Accounting Principles for Microfinance Institutions CGAP Book

Accounting Principles for Microfinance Institutions CGAP Book
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    ACCOUNTING FOR MICROFINANCE INSTITUTIONS: Fundamentals of Accounting for Microfinance Managers

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    ©2009 Consultative Group to Assist the Poor/The World Bank. All rights reserved. Consultative Group to Assist the Poor 1818 H Street, N.W. Washington, DC 20433 actionURI(http://www.cgap.org):Internet: http://www.cgap.orgactionURI(http://www.cgap.org): EmactionURI(mailto:cgap@worldbank.org):ail...

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    iii Table of Contents Acknowledgments...........................................................................................................................iv Introduction............................................................................................................................

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    iv Acknowledgments CGAP would like to thank those who were instrumental in the development and design of the original CGAP “Accounting for MFIs: Fundamentals of Accounting for Microfinance Managers” course and its update in 2008: Janis Sabetta, Brigit Helms, Jennifer Isern, Michael Goldberg,...

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    v Introduction BACKGROUND OF THE CGAP SKILLS FOR MICROFINANCE MANAGERS COURSE SERIES In 1997, Jennifer Isern and Brigit Helms of CGAP launched a pilot program in Africa to provide financial management courses to microfinance institutions (MFIs), based on industry-wide observation that the greate...

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    vi CGAP also requests that all those who offer the “Accounting” course use the following text in their marketing materials and course descriptions: “The Accounting course is based on the materials developed by CGAP which are publicly available actionURI(http://www.cgap.org):on http://www.c...

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    vii Overview of the Course Based on the premise that MFIs have to be sustainable for long-term impact and that sound accounting is one of the pillars of financial health for an MFI, the “Accounting for Microfinance Institutions: Fundamentals of Accounting for Microfinance Managers” course in...

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    viii Session 6: Creating Statements How to:  Prepare an Income Statement and a Balance Sheet from the Trial Balance  Discuss the importance and use of a cash flow statement  Record closing entries to clear and close revenue accounts Session 7: Interpreting Statements  How financial s...

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    ix References for the Course (updated in 2008) KEY DOCUMENTS CGAP. 1999. “External Audits of Microfinance Institutions: A Handbook.” Technical Tools Series, No. 3. Washington, D.C.: CGAP, actionURI(http://www.cgap.org/p/site/c/template.rc/1.9.2999):March. http://www.cgap.org/p/site/c/templat...

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    ©CGAP/World Bank, 2009 A-1 SSEESSSSIIOONN 11:: WWEELLCCOOMMEE AANNDD IINNTTRROODDUUCCTTIIOONN Session Summary OBJECTIVES: By the end of the session, participants will be able to:  Introduce participants to each other  Determine their training needs  Establish expectations  Stat...

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    Trainer Instructions A-2 Session 1: Welcome and Introduction WELCOME 1. (3 minutes) Have the representative from sponsoring organization welcome participants and open the workshop. 2. (5 minutes) Follow this with remarks from official guests. 3. (2 minutes) Introduce and hand the workshop over to...

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    A1: Welcome and Introduction A-3 information. The focus, of course, will be for managers to understand and apply these in a microfinance institution, and so provide a basis for moving toward sustainability.  Upon completion of the course, it is hoped that you will be able to operate your accou...

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    Trainer Instructions A-4 7. (12 minutes) One by one, have all members of the group introduce themselves to the entire group in less than 20 seconds, using the following format printed on a flipchart. Introduce yourself first as an example. One by one, participants should: Stand (at their seats). ...

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    A1: Welcome and Introduction A-5 These Expectations flipcharts will be reviewed in step 11. GOALS AND OBJECTIVES 11. (5 minutes) Present the overhead with the workshop seminar goals (A1-O1) again. Review it briefly. Show A1-O3, Workshop Objectives. Post the Expectations flipcharts at the same tim...

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    Trainer Instructions A-6 the group that each trainer brings specific expertise to the training that must be complemented by the other trainers for a full transfer of knowledge. 13. (2 minutes) Tell the group that it is good also to have a common understanding of terms that will be used in the cou...

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    A1: Welcome and Introduction A-7 What is the most important goal of a microfinance institution? 1. Serving the poorest 2. Getting the most donor funds 3. Reaching as many people as possible 4. Reaching financial sustainability To establish an impairment for loan loss account is for: 1. The M...

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    Trainer Instructions A-8  You can also mention that both CGAP and SEEP have developed Excel-based tools to help fill out the financial statements and calculate adjustments and financial ratios. The Internet addresses where the Excel tools can be downloaded are included on the List of Accountin...

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    A1: Welcome and Introduction A-9 A1-M1 Sample Name Tents To Use: Cut along solid lines, then fold on dotted line. Make sufficient copies (preferably copied on hard paper) for all participants. Distribute to participants and ask participants to write their name in the space provided. I hear, I for...

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    A1: Welcome and Introduction A-11 I hear, I forget I see, I remember I do, I understand

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    A1: Welcome and Introduction A-13 I hear, I forget I see, I remember I do, I understand

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    A1: Welcome and Introduction A-15 A1-M2 Training Needs Audit Answers (Value for the correct answer shown on the right) 1. Financial accounting for MFIs has to be different from “regular” accounting and cannot follow international accounting standards. True or False False 1 2. Which of the fol...

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    Trainer Instructions A-16 7. Which of the following is the best measure of an MFI’s profitability? a. Yield on portfolio b. Adjusted return on assets c. Repayment rate d. Income minus Expenses e. I don’t know 1 8. To reflect the fair value of the portfolio, MFIs make entries to account for pr...

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    A1: Welcome and Introduction A-17 A1-M3 Suggested Duration of Sessions ACCOUNTING COURSE Minutes Min Max 1 Welcome and Introduction 90 90 2 Introduction to Accounting 65 70 3 Financial Statements and Portfolio Report – Overview 160 160 4 Recording Transactions 190 250 5 Summarizing Entries 25...

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    A-19 OVERHEADS FOR SESSION 1 ARE CONTAINED IN POWERPOINT FILE ENTITLED “CGAP ACCOUNTING OVERHEADS_1.”

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    A1: Welcome and Introduction A-21 ©CGAP/World Bank, 2009GoalsGoalsGoals Understand how financial statements are created Obtain basic knowledge of:– Underlying accounting principles– How the results of accounting can assist a manager to identify and analyze problemsA1-O1©CGAP/World Ba...

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    Trainer Instructions A-22 ©CGAP/World Bank, 2009ObjectivesObjectivesObjectives To process accounting transactions To create financial statements that account for loan losses, interest revenue, and donor funds according to SEEP and CGAP formats To use accounting data to generate useful ...

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    A-23

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    A1-H1 ©CGAP/World Bank, 2009 ASSETS – What I already know LIABILITIES – What I need to learn in this course

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    A1-H2 (page 1 of 2) ©CGAP/World Bank, 2009 Training Needs Audit (Please use a pen.) Name: ________________________ Organization: ________________________ Please mark your answers on this question sheet. If you are not reasonably sure of the answer please mark “I don’t know” instead of gues...

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    A1-H2 (page 2 of 2) ©CGAP/World Bank, 2009 6. A balance sheet has three basic components: Assets, Liabilities, and Equity. Write in the letter of the following accounts next to one of these categories below. Just continue to next account if you don’t know. a. Gross Loan Portfolio b. Commercial...

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    A1-H3 ©CGAP/World Bank, 2009 Goal Understand how financial statements are created and obtain basic knowledge of underlying accounting principles and how the results of accounting can assist a manager to identify and analyze problems Objectives  To process accounting transactions  To create...

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    A1-H4 ©CGAP/World Bank, 2009 SEEP Framework for Reporting, Analysis, Monitoring, and Evaluation Measuring Performance of Microfinance Institutions: Framework for Reporting, Analysis, Monitoring, and Evaluation, The SEEP Network, 2005. TECHNICAL GUIDE actionURI(http://www.seepnetwork.org):http://...

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    A1-H5 ©CGAP/World Bank, 2009 CGAP Appraisal Guide for Microfinance Institutions TECHNICAL GUIDE, MARCH 2007 (2 VOLUMES) actionURI(http://www.cgap.org/p/site/c/template.rc/1.9.2972):http://www.cgap.org/p/site/c/template.rc/1.9.2972actionURI(http://www.cgap.org/p/site/c/template.rc/1.9.2972): acti...

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    A1-H6 ©CGAP/World Bank, 2009 CGAP Microfinance Consensus Guidelines: Disclosure Guidelines for Financial Reporting by Microfinance Institutions actionURI(http://www.cgap.org/p/site/c/template.rc/1.9.2785):http://www.cgap.org/p/site/c/template.rc/1.9.2785actionURI(http://www.cgap.org/p/site/c/tem...

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    A1-H7 (page 1 of 2) ©CGAP/World Bank, 2009 Organizational Information (Please use a pen.) Name: ________________________ Organization: ________________________ Date organization started credit activities: _______________ Number of clients: __________ as of ________________ Number of staff: _____...

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    A1-H7 (page 2 of 2) ©CGAP/World Bank, 2009 Briefly describe your main voluntary savings product. Description and terms: Rate: Minimum balance: Withdrawal frequency: Minimum /maximum withdrawal amounts: Other: What financial statements are created in your institution? How often? At what level (br...

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    ©CGAP/World Bank, 2009 A-39 SSEESSSSIIOONN 22 IINNTTRROODDUUCCTTIIOONN TTOO AACCCCOOUUNNTTIINNGG Session Summary OBJECTIVES: By the end of the session, participants will be able to:  Define accounting  State at least two accounting principles and their application to MFI accounting ...

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    Trainer Instructions A-40 Session 2: Introduction to Accounting 1. (5 minutes) Ask participants: What is accounting? Allow one minute of silence for individuals to think of an answer. Then ask participants to work in threes, with their neighbors, to define accounting. 2. (10 minutes) Ask for a de...

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    A2: Introduction to Accounting A-41 5. (10 minutes) Ask participants: What do you mean by financial accounting? Managerial accounting? Show A2-O4 with definitions. Briefly discuss the differences. Show A2-O5 with differences in summary and hand out A2-H2. Tell the group that they will discuss bot...

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    Trainer Instructions A-42 this course and that accounting for this type of financial institution in particular may not be familiar to the participants who are trained as business accountants. Try to recognize skills of participants: Tell the group that for the managers with experience in business...

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    A2: Introduction to Accounting A-43 9. (5 minutes) Summarize main points, explaining that the group now has laid out the building blocks for the course. Pass out A2-H3 and ask for any further questions. Lead into the next session.

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    Trainer Instructions A-44 A2-M1 Technical Notes This session gives the foundation for the whole course. It is therefore important for the trainer to be very clear and concise so participants easily grasp the main concepts. ACCOUNTING PRINCIPLES Double-entry Accounting—is based on the concept th...

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    A2: Introduction to Accounting A-45 The Money Measurement Principle—a record is made only of information that can be expressed in monetary terms. Sources: International Accounting Standards, 2000, published by the International Accounting Standards Committee, London; Anthony, R.N. and J.S. Reec...

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    Trainer Instructions A-46  Managerial accounting information, on the other hand, is tracked and presented at a much more detailed level, such as by program or branch. It is concerned with projected as well as historical operations, and is intended for internal use by the organization's manager...

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    A2: Introduction to Accounting A-47 ACCOUNTING FOR INTEREST REVENUE There are two primary ways that MFIs record interest revenue: i) Cash-basis accounting: record interest revenue when cash is received (usually as part of the loan repayment). This is one of the most conservative or prudent metho...

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    Trainer Instructions A-48 METHODS OF ACCOUNTING FOR INTEREST REVENUE AND ACCOUNTING PRINCIPLES ACCOUNTING PRINCIPLE FOLLOWED METHOD OF ACCOUNTING FOR INTEREST CONSERVATISM: Choose the method of presenting information that ensures that:  assets, revenues, and gains are not overstated  liabi...

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    A2: Introduction to Accounting A-49 ACCOUNTING FOR GRANTS AND CONCESSIONAL FUNDS Most MFIs receive grants and concessional funding (loans made to the MFI at less than a market rate of interest). It is important that MFIs do not include grants for any purpose in operational revenue. They should be...

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    Trainer Instructions A-50 an item is such that separate presentation would assist in presenting fairly the enterprise’s financial position.” 2. Grants are less reliable than operating income as a source of future cash flow. Thus, it is more transparent to report these items separately, so the...

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    A2: Introduction to Accounting A-51 T-ACCOUNTS FOR METHODS OF ACCOUNTING FOR INTEREST 1. Cash-basis accounting: Record interest revenue when received in cash Cash (B/S – Asset) Interest on Loan Portfolio (I/S – Revenue) 20 20 2. Accrual-basis accounting: Record interest revenue when it fa...

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    Trainer Instructions A-52 b) When interest is collected upfront: Cash (B/S – Asset) Accounts Payable Deferred Revenue (B/S – Liability) 100 100 When the related payment period falls due: Accounts Payable Deferred Revenue (B/S – Liability) Interest on Loan Portfolio (I/S – Liability) ...

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    A2: Introduction to Accounting A-53 A2-M2 Trainer Notes on Accrual Accounting International Accounting Standard on Accrual Accounting IAS 1 Presentation of Financial Statements This is a summary of issues for MFIs around the International Accounting Standard (IAS) on accrual accounting as describ...

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    Trainer Instructions A-54 a. The reader who understands accounting will know that the interest receivable account on the asset side of the Balance Sheet shows how much interest income is due but uncollected (usually this is just from loans, but could be from investments too). However, many donors...

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    A2: Introduction to Accounting A-55 disclosure of banks regarding the specific recognition policies for their principal types of income. Either of these options complies with IAS 1, in that the MFI’s financial statements use accrual accounting and disclose relevant information in an MFI’s Inc...

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    Trainer Instructions A-56 A2-M3 Trainer Notes on Accounting for Grants International Accounting Standard on Accrual Accounting IAS 20 Accounting for Government Grants and Disclosure of Government Assistance This is a summary of the issues for MFIs related to the International Accounting Standard ...

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    A2: Introduction to Accounting A-57 CGAP RECOMMENDATIONS ON MFI AUDITED FINANCIAL STATEMENTS CGAP has published the External Audit Handbook as part of its Technical Tool series as a useful reference for MFIs wanting more information on their audit process and audited financial statements. Interna...

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    Trainer Instructions A-58 means that a grant should typically not be booked until the MFI has actually received the cash. IAS 20 point 24 states: “A grant relating to assets may be presented in one of two ways: 1) as deferred income, or 2) by deducting the grant from the asset's carrying amount...

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    A2: Introduction to Accounting A-59 fair presentation of the MFIs financial position, MFI-audited financial statements need to disclose grant funding on both the income statement and balance sheet. DISCLOSURE AND TRANSITIONAL PROVISIONS IN IAS 20 POINT 39 The following must be disclosed: [IAS 20....

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    Trainer Instructions A-60  For restricted grants, only that amount of the grant for which the MFI had met the conditions (for example, loans to a specific region) should be recognized that year. The remaining amount should be recorded in the liability account—deferred income (see point 7 abo...

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    A-61 OVERHEADS FOR SESSION 2 ARE CONTAINED IN POWERPOINT FILE ENTITLED “CGAP ACCOUNTING OVERHEADS_1.”

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    A2: Introduction to Accounting A-63 ©CGAP/World Bank, 2009ASSETS = LIABILITIES + EQUITYAny given transaction will affect a minimum of two accounts.If the accounting equation is to remain in balance:any change in the left side(assets or expenses)must be accompanied by an equal but oppositechange...

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    Trainer Instructions A-64 ©CGAP/World Bank, 2009Financial AccountingFinancial AccountingFinancial Accountingis concerned withpresenting a summary view of thefinancial results of past operationsfor an external audienceA2-O4Managerial AccountingManagerial AccountingManagerial Accountingis concern...

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    A2: Introduction to Accounting A-65 ©CGAP/World Bank, 2009Financial Accounting versus Managerial AccountingFinancial AccountingFinancial Accounting versus versus Managerial AccountingManagerial AccountingA2-O5ANALYSIS AND ACTION vs.ANALYSIS Means (management tool) vs.Ends (e.g., audit) On...

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    Trainer Instructions A-66 ©CGAP/World Bank, 2009Accounting for Grants and Concessional FundsAccounting for Grants and Accounting for Grants and ConcessionalConcessional FundsFundsGrants Not included in profits or retained earnings from operations Recorded separately below the operating pr...

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    A-67

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    A2-H1 ©CGAP/World Bank, 2009 Accounting Principles Double-entry Accounting —is based on the concept tha t every tran saction affe cts and is recorded in two or mo re accounts on a business’s boo ks (referred to as the Dual Aspect Concept) a nd thus req uires entrie s in two or more places (...

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    A2-H2 ©CGAP/World Bank, 2009 Financial Accounting versus Managerial Accounting External vs. Internal Summary vs. Detailed Historical only vs. Projected also Standardized format vs. Open formats Annual vs. Monthly/quarterly Final, precise vs. Ongoing, flexible Ends (e.g., audit) vs. Means (manage...

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    A2-H3 (page 1 of 5) ©CGAP/World Bank, 2009 Technical Notes WHAT IS ACCOUNTING?  Accounting is the pro cess o f recording, classifying, and summarizing economic events which leads to th e preparation of financial statements.  Accounting is often referred to as the language of business.  ...

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    A2-H3 (page 2 of 5) ©CGAP/World Bank, 2009 actual or projected—that is of value in ma naging the en terprise, such as portfolio projections and financial indicators. ACCRUAL VERSUS CASH ACCOUNTING  Accrual accounting—records transactions when they take place whether or not cash has been e...

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    A2-H3 (page 3 of 5) ©CGAP/World Bank, 2009 This approach is effectively the same as cash accounting if interest payments are on time. However, it could appe ar to overs tate interest revenue if there are delinquent loans. (The reader of the financial statements needs to know that he or she must ...

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    A2-H3 (page 4 of 5) ©CGAP/World Bank, 2009 normal operations (mainly interest and fee income). Most MFIs cannot rely on such do nations ove r the long t erm. Thus, to appraise the long-te rm viability and capacity of an MFI to grow without continuous infusions o f donor fund s, sta keholders nee...

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    A2-H3 (page 5 of 5) ©CGAP/World Bank, 2009 T–ACCOUNTS FOR METHODS OF ACCOUNTING FOR INTEREST 1. Cash basis accounting: Record interest revenue when received in cash Cash (B/S – Asset) Interest on Loan Portfolio (I/S – Revenue) 20 20 2. Accrual basis accounting: Record interest revenue ...

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    ©CGAP/World Bank, 2009 A-79 SSEESSSSIIOONN 33:: FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS AANNDD PPOORRTTFFOOLLIIOO RREEPPOORRTT –– OOVVEERRVVIIEEWW Session Summary OBJECTIVES: By the end of the session, participants will be able to:  State the purpose and components of the three ...

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    Trainer Instructions A-80 A3-H5b Indirect Method – Cash Flow Statement A3-H6 Sample Portfolio and Activity Report Optional A3-H7 Why Are We Interested in Financial Statements? A3-H8 Two Ways MFIs Treat Cash Donations Optional PREPARED FLIPCHARTS: Balance Sheet exercise Balance Sheet component ...

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    A-81 Session 3: Financial Statements and Portfolio Report – Overview INTRODUCTION 1. (1 minute) Tell the group that session 2 introduced the basics of accounting and how accounting for MFIs is different from other businesses and other financial institutions. Explain that before actually dealin...

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    Trainer Instructions A-82 Tell the group that it is Important to note that they will use this format because it is structured to help microfinance managers better analyze their MFI’s financial performance and also can be easily used for benchmarking. It also obviously shows the impact of donor ...

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    A3: Financial Statements and Portfolio Report – Overview A-83 10. (5 minutes) Pass out A3-H2b with the answers and allow a few moments for participants to check their own answers. Take questions and review any discrepancies, using A3-O3. 11. (3 minutes) Summarize what has been covered, making s...

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    Trainer Instructions A-84 16. (5 minutes) Review answers together, using A3-O5a–b and A3-H4b answers. Cash Flow Statement (Optional—if the level of the participants and time allows) 17. (5 minutes) Ask participants: Who includes a Cash Flow Statement as an integral part of their standard fina...

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    A3: Financial Statements and Portfolio Report – Overview A-85 Put up A3-O6c–d, the Indirect Format Cash Flow, and pass out A3-H5b. Using the OH, explain that the Indirect Method starts from the net operating profit or loss and is then adjusted for the effects of transactions of a noncash natu...

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    Trainer Instructions A-86 Optional: Show A3-O8 and pass out A3-H7. You may also want to use A3-O9, Data Source Summary, to show the relationship between the portfolio data and data for other statements. RELATING THE BALANCE SHEET AND INCOME STATEMENT 23. (10 minutes) Ask participants what the rel...

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    A3: Financial Statements and Portfolio Report – Overview A-87 Summarize and resolve any issues. Ensure participants understand that CGAP is not asking them to change their audited financials. The purpose of this exercise is for managers of the MFIs to understand the fundamental concepts of good...

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    Trainer Instructions A-88 A3-M1 Technical Notes Why Are We Interested in Financial Statements? Additional information can be found in the FRAME document, pages 9–37. Answer: Financial information, as expressed in the terminology of accounting, provides an understanding of what is going on fi...

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    A3: Financial Statements and Portfolio Report – Overview A-89 For example, a client may purchase potatoes for resale. The potatoes become her “inventory” (asset), which is sold and turned into cash. Inventory  Cash Suppose the client was a tailor and purchased a sewi...

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    Trainer Instructions A-90 For example, an organization incurs a liability when it buys services or products for its operations and agrees to pay cash at a later date. This is called an Account Payable. If an organization borrows money, it incurs an obligation to repay the loan. The liability crea...

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    A3: Financial Statements and Portfolio Report – Overview A-91 operating expenses (also called profit/loss), and other capital accounts including net nonoperational income. See Trainer Notes on IAS 20 for much more detail on this topic! A balance sheet shows what the overall financial position o...

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    Trainer Instructions A-92 the credit department or the branches, just as space rental for a training seminar is a direct expense of the training program.  Indirect expenses, also referred to as overhead, are those expenses that cannot be traced exclusively to a single department. They are gene...

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    A3: Financial Statements and Portfolio Report – Overview A-93 Then other sources and uses of cash—not reflected in the income statement—are factored in. These other sources and uses are determined by the differences in assets and liabilities between the opening and ending balance sheets. In...

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    Trainer Instructions A-94 A3-M2 Trainer Notes on IAS 7 Statement of Cash Flows The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an enterprise by means of a statement of cash flows, which classifies cash flows during ...

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    A3: Financial Statements and Portfolio Report – Overview A-95  Financing activities are activities that alter the equity capital and borrowing structure of the enterprise. [IAS 7.6] Application to microfinance: Financing activities include obtaining resources from and returning resources to ...

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    Trainer Instructions A-96 depreciation and amortization are added back because these expenses reduce net income without affecting cash. The statement of cash flows prepared using the indirect method emphasizes changes in the components of most current asset and current liability accounts. Changes...

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    A3: Financial Statements and Portfolio Report – Overview A-97 Application to microfinance: Rather than follow this point of IAS 7, some MFIs record all loan disbursements and loan payment receipts separately in their cash flow statement. This is not wrong, although it is not necessary. To effec...

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    A-99 OVERHEADS FOR SESSION 3 ARE CONTAINED IN POWERPOINT FILE ENTITLED “CGAP ACCOUNTING OVERHEADS_1.”

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    A-101 ©CGAP/World Bank, 2009A balance sheet is a listing ofA balance sheet is a listing ofA balance sheet is a listing ofASSETSWhat the business HAS (or is OWNED)A3-O1LIABILITIESWhat the business OWES to others+EQUITYWhat has been invested in the business =cumulative information up to one poi...

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    Trainer Instructions A-102 ©CGAP/World Bank, 2009Effects of Transactions on the Balance Sheet Effects of Transactions on the Effects of Transactions on the Balance Sheet Balance Sheet A3-O3aix. Paid-out interest earned to clients on their savings accounts viii. A current loan becomes past due v...

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    A3: Financial Statements and Portfolio Report – Overview A-103 ©CGAP/World Bank, 2009A3-O4Sample Format for anIncome StatementSample Format for anSample Format for anIncome StatementIncome StatementNet Income (After Taxes and Donations) Net Income (After Taxes and Donations) Donations for Ope...

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    Trainer Instructions A-104 ©CGAP/World Bank, 2009MicroFund Inc. Income Statement (continued)MicroFundMicroFund Inc. Income Statement Inc. Income Statement (continued)A3-O5b2,190 2,190 2,000 190 190 4,390 2,280 110 2,390 2,000 Net Income (After Taxes and Donations) Net Income (After Taxes and Do...

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    A3: Financial Statements and Portfolio Report – Overview A-105 ©CGAP/World Bank, 2009Indirect Method – Cash Flow StatementIndirect Method Indirect Method –– Cash Flow StatementCash Flow StatementCASH FLOWS FROM OPERATING ACTIVITIESTermTermRef.Ref.Net Cash from Operating ActivitiesNet Ca...

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    Trainer Instructions A-106 ©CGAP/World Bank, 2009Indirect Method – Cash Flow Statement (continued)Indirect Method Indirect Method –– Cash Flow Statement Cash Flow Statement (continued)A3-O6dCASH FLOWS FROM FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIESIncrease/(Decrease) in Sho...

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    A3: Financial Statements and Portfolio Report – Overview A-107 ©CGAP/World Bank, 2009Sample Nonfinancial Data ReportSample Nonfinancial Data ReportSample Nonfinancial Data ReportMeasuring Performance (SEEP Framework)As of 12/31/2004 Account NameOperational Data14,658 Number of Active Clients ...

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    Trainer Instructions A-106 ©CGAP/World Bank, 2009Indirect Method – Cash Flow Statement (continued)Indirect Method Indirect Method –– Cash Flow Statement Cash Flow Statement (continued)A3-O6dCASH FLOWS FROM FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIESIncrease/(Decrease) in Sho...

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    A3: Financial Statements and Portfolio Report – Overview A-109 ©CGAP/World Bank, 2009???So What’s Different??????So What’s Different??????So What’s Different??? INCOME STATEMENTINCOME STATEMENTDonor funds are treated “below the line.”Donor money is recorded after Net Operating...

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    A-111

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    A3-H1 ©CGAP/World Bank, 2009 Balance Sheet ASSETS Cash and Due from Banks Trade Investments Net Loan Portfolio Gross Loan Portfolio Impairment Loss Allowance Interest Receivable on Loan Portfolio Accounts Receivable and Other Assets Other Investments Net Fixed Assets Fixed Assets Accum...

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    A3-H2a ©CGAP/World Bank, 2009 Effects of Transactions on the Balance Sheet – Exercise For the following transactions, show how these affect the Balance Sheet by drawing an up arrow  to show an increase in the account(s) affected and a down arrow  to show a decrease. ASSETS LIABILITIES ...

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    A3-H2b ©CGAP/World Bank, 2009 Effects of Transactions on the Balance Sheet – Answers For the following transactions, show how these affect the Balance Sheet by drawing an up arrow  to show an increase in the account(s) affected and a down arrow  to show a decrease. ASSETS LIABILITIES ...

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    A3-H3 ©CGAP/World Bank, 2009 Income Statement Financial Revenue Financial Revenue from Loan Portfolio Interest on Loan Portfolio Fees and Commissions on Loan Portfolio Financial Revenue from Investment Other Operating Revenue Financial Expense Financial Expense on Funding Liabiliti...

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    A3-H4a ©CGAP/World Bank, 2009 Income Statement – Exercise The following information is available for MicroFund Inc. for the period ended December 31, 2007. On the basis of this information, prepare an Income Statement per the recommended format in A3-H3. PARTICULARS $ PARTICULARS $ Personnel ...

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    A3-H4b ©CGAP/World Bank, 2009 Income Statement – Answers MicroFund Inc. INCOME STATEMENT For the period ended December 31, 2007 Financial Revenue 6,200 Financial Revenue from Loan Portfolio Interest on Loan Portfolio 4,500 Fees and Commissions on Loan Portfolio income 1,500 Financial Reve...

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    A3-H5a ©CGAP/World Bank, 2009 Direct Method – Cash Flow Statement (SEEP Format) Ref. Term CASH FLOWS FROM OPERATING ACTIVITIES C1 Cash Received from Interest, Fees, and Commissions on Loan Portfolio C2 Cash Received from Interest on Borrowings C3 Cash Received as Other Operating Revenue ...

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    A3-H5b ©CGAP/World Bank, 2009 Indirect Method – Cash Flow Statement Ref. Term CASH FLOWS FROM OPERATING ACTIVITIES C27 Net Operating Income C28 Depreciation and Amortization C29 Impairment Losses on Loans C30 (Cash Paid for Taxes) C31 Value of Loans Repaid C32 (Value of Loans Disbu...

  • Page 138

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    A3-H6 (Optional) ©CGAP/World Bank, 2009 Sample Portfolio and Activity Report SEEP Framework Number ofLoansValue ofPortfolioNumber ofLoansValue ofPortfolioP1, P2C9, C32Loans Disbursed32,148159,603,43726,990121,456,864P3, P4B4Loans Outstanding14,58756,609,30911,18334,701,961P5B5Impairment Loss All...

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    A3-H7 (page 1 of 10) ©CGAP/World Bank, 2009 Why Are We Interested in Financial Statements? Additional information can be found in the FRAME document, pages 9–37. Answer: Financial information, as expressed in the terminology of accounting, provides an understanding of what is going on finan...

  • Page 142

    A3-H7 (page 2 of 10) ©CGAP/World Bank, 2009 For example, a client may purchase potatoes for resale. The potatoes become her “inventory” (asset), which is sold and turned into cash. Inventory  Cash Suppose the client was a tailor and purchased a sewing machine. The sew...

  • Page 143

    A3-H7 (page 3 of 10) ©CGAP/World Bank, 2009 For example, an organization incurs a liability when it buys services or products for its operations and agrees to pay cash at a later date. This is called an Account Payable. If an organization borrows money, it incurs an obligation to repay the loan....

  • Page 144

    A3-H7 (page 4 of 10) ©CGAP/World Bank, 2009 operating expenses (also called profit/loss), and other capital accounts including net nonoperational income. See Trainers Notes on IAS 20 for much more detail on this topic! A balance sheet show s w hat the overall financial position of an organizatio...

  • Page 145

    A3-H7 (page 5 of 10) ©CGAP/World Bank, 2009  Expenses are also often classified as direct or indirect. Direct expenses are those that relate to a particular activity. For example, salaries for credit officers are direct expenses of the credit department or the branches, just as space rental f...

  • Page 146

    A3-H7 (page 6 of 10) ©CGAP/World Bank, 2009 The Indirect Method Starting with the net surplus from the income statement, the statement of cash flows adds back those expense items in the income statement that do not represent outflows of cash. Then other sources and uses of cash—not reflected i...

  • Page 147

    A3-H7 (page 7 of 10) ©CGAP/World Bank, 2009 NOTES ON IAS 7 STATEMENT OF CASH FLOWS The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an enterprise by means of a statement of cash flows, which classifies cash flows du...

  • Page 148

    A3-H7 (page 8 of 10) ©CGAP/World Bank, 2009  Financing activities are activities that alter the equity capital and borrowing structure of the enterprise. [IAS 7.6] Application to microfinance: Financing activities include obtaining resources from and returning resources to the owners and also...

  • Page 149

    A3-H7 (page 9 of 10) ©CGAP/World Bank, 2009 depreciation and amortization are added back because these expenses reduce net income without affecting cash. The statement of cash flows prepared using the indirect method emphasizes changes in the components of most current asset and current liabilit...

  • Page 150

    A3-H7 (page 10 of 10) ©CGAP/World Bank, 2009 Application to microfinance: Rather than follow this point of IAS 7, some MFIs record all loan disbursements and loan payment receipts separately in their cash flow statement. This is not wrong, although it is not necessary. To effectively compare the...

  • Page 151

    A3-H8 (Optional—page 1 of 2) ©CGAP/World Bank, 2009 Two Ways MFIs Treat Cash Donations Goals: 1. Grants are separated from operating income 2. Grants are fully disclosed in equity IAS 20 recommends income approach Considerations: Where to record them When to record them INCOME STATEMENT BALAN...

  • Page 152

    A3-H8 (Optional—page 2 of 2) ©CGAP/World Bank, 2009 A word of warning on both A and B: If an MFI includes multiyear grants, all of a restricted grant, or all of a grant for fixed assets in the income statement for the current year, then they would no longer comply with IAS 20:  For multiyea...

  • Page 153

    ©CGAP/World Bank, 2009 A-143 SSEESSSSIIOONN 44:: RREECCOORRDDIINNGG TTRRAANNSSAACCTTIIOONNSS Session Summary OBJECTIVES: By the end of this session, participants will be able to:  Record transactions of an MFI’s credit operations  Use double-entry accounting principles recording “...

  • Page 154

    Trainer Instructions A-144 A4-H5 Blank General Journal Form (multiple copies needed) A4-H6a Balance Sheet Transactions Worksheet – Motorcycles A4-H6b Balance Sheet Transactions Worksheet – Motorcycles (Answers) A4-H7a Receiving Loan Payments and Disbursing Loans Transactions Worksheet A4-H7b ...

  • Page 155

    A-145 Session 4: Recording Transactions INTRODUCTION 1. (5 minutes) Explain to the group that the next three sessions describe the steps required to account for an economic transaction from the time it occurs until it is ultimately reflected on the financial statements. This will enable particip...

  • Page 156

    Trainer Instructions A-146 Possible answers from the CGAP MIS Handbook for MFIs follow:  What is a Chart of Accounts? Provides the foundation for recording and reporting of all financial transactions for the institution. It provides the structure for accountants to post transactions to differe...

  • Page 157

    A4: Recording Transactions A-147 words, it is a critical foundation for being able to move your MFI to sustainability. Do not forget to highlight the importance of the Chart of Accounts to telling the sustainability story. Refer back to flipchart on the flow from financial information to sustaina...

  • Page 158

    Trainer Instructions A-148 left side: DEBIT BALANCE ACCOUNTS Assets Expenses Some participants find this approach easier to remember than what is in the Guide. JOURNALIZING 10. (5 minutes) Tell participants that they now have enough information to begin work on SAFE’s transactions. The first ...

  • Page 159

    A4: Recording Transactions A-149 16. (5 minutes) Demonstrate by using A4-O8’s problems on board meeting expenses. Show journal entries and remind participants to complete the journal entry for the board meeting in their journals. 17. (10 minutes) Hand out A4-H8, Short-term Deposit, and ask part...

  • Page 160

    Trainer Instructions A-150 common areas of difficulty or questions participants are asking. These points can be brought up later in the exercise review. 24. (10 minutes) Hand out answer A4-H10 and allow time for participants to verify their answers. 25. (10 minutes) Take questions on any transact...

  • Page 161

    A4: Recording Transactions A-151 A4-M1 Technical Notes – Recording Transactions DOUBLE-ENTRY ACCOUNTING Double-entry accounting means that there is an equal and opposite reaction to each event or transaction, either increasing or decreasing asset, liability, or equity items. Any given transacti...

  • Page 162

    Trainer Instructions A-152 involving cash. Similar records are kept for all other asset, liability, equity, revenue, and expense accounts. The format used to record increases and decreases in the Balance Sheet or Income Statement items is called a Ledger Account. Examples of ledger accounts are C...

  • Page 163

    A4: Recording Transactions A-153 JOURNAL ENTRIES All economic transactions are entered in to the accounting system by means of a journal entry. A journal entry records how each transaction affects either an asset, liability, equity, revenue, and/or expense account. Journal entries are made to the...

  • Page 164

    Trainer Instructions A-154 Cash 4,000 Normal Balances Increases in asset accounts are recorded by debit entries and decreases in these accounts are recorded by credit entries. The fact that assets are located on the left side of the Balance Sheet is an easy way of remembering the rule that an in...

  • Page 165

    A4: Recording Transactions A-155 Examples of how to record revenue and expense transactions: Incurred board meeting expenses of $3,100, paid in cash (August 1): ANALYSIS RULE ENTRY The cost of meeting is an expense Expenses decrease equity and are recorded by debits Debit: Board Meeting Expenses ...

  • Page 166

    Trainer Instructions A-156 Other Current Assets 2,000 Cash 2,000 The above example affects only the Balance Sheet since no expense was incurred, just cash paid out. GENERAL JOURNAL As mentioned previously, the General Journal is a listing of all economic transactions in chronological order. I...

  • Page 167

    A4: Recording Transactions A-157 5. Disposal of Fixed Asset account is closed out to the P & L account at the end of the year. Disposal of Fixed Assets Profit and Loss Account 500 300 200 1,000 300 0 0 In this case there is a debit of 300 in the P & L account, which mea...

  • Page 168

    Trainer Instructions A-158 Answer (something to the effect): If it was a correct transaction, then the prepaid rent needs to be expenses the next time rent falls due. If it was incorrect, then the finance manager needs to find out why and where the 2,000 went! WHAT IS FUND ACCOUNTING? Fund accoun...

  • Page 169

    A-159 OVERHEADS FOR SESSION 4 ARE CONTAINED IN POWERPOINT FILE ENTITLED “CGAP ACCOUNTING OVERHEADS 1.”

  • Page 170

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    A-161 ©CGAP/World Bank, 2009The Accounting CycleThe Accounting CycleThe Accounting CycleA4-O11. TRANSACTION OCCURS2. JOURNALIZINGTransactions are entered in a General Journal.3. POSTINGJournal entries are transferred to ledger accounts.4. TRIAL BALANCEAccounts are verified, totaled, and balan...

  • Page 172

    Trainer Instructions A-162 ©CGAP/World Bank, 2009Example of Double Entry Accounting (continued)Example of Double Entry Accounting Example of Double Entry Accounting (continued)A4-O2b8,000Liability8,000 (10,500 – 2,500) AssetNet Effect Short-term Borrowings8,000LiabilityCash2,500AssetMotorcycl...

  • Page 173

    A4: Recording Transactions A-163 ©CGAP/World Bank, 2009Journal EntriesJournal EntriesJournal EntriesGeneral JournalGeneral JournalA listing of all transactions in chronological order= Book of original entryA record of debits and credits entered in columns,the left column for recording deb...

  • Page 174

    Trainer Instructions A-164 ©CGAP/World Bank, 2009Journal Entries – MotorcyclesJournal Entries Journal Entries –– MotorcyclesMotorcyclesA4-O6a1. Purchased motorcycles for use by credit officers—paid 15,000—4,000 cash and 11,000 on short-term credit (July 3):15,000Gross Fixed Assets4,00...

  • Page 175

    A4: Recording Transactions A-165 ©CGAP/World Bank, 2009Journal Entries – Disbursing Loansand Receiving Loan PaymentsJournal Entries Journal Entries –– Disbursing LoansDisbursing Loansand Receiving Loan Paymentsand Receiving Loan PaymentsA4-O7a1. Received loan payments 226,200, including 1...

  • Page 176

    Trainer Instructions A-166 ©CGAP/World Bank, 2009Journal Entries – Board MeetingJournal Entries Journal Entries –– Board MeetingBoard MeetingA4-O81. Incurred board meeting expenses of 3,100, paid in cash (August 1)3,100Board Meeting Expenses3,100CashGENERAL JOURNALGENERAL JOURNAL3,100101C...

  • Page 177

    A4: Recording Transactions A-167 ©CGAP/World Bank, 2009Journal Entries –Prepaid ExpensesJournal Entries Journal Entries ––Prepaid ExpensesPrepaid ExpensesA4-O101. Pay 2,000 cash for rent in advance (August 9): 2,000Other Assets2,000CashGENERAL JOURNALGENERAL JOURNAL2,000101Cash(prepaid re...

  • Page 178

    Trainer Instructions A-168 ©CGAP/World Bank, 2009General Journal (continued)General Journal General Journal (continued)A4-O11b226,200 101 Cash July 31174,000 120Gross Loan Portfolio 52,200 410Interest on Loan Portfolio(July loan repayments)5,800415Fees on Loan Portfolio(July loan disbursements)...

  • Page 179

    A4: Recording Transactions A-169 ©CGAP/World Bank, 2009General Journal (continued)General Journal General Journal (continued)A4-O11d57,000201Demand Deposits(collect savings)6,080415Fees and Commissions on Loan Portfolio(August loan disbursements)6,080 101Cash304,000 120Gross Loan Portfolio31304...

  • Page 180

    Trainer Instructions A-170 ©CGAP/World Bank, 2009General Journal (continued)General Journal General Journal (continued)A4-O11g204,300 101Cash3,900568Bank Fees ($1,300 * 3)2,100566Utilities ($700 * 3)3,000567Courier and delivery ($1,000 * 3)9,000567Telephone ($3,000 * 3)14,100570Printing and mat...

  • Page 181

    A-171

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    A4-H1 ©CGAP/World Bank, 2009 1. TRANSACTION OCCURS2. JOURNALIZINGTransactions are entered in a General Journal.3. POSTINGJournal entries are transferred to ledger accounts.4. TRIAL BALANCEAccounts are verified, totaled, and balanced.5. ACCOUNTING ADJUSTMENTSAdjustments are made in order to pre...

  • Page 184

  • Page 185

    A4-H2 ©CGAP/World Bank, 2009 What Is a Chart of Accounts? WHAT IS ITS PURPOSE? To classify financial information so one can use it later in financial statements and managerial reports. WHAT IS INCLUDED? Typically describes each account by:  Account number: the number used to identify the acco...

  • Page 186

  • Page 187

    A4-H3 ©CGAP/World Bank, 2009 SAFE Chart of Accounts ASSETS LIABILITIES EQUITY 101 Cash and Due from Banks 110 Trade Investments 115 Net Loan Portfolio 120 Gross Loan Portfolio 125 Impairment Loss Allowance 130 Interest Receivable on Loan Portfolio 135 Accounts Receivable and Other Assets 140 Oth...

  • Page 188

  • Page 189

    A4-H4 ©CGAP/World Bank, 2009 Guide for Accounting Transactions ASSETS Debit Credit INCREASE Normal Balance DECREASE LIABILITIES AND EQUITY Debit Credit DECREASE INCREASE Normal Balance REVENUES Debit Credit DECREASE INCREASE Normal Balance EXPENSES Debit Credit INCREASE Normal Balance DECREASE

  • Page 190

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    A4-H5 ©CGAP/World Bank, 2009 General Journal Date Account Title and Explanation Ref Debit Credit

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    A4-H6a ©CGAP/World Bank, 2009 Balance Sheet Transactions Worksheet – Motorcycles 1. Purchased motorcycles for use by credit officers—paid $15,000—$4,000 cash and $11,000 on short-term credit (July 3): ANALYSIS RULE ENTRY 2. Collected savings of $51,000 (July 31...

  • Page 194

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    A4-H6b (Answers) ©CGAP/World Bank, 2009 Balance Sheet Transactions Worksheet – Motorcycles 1. Purchased motorcycles for use by credit officers—paid $15,000—$4,000 cash and $11,000 on short-term credit (July 3): ANALYSIS RULE ENTRY Asset “gross fixed assets” was increased Increases in a...

  • Page 196

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    A4-H7a (page 1 of 2) ©CGAP/World Bank, 2009 Receiving Loan Payments and Disbursing Loans Transactions Worksheet 1. Received loan payments $226,200—$174,000 principal and $52,200 interest (July 31): ANALYSIS RULE ENTRY 2. Disbursed 2,344 loans totaling $290,00...

  • Page 198

    A4-H7a (page 2 of 2) ©CGAP/World Bank, 2009 3. Complete General Journal entries for above transactions.

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    A4-H7b (Answers) ©CGAP/World Bank, 2009 Receiving Loan Payments and Disbursing Loans Transactions Worksheet 1. Received loan payments $226,200—$174,000 principal and $52,200 interest (July 31): ANALYSIS RULE ENTRY The asset cash was increased Increases in assets are recorded by debits Debit: C...

  • Page 200

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    A4-H8a ©CGAP/World Bank, 2009 Income Statement Transactions Worksheet – Short-term Deposits 1. Short-term investment of $10,000 matures—collected $400 in interest (August 7): ANALYSIS RULE ENTRY 2. Complete General Journal entries for above transactions.

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    A4-H8b (Answers) ©CGAP/World Bank, 2009 Income Statement Transactions Worksheet – Short-term Deposits 1. Short-term investment of $10,000 matures—collected $400 in interest (August 7): ANALYSIS RULE ENTRY The asset cash was increased Increases in assets are recorded by debits Debit: Cash $10...

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    A4-H9 (page 1 of 2) ©CGAP/World Bank, 2009 General Journal – July–September 2007 Date Account Title and Explanation Ref Debit Credit July 1 Fixed Assets – Computer 150 4,000 Cash 101 4,000 (purchased computer) 3 Fixed Assets – Motorcycles 150 15,000 Cash 101 4,000 Short-t...

  • Page 206

    A4-H9 (page 2 of 2) ©CGAP/World Bank, 2009 Date Account Title and Explanation Ref Debit Credit Sept 6 Professional development/study tours 565 5,000 Cash 101 1,500 Other short-term liabilities 225 3,500 (study tour) 30 Cash 101 63,000 Demand Deposits 201 63,000 (collect saving...

  • Page 207

    A4-H10 (page 1 of 2) ©CGAP/World Bank, 2009 General Journal – October–December 2007 Date Account Title and Explanation Ref Debit Credit Oct 8 Cash 101 25,000 Donations 440 25,000 (received donation for operation) 10 Training 565 500 Cash 101 500 (attend financial management t...

  • Page 208

    A4-H10 (page 2 of 2) ©CGAP/World Bank, 2009 Date Account Title and Explanation Ref Debit Credit Dec 31 Cash 101 392,600 Gross Loan Portfolio 120 302,000 Interest on Loan Portfolio 410 90,600 (December loan repayments) 31 Gross Loan Portfolio 120 401,000 Cash 101 401,000 Cash 1...

  • Page 209

    A4-H11 (page 1 of 6) ©CGAP/World Bank, 2009 Technical Notes – Recording Transactions DOUBLE-ENTRY ACCOUNTING Double-entry accounting means that there is an equal and opposite reaction to each event or transaction, either increasing or decreasing asset, liability, or equity items. Any given tra...

  • Page 210

    A4-H11 (page 2 of 6) ©CGAP/World Bank, 2009 involving cash. Similar records are kept for all other asset, liability, equity, revenue, and expense accounts. The format used to record increases and decreases in the Balance Sheet or Income Statement items is called a Ledger Account. Examples of led...

  • Page 211

    A4-H11 (page 3 of 6) ©CGAP/World Bank, 2009 JOURNAL ENTRIES All economic transactions are entered in to the accounting system by means of a journal entry. A journal entry records how each transaction affects either an asset, liability, equity, revenue, and/or expense account. Journal entries are...

  • Page 212

    A4-H11 (page 4 of 6) ©CGAP/World Bank, 2009 Cash 4,000 Normal Balances Increases in asset accounts are recorded by debit entries and decreases in these accounts are recorded by credit entries. The fact that assets are located on the left side of the Balance Sheet is an easy way of remembering t...

  • Page 213

    A4-H11 (page 5 of 6) ©CGAP/World Bank, 2009 Examples of how to record revenue and expense transactions: Incurred board meeting expenses of $3,100, paid in cash (August 1): ANALYSIS RULE ENTRY The cost of meeting is an expense Expenses decrease equity and are recorded by debits Debit: Board Meeti...

  • Page 214

    A4-H11 (page 6 of 6) ©CGAP/World Bank, 2009 Other Current Assets 2,000 Cash 2,000 The above example affects only the Balance Sheet since no expense was incurred, just cash paid out. GENERAL JOURNAL As mentioned previously, the General Journal is a listing of all economic transactions in chro...

  • Page 215

    ©CGAP/World Bank, 2009 A-205 SSEESSSSIIOONN 55:: SSUUMMMMAARRIIZZIINNGG EENNTTRRIIEESS Session Summary OBJECTIVES: By the end of this session, participants will be able to:  Post entries to the general ledger and the cash ledger  Reconcile bank accounts and the cash ledger  Create a...

  • Page 216

    Trainer Instructions A-206 HANDOUTS: A4-H3 SAFE Chart of Accounts A4-H9 SAFE General Journal – July–September 2007 A4-H10 SAFE General Journal – October–December 2007 A5-H1 General Ledger form (multiple copies needed) A5-H2 General Ledger – September 2007 A5-H3 General Ledger – Decemb...

  • Page 217

    A-207 Session 5: Summarizing Entries INTRODUCTION 1. (1 minute) Remind participants to have the necessary handouts readily available. 2. (5 minutes) Introduce the session by asking participants to briefly recap what was covered under journal entries. Fill in any points missed, then ask participa...

  • Page 218

    Trainer Instructions A-208 Tell the group that in the SAFE case, however, it is not the end of the year—it is an unusual situation for this exercise. SAFE already has a summary income statement for the first half of 2007, so to complete the year income statement, accounts start with summary bal...

  • Page 219

    A5: Summarizing Entries A-209 9. (15 minutes) Call for the group’s attention and ask each individual to give an answer when his or her account number is called. Use A5-O6, Completed Ledgers for September 2007, and reveal the answer when it is suggested by the participant. Then pass out A5-H2, C...

  • Page 220

    Trainer Instructions A-210 14. (5–10 minutes) Introduce trial balances. Ask the group what is meant by “creating a trial balance.” Take answers and give a brief overview on creating trial balances, using A5-M1. 15. (10–15 minutes) Demonstrate how to create a trial balance for January–Se...

  • Page 221

    A5: Summarizing Entries A-211 Be sure to assess whether the participants need these explained further or not. Explain that these accounting adjustments should be done periodically; at a minimum, they should be done annually. (Generally adjustments are made for the full year; adjustments for the S...

  • Page 222

    Trainer Instructions A-212 26. (10 minutes) Have group members summarize the session, and then take any questions. Once again ask for comments on the management importance of the procedures and documents kept and produced, with a focus on how they enable managers to improve their institution’s ...

  • Page 223

    A5: Summarizing Entries A-213 A5-M1 Technical Notes THE GENERAL LEDGER An MFI typically has many accounting transactions each day, such as the disbursement of loans, the payment of employee salaries, and the receipt of loan payments. It would not be practical to prepare financial statements after...

  • Page 224

    Trainer Instructions A-214 balances. For example, if a Balance Sheet dated December 31, 2004, showed a cash balance of $28,500, this balance would be carried over as the opening balance on January 1, 2005. In contrast, Income Statement accounts reflect revenue and expenses over a specified period...

  • Page 225

    A5: Summarizing Entries A-215 Cash and Due from Banks Account No. 101 Date Explanation Debit Credit Balance 404,901 July 1 Purchased computer 4,000 400,901 3 Purchased motorcycles 4,000 396,901 31 Collected savings 51,000 447,901 31 July loan repayments 226,200 674,101 31 July loan disbur...

  • Page 226

    Trainer Instructions A-216 Bank Balance, August 31, 2005 40,000 less outstanding checks: #1 147 #2 53 (200) plus outstanding deposits: #1 400 200 Adjusted Bank Balance 40,200 Cash Account Balance (prior to reconciliation) 40,350 record bank charges (150) Adjusted Cash Ac...

  • Page 227

    A5: Summarizing Entries A-217 The impairment loss allowance is on the Balance Sheet and thus has an opening balance, unless no allowance has ever been created. If this is the case, when the allowance is created, a loan loss expense (referred to as the provision for loan impairment) is recorded on...

  • Page 228

    Trainer Instructions A-218 DEPRECIATION When a capital asset is purchased, the entire cost is not immediately recorded on the Income Statement as an expense. It is depreciated over time so that each year, an amount equal to the portion of its useful life is expensed. This entry must be made at th...

  • Page 229

    A5: Summarizing Entries A-219 SAFE bought motorcycles on July 3—paid $15,000. Gross Fixed Asset 15,000 Cash 4,000 Short-term Borrowings 11,000 At end of year, record depreciation (33.33 percent) for one year: ANALYSIS RULE ENTRY Expense “Depreciation” was increased Increases in expense...

  • Page 230

    Trainer Instructions A-220 asset) even though it has not actually been received. Note that IAS recommends accrual accounting and (as previously discussed) an MFI must be extremely prudent when accruing such revenue from the loan portfolio. Accruing revenue on term deposits or an investment that i...

  • Page 231

    A5: Summarizing Entries A-221 From the trial balance SAFE has short-term borrowings equal to $12,014. To determine how much interest to accrue (record interest that has been incurred but not paid) multiply $12,014 by 15 percent for a total accrued interest expense of $1,802. ANALYSIS RULE ENTRY T...

  • Page 232

    Trainer Instructions A-222 A5-M2 Optional Loan Loss Overheads This course assumes previous experience in provisions for loan impairment and establishing a loan impairment allowance. If the level of the group and previous knowledge of provisions for loan impair-ment is low, the trainer should prep...

  • Page 233

    A-223 OVERHEADS FOR SESSION 5 ARE CONTAINED IN 3 SEPARATE POWERPOINT FILES ENTITLED “CGAP ACCOUNTING OVERHEADS_2a–2c.”

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  • Page 235

    A5: Summarizing Entries (Don’t forget session 4 overheads—A4-O1 and A4-O3) A-225 ©CGAP/World Bank, 2009The General LedgerThe General LedgerThe General Ledgeris a record of transactions organized by account number beginning with the asset accounts and ending with expense accounts A5-O1aCashC...

  • Page 236

    Trainer Instructions A-226 ©CGAP/World Bank, 2009Cash Ledger – Account 101Cash Ledger Cash Ledger –– Account 101Account 101Most ImportantMost Important The number of Cash transactions in most MFIs is large. The chances of committing fraud are higher than with other assets. Import...

  • Page 237

    A5: Summarizing Entries A-227 ©CGAP/World Bank, 2009PostingPostingPostingThe process of copying journal entry information from the General Journal to the General Ledger A5-O4General JournalChronological General LedgerBy AccountsPOSTINGJournal CreditsLedger CreditsJournal DebitsLedger Debits©CG...

  • Page 238

    Trainer Instructions A-228 ©CGAP/World Bank, 2009General LedgerSeptember 2007General LedgerGeneral LedgerSeptember 2007September 2007A5-O6aExplanationREFDebitCreditBalanceCASH AND DUE FROM BANKS101404,901 July 1Purchased computer4,000 400,901 3Purchased motorcycles4,000 ...

  • Page 239

    A5: Summarizing Entries A-229 ©CGAP/World Bank, 2009General LedgerSeptember 2007 (continued)General LedgerGeneral LedgerSeptember 2007 September 2007 (continued)A5-O6cExplanationREFDebitCreditBalanceDEMAND DEPOSITS 201595,517 July 31 July savings collected51,000 646,517 Aug 31 Au...

  • Page 240

    Trainer Instructions A-230 ©CGAP/World Bank, 2009General LedgerSeptember 2007 (continued)General LedgerGeneral LedgerSeptember 2007 September 2007 (continued)A5-O6eExplanationREFDebitCreditBalanceRENT AND UTILITIES56664,256 July 31 Rent and utilities10,700 74,956 Aug 31 Rent...

  • Page 241

    A5: Summarizing Entries A-231 ©CGAP/World Bank, 2009General LedgerDecember 2007General LedgerGeneral LedgerDecember 2007December 2007A5-O7aDateExplanationREFDebitCreditBalanceCASH AND DUE FROM BANKS101193,601 Oct8Received donation25,000 218,601 10 Attend training course500 ...

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    Trainer Instructions A-232 ©CGAP/World Bank, 2009General LedgerDecember 2007 (continued)General LedgerGeneral LedgerDecember 2007 December 2007 (continued)A5-O7cDateExplanationREFDebitCreditBalanceSHORT-TERM BORROWINGS21526,014 Dec 31 Repaid short-term loan14,000 12,014 PAID-I...

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    A5: Summarizing Entries A-233 ©CGAP/World Bank, 2009General LedgerDecember 2007 (continued)General LedgerGeneral LedgerDecember 2007 December 2007 ((continued)A5-O7eDateExplanationREFDebitCreditBalanceBANK FEES56811,594 Oct31 Bank fees1,300 12,894 Nov30 Bank fees1,300 ...

  • Page 244

    Trainer Instructions A-234 ©CGAP/World Bank, 2009A5-O9bTrial Balance (continued)Trial Balance Trial Balance (continued)Ledger AccountsRefDebitCreditInterest & Fee Expense on Borrowings515Provision for Loan Impairment530Personnel Expense545Training and Professional Development565Rent and Uti...

  • Page 245

    A5: Summarizing Entries A-235 ©CGAP/World Bank, 2009A5-O10bTrial Balance30 Sep 07 (continued)Trial BalanceTrial Balance30 Sep 07 30 Sep 07 (continued)Ledger AccountsRefDebitCreditInterest & Fee Expense on Borrowings5152,230Provision for Loan Impairment53019,128Personnel Expense545293,940Tra...

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    Trainer Instructions A-236 ©CGAP/World Bank, 2009A5-O11bTrial Balance30 Dec 07 (continued)Trial BalanceTrial Balance30 Dec 07 30 Dec 07 (continued)Ledger AccountsRefDebitCreditInterest & Fee Expense on Borrowings5154,230Provision for Loan Impairment53019,128Personnel Expense545389,940Traini...

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    A5: Summarizing Entries A-237 ©CGAP/World Bank, 2009Effect of Impairment Allowances and Losses on Balance SheetEffect of Impairment Allowances and Effect of Impairment Allowances and Losses on Balance SheetLosses on Balance SheetValue of the Outstanding PortfolioValue of the Outstanding Portfol...

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    Trainer Instructions A-238 ©CGAP/World Bank, 2009Loan Loss WorksheetLoan Loss WorksheetLoan Loss WorksheetDetermine what the Impairment Loss Allowance should be.Current Impairment Loss Allowance = $19,128. Amount of loans outstanding= $1,560,406Loan loss reserve rate= 2%The required impairment...

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    A5: Summarizing Entries A-239 ©CGAP/World Bank, 2009Depreciation Depreciation Depreciation 1. Record depreciation (50%) for one year on SAFE’s computers bought for $4000:A5-O152. Depreciate SAFE motorcycles at 33.33% for one year for $15,000:3. Depreciate fixed assets purchased before July 1,...

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    Trainer Instructions A-240 ©CGAP/World Bank, 2009Adjusting for Accruals (continued)Adjusting for Accruals Adjusting for Accruals (continued)A5-O16b3. Deposits equal to 950,517: $950,517 x 5% = $47,52647, 526Interest Expense on Deposits47, 526Interest Payable on Funding Liabilities©CGAP/World ...

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    A5: Summarizing Entries A-241 ©CGAP/World Bank, 2009General Ledger AdjustedGeneral Ledger AdjustedDecember 2007December 2007(Note: the accounts affected by adjusting entries are larger and colored)A5-O18aExplanationRefDebitCreditBalanceCASH AND DUE FROM BANKS101193,601 Oct8Received dona...

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    Trainer Instructions A-242 ©CGAP/World Bank, 2009A5-O18cExplanationRefDebitCreditBalanceDEMAND DEPOSITS201766,517 Oct31October savings collected61,000 827,517 Nov31November savings collected64,000 891,517 Dec30December savings collected59,000 950,517 ...

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    A5: Summarizing Entries A-243 ©CGAP/World Bank, 2009A5-O18eExplanationRefDebitCreditBalanceDEPRECIATION 555- Dec 31 Depreciation expense79,544 79,544 TRAINING AND DEVELOPMENT56529,379 Oct14Financial Management Training500 29,879 Nov4Executive Direc...

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    Trainer Instructions A-244 ©CGAP/World Bank, 2009Trial Balance AdjustedTrial Balance Adjusted3131 Dec 2007 Dec 2007 (continued)A5-O19bLedger AccountsRefDebitCreditDonations440507,031Interest & Fee Expense on Depositss51047,526Interest & Fee Expense on Borrowings5156,032Provision for Loa...

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    A-245

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    A5-H1 ©CGAP/World Bank, 2009 GGeenneerraall LLeeddggeerr Date Explanation Ref Debit Credit Balance

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    A5-H2 (page 1 of 3) ©CGAP/World Bank, 2009 General Ledger September 2007 ExplanationREFDebitCreditBalanceCASH AND DUE FROM BANKS101404,901 July 1 Purchased computer4,000 400,901 3 Purchased motorcycles4,000 396,901 31 Collected savings51,000 447,901 31 Jul...

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    A5-H2 (page 2 of 3) ©CGAP/World Bank, 2009 ExplanationREFDebitCreditBalanceGROSS FIXED ASSETS150230,504 July 1 Purchased computer4,000 234,504 July 3 Purchased motorcycles15,000 249,504 ACC. DEPRECIATION155(100,353) DEMAND DEPOSITS 201595,517 July 31 July s...

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    A5-H2 (page 3 of 3) ©CGAP/World Bank, 2009 ExplanationREFDebitCreditBalanceTRAINING AND DEVELOPMENT56524,379 Sept 6 Study tour5,000 29,379 RENT AND UTILITIES56664,256 July 31 Rent and utilities10,700 74,956 Aug 31 Rent and utilities10,700 85,656 ...

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    A5-H3 (page 1 of 3) ©CGAP/World Bank, 2009 General Ledger December 2007 DateExplanationREFDebitCreditBalanceCASH AND DUE FROM BANKS101193,601 Oct 8 Received donation25,000 218,601 10 Attend training course500 218,101 31 Collected savings61,000 279,101 31 Oct...

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    A5-H3 (page 2 of 3) ©CGAP/World Bank, 2009 DateExplanationREFDebitCreditBalanceDEMAND DEPOSITS201766,517 Oct 31 October savings collected61,000 827,517 Nov 31 November savings collected64,000 891,517 Dec 30 December savings collected59,000 950,517 SHORT-TERM B...

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    A5-H3 (page 3 of 3) ©CGAP/World Bank, 2009 DateExplanationREFDebitCreditBalanceRENT AND UTILITIES56696,356 Oct 31 Rent and utilities10,700 Nov 30 Rent and utilities10,700 Dec 31 Rent and utilities10,700 128,456 COMMUNICATION56736,659 Oct 31 Phone, courier, etc.4,0...

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    A5-H4 ©CGAP/World Bank, 2009 Trial Balance 30 September 2007 Ledger AccountsRefDebitCreditCash and Due from Banks101193,601Trade investments11038,270Gross Loan Portfolio1201,282,406Impairment Loss Allowance12519,128Acct Receivable & Other Assets13538,415Other (Long-Term) Investments14040,00...

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    A5-H5 ©CGAP/World Bank, 2009 TTrriiaall BBaallaannccee Ledger AccountsRefDebitCreditCash and Due from Banks101Trade investments110Gross Loan Portfolio120Impairment Loss Allowance125Acct Receivable & Other Assets135Other (Long-Term) Investments140Gross Fixed Assets150Accumulated Depreciat...

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    A5-H6 ©CGAP/World Bank, 2009 Trial Balance 31 December 2007 Ledger AccountsRefDebitCreditCash and Due from Banks101215,686Trade investments11038,270Gross Loan Portfolio1201,560,406Impairment Loss Allowance12519,128Acct Receivable & Other Assets13538,415Other (Long-Term) Investments14040,000...

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    A5-H7a (page 1 of 2) ©CGAP/World Bank, 2009 LLooaann LLoossss WWoorrkksshheeeett 1. Determine what the provision for loan impairment and impairment loss allowance should be. ANALYSIS RULE ENTRY 2. Write-off of $5,000 ANALYSIS RULE ENTRY

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    A5-H7a (page 2 of 2) ©CGAP/World Bank, 2009 3. What would happen if the write-off was $40,000?

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    A5-H7b (page 1 of 2) ©CGAP/World Bank, 2009 LLooaann LLoossss WWoorrkksshheeeett –– AAnnsswweerrss 1. Determine what the impairment loss allowance should be. Current Impairment Loss Allowance = $19,128 Gross Loan Portfolio = $1,560,406 Loan loss reserve rate = 2% The required impairment...

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    A5-H7b (page 2 of 2) ©CGAP/World Bank, 2009 Gross Loan Portfolio 5,000 (Please note: This is typical in most regions but PARMEC laws in West Africa require an additional transaction for write-offs.) 3. What would happen if the write-off was $40,000? An additional provision for loan impairment o...

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    A5-H8a (page 1 of 2) ©CGAP/World Bank, 2009 DDeepprreecciiaattiioonn WWoorrkksshheeeett Calculate the depreciation adjustments for each problem below. Use the information in the case as well as from the information gathered to date. 1. SAFE purchased computer equipment for $4,000 on July 1, pa...

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    A5-H8a (page 2 of 2) ©CGAP/World Bank, 2009 3. Depreciate fixed assets purchased before July 1, 2007 (that is, on the opening balance sheet) by $72,544: 4. What is the total depreciation expense for SAFE this year?

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    A5-H8b (page 1 of 2) ©CGAP/World Bank, 2009 DDeepprreecciiaattiioonn WWoorrkksshheeeett –– AAnnsswweerrss 1. SAFE purchased computer equipment for $4,000 on July 1, paid in cash. Record 50 percent depreciation for this year. (Refer to the “Adjusting Entries” at the end of the SAFE ca...

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    A5-H8b (page 2 of 2) ©CGAP/World Bank, 2009 3. Depreciate fixed assets purchased before July 1, 2007 (that is, on the opening balance sheet) by $72,544: Depreciation 72,544 Accumulated Depreciation 72,544 4. What is the total depreciation expense for SAFE this year? $2,000 + $5,000 + $72,544 ...

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    A5-H9a (page 1 of 2) ©CGAP/World Bank, 2009 AAddjjuussttiinngg ffoorr AAccccrruuaallss WWoorrkksshheeeett 1. Record accrued interest revenue on long- and short-term investments a. Amount in interest bearing accounts = (Use trial balance) b. Accrued interest (not received but earned) = ANALY...

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    A5-H9a (page 2 of 2) ©CGAP/World Bank, 2009 ANALYSIS RULE ENTRY 3. Should SAFE accrue any expense for client deposits? Explain your answer and make relevant T-accounts.

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    A5-H9b (page 1 of 2) ©CGAP/World Bank, 2009 AAddjjuussttiinngg ffoorr AAccccrruuaallss WWoorrkksshheeeett –– AAnnsswweerrss 1. Record accrued interest revenue on long- and short-term investments a. Amount in interest bearing accounts = (Use trial balance) Trade (Short-term) investment...

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    A5-H9b (page 2 of 2) ©CGAP/World Bank, 2009 Interest and Fee Expense on Borrowings 1,802 Short-term Borrowings 1,802 3. Should SAFE accrue any expense for client deposits? Refer to the case study and remember that in accounting, one should always err on the conservative side, and therefore sh...

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    A5-H10 ©CGAP/World Bank, 2009 GGeenneerraall JJoouurrnnaall –– AAddjjuussttiinngg EEnnttrriieess DECAccount Title and ExplanationRef. DebitCredit31Provisions for Loan Impairment53012,080Impairment Loss Allowance (increase loan loss reserve)12512,080 31Depreciation Expense55579,544Ac...

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    A5-H11 ©CGAP/World Bank, 2009 Trial Balance Adjusted Worksheet 31 December 2007 Ledger AccountsRefDebitCreditCash and Due from Banks101Trade investments110Gross Loan Portfolio120Impairment Loss Allowance125Acct Receivable & Other Assets135Other (Long-Term) Investments140Gross Fixed Assets150...

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    A5-H12 (page 1 of 3) ©CGAP/World Bank, 2009 General Ledger Adjusted December 2007 (Note: the accounts affected by adjusting entries are larger and colored) ExplanationRefDebitCreditBalanceCASH AND DUE FROM BANKS101193,601 Oct8Received donation25,000 218,601 10Attend trainin...

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    A5-H12 (page 2 of 3) ©CGAP/World Bank, 2009 ExplanationRefDebitCreditBalanceINTEREST PAYABLE ON FUNDING LIABILITIES220- Dec 31 Accrue interest expense1,802 1,802 Accrue interest expense47,526 49,328 PAID-IN CAPITAL30150,000 DONATED EQUITY PRIOR YEARS3101,389,2...

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    A5-H12 (page 3 of 3) ©CGAP/World Bank, 2009 ExplanationRefDebitCreditBalanceCOMMUNICATION56736,659 Oct31Phone, courier, etc.4,000 Nov30Phone, courier, etc.4,000 Dec31Phone, courier, etc.4,000 48,659 BANK FEES56811,594 Oct31Bank fees1,300 ...

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    A5-H13 (Answers) ©CGAP/World Bank, 2009 Trial Balance Adjusted 31 December 2007 Ledger AccountsRefDebitCreditCash and Due from Banks101215,686Trade investments11038,270Gross Loan Portfolio1201,560,406Impairment Loss Allowance12531,208Acct Receivable & Other Assets13543,894Other (Long Term) I...

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    A5-H14 (page 1 of 9) ©CGAP/World Bank, 2009 TTeecchhnniiccaall NNootteess THE GENERAL LEDGER An MFI t ypically has many accounting transacti ons each d ay, such as the disbursement of loans, the p ayment of e mployee salaries, and t he receipt o f loan payments. It would not b e practical to p...

  • Page 296

    A5-H14 (page 2 of 9) ©CGAP/World Bank, 2009 balances. F or exa mple, if a Balance Sheet dated December 31, 2004, showed a cash balance of $28,500, this balance would be carried over as the opening balance on January 1, 2005. In contrast, Income Statement accounts reflect revenue and expenses ove...

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    A5-H14 (page 3 of 9) ©CGAP/World Bank, 2009 Cash and Due from Banks Account No. 101 Date Explanation Debit Credit Balance 404,901 July 1 Purchased computer 4,000 400,901 3 Purchased motorcycles 4,000 396,901 31 Collected savings 51,000 447,901 31 July loan repayments 226,200 674,101 31 J...

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    A5-H14 (page 4 of 9) ©CGAP/World Bank, 2009 Bank Balance, August 31, 2005 40,000 less outstanding checks: #1 147 #2 53 (200) plus outstanding deposits: #1 400 200 Adjusted Bank Balance 40,200 Cash Account Balance (prior to reconciliation) 40,350 record bank charges (150)...

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    A5-H14 (page 5 of 9) ©CGAP/World Bank, 2009 The impairment loss allowance is on the Balance Sheet and thus has an opening balance, unless no allowance has ever been created. If this is the case, when the allowance is created, a loan lo ss expense (referred to a s the provis ion for loan impairme...

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    A5-H14 (page 6 of 9) ©CGAP/World Bank, 2009 DEPRECIATION When a capital asset is purchased, the entire cost is not immediately recorded on the Income Statement as an expense. It is depreciated over time so th at each year, an amount equal to the portion of its useful life is expensed. This entry...

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    A5-H14 (page 7 of 9) ©CGAP/World Bank, 2009 SAFE bought motorcycles on July 3—paid $15,000. Gross Fixed Asset 15,000 Cash 4,000 Short-term Borrowings 11,000 At end of year, record depreciation (33.33 percent) for one year: ANALYSIS RULE ENTRY Expense “Depreciation” was increased Incre...

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    A5-H14 (page 8 of 9) ©CGAP/World Bank, 2009 asset) even though it has not actu ally been received. Note that IAS recommends accrual accounting and (as previously discussed) an MFI must be extremely prudent when accruing such revenue from the loan portfolio. Accruing revenue on term deposits or a...

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    A5-H14 (page 9 of 9) ©CGAP/World Bank, 2009 From the t rial balance SAFE has short-term borrowings equal to $12,014. To determine how much interest to accr ue (record interest that has been incurred but not paid) multiply $12,014 by 15 percent for a total accrued interest expense of $1,802. ANAL...

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    ©CGAP/World Bank, 2009 A-295 SESSION 6: CREATING STATEMENTS Session Summary OBJECTIVES: By the end of the session participants will be able to:  Prepare an Income Statement and a Balance Sheet from the trial balance  Discuss the importance and use of a Cash Flow Statement  Record closi...

  • Page 306

    Trainer Instructions A-296 A6-H7a Direct Method – Statement of Cash Flows A6-H7b Indirect Method – Statement of Cash Flows A6-H8 Group Discussion Guide A6-H9 Technical Notes – Closing Entries CASE STUDY: SAFE—“Our clients are SAFE with us” (If desired, all case handouts may be copied ...

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    A-297 Session 6: Creating Statements INTRODUCTION 1. (3 minutes) Introduce the session by revealing once again the Accounting cycle (A4-O1). Tell the group that they now have all the information needed to construct financial statements for SAFE, and remind them of the materials they need to have...

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    Trainer Instructions A-298 the Income Statement and Balance Sheet tell managers. Congratulate participants again and let them know they have just one financial statement left to create. 7. (10 minutes) Reintroduce the Cash Flow Statement and demonstrates how to create one, using A6-M1 and A3-M2, ...

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    A6: Creating Statements A-299 A6-M1 Technical Notes – Closing Entries Now that we have completed the General Journal, the General Ledger, the trial balance, and the adjusting entries, the next step is to record closing entries. Closing entries are prepared after the final trial balance is compl...

  • Page 310

    Trainer Instructions A-300 A6-M2 Possible Answers for Discussion of A6-H8 Group Discussion Guide COMMENT ON SAFE’S POSITION WITH RESPECT TO: 1. Its operating profit/(loss)  SAFE has had a big operating loss for three years and does not seem to be improving quickly enough.  Would want to c...

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    A-301 OVERHEADS FOR SESSION 6 ARE CONTAINED IN POWERPOINT FILE ENTITLED “CGAP ACCOUNTING OVERHEADS_3.”

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    A6: Creating Statements (Don’t forget sessions 3–5 overheads: A3-O1–O12, A4-O1, and A5-O19a–b) A-303 ©CGAP/World Bank, 2009General Journal – Closing Entries General Journal General Journal –– Closing Entries Closing Entries A6-O1aLedger AccountsRefDebitCreditDec 31 Interest on Loa...

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    Trainer Instructions A-304 ©CGAP/World Bank, 2009SAFE – “Our clients are SAFE with us” SAFE SAFE –– “Our clients are SAFE with us” “Our clients are SAFE with us” A6-O2aIncome Statement for the year ending December 31, 2007 Income Statement for the year ending December 31, 20...

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    A6: Creating Statements A-305 ©CGAP/World Bank, 2009SAFE Balance Sheet SAFE Balance Sheet SAFE Balance Sheet A6-O3aRef.Account Name200520062007ASSETSB1Cash and Due from Banks267,439 302,067 215,686 B2Trade Investments17,000 47,319 38,270 B3Net Loan ...

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    Trainer Instructions A-306 ©CGAP/World Bank, 2009Direct Method – Statement ofCash Flows WorksheetDirect Method Direct Method –– Statement ofStatement ofCash Flows WorksheetCash Flows WorksheetA6-O4aRef.Term200520062007CASH FLOWS FROM OPERATING ACTIVITIESC1Cash Received from Interest, Fees...

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    A6: Creating Statements A-307 ©CGAP/World Bank, 2009Indirect Method – Statement of Cash Flows Worksheet (continued)Indirect Method Indirect Method –– Statement of Cash Flows Statement of Cash Flows Worksheet Worksheet (continued)A6-O4dRef.Term200520062007C38(Increase)/Decrease in Other In...

  • Page 318

    Trainer Instructions A-308 ©CGAP/World Bank, 2009Direct Method – Statement ofCash FlowsDirect Method Direct Method –– Statement ofStatement ofCash FlowsCash FlowsA6-O5aRef.Term200520062007CASH FLOWS FROM OPERATING ACTIVITIESC1Cash Received from Interest, Fees, and Commisions on Loan Portf...

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    A6: Creating Statements A-309 ©CGAP/World Bank, 2009Indirect Method – Statement of Cash Flows(continued)Indirect Method Indirect Method –– Statement of Cash FlowsStatement of Cash Flows(continued)A6-O5dRef.Term200520062007C38(Increase)/Decrease in Other Investments(18,219) (10,064) ...

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    A-311

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    A6-H1 ©CGAP/World Bank, 2009 General Journal – Closing Entries The net effect on the current year profits/losses account is a $292,741 debit. The $507,031 donation is recorded “below the line” as nonoperational income and transferred separately to the Balance Sheet as a credit to donated ...

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    A6-H2 ©CGAP/World Bank, 2009 SAFE Income Statement – Worksheet Ref. Account Name 2005 2006 2007 I1 Financial Revenue 60,114 200,455 I2 Financial Revenue from Loan Portfolio 47,072 189,619 I3 Interest on Loan Portfolio 42,626 171,708 I4 Fees and Commissions on Loan Portfolio 4,446 17,911 I5...

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    A6-H3 ©CGAP/World Bank, 2009 SAFE Income Statement Ref.Account Name200520062007I1Financial Revenue60,114 200,455 739,948 I2Financial Revenue from Loan Portfolio47,072 189,619 734,069 I3 Interest on Loan Portfolio42,626 171,708 ...

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    A6-H4 ©CGAP/World Bank, 2009 SAFE Balance Sheet – Worksheet Ref.Account Name200520062007ASSETSB1Cash and Due from Banks267,439 302,067 B2Trade Investments17,000 47,319 B3Net Loan Portfolio201,470 617,263 B4 Gross Loan Portfolio201,470 ...

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    A6-H5 ©CGAP/World Bank, 2009 SAFE Balance Sheet Ref.Account Name200520062007ASSETSB1Cash and Due from Banks267,439 302,067 215,686 B2Trade Investments17,000 47,319 38,270 B3Net Loan Portfolio201,470 617,263 1,529,198 B4 ...

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    A6-H6a ©CGAP/World Bank, 2009 Direct Method – Statement of Cash Flows Worksheet Ref.Term200520062007CASH FLOWS FROM OPERATING ACTIVITIESC1Cash Received from Interest, Fees, and Commisions on Loan Portfolio 47,072 189,619 C2Cash Received from Interest on Investment 13,042 ...

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    A6-H6b ©CGAP/World Bank, 2009 Indirect Method – Statement of Cash Flows Worksheet Ref.Term200520062007CASH FLOWS FROM OPERATING ACTIVITIESC27 Net Operating Income (307,154) (471,581)C28 Depreciation and Amortization 36,437 63,916 C29 Impairment Losses on Loans ...

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    A6-H7a ©CGAP/World Bank, 2009 Direct Method – Statement of Cash Flows Ref.Term200520062007CASH FLOWS FROM OPERATING ACTIVITIESC1Cash Received from Interest, Fees, and Commisions on Loan Portfolio 47,072 189,619 734,069 C2Cash Received from Interest on Investment 13,04...

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    A6-H7b ©CGAP/World Bank, 2009 Indirect Method – Statement of Cash Flows Ref.Term200520062007CASH FLOWS FROM OPERATING ACTIVITIESC27 Net Operating Income (307,154) (471,581) (292,741)C28 Depreciation and Amortization 36,437 63,916 79,544 C29 Impairment Losses on...

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    A6-H8 ©CGAP/World Bank, 2009 Group Discussion Guide (Use all statements together and discuss the following.) COMMENT ON SAFE’S POSITION WITH RESPECT TO: 1. Its operating profit/(loss) 2. Its capital structure—donations, paid-in capital, commercial loans, and so on 3. What can we deduce about...

  • Page 342

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    A6-H9 ©CGAP/World Bank, 2009 Technical Notes – Closing Entries Now that we have completed the General Journal, the Ge neral Ledger, the trial balance, and the adjustin g entries, the next step is to record closing e ntries. Closing entries are prepared after the fin al trial ba lance is comple...

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    ©CGAP/World Bank, 2009 A-335 SSEESSSSIIOONN 77:: IINNTTEERRPPRREETTIINNGG SSTTAATTEEMMEENNTTSS Session Summary OBJECTIVES: By the end of the session participants will be able to:  Discuss how financial statements can be used to identify and analyze problems  Define and discuss key ind...

  • Page 346

    Trainer Instructions A-336 A7-O10 Sample Adjustment for Impairment Loss Allowance and Write-Off A7-O11 SAFE Analytical Adjustments A7-O12a–b Adjusted Income Statement A7-O13a–b Adjusted Balance Sheet A7-O14a–b SAFE Profitability Indicators A7-O15a–b SAFE ALM Ratios A7-O16 Purpose of Inter...

  • Page 347

    A-337 Session 7: Interpreting Statements INTRODUCTION 1. (1 minute) Link this session to the previous one by reminding participants that they have completed the accounting cycle and created the I/S, B/S and Cash Flow Statement. Use A4-O1 to review the steps they have taken and to arrive at finan...

  • Page 348

    Trainer Instructions A-338 3. (3 minutes) Ask the group again: Why do we take so much time understanding accounting and then collecting and organizing data? What can we do with it now? Probe participants until an answer emerges that relates to using the information for decision making and to iden...

  • Page 349

    A7: Interpreting Statements A-339 7. (5 minutes) Ask participants to name the most useful outputs of the I/S that will enable them to make the decisions they have identified. (Answer: ratios/Indicators in reports.) Refer to the quote on A7-O2 and ask: What is meant by financial and management ind...

  • Page 350

    Trainer Instructions A-340 they will not have to calculate it and when they take the CGAP Financial Analysis course they will be fully explained. Put up A7-O11, A7-O12, and A7-13, Adjustment worksheet, Adjusted Balance Sheet, and Adjusted Income Statement, respectively. Then distribute A7-H4, SAF...

  • Page 351

    A7: Interpreting Statements A-341 MIS. Also tie in responses from A1-H7 either verbally or through a previously prepared flipchart that lists some of the responses.) 18. (15 minutes) Keeping their same subgroups, participants will start to answer the question by filling in A7-H13, the Report Work...

  • Page 352

    Trainer Instructions A-342 A7-M1 Technical Notes – Statements and Reports Now that the financial statements have been created, we need to look at how the information provided can be used in a useful manner—that is, how do financial statements help management and shareholders make decisions? ...

  • Page 353

    A7: Interpreting Statements A-343  How can reports be designed to meet the needs of different users?  How frequently and how immediately do the users need to receive the information?  How might the users’ information needs change in the future, and how would those changes affect the de...

  • Page 354

    Trainer Instructions A-344  Active loans by loan officer Portfolio Quality Reports  Delinquent loans by loan officer  Summarized aging of portfolio-at-risk by loan officer  Loan write-off and recuperations report  Aging of loans and calculation of reserve requirements If a credit a...

  • Page 355

    A7: Interpreting Statements A-345 USE OF RATIOS Ratio analysis is a financial management tool that enables managers of microfinance institutions to assess their progress in achieving sustainability. They can help answer two primary questions that every institution involved in microfinance needs t...

  • Page 356

  • Page 357

    A-347 OVERHEADS FOR SESSION 7 ARE CONTAINED IN 2 SEPARATE POWERPOINT FILES ENTITLED “CGAP ACCOUNTING OVERHEADS_4a & 4b.”

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  • Page 359

    A7: Interpreting Statements (Don’t forget sessions 1–6 overheads: A1-O1–O3, A3-O7a–b & -O9, and A6-O2a–b & -O3a–b) A-349 ©CGAP/World Bank, 2009“A management information system is““A management information system isA management information system isthe series of process...

  • Page 360

    Trainer Instructions A-350 ©CGAP/World Bank, 2009A7-O3aRisk Coverage RatioAdjusted Risk Coverage RatioWrite-off RatioAdjusted Write-off RatioPortfolio-at-Risk (PAR) RatioAdjusted PAR RatioPortfolio Quality R11R10R9Liquid RatioR8Debt to EquityAdjusted Debt to EquityR7Cost of Funds RatioAdjusted ...

  • Page 361

    A7: Interpreting Statements A-351 ©CGAP/World Bank, 2009Sustainability and Profitability RatiosSustainability and Profitability Sustainability and Profitability RatiosRatiosA7-O4aAdjusted Net Operating Income − TaxesAverage Adjusted Assets Adjusted ROA (AROA) Net Operating Income − TaxesAve...

  • Page 362

    Trainer Instructions A-352 ©CGAP/World Bank, 2009ALM Ratios and Formulae ALM Ratios and Formulae ALM Ratios and Formulae A7-O5aInterest Rate Management Adjusted financial expense on funding liabilitiesAverage gross loan portfolio Adjusted FundingExpense Ratio Financial expense on funding liabil...

  • Page 363

    A7: Interpreting Statements A-353 ©CGAP/World Bank, 2009A7-O7Types ofTypes ofAnalyticalAnalyticalAdjustmentsAdjustmentsWrite-off A5Impairment Loss Allowance A4Portfolio-at-Risk Inflation A3Inflation In-kind Subsidy A2Subsidies Subsidized Cost of Funds A1©CGAP/World Bank, 2009Analytical Adjustm...

  • Page 364

    Trainer Instructions A-354 ©CGAP/World Bank, 2009Subsidies AdjustmentsSAFE 2005Subsidies AdjustmentsSubsidies AdjustmentsSAFE 2005SAFE 2005A7-O83,3103,310Adjustment for Subsidized Cost of Funds(A1) = c − de2,087 Interest and Fee Expense on Borrowings d5,397 Market Cost of Funds = a x bc26% M...

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    A7: Interpreting Statements A-355 ©CGAP/World Bank, 2009SAFE Inflation Adjustments (continued)SAFE Inflation Adjustments SAFE Inflation Adjustments (continued)A7-O9b59,698 Net Adjustment for Inflation (A3) = c – f g19,351 Adjustment to Fixed Assets (A3.2) = d x ef18%Inflation Ratee107,507Net ...

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    Trainer Instructions A-356 ©CGAP/World Bank, 2009SAFE Analytical AdjustmentsSAFE Analytical AdjustmentsSAFE Analytical Adjustments A7-O11200520062007A1 Adjustment for Subsidized Cost of Fundsa. Average Short-term Borrowings20,756 52,802 38,053 b. Average Long-term Borrowings- ...

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    A7: Interpreting Statements A-357 ©CGAP/World Bank, 2009Adjusted Income Statement (continued)Adjusted Income Statement Adjusted Income Statement (continued)A7-O12bRef.Account Name200520062007I15 Value of Loans RecoveredI16Operating Expense405,181 711,391 987,923 I17Person...

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    Trainer Instructions A-358 ©CGAP/World Bank, 2009SAFE Profitability IndicatorsSAFE Profitability IndicatorsSAFE Profitability IndicatorsA7-O14aRef.DESCRIPTION200520062007R1Operational Self-Sufficiency RatioaFinancial Revenue60,114 200,455 739,948 bFinancial Expense2,08...

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    A7: Interpreting Statements A-359 ©CGAP/World Bank, 2009SAFE Profitability Indicators (continued)SAFE Profitability Indicators SAFE Profitability Indicators (continued)A7-O14bRef.DESCRIPTION200520062007Adj R2 Adjusted Return on Assets (AROA)aAdjusted Net Operating Income(350,464) (584,36...

  • Page 370

    Trainer Instructions A-360 ©CGAP/World Bank, 2009Purpose of Internal ControlsPurpose of Internal ControlsPurpose of Internal Controls Preserve the safety of assets Improve quality of customer service Ensure reliability of financial information Ensure staff adherence to policy and gu...

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    A7: Interpreting Statements A-361 ©CGAP/World Bank, 2009Sources of RiskSources of RiskSources of Risk Delinquency Risk  Fraud  Liquidity Risk  Operating Risk  Security Risks  Accounting/Bookkeeping Risk Risk of Computerization GovernanceA7-O17©CGAP/World Bank, 2009Exter...

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    A-363

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    A7-H1 ©CGAP/World Bank, 2009 Sustainability and Profitability R1 Operational Self-Sufficiency Financial Self-Sufficiency R2 Return on Assets (ROA) Adjusted Return on Assets (AROA) R3 Return on Equity (ROE) Adjusted Return on Equity (AROE) Asset/Liability Management R4 Yield on Gross Portfolio...

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    A7-H2 ©CGAP/World Bank, 2009 Sustainability and Profitability Ratios and Formulae RATIO FORMULA Operational Self-Sufficiency Financial Revenue (Financial Expense + Impairment Losses on Loans + Operating Expense) Financial Self-Sufficiency Adjusted Financial Revenue (Adjusted Financial Expense + ...

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    A7-H3 ©CGAP/World Bank, 2009 ALM Ratios and Formulae INTEREST RATE MANAGEMENT Yield on Gross Portfolio Cash Received from Interest, Fees, and Commissions on Loan Portfolio Average Gross Loan Portfolio Cost of Funds Financial Expense on Funding Liabilities (Average Deposit + Average Borrowing) Ad...

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    A7-H4 ©CGAP/World Bank, 2009 SAFE Analytical Adjustments 200520062007A1 Adjustment for Subsidized Cost of Fundsa. Average Short-term Borrowings20,756 52,802 38,053 b. Average Long-term Borrowings- - - c. Average Long and Sho...

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    A7-H5 ©CGAP/World Bank, 2009 Adjusted Income Statement Ref.Account Name200520062007I1 Financial Revenue60,114 200,455 739,948 I2 Financial Revenue from Loan Portfolio47,072 189,619 734,069 I3 Interest on Loan Portfolio42,626 171,708 668...

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    A7-H6 ©CGAP/World Bank, 2009 Adjusted Balance Sheet Ref.Account Name200520062007B1Cash and Due from Banks267,439 302,067 215,686 B2Trade Investments17,000 47,319 38,270 B3Net Loan Portfolio201,470 617,263 1,529,198 B4 Gross Loan Port...

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    A7-H7 ©CGAP/World Bank, 2009 Profitability and Sustainability Ratios – Worksheet Ref.DESCRIPTION200520062007R1Operational Self-Sufficiency RatioaFinancial Revenue60,114 200,455 bFinancial Expense2,087 645 cImpairment Losses on Loans- -...

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    A7-H8 ©CGAP/World Bank, 2009 ALM Ratios – Worksheet Ref.DESCRIPTION200520062007R4Yield on Gross Portfolio Ratio = a/baCash Received from Interest, Fees,and Commissions on Loan Portfolio47,072 189,619 bAverage Gross Loan Portfolio100,735 409,367 R4Y...

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    A7-H9 ©CGAP/World Bank, 2009 Profitability and Sustainability Ratios – Answers Ref.DESCRIPTION200520062007R1Operational Self-Sufficiency RatioaFinancial Revenue60,114 200,455 739,948 bFinancial Expense2,087 645 53,558 cImpairment L...

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    A7-H10 ©CGAP/World Bank, 2009 ALM Ratios – Answers Ref.DESCRIPTION200520062007R4Yield on Gross Portfolio Ratio = a/baCash Received from Interest, Fees,and Commissions on Loan Portfolio47,072 189,619 734,069 bAverage Gross Loan Portfolio100,735 409,...

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    A7-H11 (page 1 of 2) ©CGAP/World Bank, 2009 Benchmarking of Key Indicators Average Indicator for the Category Category of MFI Administrative Efficiency % Portfolio Yield % Operating Self Sufficiency % Adjusted Return on Assets % Portfolio-at-Risk > 90 Days % Number of Active Clients Outstandi...

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    A7-H11 (page 2 of 2) ©CGAP/World Bank, 2009 Source: Micro Banking Bulletin, Issue 15, Autumn 2007. Average Indicator for the Category Category of MFI Administrative Efficiency % Portfolio Yield % Operating Self Sufficiency % Adjusted Return on Assets % Portfolio-at-Risk > 90 Days % Number of ...

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    A7-H12 ©CGAP/World Bank, 2009 Questions about SAFE’S Performance 1. How would you describe SAFE’s profitability? 2. What are SAFE’s prospects for the future? 3. What additional information would you need to more fully understand SAFE’s performance? 4. How does SAFE compare to the microfi...

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    A7-H13 ©CGAP/World Bank, 2009 Use of Reports – Worksheet Please note which of the following stakeholders needs each report, and if they do, how frequently and for what purpose Type of Report Managers Board Loan Officers All Staff Public Summary Balance Sheet Detailed Balance Sheet Su...

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    A7-H14 ©CGAP/World Bank, 2009 Purpose of Internal Controls  Preserve the safety of assets  Improve quality of customer service  Ensure reliability of financial information  Ensure staff adherence to policy and guidelines Sources of Risk  Delinquenc y Risk  Fraud  Liqu idity ...

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    A7-H15 (page 1 of 4) ©CGAP/World Bank, 2009 Technical Notes – Statements and Reports Now that the financial statements have been created, we need to look at how the information provided can be used in a useful manner—that is, how do financial statements help management and shareholders make ...

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    A7-H15 (page 2 of 4) ©CGAP/World Bank, 2009  How frequently and how immediately do the users need to receive the information?  How might the users’ information needs chan ge in the fu ture, and how would those changes affect the design of the MIS? KEY ISSUES IN REPORT DESIGN INCLUDE: ...

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    A7-H15 (page 3 of 4) ©CGAP/World Bank, 2009 Portfolio Quality Reports  Delinquent loans by loan officer  Summarized aging of portfolio-at-risk by loan officer  Loan write-off and recuperations report  Aging of loans and calculation of reserve requirements If a credit and savings MFI,...

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    A7-H15 (page 4 of 4) ©CGAP/World Bank, 2009 USE OF RATIOS Ratio analysis is a financial management tool that enables managers of microfinance institutions to assess their progress in achieving sustainability. They can h elp answer two primary questions that every institution involved in microfi...

  • Page 407

    ©CGAP/World Bank, 2009 A-397 88:: BBAALLAANNCCIINNGG AACCTT Session Summary OBJECTIVES: By the end of the session, participants will be able to:  Practice skills in accounting, decision making, and auditing  Produce financial statements from information generated based on their partici...

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    Trainer Instructions A-398 Note: The handouts for the game have been changed from the original to reflect the new financial statement formats. The playing board and cards remain the same as in the original game. HANDOUTS: A8-H1 Chart of Accounts A8-H2 Opening Balance Sheet A8-H3 General Journal f...

  • Page 409

    A-399 Session 8: Balancing Act INTRODUCTION TO THE GAME 1. (2 minutes) (Using A8-O1 as background, introduce the session by telling participants that they will participate in an accounting game for MFIs. The game is called the Balancing Act and is to serve as summary application of skills learne...

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    Trainer Instructions A-400  To start: Referring to the materials already given to participants (A8-H1 through A8-H4), use flipchart 2 to tell participants what they will need to start playing the game.  Determine levels of risk and interest rates. Using A8-O2, walk participants through the ...

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    A8: Balancing Act A-401 SETTING CRITERIA FOR “BEST BRANCH” 6. (10 minutes) Ask participants how they will choose the best branch. If necessary, remind them this is an accounting game, so they want to reward good accounting. Have the group quickly brainstorm a list of factors to be considered ...

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    Trainer Instructions A-402 Note: Decide early in the process how fast participants are going and, if they are slow, whether it would be better for some of them to complete the accounting cycle and prepare I/S and B/S based on week 26 rather than, say, only completing a trial balance at week 52. B...

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    A8: Balancing Act A-403 14. (20 minutes or longer) Debrief the group, processing what happened, drawing conclusions, and discussing applications of the event. (Use the Socratic method!) The following questions can be used as a guide for this discussion: Processing Questions  What did you think...

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    Trainer Instructions A-404 A8-M1 BALANCING ACT: A Microfinance Accounting Game GAME OVERVIEW FOR TRAINER The use of a structured experience such as a game provides participants with significant opportunities to experience learning. By experience—we mean to learn from one's personal involvement ...

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    A8: Balancing Act A-405 H-4 Opening Balance Sheet H-5 Ledger paper for General Journal (distribute 2–3 per person) H-6 Ledger paper for Cash Ledger (distribute 2 per person) H-7 Ledger paper for General Ledger (distribute 2–3 per person) H-8 Ending the Game Guide/Tracing Errors in the Trial B...

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    Trainer Instructions A-406 Trainer should not go into the details of ending the game at this point and only alert the participants to the closing entries and that detailed instructions will be distributed at the end of the game. Trainer may elect to work through one roll of the die with the group...

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    A8: Balancing Act A-407 find most difficult to understand?" OR asks participants to answer: "I am still unsure of how to..." Trainer should note the questions and answer them thoroughly. (This is the last chance for review.) 12. (2 minutes) Ask: What will you do with what the game ...

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    Trainer Instructions A-408 A8-M2 BALANCING ACT: A Microfinance Accounting Game GAME DIRECTIONS FOR TRAINER TO BEGIN THE GAME  Each player makes a strategic decision regarding the amount of risk they wish to take on their investments—either high, medium or low.  Once the decision is made, ...

  • Page 419

    A8: Balancing Act A-409 LANDING ON A SQUARE Disbursement Squares "D"  When a player lands on a "D" square, s/he picks up a "D" card from the middle of the board and disburses loans in the amount stated on the card. All loans disbursed during the game are 12-month ...

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    Trainer Instructions A-410 General Squares  The remaining squares represent typical transactions or events that an MFI experiences. Landing on a general square requires players to make accounting entries to record the transaction of the event. Half Way Point – Square 26 All players must STOP...

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    A8: Balancing Act A-411 iii. Carrying on with the above example, the MFI collects full interest payment upfront, i.e., at the time of disbursement, at a rate of 26% annual flat on its loans and the loan term is one year (52 weeks). The recognition of interest is split between two years as follows...

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    Trainer Instructions A-412 ANTICIPATED QUESTIONS/DIFFICULTIES  If a player lands on squares #13 and/or #39 be sure that the Investment account balance is calculated based on both the opening balance PLUS any investments made during the game.  If a player is forced to borrow funds on the las...

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    A8: Balancing Act A-413 A8-M3 Half-year Expense Cards Cut out each square and place on the game board at Week 26. Make enough so that each player has a square. STOP Disburse loans! 10,000 times the value of the number o n one die Receive loan payments! 8,000 times the valu e of another roll of th...

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    A8: Balancing Act A-415 A8-M4 Flipchart Guide INFORMATION TO BE PREWRITTEN ON FLIPCHARTS: Each centered title represents a new concept and a separate flipchart; each dotted line suggests a separate flipchart because information for a particular concept may not fit on one sheet of paper. F1 BALANC...

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    Trainer Instructions A-416 F3 TYPES OF SQUARES Loan square (pick up an L card) = LOAN DISBURSEMENT Loans 26 percent flat annual interest 5 percent up-front fee Principal collected at end Interest collected and recorded up front Interest represents 52 weeks of revenue  portion will nee...

  • Page 427

    A8: Balancing Act A-417 F5 HALFWAY POINT – Week 26 When you stop or pass square 26, pick an expenses card and follow these directions: 1. Disburse loans at 10,000 times a roll of the die. Die = 6 Disburse loans = 60,000. 2. Calculate and record semiannual expenses according to instructions on t...

  • Page 428

    Trainer Instructions A-418 F7 ENDING THE GAME–Week 52 What you will do:  Disburse 10,000 x Die.  Pay semiannual expenses again as on square 26.  If you do not have the cash you must access a line of credit.  Complete a General Ledger for all transactions.  Complete a trial balanc...

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    A-419 OVERHEADS FOR SESSION 8 ARE CONTAINED IN POWERPOINT FILE ENTITLED “CGAP ACCOUNTING OVERHEADS_4b.”

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    A8: Balancing Act A-421 ©CGAP/World Bank, 2009Instructions to Determine Levelsof Risk and Interest on Debt Instructions to Determine LevelsInstructions to Determine Levelsof Risk and Interest on Debt of Risk and Interest on Debt Risk LevelRisk Level Choose a level of risk: Low, Medium, High...

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    Trainer Instructions A-422 ©CGAP/World Bank, 2009Instructions to Determine Levels of Riskand Interest on Debt (continued)Instructions to Determine Levels of RiskInstructions to Determine Levels of Riskand Interest on Debt and Interest on Debt (continued)Determine Interest on Debt Determine Inte...

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    A8: Balancing Act A-423 ©CGAP/World Bank, 2009Sample Entries for Loan Disbursementsand Loan Repayments (continued)Sample Entries for Loan DisbursementsSample Entries for Loan Disbursementsand Loan Repayments and Loan Repayments (continued)(continued)A8-O3b2. The calculation of loan fees earned ...

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    Trainer Instructions A-424 ©CGAP/World Bank, 2009Sample Entries for Loan Disbursementsand Loan Repayments (continued)Sample Entries for Loan DisbursementsSample Entries for Loan Disbursementsand Loan Repayments and Loan Repayments (continued)(continued)A8-O3d375 225 Deferred Revenue (5/52 weeks...

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    A8: Balancing Act A-425 ©CGAP/World Bank, 2009Opportunity Square – A Choice Opportunity Square Opportunity Square –– A Choice A Choice  This is your decision—you may choose or decline the opportunity. Decide based on your risk level, cash position, and so on.A8-O4Other SquaresOthe...

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    Trainer Instructions A-426 ©CGAP/World Bank, 2009Instructions onHow to Start PlayingInstructions onInstructions onHow to Start PlayingHow to Start Playing1. Roll die to see who starts first. The person who rolls the highest number on the die begins. 2. The next players are determined in a clock...

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    A-427

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    A8-H1 ©CGAP/World Bank, 2009 Balancing Act Chart of Accounts ASSETS LIABILITIES EQUITY 101 Cash and Due from Banks 110 Trad e Investments 115 Net Loan Portfolio 120 Gross Loan Portfolio 125 Impairment Loss Allowance 130 Interest Receivable on Loan Portfolio 135 Accounts Receivable and Other Asse...

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    A8-H2 ©CGAP/World Bank, 2009 Balancing Act Opening Balance Sheet ASSETS LIABILITIES AND EQUITY Cash & Due from Banks $ 74,100 Loans Outstanding: Current 136,700 Past Due 10,800 Gross Loan Portfolio 147,500 (Impairment Loss Allowance) (3,950) Net Loans Portfolio 143,550 Accounts Receiva...

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    A8-H3 ©CGAP/World Bank, 2009 Balancing Act General Journal Week # Account Titles & Explanation Ref.Debit Credit

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    A8-H4 ©CGAP/World Bank, 2009 Balancing Act General Ledger Week # Account Titles & Explanation Ref Debit Credit Balance ...

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    A8-H5 ©CGAP/World Bank, 2009 Balancing Act: A Microfinance Accounting Game TO BEGIN THE GAME  Each player makes a st rategic decision regarding the amo unt of risk he/she wishes to take on investments—either high, medium, or low.  Once the decision is m ade, players role the die to deter...

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    A8-H6 ©CGAP/World Bank, 2009 Landing on a Square LOAN SQUARES (“D”)  When a player lands on a “D” square, he picks up a “D” c ard from the middle of the board and disburses loans in the a mount stated on the car d. All loans disbursed during the ga me are 12-month (52 weeks) loans...

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    A8-H7 ©CGAP/World Bank, 2009 Sample Entries for Loan Disbursements, Loan Repayments, and Accessing Lines of Credit LOAN DISBURSEMENTS (D CARDS) If $15,000 in loans was disbursed in the fifth week of the year at 26 percent flat annual rate with a 5 percent up-front fee, the General Journal entry ...

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    A8-H8 ©CGAP/World Bank, 2009 Balancing Act Trial Balance Ref. Account Title Debit Credit

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    A8-H9 ©CGAP/World Bank, 2009 Tracing Errors in the Trial Balance 1. Check the additions in the trial balance. 2. Check that all the items have been recorded on the correct side of the trial balance. 3. Calculate the amount of the difference: 3.1 If difference is very big, it is often a n indicat...

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    A8-H10 ©CGAP/World Bank, 2009 Ending the Game (Week 52)  Disburse 10,000 times the number appearing on the die.  Pay semiannual expenses based on the clo sing loan portf olio. Note: If players do not have enough cash to pay the semiannual expenses, they must access their line of credit . H...

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    A8-H11 (page 1 of 2) ©CGAP/World Bank, 2009 Balancing Act Adjusted Trial Balance Ref. Account Title Debit Credit 101 Cash and Due from Banks 110 Trade Investments 115 Net Loan Portfolio 120 Gross Loan Portfolio 125 Impairment Loss Allowance 130 Interest Receivable on Loan Portfolio 1...

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    A8-H11 (page 2 of 2) ©CGAP/World Bank, 2009 Ref. Account Title Debit Credit 410 Interest on Loan Portfolio 415 Fees and Commissions on Loan Portfolio 420 Financial Revenue from Investment 425 Other Operating Revenue 435 Other Nonoperating Revenue 440 Donations 500 Financial Expense ...

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    A8-H12 ©CGAP/World Bank, 2009 Balancing Act Statement of Income and Expenditure FINANCIAL REVENUE Financial Revenue from Loan Portfolio Interest on Loan Portfolio Fees and Commissions on Loan Portfolio Financial Revenue from Investments Other Operating Revenue Financial Expense Fin...

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    A8-H13 ©CGAP/World Bank, 2009 Balancing Act Closing Balance Sheet 20062007ASSETSCash and Due from BanksTrade InvestmentsNet Loan Portfolio Gross Loan Portfolio Impairment Loss AllowanceInterest Receivable on Loan PortfolioAccounts Receivable and Other AssetsOther InvestmentsNet Fixed Asset...

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    A8-H14 ©CGAP/World Bank, 2009 Balancing Act Analytical Adjustments 2007A1 Adjustment for Subsidized Cost of Fundsa. Average Short-term Borrowingsb. Average Long-term Borrowingsc. Average Long- and Short-term Borrowingsd. Market Rate, End of Periode. Market Cost of Funds = c x df. Interest and F...

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    A8-H15 (page 1 of 3) ©CGAP/World Bank, 2009 Balancing Act Performance Indicators ASSET LIABILITY MANAGEMENT 2007a.Cash Received from Interest, Fees,and Commissions on Loan Portfoliob.Average Gross Loan Portfolioa.Gross Loan Portfoliob.Assetsa.Financial Expenses on Funding Liabilitiesb.Average D...

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    A8-H15 (page 2 of 3) ©CGAP/World Bank, 2009 ASSET LIABILITY MANAGEMENT (continued) 2007a.Cashb.Trade Investmentsc.a + bd.Demand Depositse.Short-term Depositsf.Short-term Borrowingsg.Interest Payable on Funding Liabilitiesh.Account Payable and Other Short-term Liabilitiesi.d + e + f + g + hLiqui...

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    A8-H15 (page 3 of 3) ©CGAP/World Bank, 2009 PROFITABILITY AND SUSTAINABILITY 2007a. Financial Revenueb. Financial Expensec. Impairment Losses on Loansd. Operating Expensee. b + c + da. Financial Revenueb. Adjusted Financial Expensec. Adjusted Impairment Losses on Loansd. Adjusted Operating Expen...

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    A8-H16a ©CGAP/World Bank, 2009 Balancing Act Direct Method – Statement of Cash Flows Term2007Cash Received from Interest, Fees, and Commisions on Loan PortfolioCash Received from Interest on InvestmentCash Received as Other Operating RevenueValue of Loans Repaid(Cash Paid for Financial Expense...

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    A8-H16b ©CGAP/World Bank, 2009 Balancing Act Indirect Method – Statement of Cash Flows Term2007Net Operating Income Depreciation and AmortizationImpairment Losses on Loans(Cash Paid for Taxes)Value of Loans Repaid(Value of Loans Disbursed)(Increase)/Decrease in Trade InvestmentsIncrease/(Decre...

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    ©CGAP/World Bank, 2009 A-465 SSEESSSSIIOONN 99:: SSUUMMMMAARRYY AANNDD AACCTTIIOONN PPLLAANNNNIINNGG Session Summary OBJECTIVES: By the end of the session participants will be able to:  State the parts of the accounting cycle  Trace a transaction from point of entry to financial sta...

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    Trainer Instructions A-466 Session 9: Summary and Action Planning COURSE SUMMARY 1. (3 minutes) Explain that providing a session summary would be contrary to the principle of active learning—participants will be responsible for summarizing the course themselves. (This strategy gives participant...

  • Page 477

    A9: Summary and Action Planning A-467 8. (10 minutes) Pass out A9-H1. Ask participants (individually or by organization) to list two to three ideas and concepts they would like to apply to when back on the job. Then ask the group to predict and list obstacles they will have to overcome in applyin...

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    A-469

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    A9-H1 ©CGAP/World Bank, 2009 Action Plan FUNDAMENTALS OF ACCOUNTING FOR MICROFINANCE MANAGERS A. I want to take the following actions upon my return to my MFI: 1. 2. 3. 4. B. Obstacles that might prevent me from implementing the above are: 1. 2. 3. 4. C. Actions to overcome anticipated implement...

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    A9-H2 ©CGAP/World Bank, 2009 Where to Go for Additional Recommended Readings on Accounting1 1 Please note these references are not in priority order Measuring Performance of Microfinance Institutions: A Framework of Reporting, Analysis and Monitoring S...

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    ©CGAP/World Bank, 2009 A-475 SSEESSSSIIOONN 1100:: CCOOUURRSSEE EEVVAALLUUAATTIIOONN AANNDD CCLLOOSSUURREE Session Summary OBJECTIVES:  To complete the training audit  To complete course evaluation forms  To issue certificates to participants  To officially close the workshop ...

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    Trainer Instructions A-476 Session 10: Course Evaluation and Closure SEMINAR EVALUATION 1. (3 minutes) Remind participants that the course has finished and it is sincerely hoped that they have met their goals. Say: To help trainers check how effective we were in training, we ask you to take five ...

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    A-477

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    AI0-H1 (page 1 of 2) ©CGAP/World Bank, 2009 Training Audit (Please use a pen.) Name: ________________________ Organization: ________________________ Please mark your answers on this question sheet. If you are not reasonably sure of the answer please mark “I don’t know” instead of guessing....

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    AI0-H1 (page 2 of 2) ©CGAP/World Bank, 2009 6. A balance sheet has three basic components: Assets, Liabilities, and Equity. Write in the letter of the following accounts next to one of these categories below. Just continue to next account if you don’t know. a. Gross Loan Portfolio b. Commercia...

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    A10-H2 (page 1 of 2) ©CGAP/World Bank, 2009 Accounting for Microfinance Institutions Course Evaluation (Please use a pen) Please rate and comment on the following: 1 = Poor 2 = Fair 3 = Average 4 = Good 5 = Excellent Overall Course (not food or logistics) 1 2 3 4 5 Comments: Length of C...

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    AI0-H2 (page 2 of 2) ©CGAP/World Bank, 2009 Facilities 1 2 3 4 5 Comments: 1. What I learned most from this course was: 2. What I still need to learn more about is: 3. I will apply the following in my organization: 4. I will have difficulty applying the following to my organization: 5. My overal...

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    A-483

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    ©CGAP/World Bank, 2009 Page 1 of 5 SAFE—“Our clients are SAFE with us” SAFE was established in 2005 as a credit and savings organization. By July 2007, SAFE had 14,530 clients (of which 12,457 were active loan clients) and an outstanding loan portfolio of $956,406. Client savings totaled ...

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    Case Study: SAFE—“Our clients are SAFE with us” Page 2 of 5  Telephone $ 3,000/month  Courier and delivery $ 1,000/month  Utilities $ 700/month  Bank fees $ 1,300/month Next, she made a list of transactions by month: Transactions – July, 2007 July 1 Purchased a computer...

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    Case Study: SAFE—“Our clients are SAFE with us” Page 3 of 5 Transactions – November, 2007 Nov 4 Executive director attended conference and paid $1,000 fee in cash. Nov 19 Paid $700 insurance bill with cash. Nov 30 Collected savings of $64,000 Nov 30 Received loan payments of $369,200, inc...

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    Case Study: SAFE—“Our clients are SAFE with us” Page 4 of 5 SAFE INCOME STATEMENT Ref.Account Name200520062007I1Financial Revenue60,114 200,455 739,948 I2Financial Revenue from Loan Portfolio47,072 189,619 734,069 I3 Interest on Loan Portfoli...

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    Case Study: SAFE—“Our clients are SAFE with us” Page 5 of 5 SAFE BALANCE SHEET Ref.Account Name200520062007ASSETSB1Cash and Due from Banks267,439 302,067 215,686 B2Trade Investments17,000 47,319 38,270 B3Net Loan Portfolio201,470 617,26...