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1 SECTION III. ACCOUNTING GUIDELINES AND DOCUMENTS A. ACCOUNTING GUIDELINES AND DOCUMENTS APPROVED BY THE MINISTRY OF FINANCE For the purpose of implementing the accounting standards based on IAS, the Ministry of Finance has approved and mandated the following accounting guidelines and documents: 1. Chart of accounts and guidelines to be followed by entities. Minister of finance, Resolution 116, December 22, Methodology for the preparation of financial statements of an entity and forms of financial statements. Minister of finance, Resolution 215, December 27, Illustrative guide on the preparation of disclosure to financial statements and forms for disclosures. Minister of finance, Resolution 64, April 13, Procedure to reconcile differences between tax reporting and financial reporting of an entity, form of the reconciliation statement Minister of finance, Resolution 135, July 07, Methodology for the preparation of Consolidated financial statements, and accouting for investment in subsidiaries Minister of finance, Resolution 99, December 07, Guidance for the use of accounting journal forms to be followed by an entity. Minister of finance, Resolution 191, Guidance on the use of source documents to be followed by all types of business entities. Minister of finance, Resolution 171/11, Accounting guidelines and forms to be followed by small entities, Minister of finance, Resolution 192, July 04, B. ACCOUNTING DOCUMENTS The documents used in accounting are the basis for performing all accounting processes properly. Since the accounting documents are the major tools used for recognition, recording and reporting of all transactions, it is vital to systematically learn the proper use of these documents. Accounting documents can be classified into the following major types: Initial source documents Journals Subsidiary ledgers General Ledger Source documents are used at the very first step which is to identify and recognize transactions. General and special journals The Journal is a record of transactions in chronological order showing the amount and nature of transactions and proper accounts debited and credited. Accounting entries referred to as journal entries have the following traditional form: 45

2 Dr. Cash 5,000 Cr. Receivables 5,000 Journals are classified into: General Journal Special journals. The General Journal can be used for any type of transaction. If special journals are used, all transactions not recorded in a special journal are recorded in the General Journal. It is common that depreciation expenses and payroll expenses are recorded in the General Journal. Transactions recorded in the General Journal must be posted to the General Ledger. An entity with a limited number of transactions and a simple accounting system can use the General Journal to record all transactions. All adjusting and closing entries are made in the General Journal. When the same accounting entry is made often during the period, it is more effective or meaningful to use special journals. Special journals are used for a group of transactions with the same nature such as all cash receipts or all cash disbursements. The type of special journal that should be used by the entity depends on the types of transactions that occur most frequently. Commonly used special journals are: Sales journal sales (especially credit sales) are recorded Cash receipts journal all cash receipts are recorded, including sales in cash Cash disbursement journal all cash disbursements are recorded Purchase journals inventory purchases on credit are recorded Special journals have several columns detailing accounts frequently debited and credited and also one column referred as Other accounts. Transactions that occur frequently will be assigned a separate column specifing the debit or credit account. For example: the cash receipts journal may have one column labelled Accounts Receivable because the cash collection transaction which should be recorded as Dr Cash and Cr Accounts Receivable occurs frequently. Transactions that should be recorded in accounts other than those for which there are designated columns should be recorded in the column Other accounts. The Ledger is a document in which activity for all accounts in the chart of accounts are recorded. Ledgers in a manual accounting system are in a book form and consist of pages for each account. Some groups of accounts are separated from the General Ledger and kept as subsidiary ledgers. For example sub accounts for each customer can be kept in the Accounts Receivable subsidiary ledger. A Subsidiary ledger is a group of accounts with the same nature or purpose. The subsidiary ledger releases the General Ledger from including information for many small and separate account balances. 46

3 In order to ensure that the General Ledger is in balance, the group of accounts is reflected as one Control account in the General Ledger. A Control account in the General Ledger serves as a summary account for all debits and credits in the subsidiary ledger. This control account serves as a control tool over the transactions in the subsidiary ledger. The balance of Contol accounts should be equal to the sum of balances of all accounts in the subsidiary ledger. Common subsidiary ledgers are: 1. Accounts Receivable subsidiary ledger - this subsidiary ledger is controlled by the Accounts Receivable account in the General Ledger. 2. Accounts Payable subsidiary ledger this subsidiary ledger is controlled by the Accounts Payable account in the General Ledger. When a subsidiary ledger is used, the amount is actually posted twice. Posting will be made to a subsidiary ledger on a daily basis, and at the end of an accounting period a summary posting will be made to the General Ledger. The posting to the subsidiary ledger is made on a daily basis and posting to the General Ledger is made at the end of an accounting period. Posting entries in subsidiary ledgers and to control accounts in the General Ledger are made from special journals. In an entity with a large accounting system the General Ledger consists mostly of control accounts. A subsidiary ledger has the following characteristics: The activity of one specific debtor or creditor is reflected in one particular account; this facilitates updating balances on a timely basis. This keeps the General Ledger from reflecting too much detailed information. As a result, the General Ledger will contain fewer sub accounts. Use of a subsidiary ledger and control accounts assists in identifying accounting errors in particular accounts. Recording in a subsidiary ledger enables to make proper allocation of duties and responsibilities in the accounting system. One accountant can be responsible for posting to the General Ledger and another accountant responsible for posting to the subsidiary ledger. A third person can be responsible for reconciling the balance in the subsidiary ledger to that of the control account. Accounting documents approved for use by an entity (specific forms approved by MOFE are listed). (Journals) (Source document) Cash & receivables Cash revenue document SF CA 1 Cash revenue journal CR-1. CR-2 Cash expenditure document SF CA 2 Cash expenditure journal CE-1. CE-2 Application for request on cash SF CA 3 S-1 Sales journal S-2 Cash flow report SF CA 4 Receivable subsidiary R-1 Cash counting document SF CA 5 47

4 Invoice SF EF 1 Cash deposit report SF EF 2 Estimated balances SF EF 3 Drivers estimation sheet SF EF 4 Inventories & purchases Purchasing journal Purch. Inventory purchasing document SF Inv. 1 Inventory receipt journal IRD Receipt document SF Inv. 2 Inventory expenditure journal IED Expenditure document SF Inv. 3 Inventory subsidiary Inv.-1 Inventory issuance permission SF Inv. 4 Summary for Inventory ledger Inv.-2 Storage records SF Inv. 5 Inventory requirement slip SF Inv. 6 Payable subsidiary P-1 Physical inventory count sheet SF Inv. 7 Counting records SF Inv. 8 Inventory report SF Inv. 9 Records of furniture& fixtures used by employees SF Inv. 10 Payroll Payroll subsidiary P-1 Hours worked SF P1 Subsidiary for recording transactions with employees P-2 Work hours sheet SF P 2 Work assignment SF P 3à Work assignment summary SF P 3á Payroll card SF P 4 Payroll advance sheet SF P 5à Payroll payment sheet SF P 5á Fixed Assets Fixed assets subsidiary General Ledger Summary of journals General Journal General Ledger FA-1 SJ GJ GL Fixed assets receipt and transferring document SF FA 1 Extension, improvement and capital repair receipt document SF FA 2 Write-off of fixed assets SF FA 3 Attached slip for transferring fixed assets internally (within the entity) SF FA 4 Note: SF- standard form; FA- fixed assets; P- payroll; Inv.- inventory; EF- estimation form; R- receivable; S- sales 48

5 C. ACCOUNTING STATUS OF AN ENTITY THAT HAS NOT FULLY ADOPTED IAS This is a brief note about the real situation and difficulties that are likely to be encountered by accountants working at a particular entity to fully adopt the accounting system based on IAS. The problems in the accounting system and policies of an entity which has not fully implemented the accounting treatments required by IAS can be analysed through the following three areas: Source documentation; Journals and ledgers; and Preparation of financial statements. Source documentation Source documents are missing or transactions are recorded on the basis of incomplete source documents There is no systematic flow of accounting documents Source documents are not able to evidence the transactions in the past Journals and ledgers Journals and subsidiary ledgers are not kept officially and there is a practice to use personal notes to follow up on transactions Various forms of journals are used: whatever is available. Thus, it leads to inappropriate and inconsistent system in preparation of financial statements. Preparation of financial statements Chart of Accounts is not fully renewed or applied properly General Ledger is not used. Only a trial balance (which may not match the General Ledger) is used to prepare financial statements. Accounting methods or treatments are not applied properly due to lack of knowledge and understanding. Learning the use of accounting documents and journals and ledger forms will be a key element in implementing the accounting system based on IAS principles. The above mentioned deficiencies or weaknesses in current accounting system are just several examples out of many that might be faced during implementation. Therefore it is notable for accountants that they will find and resolve many other difficulties and weaknesses using their professional judgment while they are implementing IAS. 49