1.

Historical backgrounds of FGE accounting system

•The Federal Government of Ethiopia (FGE) accounting system used in
1994E.C has been in service for more than a half a century.

•The system has been revised at various times and the revisions through
times have brought major changes in recording, summarising and
reporting of government financial information.

•Thus the government decided that there was need to revise the
accounting process as an integral parts of civil service reform.
•Then the overall strategy of civil service reform for accounts is to move
from strictly cash controls to an emphasis on management and
accountability.
•Finally federal government of Ethiopia/FGE/accounting system is
installed.
Historically, single-entry bookkeeping
referred to as merchant’s single
entry bookkeeping method was the
accounting method used in the
business sector (Lee, 1986
To report the immediate cash effect of the
revenues and expenditures (i.e., immediate
cash inflows and immediate cash outflows).
Monsen (2008) refers to these types of accounts
as cash accounts.
Also, with single entry bookkeeping method,
only one account (cash account) with two sides
i.e., (debit and credit sides) was used.
In this manner, the cash inflows were
recorded on the debit side, while the cash
outflows were recorded on the credit side.
•Goals FGE accounting system

A. Budget control
B. Cash control

C. Accountability
 Goals of FGE accounting system
A. Budget control
• Budget is a plan of expected spending and income for a period of time.

•FGE budget control is achieved by:-

The ability of the accounting system to report expenditure
consistent with budgetary principles;
Including accounting for commitments in system.

A commitment is an amount of budgeted fund that is

reserved for a specific future expenditure
Any committed budgeted funds are no longer available for
future commitments.
 Commitments are made against the budgeted when a
purchase order is approved .
 B. Cash control
Cash is nothing but money in the form of coins or notes or the using of
money in coins or notes. In case of FGE cash is can be considered as cash
in bank and cash at hand.
•Maintaining the balance of cash at bank and cash in safe in general
ledger.
•Clarifying the responsibilities and duties of cashier and the accountant for
cash and cash in safe. The cashier handles cash in safe, While the accountants
are assigned overall responsibility for the check book and cash at bank.
Using an impress system to control cash in safe.
• An impress system the cash in the safe is established for fixed
amount.
• Each payment for the safe is documented.
• The cash in the safe periodically reimbursed, based on vouchers,
for the exact amount necessary to restore the original cash
balance.
• Any cash collected from sources other than the accountant is
deposited in bank intact.
Applying double entry book keeping techniques in the accounting system.
• Double entry book keeping creates a set of self balancing, accounting
records are controlled.
• A cash accounting ledgers in a general ledger, so cash also is controlled
by double-entry book keeping.
Therefore, a running cash balance in the registered and in the
general ledger reflects the actual cash available

•Employing a modified cash basis accounting when accounting for

transactions.
 The modified cash basis of accounting allows the accounting system to
recognize revenue expenditure consistent with budgetary process and
financial law.
 C. Accountability
Accountability in FGE accounting system is achieved by:-

•Employing a general system. Each accounting unit maintains a

general ledger for each sources of funding, So each unit maintains a
balanced and continuous record of its responsibilities and
performance.

•Creating the ability to record and report on any assets and liabilities
using cost methods of valuation. The FGE accounting system includes
simplified process for recording any assets and liabilities in set of
registers and in 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 are a statement of budget.
Actual for revenue and expenditure And a statement of net
asset.
 1.Chart of Account
•The chart of accounts is a system of coding government uses to identify and classify
financial entities and events. 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 current chart of accounts treats all detailed account codes as temporary
accounts. However, In FGE accounting system permanent accounts also included.

•Temporary accounts are accounts that begin each year with zero balances.
•Revenue, expenditure and transfers are account code categories.
• Are always treated as temporary accounts
• Begin each year with a zero balance

•Permanent accounts are detailed accounts codes whose balance at the end of the year
becomes the balance in the account at the beginning of the next year.
Assets, liabilities and net asset/equity are account code categories.
• Are always treated as permanent accounts
• Begin each year with the same account balances that they had at the end of the
previous year. In other words these accounts are not closed.
 Descriptions of permanent accounts
A. Assets
Assets are formally defined by the international federation of
accountant public sector standards (IPSAS) as “a resource 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.”
Cash and cash equivalent:-
 cash is cash on hand and cash at bank. Cash equivalents are short
term highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of
change in value.
Receivables:-
 Receivables are amounts owed to a government unit by another
government unit, a person, or a non government entity except
public enterprise. 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.

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.
Loan receivable: -
 loans are amounts due from public enterprises over a
period of time exceeding one year.

Investment:-
 Investment are FGE investment in public enterprises and
private organizations that are held for more than one year.
 liabilities:-
•Payables:-
• payables are obligations to pay that are due in less than one year. Examples of
FGE payable are Deposits, grace period payable, Treasury bill, and
retention/witholding/ on contracts.
•Long term debt:-
• Long term debt is an obligation to pay that is due in more than one year.

•Letter of credit:-
• a letter of credit represents a guarantee to pay suppliers with cash set aside in a
bank account restricted for that purpose.

•Net asset/Equity:-
• Net asset/equity is 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 balances represents the equity of interest of FGE.
 1.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.

The FGE accounting FGE system employs a modified cash basis of

accounting.

The modidfied cash basis of accounting in FGE meanse that cash

basis applies except for recognition of the following transactions:
•Revenue and expenditure recognize when aid in kind is recieved
 • Expenditure is recognized
• When peyroll is proceeded
 At the end of the year when grace period is payable is recognized
 When goods are recieved or services are rendered if payment for
goods or service was rendered in adevance.
 When cash move from an unrestricted to a restricted bank account
to meet the requirement of a letter of credit. When cash moves out
of the restricted account, no expenditure is recognized.

•Intergovernmental transfers are recognized in the absence of

actual c ash movement .
•Transaction resulting from salary witholdings are recognized in
the absence of cash movement.
The FGE accounting system employs a combination
of temporary and permanent accounts.
• All accounts balances at the ends of the year are
not set to zero so as a process is necessary that
distinguishes temporary accounts and sets them
to zero
• The processes of setting the balance in temporary
accounts to zero is called closing 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 year.
• This process requires a net assets/equity/account.
All asset 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 final
information is that is reported in a statement of changes in cash
position and statements of budgeted versus actual
expenditures.
Although it is possible to include all assets and
liabilities in the government accounting system at a
future date, the needs of government and the
capacity of manpower and institutions must be
considered.
The major considerations identified for
determining items to include and exclude in the
modified cash basis system are:-
• Government is interested in knowing total resources
available to cover expenditures, and therefore is
primarily interested in cash, receivables and payables.
• The capacity of government accounting staff working
at various level may not be able sufficient to handle
complex accounting concepts.
 Bookkeeping Method
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 amounts 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 totals of all
credits, therefore, many errors are easily
detected and
•Modified cash basis of accounting can be introduced.

Double-entry bookkeeping requires an understandings 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 below.
 In Double-entry bookkeeping system, the book of
original entry is the register.
A register is a chronological listing of transactions and serve
as the book of original entry into the accounting system.

Information regarding transactions and services is taken

from various documents/invoices, receiving reports,etc/ and
recorded in the accounting system for the first time on the
register.
The transactions in the register are in chronological order.
Each transaction entered on the register in the double-
entry system affects two accounts.

One account is a debit and the other is credit, but both

accounts are affected by the same amount.

Therefore, for each transactions that is recorded in the

double-entry register, the recorded in the register will
always equal the total of all credits in the register.
In the double entry system,
• A ledger card is created and kept for all accounts.
• All transactions entered in the register must be
transferred to ledger cards.
• The process of transferring information from the
register to the ledger card is called posting.
In the double entry system, a ledger card is created and
maintained for each account Because each transaction is
entered on the register as a debit to one account and credit
to another account, each transaction is posted to two
ledger cards.

The set of all ledger card is called a general ledger.

• Two posting are made for each transaction in the general
ledger of equal amounts in different amounts, but one is
entered as debit and one as a credit.
• Therefore, the total debit amount on all ledger card must
equal the total credit amount on all ledger cards.
.
The general ledger is kept a set of self balancing
accounts/ total,debits equals total credits/ is
maintained and a report of financial information is
available.
Financial reports can be prepared from a single
general ledger or from any combination of general
ledgers
 1.Overview of FGE Financial Administration and
Accounting System
FGE Financial Administration
The structure of financial administration and authority
in the federal government must be understood to the
extent that it impacts the accounting system.
Although the structure of financial administration is
not standard across all units in the federal government, a
general pattern exists.
Financial administration begins with the planning and
budgeting.
The budget manual describes the process for
preparing requesting and reserving notification of an
appropriated and allocated budget from the federal
government.
The description of the accounting system begins
where the budget manual ends with the recording of
the budget in the accounting ledgers.
The accounts reform terms recognizes that a
thorough study of each administrative unit has
not been conducted to fully assess
• Capacity for financial management
• Administrative structure and
• Lines of authority
A complete study could help to rationalize
standardize the budget, cash management and
accounting systems.
•Ministry of Finance and Economic Development (MoFED)
MoFED administers the financial system for the federal
governments and has the highest levels of administrative
authority. MoFED consists of a:
• Budget department that prepares and distributes
notification of approved federal budgets and administer
the budget
• Central accounts department that receives monthly
reports and compiles financial statements for the federal
government
• Credit and investment department that manages the
federal government’s investment department
•Public Body
IT IS the next level of financial administrative authority in the federal
government after MoFED. A PB is defined in the budget manual as: An
institution has:-
• A legal mandate,
• Receives a partial or complete budget directly from the respective
finance and planning bodies,
• Submits its final accounts directed to MoFED and
• Is on the approved list of bodies by the office of the prime minister
Each PB is assumed to have the following financial administration for budget: A
head of PB; A head of administrative and finance department and A head of
budget and accounts section who oversees(Accounts section with Accountant,
and Cashier Budget section)
 •Programs
Planning is conceived in terms of programs and
encompasses period of up to three years. A sub-program is
sub-set of program. Programs are the main objectives of
public bodies as stated in established law.

Programs and PB are not the same. More than one PB may share
single program and any single PB may have more than one program.
Although codes of program and sub-program are not included in
chars of accounts, neither receives a budget. A code for PB is part of
the chart of accounts.
To obtain financial information about the total
expenditures incurred by the various budgetary units
involved in the program must to be consolidated.

The FGE accounting system employs the program

and sub-program code for consolidation and
reporting purposes only. Programs and sub-
programs have no administrative role in the
accounting system.
 • Budgetary Institution (BI)
•Any entity that receives an approved budget from a
PBs approved budget is called budgetary institution
• Appropriated budget፡-
It is the budget approved by the council of people’s
representatives(CPR).
The appropriated budget is broken by:
• Recurrent and capital expenditure for the federal
government and
• Subsidy for each regional government
 • Approved budget፡-
•The federal government’s portion of the appropriated
budget is assigned to project and sub-agencies within PBs
and broken down of funding (domestic, assistance and loan)
this called approved budget.
•The approved budget is published in the negarit gazeta
with the appropriate budget.
•A PB’s entire budget is assigned to projects and sub-
agencies under its intimidate administrative control.
•The budget of a PB is the total budget of its projects and
sub-agencies.
 • Allocated budget፡-
A project or sub-agency may allocate any
portion of its approved budget to sub-project
or sub-agencies.
The budget of a sub-project or sub-agency is called
an allocated budget.
A sub-projector or sub-agency that is allocated
budget is always at a different location from the
project or sub-projector sub-agency.
A notification of any allocation is sent to MoFED.
 Allocated budget
Thus, Projects, sub-agencies, sub-projects and sub-
agencies are defined and coded in the chart of
accounts. Any entity that receives an approved budget
from a PBs approved budget is called budgetary
institution.
(BI) generally:
• PBs are ministries, authorities, and commissions
• BIs are projects, sub-agencies, sub-projects, and sub-
agencies
• BIs are administered by PBs
• The entire approved budget of a PB is assigned to BIs
 • Accounting Unit
For cash management another entity is
created the bank account (BA).
The BA is not coded in the chart of account
and does not receive a budget. However, it is
important for cash management and control.
The FGE accounting system includes 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.
• Is managed by account
• May have its own cashier; Share a cashier with
other BA s; and Have no cashier
• Handles cash flow:- For one or more than one BI
and From one source of financing(domestic,
assistance and 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:
•Process transactions for BI/BA
• Maintain register for BI?BA
• Maintains subsidiary ledgers for(Asset account,
Liability account and Letter of credit)
• Prepares a monthly report for the BI/BA
When a BA handles cash for only one BI; the
accounting unit:-
• Process transaction
• Maintain register
• Maintain general ledger
• Maintain subsidiary ledger for( asset, liability,
letter of credit)
 • 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 monthly reports directly to MoFED.
The reporting entity may be: The accounting
unit, or a higher level of authority (perhaps a
PB).
Each of the following is possible:
• A reporting unit may be an accounting
unit, and an accounting unit may
consist of only one BI.
• Therefore, a single BI may be reporting
entity. And A reporting entity may a PB
that receives the monthly reports from
several accounting units.
 Cash management
Cash management involves forecasting
and internal control for ensuring
sufficient cash is available, investing idle
cash within the institution, and
preventing loss of cash.
Cash forecasting: -
• Is necessary for proper planning and to ensure
availability of cash when needed cash is not
excessive. Thus, internal control consist of
administrative control accounting control.
• Administrative control involves plan of
organization procedures, record etc concerned
with decision process leading to authorization.
• In addition, accounting control is concerned
with the safeguarding of assets and reliabilities
of records.
 Safeguarding of cash
In FGE accounting system cash is safeguarded
through the following mechanisms:-
•By keeping the money in safe by the cashier
•By maintaining special fund like(petty cash,
channel fund, entertainment fund, travel fund)
•By depositing in a bank account i.e. all cash
receipt are deposited to bank and all payments
are made by checks.
 Cashier and accountant in FGE
In FGE accounting system the roles of
cashier and accountant are distnict.
Cashier
•Consist of currency and checks
•Maintain and control cash in safe
•Only the cashier can receive currency and
checks and disbursement to currency
 Cashier
•Daily should count cash on hand and reconcile
ending cash on hand to the cash book.
•When cash received the cashier will:-Issue cash
receipt; Safeguard the cash received from cash
available to dispurse; Deposit the cash received
in the bank, usually, daily and; Surrender copies
of all cash receipt and copy of the bank deposit
of slip to the accountant.
 Accountant
•Maintain record and control cash at bank
•Maintain record of total cash position of
the entity, including cash at bank and cash
in safe.
•Record cash movement that flow through
the cashier and cash movement that flow
directly through bank.
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