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:
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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
-- Vouchers
-- Bank Statements
-- Transfer entrees
Record in Journals
Post
General
Ledger
Post
Subsidiary
Ledgers
Prepare Trial Balance
Daily bank statements
Register of checks
Payment vouchers
Revenue receipts
Transfer entrees
General / Special Journals
General Ledger
Subsidiary Ledgers
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:
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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:

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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
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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
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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
ANALYTIC
FRAMEWORK
TRANSACTIONS
Revenue
minus
OPENING
BALANCE
SHEET
Expense
= NET OPERATING
BALANCE
minus
Nonfinancial
Assets
Nonfinancial
Assets
OTHER ECONOMIC FLOWS
Holding Gains
Other Changes in
& Losses
the Volume of Assets
CLOSING
BALANCE
SHEET
Nonfinancial
Assets
Nonfinancial
Assets
Nonfinancial
Assets
Financial
Assets
Financial
Assets
Financial
Assets
Liabilities
Liabilities
Liabilities
= NET LENDING/
BORROWING
Financial
Assets
Financial
Assets
• cash
• other financial assets
minus
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:
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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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