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Sailendra Pattanayak, FAD International Monetary Fund

Key Elements of an Accounting Framework


Accounting basis cash or accrual
Budget classification and chart of accounts General Ledger and subsidiary records Accounting process (manual or computerized) and outputs Accounting policies Reporting entity Financial statements/reports
Skilled personnel is important resource to implement the above

Accounting Framework in a Typical LIC Main Issues


Manual book keeping
No ledger-based double entry system Lack of a comprehensive chart of accounts (or a detailed

coding system with various segments) Substantial delay in annual accounts preparation Lack of clarity on the reporting entity concept for consolidation of annual accounts Lack of clear methodology and accounting policies/standards for financial statements/reports

Cash Basis Accounting


Transactions are recognized only when the related

cash receipts and payments occur

Accrual Basis Accounting


Flows are recorded at the time economic values are created,

transformed, exchanged, transferred, or extinguished GFSM 2001


A basis of accounting under which transactions and other events are

recognized when they occur (and not only when cash or its equivalent is received or paid) - IFAC Public Sector Committee

Basis of Recording Government Financial Operations


Cash based accounts:
Revenue / expenditure transactions are recognized only when cash

flow results Ignores liabilities until due for payment Ignores non-cash operations altering stock of government assets and/or liabilities Needs to be supplemented by memoranda items to bring to light economic flows escaping the accounts Accrual based accounts: Economic flows are recorded at the time economic value is created, transformed, exchanged, transferred, or extinguished. All economic flows (not just cash flows) are recorded. At the heart of accrual based accounts are the criteria adopted for recognizing an economic flow. Imprecise and non-transparent recognition criteria will compromise the integrity of accrual based accounts
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Basis of Recording Government Financial Operations


Modified Accrual based Accounts:
The term modified accrual basis, no longer defined as a formal, distinct

accounting basis, is generally used to imply relaxed standards for recognition of economic flows.
Modified accrual basis is commonly employed:

To enhance cash based accounting by accounting for certain operations like expenditure commitments before cash flow results To provide a migration path from cash-based to accrual based accounting systems

Modified Cash based Accounts:


This term is used to describe accounting systems under which cash-

based accounts are kept open for some days/months beyond the close of the year to take on board transactions in pipeline at the time of year-end
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Accounts Keeping Process and Outputs


STEPS Collect Source Documents -- Vouchers -- Bank Statements -- Transfer entrees Record in Journals RECORDS Daily bank statements Register of checks Payment vouchers Revenue receipts Transfer entrees General / Special Journals General Ledger Subsidiary Ledgers Trial Balance

Post General Ledger

Post Subsidiary Ledgers

Prepare Trial Balance

Prepare Correction Entrees


Prepare Financial Statements Consolidated Financial Statements
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Government Financial Statements


Annual Government Financial Statements
Final Government accounts duly certified by the independent

Supreme Audit Institution (SAI), together with a comprehensive audit report on the regularity, integrity, and propriety of government fiscal operations

Government accounts should, at the minimum consist of :

Under cash based accounting:

Statement on sources, allocations, and use of cash resources Finance Accounts Statement on approved budget estimates and actuals Budget Execution Accounts/Appropriation Accounts Statement of Government Operations Statement of Other Economic Flows Balance sheet Statement of Sources and Uses of Cash Budget Execution/Appropriation Accounts

Under accrual based accounting:


Chart of Accounts
Countries do not always have a chart of accounts That means that they do not have a proper general

ledger system Occasionally, some transactions are recorded in one system, and other transactions are recorded in another system Without a COA and ledger system, the accounting framework can be considered to be lacking in basic accounting discipline and controls The reliability and accuracy of the accounting system can be in doubt
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Chart Of Accounts what it is


Logical framework for recording and reporting

financial information Modern systems include budget classification fully in COA COA can accommodate progressive move to accrual accounting Asset and liability accounts in addition to revenue and expense accounts The Chart of Accounts needs to meet the business requirement of the Government COA forms core of the information to be generated and tracked in a GFMIS

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Budget Classification and Chart of Accounts


BC = revenue, expenditure & borrowings COA = BC + asset, liability and equity accounts

COA also includes any internal management

classification such as departments, cost centers, regions. GFSM 2001 should be followed when developing budget classification Uniform budget classification system, at all levels of government (e.g. Brazil, India) helps in general government reporting.

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Budget Classifications
GFSM requires Economic and Functional

Classifications
Salary, goods and services, grants, subsidies are

economic classifications Education, health, defense, are functions

Other Classifications Countries usually also have administrative classification ministries and departments Other classifications may include: programs, fund, geographic location, etc.
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Account Type
Revenue and expense type

Asset, liability type


Net-worth/Equity type Revenue and expense accounts are netted off at year-

end and the surplus/deficit is transferred to Networth/equity Asset liability account balances are carried forward to next year

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Year-end Processes
First step is to extract a trial balance (TB) Modern computerized systems produce TB automatically A trial balance is a list of all account balances in the general

ledger Once the TB is obtained, the balances should be reviewed to ensure that there are no obvious mistakes, etc. If double-entry has been followed, the trial balance must be in balance, i.e., total debits must equal total credits All revenue and expense type accounts are then written off to the net-worth/equity accounts, etc. The remaining account balances relate to assets and liabilities and constitute the closing balance sheet for this year
This is also the opening balance sheet for next year

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Cash Basis: Cash Flow Statement Part 1


Cash flows from operating activities
Receipts
Taxes ... ... ... Social contributions ... ... ... Grants ... ... ... Other revenues... ... ...

Total Receipts
Continued...
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Cash Basis: Cash Flow Statement Part 1


Cash flows from operating activities
Payments
Wages and allowances ... ... ... Goods and Services ... ... ... Interest payments Subsidies ... ... ... Grants Social benefits ... ... ... Other expenditures ... ... ...

Total Payments
Net cash flows from operating activities
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Cash Basis: Cash Flow Statement Part 2


Cash flows from investment activities
Acquisition of fixed assets Buildings and structures ... Inventories Strategic stocks ... Valuables Non-productive assets Land ... Less proceeds from sale of assets Net cash flows from investment activities
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Cash basis: Cash flow statement-Part 3


Cash flows from financing activities
Proceeds from domestic borrowing ... Proceeds from foreign borrowing ...

Less repayment of borrowing Net cash flows from financing activities

Net increase / decrease in cash


Opening cash balance Closing cash balance

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Accrual Basis - the Analytic Framework


Net operating balance = Revenue expense Net lending/borrowing = Net operating balance net

acquisition of non-financial assets Net worth =Asset- liability Closing net worth = Opening net worth + Net operating balance + other economic flows

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FLOWS TRANSACTIONS Revenue


minus

GFSM 2001 ANALYTIC FRAMEWORK

OPENING BALANCE SHEET

Expense
= NET OPERATING BALANCE

OTHER ECONOMIC FLOWS Holding Gains Other Changes in & Losses the Volume of Assets

minus

CLOSING BALANCE SHEET

Nonfinancial Assets

Nonfinancial Assets
= NET LENDING/ BORROWING

Nonfinancial Assets

Nonfinancial Assets

Nonfinancial Assets

Financial Assets

Financial Assets
cash other financial assets

Financial Assets

Financial Assets

Financial Assets

minus

Liabilities

Liabilities

Liabilities

Liabilities

Liabilities

Net Worth

Net Worth

Changes in Net Worth

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GFSM 2001 Statements


Statement of Government Operations
Statement of Sources and Uses of Cash Statement of Other Economic Flows Balance Sheet

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GFSM 2001 Analytical Balances


Statement of Government Operations shows the following

measures of government performance:


Net/gross operating balance Net lending/borrowing

Statement of Sources and Uses of Cash shows the following

measures of government performance:


Cash flows from operating activities Cash surplus/deficit Cash flows from financing activities other than cash Net change in the stock of cash

Statement of Other Economic Flows shows: Total change in net worth due to holding gains/ losses and other changes in volume of assets Balance Sheet shows: Net worth
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