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Government accounting and chart of accounts - PFM blog

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Sailendra Pattanayak, FADInternational Monetary Fund
Government AccountingFramework
Key Elements of an Accounting Framework
Accounting basis – cash or accrualBudget classification and chart of accountsGeneral Ledger and subsidiary recordsAccounting process (manual or computerized) and outputsAccounting policiesReporting entityFinancial statements/reportsSkilled personnel is important resource to implement the above
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Accounting Framework in a TypicalLIC– Main Issues
Manual book keepingNo ledger-based double entry systemLack of a comprehensive chart of accounts (or a detailed coding system with various segments)Substantial delay in annual accounts preparationLack of clarity on the ‘reporting entity’ concept for consolidation of annual accountsLack 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 paymentsoccur
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Accrual Basis Accounting
Flows are recorded at the time economic values are created, transformed, exchanged, transferred, or extinguished–GFSM2001A 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 resultsIgnores liabilities until due for paymentIgnores non-cash operations altering stock of government assets and/or liabilitiesNeeds to be supplemented bymemoranda itemsto bring to light economic flows escaping the accountsAccrual based accounts:Economic flows are recordedat the timeeconomic value iscreated, 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 recognizingan 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 termmodified 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 resultsTo provide a migration path from cash-based to accrual based accounting systemsModified 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
PostGeneralLedger
PostSubsidiaryLedgers
Prepare Trial Balance
Prepare Financial Statements
Prepare Correction Entrees
Collect Source Documents-- Vouchers-- Bank Statements-- Transfer entrees
Record in Journals
General/ Special Journals
GeneralLedgerSubsidiaryLedgers
TrialBalance
Dailybank statementsRegisterof checksPaymentvouchersRevenuereceiptsTransferentrees
Consolidated Financial Statements
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Government Financial Statements
Annual Government Financial StatementsFinal 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 operationsGovernment accounts should, at the minimum consist of :Under cash based accounting:Statement on sources, allocations, and use of cash resources – Finance AccountsStatement on approved budget estimates andactuals–BudgetExecution Accounts/Appropriation AccountsUnder accrual based accounting:Statement of Government OperationsStatement of Other Economic FlowsBalance sheetStatement of Sources and Uses of CashBudget Execution/Appropriation Accounts
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Chart of Accounts
Countries do not always have a chart of accountsThat means that they do not have a proper general ledger systemOccasionally, some transactions are recorded in one system, and other transactions are recorded in another systemWithout a COA and ledger system, the accounting framework can be considered to be lacking in basic accounting discipline and controlsThe 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 informationModern systems include budget classification fully in COACOA can accommodate progressive move to accrual accountingAsset and liability accounts in addition to revenue and expense accountsThe Chart of Accounts needs to meet the business requirement of the GovernmentCOA forms core of the information to be generated and tracked in a GFMIS
BudgetClassificationand Chart of Accounts
BC = revenue, expenditure & borrowingsCOA = BC + asset, liability and equity accountsCOA also includes any internal management classification such as departments, costcenters,regions.GFSM2001 should be followed when developing budget classificationUniform budget classification system, at all levels of government (e.g. Brazil, India) – helps in general government reporting.
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Budget Classifications
GFSMrequires Economic and Functional ClassificationsSalary, goods and services, grants, subsidies are economic classificationsEducation, health, defense, arefunctionsOther ClassificationsCountries usually also have administrative classification — ministries and departmentsOther classifications may include: programs, fund, geographic location, etc.
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Account Type
Revenue and expense typeAsset, liability typeNet-worth/Equity typeRevenue and expense accounts are netted off at year-end and the surplus/deficit is transferred to Net-worth/equityAsset 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)Moderncomputerized systemsproduce TB automaticallyA trial balance is a list of allaccount balancesin the generalledgerOnce the TB is obtained, the balances should be reviewed to ensure that there are no obvious mistakes, etc.Ifdouble-entry has been followed, the trial balance must be in balance, i.e., total debits must equal totalcreditsAll 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 yearThis is also the opening balance sheet for next year
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Cash Basis: Cash Flow StatementPart 1
Cash flows from operating activitiesReceiptsTaxes ... ... ...Social contributions ... ... ...Grants ... ... ...Other revenues... ... ...Total Receipts
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Continued...
Cash Basis: Cash Flow StatementPart 1
Cash flows from operating activitiesPaymentsWages and allowances ... ... ...Goods and Services ... ... ...Interest paymentsSubsidies ... ... ...Grants… … …Social benefits ... ... ...Other expenditures ... ... ...Total PaymentsNet cash flows from operating activities
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Cash Basis: Cash Flow StatementPart2
Cash flows from investment activitiesAcquisition of fixed assetsBuildings and structures...InventoriesStrategic stocks...ValuablesNon-productive assetsLand...Less proceeds from sale ofassetsNet cash flows from investment activities
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Cash basis: Cash flow statement-Part 3
Cash flows from financing activitiesProceeds from domestic borrowing...Proceeds from foreign borrowing...Less repayment of borrowingNet cash flows from financing activitiesNet increase / decrease in cashOpening cash balanceClosing cash balance
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Accrual Basis - the Analytic Framework
Net operating balance = Revenue – expenseNet lending/borrowing = Net operating balance –net acquisition of non-financial assetsNet worth =Asset- liabilityClosing net worth = Opening net worth + Net operating balance + other economic flows
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OPENINGBALANCESHEET
NonfinancialAssets
FinancialAssets
Liabilities
Net Worth
Changes in Net Worth
F L O W S
CLOSINGBALANCESHEET
Net Worth
NonfinancialAssets
FinancialAssets
Liabilities
TRANSACTIONS
Revenue
Expense
=NET OPERATING BALANCE
minus
NonfinancialAssets
= NET LENDING/BORROWING
minus
Liabilities
FinancialAssetscashother financial assets
minus
OTHER ECONOMIC FLOWS
Holding Gains& Losses
Other Changes inthe Volume of Assets
NonfinancialAssets
FinancialAssets
Liabilities
NonfinancialAssets
FinancialAssets
Liabilities
GFSM 2001 ANALYTIC FRAMEWORK

GFSM 2001 Statements
Statement of Government OperationsStatement of Sources and Uses of CashStatement of Other Economic FlowsBalance Sheet
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GFSM 2001 Analytical Balances
Statement of Government Operations shows the following measures of governmentperformance:Net/gross operating balanceNetlending/borrowingStatement of Sources and Uses of Cash shows the following measures of government performance:Cash flows from operating activitiesCash surplus/deficitCash flows from financing activities other than cashNet change in the stock of cashStatement of Other Economic Flows shows:Total change in net worth due to holding gains/ losses and other changes in volume of assetsBalance Sheet shows:Net worth
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Government accounting and chart of accounts - PFM blog