheet, Statement of Special
(Designated) Accounts /FUND FLOW/, Fund Flow Statement of Pooled Bank Account, Fund
Utilization Report, Consolidated Expenditures Summary, A statement of cash forecast or
requirement covering for six months period, Notes and Explanations, Other Supporting
Schedules and Documents, Replenishment of Pooled Account at Federal-level, Verification
on Reports, Reporting Flow / Procedures

Objectives: after completion of this chapter the student will be able to:
 Define financial statement
 Identify the objectives of the financial reporting
 List and explain types of financial reporting in government operation
 Describe reporting flow procedures
 Describe the roll of financial statement

5.1. Introduction to financial reporting

So for Ethiopian Government Accounting system uses IBEX software to integrate the
financial accounting and reporting system to produce consolidated financial report which will
enable the decision makers to pass sound decisions. As discussed in various sections of this
module the financial recording and reporting system, IBEX, for accounting and reporting is
used for recording expenditure on a standalone basis. Consolidation of IBEX records at
WoFED, BUREAU OF FINANCE AND ECONOME DEVELOPMENTand MOFEC level is
done on a standalone procedure without mixing with the main treasury database.
Under chapter three we demonstrated the accounting cycle from the preparation of chart of
account, transaction processing, journalizing / Data entry, and posting to the ledger and
finally generation of report. Yearend and beginning of year procedures are also explained.
Once transaction is posted, financial reports will be extracted from the system based on the
required filtering criteria.
The system runs using the Government of Ethiopia's financial recording and reporting
system, IBEX, for accounting and reporting on expenditure on a standalone basis. However,
at regional and federal level, all BOFEDs and MOFEC uses IBEX to consolidate and produce
the financial reports and all expenditures should be entered into the system and reports are
automatically generated.
5.2. Responsibility
The timely submission of quality financial reports is a must to ensuring that cash resources
flow to the PSNP as required by the Annual Plan. Financial reports trigger the replenishment
of the PSNP pooled account at Federal-level by development partners and also determine
whether or not deductions will be made to transfers from Federal to Regions to account for
carry-over balances. Because of this, it is vital that WOFEDs, BOFEDs, and MOFEC work
diligently to submit quality reports on time.
If IFRs are not received on or before the due date and are of insufficient quality,
disbursements from the Development Partners may be delayed to all regions, until reports of
adequate quality are received. This means the entire program and its million clients will be
affected.

5.3. Financial Statement Reporting standards

The responsibility for the preparation of financial statements including adequate disclosure is
that of MOFEC. WoFEDs and BoFEDs are also responsible for the timely dissemination of
quality financial reports to MoFEC. MOFEC is also responsible for the election and
application of accounting policies. MOFEC would prepare the Project Financial Statements
in accordance with IPSAS (International Public Sector Accounting Standards) – Cash basis or
equivalent national accounting standards as promulgated by the International Federation of
Accountants (IFAC). The Government’s accounting system outlined in the Manual of the
Federal Accounting System – based on modified cash basis of accounting can be used.
The accounting statements would be prepared in respect of each accounting period for the
purpose of providing complete financial information including the operating results, status of
assets and liabilities of the activities financed under the Safety Net program during that
accounting period.
At MoFEC level, two types of financial statements produced in relation to program based on
the end users specific requirements. These are FGE reporting and the Project reporting (IFR)
Financial statements required by the FGE. These statements are prepared based on the
Government Financial Statement Manual. The FGE accounting system shall produce the
following set of financial statements. The reports are imbedded in IBEX.
 Statement of Financial Position
 Statement of Financial performance
 Statement of Changes in Net Asset/Equity
 Cash flow statement
 Accounting Policies and Notes to Financial Statements
 Statement of Comparison of Budget and Actual Amount-Domestic Revenue
 Statement of Comparison of Budget and Actual Amount-External Assistance
 Statement of Comparison of Budget and Actual Amount-Expenditures
 Comparison of Original and Adjusted Budget and Actual Amounts
 Statement of Expenditures by Functional Classification
At Woreda level, IBEX can generate all the above reports. However, to the minimum the
following reports are required to be generated to compile the IFR and annual reports.
 Trial Balance
 Expenditure report by components
 Receivables report
 Payables report
 Transfer report
At MOFEC, Central government account directorate is prepared financial statements with the
overall FGE financial statements. Details about FGE financial statements preparation are
presented in the FGE manual.
The annual project financial statements will adopt the same format as the quarterly reports
and may also include other issues. However, the annual financial statements do not need to
include a statement of cash forecast/ requirement. The report should be submitted in 60 days
from the end of the fiscal year.
This manual will focus on the statements required by financiers of the program. The
financial statement formats used by the program are agreed formats between the FGE and
financiers. Therefore, they are subject to change if specific need will arise to modify the
formats but prior agreements should be reached between FGE and financiers.
5.4. Interim Financial Reports
In addition to standard government reporting, the project should prepare consolidated
quarterly Interim unaudited Financial Report (IFR). This will be submitted to the World Bank
and other DPs within 60 days of the end of the quarter. The format and the content, which are
consistent with the World Bank’s standards, have been agreed with MOFEC
IFR in general covers sources and uses of funds, transfer to regions, expenditures incurred
and apportioned to donors’ funds, budget versus actual expenditure comparison and status of
ending balances. Detail IFR is discussed below. In addition to the financial report, various
supporting tables and explanations are also incorporated in the report.
Sources & Uses of Funds
Summary information on opening cash balances; sources of funds, uses of funds and closing
cash balance will be contained in this form. This report is prepared both at regional (BOFED)
and federal level (MOFEC).
In this statement BUREAU OF FINANCE AND ECONOME DEVELOPMENT shall
include all opening balances of woredas and region, cash transfer from MOFEC and donor
direct transfer if any, expenditures of reporting period with major components level(public
works, direct support, capital, administrative & management, contingency, risk financing,
and institutional support) , and ending balance with detail breakdown(cash on hand, cash at
bank, advances, payables).
Report prepared at MOFEC level include all opening balances of donors account & regions,
sources or collection from donors and government, expenditures total of the reporting period
with components details(Safety Net Activities:- public works, direct support, capital,
administrative & management, contingency and risk financing, and institutional support),
ending balance with sufficient breakdown ( Regions, MOFEC, and MOFEC finance
department).
All donors account balance kept in foreign currency are converted to Birr using the prevailing
exchange rate. The statements shall be prepared every quarter and once in a year.
5.5. Balance Sheet
Balance sheet is prepared at federal level only. MOFEC shall prepare balance sheet after
preparing sources & uses of funds. It shows the overall financial position of the program.
Major consolidated items included in this statement are current assets, currents liabilities and
accounted fund. The statements shall be prepared every quarter and once in a year. Woredas
shall prepare a summary of balance sheet items including cash, receivables, payables and Net
assets. IBEX generates balance sheet.
Statement of Special (Designated) Accounts /FUND FLOW/
This is a statement showing summary of the movements of each of the financers’ special
foreign bank accounts. Separate statement shall be prepared for each financer.
The statement includes receipts, transfer to pool Birr account, service charge apportioned
expenditures of the period, closing balance, and foreign exchange gain or loss.
Calculation of exchange rate gain or loss shall follow governments accounting procedures.
The statements shall be prepared every quarter and once in a year. See
5.6. Fund Flow Statement of Pooled Bank Account
Just like statement of special account, fund flow statement of pooled account shows a
summary of cash movement of the pooled account. It includes transfer from special foreign
account, fund transfer to regions & other sector offices, bank service charges, incoming and
outgoing and audit fee. Similar statements shall be prepared for MOFEC held accounts that
shows cash movements of the accounts during the reporting period. . The statements shall be
prepared every quarter and once in a year.
5.7. Fund Utilization Report
Statement of uses /fund utilization/ shows actual expenditures, which are appropriately
classified by main project activities (categories, components and sub-components) and
includes actual versus budget comparisons for the quarter and cumulative and percentage of
utilization.
The statement is prepared both at regional and wordas levels. The regions are consolidating
each wordas actual utilization report and compare with their allocated budget.
5.8. Consolidated Expenditures Summary
Summary of expenditures consolidated at federal level. Each region expenditures should be
presented with major components and sub component details.
Both annually and quarterly reports should be prepared and compared with respective period
budgets. The statements show fund utilization percentage per each region and major
components. Expenditures Forecasts & Cash Requirements
5.9. A statement of cash forecast or requirement covering for six months
period.
This report should be worked with maximum due diligent to get accurate forecast figure
which reflect the correct future expenditure and source of funds. \
5.10. Notes and Explanations
These include Note to the accounts and narrative for financial performances that happened
during the reporting period. The narratives should include the following:-
 Discussion on budget utilization and Variance Analysis-Budget vs actual comparison
and explanation of major variances by region, by components and by line items.
 Explanation on balance sheet items and especially advances/receivables and cash at
hand at woreda, etc
 Discussion on major achievements in FM and challenges encountered
 Discussion on prior period Adjustments if any
 Updates on action plan
 Expenditure apportionment tables to financiers
 Other narrations as appropriate eg Exchange rate calculations- refer to comments
made above,
 Bank Reconciliation and bank statement (woreda to region), Region to MoFEC
 Aging report for receivables and Payables
 Staff turnover information
 Reason for using Risk financing ,Contingency and budget utilization
 Major achievements, (field visit, training, quality report, support to woreda and sector
office, timely submission of report, provision of adequate explanation on IFR.
 challenges and cop up mechanisms
 Prior period Adjustments if any – adequate explanation and supporting JV/ reason for
adjustment.
 About woredas who didn’t submit quarterly reports (for regions).
 5.11. Other Supporting Schedules and Documents
To supplement the report and better inform the reader various tables and explanations that
indicate number of beneficiaries, number of manpower deployed and number of
implementing wordas are presented.
5.12. Replenishment of Pooled Account at Federal-level
MOFEC will submit the following to the World Bank account:
 Interim (un-audited) financial reports (IFRs), prepared for actual expenditures;
 Withdrawal Application;
 Cash forecast for the next six months.
Any delays in the submission of these reports or the submission of low quality reports will
result in delays in the replenishment of the PSNP pooled accounts, and will therefore affect
delivery of transfers in all Regions. In this way all regions are accountable to other Regions
for the timely delivery and quality of their IFR.
5.13. Verification on Reports
Before signing the reports to evidence its verification, the accounts team leader will:-
 Verify the suspense payment Vouchers in the cash box to ensure that the Suspense
Vouchers are not more than 30 days old.
 Verify that the General Ledger balances are correctly carried forward to each balance
included in the Revenue/Assistance/Loan Report, Receivables report, and payable
report-100% checked.
 Verify that the Budget Expenditure Subsidiary Ledger Card balances are correctly
carried forward to each balance included in the expenditure report 100% Bank
 Verify mathematical accuracy of each report-100% checked
 Verify that totals in the Revenue Report, Expenditure Report, Receivables Report, and
Payable Report are carried forward to the Trail Balance-100% checked
 Verify that the Net Asset/Equity, cash and Bank balances in the General Ledger are
correctly carried forward to the Trail Balance.
 Verify that all fields in report are completely filled
 Verify that the account balances included in report are reasonable and there is no
cause for any investigation/follow up actions.
 Verify the monthly bank reconciliations prepared for all bank accounts.
 Checking the narrative part of the report in terms of completeness, understandability,
reliability, relevance, consistency, timeliness, comparability and usefulness.
Sign the report only after completing the above tasks-on a 100% basis of verification-NOT a
sample basis of verification.
5.14. Reporting Flow / Procedures
Government and Development Partners are concerned with the efficient use of resources in
the PSNP implementation, which will require the provision of accurate financial reports.
These reports should be brought to the attention of all concerned bodies through periodic
reports in the following manner;
 Step 1: Each WOFED prepares a monthly financial statement and submits a quarterly
procurement report, to the BUREAU OF FINANCE AND ECONOME
DEVELOPMENT within 20 days after the quarter has ended. The financial reporting
formats described above. The procurement report content and format is indicated in
the PSNP procurement manual.
WOFED submits a copy of the final report to the Woreda Food Security Desk, which
reconciles the financial report with the physical progress reports. In regions where the zonal
system is active, WOFEDs could send their quarterly financial reports to the Zonal office of
Finance and Economic Development ZOFED (the PSNP accountants) who in turn submit
them to BOFED.
 Step 2: BUREAU OF FINANCE AND ECONOME DEVELOPMENT consolidates
and analyses the financial report it receives from the woredas (via the zones), as well
as reports coming from regional implementing agencies. BUREAU OF FINANCE
AND ECONOME DEVELOPMENT reviews the quality of the reports, ensuring that
they are complete and meet all expected standards. BUREAU OF FINANCE AND
ECONOME DEVELOPMENT follows up with WOFED if there are discrepancies in
the reports, any gaps or incomplete information. If required, BUREAU OF
FINANCE AND ECONOME DEVELOPMENT staff travel to the woredas to work
with WOFED staff to produce a complete report that meets the expected standards.
BUREAU OF FINANCE AND ECONOME DEVELOPMENT analyses its own records and
discusses the findings with Regional Food Security on key aspects of the reports and
balances, etc.
BUREAU OF FINANCE AND ECONOME DEVELOPMENT submits the final Regional
Financial Report to the Regional Food Security (which analyses it together with the physical
progress report), the regional agencies involved in the implementation of the PSNP and to
MOFEC, as per the reporting format indicated above quarterly within 40 days after the end of
the quarter.
Bureau of Finance and Economec Development submit quarterly financial reports to regional
level implementing agencies to review their own narrative reporting.
 Step 3: MOFEC reviews the reports it receives from the BOFEDs and to verify the
quality and completeness of the information. MOFEC then analyses the information
it receives from regions and the accounts held at federal level.
  Step 4: As part of the quarterly IFRs, BOFEDs analyze the dates WOFEDs received
the cash resources to determine if there are any delays
in the system and, if so, how these can be fixed. This information is submitted to MOFEC,
which analyses the reports from all the BUREAU OF FINANCE AND ECONOME
DEVELOPMENT and takes steps to address any delays.
Step 5: On an annual basis, MOFEC prepares annual financial statements, which are
submitted to external auditors.
Financial Reporting for USAID financed NGO supported woredas Reporting in woredas
supported by USAID financed NGOs is the responsibility of NGOs. NGOs submit quarterly
financial and narrative reports to USAID. USAID compiles the financial reporting for all
NGOs.
The remainder of this chapter describes the format of some financial statement.
 GOVERNMENT OF ETHIOPIA

Statement of Financial Position

As at 7 July 2017

Ethiopian Birr '000

Notes 2017 2016

ASSETS (CURRENT)

Cash and cash equivalents 1 0 0

Receivables 2 0 0

   

Total Assets 0 0

LIABILITIES(CURRENT)

Current Liabilities - Payables 3 0 0

Total liabilities 0 0

Net Current
Assets/(Liabilities) 0 0
NET ASSETS/EQUITY

Accumulated surpluses/deficits 0 0

                   
 GOVERNMENT OF ETHIOPIA

Statement of Financial Performance

For the year ended 7 July 2017

Ethiopian Birr '000

Notes 2017 2016

OPERATING ACTIVITIES

Operating Revenue

Tax revenues 4 0 0

Non-tax revenues 5 0 0

Subsidies 6 0 0

Municipality revenues 7 0 0

Other revenue 8 0 0

Total operating revenue 0 0

Operating Expenses

Subsidies 0 0

Personnel services 9 0 0

Goods and services 10 0 0

Fixed assets and construction 11 0 0

Other expenses 12 0 0

Total operating expenses 0 0

Surplus/(deficit) from operating
activities 0 0

NON OPERATING ACTIVITIES

External assistance 13 0 0

External loans 14 0 0

Capital revenue 15 0 0

Debt repayments – principal 16 (0) (0)

Finance costs 17 (0) (0)

Surplus/(deficit) from non operating activities 0 0

Surplus/(deficit) for the year 0 0

GOVERNMENT OF ETHIOPIA

Statement of Changes in Net Assets/Equity

For the year ended 7 July 2017  

Ethiopian Birr '000

Balance at 7 July 20X1 0

Changes in accounting
policy/Fundamental errors 0

Restated balance 0

Net surplus/(deficit) for the year 0

Balance As at 7 July 2017 0

                 
 GOVERNMENT OF ETHIOPIA

Cash Flow Statement

For the year ended 7 July 2017

Ethiopian Birr '000 2017 2016

CASH FLOW FROM OPERATING

1 ACTIVITIES

Tax revenues 0 0

Non tax revenues 0 0

Other income 0 0

Miscellaneous income 0 0

Municipality revenues 0 0

Regional subsidy 0 0

Total Receipts - A 0 0

Personnel services 0 0

Goods and services 0 0

Finance charges 0 0

Subsidies 0 0

Other expenses 0 0

Total Payments - B 0 0

Non Cash Movements

Increase/(Decrease) in payables 0 0

Increase/(Decrease) in receivables 0 0

Total Non Cash Movements -

C 0 0
 Net Cash Flow from Operating Activities 0 0

CASH FLOW FROM INVESTING

2 ACTIVITIES

Sale of assets 0 0

Sale of equity 0 0

Repayment of borrowings to government 0 0

Privatization proceeds 0 0

Capital receipts from non government 0 0

Total Receipts (A) 0 0

Fixed Assets and Construction 0 0

Govt. lending or equity investments 0 0

Total Payments (B) 0 0

Net Cash Flow from Investing Activities 0 0

 GOVERNMENT OF ETHIOPIA

Cash Flow Statement

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

3 CASH FLOW FROM FINANCING ACTIVITIES

Proceeds from external assistance 0 0

Proceeds from external loans 0 0

Total Receipts (A) 0 0

Debt repayments – external Total

Payments (B) 0 0

Net Cash Flow from Financing Activities 0 0

NET INCREASE/(DECREASE) IN CASH &CASH

4 EQUIVALENTS 0 0

Cash and Cash Equivalents at Beginning of

5 Year 0 0

Net Increase/(Decrease) in Cash Equivalents During the

6 Year 0 0

7 Cash and Cash Equivalents at End of Year 0 0

 GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Notes to Financial Statements

Ethiopian Birr ‘000

1 Cash and Cash Equivalents 2017 2016

Domestic currency

Foreign currency

Budget support

Counterpart funds

SSDP

Cash in transit

Sinking fund

Others

Domestic currency refers to local currency held in a safe as well as in a bank account.
Foreign currency is cash held in a bank account denominated in foreign currency. Budget
support refers to cash from a foreign source held in a bank account available for unrestricted
general budgetary support. Counterpart funds refer to grants held in a bank account reserved
for specific program support.
2 Receivables

Advances

Prepayments

Others ___________ ______

Advances represent amounts due from government entities and staff. Prepayments represent
amounts due from suppliers, contractors and consultants. Others represent amounts due from
peasant associations, cooperatives, individuals, private organizations and others.

GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Notes to Financial Statements

Ethiopian Birr ‘000

3 Payables 2017 2016

Accounts Payable

Payables within Government

Direct advances

Treasury bills

Deposits

Retentions ___________ ______

Accounts payables represent grace period payables, sundry creditors, pension contributions
payable, salary payable and other payroll deductions. Payables within government represent
amounts due to government entities and staff. Deposits represent customs, court, hospital
bid bond, VAT and other deposits.

4 Tax Revenues
Tax revenues are legally mandated payments to government. Tax revenues represent taxes
on income, profits and capital gains, value added tax and sales turnover tax on domestically
manufactured goods and services, excise tax and foreign trade taxes which include excise tax,
value added tax, customs and export duties. The breakdown of tax revenues by revenue item
is provided in the statement of comparison of budget and actual amounts – domestic revenue.

5 Non Tax Revenues

Non-tax revenues represent administrative fees and charges, sales of goods and services and
miscellaneous revenues. The breakdown of non tax revenues by revenue item is provided in
the statement of comparison of budget and actual amounts – domestic revenue.
 GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Notes to Financial Statements

6 Subsidies
Subsidy revenue represents treasury funds received by regions from the federal government
to execute their recurrent and capital budgets and subsidy expense represents treasury funds
transferred by the federal government to regions to execute their recurrent and capital
budgets.

7 Municipality Revenues
Municipality revenue represents different types of municipal taxes, municipal rents and
service charges and sale of goods and municipal services.

8 Other Revenues
Other revenue represents government investment income including dividend income, residual
surplus and capital charges. The breakdown of other revenues by revenue item is provided in
the statement of comparison of budget and actual amounts – domestic revenue.

9 Personnel Services
Personnel services represent government pension contributions made to pension funds and
salaries, wages, allowances/benefits paid to permanent, contracted, externally contracted and
casual staff. The breakdown of personnel services by expense item is provided in the
statement of comparison of budget and actual amounts – expenditure.

10 Goods and Services

Goods and services represent expenditure incurred on goods and supplies, traveling,
maintenance and repairs, training, stocks of emergency and strategic goods and contracted
services. The breakdown of goods and services by expense item is provided in the statement
of comparison of budget and actual amounts – expenditure.
 GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Notes to Financial Statements

11 Fixed Assets and Construction

Fixed assets and construction represent expenditure incurred in the acquisition of fixed assets
and the pre-construction and construction of buildings and infrastructure. The breakdown of
fixed assets by expense item is provided in the statement of comparison of budget and actual
amounts – expenditure.

12 Other Expenses
Other expenses include contingency and miscellaneous payments, compensation to
individuals and institutions, government investments, grants to institutions, and contributions
to international organizations. The breakdown of other expenses by expense item is provided
in the statement of comparison of budget and actual amounts – expenditure.

13 External Assistance

External assistance represents the amounts contributed by donors as grants and are
recognized as revenue on receipt of funds. The breakdown of external assistance by donor is
provided in the statement of comparison of budget and actual amounts – external assistance.

14 External Loans

External loans represent amounts received from external lenders as loans during the fiscal
year and are recognized as revenue on receipt of funds directly or payments to suppliers on
behalf of the government. The breakdown of external loans by lenders is provided in the
statement of comparison of budget and actual amounts –external loans.

15 Capital Revenues

Capital revenue represents proceeds from the privatization of state owned enterprises, sale of
fixed assets, stocks and intangible assets and amounts received from non-governmental
sources for capital purposes. The breakdown of capital revenues by item of revenue is
provided in the statement of comparison of budget and actual amounts – domestic revenue.
 GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Notes to Financial Statements

Ethiopian Birr ‘000

16 Debt Repayments
Debt repayments to domestic and external lenders represent the principal amounts repaid
during the year and are recognized as expenditure. The breakdown of debt repayments by
internal and external debt is provided in the statement of comparison of budget and actual
amounts – expenditure.

17 Finance Costs
Finance costs represent payments of bank charges and interest on external and domestic debt.

18 Long Term Foreign Loans

2017 2016

At the beginning of the year 0 0

Additions 0 0

Amounts written off 0 0

Repayments 0 0

Exchange Differences 0 0

At the end of the year 0 0

The amounts falling due for repayment within the next 12 months amount to Birr …..

Details of the lenders, date of obtaining loan, amount due in foreign currency and the period
of repayment are detailed below:

Name of Lender Date of loan Amount Due Period

 GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Notes to Financial Statements

Ethiopian Birr ‘000

19 Long Term Domestic Loans

2017 2016

At the beginning of the year 0 0

Additions 0 0

Repayments 0 0

At the end of the year 0 0

Maturity Analysis

Due within 1 year 0 0

Due within 2 to 5 years 0 0

Due after more than 5 years 0 0

The loans represent long term bonds issued.

20 Comparison of Budget and Actual Amounts – Domestic Revenue

The causes for material differences between the actual amounts and the budget amounts are
detailed below by item of revenue:

21 Comparison of Budget and Actual Amounts – Expenditure

The causes for material differences between the actual amounts and the budget amounts are
detailed below by item of expenditure:

22 Contingent Liabilities

A list of contingent liabilities, explaining its type, nature and circumstances should be
provided together with a reliable estimate of the probable amount.

23 Other Notes

Any other notes and disclosures that MOFEC may decide to include as part of the financial
statements.
 GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Accounting Policies

The principal accounting policies of the Government, which are set out below, have been
applied consistently throughout the period.

BASIS OF ACCOUNTING

The financial statements have been prepared on the historical cost basis using a modified cash
basis of accounting that recognizes the following non-cash transactions:

 Revenue is recognized when:

o Aid in kind is received.

o Payroll is processed (income tax and employee fines)

o Salary advance is made to an employee (interest on salary advances)

o Withholding tax is deducted from the amount due to a supplier

 Expenditure is recognized when:

o Payroll is processed (salary and pension expenses)

o Aid in kind is received

o Goods are received or services are rendered

o At the end of the year, a grace period payable is accounted for.

 Intergovernmental transfers are recognized without actual cash movement

 Amounts borrowed using treasury bills and direct advances from the National Bank of
Ethiopia are recognized as current liabilities

REVENUE

Revenues are recognized on receipt of amounts except as stated above.

FINANCE COSTS
Finance costs are recognized as an expense in the period in which they are paid.
 GOVERNMENT OF ETHIOPIA

Accounting Policies and Notes to Financial Statements

Accounting Policies

TRANSLATION OF FOREIGN CURRENCIES

Transactions denominated in foreign currencies are translated into Ethiopian Birr at the rates
of exchange ruling at the date of the transaction.

Cash and bank balances that are denominated in foreign currencies are translated at the rates
of exchange ruling at the year end and the exchange gains/loss arising from such translation
are recognized as revenue/expenditure respectively.

CONSOLIDATION

The accounts of controlled entities are not consolidated– for example Ethiopian Airlines and
Ethiopian Telecommunications Corporation.

GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts - Domestic Revenue

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

Budget Actual Variance Budget Actual Variance

OPERATING REVENUE

Tax revenues

Tax on income, profit and capital

gains

Value Added Tax on goods &

services

Excise Tax

Sales turnover tax on goods &

services

Stamp sales and duty

Customs Duty on imported goods

Excise Tax on imported goods

Value Added Tax on imported goods

Export Duties

Timber Tax

Municipality Tax revenue

Total tax revenues

Non-tax revenues

Administrative fees and charges

Sales of public goods and services

Miscellaneous revenue

Municipality revenues

Total non-tax revenues

Subsidies

External assistance

External loans

Total operating revenues

 OVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts - Domestic Revenue

For the year ended 7 July 2017

Ethiopian Birr '000

20X17 2016

Budget Actual Variance Budget Actual Variance

Other revenues

Government investment income

Dividend income

Residual surplus

Interest income and capital charges

Total government investment income

Contribution to pension funds

Capital revenue

Sale of properties, stock and intangible assets

Privatization proceeds

Capital transfers from non-governmental

sources

Collection of principal from on-lending

Municipality capital and investment revenue

Total capital revenues

Total other revenues

TOTAL REVENUE

GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts - External Assistance

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

Adjusted Adjusted

Budget Actual Variance Budget Actual Variance

External Assistance

List of donors

0 0 0 0 0 0

           

Total 0 0 0 0 0 0

                         
 GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts - External Loan

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

Adjuste
d Adjusted

Actua Varianc Actua Varianc

Budget l e Budget l e

External Loan

List of lenders

0 0 0 0 0 0

           
Total External
Loan 0 0 0 0 0 0

                         

GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts – Expenditure

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

Adjusted Adjusted

PERSONNEL
SERVICES Budget Actual Difference Budget Actual Difference

Emoluments

Salaries to permanent staff 0 0 0 0 0 0

Salaries to military staff 0 0 0 0 0 0

Wages to contract staff 0 0 0 0 0 0

Wages to casual staff 0 0 0 0 0 0

Wages to external contract

staff 0 0 0 0 0 0

Miscellaneous payments to
staff 0 0 0 0 0 0

Total 0 0 0 0 0 0

Allowances/benefits

Allowances to permanent
staff 0 0 0 0 0 0

Allowances to military
staff 0 0 0 0 0 0

Allowances to contract
staff 0 0 0 0 0 0

Allowances to external
contract staff 0 0 0 0 0 0

Total 0 0 0 0 0 0

Pension contributions

Cont to permanent staff

pensions 0 0 0 0 0 0

Cont to military staff

pensions 0 0 0 0 0 0

Total 0 0 0 0 0 0
TOTAL PERSONNEL
SERVICES 0 0 0 0 0 0

GOODS AND
SERVICES

Goods and supplies

Uniforms, clothing,
bedding 0 0 0 0 0 0

Office supplies 0 0 0 0 0 0

Printing 0 0 0 0 0 0

Medical supplies 0 0 0 0 0 0

Educational supplies 0 0 0 0 0 0

Food 0 0 0 0 0 0
 GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts – Expenditure

For the year ended 7 July 2017

Ethiopian Birr '000 2017 2016

Adjusted Adjusted

Budget Actual Difference Budget Actual Difference

Fuel and lubricants 0 0 0 0 0 0

Other material and supplies 0 0 0 0 0 0

Miscellaneous equipment 0 0 0 0 0 0

Agriculture, forestry &

marine inputs 0 0 0 0 0 0

Veterinary supplies and

drugs 0 0 0 0 0 0

Research and development

supplies 0 0 0 0 0 0

Ammunition and ordinance 0 0 0 0 0 0

           

Total 0 0 0 0 0 0

Traveling & official

entertainment

Per diem 0 0 0 0 0 0

Transport fees 0 0 0 0 0 0
Official entertainment 0 0 0 0 0 0

Total 0 0 0 0 0 0

Maintenance and repair

services:

Vehicles and other

transport 0 0 0 0 0 0

Aircraft and boats 0 0 0 0 0 0

Plant, machinery, and

equipment 0 0 0 0 0 0

Buildings, furniture and

fixtures 0 0 0 0 0 0

Infrastructure 0 0 0 0 0 0

Military equipment 0 0 0 0 0 0

Total 0 0 0 0 0 0
 GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts - Expenditure(Cont'd)

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

Adjusted Adjusted

Contracted services Budget Actual Difference Budget Actual Difference

Contracted professional
services 0 0 0 0 0 0

Rent 0 0 0 0 0 0

Advertising 0 0 0 0 0 0

Insurance 0 0 0 0 0 0

Freight 0 0 0 0 0 0

Fees and charges 0 0 0 0 0 0

Electricity charges 0 0 0 0 0 0

Telecommunication
charges 0 0 0 0 0 0

Water and other utilities 0 0 0 0 0 0

Total contracted services 0 0 0 0 0 0

Training services

Local training 0 0 0 0 0 0

External training 0 0 0 0 0 0
Total training services 0 0 0 0 0 0

Emergency & strategic

goods

Stocks of food 0 0 0 0 0 0

Stocks of fuel 0 0 0 0 0 0

Other stocks 0 0 0 0 0 0

           

Total stocks 0 0 0 0 0 0

TOTAL GOODS AND

SERVICES 0 0 0 0 0 0
 GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts - Expenditure(Cont'd)

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

Adjusted Adjusted

Fixed Assets And

Construction Budget Actual Difference Budget Actual Difference

Purchase of Fixed Assets

Vehicles & other vehicular

transport 0 0 0 0 0 0

Aircraft, boats, etc. 0 0 0 0 0 0

Plant, machinery and

equipment 0 0 0 0 0 0

Buildings, furnishings and

fixtures 0 0 0 0 0 0

Livestock and transport

animals 0 0 0 0 0 0

Military equipment 0 0 0 0 0 0

           

Total 0 0 0 0 0 0

Construction

Pre-construction activities 0 0 0 0 0 0

Construction of buildings-
residential 0 0 0 0 0 0
Const. of building-non-
residential 0 0 0 0 0 0

Construction of
infrastructure 0 0 0 0 0 0

Construction for military

purposes 0 0 0 0 0 0

Total 0 0 0 0 0 0

Total Fixed Assets &

Construction 0 0 0 0 0 0

SUBSIDIES 0 0 0 0 0 0

FINANCE COSTS

Interest & bank charges –

ext. debt 0 0 0 0 0 0

Interest & bank charges –

dom. debt 0 0 0 0 0 0

           

TOTAL 0 0 0 0 0 0
 GOVERNMENT OF ETHIOPIA

Statement of Comparison of Budget and Actual Amounts - Expenditure (Cont'd)

For the year ended 7 July 2017

Ethiopian Birr '000

2017 2016

Adjusted Adjusted

OTHER EXPENSES Budget Actual Difference Budget Actual Difference

Principal debt payments

Payment – principal of
external debt 0 0 0 0 0 0

Payment - principal of
domestic debt 0 0 0 0 0 0

Total 0 0 0 0 0 0

Pension payments

Pension payment to
permanent staff 0 0 0 0 0 0

Pension payment to
military staff 0 0 0 0 0 0

Total 0 0 0 0 0 0

Grants & Cont. to

institutions 0 0 0 0 0 0

Government investment 0 0 0 0 0 0
Cont. to international
organizations 0 0 0 0 0 0

Contingency 0 0 0 0 0 0

Comp. to individuals and

institutions 0 0 0 0 0 0

Grants and gratuities to

individuals 0 0 0 0 0 0

Contributions to sinking
funds 0 0 0 0 0 0

Miscellaneous payments 0 0 0 0 0 0

Total Other Expenses 0 0 0 0 0 0

TOTAL EXPENSES 0 0 0 0 0 0
 GOVERNMENT OF ETHIOPIA

Summary Statement of Expenditure

For the year ended 7 July 2017

Ethiopian Birr ‘000

Particulars Recurrent Capital Subsidies Total

Expenditure Expenditure

Administrative & General Service: 100

series

Organs of State

Justice and Security

National Defense

General Services

Others:

Economic Services: 200 series

Agriculture & Rural Development

Water Resources

Trade and Industry

Mines and Energy

Transport and Communication

Construction

Others:
Social Services: 300 series

Education

Information and Communication

Culture and Sport

Health

Labor and Social Affairs

Prevention and Rehabilitation

Others:

Other Expenditures: 400 series

Transfers

Subsidies to regions

Debt

Contingencies and Bank Charges

Miscellaneous

Others:

Grand Total
 Summary

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:
 Statement of Financial Position
 Statement of Financial performance
 Statement of Changes in Net Asset/Equity
 Cash flow statement
 Accounting Policies and Notes to Financial Statements
 Statement of Comparison of Budget and Actual Amount-Domestic Revenue
 Statement of Comparison of Budget and Actual Amount-External Assistance
 Statement of Comparison of Budget and Actual Amount-Expenditures
 Comparison of Original and Adjusted Budget and Actual Amounts
 Statement of Expenditures by Functional Classification
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.
Annual Reports are mainly prepared for audit purpose. Annual reports are not separate
reports from the frequent Monthly report (FMRs) that will be prepared periodically (at lease
six-monthly). Rather they are similar except that the periodic FMRs shall be consolidated to
give the annual reports. To facilitate consolidation and to reduce degree of error in compiling
the annual accounts, the periodic reports shall be prepared for periods that start on July 8
(Hamle 1) of the year and ends July 7 (Sene 30) of the next year. If, for example, FMRs are
prepared quarterly, the four quarter of the year will be: July 8 – October 7; October 8 –
January 7; January 8 – April 7; and April 8 – July 7.

 The annual report will then become the consolidated report of the four quarters. FMRs
may not be introduced as a disbursement mechanism during the initial period of the
project implementation. For the annual accounts purpose however, the two financial
reports, Statement of Receipts and Payments and Use of Funds by Sub Program, will
be prepared starting from year one. Whenever there are figures that need additional
explanations, notes to the accounts shall be prepared. The notes to the accounts shall
also be used to give brief information about the nature of the project, the accounting
policies followed in the preparation of the financial statements and any additional
information relevant for the reader of the financial statements

Chapter 6: FGE Financial Management

 6.1. Introduction

6.2. Objectives of Public Financial Management

6.3. Legal Framework of Public Financial management

6.4. Federal Audit

Summary

Introduction

Dear learner, now have reached to final chapter of the module. It basically deals about
Introduction to Public financial management, Objectives of Public Financial Management,
Legal Framework of Public Financial management and Federal Audit

Objectives: After completion of this chapter you will be able to:

 Define public financial management

 Understand legal framework of public financial management in Ethiopi

 Describe the role of Federal Audit

6.1. Introduction to Public Financial Management
Public Financial Management (PFM) is concerned with aspects of resource mobilization and
expenditure management in the public sector. Since the private sector lacks the moral
sentiment and incentives of a responsible government to provide for various segments of the
economy, including the underprivileged, the public sector's role is significant. Expenditure on
public services accounts for more than one third of GDP in most countries, hence interest and
expectations of these services are high and management of public funds needs to be able to
withstand scrutiny from all quarters.
6.2. Objectives of public financial management:
In a business enterprise, effective management of finances aids the achievement of business
objectives. Similarly, sound public financial management is critical to the achievement of the
aims of the public sector through its role in improving the quality of public service outcomes;
operational and strategic decision-making; long term sustainability of public services;
building public trust in the performance of the sector; and ensuring the efficient and effective
use of public funds. Optimal public financial management would additionally display
flexibility that allows the targeted sectors to adjust easily and in the desired manner with the
public sector induced changes.
The government has identified four key objectives that effective public financial management
should cover:
1. Aggregate financial management:
A state normally mobilizes its revenue from natural resources under its control, collection
of taxes from the public, borrowings, establishment or sale and privatization of state
owned corporations. These resources are then allocated to various public departments in
the annual budget according to the priorities that have been identified and agreed upon by
the different stakeholders. Public financial management is not only crucial in meeting
fiscal aims, monitoring progress against targets and effective utilization of resources, but
a sound system can aid the government in setting future priorities and ensuring fiscal
sustainability.

2. Operational management
Sound financial management has a direct impact on short and long-term decision-making,
performance measurement, strategic planning and management of public services. Some
operational aspects that are directly affected through financial management are described
as follows.
A) Asset Acquisition & Disposal Financing capital assets are some of the key decisions
in the management of financial resources as they involve significant outflow of
resources. In an efficient financial management system, alternative options are
explored to finance capital assets in such a way that liquidity is maintained in the
successful pursuit of long term objectives. A good governance structure consists of a
system of authorizations requiring consent from all the stake holders (or their
representatives) before execution of material contracts.
B) Treasury Management managing financial resources with the objective of maximizing
its value involves sufficient risks. In public finance, sound treasury management
balances the value maximization objective of the government with the need to
maintain liquidity for the discharge of institutional liabilities. As public funds are at
stake, preferred investment opportunities are typically those which are medium to low
risk in nature.
C) Review and Performance Evaluation Performance evaluation is a critical process for
identifying and understanding the mistakes of the past, so as to formulate and
implement insightful strategies in the future. For productive performance evaluation,
performance targets and appraisal methods should be decided inclusively and by
consensus within stakeholders to facilitate understanding, monitoring and evaluation
of targets and to encourage ownership of shared goals and outcomes. In the public
sector, where public services are often provided in partnership with other public,
private or third sector entities or where investment by one sector of public services
may trigger or cause improvements in the outcomes of another (for e.g. an effective
federal vaccination campaign in decreased hospital admissions in an individual
district / state without any deployment of resources at local level), performance
evaluation of individual public entities becomes all the more challenging. Insightful
performance evaluations may lead to surprising discoveries and revolutionary
solutions. As an example, in order to optimize the use of limited public funds,
governments can benefit by considering automation and re engineering of processes
and by phasing out activities that do not add value.
D) Reporting to stakeholders An important aspect of financial management, stewardship
and the mechanism by which entities meet their financial accountability obligations, is
the preparation and publication of annual audited financial statements in entities’
annual reports. The purpose of financial statements is to present a true and fair view
of an entity’s financial performance, position and cash flows. As such, they are an
important means of demonstrating how the public sector, both at individual entity and
at government level, discharges its financial management responsibilities. Although,
both cash and accruals basis accounting is being employed by different countries
around the world, in the long term the accruals basis of accounting is preferable to
account for public funds as it increases transparency and accountability. It is believed
that the timely finalization of an entity's financial statements, accompanied by an
unmodified audit opinion, is an important indicator of the effectiveness of an entity’s
financial management performance. Sound financial management fosters confidence
that the entity is using public funds efficiently to provide value for money. The
methods of reporting for public services are continually under debate due to the
diverse nature of services provided by the public sector, overlap between services
provided by different public sector organizations and the presence of multiple
stakeholders. Many believe that since the aim of public entities is to provide services
 and not to make profits, financial statements can only give limited information about
their performance. Innovative methods of reporting (including narrative reporting,
scorecards etc.) are being considered to satisfy such diverse audiences and effectively
portray public sector performance.
3. Good Governance
Good governance in public services is defined as ensuring the organization is doing the right
things, in the right way, for the right people, in a timely, inclusive, open, honest and
accountable manner. Good governance assigns the decision making structure to people that
can be relied upon for the effective discharge of their responsibility, and this would only be
possible when persons with the right set of technical skills and proven capabilities for
managing their role have been employed. Decision making provides an opportunity for
choosing between available alternatives; hence if an efficient governance structure is
established then one can expect that the chosen alternatives would maximize the desired
outcomes. Knowledge of the constitutional environment within which a country operates is
crucial to understanding the accountability structures within the public sector. In most
jurisdictions/countries, the overall accountability of government organizations to the public
is through parliaments or democratically elected representatives. A good public financial
management system supports this by providing information which is understandable,
accessible and clear and through parliamentary scrutiny of the Government’s performance.
Sound public financial management is inextricably linked with anti-fraud and corruption
cultures. An independent internal audit function within a public entity has an integral role to
play towards its good governance. It is important that control structures are in place to
ascertain whether the allocated financial resources are being utilized for the service of
desired outcomes. The public and other stakeholders increasingly expect public entities to
bring about improvements in their financial discipline and internal control environments in
order to minimize the possibility of fraud and malpractices through improved governance
structures.
4. Fiduciary risk management
Flexible and intuitive fiduciary risk management is required to mitigate anticipated and
unanticipated risks that public entities face while pursuing their objectives. Ongoing
monitoring of progress versus goals aids the timely correction of errors and identification of
problem areas and future risks. Public audit from an independent external third party is one
of the ways through which the risks that may deter the achievement of desired objectives can
 be addressed. Public audit is the examination of the records and reports of an enterprise or
governmental department by experts or persons other than those responsible for their
preparation. Although every transaction cannot be verified by an independent authority,
external audits can nonetheless provide reasonable assurance about the governance and
discharge of the financial management responsibility by the organization and that it
represents value for money. It can also highlight any shortcomings for management action.
6.3. Legal Framework of Public financial Management
After a long history of highly centralized government, Ethiopia is now a federal state that has
also embraced wide-scale decentralization below regional government level. Thus there are a
number of relationships that need to be taken account of when mapping the fiscal framework:
relations between federal government and the regions (of which there are 9, plus two
municipalities that have region status), between each region and the districts (or Weredas)
below it (which number in excess of 600), and the relationship between Weredas and village
councils (or kebeles). Whilst the (political governance) issues around federalism and
decentralization are distinct, they contribute two important facets to the fiscal architecture.
The 1995 constitution sets out the main issues for decentralization. In terms of expenditure
assignment, Federal Government looks after issues of state and certain sector issues best
handled at this level (e.g. food security, transport policy). Regional governments are
responsible for the implementation of socio-economic development policy, policing of
regional states, Regional water resource development and Standard setting for primary
service delivery. Weredas are responsible for delivery of primary services. The principle
transfer mechanism between Federal Government and Regions is the General Purpose grant,
or the Block Grant. The intention behind this is to move resources down to lower levels of
government, whilst not compromising the abilities these tiers to make their own spending
decisions. Funds are untied. Funds are allocated according to a transfer formula, which is
designed to address efficiency and equity in the allocation. Current formula methodology
aims at ensuring horizontal fiscal equalization, meaning that as a guiding principle each
region should be given resources to provide average or standard public services, taking into
account average levels of efficiency and average efforts to raise revenue from its own
sources. Currently these formulae are being reviewed, and more transparent systems (based in
part on performance) will soon be introduced.
Below this, there is also a Regional Grant system (or regional block grant), again using a
grant formula system (closely replicating the Federal Block grant system) that provides a
block grant to weredas. The basic objective of this is to empower wereda level and grass root
populations to decide on development priories and expenditure needed to move these
forward. In theory the system affords a great deal of budgetary autonomy at both region and
wereda level. However, in reality severe resource constraints mean that weredas have little
discretion, as all available funding goes on establishment costs.

Each region has its own legal and regulatory framework that resembles the framework at
federal level. This includes, for example, arrangements for external audit (through Regional
Auditors General rather than the Federal Auditor General), procurement and revenue rising.
The Constitution of 1995 assigns different forms of taxation to different levels of
Government. Those taxes that are highly progressive, redistributive and important for
economic stabilization are assigned to Federal Government, whilst taxes that are levied on
what is termed ―relatively immobile assets‖ are assigned to lower levels of Government. In
addition to this, weredas are assigned a share of personal income tax income incurred within
their boundaries (shared with regional government), agricultural income, rural land use fees,
rental income tax and licences or fees for services rendered within districts.
One idiosyncrasy of the current structure is that staffing within regions is the same across
weredas no matter how big the wereda is (in terms of either land area or population). This
places particular strains on smaller weredas.
6.4. Federal Audit

This section elaborates the different types of audit to be conducted on Governmental

organization or budgetary institutions.
These are internal audit, external audit (including interim and final audit), commodity audit
and Procurement audit. According to the Ethiopian Constitution, the Office of Federal
Auditor General (OFAG) is responsible for carrying out the audit of all the financial
transactions of the Federal Government and subsidies to the Regions. Each region has
regional Auditor General responsible for auditing financial transactions in the region. The
OFAG may delegate much of its responsibility of auditing the budgetary institutions, to an
independent external auditor to carry out the audit of donor-financed projects. Regarding to
internal audits, MoFEC is responsible for the application of internal audits throughout all
public bodies.
6.4.1. Internal Audit
The Financial Regulations of the Council of Ministers (No 17/1997) and Article 68 of the
Proclamation on Financial Administration (No. 57/1996) establish the basis for internal audit
and internal control of the Government of Ethiopia. According to the regulation, MoFEC is
responsible among others, to develop and maintain appropriate standards of work and
conduct for application of internal audit functions throughout all public bodies. The same
regulation states that public bodies at all levels are responsible to ensure that the internal
audit system is appropriately staffed with trained and qualified manpower and that internal
audits are carried out efficiently, effectively and economically.

Responsibility of Head of Public Body: The heads of public body at all levels are responsible
to ensure that the appropriate numbers of internal auditors with the required qualifications are
staffed and that PSNP activities are part of the annual audit plan and that the plan is executed
accordingly.
Responsibility of Internal Audit:
The Internal Audit is responsible for an independent, objective assurance and consulting
activity designed to add value and improve the PSNP operations. It helps the public body
accomplish its objectives by bringing a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management, control and governance processes
6.4.2. Scope of Work for Internal Audit
Internal audit should fulfil its duty by systematic review and evaluation of risk management,
control and governance which comprises the policies, procedures and operations in place to:
 Monitor the achievement of the PSNP’s objectives;
 Identify, asses and manage the risks in achieving the PSNP’s objectives;
 Ensure the economical, effective and efficient use of resources;
 Ensure compliance with established policies (including behavioural and ethical
expectations), procedures, laws and regulations;
 Safeguard the Program’s assets and interests from losses of all kinds, including those
arising from fraud, irregularity or corruption;
 Ensure the integrity and reliability of financial reports.
 Ensure that adequate internal controls are in place.
Internal audit should devote particular attention to any aspects of the risk management,
control and governance affected by material changes to the Program’s risk environment. The
following areas are among the priority concern in the PSNP program
 Financial transaction audit, including cash audit
 Budget executions
  Procurement audit
 Commodity audit
 Payroll audit
 Performance audit on cash transfer cycle to the scope of their respective public
bodies including follow-up of cash and food transfer in, transfer out,
 Withdrawal and follow-up from bank, attendance processing, payroll payments and
reporting.
Independence: Internal audit should be sufficiently independent of the activities, which it
audits to enable auditors to perform their duties in a manner, which facilitates impartial and
effective professional judgments and recommendations. It should have no executive
responsibilities in any of PSNP program
6.4.3. Organizational Independence
Internal audit should report directly to the relevant Head of the Public Body and Audit
Committee of the Public Body. Internal Auditor at Woreda level will report to Woreda
Administrator and Audit committee established at Woreda level (if any). A copy of annual
internal audit report, which will be addressed to the head of the public body, should be
submitted to the MoFEC for follow up on reported audit findings and recommendations.
Their Audit Committee should advise the Heads of the Public Bodies on the discharge of
their responsibilities in respect of internal audit. The internal Auditor or internal audit unit
should also issue copy of the audit report to the relevant Food Security Task Force.
The Heads of Public Bodies should make appropriate arrangements for the routine
supervision and management of the budget and resources of internal audit (including staff
appraisal arrangements) without prejudice to the direct accountability of internal audit to the
Head of Public Body. The internal audit activity should be free from interference in
determining the scope of internal auditing, performing work, and communicating results.
6.4.4. Independence of Individual Auditors

Individual auditors should have an impartial, unbiased attitude, characterized by integrity and
an objective approach to work, and should avoid conflicts of interest.
They should not allow external factors to compromise their professional judgment. Internal
auditors should possess the knowledge, skills, and other competencies needed to perform
their individual responsibilities.
6.4.5. Relationship with External Auditors
 Internal audit should seek to meet regularly with the external auditor to consult on audit
plans, discuss matters of mutual interest, discuss common understanding of audit techniques,
methods and terminology and seek opportunities to rely on their work where appropriate,
provided this does not prejudice internal audit’s independence.
The internal auditors need to plan and accomplish internal audit so that they could have prior
findings on the following types of audits so that they can share to external auditors:
 Interim Audit
 Annual Final Audit
 Commodity audit
 Procurement audit
In any case of conflict with the External Auditor, the Head of Internal Audit will consult with
or refer the matter to the Head of Public Body.
6.4.6. Relationship with other internal auditors
Internal Audit at the level of Woreda is on a pool basis. As a result the internal auditor has
access to all sector offices within the Woreda. However, if there is a need to communicate
with next levels of administration bodies like the regional and federal offices, internal
auditors may collaborate.
At regional and Federal level, internal auditors are available in each bureaus, ministries and
directorates. As PSNP program engages different bureaus and ministries at these levels of
administration, it is essential also to work with other internal auditors to get the better
understanding of the relationships in terms of resource and information flows.
Where Internal Auditors need to work with Internal Auditors of another organization, the
roles and responsibilities of each party should be agreed and endorsed by the Head of each
Public Body. Whenever possible agreement to joint working or to placing professional
reliance on work carried out by one party should be sought

6.4.7. Qualification of Internal Auditors:

Ministry of Finance and Economic Development defines the minimum level of skill,
knowledge and experience required of an internal auditor and the Head of Internal Audit. The
Head of Internal Audit should be qualified and have a wide experience of management.
Internal Auditors need to have a minimum of 3 years experience in auditing or accounting.
MoFEC is responsible for ensuring that internal auditors have access to the full range of
knowledge, skills, qualifications and experience to meet the unit’s audit objectives and
standards. In addition to internal audit skills, MoFEC should specify any other professional
skills, which may be needed by the internal audit unit. It should also make provision for
appropriate administrative support. MoFEC is also responsible to make sure that internal
auditors are well acquainted with PSNP program through provision of training on PSNP
financial management systems and availing of essential program documentations and copies
of audit reports.
The Ministry of Finance and Economic Development should set criteria for the appointment
of the more senior staff in the internal audit unit based on training and experience of the
Internal Auditor.
6.4.8. Review of Audit Assignments:
Internal reviews should be performed periodically by experienced members of the internal
auditing staff to appraise the quality of the audit assignment performed in relation to PSNP
program in accordance with the Internal Audit manual. MoFEC should coordinate an external
review of the internal auditing department by persons who are independent of the public body
to appraise the quality of the audit assignment carried out in PSNP program. Experienced
internal auditor of other public body may carry out external review as a peer-review in
accordance with guidelines stated in the
6.4.9. Internal Audit Manual.
Follow-up on Reported Audit Findings and Recommendations: The Internal Auditor should
establish a time frame within which management's response (including the relevant Food
Security Task Force) to the audit findings is required and evaluate the response received. The
responses should include sufficient information for the Internal Auditor to evaluate the
adequacy and timeliness of corrective action. The Internal Auditor should receive periodic
updates from management in order to evaluate the status of management's efforts to correct
previously reported conditions
External Audit – Audit of Project Financial Statements: MOFEC will have the project
financial statements audited by the Office of the Federal Auditor General (OFAG) or an
auditor assigned by OFAG. Should OFAG decide to assign an independent audit firm to
handle the financial audit, efforts should be made to ensure that the auditors are recruited or
appointed within two months of effectiveness.
6.4.10. Objective of the External Audit
The objectives of the audit of the Project Financial Statements (PFSs) is to enable the auditor
to express a professional opinion(s) on the financial position of the project at the end of the
fiscal year, and on funds received and expenditures incurred for the relevant accounting
period. The accounting system, books and records provide the basis for preparation of the
PFSs by the project implementing agency and are established to reflect the financial
transactions in respect of the project.
6.4.11. Scope of the Audit
The auditor is responsible for forming and expressing opinion on the financial statements.
The audited financial statement will include all sources of funds for the program, including
other development partners and the Government.
The auditor will prepare a work plan to ensure adequate coverage of the various institutions
that receive project funds and cover all the major risk areas. The audit of the project will be
carried out in accordance with International Standards on Auditing (ISA) promulgated by the
International Federation of Accountants (IFAC), and to relevant World Bank guidelines, and
will include such tests and auditing procedures as the auditor will consider necessary under
the circumstances. In complying with International Standards on Auditing, the auditor is
expected to pay particular attention to fraud and corruption, laws and regulations, governance
and risks
.
The audit report should include follow up on the audit recommendations noted by audit
reports at different ministries and sector bureaus. In addition to the audit of the Project
Financial Statements, the auditor is required to verify IFRs used as a basis for the submission
of loan withdrawal applications to the World Bank. The auditor will apply such tests and
auditing procedures as considered necessary under the circumstances.
6.4.12. Preparation of Annual Financial Statements
As explained in the financial report section of this manual, the responsibility for the
preparation of financial statements of the program including adequate disclosure is that of
MOFEC.
Interim Audits: The purpose of interim audit is primarily to ensure that the funds allocated for
PSNP are used for the purposes for which they are intended in accordance with established
rules and regulations. The audits are not a separate exercise and thus are not only an end on
their own, but are intended to facilitate the process of the annual financial audit, and also
provide early information to project management to enable them to timely take corrective
actions and to assure all parties (including donors) that funds are utilized for the purposes
intended.
The Interim Audit covers six months ending on January 7, and reports are submitted by
MOFEC to Development Partners within 90 days (April 7).
The auditor will carry out interim audits semi annually following the audit plan that is
designed at planning stage of the audit. The auditor would select representative samples of
implementing agencies in different geographical regions to conduct the audit.
When the PFS are submitted to the auditor, in addition to other relevant audit activities/
works, the auditor would draw on the results of the interim audit to form an opinion on the
Project Financial Statements.
Since the Interim audit is part and parcel of the final year-end audit, the overall scope of the
work (of the interim audit) is within the “Scope of the Audit” described above.
The Interim Audit focuses on identifying and managing any risks to achieving the PSNP’s
objectives and ensuring that systems are in place and function to allow compliance with
established policies and procedures and to ensure efficient and effective use of programme
resources. The Interim Audit covers six months ending on January 7, and reports are
submitted by MOFEC to Development Partners within 90 days (April 7). The Interim Audit
is not a separate exercise; instead, it is part of the annual audit process facilitating timely
completion and coverage of programme implementation.
6.4.13. Commodity Audits
The scope and Objectives of Commodity Audit:As the Commodity Flow and Status Report is
prepared by inputs from agencies including USAID and WFP as well as the government’s
own records, the scope of the audit covers these and related institutions that channel the
commodities to the final beneficiaries.
The audit will be conducted to ascertain the fairness of the commodity flow and status report
and at hand balances, and to review internal control and identify weakness in the system and
to ensure that the commodities are finally distributed to the intended beneficiaries and to
assess the overall commodity flow process as well as to ensure that the reporting system is
satisfactory. Detail activities are included in the Terms of Reference for commodity audit
Relevant reports that should be audited include the quarterly commodity flow and status
report.The Auditor is expected to produce two reports: Audited Commodity Flow and Status
Report including an opinion on the fairness of the states of affairs of the project in terms of
commodity movement and respective balances and; a detailed report of the audit work.
6.4.14. Timing of Audit Reports
Financial Audit: MOFEC shall submit quarterly IFRs to the World Bank and other DPs 60
days after the end of the quarter period. In addition, reports on the findings noted during the
semi-annual interim audit will be submitted to the World Bank and other DPs within 90 days
of the end of the quarter.
Audit Report on the Interim Audit – The auditor shall submit interim audit reports (summary
of Findings) to MOFECand Development partners (DPs) with recommendations for
improvements. It will be submitted, on semi-annual basis, to IDA and DPs within 90 days.
MOFEC shall submit audited program accounts to the World Bank and other DPssix months
after the end of each fiscal year, which ends on July 7.
The auditor will submit the audit report in line with the revised TOR and content satisfactory
to the World Bank and other DPs within six months of the end of the Ethiopian Fiscal Year.
MOA will submit annual commodity audit report within 6 months of the end of the fiscal
year ending 7 July of each year.
Procurement Audit: An independent procurement review of the project procurements will be
conducted annually covering 40 of the woredas and at least 30 percent of the contracts
subject to post review.
Summary

 Public Financial Management (PFM) is concerned with aspects of resource

mobilization and expenditure management in the public sector
 Effective public financial management should cover Aggregate financial
management, Operational management , Good Governance and Fiduciary risk
management
 Ethiopian Public Financial Management is based on 1/1995 0f Ethiopian
Constitutions. Each region has its own legal and regulatory framework that resembles the
framework at federal level. This includes, for example, arrangements for external audit
(through Regional Auditors General rather than the Federal Auditor General), procurement
and revenue rising. The Constitution of 1995 assigns different forms of taxation to different
levels of Government.
 According to the Ethiopian Constitution, the Office of Federal Auditor General
(OFAG) is responsible for carrying out the audit of all the financial transactions of the
Federal Government and subsidies to the Regions. Each region has regional Auditor
General responsible for auditing financial transactions in the region. The OFAG may
delegate much of its responsibility of auditing the budgetary institutions, to an
independent external auditor to carry out the audit of donor-financed projects.
Regarding to internal audits, MoFEC is responsible for the application of internal
audits throughout all public bodies.
References

 Financial Management Manual February, 2016

 Manual 3 -Federal Accounting System

 Manual 3 FGE Accounting System VOLUME I Version 1.3 [FINAL

DRAFT] Project Report: A-166 May 24, 2007
 Finacial Proclamation No.57,1996 and financial Regulation No.1996