Glossary of Terms for Financial Statements
Balance Sheet
A Balance Sheet is a summary (or snapshot) of an organization’s financial position at a
specific point in time; therefore it is static. It presents the institution’s stock of assets (such as
cash, loan portfolio, investments or fixed assets), liabilities (such as loans or accounts
payable), and equity capital (net worth, or difference between assets and liabilities). All
amounts are cumulative since the organization began. On a Balance Sheet, Assets equal
Liabilities plus Equity.
Why is it called a “Balance” Sheet? What elements must balance on a Balance Sheet?
All assets of the organization are funded either by outside parties (liabilities) or by investors,
including donors or other interested parties (equity or net worth). The total amount of assets
therefore must equal the funding sources. The tow sides of the Balance Sheet are two views
of the same resources of the organization: the organization’s assets on one side and the
funding sources for those assets on the other.
ASSETS
Assets represent what is owned to it. They are those items in which an organization has
invested its funds for the purpose of generating future income. On the Balance Sheet, assets
are always equal to the sum of liabilities plus equity.
Assets are divided in order of liquidity into short-term or current assets and long-term term
assets including fixed assets.
Current assets
Cash and marketable securities, accounts receivable, and
inventories that in the normal course of business will be
tuned into cash within a year.
Cash and due from banks
All balances available to the organization on a demand
basic such as cash, and funds on deposit in non-interest
bearing accounts.
Reserves in central bank
Funds held on deposit at the central bank as required by
some bank superintendencies; the amount is generally
determined as a percentage of assets or liabilities held by
the MFI. Cash reserves are applicable only to regulated
financial institutions.
Total or Gross loan
Portfolio outstanding
(could be further defined in
short-term and long-term net
portfolio outstanding)
Assets composed of the total amount of loans
remaining to be paid at a point in time, that is,
the total amount owed to an institution by its
borrowers. It includes loans outstanding that are
current, with no late payments or defaults, and
the total amount of loans outstanding that have
an amount past due. Past due is typically
defined as when a payment is one day late.
Net loans outstanding or Net
Loan portfolio outstanding
(could be further defined in short-term
and long-term net portfolio outstanding)
All loans disbursed and not yet repaid or written
off, minus the loan loss reserve. Te net loans
outstanding figure reflects only the principal and
does not include interest expected to be received.
Loan loss reserve
Amount set aside to recognize probable future
loan losses on the loan portfolio so that the true
value of the loan portfolio so that the true value
of the loan portfolio is fairly stated. To create or
increase the loan loss reserve, a loan loss
expense (referred to as the loan loss provision) is
recorded on the Income Statement as an
expensed. The amount of loan loss provision is
then recorded on the Balance Sheet as the
negative asset – loan loss reserve. The negative
asset reduces the net outstanding loan portfolio
Actual loan losses, or write-offs, affect the
Balance Sheet only (and not the Income
Statement) as a reduction of the loan loss reserve
and the total loan portfolio.
Other short-term or current assets
Items that do not appear in the foregoing, such
as:
• Accrued interest – interest that has come due
and is recorded but has not yet been
received (not recommended by CGAP for
loan interest)
•
Accounts receivable – amounts owed to the
MFI for services already rendered or
products already delivered.
•
Prepaid expenses – for example, rent or
insurance premiums paid in advance for the
upcoming period
Long-term financial assets
Investments not intended as a ready source of
cash, such as stocks, bonds, promissory notes,
and land that will be held for more than on year
or one cycle.
Fixed assets
Includes property, plant, and equipment; they
represent assets that are not readily redeemable
for cash. Examples are land, buildings,
machinery, equipment, furniture, automobiles.
•
Cost – property and equipment (fixed assets)
are recorded at accost or current market
value at acquisition.
•
Accumulated depreciation – an annual, noncash expense that is determined by
estimating the useful life of each asset.
Depreciation represents a decrease in the
value of property and equipment to account
for the portion of their useful life that is used
up during each accounting period. Annual
depreciation is recorded on the income
statement as an expense that increases the
accumulated depreciation on the balance
sheet by the same amount. Like the loan
loss reserve, accumulated depreciation is a
negative asset.
•
Net fixed assets – the cost or recorded
market value of property and equipment less
accumulated depreciation.
Liabilities represent what is owed by the MFI to others either in the form of a loan that has
been extended to it or obligations for the MFI to provide goods and services in the future.
Compulsory savings deposits
Voluntary savings deposits
Compulsory client savings that have been
deposited in the MFI that the MFI must return,
generally when the loan has been repaid or when
the client leaves the MFI. Forced savings may or
may not incur an interest cost for the MFI.
Client savings that have been deposited
voluntarily with the MFI that the MFI must
return. Although a liability for MFI, voluntary
savings are different from borrowed funds
because there is no due date or amortization
schedule. Voluntary savings generally incur an
interest cost for the MFI. If interest is not paid
out to the client, it is sometimes accrued and
increases the liability of the MFI to the client.
Amounts deposited with the MFI for a specified
period of time. The rate of interest paid generally
increases as the length of the deposit increases.
Time deposits
(short-term or long-term)
Commercial borrowings
(short-term or long-term)
Outstanding amount that the MFI owes a bank or
other lender for which it is paying a market rate
of interest. The loans could be short-term or
long-term. Long-term debt is that portion which
is due in over one year’s time.
Outstanding amount that the MFI owes to a
lender (typically from a donor or government) for
which it is paying the lender a rate of interest
below the rate the MFI could have obtained from
commercial sources.
Concessional borrowing (also called
subsidized or soft loan)
(short-term and long-term)
Other short-term liabilities and accounts
payables
Restricted or deferred revenue (shortterm or long-term)
Outstanding amounts that the organization owes
to a bank, other lenders or other organization
(such as past due rent) that are due within one
year or less. Also includes accrued expenses and
unearned/deferred income.
Funds received but restricted for use in future
years or for specific activities are classified as a
liability on the Balance Sheet because they must
be returned to the funding organization if the
specified programs are not carried out. Restricted
funds are not recorded as earned until the service
or product that they are funding is delivered.
When the organization receives restricted funds,
it incurs an obligation (liability) to provide the
services described in the grant agreement. As the
organization provides the services (such as loans
to microentrepreneurs in a certain region), it
incurs expenses. Deferred revenue is then
recognized as grant revenue and used to cover
those expenses.
Other long-term liabilities
Outstanding amounts that the organization owes
to a bank, other lenders, or other organizations
that are due more than one year form the date of
the financial statements.
EQUITY
Equity is also referred to as capital or net worth. Unlike liabilities, the equity of an
organization does not have to be repaid. It therefore represents the value or “net worth” of the
MFI. Equity is equal to the amount of assets less liabilities. It represents the link between the
balance sheet and the income statement flows into the equity section of the balance sheet at
the end of each period.
Paid in capital from shareholders
Amount of funds contributed by shareholders to
the MFI.
Donated equity
Accumulated amount of donations received by
the MFI.
Retained earnings
Amount of profit (or loss) accumulated in
previous years since the formation of the
organization.
Other capital accounts
other specific fund or reserves such as
nonrefundable contributions from clients and/or
statutory reserves required by law. Should also
include the difference between nonoperational
income and expenses.
INCOME STATEMENT
The Income Statement is also known as the Profit and Loss Statement. It is a summary of the
income, expense and net profit or loss (the difference between income and expenses) for a
period of time – say, January 1 to December 31 2002.
INCOME
In accounting terms, revenue refers to money earned by the organization for goods sold and
services rendered during a given period. When an organization renders services to its clients.
It usually received income in the form of cash or an account receivable. Main income for
MFIs is interest revenue on loans.
OPERATING INCOME
Operating Income is produced by an institution’s core business. For a microfinance
organization operating income includes interest earned on loans to clients; fees earned on
loans to clients; interest earned on funds on deposit with a bank, and so forth.
Financial revenue from loan portfolio
a) Interest income from loans
b) Fee income from loans
Amount received from clients for borrowing
money from the MFI for a specified period of
time. The interest rate is stated as a percentage
of the loan amount. Interest received refers to
the interest that the borrowers owes the MFI but
has not yet paid.
Note: The principal amount of the loan repaid is
not included in income. Only the Balance
Sheet accounts are affected by the principal
portion of a loan repayment; that is, total loan
portfolio decreases and cash increases. The
only time the Income Statement is affected by
the principal portion of a loan is when a loan
which has been written off is repaid.
Amount charged to clients for (services
associated with) loans disbursed by the MFI,
usually in addition to the Interest charged.
They may be stated as a percentage of the loan
amount or a flat amount. These fees or service
charges are often charged up front. There are
also penalty fees for late or partial payment and
these are charged once a payment is missed.
Amount of interest earned by the organization
on its investments such as interest-bearing
deposit accounts, term deposits, treasury bills,
and so on.
Income from investments
EXPENSES
Expenses represent the costs incurred for services used in the process of earning revenue.
They are often referred to as the “cost of doing business” since they represent the cost that are
necessary for the organization to generate revenue and thus remain in operation. Direct
expenses for a microfinance organization include financial costs, operating expenses and loan
loss provisions.
FINANCIAL EXPENSES
Expenses that are specific to delivery of the core business (credit and savings activities) for a
specified time period. For a single-purpose MFI, all costs should be included. For multipurpose institutions, all direct costs of financial operations and an appropriate portion of the
institution’s overhead should be included.
Financial expenses on liabilities
a) client savings
Payments (interest and fees) made to clients
who deposit savings in the organization (either
voluntary or forced).
b) borrowings
Interest and fees paid to banks and other
financial institutions for money that they have
loaned to the MFI.
Loan loss provision expense
Based on the historical default rate and the
current outstanding loan loss reserve, the loan
loss provision is the (non-cash) amount
expensed in a period to increase the loan loss
reserve to an adequate level to cover probable
defaults of the loan portfolio. Although the
loan loss provision is a non-cash expense, it is
treated as a direct expense for an MFI.
OPERATING EXPENSES
Expenses that are considered a subset of financial expenses.
Personnel: Salaries and benefits
Payments from the MFI to its staff for services
rendered; usually the largest operating expense
for an MFI.
Administrative Expense
a) Rent
Payments made for lease of land and/or buildings
for the purposes of loan fund management over a
specified time period.
b) Transportation and travel
Payments for transportation, room and board,
etc., of staff members working on behalf of the
organization.
c) Depreciation
An annual, non-cash expense that is determined
by estimating the useful life of each asset. Using
the most common method, called straight-line
depreciation, an asset with an estimated useful
life of five years would have on-fifth of its
purchased price reflected as an expense in each of
the five years. The depreciation expense
increases the accumulated depreciation account
on the balance sheet (similar to the loan loss
provision [expense] and the loan loss reserve
[negative asset] respectively).
Plus
All other expenses related to the MFI’s
operations, such as office materials/supplies,
publications/publicity, telephone and postage,
insurance, utilities, staff training, board meeting
expenses, legal services/other service fees,
expenses, legal service/other service fees, bank
charges, repair and maintenance, courier and
delivery, loss on currency conversion, taxes, etc.
NET OPERATING PROFIT/LOSS OR NET INCOME FROM OPERATONS
Income that is direct result of the MFI’s lending and savings activities net of the expenses
directly related to these activities.
NON-OPERATIONAL INCOME AND EXPENSES
Income not produced by the core business (e.g., donations); expenses not incurred by the core
business.
CASH DONATIONS
Funds donated to the MFI that year (for which the conditions, if any, have been met), to cover
operating expenses, loan fund capital, and so on.
OTHER NON-OPERATIONAL INCOME AND EXPENSES
Other revenue earned by the MFI for services provided other than credit and savings, such as
training fees, and expenses incurred in providing these services.
BALANCE SHEET
Assets
Short Term Assets
Cash and Due from banks
Reserves with the Central Bank
Short Term Financial Assets
Net Outstanding Portfolio
Gross ST Outstanding portfolio
(Loan loss reserve)
Accounts receivables
Other short term assets
Long Term Assets
Long term financial assets
Net fixed assets
Gross fixed assets
(Accumulated Depreciation)
Other long term assets
Liabilities and Equity
Liabilities
Short term liabilities
Demand deposits
Short term deposits
Short term borrowings – commercial
Short term borrowings – concessional
Other Short term liabilities
Long term liabilities
Long term deposits
Long term borrowings – commercial
Long term borrowings – concessional
Other long term liabilities
Restricted funds
Equity
Paid-in capital
Donated equity
Reserves
Retained earnings
Current year
Previous years
Year 1
INCOME STATEMENT
a
Financial revenue from operations
Revenue from loan portfolio
Revenue from other financial assets
Other Revenue related to financial services
b
Financial expenses from operations
Interest and fees paid on borrowings
Interest and fees paid on deposits
Other expense related to financial services (net exchange losses)
c
Gross Financial income from operations (a-b)
d
Loan loss provision expense
e
Net Financial Income (c-d)
f
Operating expenses
Personnel Expenses
Administrative Expenses (including depreciation)
g
Operating Income (e-f)
h
Income not from operations
i
Income tax
j
Net Income before donations (g+h-i)
k
Revenue from donations
l
Net Income after donations (j+k)