Catalyzing Microfinance for the Poor

Bank of Lao PDR MFC Asian Development Bank Catalyzing Microfinance for the Poor Microfinance Accounting Training Guidelines

Table of Contents ACKNOWLEDGEMENT... II LIST OF ACRONYMS... II INTRODUCTION... III COURSE OVERVIEW... IV INDICATIVE SCHEDULE FOR IMPLEMENTATION OF SESSIONS... V INTRODUCTION: OVERVIEW OF THE COURSE... 6 SESSION 1: INTRODUCTION TO ACCOUNTING AND ITS PRINCIPLES... 8 SESSION 2: CASH BASED & ACCRUAL BASED ACCOUNTING... 11 SESSION 3: CHART OF ACCOUNTS... 13 SESSION 4: MAKING ACCOUNTING ENTRIES... 15 SESSION 5: TRIAL BALANCE & ADJUSTMENTS... 18 SESSION 6: CLOSING ENTRIES AND PREPARING FINANCIAL STATEMENTS... 21 SESSION 7: ACCOUNTING FOR GRANTS RECEIVED... 23 SESSION 8: CASH FLOW MANAGEMENT AND PORTFOLIO REPORTING... 25 SESSION 9: THE ACCOUNTING CYCLE... 27 i

Acknowledgement These guidelines have been developed for use under the Bank of Lao PDR Asian Development Bank Catalyzing Microfinance for the Poor project. The training guidelines have been sourced from World Education Australia with consent and modified for use under the project. The complementary Reading and Resource Pack was modified from a version originally developed under the PNG-ADB Microfinance Project by the PNG Institute of Banking and Business Management. The Catalyzing Microfinance for the Poor project acknowledges and extends its appreciation for these sources of materials. Shane Nichols Deputy Team Leader / Microfinance Training Specialist May 2009 List of Acronyms BoL CoA MFI MIS SCU Bank of Lao PDR Chart of Accounts Microfinance Institution Management Information System Savings and Credit Union ii

Introduction How to use these guidelines These guidelines have been developed to assist trainers in delivering microfinance accounting training. They provide a suggested schedule for delivery of the training, and the introduction to each session indicates timing, resources needed, and key objectives of the session. The session plans take you step-by-step through the activities suggested for delivering the training. Suggestions are provided for practical exercises, and some supplementary technical information is provided in the form of handouts for participants to take away. These guidelines do not contain the detailed technical information that will form the content of much of the training. This information is contained in the reading and reference materials that are designed to complement this manual. The trainer may refer to these materials during training delivery, but should be intimately familiar with the content so that they do not need to read from the materials in order to explain the concepts to participants. It is important that the facilitator concludes each session (or day) with a mini-review of the contents of the session. At the end of each session is a Review activity. This involves using a checklist and asking participants questions to make sure that each of the session s objectives has been met. Training Tips Below are some tips on how to be a good trainer. 1. Manage Expectations: The objectives of the training must be clearly explained and understood by the participants at the beginning. These should be reiterated throughout the course. Do not create expectations that cannot be met. 2. Be Organised: Ensure that you are familiar with all of the training content, materials and handouts, and that these are prepared in advance of the training. Be ready and ensure that sessions start on time. 3. Make sessions relevant and interesting: The trainer will be required to explain various concepts and approaches. These presentations should be explained in simple terms and placed in real life context. Where possible interactive activities should be incorporated. By making the sessions interesting, participants will be more likely to remember what they have learned and how they can apply this knowledge in future. 4. Presentation Tips: Speak clearly, slowly and repeat important messages. A short introduction and review at the beginning of each session and another review at the end of each session will help participants to remember key points and important information. Encourage questions, actively listen to the speaker and encourage participants to respond to points raised by other participants. Be animated and move around while presenting information and monitoring activities. When using visual aids like flipcharts or projections, make sure they are visible to everyone. If practical, display important information around the room to remind participants of key content. iii

Course Overview OBJECTIVES The objectives of the course are: To understand basic accounting principles and their application to microfinance To gain knowledge of accounting records relevant to microfinance To review the purpose and components of financial statements relevant to microfinance To practice the accounting cycle OUTCOMES At the end of the course participants will be able to: Understand and apply basic accounting practices Record transactions and prepare financial reports Understand adjustments and their impact on financial reports TOPICS The course contains the following sessions / topics: 1. Introduction to Accounting and its Principles 2. Cash vs. Accrual Based Accounting 3. Cash Flow Management and Portfolio Reporting 4. Chart of Accounts 5. Making Accounting Entries 6. Accounting for Grants Received 7. Trial Balance and Adjustments 8. Closing Entries and Preparing Financial Statements 9. Internal Controls for MFIs iv

Indicative schedule for Implementation of sessions The following provides a suggested plan for the implementation of the sessions outlined in these guidelines. Feel free to adjust this according to your own requirements. Day Time No. Session Est. Duration 1 0 Overview of course 50 mins 1 Introduction to accounting 155 mins 2 Cash & Accrual based accounting 85 mins 2 3 Chart of Accounts 105 mins 4 Making Accounting Entries 240 mins 3 5 Trial Balance and Adjustments 180 mins 6 Closing Entries and preparing Financial Statements 165 mins 4 7 Accounting for Grants 180 mins 8 Cash flow management and portfolio reporting 165 mins 5 9 The Accounting Cycle 180 mins 10 Software Demonstration 60 mins v

Introduction: Overview of the course Objectives: 1. to match the expectations of participants with those of the trainer 2. for participants to have a clear idea of what will be covered in the course and why 3. for participants and the trainer to agree on how the training will be conducted Time: 60 minutes Materials: Blank poster paper Poster with course objectivities and contents Preparation: Prepare posters on flip chart or wall Process 1. Welcome & Introduction (20 mins) 1.1. Welcome participants to the training. The trainer(s) should introduce themselves and tell participants a little about their background. 1.2. Ask each participant by introduce themselves by saying: Their name and position Their job responsibilities Any accounting training or experience they have had What they hope to learn in the course (the trainer should note these comments down on poster paper) 2. Managing expectations (20 mins) 2.1. Display the poster paper containing participants expectations of the course, and briefly summarise these. 2.2. Alongside this poster, paste another poster containing the objectives and contents of the course. Provide a brief overview. 2.3. Compare the participants expectations with the training plan. Try to match as many of these as possible. For participant expectations that are not listed in the training plan, explain why these are not covered. (or, if it is possible to cover these during the training, explain when you will do this). For items in the training plan that were not listed by participants, explain why these are important 3. Setting ground rules (20 mins) 3.1. Present the training timetable. Explain that there is a lot of material to cover, and we can only achieve this if we start sessions on time. Gain agreement on what time the participants will arrive each morning and afternoon. 3.2. Ask participants for their suggestions regarding ground rules for the training. Ground rules may cover the following (but feel free to add more): Listening to the speaker, and not talking while they are talking Asking questions (e.g. raise hand) Arriving at class on time Doing reading / homework 3.3. You may wish to agree to agree on penalties that will apply if anyone (including the trainer!) breaks the ground rules. 6

3.4. Write the ground rules on a poster and display this on the wall for the duration of the training. 7

Session 1: Introduction to Accounting and its Principles Objectives: 1. to understand the importance of accounting in an MFI 2. to be aware of the various financial statements produced as a result of the accounting process 3. to develop a basic understanding of the principles of accounting Time: 120 minutes Materials: Poster 1: Session 1 Objectives and Checklist Preparation: Prepare the warm-up exercise on accounting knowledge Prepare an example of the use of accounting infomation for internal and external. (Handount 1.1) Prepare the mini quiz on accounting principles (Handount 1.2, 1,3) Process Warm-up Exercise (10 mins) Conduct a short exercise for participants to identify what they already know about accounting; understanding of concepts, experience in accounting procedures, relevance to their job. 1. Definition of Accounting (10 mins) 1.1. Present the following definition of accounting: Accounting is the process of identifying, measuring, recording, summarizing and communicating the economic activity of an organization. 1.2. Explain the importance of accounting in microfinance. Basic accounting concepts form the basis of financial management of any business, including MFIs. 1.3. Accounting provides the information required to answer questions such as: What are the resources of the organization? What debts does it owe? Are its operating expenses too high relative to revenue? Are the organization s current lending activities generating enough income for it to be sustainable? 1.4. It is helpful for all staff, including managers, to understand the framework within which accounting operates. 2. Financial vs. Management Accounting (10 mins) Explain that accounting falls into two general categories. Describe differences between financial accounting and management accounting. 8

Financial accounting presents a summary of the financial results of past operations. Financial accounting reports are aimed at external audiences although they are used internally as well. Management accounting information is tracked and presented at a much more detailed level, such as by program or MFI. Projected financial information is also part of management and is aimed primarily at internal audiences. Management reports are prepared frequently and report on an ongoing basis the differences between planned and actual results. 3. Introduction to Financial Statements (30 mins) 3.1. Explain that financial statements are the product of the accounting process. 3.2. Discuss the purpose of these statements 3.3. Describe the three main financial statements: the Balance Sheet, the Income Statement and the Cash Flow Statement. Ask participants about their knowledge and experience preparing or working with such documents. 3.4. Present an example of an income statement from a real MFI. Explain each of the items. Ask participants what they know about the MFI from looking at the income statement. Discuss. 3.5. Present an example of a balance sheet from a real MFI. Explain each of the items. Ask participants what they know about the MFI from looking at the balance sheet. Discuss. 3.6. Explain that microfinance agencies also prepare a Cash Flow Statement and a Portfolio Report, and that we will look at these in future sessions. The Balance sheet is a summary of the economic resources of an organization and the claims against those resources at a specific point in time. The Income Statement reports the organization s economic performance over a specific period of time. It is also known as a Statement of Profit and Loss. The Cash Flow Statement reports the organization s sources and use of funds (also referred to as the Statement of Changes in Sources and Uses of Funds). It explains how an organization obtains cash (sources of funds) and how it spends cash (use of funds) including the borrowing and repayment of debt, capital transactions and other factors that may affect the cash position. Together, these statements summarize all the information contained in the organization s accounts. In addition, and especially in the microfinance industry, a fourth statement is widely used: The Portfolio Report provides detailed information about the lending and/or savings operations of an MFI. It is prepared more frequently than the other statements and gives an indication of the portfolio quality. 4. Accounting Principles (30 mins) 4.1. Briefly explain the following accounting principles: Double-entry Accounting The Conservatism/Prudence Principle 9

The Materiality Principle The Consistency Principle The Realization Principle The Going Concern Concept The Business Entity Concept The Matching Principle The Cost Principle The Money Measurement Principle Exercise (20 mins) Conduct a mini quiz to test participants recollection of the main financial statements, and the principles of accounting. Session 1 Review 5. Review progress against session objectives (10 mins) 5.1. Explain that we will now check to make sure that we have achieved the objectives that were set. Present Poster 1: Session 1 Objectives and Checklist to reveal the Session 1 review checklist. 5.2. Select a few participants and ask them the questions in the checklist. If there is any misunderstanding then clarify the concepts. Ask the group if there are any further questions. 5.3. Congratulate participants on having completed Session 1. Explain that they should now be aware of the role and importance of accounting in MFIs and have an understanding of the basic principles of accounting. 5.4. Explain that the next session will look at different types of accounting systems, namely cash based and accrual accounting. 10

Session 2: Cash Based & Accrual Based Accounting Session Objectives: 1. to develop an understanding of cash based and accrual based accounting systems, and the terminology used. 2. to be able to determine whether an accounting entry should be applied on a cash basis or accrual basis Time: 80 minutes Materials: Poster 2: Session 2 Objectives and Checklist Handout 2.1 Cash or accrual Preparation: Review and prepare the scenarios for the Cash vs. Accrual? exercise Process 1. Present the session objectives (10 mins) 1.1 Show participants poster 2: Session 2 Objectives and Checklist with the session objectives written on. Ask a participant to read out the session objectives and clarify what they mean. Explain that at the end of the step we will check to see if the objectives have been met. 1.2 Ask if participants have any questions. 2. Cash Based Accounting vs Accrual Based Accounting (30 mins) 2.1 Explain what is meant by cash based accounting 2.2 List the benefits and pitfalls of a cash-based accounting system 2.3 Explain what is meant by accrual based accounting 2.4 Define the following terms: Accrued income Accrued expenses Prepayments Debtors Creditors 2.5 List the benefits and pitfalls of an accrual based accounting system 2.6 Explain that it is possible to implement a mixture of the two systems. In microfinance accounting the two systems are used at varying levels 2.7 Considering the principle of conservatism, CGAP has made recommendations on which systems to use. Explain the following: Cash-based accounting principles for interest to be received on loans. Accrual-based accounting principles for interest received up-front. Accrual-based accounting principles for expenses to be paid 2.8 Ask participants for their questions Exercise (30 mins) 11

Cash vs Accrual? Present Handout 2.1 with the list of example scenarios. Divide the participants into small groups and give each group the list of scenarios. The groups should indicate whether, in each case, they would use cash or accrual based accounting, and why. Once groups have finished, have each group present their response to one scenario. If other groups disagree, have the two groups debate which is correct. Note for trainer: In the final scenario, Principal repayments are NOT income. They go straight into the balance sheet. Principle repayments should be recorded on a cash basis. You may wish to add additional scenarios. Session 2 Review 3. Review progress against session objectives (10 mins) 3.1 Explain that we will now check to make sure that we have achieved the objectives that were set. Fold down the lower half of poster 2: Session 2 Objectives and Checklist to reveal the Session 2 review checklist. Ask one of the participants to read out each of the questions. Ensure that everyone understands the questions. 3.2 Select a few participants and ask them the questions in the checklist. If there is any misunderstanding then clarify the concepts. Ask the group if there are any further questions. 3.3 Congratulate participants on having completed Session 2. Explain that they should now have a basic understanding of cash and accrual based accounting. 12

Session 3: Chart of Accounts Session Objectives: 1. to understand the role of the chart of accounts in an accounting system 2. to become aware of the Bank of Lao prescribed chart of accounts for SCUs and microfinance institutions Time: Materials: 60 minutes Poster 3: Session 3 Objectives and Checklist Handout 3.1 CoA for SCUs Preparation: Prepare the standard SCU Chart of Accounts to display Prepare the CoA number game Process 1. Review Progress and Present Session Objectives (5 mins) 3.1 Show participants poster 3: Session 3 Objectives & Checklist with today s session objectives. Read out each of the session objectives and clarify what each one means. 3.2 Ask if participants have any questions. 2. What is the Chart of Accounts? (15 mins) 2.1. Ask participants: What is the Chart of Accounts (CoA)? Who is it used by and for what purposes? 2.2. Ask participants if they know the categories of accounts that exist (balance sheet v. income statement accounts) 2.3. Ask participants to give some examples of accounts in each of the main categories. Categories of Accounts Balance Sheet Accounts: Asset Accounts = Liability Accounts + Equity Accounts Income Statement Accounts: Income Accounts - Expense Accounts = Profit Account 3. Standard CoA for Savings and Credit Unions, Lao PDR (10 mins) 3.1. Explain that Bank of Lao has prescribed a uniform CoAs for SCUs and MFIs. Distribute handout 3.1; CoA for SCUs Present the structure (and numbering) of the CoA. Ask participants to give examples of transactions that would relate to different accounts Discuss the benefits of having a uniform CoA Remember: The level of Detail of the Chart of Accounts determines the level of detail of the information available for decision-making! Exercise (20 mins) 13

CoA Number Game: Test participants knowledge of the structure of the CoA with a game. Arrange participants into teams. Explain that you will call out an item, and the participants must call out the number of the accounts that will be affected by the transaction. The first person to call out the correct account number earns 1 point for their team. At the end of the game, the team with the most points wins. (Note: make sure that all participants can clearly see the standard CoA numbers) The following are examples of transactions that can be used in the game: 1. Apart from the cash account, which accounts will be affected by the following transactions? (1 point each) Interest paid by clients Staff wages A loan issued to a client Fuel for a motorcycle Telephone bill Pens and paper Client savings deposit 2. The following are not cash transactions. Which accounts will be affected by the following transactions? (2 points each) An increase in the loan loss provision Annual depreciation of a motorbike (create other examples as required) Session 3 Review 4. Review progress against session objectives (10 mins) 4.1. Refer to poster 3: Session 3 Objectives & Checklist with the objectives written on and ask participants to consider if they have met these objectives. 4.2. Select a few participants and ask them the questions in the checklist. Ask the group if there are any further questions. 4.3. Congratulate participants on having completed Session 3. Explain that the group should by now have a clear idea of the use of a chart of accounts. Explain that the next session will look into the intricacies of book-keeping. 14

Session 4: Making Accounting Entries Session Objectives: 1. to understand and be able to complete various accounting entry procedures including vouchers and journal entries 2. to understand and apply the double entry accounting system 3. to be able to perform bank reconciliations. Time: 130 mins Materials: Poster 4: Session 4 Objectives and Checklist Preparation: Handouts 4.1, 4.2, 4.3 and 4.4 for each group Process 1. Review Progress and Present Session Objectives (5 mins) Briefly summarise the progress they made against the objectives. Show participants poster 4: Session 4 Objectives & Review Checklist with the session objectives written on. Explain that at the end of the step we will check to see if the objectives have been met. Ask if participants have any questions. 2. Vouchers (5 mins) Explain the use and importance of vouchers as part of the accounting system. Indicate that there is no standard Voucher system Show an example of a payment and receipt voucher (handout 4.1), and how the details are recorded (ensure that the voucher clearly states all relevant details) Exercise (20 mins) Voucher exercise: Participants should sit in small groups. Give each group a copy of a blank voucher (Handout 4.1) and a list of sample transactions (Handout 4.2). Ask participants to complete the voucher using the details provided. Once they have completed the voucher, ask them to check the details, making sure they indicate which accounts will be affected by this transaction. Ask groups to read out their answers. 3. Journals & Double Entry Accounting (20 mins) Explain what a journal entry is and why it is important. Present an example of a General Journal. Explain the features, and the arrangement of debits and credits. Remind participants of the double entry accounting principle. Explain how we undertake double entry accounting, and why. 15

Present the rules regarding debits and credits (refer participants to the relevant section in the resource pack) Describe common pitfalls including: the meaning of debit v. credit and how this varies in different accounts Refer to the following table as a guide to which entries are debits and which are credits. Income Statement Accounts Income Increase = credit Expenses Increase = debit Balance Sheet Accounts Assets Increase = debit Liabilities & Equity Increase = credit Present a few examples of how vouchers are recorded in the General Journal, listing both debits and credits. Use examples from previous activities so that participants are familiar with the examples used. Exercise (15 mins) Journal entry exercise: Provide each group with a copy of a blank General Journal (Handout 4.3). Ask the group to refer to their vouchers they prepared in the previous exercise. Ask them to record each entry in their general journal, specifying the debits and credits and the relevant accounts being charged. Once the groups are finished, ask them how they classified each item. Ask each group in turn. If groups have different answers, encourage them to discuss and agree which is correct (i.e. do not simply tell them which is correct, make them work it out for themselves) 4. The General Ledger (10 mins) Explain the ledger account and how it fits into the accounting system. A ledger account is the accumulation of all transactions reflecting changes in an account. (e.g. all transactions concerning incoming and outgoing cash during one month will be recorded in the cash ledger account). Each ledger account is identified by its account name and its account number. The accounts are numbered based on whether they are an Asset, Liability, Equity, Revenue or Expense account. Present an example of a General Ledger and explain how it lists the debit or credit balance of each ledger account. 16

Exercise (20 mins) General Ledger exercise: Participants should continue working in their groups. Provide each group with a blank General Ledger (Handout 4.4). Using the information from the General Journal (that they prepared in the previous exercise), ask them to prepare the General Ledger by showing the debit or credit balance of each account. Once the groups are finished, ask them to read out their answers. Compare these with the answers with other groups. 5. Cash Accounting and Bank Account Reconciliation (15 mins) Explain the importance of the cash (bank) account, and why for MFIs it is particularly important to get the cash account right. Reconciling bank statement with the accounting records. Explain what this involves, how often it occurs, when. Explain that sometimes the bank statement will not exactly match the accounting records. Ask participants for examples of why this might occur. (e.g. cheques issued but not yet cashed; bank charges incurred on bank account but not yet entered into your accounts) Explain the process with an example bank reconciliation (refer to the example in the resource pack) Exercise (10 mins) Bank reconciliation: Provide participants with (i) a bank statement, (ii) an accounting bank balance, and (iii) details of several cheques not yet cashed. Groups should reconcile the bank statement with the accounting bank balance. Session 4 Review 6. Review progress against session objectives (10 mins) Explain that we will now check to make sure that we have achieved the objectives that were set. Fold down the lower half of poster 4: Session 4 Objectives & Checklist to reveal the review checklist. Ask the group if there are any further questions. Congratulate participants on having completed Session 4. Explain that participants should now have a basic understanding of the process for making accounting entries. In the next session, Explain that in the next session we will look at Trial Balance and Adjustments. 17

Session 5: Trial Balance & Adjustments Session Objectives: 1. to be able to carry out a trial balance of the general ledger 2. to understand how adjustments are made to the accounts 3. to learn how to show adjustments in the general ledger Time: 130 minutes Materials: Poster 5: Session 5 Objectives and Checklist Preparation: Handouts 5.1, 5.2 Process 1. Review Progress and Present Session Objectives (10 mins) 1.1 Briefly summarise the progress made so far. 1.2 Show participants the poster with this session s objectives. Read out each of the session objectives and clarify what each one means. 1.3 Ask if participants have any questions. 2. What is a Trial Balance? (10 mins) Explain the procedure of verifying that the debits and credits are in balance (refer to the example in the resource pack) Exercise (15 mins) Trial balance: Provide participants with a copy of Handout 5.1 and ask them to complete the exercise. Once they have completed the exercise they should check each other s work and clarify any discrepancies. 3. Adjustments to the General Ledger: Non cash items (10 mins) Ask participants: What are the non cash items that do not yet appear in the general ledger? (i.e. loan loss reserve, depreciation, accrued income and expenses) Ask why these need to be factored into the accounting system. Explain when these adjustments are performed. 4. Loan loss provision and loan loss reserve (20 mins) Write down on poster paper the two headings: Loan Loss Provision and Loan Loss Reserve. Ask participants to call out features of each (write these down under the relevant heading. 18

Review importance of loan loss provisioning. Ask if participants know how these are calculated. Present the provisioning requirements of the Bank of Lao and explain how these are calculated. Classification Provision Required by BoL (% of outstanding loan balance) Current loans 1% Overdue 31-90 days 25% Overdue 91-180 days 50% Overdue >180 days 100% Ask participants if they know (or can guess) which accounts are debited and credited when making a provision. Explain how accounting entries for loan loss provision and loan loss reserve are carried out by using the following example. Example 1: The MFI has given out loans to a small village near Pakse. Two of the borrowers have not paid their monthly installments and are more than one month late. The loan officer is not sure if they will start paying again or if the loan amounts are lost. In accordance with BoL policy, the MFI puts 25% of the outstanding loan amounts aside as a provision. The outstanding loan amount is 200,000 Kip, so the provision is 50,000 Kip (25% * 200,000). Debit Credit Loan Loss Provision (expense in the profit and loss statement) 50,000 Kip Loan Loss Reserve (balance sheet item) 50,000 Kip 5. Depreciation (15 mins) Ask participants: Why is it necessary to depreciate assets? How often should this be done? Discuss. Ask participants if they know (or can guess) which accounts are debited and credited when depreciating an asset. Explain how accounting entries for depreciating assets are performed by using the following example. Depreciation Example: The MFI purchases a new motorcycle for the loan officers on 1 July 2007 for 1,500,000 Kip. It decides to depreciate the asset over 4 years. Debit Credit Fixed asset account 1,500,000 Kip Cash account 1,500,000 Kip Year end depreciation (25% per year). Debit Credit Depreciation 375,000 Kip Accumulated Depreciation 375,000 Kip 6. Accruing income & expenses (20 mins) Ask participants: When should an MFI accrue income? When should an MFI accrue expenses? Discuss by giving examples. 19

Ask participants if they know (or can guess) which accounts are debited and credited when accruing income. Explain that this is a two-step process. Explain the accounting entries involved in accruing income (refer to resource guide) Explain the accounting entries involved in accruing expenses (refer to resource guide) Present the following example. Accrual Example: The MFI has short-term liabilities at year end of 10,000,000 Kip (assume that it had the liabilities the whole year, no changes). It must pay 5% interest p.a. on the borrowings, which have not yet been paid. It therefore needs to accrue this expense. Debit Credit Interest Expense 500,000 Kip Short term accounts payable 500,000 Kip Exercise (20 mins) Adjustments: Provide participants with a copy of Handout 5.2. Ask them to perform the required adjustments by entering the relevant journals. Final Trial Balance: When participants have completed Handout 5.2, provide them with a copy of Handout 5.1 and ask them to complete the final Trial Balance. When they have finished, participants should compare their answers. Clarify any discrepancies. Session 5 Review 7. Review progress against session objectives (10 mins) Explain that we will now check to make sure that we have achieved the objectives that were set. Select a few participants and ask them the questions in the checklist. If there is any misunderstanding then clarify the concepts. Ask the group if there are any further questions. Congratulate participants on having completed Session 5. Explain that participants should know how to carry out a trial balance and make adjustments to the general ledger taking into consideration non cash items such as loan loss reserve and provision, depreciation and accrued income and expenses. Explain that the next session will discuss how closing entries and then the financial statements are prepared. 20

Session 6: Closing Entries and Preparing Financial Statements Session Objectives: 1. to understand how closing entries are made 2. to be familiar with the process of preparing financial statements Time: 60 minutes Materials: Poster 6: Session 6 Objectives and Checklist Preparation: Handouts 6.1, 6,2 Process 1. Review Progress and Present Session Objectives (5 mins) 3.1 Briefly summarise the progress in the accounting system process so far. 3.2 Show participants poster 6: Session 6 Objectives & Checklist. Read out each of the session objectives and clarify what each one means. 3.3 Ask if participants have any questions 2. Closing Entries (5 mins) Ask: What is meant by the term closing entry? How does this fit into the accounting system? Ask: How are closing entries carried out? Exercise (10 mins) Provide participants with a copy of Handout 6.1. Ask them to complete the closing entries. When they have finished participants should check with others to see if their answers agree. 3. Preparing Financial Statements (15 mins) Explain how to transfer the amounts from the Trial Balance to the Income Statement. Explain how to transfer the amounts from the Trial Balance to the Balance Sheet. Always remember, balance sheet accounts have a balance which is continuously carried forward, whereas income statement accounts have a closing balance, i.e. they will start next year within a 0 again. Exercise (20 mins) 21

Provide participants with a copy of Handout 6.2. Ask them to finalise the Income Statement. When they have finished distribute Handout 6.3, and ask participants to now finalise the Balance Sheet. Check the answers and clarify any questions. Session 6 Review 4. Review progress against session objectives (5 mins) 4.1 Explain that we will now check to make sure that we have achieved the objectives that were set. 4.2 Select a few participants and ask them the questions in the checklist. If there is any misunderstanding then clarify the concepts. Ask the group if there are any further questions. 4.3 Congratulate participants on having completed Session 6. Explain that participants should now be able to complete closing entries and transfer data from the general ledger to the income statement and balance sheet. 22

Session 7: Accounting for Grants Received Session Objectives: 1. to become aware of the various approaches taken in accounting for grants and which approach is considered best practice for MFIs 2. to understand the procedure for accounting for grants using the deferred revenue approach Time: 90 minutes Materials: Poster 7: Session 7 Objectives and Checklist Preparation: Prepare a poster-size version of handout 7.1 for activity 3 Prepare copies of Handout 7.1 for participants Process 1. Review Progress and Present Session Objectives (5 mins) 3.1 Briefly summarise the progress made against the course objectives. 3.2 Show participants poster 8: Session 8 Objectives & Checklist. Read out each of this session objectives and clarify what each one means. 3.3 Ask if participants have any questions 2. Approaches to accounting treatment for grants received (35 mins) Ask participants to think about the way that grants should be accounted for. Let them spend a few minutes discussing this in their groups. Then have groups present their opinions and explain why. Explain that there has been a long-standing debate over how grants should best be accounted for. Introduce the two approaches: Capital vs Income Explain the Capital Approach using the example in the resource pack. Now explain the Income Approach using the example in the resource pack. Refer participants to the Summary of International Accounting Standard 20: Accounting for Government Grants and Disclosures of Government Assistance provided in the resource pack. Ask participants to read this summary. Discuss the reasons for using the income approach. Explain that CGAP also support the use of the income approach in MFIs. 3. Income Approach: Accounting Treatment of Grants Received (20 mins) Use the example provided in the resource pack to provide an example of how the income approach is applied in practice. Refer to the section titled Accounting Treatment of grants received - the Deferred Revenue Approach. Work through each of the steps in the example. Using a poster-size version of the format provided in Handout 7.1, work through the table presented in the resource pack, entering one column at a time. Clarify any questions that participants may have. 23

Exercise (20 mins) Grant exercise: Provide participants with a copy of Handout 7.1. Explain that this exercise is similar the example that we just went through. Ask participants to complete the table one year at a time. Once they are finished, ask them to compare their answers with others. Clarify any questions. Session 7 Review 4. Review progress against session objectives (10 mins) 4.1 Present the checklist below on a poster. 4.2 Select a few participants and ask them the questions in the checklist. If there is any misunderstanding then clarify the concepts. Ask the group if there are any further questions. Congratulate participants on having completed Session 7. Explain that participants should now understand the correct method of accounting for grants. In the next session, we will look at the process of carrying out a trial balance and making adjustments to include non cash items. 24

Session 8: Cash flow management and portfolio reporting Session Objectives: 2. to understand the importance of cash flow management 3. to learn how to develop a cash flow statement under different accounting systems 4. to appreciate the importance of portfolio reporting in the context of MFI accounting Time: 185 minutes Materials: Poster 8: Session 8 Objectives and Checklist Preparation: Handout 8.1 Cash flow statement Solution to 8.1 Do not distribute 3 X Examples of portfolio reports for exercise 2 (from BoL) Process 1. Present Session Objectives (5 mins) Briefly summarise the progress we have made so far. Show participants poster 8: Session 8 Objectives. Explain that at the end of the step we will check to see if the objectives have been met. Ask if participants have any questions 2. Management of cash (20 mins) Ask participants: Why does an MFI needs to manage its cash flows? Briefly explain the importance of cash flow management. Ask participants: How can an MFI plan its cash flows? Introduce the Cash Flow Plan and ask: what is this? Why is it important? What are its benefits? Present the Cash Flow Statement and ask: what is this? Why is it important? What are its benefits? Note: The Balance Sheet and Income Statement are accounting reports. The figures can be influenced by management s choices regarding accounting policies. A Cash Flow Statement cannot be changed by any accounting policy. Cash and Profit: Ask participants: Are cash and profit the same thing? These will be the same under cash based accounting system but different under accrual based accounting system. 3. Preparing a cash flow statement (15 mins) Explain how a cash flow statement is prepared under cash based accounting systems Explain how a cash flow statement is prepared under accrual based accounting systems Explain that cash flows are classified in three areas: operating, investing and financing activities Refer to the cash flow statement in the reading and reference materials 25

Exercise (40 mins) Provide participants with the information needed to prepare a cash flow statement together with the worksheet and cash flow form contained in Handout 8.1. Ask them to use this information to prepare a cash flow statement. Ask them if they have any queries or questions. 4. Exercise Feedback Collect their completed sheets and compare them with the solution provided. Show the solution worksheet on the projector, in particular explain that only cash items should be included. 5. Portfolio Report (20 mins) Portfolio Report: ask participants: What is this? Why is it important? What are its benefits? Explain how the portfolio report relates to the financial statements Ask participants to list the information that would be included in a portfolio report. Then present an example report and compare this to their list. Aged arrears analysis: Ask participants: why this is important? What does it tell us? How do we calculate PAR(30)? Exercise (20 mins) Prepare three examples of portfolio reports from actual MFIs. Divide the participants into groups and have each group review one report. Ask them to summarise the report and report back on what they observe about the MFI. Session 8 Review 6. Review progress against session objectives (10 mins) 5.1. Refer to poster 8: Session 8 Objectives & Checklist with the objectives written on and ask participants to consider if they have met these objectives. 5.2. Select a few participants and ask them the questions in the checklist. If there is any misunderstanding then clarify the concepts. Ask the group if there are any further questions. 5.3. Congratulate participants on having completed Session 8. Tell the group that they should now have an appreciation and basic understanding of cash flow statements and the portfolio report. 26

Session 9: The Accounting Cycle Session Objectives: 1. to understand the concept of the accounting cycle in relation to MFIs 2. to use the knowledge gained in sessions 1 to 6 and apply it to each stage of the cycle 3. to understand their particular role in fulfilling the cycle Time: 190 mins Materials: Poster 9: Session 9 Objectives and Checklist Poster 9.1 Accounting Cycle Diagram Preparation: Prepare cards for the two exercises Process 1. Review Progress and Present Session Objectives (15 mins) Briefly summarise the progress made so far. Show participants poster 9: Session 9 Objectives & Checklist with today s session objectives. Read out each of the session objectives and clarify what each one means. Refer to poster 9.1 and briefly explain the concept of the cycle: a circular process Ask if participants have any questions. 2. What is meant by the accounting Cycle and how does it work (100 mins) Explain the cycle in detail, taking participants through each of the stages At each stage try to get them to relate it back to the relevant topic(s) covered in sessions 1 to 6 Encourage participants to raise questions at each stage to ensure they understand the processes in the cycle and link those to what they learned in 1 to 6 Wrap up the first part of session 9 by giving each participant a particular transaction or process and asking them to relate it to the cycle Exercise (10 mins) Accounting Cycle Quiz Conduct a short quiz to test participants overall knowledge of the accounting process. Question Increase in a liability account A listing of all accounts used by an MFI to record transactions Each account in a chart of accounts Residual value of assets after satisfying all liabilities Increase in an expense account Increase in an Income account The process of performing journal entries Answer Liability Credit Chart of accounts GL Account Owners or Members Equity Expense debit Income credit Journaling process 27

Process of totalling the balances of each account and ensuring the debits equal the credits Accrued or deferred transactions that are posted to the ledger accounts as part of the accounting cycle Trial balance Adjusting entries Create others as required. 3. (60 mins) Use the final formal session to cover any topic in the accounting cycle still giving concern to the participants. Anything can be considered from opening entries to closing financial statements. In particular satisfy yourself that they are up to speed on loan provisioning and accounting for grants. If required re-work earlier exercises through T-accounts on the whiteboard. Session 9 Review 4. Review progress against session objectives (15 mins) 6.1. Present the session objectives and checklist on a poster. 6.2. Select a few participants and ask them the questions in the checklist. If there are any misunderstandings then clarify the concepts. Ask the group if there are any further questions. 6.3. Congratulate participants on having completed the microfinance accounting training and award them their completion certificates. 28