Basic Financial and Accounting Systems for MFIs - …

1 Website: Website: Basic Financial and Accounting Systems for MFIs March 2008 Mennonite Economic Development Associates Ruth Dueck Mbeba Microsave Market-led solutions for Financial services Acknowledgements MEDA acknowledges the contribution and input of Nandan S. Bisht, Abhishek Choudhury, Ruth Dueck Mbeba, Ruth Hoffman, V. Nagarajan, Prakash, and Vishrant Shukla in writing and development of the overall toolkit. Much of the content and application is based on Indian and international microfinance Accounting practices. Many thanks to the helpful input and support from MEDA staff in making this effort possible, especially to Trudy Rejeski. A learning toolkit is never final as new techniques, tools and resources become available and are shared with one another.

2 Both Accounting standards and regulatory frameworks for microfinance are continually developing, and it is important to keep up to date with changes. Participant feedback and comments will assist to continually improve this toolkit and its resources. Microsave Market-led solutions for Financial services MFI Basic Financial and Accounting Systems for MFIs page i Table of Contents 1. What do Users Need and Why?..2 Microfinance Institutions and their What is Accounting ?..6 Accounting Conventions or 2..11 Overview of Microfinance Accounting SystemsMicro-Finance Accounting and Management Information 11 Cost Accounting for Multi-Service 15 The Chart of 16 The MIS Structure for Loans and 19 MFI Accounting 20 3..22 Accounting DocumentsSource 22 Accounting Transaction 22 Cash and Bank Journals (Cash Book or a Journal cum ledger).

3 23 General 24 General 24 Subsidiary 25 Fixed Assets 26 The Audit 26 4..28 The Accounting 28 Classifying 28 29 Posting to the General 29 Trial 29 30 Accounting 31 Draft Financial Statements and 31 Why is Loan and Savings Information so Important?.. 31 Transaction Occurs Client Receipt or 32 MicroSave Market-led solutions for Financial services MFI Basic Financial and Accounting Systems for MFIs page ii Issue Receipts or Verify Receipts of 32 Record and Summarise Receipts for General 33 Update Client Records with Individual 33 Draft MIS 33 Reconcile MIS and General 33 Issue Summarised MIS 33 5..35 Internal Control ProceduresControl 36 Policies and 36 Qualified, Trained and Motivated 36 External and Internal 36 General Control 37 Specific Control 38 Segregation of 38 Accounting for 39 6.

4 42 Accounting Procedures for MicrofinanceCash vs. Accrual 42 Accounting for Client 43 Accounting for Accrued Loan Interest 44 Accounting for Impairment Loss Allowance and Provision for Impairment 45 Accounting for Loan Write-Offs and Write-Off 47 Accounting for Deferred Expense on Group 48 Accounting for Software Development and 49 Accounting for the Purchase and Depreciation of Fixed Accounting for the Sale or Disposal of Fixed 50 Accounting for Grants and 50 Accounting for Fixed Asset 51 Accounting for Donations of Loan 52 Accounting for In-Kind Subsidies and Accounting for Financial 54 Translation of Foreign 54 Accounting for Bank 55 Accounting for Applications in Technology 55 Accounting for Agency 56 MicroSave Market-led solutions for Financial services MFI

5 Basic Financial and Accounting Systems for MFIs page iii 7..57 Financial Statements and ReportsThe Financial 58 Cash Flow 61 The Portfolio and Operational 63 Disclosure of Financial Information:.. 64 Consolidating Financial Statements of Closing 66 Other External 67 Emerging 67 Where to Go From 69 Resource 71 Figures: Figure : Accounting Debits and Figure : Microfinance Financial Management Information system Accounting system and Client Portfolio system (MIS)..11 Figure : Sample Chart of Account Figure : Sample Chart of Account Descriptions and Figure : General Journal Sample (adjustments)..24 Figure : Accounting Figure : Sample Trial Figure : Accounting Cycle for Client Transactions in the Figure : Illustration of Accounting for the Impairment Loss Allowance and Figure : Illustration of Accounting for Loan Write-offs and Write-off Figure : Illustration of Deferred Expense on Group Figure : Illustration of Accounting for Software Development and Figure : Illustration of Accounting for Grants and Figure : Illustration for Donations and Grants for Fixed Figure : Illustration of Donations for Loan Figure.

6 Illustration of Donations of In-kind Subsidies and Figure Understanding Relationships between Financial MicroSave Market-led solutions for Financial services MFI Basic Financial and Accounting Systems for MFIs page iv List of Handouts: Section 1: Introduction Workshop Schedule Financial Statement Terms and Definitions SEEP Framework List of International Financial Reporting Standards List of International Accounting Standards Section 2: Overview of Accounting Systems Sample Chart of Accounts Section 3: Accounting Documents Sample Accounting Documents for MFIs Sample Client Forms for MFIs Sample Document Register Section 4: The Accounting Cycle Sample Accounting Cycle Sample Reconciliation Schedule Reconciliation Tips Sample Bank Reconciliation Sample Portfolio Reports Sample MIS Report Schedule Section 5: Internal Control Procedures Sample Accounting Policies Sample Monthly Accounting Checklist Sample Manager s Accounting Report Checklist Sample Management Checklists Sample Cash Count and Verification Sample Vault Register Section 6: Accounting Procedures for Microfinance Section 7: Financial Statements and Reports Sample Financial Statements Sample Audited MFI Statements Sample Portfolio and Non- Financial Data Reports Sample Consolidated Financial Statements Course Evaluation List of Exercises Section 1.

7 Introduction Balance Sheet Classification Sample Transactions Balance Sheet Section 2: Overview of Accounting Systems Chart of Accounts Head Office and Branch Section 3: Accounting Documents Accounting Documents Design MicroSave Market-led solutions for Financial services MFI Basic Financial and Accounting Systems for MFIs page v MicroSave Market-led solutions for Financial services Section 4: The Accounting Cycle Preparation of Accounting Adjustments Analysing a Trial Balance Section 5: Internal Control Procedures Sample Accounting Transactions Segregation of Duties Distance Management Segregation of Duties Loan Officers Handling Cash Segregation of Duties -- Branch Personnel Problem Section 6: Accounting Procedures for Microfinance Accounting for Impairment Loss Allowance, Provisions and Write-Offs Accounting for Deferred Revenue Section 7: Financial Statements and Reports Financial Statement Preparation Financial Statement Preparation - Condensed Loan Portfolio Quality Reports Where Users Get their Information!

8 Case Study If I Had a Million Dollars MFI Accounting Action Plan MFI Basic Financial and Accounting Systems for MFIs Section 1 - 1 1. Introduction My Accounting department prepares all Financial statements and submits them to the investors and donors. I don t get very involved in Accounting . We produce Financial statements when requested by donors or statutory bodies usually on a quarterly basis. I find it unnecessary to do it more often. We have an external audit simply to satisfy regulatory requirements. Do these comments sound familiar? Most m icrofinance practitioners would agree that an MFI s Accounting system is a key co mponent of control and reporting in the institution. However, many are not fam iliar with Accounting and Accounting terms, let alone appreciating or understanding the Financial sta tements pro duced by the accounti ng sy stem.

9 Using the Financial stat ements as management tools the balance sheet, the income and expense st atement and the cash flo w statements is often a challenge. However, the Financial reports produ ced by Accounting s ystems ar e first and fore most i mportant management and monitoring tools. They form the foundation for relevant measurement, reporting and performance analysis. This toolkit is designed to provide MF Is of all types, legal structures and methodologies the core components of Accounting s ystems needed to record, classify and summarise Financial transactions and to produce meaningful, tim ely and accurate Financial state ments and r eports. Key practica l procedures and aspects of Accounting for microfinance institutions are highlighted. However, the toolkit is not intended to replace the extensive Accounting training offered by colleges and universities that is necessary to produce certified accountants.

10 Those courses include a strong theoretical foundation of Accounting practice, and a b road range of specific applications. This toolkit covers key t heoretical concepts but e mphasises practical procedures, skills, and tools needed to manage Accounting for microfinance. The materials draw heavily on Basic Accounting principles, and on other resources produced for the microfinance industry internationally. Resources and publications are cited in the bibliography at the end of this toolkit. Your MFI s Accounting structure and system is one of the key cornerstones of good information Systems in microfinance institutions. A good Accounting system produces accurate, relevant and timely reports that enable: meaningful analysis and monitoring of operations, are fully auditable and stand the test of external audits, and meet the requirements of external reporting needs.