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

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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

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 Cash Basis Accounting
 Transactions are recognized only when the related
cash receipts and payments occur

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 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

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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 RECORDS

Collect Source Documents Daily bank statements

-- Vouchers Register of checks
-- Bank Statements Payment vouchers
-- Transfer entrees Revenue receipts
Transfer entrees
Record in Journals
General / Special Journals

Post Post General Ledger

General Subsidiary Subsidiary Ledgers
Ledger Ledgers

Prepare Trial Balance 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
 Under accrual based accounting:
 Statement of Government Operations
 Statement of Other Economic Flows
 Balance sheet
 Statement of Sources and Uses of Cash
 Budget Execution/Appropriation Accounts

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 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 Net-
worth/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
GFSM 2001
TRANSACTIONS ANALYTIC
FRAMEWORK
Revenue
minus

OPENING Expense OTHER ECONOMIC FLOWS

CLOSING
BALANCE BALANCE
= NET OPERATING Holding Gains Other Changes in
SHEET BALANCE SHEET
minus & Losses the Volume of Assets

Nonfinancial Nonfinancial Nonfinancial Nonfinancial Nonfinancial

Assets Assets Assets Assets Assets
= NET LENDING/
BORROWING

Financial
Financial Financial Financial Financial
Assets
Assets • cash Assets Assets Assets
• other financial assets

minus

Liabilities Liabilities Liabilities Liabilities Liabilities

Net Worth Net Worth

Changes in Net Worth 21
 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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