Chapter one:

Introductions
Historical overview of Ethiopian Government Accounting System
 The Federal government of Ethiopia (FGE) accounting system has been revised at various
times and the revisions through time brought major changes in recording, summarizing and
reporting of the government financial information.
 The federal government decided that there was a need to revise the current accounting
process as an integral part of the civil service Reform. The civil service Task force, formed
in the prime minister’s office, began the revision process. Further study and implementation
responsibilities were given to the Accounts Reform Team established by the ministry of
finance and Economic Development (MOFED)
 The overall strategy of the civil service Reform for accounts is to mode from strictly cash
controls to on emphasis on management and accountability. The accounting system
described in this course is now the FGE accounting system.
Goals achieved by FGE Accounting System
As stated in the first volume of FGE Accounting system, Manual 3, The FGE accounting system
achieves three goals: budget control, cash control, and accountability.

Budget control
The ability of the accounting system to report expenditure consistent with budgetary principle
and including accounting for commitments in the system. A commitment is an amount of
budgeted funds that is reserved for a specific future expenditure. Any committed budgeted funds
are no longer available for future commitments. Commitments are made against the budget when
a purchase order is approved.
 Commitments are an intrinsic part of the expenditure planning and the budgetary control processes. It
is essential that Commitment controls are in place to: ensure compliance to Sections 32 and 46 of
the Financial Administration Act (FAA), which confirms the availability of funds before a contractual
arrangement is entered into; record the Commitment s or obligations into the System for
Accountability and Management (SAM).
A Commitment can be recognized at any of the following stages:
1. When goods or services are formally requisitioned internally, but no actual contractual
obligation is made;
2. When the actual contractual obligation is made; or
3. When there is a need to reserve funds to fulfill a future obligation, e.g. Grant or contribution
payments.
The most common example of a Commitment is contracting for goods or services. Once the
contract between the department and the supplier has been signed, there is a Commitment on the
part of the department to perform its part of the contract, which, is generally to pay the supplier.
The Commitment exists until the supplier has performed their part of the contract, (i.e., delivered
goods or services of a specified nature and/or quality, etc). Once a department receives the goods
or services, the Commitment ceases to exist and an obligation or liability commences to pay the
supplier.

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 Government financial management is different from the private sector, particularly for budgets
and commitments. This is often called ‘Commitment’ or ‘Encumbrance’ accounting. Financial
Accounting relates to transactions that affect the General Ledger such as revenue, payroll and
purchasing.
Terminology: commitments are often termed “soft commitments” or “pre-encumbrances”. Obligations are often
termed “hard commitments” or “encumbrances”
Cash control
 Maintaining the balance of cash at bank and cash in safe in a general budget.
 Clarifying the responsibilities and duties of the cashier and the accountant for cash at bank
and cash in safe. The cashier handles cash in safe, while the accountant is assigned overall responsibility for cash in
safe and specific responsibility for the checkbook and cash at bank.
 Using on imprest system to control cash in safe. In an imprest system, the cash in safe is
periodically reimbursed, based on vouchers, for the exact amount necessary to restore the
original cash balance deposited in the bank intact.

The imprest system is an accounting system for paying out and subsequently replenishing petty cash. Petty cash
is a small reserve of cash kept on-site for incidental cash needs. The imprest system is designed to provide a
rudimentary manual method for tracking petty cash balances and how cash is being used.

 Applying double entry bookkeeping techniques in the accounting system. Double entry
bookkeeping creates a set of self balancing account ledgers (general ledger). Therefore a
running cash balance in the register ledger reflects the actual cash available.
 Employing a modified cash basis of accounting when accounting for transactions, the
modified cash basis of accounting allows the accounting system to recognize revenue and
expenditure consistent with the budgetary process.
Accountability
 Imploring a general ledger system. Each accounting unit maintains a general ledger for each
source of funding, so each unit maintains a balanced and continuous record of its
responsibilities and performance. A set of financial reports can be produced from any single
general ledger or from any combination of general ledgers.
 Creating the ability to record and report on any assets and liabilities using a cost method of
valuation. The FGE a accounting system included a simplified process for recording any
assets and liabilities in a set of registers and in a general ledger that is independent of
accounting for transactions using a modified cash basis of accounting.
 Establishing a system of financial reporting that produces two reports for use by government
and a statement of changes in cash position for use by interested parties.

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Chart of Accounts of FGE Accounting Systems
A chart of accounts is a system of coding used to identify and classify financial entities and
events. The current chart of accounts, described in the Budget Reform Manual incorporates
detailed codes for items of domestic revenue, external assistance, external loans, and items of
expenditure. This unit completes the FGE chart of accounts by adding detailed codes for
transfers, assets, liabilities, letters of credit and net assets/equity.
The classification of the chart of accounts is structured in a systematic manner and facilitates the
recording of transactions and the reporting of information in accordance with the budget.
The chart of accounts treats all detailed account codes as temporary accounts and permanent
accounts. Temporary accounts are accounts that begin each year with a zero balance.
Permanent accounts are detailed account codes whose balance at the end of a year becomes the
balance in the account at the beginning of the next year.
Revenue, expenditure and cash transfers are temporary account code categories. Account codes
in these categories are always treated as temporary accounts, and begin each year with a zero
balance.
Assets, liabilities and net asset/equity are permanent account code categories. Account codes in
these categories are always treated as permanent accounts, and begin each year with the account
balance as long as they had at the end of the previous year. In other words, these accounts are
not closed. Cost method can be deferred for later implementation.
Chart of Temporary Accounts
The Budget Reform Team under the Expenditure Management and Control Sub-Program of the
Civil Service Reform designed codes in the chart of accounts for detailed coding of:
 Items of domestic revenue(Various tax revenues, including value added tax, business tax,
consumption tax, land value added tax, tax on city maintenance and construction, resources
tax, tax on use of urban land, enterprise income tax, personal income tax, tariff, stamp tax on
security transactions, tax on purchase of motor vehicles, tax on agriculture and animal
husbandry and tax on occupancy of cultivated land, etc.,  Special revenues, including
revenues from the fee on sewage treatment, fee on urban water resources, fee for the
compensation of mineral resources and extra-charges for education, etc, Other revenues,
including revenue from interest, revenue from the repayment of capital construction loan,
revenue from capital construction projects, etc), external assistance and external loans
using code numbers 1000 through 3,999, and
 Transfers using code numbers 4000 through 4099.
 Items of expenditure using code numbers 6,000 through 6,999.
The Budget Manual created account codes for the FGE chart of accounts as follows:
 Items of domestic revenue using account codes 1000-1799,
 External assistance using account codes 2000-2999,
 External loans using account codes 3000-3999,
 Transfers using code numbers 4000 through 4099, and
 Items of expenditure using account code 6000-6999.
Assignment one (10%)
 By referring one of governmental organization operating in Nekemte town, Present the chart of
account for one of the above five classifications.
Chart of Permanent Accounts
The Accounts Reform Team under the Expenditure Management and control Sub-Program of the
Civil Service Reform designed codes for detailed coding of:
 Assets using code numbers 4100 through 4999.

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  Liabilities using code numbers 5000 through 5499.
 Letters of Credit using code numbers 5500 through 5599.
 Net Assets/Equity using code numbers 5600 through 5699.
Assets: As written by different scholars at different times, Assets are 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 FGE accounting system are: cash
and cash equivalents, receivables, goods in transit, stocks, fixed assets, loans receivable,
investments, liabilities, letters of credit, and net assets/equity.
Cash and cash equivalents: Cash is cash on hand and cash at bank. Cash equivalents are short-
term, highly liquid investments that are readily convertible to known amount of cash and which
are subject to an insignificant risk of change in value.
Receivables: receivables are amounts owed to (given to) a government unit by another
government unit, a person, or a non-government entity except public enterprises. Salary
advances to employees and advances to suppliers are two examples of receivables commonly
occurring in FGE transactions.
Goods in transit: Goods in transit are goods that are owned by the FGE but not yet in the FGE's
possession. Typically, these are goods that are purchased overseas using a letter of credit.
Stocks: Stocks are goods that are consumed in less than one year.
Fixed assets: Fixed assets are physical items that are expected to have a useful life of longer
than one year and have a certain minimum value.
Loans receivable: Loans receivable are amounts due from public enterprises over a period of
time exceeding one year.
Investments: Investments are FGE investments in public enterprises and private organizations
that are held for more than one year.
Liabilities: Liabilities are formally defined by the Institute of Public Sector Accounting
standards as "present obligations of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits or
service potential." Liabilities are better defined by example. The categories of liabilities in the
improved and expanded accounting system are:
 Payables. Payables are obligations to pay that are due in less than one year.
Examples of FGE payables are deposits, grace period payables, treasury bills, and
retention on contracts.
 Long-term debt. Long-term debt is an obligation to pay that is due in more than one
year.
Letters of Credit: A letter of credit represents a guarantee to pay suppliers with cash set aside in
bank account restricted for that purpose.
Net assets/equity: Net assets/equity is formally defined by the Institute of public sector
accounting standards as "the residual interest in the assets of the entity after deducting all its
liabilities." Net assets/equity is the balance remaining after liabilities are deducted from assets.
This balance represents the equity interest of Regional and Federal Governments.
Budgetary Institution (BI)
Budgetary Institutions are defined as those institutions that are fully or partially financed by
Government. The budget process assumes the appropriation of budgets. The appropriated budget
is the budget approved by the Council of people's Representatives (CPR). The appropriated
budget is broken down by:
 Recurrent and capital expenditure for the federal government, and
 Subsidy for each regional government
The federal government's portion of the appropriated budget is assigned to projects and sub-
agencies within PBs and broken down by sources of funding (domestic, assistance and loan).

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This is called the approved budget. The approved and appropriated budget is published in the
Negarit Gazeta.
A PB's entire approved budget is assigned to projects and sub-agencies under its immediate
administrative control. The budget of a PB (public bodies) is the total budget of its projects and
sub-agencies.
A project or sub-agency may allocate any portion of its approved budget to sub-projects or sub-
sub-agencies. The budget of a sub-project or sub-sub-agency is called an allocated budget. A
sub-project or sub-sub-agency for which a budget is allocated is always at a different location
from the project or sub-agency. A notification of any allocation is sent to MOFED.
Projects, sub-agencies, sub-projects, and sub-sub-agencies are defined and coded in the chart of
accounts. Any entity that receives an approved or allocated budget from a PB's approved budget
is called a Budgetary Institution (BI). Generally:
 PBs are ministries, authorities, and commissions.
 BIs are projects, sub-agencies, sub-projects, and sub-sub-agencies.
 BIs are administered by PBs.
 The entire approved budget of a PB is assigned to BIs.
The focus of budgetary control is on the BI. PB's budgetary compliance can be computed by
consolidating reports from all BIs included in its approved budget.
Accounting Unit
For cash management, another entity is created: the Bank Account (BA). The BA is not coded in
the chart of accounts and does not receive a budget. However, it is important for cash
Management and control. The FGE accounting system includes the BA in the accounting system.
A PB may administer many BIs and many BAs, or a PB may have only one BI and one BA.
Each BA:
 Is managed by an accountant.
 May: Have its own cashier,
 Share a cashier with other BAs, or
 Have no cashier associated with it (like foreign currency bank accounts)
 Handles cash flows:
 For one or more than one BI, and
 From one source of financing (domestic, assistance or loan).
 For more than one type of budget (capital/recurrent).
An accounting unit is the unit that initially captures and records transactions into the accounting
system. If a BA handles cash for only one BI (BI/BA), the accounting unit:
 Processes transactions for the BI/BA,
 Maintains registers for the BI/BA,
 Maintains a general ledger for the BI/BA.
 Maintains subsidiary ledgers for:
 Asset accounts.
 Liability accounts.
 Letters of credit.
 Prepares a monthly report for the BI/BA.
A complete set of accounts and general ledger is maintained for each BI by bank accounts,
because each source of funding is budgeted distinctly, and the cash from each source is
physically separated in distinct bank accounts.
Reporting Entity: A reporting entity is the entity that sends monthly reports to MOFED.
Although the accounting unit prepares monthly reports, every accounting unit may not send

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monthly reports directly to MOFED. The reporting entity may be the accounting unit or a higher
level of authority (perhaps a PB).
Whoever sends the reports to MOFED is the reporting entity. Therefore, the reporting entity is
not, necessarily, an accounting unit.
Cashier and Accountant
In the FGE accounting system of cash control, the cashier's function and the accountant's
function are distinct. Cash consists of currency and checks. The cashier's function is to
maintain and control cash in the safe. The accountant's function is to maintain and control
cash at the bank.
Only the cashier can receive currency and checks and make disbursements in currency. Daily,
the cashier should count cash on hand and reconcile ending cash on hand to the cash book.
The cash in safe is controlled by an imprest system. When cash is received as per the budget or
other sources, the cashier will:
 Issue a cash receipt,
 Segregate the cash received from cash available to disburse,
 Deposit the cash received intact in the bank as soon as practical, usually
daily, and
 Surrender copies of all cash receipts and a copy of the bank deposit slip to
the accountant.
In the imprest system, a balance is established for cash in safe. The accountant issues this
amount of cash to the cashier using a check. The replenishment should return the balance of cash
in safe to the established level.
The accountant's responsibility for cash is to maintain a record of the total cash position of the
entity, including cash at the bank and cash in the safe. The accountant records cash movements
that flow through the cashier and cash movements that flow directly through the bank. Direct
cash movements through the bank normally include bank transfers and charges, checks written,
and any other transactions that do not require cash handling by the cashier.
When a PB has more than one cashier, one cashier is designated as the main cashier. The other
cashiers are designated as assistant cashiers. Each PB is responsible for organizing assistant and
main cashiers. However, some general principles apply.
Assistant cashiers are responsible for:
 Collection of Cash
 Issuing deposit and/or receipt vouchers
 Making deposits at Bank
The main cashier is responsible for:
 Reconciling cash and vouchers for each assistant cashier
 Depositing cash in the bank
 Disbursing cash for the proper functioning of the PB
 Managing the petty cash
To accomplish these responsibilities, most PB s with multiple cashiers are organized as follows:
Each assistant cashier:
 Collects revenue and issues receipt vouchers
 May summarize receipt vouchers on Model 16
 Sends a copy of receipt Vouchers and Model 16 to accounts
 Sends cash to main cashier
 Receives Model 64 as receipt from main cashier
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The main cashier:
 Collects cash from cashiers
 Verifies cash with accounts
 Verifies the amount on receipt vouchers equals cash received
 Verifies amount for each revenue account
 Completes Model 64
 Gives the copy of Model 64 with the deposit slip to accounts
 Gives a copy of Model 64 to assistant cashiers
 Deposits cash in bank
 Attaches the deposit slip to Model 64
 Gives the copy of Model 64 with the deposit slip to accounts
The accountant:
 Receives receipt vouchers and Model 16 from assistant cashiers
 Verifies accounts and amounts on receipt vouchers
 Dispatch the documents to the main cashier
 Receives Model 64 with deposit slip attached from main cashier
 Records Model 64 in the transaction register and ledgers
1.2Public Bodies with Branch Bank Accounts
Some PBs establishes operations or branches in more than one location, and opens a bank
account at each branch. These branch bank accounts do not receive or send transfers directly to
MOFED.
The public Body uses Branch bank accounts for operations within the Public Body. They are
blocked at the end of the year. Some public Bodies maintain other types of bank accounts for
special purposes, such as deposits. These are not blocked at the end of the year and are not
considered branch bank accounts.
Depending on the capacity of the PB, accounting for the branch bank account can be handled in
one of the two ways:
o If there is sufficient capacity, each branch bank account can be treated as an accounting
unit.
o If there is no sufficient capacity, each branch bank account can be treated as a safe.
Branch Bank Account treated as Accounting Unit
If the branch bank account is treated as an accounting unit:
 A general ledger is established for the branch bank account
 Cash movements between the main bank account of the PB and the branch
bank account are recorded as transfers,
 Subsidiary ledgers are established from each BI receiving funds from the
branch bank account, and
 A monthly report is prepared and sent to the accounting unit of the PB's
main bank account
The accounting unit of the PB's main bank account consolidates the monthly report from the
branch bank account with the monthly report of the main bank account. The consolidated
monthly report is sent to MOFED. This process is shown in Figure 2.3.

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 Figure 1.1
Branch Bank Account Treated as Accounting Unit
 This is an Accounting Unit
 A general ledger is maintained
 Subsidiary ledgers are maintained for each BI using this account
 Transfers are recorded for funds sent to other bank accounts
 A subsidiary ledger is maintained for the transfer account
 Monthly reports are received from other bank accounts
 Monthly reports are combined into one monthly report for MOFED

Cash is transferred Monthly report is sent

Branch Bank Account

 This is an Accounting Unit
 A general ledger is maintained
 Subsidiary ledgers are maintained for each BI using this account
 Transfers are recorded for funds received from PB bank account
 Monthly report is prepared sent to main bank accounts accounting
unit
Branch Bank Account treated as a Safe
If the branch bank account is treated as a safe:
 A cash book is maintained for the branch bank account, and
 Receipt and payment vouchers are given to the main bank account's accounting unit.
The accounting unit of the PB's main bank account does the following:
 Cash movements between the main bank account of the PB and the branch
bank account are recorded as advances, and
 Receipt and payment vouchers received from the branch bank account are
recorded in general and subsidiary ledgers.
The Process is shown in Figure 2.4 below.
Figure 2.4: Branch Bank Account Treated as Safe

PB Main Bank Account

 This is an Accounting Unit
 A General Ledger is maintained
 Subsidiary Ledgers are maintained for all BI under this PB

Cash is Sent Vouchers are sent

Branch Bank Account

 A Cashbook is maintained
 Receipt and payment vouchers are sent to the main bank account's
BAU
Budget Ledger Card
The purpose of the budget ledger card is to maintain a continuous and updated record for each
budgeted item of expenditure by BI and source of finance with respect to:
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  Approved budget
 Revised budget
 Payments received for budgeted expenditure.
 Amount remaining to be requested.
 Commitments
 Balance in the revised budget that is not committed.
The budget ledger card is divided into two parts:
A. The top of the card contains information to identify the
 BI,
 Type of budget, and
 Item of expenditure.
 The table on the card contains detailed information about each budget transaction.
Purpose of Each Field in the Budget Card
Upper part of the Budget Ledger Card
Name of Public body and Public Body code: the field is to identify the PB to which the budgeted
expenditure is related.
Name of Program and program Code: the field is to identify the Program to which the budgeted
expenditure is related.
Name of sub agency & Sub Agency Code: the field is to identify the BI to which the budgeted
expenditure is related.
Name of Sub Program and Sub Program Code: the field is to identify the Sub Program to which
the budgeted expenditure is related.
Name of Project & Project code: the field is to identify the BI to which the budgeted expenditure
is related. Source of Finance & code: the field is to identify the source of funding that is recorded
on the ledger card.
Page Number: the field identifies the page number of the budget ledger card.
Type of Budget and Code: the field is to identify whether the item of expenditure is a part of the
recurrent or capital expenditure budget.
Item of Expenditure & Code: the field is to identify and describe the item of expenditure by its
budget code.
Lower Part of the Budget Ledger Card
Number, Date, Description & Reference Number: the purpose of these fields is to respectively
identify:
 The sequential number of the transaction.
 The date of the transaction.
 A brief narrative of the description of the transaction.
 The reference number of the source document to the transaction.
Approved Budget identifies the amount of the original approved budget for the item of
expenditure.
Additions/Reductions to approved Budget: are used to track changes to the approved budget and
provide information to compute the revised budget.

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Revised Budget: contains the approved budget adjusted for any additions or reductions. The
revised budget is key for budget control. An item of expenditure must not exceed its revised
budget.
Payment Received for Budgeted Expenditure: is used to record payments received (Whether as
cash or non-cash from the appropriate source of funding and assists in keeping track of the
amounts of money received for the item of expenditure.
Unpaid Balance: the field is the difference between the revised budget and the amount of funds
received (whether as cash or non-cash) 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 revised budge and the commitments. 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.
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.
Although organization’s earnings and related operating activities are continuous, they are
reported at specific intervals (i.e. an accounting period or budget year) in order to provide useful
information for decision-making on a timely basis. Some activities may begin and end during
the accounting period, while others may require two or more accounting periods for completion.
Budget year for FGE is from Hamle 1 to Sene 30.
In summary, accrual accounting is based on cash flows but reports transactions and other events
with cash consequences at the time the transactions occur rather than at the time cash is received
or paid. Accrual accounting is also superior to cash-basis accounting from the standpoint of
measuring financial statement elements.
The FGE accounting system employs a modified cash basis of accounting. Modified cash basis
of accounting is a compromising basis of accounting between the two extreme bases of
accounting. It adopts features from both bases of accounting. Most transactions are recorded
using cash basis of accounting and some transactions are recorded using accrual 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.
 Expenditure is recognized:
 When payroll is processed.
 At the end of the year when a grace period payable is recognized.
 When goods are received or services are rendered if payment for the goods or services
was rendered in advance.
 When cash moves from an unrestricted to a restricted bank account to meet the
requirements of a letter of credit. When cash moves out of he restricted account, no
expenditure is recognized.

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  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.
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 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 and
payables.
The FGE accounting system employs a combination of temporary and permanent accounts. All
account balances at the end of the year may not have a zero balance. So, a process is necessary
that distinguishes temporary accounts and sets them to zero. The process of setting the balance in
temporary accounts to zero is called closing the accounts, and the process is performed by a
closing entry. The closing entry is an accounting activity that takes place at the end of each
budget year. This process requires a net assets/equity account.
All assets and liabilities are not recognized in the modified cash basis accounting system. Only
those receivables and payables included in the chart of accounts are included in the system. The
modified cash basis accounting system produces financial information that is reported in a
Statement of Changes in Cash Position and a Statement of Budgeted versus Actual Expenditure.
Asset and liability accounts other than cash, receivables, payables, and letters of credit are
included in the chart of accounts to allow institutions that have the capacity to maintain
accounting records of all assets and liabilities. These other assets and liabilities are recorded
using the cost method. The cost method values assets at their original cost and liabilities at the
amount still due. Recording these other assets and liabilities is an option for the future in the
FGE accounting system.
Legal financial administration:
The financial administration in FGE mainly involves Ministry of Finance and Economic
Development (MOFED) and Regional Finance and planning offices and a Public Body. The
specific Federal and Regional government administrative authorities and the required
organizational structure in public bodies are illustrated in the following
Figure 2.1 Structure of Financial Administration in the Budget Process
Ministry of Finance and Economic Development

Public Body

Budgetary Institution:
Project or Sub-Agency

Budgetary Institution:
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 Figure2.2: Structure of financial administration within public Body

Head of public Body

Head of Administration and Finance

Head of Budget and

Accounts General Services
and Administration

Budget Section
Accounts section

Accountant Cashier

The following are responsibilities of MOFED, Budgetary Institutions, Accounting unit,

Reporting Entity, Cashier and Accountant in the financial administration in the Budget process
and within the Public Body
Ministry of Finance and Economic Development (MOFED)
MOFED administers the financial system for the federal government and has the highest level of
administrative authority. MOFED consists of a:
 Budget Department that prepares and distributes notification of approved federal
budgets and administers the budget.
 Central Accounts Department that receives monthly repots and compiles financial
statements for the federal government.
 Central Treasury Department that receives and distributes cash from central treasury.
 Credit and Investment Department that manages the federal government's investments
and debt.

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This is not a complete description of MOFED or its departments. This is description of their
roles and responsibilities within the accounting system.

Figure 2.2
Structure of Financial Administration within a Public Body

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