Chapter One

1. Introductions

1.1 Historical overview of Ethiopian Government Accounting System

 The Federal government of Ethiopia (FGE) accounting system used in 1994 EC has been
in service for more than hast a century. The system has been revised at various times and
the revisions through time house brought major changes in recording, summarizing and
reporting of the government financial information.
 The federal government decided that there was a need to revise the current accounting
process as an integral part of the civil service Reform. The civil service Task force,
formed in the prime minister’s office, began the revision process. Further study and
implementation responsibilities were given to the accounts Reform Team established by
the ministry of finance and Economic Development (MOFED)
 The overall strategy of the civil service Reform for accounts is to mode from strictly cash
controls to on emphasis on management and accountability, The FGE accounting system
described in this module is now the FGE accounting system.
1 Goals achieved by FGE Accounting System
As stated in the first volume of FGE Accounting system, Manual 3, The FGE accounting
system achieves three goals: budget control, cash control, and accountability.
Budget control
 The ability of the accounting system to report expenditure consistent with budgetary
principled and
 Including accounting for commitments in the system. A commitment is an amount of
budgeted funds that is reserved for a specific future expenditure. Any committed
budgeted funds are no longer available for future commitments. Commitments are made
against the budget when a purchase order is approved.
Cash control
 Maintaining the balance of cash at bank and cash in safe in a general budget.
 Clarifying the responsibilities and duties of the cashier and the accountant for cash at
bank and cash in safe. The cashier handles cash in safe, while the accountant is assigned

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 overall responsibility for cash in safe and specific responsibility for the checkbook and
cash at bank.
 Using on imprest system to control cash in safe. In an imprest system, the can safe is
from the safe is documented. The cash in safe is periodically reimbursed, based on
vouchers, for the exact amount necessary to restore the original cash balance deposited in
the bank intact.
 Applying double entry bookkeeping techniques in the accounting system. Double entry
bookkeeping creates a set of self balancing account ledgers (general ledger), Because
the account ledgers are self balancing accounting records in a general ledger, So cash
also in controlled by double entry bookkeeping. Therefore a running cash balance in the
register ledger reflects the actual cash available.
 Employing a modified cash basis of accounting when accounting for transactions, the
modified cash basis of accounting allows the accounting system to recognize revenue and
expenditure consistent with the budgetary process and financial low.
Accountability
 Imploring a general ledger system. Each accounting unit maintains a general ledger for
each source of funding, so each unit maintains a balanced and continuous record of its
responsibilities and performance. A set of financial reports can be produced from any
single general ledger or from any combination of general ledgers.
 Creating the ability to record and report on any assets and liabilities using a cost method
of valuation. The FGE a accounting system included a simplified process for recording
any assets and liabilities in a set of registers and in a 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 and a statement of changes in cash position for use by interested p[arties
outside of Budget and Actual for revenue and expenditure and a statement of Net assets.

1.2 Chart of Accounts of FGE Accounting Systems

A chart of accounts is a system of coding used to identify and classify financial entities and
events. The current chart of accounts, described in the Budget Reform Manual incorporates
detailed codes for items of domestic revenue, external assistance, external loans, and items of

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expenditure. This unit completes the FGE chart of accounts by adding detailed codes for
transfers, assets, liabilities, letters of credit and net assets/equity.

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 chart of accounts treats all detailed account codes as temporary accounts and permanent
accounts. Temporary accounts are accounts that begin each year with a zero balance.
Permanent accounts are detailed account codes whose balance at the end of a year becomes the
balance in the account at the beginning of the next year.

Revenue, expenditure and cash transfers are temporary account code categories. Account codes
in these categories:

 are always treated as temporary accounts, and

 begin each year with a zero balance.

Assets, liabilities and net asset/equity are permanent account code categories. Account codes in
these categories:

 are always treated as permanent accounts, and

 begin each year with the account balance as long as they had at the end of the
previous year. In other words, these accounts are not closed.

 cost method can be deferred for later implementation.

Chart of Temporary Accounts

The Budget Reform Team under the Expenditure Management and Control Sub-Program of the
Civil Service Reform designed codes in the chart of accounts for detailed coding of:

 Items of domestic revenue, external assistance and external loans using code numbers
1000 through 3,999, and

 Transfers using code numbers 4000 through 4099.

 Items of expenditure using code numbers 6,000 through 6,999.

The Budget Manual created account codes for the FGE chart of accounts as follows:

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  Items of domestic revenue using account codes 1000-1799,

 External assistance using account codes 2000-2999,

 External loans using account codes 3000-3999,

 Transfers using code numbers 4000 through 4099, and

 Items of expenditure using account code 6000-6999.

The chart of accounts for these classifications is presented in Annex 2 at the end of this module.

Chart of Permanent Accounts

The Accounts Reform Team under the Expenditure Management and control Sub-Program of the
Civil Service Reform designed codes for detailed coding of:

 Assets using code numbers 4100 through 4999.

 Liabilities using code numbers 5000 through 5499.

 Letters of Credit using code numbers 5500 through 5599.

 Net Assets/Equity using code numbers 5600 through 5699.

Although a general description of these account codes is described here, refer the account titles
with their corresponding codes in Annex 1 and 2 presented at the end of this module for detail
and complete list of accounts.

Assets: As written by different scholars at different times, Assets are resources 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. The categories of assets in the FGE accounting system are: cash
and cash equivalents, receivables, goods in transit, stocks, fixed assets, loans receivable,
investments, liabilities, letters of credit, and net assets/equity.

Cash and cash equivalents: Cash is cash on hand and cash at bank. Cash equivalents are short-
term, highly liquid investments that are readily convertible to known amount of cash and which
are subject to an insignificant risk of change in value.

Receivables: receivables are amounts owed to (given to) a government unit by another
government unit, a person, or a non-government entity except public enterprises. Salary

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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. Typically, these are goods that are purchased overseas using a letter of credit.

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.

Loans receivable: Loans receivable are amounts due from public enterprises over a period of
time exceeding one year.

Investments: Investments are FGE investments in public enterprises and private organizations
that are held for more than one year.

Liabilities: Liabilities are formally defined by the Institute of Public Sector Accounting
standards as "present obligations of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits or
service potential." Liabilities are better defined by example. The categories of liabilities in the
improved and expanded accounting system are:

 Payables. Payables are obligations to pay that are due in less than one year.
Examples of FGE payables are deposits, grace period payables, treasury bills, and
retention on contracts.

 Long-term debt. Long-term debt is an obligation to pay that is due in more than one
year.

Letters of Credit: A letter of credit represents a guarantee to pay suppliers with cash set aside in
bank account restricted for that purpose.

Net assets/equity: Net assets/equity is formally defined by the Institute of public sector
accounting standards as "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 balance represents the equity interest of Regional and Federal Governments.

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1.3 Historical Background of the Budget in Ethiopia

In contrast to organized government in Ethiopia that enjoys long history, the budget as an
instrument of economic management and legislative control is a phenomenon of a recent past not
exceeding 70 years.
The first constitution of Ethiopia, which was promulgated in 1931provided that the receipts of
the government treasury should only be expended in conformity with the annual budget, fixing
the sum to be at the disposal of each ministry. This constitution further stipulated that the
annual budget should be based on the proposal of the Ministry of Finance and discussed in the
chamber of Deputies and in the senate, whose resolutions should be submitted for approval by
the emperor.
But this constitution provision had been put in to effect only after 13 years when the first budget
was actually published in the year 1944, followed by the succeeding year budget in 1945. This
exercise was, however, interrupted for another eight years until 1953 when a form of budget was
published as a notice of the Ministry of Finance. The budget continued to be issued in this
manner until 1955.
The revised 1955 constitution of Ethiopia gave an entirely new impetus to budgeting which laid
the foundation of modern public sector budgetary system. The Revised constitution provided that
“ non-of the public revenue shall be expended except as authorized by Law.” The following
budgetary system and guidelines were also drawn according to which:
1. Each year the Council of Ministers presented with the approval of the emperor to the
parliament a draft law for the approval of the budget of the following year which budget
was required to accompany the said draft law
2. Each of the chambers of parliament was required to examine the budget in detail and to
vote on it item by item. However, the parliament was not allowed to fix allowances for
unforeseen expenses.
3. If the draft law of the budget was not approved before the beginning of the fiscal year, the
budget of the previous year continued in force until anew budget law was proclaimed.
4. It was stipulated that a supplementary budget could be submitted during the course of the
fiscal year. The procedure for the approval of a supplementary budget was kept identical
that of the annual budget.

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In practice the first three to four years after the promulgation of the revised constitution of 1955
considerable delay was seen in the budgetary process which entailed the late publication of the
annual budget which in turn rendered the necessary budgetary control continued to be the
ineffective for some time. But after 1961 the procedures were streamlined, the budgets were
properly enacted and published in accordance with the requirement of the law of the land. Quite
apart from its timeliness a lot of improvements were made in the budgetary system until the
advent of 1974 revolution. Some of these improvements consisted of:
 Building appropriate budgetary structure by providing heads and subheads for the
government departments and agencies
 Introduction of extensive classification by object
 Introduction of a firm budgetary procedures for the processing, enacting, and execution of
the annual budget
 Introduction of formats and procedures for capital budgeting
 Consolidation and revision of the accounting regulations.
In its presentation, the budget consisted of one consolidated central government budget which
used to be sub divided in to the ordinary revenue and expenditure budget as well as special
revenue and capital expenditure budget. The budget covered one fiscal year running from July
the 8th of the current fiscal year to July 7 th of the following fiscal year. The budget used to be
presented to the parliament in four parts:
1. The draft of the budget proclamation
2. Summary of the budgetary revenue and expenditures
3. The schedule of expenditures, for each budgetary head and subhead for each item (group
of expenditure)
4. Details to the schedule of expenditures

The budget approved by the parliament and the head of the state is published in the official
Gazette. In Ethiopia, there has been no codified budgetary law. The annual budget is based on:

 The relevant provisions of the supreme law of the land

 The proclamation defining powers and duties of the ministers
 Annual budget proclamations and supplementary budget proclamation

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The consolidated budget of the central government presented ordinary expenditure budget
containing expenditures allocated to each budgetary head essentially government ministries and
agencies. The capital expenditure budget presents expenditures for specific projects, grouped
together under social development, economic development and public building. The ordinary
revenue budget showed the revenue from normal sources of recurrent domestic revenue and
revenue from external grants to be used for covering ordinary expenditures. The special revenue
consisted of foreign and domestic loans and receipts of capital nature.
The presentation of the budget proposal as an integrated central government budget had
remained as the exclusives responsibility of the Ministry of Finance and the planning organ of
the country since the introduction of the legislated budgeting system in the country. The Ministry
of Finance held the responsibility for the preparation of the recurrent budget and that of the
capital budget had been given to the planning organ of the government.

The Structure of Government Budget

The structure of government budget constitutes the formats in which the budget data are
organized and classified for different purposes. Not only the intentions of the government will be
revealed but also the responsibility of implementing agencies will be clearly indicated in these
formats. The classification of government budget is divided into revenue and expenditure budget.

1. Revenue Budget
Revenue budget consists of the annual forecast of government budget from tax and non-tax
sources. In Ethiopia, the annual revenue budget is structured into ordinary revenue, external
assistance and capital revenue.
The direct tax of the ordinary revenue consist of personal income tax, rental income tax, business
income tax, agricultural income tax, tax on dividend and chance winning, land use fee and lease.
The indirect tax is consisting of the excise and sales tax on locally manufactured goods, service
sales tax, stamps on duty. Tax on foreign trade includes customs duty and excise tax on imported
goods, sales tax on imported goods and export tax on coffee. The revenue budget for the federal
government of Ethiopia is prepared by the Ministry of Finance and Economic Development
(MoFED) and for the regional governments by the respective regional finances bureaus.

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 Federal Government Expenditure and its Financing
Revenue Budget (Financing)
(A) Domestic Revenue
Tax Revenue 8,588,305,263
Non-Tax Revenue 1,945,304,152
Capital Revenue 359,673,355
Domestic Revenue Total 10,893,282,770
(B) External Assistance
Multilateral Institutions 746,945,350
Bilateral Assistance 579,269,170
Counter Part Fund Assistance 2,474,850,263
HIPC Relief Assistance 819,063,431
External Assistance Total 4,620,128,214
(C) Loans and Credits
Multilateral Institutions 2,142,696,544
Bilateral Loan 0
Counter Part Fund Loan 240,103,500
Loans and Credit Total 2,382,800,044
(D) Domestic Borrowing 1,364,000,000
Total Revenue, Assistance and Borrowing 19,260,211,028

2. Expenditure Budget
The recurrent budget is mostly financed from the domestic revenue source, that is from tax and
non-tax revenues. The capital budget is usually financed by external borrowing and grants.

The recurrent budget expenditure consists of expenses that are repeated in nature like salaries of
civil servants. The recurrent budget is structured in Ethiopia under four functional categories:
Administrative and general services, economic services, social services, and other expenditures.
All government bodies fall under either of these categories. For instances, administrative and
general services include such activities as political organs of the state such as council of
representatives and ministers, ministries, defence and so on. The economic services include such
activities under the agricultural, industrial and service sectors. The social services include such
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activities as health, education and culture. Other expenditure includes pension payments,
repayment of public debts, provision of unforeseen expenses and similar items. Capital budget
expenditure is usually made on the acquisition and improvements to fixed assets and includes the
expenses for consultancy services. The capital budget is grouped under three headings: economic
development, social development, and general development. Economic development includes
production activities in the agricultural and industrial sectors, economic infrastructure in mining,
road, and energy, commerce and communication. Social development includes such activities
like education, health, urban development, and welfare.
Federal Government Expenditure and its Financing
Expenditure Budget
(A) Recurrent Expenditure Birr Birr
Administration and General Service 3,755,926,900
Economic Service 396,071,700
Social Services 740,080,400
Other Expenditure 8,963,221,000
Recurrent Expenditures Total 13,855,300,000
(B) Capital Expenditure
General Development 746,945,350
Economic Development 579,269,170
Social Development 2,474,850,263
Other Expenditures 1,007,214,100
Capital Expenditure Total 5,404,911,02
Recurrent & Capital Expenditure Total 19,260,211,028

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 Summary of Revenue and Expenditure Budget
Revenue Budget (Financing)
(A) Domestic Revenue
Tax Revenue 8,588,305,263
Non-Tax Revenue 1,945,304,152
Capital Revenue 359,673,355
Domestic Revenue Total 10,893,282,770
(B) External Assistance
Multilateral Institutions 746,945,350
Bilateral Assistance 579,269,170
Counter Part Fund Assistance 2,474,850,263
HIPC Relief Assistance 819,063,431
External Assistance Total 4,620,128,214
(C) Loans and Credits
Multilateral Institutions 2,142,696,544
Bilateral Loan 0
Counter Part Fund Loan 240,103,500
Loans and Credit Total 2,382,800,044
(D) Domestic Borrowing 1,364,000,000
Total Revenue, Assistance and Borrowing 19,260,211,028

Expenditure Budget
(A) Recurrent Expenditure Birr Birr
Administration and General Service 3,755,926,900
Economic Service 396,071,700
Social Services 740,080,400
Other Expenditure 8,963,221,000
Recurrent Expenditures Total 13,855,300,000
(B) Capital Expenditure
General Development 746,945,350
Economic Development 579,269,170

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 Social Development 2,474,850,263
Other Expenditures 1,007,214,100
Capital Expenditure Total 5,404,911,02
Recurrent & Capital Expenditure Total 19,260,211,028

The Budget Policy

It is the policy of the federal government to have effective budgets that comply with the financial
law/regulations/directives, that comprehensively manage public expenditure, that link public
expenditure to government policy, that limit expenditure to revenue and debt targets, that
promote a balance of capital and recurrent expenditure, that transparently present items and
activities of expenditure, that are prepared systematically according to an authorized calendar,
that are fully funded and promptly disbursed, and that are prepared and implemented by staff
trained in the regulations, principles and practice of budgeting.

Compliance with the financial law, regulations and directives. Budgets will be prepared and
implemented in compliance with the financial law, regulations and directives.

i) Comprehensive management of public expenditure

Proclamation No. 57/1996 "Financial Administration proclamation of the Federal Government of

Ethiopia" stipulates that the budget will comprehensively manage public revenues and
expenditure. The proclamation requires that all public money except those allowed by law by
placed in the consolidated fund and that all disbursement from the consolidated fund be approved
by the council of peoples representatives through an appropriation. Appropriations will be
implemented through the annual budget and through supplementary budgets as necessary. No
expenditure or commitment of expenditure can be incurred from an appropriation without the
approval of the Ministry of Finance and Economic Development.

ii) Linking public expenditure to government policy

Council of minister's regulation no 17/1997 stipulates that the priorities of the public investment
programs will set the priorities of the capital budget and no capital expenditure shall be included
in the capital budget if it has not been approved by the public investment program. The civil

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service reform will expand the public investment program into a public expenditure program
which will comprehensively plan for three years both capital and recurrent expenditure. The
public expenditure program will set the priorities of the capital and recurrent budget.

iii) Limiting Expenditure to Revenue and Debt Targets

The Ministry of Finance and Economic Development will establish the revenue projection for
the annual budget. Expenditure ceiling will be established based on this forecast taking into
account policy largest and external agreements establishing financing limits.

iv) A balance of capital and recurrent expenditure

It is government policy that public expenditures be sustainable. Capital expenditure will have
adequate complimentary recurred expenditure. To promote this balance of capital and recurrent
expenditure, the planning and budgeting reforms of the civil service reform will improve the
linkage between the planning and budgeting of capital and recurrent expenditure. One reform
will be the introduction of cost centre budgeting, which will link expenditures within and
between the recurrent and capital budgets to common activity. A second reform will be the
introduction of the public expenditure program that will link capital and recurrent expenditures
and frame the priorities of both the capital and recurrent budgets. A third reform will be the
development of budget norms which link an activity's capital, non-wage recurrent and salary
costs.
v) Transparent Presentation of items and activities of expenditure
It is government policy to strengthen the line item budget and their introduce cost centre
budgeting to promote responsibility for inputs and their outputs. Five steps are being taken to
implement these reforms. Once step is to develop a consistent coding of the chart of accounts.
The charts of accounts are the major budget headings used to present the budget.
A second step is to promote consistency in budget categories. Consistent formats should be used
to the extent possible by both the capital and recurrent budgets.
A third step is to link where possible capital and recurrent expenditures on a cost centre basis.
Cost centres will allow managers in public bodies to know the total cost of an activity or an
administrative unit and can guide budgeting decisions.
A fourth step is to improve the list of the items of expenditure. Line item budgets are based on

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items of expenditure and are designed to control the inputs of expenditure. (Strengthening line
items budgets require improving the item of expenditure codes so they are consistent, detailed
and transparent.)
A fifth step in improving the budget will be the introduction of work plans for the cost centre.
The work plans will link inputs to outputs and will form the bases of a public body's request for a
budget.

Cost Centre Budgeting

The current budget strategy in Ethiopia emphasises on management of budget using cost centre
as compared to the former emphasis on control using line item budgets. This does not mean that
the line item control is abandoned. Rather line items of expenditures that are separately listed in
capital and recurrent budgets are linked to cost centres formed around budget categories such as
sub- agencies or projects in the budget.

A cost centre may be considered as a floating budget classification i.e. it can be found in any part
of the budget at any level of the budget. At every level of the public service, individual budget
holders are responsible for the actions of the budget holders above them. Let’s take one public
service, Ministry of Education, to explain the concept of public body, sub agency, sub-sub
agency, and cost centre.

Ministry of education is a public body and individual higher education institution represents sub
agency within the Ministry. Individual faculty /school within higher education institution is a
sub-sub agency. Each department is a cost centre within each faculty or school. A faculty
/school is a cost centre within higher education institution. Finally, each higher education
institution represents a cost centre within the Ministry.

Similarly, at regional level, the concept of cost centre may be explained as follows: Within
woreda, each Kebele is considered a cost centre and woreda, in turn, represents a cost centre
within Zone. Each zone is a cost centre in the context of region. In general, each cost centre is
defined in terms of to whom it is responsible.
Benefits of cost centre Budgeting
Cost centre budgeting has several advantages over line item budgeting. Some of them are

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described below:

1. Cost centre budgeting can promote accountability for inputs and outputs by assigning
specific responsibility for budgets to a public body’s sub-agency and projects. It requires
public bodies to map their budget to their organizational unit and activities, programs,
sub programs, and projects.
2. Cost centre budgeting provides the total cost for each sub-agency and project of public
body so that decision makers can better understand the benefits of funding different sub-
agencies and/or projects.
3. Cost centre budgeting facilities the linkage of recurrent and capital expenditures by sub-
agency and project which promotes better balance s in expenditures.

The Financial Calendar and the Planning Cycle

The Financial Calendar

The financial calendar includes a planning and budgeting cycle. The financial calendar clearly
defines and adequately schedules tasks so that plans and budgets are linked and are
systematically prepared, approved and implemented. An authoritative budget calendar is needed
for effective budgeting because budgeting depends on the outputs of the planning cycle. The
financial calendar in terms of the planning, budget cycle, the principal tasks, and the institution
responsible is described below.
Cycle /Part/Stage Period Responsible Institution
Planning Cycle: 1. Multi-year Hamle 1- Nehasse 15 MoFED MoFED & Public
Planning 2. Multi-year Programming Meskerem 14 - Tahisas bodies MoFED
3. Annual fiscal Plan 29 Pagume 1- Tahisas 29
Budgeting cycle:
A. Executive Preparation 1. Budget Meskerem 20- Megabit Public bodies
preparation 6
2. Preparation of formula for Meskerem 20 - Hidar 5 MoFED
regional subsidy
3. Notification of the estimate Tahisas 30 -Tir 7 MoFED
of subsidies
4. Budget call Tahisas 30 - Tir 7 MoFED
5. Budget Request Tir 30 - Megabit 22 Public bodies
[Link] of the Megabit 23 - Ginbot 29 MoFED
recommended budget

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[Link] of the recommended Ginbot 30 - Sene 13 PMO, Council of Minister
budget
B. Legislative Approval 8. Hidar 6 - Tahisas 5 Federation council
Approval of the formula for Sene 14 - Sene 30 Sene Parliament Parliament
Regional subsidy [Link] of the 14 - Sene 30
Recommended budget
[Link] of the approved
budget
[Link] Implementation Hamel 1 - Hamle 8 MOFED MOFED &
[Link] of the Hamle 1 - Nehasse 9 Public bodies Public
Proclaimed budget [Link] of Hamle 9 - Hamle 30 bodies
the Proclaimed budget 13.
Implementation of the Proclaimed
budget D. Executive audit /
Monitoring

The Stages of the Planning cycle

The planning cycle involves three stages. These are:

1. Multi - year planning

Multi - year planning is based on the preparation of a Macro-Economic and Fiscal Framework
(MEFF), which provides three year forecast of the following:
 Economic growth and the gross domestic product
 Public sector expenditure and source of finance
 The allocation between the federal government expenditure and the total subsidies to
regions and administrative council.
 The allocation between capital and recurrent expenditures for the federal government
 The allocation of capital expenditure between federal public bodies through Indicative
Planning Figures (IPF). IPF’s provide federal public bodies with a three-year framework
to guide them in financial programming. The Ministry of finance and Economic
Development (MOFFED) between July 8 and August 21 prepare the multi-year
planning.

2. Multi-year programming
Multi-year programming begins after the release of multi- year planning in August. It deals with
the preparation of the Public Investment Program (PIP), which involves financial programming
using Indicative Planning Figures. The programming stage requires a public body to prioritise

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expenditures based on their rank in achieving the objectives of public bodies by taking in to
account resources availability and the capacity to financially absorb and physically implement.
The Public Investment Program (PIP) requires public bodies to prioritise the capital expenditures
into three categories of projects; namely, ongoing, approved, and planned. According to PIP, no
capital expenditure should be included in capital budget if it has not been approved in the Public
Investment Program. Multi-year programming is prepared by public bodies between Meskerem
14 and Tahisas 29 and is coordinated and consolidated by the MoFFED.

The Public Investment Program (PIP) is submitted to the Council of Minister for review,
revision, and approval. It is then sent back to MoFED for the necessary changes. The revised
PIP is forwarded to the office of the Prime Minister (PMO) which in turn presents it to the
parliament for review, revision, and approval. The approved PIP is then circulated to public
bodies and frames the upcoming years capital budget.

3. Annual Fiscal plan

The annual fiscal plan is used:

- To forecast revenue and expenditure
- To set Ceiling for federal revenue and expenditure
- To make the split between federal expenditures and regional subsidies.
The fiscal plan shapes significantly the annual budget by setting the total expenditure and the
federal and regional shares of that expenditure. The annual fiscal plan is approved by the Office
of the Prime Minister.

The fiscal plan involves several tasks. Some of them include:

1. There has to be an update of the domestic and external sources available for public
expenditure.
2. It establishes a balance between the total level of expenditure and the resources available
to finance the expenditure. If the government accepts a level of expenditure beyond
domestic revenue and external grant, it must be financed by external or domestic
borrowing.
3. It allocates resources by jurisdiction (federal/ region) and by type of budget (recurrent/
capital) for the federal government.

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 4. It determines the overall ceiling of federal recurrent and capital expenditures as well as
the total ceiling for subsidy to regions and administrative councils.
5. It updates the first year of the three-year Macro-Economic and Fiscal Framework for the
upcoming fiscal year.

If is the MoFED that prepares the fiscal plan between Pagume 1 and Tahisas 29. The fiscal plan
completes the planning cycle and sets the stage for the budget cycle. This implies that it has a
link with the budget cycle.

Elements of Federal Government Budget

The key principle of a good budget is that it comprehensively manages public expenditure. The
federal annual budget has four elements. These are :
1. An estimate of the financial resources. These include domestic revenues, external assistance,
and external loan.
2. The subsidy for regions and administrative councils.
3. The recurrent budget, which includes recurrent expenditure and source of finance.
4. The capital budget which includes capital expenditure and source of finance.

Types of Budgets

Two types of budgets are prepared. These are:

1. Recommended budget
Recommended budget is prepared and approved by executive public bodies. This in turn will
be presented to parliament for review and final approval.
2. Approved budget
Approved budget is a recommended budget that has been revised, reviewed and approved by
the parliament. In other words, when a recommended budget is reviewed, revised, and
approved, it becomes an approved budget.

The budget cycle

The budget cycle has four parts. These are

1. Executive preparation
2. Legislative Adoption

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 3. Executive Implementation
4. Audits and Evaluation.
Note that the federal, regional, and administrative councils use virtually the same budget cycle

1. Executive Budget preparation

Responsibility for initiating the budget comes from the executive organs of the government.
Executive preparation of budget has seven stages. These are
1. Budget preparation
2. Preparation of the formula for Regional subsidy
3. Notification of the subsidy to regions
4. Budget call
5. Budget request
6. Preparation of the recommended budget
7. Approval of the recommended budget

Stage 1: Budget Preparation

The budget preparation involves three tasks. These are
1. Development of unit cost
Unit costs are key techniques for developing the cost build up in the request stage. Unit costs
relate resources (expenditures and revenues) to purposes. Unit costs are developed for each
major area of service and calculated by dividing resources invested by outputs.
2. Mid-year program review.
This review involves an assessment of the performance of ongoing projects with their work
plans. The purpose of review is to prepare work plans to support the budget request for the
upcoming fiscal year. This assessment also meets the legal requirement that recurrent budget
requests must be accompanied by a program review which covers the previous year and mid-year
of the current year. The program reviews provides public bodies an opportunity to review their
existing activities prior to proposing work plans for the up coming budget year.
3. Work plan development
Work plan is developed for ongoing and new projects for the upcoming fiscal year. The task
starts after the approval of public investment programs (PIP). The approved PIP is the resource

19
envelope for each public body and a list of their priority activities.

The above tasks are performed by public bodies to prepare for their budget request.
The budget preparation stage is scheduled between Meskerem 20 and Megabit 6 with the
completion of work plans.
Public bodies prepare two categories of budget documentation forms for their recurrent and
capital budget submissions during the budget preparation stage.
1. Recurrent budget Documentation form 1 (form RBD)
RBD-1. Unit costs for costs centres in recurrent budget
RBD-2. Mid-year program review in recurrent budget
RBD-3. Work plans in recurrent budget
2. Capital budget Documentation form 1 (CBD)
CBD-1. Unit costs for projects in capital budget
CBD-2. Mid-year program review for projects
CBD-3. Work plans for projects.
Once the preparation stage is complete, the next stage in federal level budgeting is for public
bodies to receive their budget ceiling in the budget call and then reduce their work plans to fit the
ceilings and document the cost build up of their work plans. The budget preparation stage is
complete when public bodies have completed forms RBD-1 to RBD-3 and CBD-1 to CBD-3 for
the recurrent and capital budgets respectively.

Stage 2: Preparation of the formula for Regional subsidy

The formula for the regional subsidy is prepared by the regional department of the MoFED and
submitted to the federation council for review and approval. The formula is then used to allocate
the total regional subsidy among the regions and administrative council. Although the formula is
not the same in all years, population, level of development, and revenue generation are the most
common factors. Their weights are not equal and may be 60%, 25%, and 15% respectively. The
MoFED prepares the proposal and submit to the federation council between Meskerem 20 and
Hidar 5.

20
Stage 3: Notification of the Estimate of subsidies

Once the federation council has approved the formula for regional subsidies, the MOFED
prepares a notification to the regions and administrative councils of the estimates of their
subsidy.
Stage 4: Budget call
The budget call is the notification by the MoFED to the spending agencies to prepare a budget
request for their expenditure and sources of finance for the upcoming fiscal year. The budget call
includes both calls for recurrent budget as well as capital budget.
The budget call has seven parts. These are;
1. Submission date.
The submission date specifies the deadline for public bodies to submit their estimates.
2. A brief review of the economic and financial constraints which public bodies should consider
when preparing their budgets
3. A review of the policies that should guide public bodies in preparing their budgets.
This part reiterates the principles of the government’s budget policy including the need to be
comprehensive, set priorities, have good composition between operating and investment
expenditure, and the need to adhere to spending priorities.
4. The procedures for treating external loan and assistance.
It cautions that the budget is based on the absorption of these external commitments and that if
there is a short fall in absorption, there will be a short fall in the budget. A commitment list of
external loans and assistance is periodically issued throughout the budget cycle by the MoFED to
provide budget staff of public bodies an up to date picture of the external commitments. Public
bodies receive the latest commitment list two weeks before the deadline. This commitment list is
attached to budget submission by the public bodies.

If a public body’s external assistance has increased since the budget call, the public body is
allowed to use the higher figure from the commitment list as long as the additional assistance
does not require additional treasury financing. If a public body’s loan ceilings are higher in the
commitment list, a public body cannot automatically increase their loan ceiling set in the budget
call. Requests raise the loan ceiling must be negotiated with the MoFED.
5. Specific guidelines for the preparation of the recurrent and capital budgets.

21
This part of the budget call presents instructions for preparing the request for the recurrent as
well as the capital budgets. Some of the key instructions include.
a. The components of the recurrent ceiling are not fungible.
Example. The assistance ceiling cannot be used for the treasury ceiling.
b. Collection of budgeted retained revenue must be vigorously pursued otherwise the
public bodies will be reduced by the shortfall in collections.
c. Complement control is essential and the approval of posts by civil service
commission does not automatically mean these positions are funded in the budget.
d. The recurrent budget should be prioritized and not simply increased on an
incremental basis.
Similarly, the instructions for capital budgets include:
a/ The components of the capital ceiling are not fungible
b/ It outlines the hierarchy of priorities in selecting capital expenditures
c/ pending Bills
d/ counterpart funding for external loan and assistance based on priorities
e/ Completion of ongoing projects
f/ Approved projects
g/ Planning projects.
6. The Budget ceilings for expenditures and the sources of finance for each public body.
7. The forms and Instructions for preparing the recurrent and capital budget submissions.

Stage 5: Budget Request

The budget request is the budgeting stage when public bodies prepare their budgets using the
ceilings of the budget call, and the information from the budget preparation stage. Public bodies
preparing their capital budget will also take into consideration the approved public investment
program (PIP). Public bodies have three principal tasks to prepare their budget request. These
are:
1. Adjust their work plans to the budget ceilings
2. Document the cost build up in the work plans.
3. Complete the forms for submitting the recurrent and capital budget requests.
The budget request provides the baseline information of a public body’s budget bid.
A public body will submit six forms each for their recurrent and capital budget request. These
22
are:
1. Recurrent budget Request formats
a/ Recurrent Budget Documentation 1 (RBD-1)
b/ Recurrent Budget Documentation 2 (RBD-2)
c/ Recurrent Budget Documentation 3 (RBD-3)
d/ Recurrent Budget Documentation 4 (RBD-4)
e/ Recurrent Budget -1 (RB-1)
f/ Recurrent Budget -2 (RB-2)
Forms (e) and (f) are summary forms which are used to present the summary of recurrent budget
request.
2. Capital Budget Request formats
a/ Capital Budget Documentation -1 (CBD-1)
b/ Capital Budget Documentation -2 (CBD-2)
c/ Capital Budget Documentation -3 (CBD-3)
d/ Capital Budget Documentation -4 (CBD-4)
e/ Capital Budget - 1 (CB-1)
f/ Capital Budget - 2 (CB-2)
Forms (e) and (f) are summary forms which are used to present the summary of capital budget
request. Form RB-1 provides an overview of the public body’s recurrent budget by class of
expenditure and source of revenue. The most important feature of form RB-1 is that it requires
the public body to organize its budget by two budget categories i.e. programs and sub agency.
Other columns of form RB-1 are used to present the code of account, class of account, the budget
request for the upcoming year, the current year’s budget, and the percentage difference between
the current year budget and the request. The sources of finance for budget may be treasury,
retained revenue, and /or assistance.

Form RB-2 presents the details of a public body’s recurrent budget by the sub-agency, budget
category and by item of expenditure. The format is headed by:
- The name of public body
- The class of account code (head)
- Sub -sub head
The amount columns of form RB2 presents:
23
 - The budget request
- The current year’s budget
- The Percentage difference between the two and the Mid-year expenditures for the
current year
- Source of finance (Treasury, Retained Revenue)
- External assistance
The capital budget request is also based on six forms described earlier. With some differences,
the capital budget forms are virtually identical to the recurrent budget forms. There are three
differences between the capital (CB-1 and CB-2) and the recurrent budget forms (RB-1 and RB-
2).
1. Both of the capital budget forms compare the budget request with the amounts listed in
the Approved public Investment program. The head of the CB-1 form includes the
approved PIP total for the public body and compares this figure with the budget request
and the ceiling. The head of CB-2 form compares the budget request for a project with
the PIP figure for that project.
2. The CB-2 form presents the details of the capital budget request by the project by the
project budget category account while the RB-2 form presents the details of the recurrent
budget by the sub-agency budget category.
3. The capital forms include a column for the loan source of finance which is not in the
recurrent budget forms because the recurrent budget is not financed by loan.

Recurrent Budget Request

24
 Public Body: ______________________________________
Total Request ____________________________________
Total Ceiling ____________________________________
Amount above Ceiling ____________________________
Class of Accounts Descript Budget Current Percen Source of finance
ion Request year’s t
Budget change
%
Subhead SS SSS Treasury Retained Aggreg
program head head Revenue ates
project project

Capital Budget Request

Public Body : ________________________________
Total Request _______________________________________
Total ceiling __________________________________________
Approved PIP ________________________________________
Request Above ceiling _________________________________
Request Above PIP ___________________________________
Class of Account Descr Budget Current Percent Source of Finance
iption Request year’s change %
Budget
Sub SS SSS SSSS Trea Retain Assistance
head head head head sury ed
progr S- subprog project Reven
am agency ram ue

Recurrent Budget Request (RBD-4)

Profile of Sub-Agency

25
 Part 1
Summary
1. Public body
2. Sub-Agency
3. Total budget requested
4. Retained Revenue
5. Treasury Financing
6. External Assistance
7. Source of external Assistance
8. Assistance code :

Part II
Description of sub agency Activities
9. Objectives accomplished and expected to be completed by the end of the current fiscal
year
10. Brief summary of the physical and financial action plan for the upcoming fiscal year.
11. Expected constraints and possible solutions:
12. Manpower requirements:
Capital Budget Request (CBD-4)
Project Profile
Part I
Summary
1. Public body
2. Project:
3. Location of the project:
4. Project description:
5. Status of project in the PIP: ongoing
6. Start and date:
7. Total cost of project (all years) :
8. Total amount in PIP for next F.Y.
9. Total budget requested:

26
 10. Treasury financing
11. External assistance
12. External loan
13. Source of external financing
14. Assistance /loan code:
15. Date of external agreement:
16. Source of foreign exchange:
Part II
Detailed Description of the project
17. Physical works so far accomplished and expected to be completed by the end of the
current fiscal year.
18. Brief summary of the physical and financial action plan for the up coming fiscal year:
19. Expected activities by other institutions that will affect the performance of the project:
20. Expected problems and possible solution:
21. Manpower requirements:
Part III
Expected Benefits
22. Benefits from the project:
a/ Expected benefits during the process of implementation.
b/ Envisaged benefits after the completion of the project.
c/ Expected employment creation by skill category:

Stage 6: preparation of the Recommended Budget

After public bodies submit budget request for recurrent and capital budget, the Ministry of
Finance and Economic Development (MoFED) prepares the Recommended budget. The
recommended budget is prepared and consolidated by the ministry for executive approval by the
Office of the Prime Minster (PMO) and legislative approval by the parliament. The
recommended budget presents the policies of the government and the expenditures and sources
of finance to achieve those policies of the government and the expenditures and sources of
finance to achieve those policies in the upcoming fiscal year.

27
The recommended budget presents the MoFED’s suggested budget for total public expenditure
and its financing. It has two audiences. These are:
1. Policy makers
2. Administrators.
For policy makers, the recommended budget presents how government policy will be
implemented through the upcoming year’s expenditures and financing. For administrator, the
recommended budget maps a public body’s budget to cost centres and provides comprehensive
details of expenditure for disbursements and control.

In order to meet the needs of the different audiences, the recommended budget is presented in
four parts. These are:
1. Introduction
This part presents a brief statement of the economic performance, the government’s development
policies, the proposed expenditure allocation, and initiatives for revenue mobilization.
2. Overview
This part presents an overview of the upcoming fiscal year’s expenditure and financing through
summary tables.
3. Budget and subsidies for appropriation.
This part of the recommended budget presents the draft of the budget proclamation which is the
legal instrument for appropriating the annual budget. Budget is appropriated in aggregate by
budget type. Thus, a total capital budget is appropriated; a total recurrent budget is appropriated;
and a total budget is appropriated.
4. Budget for approval
This part presents the approved budget with both its summary and details. The approved budget
is presented in two parts. These are:
i. Summary. In the summary, expenditures are presented in broad functional
categories.
ii. Details. In the details, each public body’s budget submission is presented by cost
centres with line item detail. Disbursement and budget control will be based on
cost centres. The detail part also presents the details of financing including the list
of assistance/ loan codes for external assistance, and loan.
More specifically, the outline of the recommended budget is presented below:
28
Part 0. Letter of transmittal (See the sample on the next page)
Part I. Introduction
- Economic performance
- Development policies
- Expenditure allocation
- Revenue Mobilization

Part II. Overview

- Expenditure and financing
- Total expenditure by functional and sub functional classification
- Recurrent and capital budgets by public body
- Subsidy to regions and Administrative councils.
- Recurrent budget by functional and sub functional classification
- Recurrent budget by public body
- Capital budget by functional and sub functional classification
- Capital budget by public body
- Financing
Part III Budget and subsidies for appropriation
- Budget proclamation No XX/Financial Year
Part IV Budget for approval
4.1 Approved budget summary
- Expenditure and financing
- Recurrent budget by class of account, functional and sub functional classification
- Capital budget by class of account, functional and sub functional classification
- Financing the federal budget
- Financing subsidies to regions & administrative councils.
4.2 Approved Budget Details
- Recurrent budget by public body and by sub-agency
- Capital budget by public body and by project
- Summary of Domestic revenue
- Summary of external assistance

29
 - Summary of external loan

The sample of letter of transmittal is shown below:

Federal Democratic Republic of Ethiopia Date ________________
Office of the Prime Minister Transmittal of the Recommended Budget I hereby
transmit to the House of People Representative for your review and approval of the
recommended budget for the Federal Government for Fiscal year ___________. The
total budget is Br ________________ . This expenditure is financed by Domestic
revenue of Br _______________,Assistance of Br. ________________and loan of Br
_____________________ His Excellence Prime Minister.

The process of preparing the Recommended Budget

The MoFED prepares the Recommended budget for recurrent as well as capital budget. There
are two steps in the preparation of the recommended budget. First, the budget department of the
MoFED conducts hearings of each public body’s budget request. After the budget hearing, the
budget department submits to the budget committee an explanatory note, which summarized the
request. This note contains the following information:
 A brief description of the responsibility for the public body.
 Its work plans for the upcoming year
 Justification for an increment for an increment or decrement of the budget
 An overview of the current year’s performance
 Policy issues that require decision
 An explanation of the deviation between ceiling request and recommendation.
The budget committee of the MoFED and the Minister discuss the recommendation document
and then makes a recommendation. The recommendation is supported by explanatory
documentation that includes:
 A brief explanation on the fiscal plan
 Current year performance to date in terms of revenue and
expenditures by functional classification
 The assumptions made in arriving at the recommendation
 Expenditure priorities

30
  Policy issues
 The source of finance
MoFED also prepares the recommended budget for capital budget. The preparation of capital
budget involves the following steps:
1. Review the capital budget requests from public bodies.
If the review and the request of public body differ, discussions are held to reach
agreement on the request.
2. Based on the review, capital budget recommendation is prepared and submitted to
the capital budget steering committee which have members from the PMO and
MoFED.
3. The steering committee calls the public bodies to defend their budget (conduct
capital budget hearing). The hearing is comprehensive but focuses particular attention
to the following issues:
 The status of projects
 Implementation capacity of the institutions involved.
 Compatibility of proposed projects with the country’s development strategy and
policy
 The cost structure of the projects, and
 The regional distribution of project
4. The result of the capital budget hearing is informed to the department in MoFED that
prepared the recommendation budget for further refinement.
5. After refinement, the final recommended capital budget is prepared.

2. Legislative Approval and Appropriation of the Budget

The concept of Approval and Appropriation
Approval is the review by the parliament to ensure that public expenditures and their financing
accords with government policy. Appropriation is an authorization by an act of the parliament
that permits public bodies to incur obligations and to make payments out of the consolidated

31
fund for specific purposes. The current practice is to appropriate just the total of the capital and
recurrent budgets and not the specific allocation to public bodies.
Appropriation focuses on the legal authority to obligate expenditure. It is essential that the
approval step be added. It is during this step that parliament examines the relation of public
expenditure and public policy. To facilitate the review, parliament can use the Public Investment
Program to review capital expenditure and eventually use the Public Investment Program to
review both capital and recurrent expenditure to determine if government policy is incorporated
in the annual budget.

Approval and Appropriation are very different steps and need to be kept separate. Approval can
and should be done by very detailed budget categories such as public body, program, sub agency,
sub-program, project etc. Appropriation can be more global. By maintaining the practice of
global appropriation of the annual recurrent and capital budgets, the parliament provides the
executive branch flexibility to manage the budget. For example, Under a global appropriation,
the parliament does not appropriate a specific amount to a public body ( example. The Ministry
of Education is not appropriated X million Birr). With a global appropriation, the MoFED with
the approval of the Council of Ministers can reallocate the budget between public bodies without
further parliamentary approval as long as the global total of the recurrent or capital budgets are
not increased.

Once the parliament has approved the recommended budget, it becomes the approved budget.
Then the parliament votes an annual appropriation to fund the regional subsidy and the Federal
recurrent and capital budget out of the consolidated fund.

Finally, the approved budget is proclaimed using Nagarit Gazette (Refer to proclamation No
____ 19 ___ for the proclaimed budget of 19 __)

3. Executive Implementation of the budget

After parliamentary approval and appropriation of the budget, the executive public bodies have
to implement the budget.

32
There are three stages in implementation. These are:
1. Notification of the proclaimed budget to the federal public bodies.
Budget notification takes place when the MoFED notifies federal public bodies of their budget
by class of account and by item and when MoFED also notifies regions of their appropriated
subsidies. The notification phase of budgeting for the federal public bodies would involve the
following steps:
a. Revision in Approved budget to reflect the changes made by parliament.
b. Notify to each public body of their approved budget by item of expenditure or by sub-
agency budget category for the recurrent budget and by the project budget category for
the capital budget.
c. The MoFED issues to public bodies form RB-3 “proclaimed recurrent Budget for
notification”.
2. Operation of the proclaimed Budget
In the operation stage, the proclaimed budget is operationalized in to the action plans which are
submitted to the respective finance institutions as well as used within the public body to
implement the budget. Action plans are how work plans are to be implemented both financially
and physically.
3. Implementation of the proclaimed budget.
In the implementation stage, the proclaimed budget is managed in terms of requests for
adjustments (transfers, virements and supplementary) and monitored through physical and
financial reports. Transfers refer to funds that are transferred between public bodies which
increase one public body’s budget and decrease another public body’s budget. Transfers do not
change the total government budget; virement is the allocation of funds within a public body’s
budget between items of expenditure (ex. Reallocation from supplies to maintenance), between
projects, but does not change the total of a public body’s budget. Supplementary are additional
funds to a public body which increase the total government budget and require additional
resources and require additional appropriation.

Budgetary Institution (BI)

Budgetary Institutions are defined as those institutions that are fully or partially financed by
Government. The budget process assumes the appropriation of budgets. The appropriated budget

33
is the budget approved by the Council of people's Representatives (CPR). The appropriated
budget is broken down by:

 Recurrent and capital expenditure for the federal government, and

 Subsidy for each regional government

The federal government's portion of the appropriated budget is assigned to projects and sub-
agencies within PBs and broken down by sources of funding (domestic, assistance and loan).
This is called the approved budget. The approved and appropriated budget is published in the
Negarit Gazeta.

A PB's entire approved budget is assigned to projects and sub-agencies under its immediate
administrative control. The budget of a PB is the total budget of its projects and sub-agencies.

A project or sub-agency may allocate any portion of its approved budget to sub-projects or sub-
sub-agencies. The budget of a sub-project or sub-sub-agency is called an allocated budget. A
sub-project or sub-sub-agency for which a budget is allocated is always at a different location
from the project or sub-agency. A notification of any allocation is sent to MOFED.

Projects, sub-agencies, sub-projects, and sub-sub-agencies are defined and coded in the chart of
accounts. Any entity that receives an approved or allocated budget from a PB's approved budget
is called a Budgetary Institution (BI). Generally:

 PBs are ministries, authorities, and commissions.

 BIs are projects, sub-agencies, sub-projects, and sub-sub-agencies.

 BIs are administered by PBs.

 The entire approved budget of a PB is assigned to BIs.

Figure 2.1 shows the structure of financial administration in the budget process. There are
exceptions to these generalities, but the majority of government is organized in this manner.
The focus of budgetary control is on the BI. PB's budgetary compliance can be computed by
consolidating reports from all BIs included in its approved budget.

Accounting Unit

34
For cash management, another entity is created: the Bank Account (BA). The BA is not coded in
the chart of accounts and does not receive a budget. However, it is important for cash
Management and control. The FGE accounting system includes the 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.
Each BA:

 Is managed by an accountant.

 May: Have its own cashier,

 Share a cashier with other BAs, or

 Have no cashier associated with it (like foreign currency bank accounts)

 Handles cash flows:

 For one or more than one BI, and

 From one source of financing (domestic, assistance or 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:

 Processes transactions for the BI/BA,

 Maintains registers for the BI/BA,

 Maintains a general ledger for the BI/BA.

 Maintains subsidiary ledgers for:

 Asset accounts.

 Liability accounts.

 Letters of credit.

 Prepares a monthly report for the BI/BA.

A complete set of accounts and general ledger is maintained for each BI by bank accounts,
because each source of funding is budgeted distinctly, and the cash from each source is
physically separated in distinct bank accounts.

35
Each month, a monthly report is prepared from the general ledger for the Bank Account (BA).
Cash ledger cards in the general ledger control the cash balances in the bank and in the safe. If
more than one BI shares a single BA, the accounting unit:

 Processes transactions for all BIs.

 Maintains a register for the BA.

 Maintains a general ledger for the BA.

 Maintains subsidiary ledgers for:

 Items of expenditures by BI and by type of budget.

 Asset accounts.

 Liability accounts.

 Prepares a monthly expenditure report for each BI.

 Prepares a consolidated monthly Trial Balance for the BA.

One general ledger is maintained for the BA. The only records maintained for each BI are
accounts in subsidiary ledgers for items of expenditure. Monthly, the subsidiary ledger
information is used to prepare an expenditure report for each BI. These reports are consolidated
with information from the general ledger into a monthly report for the BA.

The balances of cash in safe and cash in bank are maintained in ledger cards of general ledger for
the BA.

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 may apply to a reporting entity:

 A reporting entity may be an accounting unit, and an accounting unit may consist of only
one BI. Therefore, a single BI may be a reporting entity.

 A reporting entity may be a PB that receives the monthly reports from several accounting
units.

36
Whoever sends the reports to MOFED is the reporting entity. Therefore, the reporting entity is
not, necessarily, an accounting unit.

Cashier and Accountant

In the FGE accounting system of cash control, the cashier's function and the accountant's
function are distinct. Cash consists of currency and checks. The cashier's function is to maintain
and control cash in the safe. The accountant's function is to maintain and control cash at the
bank.

Only the cashier can receive currency and checks and make disbursements in currency. Daily,
the cashier should count cash on hand and reconcile ending cash on hand to the cash book.

The cash in safe is controlled by an imprest system. When cash is received as per the budget or
other sources, the cashier will:

 Issue a cash receipt,

 Segregate the cash received from cash available to disburse,

 Deposit the cash received intact in the bank as soon as practical, usually
daily, and

 Surrender copies of all cash receipts and a copy of the bank deposit slip to
the accountant.

In the imp rest system, a balance is established for cash in safe. The accountant issues this
amount of cash to the cashier using a check. When cash is disbursed to establish the Imprest
Fund, the cashier will issue a receipt voucher. If the amount of cash in safe is to be replenished,
the cashier will surrender all payment vouchers to the accountant. The accountant will replenish
the cash in safe by issuing a check to the cashier for the total amount of the payment vouchers
that are surrendered. The replenishment should return the balance of cash in safe to the
established level.

The accountant's responsibility for cash is to maintain a record of the total cash position of the
entity, including cash at the bank and cash in the safe. The accountant records cash movements
that flow through the cashier and cash movements that flow directly through the bank. Direct

37
cash movements through the bank normally include bank transfers and charges, checks written,
and any other transactions that do not require cash handling by the cashier.

When a PB has more than one cashier, one cashier is designated as the main cashier. The other
cashiers are designated as assistant cashiers. Each PB is responsible for organizing assistant and
main cashiers. However, some general principles apply.

Assistant cashiers are responsible for:

 Collection of Cash

 Issuing deposit and/or receipt vouchers

 Making deposits at Bank

The main cashier is responsible for:

 Reconciling cash and vouchers for each assistant cashier

 Depositing cash in the bank

 Disbursing cash for the proper functioning of the PB

 Managing the petty cash

To accomplish these responsibilities, most PB s with multiple cashiers are organized as follows:

Each assistant cashier:

 Collects revenue and issues receipt vouchers

 May summarize receipt vouchers on Model 16

 Sends a copy of receipt Vouchers and Model 16 to accounts

 Sends cash to main cashier

 Receives Model 64 as receipt from main cashier

The main cashier:

 Collects cash from cashiers

 Verifies cash with accounts

 Verifies the amount on receipt vouchers equals cash received

38
  Verifies amount for each revenue account

 Completes Model 64

 Gives the copy of Model 64 with the deposit slip to accounts

 Gives a copy of Model 64 to assistant cashiers

 Deposits cash in bank

 Attaches the deposit slip to Model 64

 Gives the copy of Model 64 with the deposit slip to accounts

The accountant:

 Receives receipt vouchers and Model 16 from assistant cashiers

 Verifies accounts and amounts on receipt vouchers

 Dispatch the documents to the main cashier

 Receives Model 64 with deposit slip attached from main cashier

 Records Model 64 in the transaction register and ledgers

Public Bodies with Branch Bank Accounts

Some PB s establishes operations or branches in more than one location, and opens a bank
account at each branch. These branch bank accounts do not receive or send transfers directly to
MOFED.

The public Body uses Branch bank accounts for operations within the Public Body. They are
blocked at the end of the year. Some public Bodies maintain other types of bank accounts for
special purposes, such as deposits. These are not blocked at the end of the year and are not
considered branch bank accounts.

Depending on the capacity of the PB, accounting for the branch bank account can be handled in
one of the two ways:

o If there is sufficient capacity, each branch bank account can be treated as an accounting
unit.

39
 o If there is no sufficient capacity, each branch bank account can be treated as a safe.

Branch Bank Account treated as Accounting Unit

If the branch bank account is treated as an accounting unit:

 A general ledger is established for the branch bank account

 Cash movements between the main bank account of the PB and the branch
bank account are recorded as transfers,

 Subsidiary ledgers are established fro each BI receiving funds from the
branch bank account, and

 A monthly report is prepared and sent to the accounting unit of the PB's
main bank account

The accounting unit of the PB's main bank account consolidates the monthly report from the
branch bank account with the monthly report of the main bank account. The consolidated
monthly report is sent to MOFED. This process is shown in Figure 2.3.

Figure 2.3

 Branch Bank
This is an Accounting Account Treated as Accounting Unit
Unit
 A general ledger is maintained
 Subsidiary ledgers are maintained for each BI using this account
 Transfers are recorded for funds sent to other bank accounts
 A subsidiary ledger is maintained for the transfer account
 40 bank accounts
Monthly reports are received from other
 Monthly reports are combined into one monthly report for MOFED
 Cash is transferred Monthly report is sent

Branch Bank Account

 This is an Accounting Unit
 A general ledger is maintained
 Subsidiary ledgers are maintained for each BI using this account
 Transfers are recorded for funds received from PB bank account
 Monthly report is prepared sent to main bank accounts accounting unit

Branch Bank Account treated as a Safe

If the branch bank account is treated as a safe:
 A cash book is maintained for the branch bank account, and
 Receipt and payment vouchers are given to the main bank account's accounting unit.
The accounting unit of the PB's main bank account does the following:
 Cash movements between the main bank account of the PB and the branch
bank account are recorded as advances, and
 Receipt and payment vouchers received from the branch bank account are
recorded in general and subsidiary ledgers.
The Process is shown in Figure 2.4 below.

Figure 2.4: Branch Bank Account Treated as Safe

PB Main Bank Account

 This is an Accounting Unit
 A General Ledger is maintained
 Subsidiary Ledgers are maintained for all BI under this PB

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 Cash is Sent Vouchers are sent

Branch Bank Account

 A Cashbook is maintained
 Receipt and payment vouchers are sent to the main bank account's
BAU

Budget Ledger Card

The purpose of the budget ledger card is to maintain a continuous and updated record for each
budgeted item of expenditure by BI and source of finance with respect to:

 Approved budget

 Revised budget

 Payments received for budgeted expenditure.

 Amount remaining to be requested.

 Commitments

 Balance in the revised budget that is not committed.

The budget ledger card is divided into two parts:

A. The top of the card contains information to identify the

 BI,

 Type of budget, and

 Item of expenditure.

 The table on the card contains detailed information about each budget transaction.

Purpose of Each Field in the Budget Card

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Upper part of the Budget Ledger Card

Name of Public body and Public Body code: the field is to identify the PB to which the budgeted
expenditure is related.

Name of Program and program Code: the field is to identify the Program to which the budgeted
expenditure is related.

Name of sub agency & Sub Agency Code: the field is to identify the BI to which the budgeted
expenditure is related.

Name of Sub Program and Sub Program Code: the field is to identify the Sub Program to which
the budgeted expenditure is related.

Name of Project & Project code: the field is to identify the BI to which the budgeted expenditure
is related. Source of Finance & code: the field is to identify the source of funding that is recorded
on the ledger card.

Page Number: the field identifies the page number of the budget ledger card.

Type of Budget and Code: the field is to identify whether the item of expenditure is a part of the
recurrent or capital expenditure budget.

Item of Expenditure & Code: the field is to identify and describe the item of expenditure by its
budget code.

Lower Part of the Budget Ledger Card

Number, Date, Description & Reference Number: the purpose of these fields is to respectively
identify:

 The sequential number of the transaction.

 The date of the transaction.

 A brief narrative of the description of the transaction.

 The reference number of the source document to the transaction.

Approved Budget: the field identifies the amount of the original approved budget for the item of
expenditure.

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Additions/Reductions to approved Budget: the fields are used to track changes to the approved
budget and provide information to compute the revised budget.

Revised Budget: the field contains the approved budget adjusted for any additions or reductions.
The revised budget is key for budget control. An item of expenditure must not exceed its revised
budget.

Payment Received for Budgeted Expenditure: the field is used to record payments received
(Whether as cash or non-cash from the appropriate source of funding and assists in keeping track
of the amounts of money received for the item of expenditure.

Unpaid Balance: the field is the difference between the revised budget and the amount of funds
received (whether as cash or non-cash) to meet the budgeted expenditure and assists in keeping
track of the remaining amounts of money that may be requested for an item of expenditure.

Commitment: the field is used to record current commitments and assists in identifying the
balance available in the budget for expenditure. Balance not committed: the field contains the
difference between the revised budget and the commitments. The balance not committed is the
available budget for future spending. Once the uncommitted balance is reduced to zero, the
Budget Section will approve no further spending.

1.4 Basis of Accounting

A transaction is an economic event that affects the financial position of the government. 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 cash basis of accounting is a basis of
accounting that recognizes transactions and other events when cash is received or paid.

Although organization’s earnings and related operating activities are continuous, they are
reported at specific intervals (i.e. an accounting period or budget year) in order to provide useful
information for decision-making on a timely basis. Some activities may begin and end during
the accounting period, while others may require two or more accounting periods for completion.
Budget year for FGE is from Hamle 1 to Sene 30.

In summary, accrual accounting is based on cash flows but reports transactions and other events
with cash consequences at the time the transactions occur rather than at the time cash is received

44
or paid. Accrual accounting is also superior to cash-basis accounting from the standpoint of
measuring financial statement elements.

The FGE accounting system employs a modified cash basis of accounting. Modified cash basis
of accounting is a compromising basis of accounting between the two extreme bases of
accounting. It adopts features from both bases of accounting. Most transactions are recorded
using cash basis of accounting and some transactions are recorded using accrual basis of
accounting. The modified cash basis of accounting in FGE means that cash basis applies except
for recognition of the following transactions:

 Revenue and expenditure are recognized when aid in kind is received.

 Expenditure is recognized:

 When payroll is processed.

 At the end of the year when a grace period payable is recognized.

 When goods are received or services are rendered if payment for the goods or services
was rendered in advance.

 When cash moves from an unrestricted to a restricted bank account to meet the
requirements of a letter of credit. When cash moves out of he restricted account, no
expenditure is recognized.

 Intergovernmental transfers are recognized in the absence of actual cash movement.

 Transactions resulting from salary withholdings are recognized in the absence of actual
cash movement.

The modified cash basis of accounting is consistent with the budgeting process and produces
information useful for comparing budgeted and actual revenue and expenditure. The modified
cash basis accounting system requires the same temporary accounts as the cash basis of
accounting plus the following permanent accounts: cash and cash equivalents, receivables and
payables.

The FGE accounting system employs a combination of temporary and permanent accounts. All
account balances at the end of the year may not have a zero balance. So, a process is necessary
that distinguishes temporary accounts and sets them to zero. The process of setting the balance in

45
temporary accounts to zero is called closing the 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
budget year. This process requires a net assets/equity account.

All assets 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 financial information that is reported in a
Statement of Changes in Cash Position and a Statement of Budgeted versus Actual Expenditure.

Asset and liability accounts other than cash, receivables, payables, and letters of credit are
included in the chart of accounts to allow institutions that have the capacity to maintain
accounting records of all assets and liabilities. These other assets and liabilities are recorded
using the cost method. The cost method values assets at their original cost and liabilities at the
amount still due. Recording these other assets and liabilities is an option for the future in the
FGE accounting system.

Legal financial administration:

The financial administration in FGE mainly involves Ministry of Finance and Economic
Development (MOFED) and Regional Finance and planning offices and a Public Body. The
specific Federal and Regional government administrative authorities and the required
organizational structure in public bodies are illustrated in the following;

Figure 2.1 Structure of Financial Administration in the Budget Process

Ministry of Finance and Economic Development

Public Body
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 Budgetary Institution:
Project or Sub-Agency

Budgetary Institution:
Sub-Project or Sub-Sub-Agency

Figure2.2: Structure of financial administration within public Body

Head of public Body

Head of Administration and Finance

Head of Budget and

General Services
Accounts
and Administration

Budget Section
Accounts section

The following are responsibilities of MOFED, Budgetary Institutions, Accounting unit,

Accountant Cashier
Reporting Entity, Cashier and Accountant in the financial administration in the Budget process
and within the Public Body

Ministry of Finance and Economic Development (MOFED)

MOFED administers the financial system for the federal government and has the highest level of
administrative authority. MOFED consists of a:

 Budget Department that prepares and distributes notification of approved federal

budgets and administers the budget.

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  Central Accounts Department that receives monthly repots and compiles financial
statements for the federal government.

 Central Treasury Department that receives and distributes cash from central treasury.

 Credit and Investment Department that manages the federal government's investments
and debt.

This is not a complete description of MOFED or its departments. This is description of their
roles and responsibilities within the accounting system.

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