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.

2 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. 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.

3 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).. 23 General 24 General 24 Subsidiary 25 Fixed Assets 26 The Audit 26 4.

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.

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..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

6 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 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).

7 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.

8 Illustration of Donations for Loan Figure : 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.

9 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: Introduction Balance Sheet Classification Sample Transactions Balance Sheet Section 2: Overview of Accounting Systems Chart of Accounts Head Office and Branch Section 3.

10 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.