Work Effectively in Financial Service Sector

Chapter One
Financial Services in Financial Sectors

Introduction
The Ethiopian financial services industry has undergone a metamorphosis since1990. Before its
emergence the commercial banks and other financial institutions dominated the field and they
met the financial needs of the Indian industry. It was only after the economic liberalization that
the financial service sector gained some prominence. Now this sector has developed into an
industry. In fact, one of the world’s largest industries today is the financial services industry.
Financial service is an essential segment of financial system. Financial services are the
foundation of a modern economy. The financial service sector is indispensable for the prosperity
of a nation.

Meaning of Financial Services

In general, all types of activities which are of financial nature may be regarded as financial
services. In a broad sense, the term financial services means mobilization and allocation of
savings.
Thus, it includes all activities involved in the transformation of savings into investment.

Financial services refer to services provided by the finance industry. The finance industry
consists of a broad range of organizations that deal with the management of money. These
organizations include banks, credit card companies, insurance companies, consumer finance
companies, stock brokers, investment funds and some government sponsored enterprises.
Financial services may be defined as the products and services offered by financial institutions
for the facilitation of various financial transactions and other related activities.
Financial services can also be called financial intermediation.
Financial intermediation is a process by which funds are mobilized from a large number of
savers and make them available to all those who are in need of it and particularly to corporate
customers. There are various institutions which render financial services. Some of the
institutions are banks, investment companies, accounting firms, financial institutions, merchant
banks, leasing companies, venture capital companies, factoring companies, mutual funds etc.
These institutions provide variety of services to corporate enterprises. Such services are called
financial services. In short, services provided by financial intermediaries are called financial
services.

Functions of financial services

1. Facilitating transactions (exchange of goods and services) in the economy.
2. Mobilizing savings (for which the outlets would otherwise be much more limited).
3. Allocating capital funds (notably to finance productive investment).
4. Monitoring managers (so that the funds allocated will be spent as envisaged).

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5. Transforming risk (reducing it through aggregation and enabling it to be carried by those more
willing to bear it).

Characteristics or Nature of Financial Services

From the following characteristics of financial services, we can understand their nature:
1. Intangibility: Financial services are intangible. Therefore, they cannot be standardized or
reproduced in the same form. The institutions supplying the financial services should have a
better image and confidence of the customers. Otherwise, they may not succeed. They have to
focus on quality and innovation of their services. Then only they can build credibility and gain
the trust of the customers.
2. Inseparability: Both production and supply of financial services have to be performed
simultaneously. Hence, there should be perfect understanding between the financial service
institutions and its customers.
3. Perishability: Like other services, financial services also require a match between demand
and supply. Services cannot be stored. They have to be supplied when customers need them.
4. Variability: In order to cater a variety of financial and related needs of different customers in
different areas, financial service organisations have to offer a wide range of products and
services. This means the financial services have to be tailor-made to the requirements of
customers. The service institutions differentiate their services to develop their individual identity.
5. Dominance of human element: Financial services are dominated by human element. Thus,
financial services are labour intensive. It requires competent and skilled personnel to market the
quality financial products.
6. Information based: Financial service industry is an information based industry. It involves
creation, dissemination and use of information. Information is an essential component in the
production of financial services.

Importance of Financial Services

The successful functioning of any financial system depends upon the range of financial services
offered by financial service organisations. The importance of financial services may be
understood from the following points:
1. Economic growth: The financial service industry mobilises the savings of the people, and
channels them into productive investments by providing various services to people in general
and corporate enterprises in particular. In short, the economic growth of any country depends
upon these savings and investments.
2. Promotion of savings: The financial service industry mobilises the savings of the people by
providing transformation services. It provides liability, asset and size transformation service by
providing huge loan from small deposits collected from a large number of people. In this way
financial service industry promotes savings.
3. Capital formation: Financial service industry facilitates capital formation by rendering
various capital market intermediary services. Capital formation is the very basis for economic
growth.
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4. Creation of employment opportunities: The financial service industry creates and provides
employment opportunities to millions of people all over the world.
5. Contribution to GNP: Recently the contribution of financial services to GNP has been
increasing year after year in almost countries.
6. Provision of liquidity: The financial service industry promotes liquidity in the financial
system by allocating and reallocating savings and investment into various avenues of economic
activity. It facilitates easy conversion of financial assets into liquid cash.
Types of Financial Services
Financial service institutions render a wide variety of services to meet the requirements of
individual users. These services may be summarized as below:
1. Provision of funds:
(a) Venture capital
(b) Banking services
(c) Asset financing
(d) Trade financing
(e) Credit cards
(f) Factoring and forfaiting
2. Managing investible funds:
(a) Portfolio management
(b) Merchant banking
(c) Mutual and pension funds
3. Risk financing:
(a) Project preparatory services
(b) Insurance
(c) Export credit guarantee
4. Consultancy services:
(a) Project preparatory services
(b) Project report preparation
(c) Project appraisal
(d) Rehabilitation of projects
(e) Business advisory services
(f) Valuation of investments
(g) Credit rating
(h) Merger, acquisition and reengineering
5. Market operations:
(a) Stock market operations
(b) Money market operations
(c) Asset management
(d) Registrar and share transfer agencies
(e) Trusteeship
(f) Retail market operation
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 (g) Futures, options and derivatives
6. Research and development:
(a) Equity and market research
(b) Investor education
(c) Training of personnel
(d) Financial information services

Scope of Financial Services

The scope of financial services is very wide. This is because it covers a wide range of services.
The financial services can be broadly classified into two: (a) fund based services and (b) non-
fund services (or fee-based services)

The most important fund based and non-fund based services (or types of services) may be
briefly discussed as below:
A. Asset/Fund Based Services
1. Equipment leasing/Lease financing: A lease is an agreement under which a firm acquires a
right to make use of a capital asset like machinery etc. on payment of an agreed fee called lease
rentals. The person (or the company) which acquires the right is known as lessee. He does not
get the ownership of the asset. He acquires only the right to use the asset. The person (or the
company) who gives the right is known as lessor.

2. Hire purchase and consumer credit: Hire purchase is an alternative to leasing. Hire
purchase is a transaction where goods are purchased and sold on the condition that payment is
made in installments. The buyer gets only possession of goods. He does not get ownership. He
gets ownership only after the payment of the last installment. If the buyer fails to pay any
installment, the seller can repossess the goods. Each installment includes interest also.

3. Bill discounting: Discounting of bill is an attractive fund based financial service provided by
the finance companies. In the case of time bill (payable after a specified period), the holder need
not wait till maturity or due date. If he is in need of money, he can discount the bill with his
banker. After deducting a certain amount (discount), the banker credits the net amount in the
customer’s account. Thus, the bank purchases the bill and credits the customer’s account with the
amount of the bill less discount. On the due date, the drawee makes payment to the banker. If he
fails to make payment, the banker will recover the amount from the customer who has
discounted the bill.
In short, discounting of bill means giving loans on the basis of the security of a bill of exchange.

4. Venture capital: Venture capital simply refers to capital which is available for financing the
new business ventures. It involves lending finance to the growing companies. It is the investment
in a highly risky project with the objective of earning a high rate of return. In short, venture
capital means long term risk capital in the form of equity finance.
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5. Housing finance: Housing finance simply refers to providing finance for house building. It
emerged as a fund based financial service in India with the establishment of National Housing
Bank (NHB) by the RBI in 1988. It is an apex housing finance institution in the country. Till
now, a number of specialised financial institutions/companies have entered in the filed of
housing finance.
Some of the institutions are HDFC, LIC Housing Finance, Citi Home, Ind Bank Housing etc
6. Insurance services: Insurance is a contract between two parties. One party is the insured and
the other party is the insurer. Insured is the person whose life or property is insured with the
insurer. That is, the person whose risk is insured is called insured. Insurer is the insurance
company to whom risk is transferred by the insured. That is, the person who insures the risk of
insured is called insurer. Thus insurance is a contract between insurer and insured. It is a
contract in which the insurance company undertakes to indemnify the insured on the happening
of certain event for a payment of consideration. It is a contract between the insurer and insured
under which the insurer undertakes to compensate the insured for the loss arising from the risk
insured against.
The amount for which the insurance policy is taken is called ‘sum assured’. The consideration
in return for which the insurer agrees to make good the loss is known as ‘insurance premium’.
This premium is to be paid regularly by the insured. It may be paid monthly, quarterly, half
yearly or yearly.

7. Factoring: Factoring is an arrangement under which the factor purchases the account
receivables (arising out of credit sale of goods/services) and makes immediate cash payment to
the supplier or creditor. Thus, it is an arrangement in which the account receivables of a firm
(client) are purchased by a financial institution or banker. Thus, the factor provides finance to the
client (supplier) in respect of account receivables. The factor undertakes the responsibility of
collecting the account receivables. The financial institution (factor) undertakes the risk. For this
type of service as well as for the interest, the factor charges a fee for the intervening period. This
fee or charge is called factorage.

8. Forfeiting: Forfeiting is a form of financing of receivables relating to international trade. It is

a non-recourse purchase by a banker or any other financial institution of receivables arising
from export of goods and services. The exporter surrenders his right to the forfaiter to receive
future payment from the buyer to whom goods have been supplied. Forfaiting is a technique that
helps the exporter sells his goods on credit and yet receives the cash well before the due date. In
short, forfaiting is a technique by which a forfaitor (financing agency) discounts an export bill
and pay ready cash to the exporter. The exporter need not bother about collection of export bill.
He can just concentrate on export trade.

9. Mutual fund: Mutual funds are financial intermediaries which mobilize savings from the
people and invest them in a mix of corporate and government securities. The mutual fund
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operators actively manage this portfolio of securities and earn income through dividend, interest
and capital gains. The incomes are eventually passed on to mutual fund shareholders.

Non-Fund Based/Fee Based Financial Services

1. Merchant banking: Merchant banking is basically a service banking, concerned with
providing non-fund based services of arranging funds rather than providing them. The merchant
banker merely acts as an intermediary. Its main job is to transfer capital from those who own
it to those who need it.
2. Credit rating: Credit rating means giving an expert opinion by a rating agency on the relative
willingness and ability of the issuer of a debt instrument to meet the financial obligations in time
and in full. It measures the relative risk of an issuer’s ability and willingness to repay both
interest and principal over the period of the rated instrument. It is a judgement about a firm’s
financial and business prospects. In short, credit rating means assessing the creditworthiness of
a company by an independent organisation.

3. Stock broking: Now stock broking has emerged as a professional advisory service. Stock
broker is a member of a recognized stock exchange. He buys, sells, or deals in shares/securities.
It is compulsory for each stock broker to get himself/herself registered with SEBI in order to act
as a broker. As a member of a stock exchange, he will have to abide by its rules, regulations and
bylaws.

4. Custodial services: In simple words, the services provided by a custodian are known as
custodial services (custodian services). Custodian is an institution or a person who is handed
over securities by the security owners for safe custody. Custodian is a caretaker of a public
property orsecurities. Custodians are intermediaries between companies and clients (i.e. security
holders) and institutions (financial institutions and mutual funds). There is an arrangement and
agreement between custodian and real owners of securities or properties to act as custodians of
those who hand over it
Thus custodial service is the service of keeping the securities safe for and on behalf of somebody
else for a remuneration called custodial charges.
5. Loan syndication: Loan syndication is an arrangement where a group of banks participate to
provide funds for a single loan. In a loan syndication, a group of banks comprising 10 to 30
banks participate to provide funds wherein one of the banks is the lead manager. This lead bank
is decided by the corporate enterprises, depending on confidence in the lead manager.

6. Securitization (of debt): Loans given to customers are assets for the bank. They are called
loan assets. Unlike investment assets, loan assets are not tradable and transferable. Thus loan
assets are not liquid. The problem is how to make the loan of a bank liquid. This problem can be
solved by transforming the loans into marketable securities. Now loans become liquid. They get
the characteristic of marketability. This is done through the process of securitization.
Securitization is a financial innovation. It is conversion of existing or future cash flows into
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marketable securities that can be sold to investors. It is the process by which financial assets such
as loan receivables, credit card balances, hire purchase debtors, lease receivables, trade debtors
etc. are transformed into securities.
In short, securitization is the transformation of illiquid, non- marketable assets into securities
which are liquid and marketable assets. It is a process of transformation of assets of a lending
institution into negotiable instruments.
Securitization is different from factoring. Factoring involves transfer of debts without
transforming debts into marketable securities. But securitization always involves transformation
of illiquid assets into liquid assets that can be sold to investors.

Challenges faced by the financial service sector.

Financial service sector has to face lot of challenges in its way to fulfil the ever growing
financial demand of the economy. Some of the important challenges are listed below:
1. Lack of qualified personnel in the financial service sector.
2. Lack of investor awareness about the various financial services.
3. Lack of transparency in the disclosure requirements and accounting practices relating to
financial services.
4. Lack of specialization in different financial services (specialization only in one or two
services).
5. Lack of adequate data to take financial service related decisions.
6. Lack of efficient risk management system in the financial service sector.

Chapter Two
Management of Financial Sector

Guidelines, procedures, legislation and codes of practice applying to the financial industry are
identified and the effects on everyday work determined

 anti-discrimination legislation
 Electronic Funds Transfer (EFT) code of conduct
 relevant environmental legislation
 finance code
 Financial Services Reform Act (FSRA)
 Financial Transaction Reports Act
 industry codes of practice
 legislation covering competition, prudential regulation
 occupational health and safety (OHS) legislation
 Privacy Act
 Anti-Money Laundering and Counter Terrorism Financing Acts.

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Workplace procedures and instructions for environmentally sustainable work practices are
recognised and followed and any potential improvements suggested to appropriate
personnel

 improving energy efficiency

 increasing use of resources that are:
 renewable
 recyclable
 reusable
 recoverable
 recognising opportunities to reduce emissions of greenhouse gases
 reducing use of non-renewable resources.

Appropriate personnel may include:

o colleagues
o human resources staff
o managers or supervisors
o mentors.

Work tasks are carried out in accordance with specific organisation policy, guidelines and
procedures
Organisation policy, guidelines, and procedures may include:

 organisation and customer charters

 organisation codes of practice
 complaint and grievance procedures
 best practice guidelines
 customer services statements
 induction program
 industry policy documents
 industry procedures manuals
 operating manuals.

Work tasks undertaken meet the organisation philosophy, values and objectives in relation to
customer service, professional practice and ethical principles
Organisation philosophy, values and objectives may include:

 best practice guidelines

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  organisation and customer charters
 guidance from supervisor
 mission statements.

Effective listening and speaking skills are used in verbal communication

Verbal communication may include:
 answering telephone calls
 answering enquiries from clients
 informal discussions
 requests from colleagues
 use of voice mail.

Presentation of written information meets organisational standards of style, format and accuracy
Standards may include:

 ethical behaviour expectations

 legislation
 organisational policies and procedures
 specified work standards
 standards set by work group.

Established safety procedures are followed when conducting work

Safety procedures may include:

 completing required documentation

 displaying health and safety brochures, magazines and other material
 following OHS guidelines relevant to workplace
 keeping workplace clean and tidy
 local, State or Territory and Commonwealth legislation
 office practice manual
 undergoing operator training when using new equipment or processes.

Designated persons are identified for reporting queries and concerns about safety in the
workplace

Designated persons may include:

 designated health and safety officers

 managers
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  other persons authorised or nominated by the enterprise or industry
 supervisors
 team leaders.

Risk is the chance of something occurring in the workplace or when carrying out job role
activities that could result in injury or damage to self or others.

An Organisation’s Procedures

• As you can imagine, the staff of a financial services organisation perform

a variety of tasks. Staff undergo training (on the job and internal training)
to perform their tasks in a satisfactory manner.
• For consistency purposes, staff must follow the same steps and process
when performing a task. To achieve this, organizations develop
procedures for staff to follow when performing various tasks.

Proprietary or organisational software may include

 custom designed financial software
 databases
 spreadsheets
 word processers.
 client contact systems

Time, Resources and Priority Management

 An essential element of planning your work effectively is learning how to

manage your time.
 You can analyse the effectiveness of your planning and task management by:
o keeping a detailed record of all the activities that you complete during
a day when you are very busy working or studying
o recording the time spent on each task
o reflect on whether you used your time well
o reflect on whether you had appropriate resources
o consider ways you could have worked more effectively

Manage Information
• Efficient and effective management of information is essential in the day-to-day operation of
all businesses.

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• Working in the financial services sector involves reading, understanding, analysing, checking
and organising documents and reports in order to meet the needs of both the organisation and its
clients.

Types of Information
Information comes in a variety of forms such as minutes of meetings, memos, letters and emails,
departmental reports to management, company reports, sales figures, monthly financial reports,
client invoices and statements, client files and databases, personnel files, brochures explaining
services to clients, graphs, accounting records, purchase orders, delivery dockets.
Some examples of financial documents include:
o Quotation - A document specifying an offer to sell particular goods at a stated
price and under specified conditions.

o Purchase order - A document used to order goods or services from a supplier.

When the goods/services are received, the invoice for the goods will be checked
against a duplicate copy of the original purchase order.

o Invoice - A document sent by the supplier to the purchaser with details of the
products/services and prices. When the goods/services are received,the invoice for
the goods will be checked against a duplicate copy of the original purchase order
and the details recorded.

o Statement - A monthly summary of all transactions between the supplier and

purchaser. These are vital documents that should be checked against invoices and
receipts.

o Receipt - A document sent by the supplier to the purchaser after payment is

made. Details must be checked and recorded by the supplier in the cash receipts
journal.

Processing Information

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 Employees will be responsible for receiving information from management, other staff
members, suppliers and clients. They will also need to prepare information in a format
appropriate for management, staff members, suppliers and clients.

Documents, reports, diary entries, and documents from suppliers and purchasers should be
carefully checked and accurately processed. This may involve checking times and dates of
appointments, the spelling of names of companies, people and products, addresses, all figures
and calculations and details in quotations. It will also involve cross-checking documents, etc.

Providing Information
 Effective filing will ensure that employees can access the necessary information they
will need when dealing with clients, suppliers or other employees.
 It is important that employees understand what information can be provided, and which
information, such as clients' personal details and details of company activities, is
private or confidential.

Handling Financial Documents

 Employees will have to handle, issue and process many different types of source
documents in accordance with their employer's security procedures.
 This may involve measures such as two employees counting cash, more than one
employee signing cheques, or two employees holding the keys to safes.

Managing Financial Information

All forms of business are required to issue financial reports for review by stakeholders.
Stakeholders include managers, shareholders, financiers, taxation authorities, regulatory bodies
and staff.

Financial reports include the following:

 Statement of Financial Position (the balance sheet), and
 Statement of Financial Performance (the income statement), and
 Statement of Cash Flows.

PROCESS CUSTOMER ACCOUNT

CHAPTER ONE
1. Identify customer account needs
A bank account is a financial account maintained by a financial institution for a customer.
A bank account can be a deposit account, a credit card account, or any other type of account
offered by a financial institution, and represents the funds that a customer has entrusted to the

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financial institution and from which the customer can make withdrawals. Alternatively, accounts
may be loan accounts in which case the customer owes money to the financial institution.
The financial transactions which have occurred within a given period of time on a bank account
are reported to the customer on a bank statement and the balance of the accounts at any point in
time is the financial position of the customer with the institution.
The laws of each country specify the manner in which accounts may be opened and operated.
They may specify, for example, who may open an account, how the signatories can identify
themselves, deposit and withdrawal limits and many other matters.

Account structure
Bank accounts may have a positive, or credit balance, where the financial institution owes
money to the customer; or a negative, or debit balance, where the customer owes the financial
institution money.
Broadly, accounts opened with the purpose of holding credit balances are referred to as deposit
accounts; whilst accounts opened with the purpose of holding debit balances are referred to
as loan accounts. Some accounts can switch between credit and debit balances.
Some accounts are categorized by the function rather than nature of the balance they hold, such
as savings account, which routinely are in credit.
All financial institution have their own names for the various accounts which they open for
customers. Financial institution have a variety of fees for the maintenance of various accounts
and for the processing of certain transactions.

Types
A deposit account is a savings account, current account or any other type of bank account that
allows money to be deposited and withdrawn by the account holder. These transactions are
recorded on the bank's books, and the resulting balance is recorded as aliability for the bank and
represents the amount owed by the bank to the customer. Some banks may charge a fee for this
service, while others may pay the customer interest on the funds deposited.
Major types deposit account 
 Transactional account
Current account (Commonwealth)/Checking account (US)
A deposit account held at a bank or other financial institution, for the purpose of securely
and quickly providing frequent access to funds on demand, through a variety of different
channels. Because money is available on demand these accounts are also referred to as
demand accounts or demand deposit accounts, except in the case of NOW Accounts.

 Money market account

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 A deposit account that pays interest, and for which short notice (or no notice) is required
for withdrawals. In the United States, it is a style of instant access deposit subject to
federal savings account regulations, such as a monthly transaction limit.
 Savings account
Accounts maintained by retail banks that pay interest but can not be used directly as
money (for example, by writing a cheque). Although not as convenient to use as checking
accounts, these accounts let customers keep liquid assets while still earning a monetary
return.
 Time deposit
A money deposit at a banking institution that cannot be withdrawn for a preset fixed
'term' or period of time. When the term is over it can be withdrawn or it can be rolled
over for another term. Generally speaking, the longer the term the better the yield on the
money.
 Call deposit
A deposit account that allows for the withdrawal of funds without penalty, generally
without notification to the bank. Often it bears a favourable interest rate, but also requires
a minimum balance to take advantage of the benefits

Types of bank accounts

When you go to a bank to open a new account, you will have a variety of account types and
features to choose from. Should you choose the basic checking option or an account that earns
interest? Do you want the convenience of a bundled checking and savings account or the higher
returns of a money market account?
To make these decisions, it’s helpful to first understand the differences between the most
common bank account types. Here are some definitions to help you navigate your banking needs:
 Checking account: A checking account offers easy access to your money for your daily
transactional needs and helps keep your cash secure. Customers can use a debit card or checks
to make purchases or pay bills. Accounts may have different options or packages to help waive
certain monthly service fees. To determine the most economical choice, compare the benefits
of different checking packages with the services you actually need.
 Savings account: A savings account allows you to accumulate interest on funds you’ve
saved for future needs. Interest rates can be compounded on a daily, weekly, monthly, or
annual basis. Savings accounts vary by monthly service fees, interest rates, method used to
calculate interest, and minimum opening deposit. Understanding the account’s terms and
benefits will allow for a more informed decision on the account best suited for your needs.
 Certificate of Deposit (CD): Certificates of deposit, or CDs, allow you to invest your
money at a set interest rate for a pre-set period of time. CDs often have higher interest rates
than traditional savings accounts because the money you deposit is tied up for the life of the
certificate – which can range from a few months to several years. Be sure you do not need to
draw on those funds before you open a CD, as early withdrawals may have financial penalties. 

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  Money market account: Money market accounts are similar to savings accounts, but
they require you to maintain a higher balance to avoid a monthly fee. Where savings accounts
usually have a fixed interest rate, these accounts have rates that vary regularly based on money
markets. Money market accounts can have tiered interest rates, providing more favorable rates
based on higher balances. Some money market accounts also allow you to write checks against
your funds, but on a more limited basis.
 Individual Retirement Accounts (IRAs): IRAs, or individual retirement accounts,
allow you to save independently for your retirement. These plans are useful if your employer
doesn’t offer retirement benefits or you want to save more than your employer-sponsored plan
allows. These accounts come in two types: the traditional IRA and Roth IRA. The Roth IRA is
popular because the funds can be withdrawn tax-free in many situations. Others prefer
traditional IRAs because these contributions are tax-deductible. Both accounts have
contribution limits and other requirements you may need to discuss with your tax advisor
before choosing your account.
CHAPTER TWO
2. Open customer account
Opening a Basic Account
1. Make sure you're eligible to open an account. Before you head to the bank, it's wise to
check whether you meet all the criteria for opening an account. As a general rule, most banks
will require the following:
 If you're under 18, some banks might require your parents to sign some forms
when you make your account. Not all banks do this, so if you don't want your parents to be
involved with your banking, try emailing banks before you go into them asking whether they
require your parents to sign
 You'll need to have valid identification and be willing to share basic information
about yourself. In the US, you'll usually need your Social Security number.[1]
 You'll need to have at least the minimum amount of money for opening account.
This can vary based on the bank and account you choose. For example, a basic Bank of America
savings account requires a minimum deposit of $300.[2]
2. Choose the bank that's best for you. Not all banks are the same, even when it comes to basic
personal accounts. It can be very wise to contact the banks in your local area to discuss what
exactly you'd get if you opened a basic account. While all banks are different, they can generally
be lumped into two general categories: large chain banks and smaller local ones. See below:[3]
 Large chain banks: Large banks usually have branches in most towns and cities
across the country, which means you'll be able to get basically the same service no matter where
you go. This wide coverage can help you avoid fees you'll have to pay for using other banks'
services (like ATM fees, etc.) Large banks also usually have the resources to offer services like
24-hour help lines for their customers. In addition, these banks tend to have a stable, trusted
reputation — they are unlikely to fail or present you with "surprise" difficulties.

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 Smaller local banks: Small banks offer a more personal, human experience.
They tend to be friendlier than big banks in several ways — not only will they be willing to offer
more personal, one-on-one attention, but they'll often be willing to "work with you" when
something goes wrong (like you overdraft from your account). Smaller banks also usually charge
smaller fees for using their services. On the other hand, smaller banks fail more frequently than
large banks (this is still very rare, though).
3. Pick the type of account you want. Most of the time, one someone opens his or her first bank
account, it is a regular checking or savings account (or both). Both of these types of accounts
allow you to safely store your money with the bank and withdraw it when you need it.
However, each type of account is best for different tasks. See below:
 Checking: A checking account is what most people use for day-to-day purchases.
With a checking account, you'll get a checkbook and a debit card that you can use to pay for
things with the money in your account. Money in a checking account doesn't change over time
— if you want more money, you have to put it in yourself.
 Savings: As its name suggests, a savings account is best for saving money long-
term. Money in a savings account slowly gains interest — in other words, the bank will pay you
a small amount for storing your money with it. The more money you have in the account and the
longer you save it, the more interest you get. You can still withdraw money from a savings
account at banks and ATM, but you can't generally use it for checks and debit card payments.
 If you have enough money to meet the minimum deposit for both, having both a
checking and a savings account is usually best. You can use the checking account for your daily
expenses and put extra money in your savings to make interest.
4 Visit your bank and ask to open an account. Opening an account in person is usually the
best option for first-time account holders. One big advantage of opening an account in person is
that you can ask the teller all of your questions and get immediate answers (as opposed to the
waiting you'll have to do online or on the phone). Also, because you can sign the forms and
receive your confirmation documents on the spot, the process of opening an account is also
usually speedier in person.
 The rest of this section will assume you're opening an account in person.
However, depending on your bank, you may also be able open an account over the phoneor
even online. These options vary from bank to bank — not all banks will let you open your
account these ways.
5 . Ask important questions before you finalize your account. Now is an excellent time to
ask for clarification on any issues regarding your account that you don't understand. Below are a
few suggestions for questions you may want to ask, but don't be afraid to ask any others that
occur to you.
 Is there a monthly fee for maintaining this account? If so, what is it?
 Is there a minimum balance that I must keep within this account? If so, what is it?
What sorts of fees apply if I go under that limit?

16 | P a g e
  What is the interest rate of my savings account? How often does interest
generate?
 Is there a limit to the amount of transactions (deposits/withdrawals, check writing,
ATM uses) I have per month?
 Where can I withdraw cash without paying any fees? What is the fee for using an
ATM that doesn't belong to this bank?
 Is the account I'm applying for insured by a Deposit Guarantee Scheme (DGS)?

6. Supply the necessary information to create your account. As noted above, opening a
checking account requires a few basic pieces of personal information. Youmay or may not have
to provide documentation to prove this personal information. This depends on the exact bank
you're opening an account with.
In general, it's a good idea to have:
 Proof that you are who you say you are: Have a government-issued ID with
your photo on it with you (a driver's license or a passport are best).
 Proof of address: A phone bill, driver's license, or any other official document
with your name and address will usually do.
 Proof you are a registered citizen: The bank will ask for your Social Security
number, taxpayer identification number, or employer identification number to ensure that you are
"on record" with the government. As long as you know this number, you don't generally need to
have your Social Security card, etc. with you.

7. Keep the account documents you receive secure. When you finish completing your account,
you will receive documents that contain important information about your account. Keep these in
a safe place, like a strongbox. Don't let people you don't trust access these documents — they
may be able to use them for malicious purposes. If you can, it's a wise idea to commit the
following information to memory so that you don't need to rely on the documents in the future:
 Your four-digit PIN number: You need this to use your debit card for
purchases.
 Your bank account number: You need this for financial tasks like setting up
direct deposits
 Your Social Security number: You need this for various tax and financial tasks
in the future
 If you believe your account information has fallen into the wrong hands, you can
always contact your bank and request a "freeze" on your account to prevent unauthorized
use.Part2

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 CHAPTER 3
3. Transfer or close customer account
Using Your Account's Features
1.Withdraw money from your account when needed. The biggest benefit of having a bank
account is that it's a safe way to store your money. Money in the bank can't be lost or stolen —
it's yours until you spend it. Even in the unlikely event that your bank is robbed, your money is
insured by the government, so you won't lose it.When you want to get the money in your bank
account, you need to make a withdrawal. There are several ways to do this:
 Visit the bank in person and fill out a withdrawal form. You'll usually need
your account number and basic personal information for this. Somewhat time-consuming
compared to the other options, but necessary for special tasks like large withdrawals.
 Use an ATM. See below for more information.
 Online. In this case, your withdrawals are usually limited to transfers between
accounts and payments to other individuals — you can't "get cash" online. See below for more
information.

2. Get cash from an ATM. ATMs (automatic teller machines) are a convenient way to get cash
when you're out and about. ATMs are located at almost all banks. In addition, you can usually
find them in areas of commerce, like malls, grocery stores, and some restaurants.
 To use an ATM, you will need to know your checking account's four-digit PIN
number.
 It's always best to use your own bank's ATMs when possible. Usually, you'll have
to pay a small fee for using ATMs that don't belong to your bank. Note also that your bank may
have a limit on the number of times you may use its own ATMs per month without receiving
fees.
But before you can use your ATM or Debit card to make any kind of transactions they may be
online or offline such as withdrawal of money from your account using an ATM machine you
will have to activate your Debit card.
The procedure to activate a debit card varies from bank to bank so you should ask your bank
about the procedure which is to be followed to activate your debit or ATM card.

1. Write checks to pay for purchases. Another way to use your bank account to pay for
purchases is to write a check. This is a convenient option when you don't have cash handy. A
check is basically an official slip of paper that shows that you promise to pay someone a certain
amount of money. When the person you write the check to brings it to the bank, it will use
money from your account to pay.

 Make sure you have enough money in your account to pay for your purchase
before you write your check. If you don't, your check will "bounce." This means that the

18 | P a g e
 payment won't go through, you'll have to pay a fee, and you'll still be held responsible for the
money.
 Some banks offer "overdraft protection" services for check-writing. In these
cases, when you write a check that you don't have enough money to pay for, your bank may
"spot" you the money to cover the purchase. You will still have to pay a fee but you won't have
to deal with the check bouncing.

2. Make a deposit to add more money to your account. When you want to put more money
into your bank accounts, you need to make a deposit. As with withdrawals, there are several
ways to do this:
 Bring your money or check to your bank. You will have to fill out a deposit form,
which requires you to provide your account number.
 Use an ATM. Today, many ATMs (especially the ones at banks) allow you to
make deposits. You will usually have to do this at one of your own bank's ATMs.
 Use mobile check deposit services. One relatively new way to deposit checks
involves taking a picture of the check with your mobile phone and sending it to the bank. This
usually requires you to download your bank's mobile app. For example,click here for instructions
for Bank of America's mobile check deposit service. Note that not all banks offer this.

3. Try your bank's online banking features. Today, nearly all banks will offer some sort of
online options for viewing and managing your bank accounts online. Usually, you are prompted
to set these up when you first open your account. These services will differ from bank to bank
and account to account. In general, most banks will offer:
 Secure online login options on the bank's official site
 The ability to view your accounts' balances
 The ability to view a record of purchases, withdrawals, and deposits for each
account
 The ability to transfer money between accounts
 The ability to send money to other individuals

4. Set up a direct deposit to make maintaining a balance simpler. Don't want to make a trip
to the bank every time you are paid? Most employers offer the option for you to be paid directly
into your bank account — this is called "direct deposit." In this case, taxes are withdrawn before
the money is added to your account.
 Talk to your employer's payroll department if you want to set up a direct deposit.
This will usually require you to fill out some forms and provide information about your bank
account (like your account number).

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 . How to Close Your Bank Account Properly

By taking the right steps when switching banks, you could ensure a seamless transition and free
yourself from plenty of headaches.

. 1. Find your new bank.

. Before closing your old bank accounts, you should have a new bank ready to receive your
money. If you close your bank accounts and then start looking for a new bank, you may
find yourself inconvenienced when you need to write a check, transfer money, or pay a
bill.

. 2. Review and transfer automatic payments and recurring transactions.

. Since banks allow customers to automate much of their finances, consumers who want to
leave banks found themselves hindered by the chore of having to re-establish that
automatic flow of money. In most cases, however, the transition simply requires you to
change the bank account number and routing number.

. Review your bank statements for the past six to 12 months so you can identify which
automated transactions need to be rerouted to your new bank. These transactions could
include rent payments, bill payments, direct deposit, and automatic fund transfers. You
may also find infrequent transactions that also draw from your old accounts.

. After rerouting these automated transactions, give it two to three weeks for these
transactions to shift to your new bank accounts.

. 3. Transfer the money from your old bank to your new bank.

. When you have confirmed that automatic transactions have been re-routed properly, you
can begin to move your money to the new bank. You can do so without telling your old
bank that you plan to close your accounts. Be cognizant of any withdrawal or transfer
limits if there is a large amount of cash in your old accounts.

. 4. Close the account and request a written letter.

. Now, go to the bank and ask for your accounts to be closed. If you didn’t already move
your money out, you will receive the balances in your accounts in the form of a check.

. Many consumers have complained of “zombie” accounts, which occur when a bank re-
opens an account because a company attempted to draw money from it. Closed accounts
were often reactivated because of billing errors or when customers forgot about an
automated bill payment.

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 . So, it is important to request a written letter that states that your accounts are closed—just
in case you have to settle any discrepancies in the future.

. With some planning, switching banks isn’t such a terrifying experience. In the future, the
Consumer Financial Protection Bureau may even make it easier for consumers to switch
banks.

CHAPTER 4

4. Administer the process

Setting Up Special Accounts
1. Consider linking your checking and savings accounts. "Linking" two separate accounts to
each other usually means that the funds from one account are made available to the other for
special expenses. For instance, if you link your checking and savings accounts, some banks will
let you use the money from the savings account to cover overdrafts on your checking account.[

Other benefits include:

 Avoiding some types of minimum-balance fees
 Receiving one combined account statement rather than two separate ones
 Allowing easier transfer of money between accounts.

2. Consider making a joint account with someone else. When you open any account with
another person, it is called a "joint account." Married couples often open one of these accounts,
but any two people can do this. You and the co-account opener have equal ownership over all the
money in the account, and can take advantage of all the services that come with the account.
Either owner can deposit or withdraw money without having to answer to the other holder.
 For these reasons, it's important only to open a joint account with someone you
absolutely trust. For instance, there's nothing the bank can do to stop one owner from taking all
the money out of the account without the other's notice.[9]
 To make a joint account, both account holders must agree to the terms of the
account and fill out their own copy of the account creation forms. This means each person will
need to provide an ID, Social Security number, etc.
 Generally, most joint accounts carry "rights of survivorship." This means if one of
the joint account owners dies, the surviving owner gets all the money in the account.

3. Consider opening a high-interest account. Looking to earn more interest on the money

you're storing long-term in your bank account? Many banks offer special options for starting
accounts with higher-than-normal interest rates. This increases your long-term earnings, but
you'll usually have to meet certain conditions to keep these accounts. See below for more
information:

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 High-interest savings: This account comes with all the benefits of a regular
savings account, but has a higher minimum balance (that is, you have to keep more cash sitting
in the account). You may also be limited in terms of how often you can withdraw from it. In
return, you will earn higher interest.
 Interest Checking: This account features everything that a regular checking
account has (ATM privileges, check writing, etc.), but it includes an interest rate, so it acts a little
like a regular savings account. However, the monthly maintenance fees for these accounts are
usually higher. This means it's in your interest to keep enough money in your account so that the
interest outweighs the monthly charge.

4. Consider a certificate of deposit (CD) for long-term gains. When you put your money in a
CD, you legally agree to put it away for a certain amount of time. This usually ranges from
several months to about five years.[11] During this time, you may not add or remove money from
the CD. Because you are agreeing to let the bank have your money "no matter what" for the
agreed-upon length of time, CDs usually have higher interest rates than basic savings accounts.

Course Title: Process Financial Transactions and Extract Interim Report

Aims & Objectives
By the time you have finished this unit you should be able to:
- Explain the meaning and nature of an account.
- Apply debits and credits to record business transactions
- Define the terms journal, ledger, journalizing, posting, trial balance etc.
- Complete the accounting cycle
Introduction
This accounting procedure will be discussed in detail. The different and interrelated stages of
the accounting cycle will be presented. The course is lengthy, but essential for the remaining
chapters in this course and other accounting courses. Therefore, you are advised to study the
chapter carefully.

Nature of an account
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In order to provide the necessary information to users, accountants maintain separate records on
each element of the financial statements. For example, to report the balance for cash at the end
of a year, a record regarding cash should be kept. The record includes beginning cash balance,
cash payments & cash collections during the period. This record is called an account.
account.

Definition: An account is a subdivision under the three elements of the accounting equation
used to record the changes over a single element in the financial statements. An account has
three parts, Title, Debit, and credit. For illustration purposes an account can be represented in
the form of the capital letter ‘T’.
Example
Title
Debit Credit
Dr Cr

Classifications of Accounts

Accounts are classified into five: assets, liabilities, capital, revenue and, expenses.
expenses. The first
three are called balance sheet accounts and the other two are called income Statement accounts.
accounts.
Balance Sheet accounts are those reported on the balance sheet at the end of the reporting period
and Income Statement accounts are reported on the Income Statement.
The five groups of account are discussed below

1. Assets: Resources owned by a business or individual are called assets. assets. Assets could be
tangible or intangible. Tangible assets are assets having physical existence, like cash, land,
computer, stationery materials. Intangible assets do not have physical existence. Example:
Goodwill, Copyright, patent right.
On the balance sheet assets are classified into two current assets and non – current assets.
Current Assets – are those assets, which can be used, sold, or converted into cash within one
accounting year. Example: cash, supplies, prepayments, receivables etc.
Noncurrent Asset: All assets other than current assets are called non-current assets. Example:
land, patent right, office equipment, vehicles.
2. Liabilities: Creditors’ claims to the assets of a business; amounts owed to creditors are called
liabilities. Like assets, liabilities are classified into two as current liabilities and non – current
liabilities
Current liabilities: The liabilities that are payable within the next (one) accounting year are
known as a current liability. Example: Accounts Payable, Rent Payable, Salary Payable.

Non – Current Liabilities: Debts that are not required to be paid within the next accounting
period. Example long term notes payable.

3. Capital: The excess of the assets of a business over its liabilities is referred to as capital. It is
the equity of the owner in the business.
4. Revenue: Are increases in owner’s equity resulting from the main operations of the business.
Examples of revenue accounts are sales, interest income, tuition fee, and sales commission.

23 | P a g e
5. Expenses: are decreases in owner’s equity in the process of earning revenue. For example, a
hotel has to pay salary to its workers for the services rendered to clients in order to get the
income from customers (revenue) the Hotel has paid salary to the employees (expense).
Example of expenses: Salary, insurance, depreciation, supplies, utilities, rent etc.

Chart of Accounts
The number and name of accounts used by an organization depends on the nature of its
operation. The list of accounts used by an organization and their codes is called the chart of
accounts. Look at the following chart of accounts of Bati Transport.

Bati Transport
Chart of Accounts

Asset Account number

Cash--------------------------------------------------------------------------11
Accounts Receivable------------------------------------------------------ 12
Supplies----------------------------------------------------------------------13
Prepaid Insurance-----------------------------------------------------------14
Equipment------------------------------------------------------------------- 15
Accumulated Depreciation –Equipment---------------------------------16
Truck--------------------------------------------------------------------------17
Accumulated depreciation – Truck----------------------------------------18

Liabilities
Accounts Payable-------------------------------------------------------------21
Notes Payable-----------------------------------------------------------------22

Owners' Equity
Yimer Adem, Capital----------------------------------------------------------31
Yimer Adem Drawing-------------------------------------------------------32
Income Summary-------------------------------------------------------------33

Revenue
Service income----------------------------------------------------------------41

Expense
Salaries Expense --------------------------------------------------------------51
Rent Expense ------------------------------------------------------------------52
Utilities Expense---------------------------------------------------------------53
Supplies Expense--------------------------------------------------------------54
Insurance Expense-------------------------------------------------------------55
Maintenance Expense---------------------------------------------------------56
Depreciation Expense---------------------------------------------------------57
Truck Expense-----------------------------------------------------------------58

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Miscellaneous expense--------------------------------------------------------59

In the chart of accounts, the asset accounts are listed according to their liquidity. Liquidity is the
ease with which an asset can be converted into cash. Cash is the most liquid asset so it is listed
first. Accounts, other than cash will be listed in their frequency of use or in alphabetical order.

The account number is a code to identify accounts. The number could be a two digit, three digits
or more digits. In the above example a three – digit code is used.

When the chart of accounts is prepared in an organization we say the ledger is opened.

Rules of Debits and Credits

As shown above every account has three parts. These parts are discussed below:

Title – The name of the account. This is written at the top of the account.

Debit – is the left hand side of an account –Debit is abbreviated as ‘Dr.’. When an amount is
entered on the left side of an account we say the account is debited or charged.
charged.
Credit – is the right hand side of an account. Credit is abbreviated as Cr. An account is said to
be credited when an amount is entered on the right hand side of the account.

An account may increase or decrease on the debit side or on the credit side depending on the
nature of the account. In general, accounts appearing on the left hand side of the accounting
equation increase on their left side (Dr. Side) and decrease on their right side (Cr. Side); whereas
accounts on the right side of the equation increase on their right side and decrease on their left
side.

The above general rule will be expanded as follows

Debit Credit
-Increase in assets -Decrease in assets
-Increase in expenses -Decrease in expenses
-Decrease in capital -Increase in Liabilities
-Decrease in liabilities -Increase in liabilities
-Decrease in revenue -Increase in revenue.

The normal balance of an Account

Normal balance refers to the side of an account (Dr. Or Cr.), which will have greater entries than
the other. The increasing side will be the normal balance for the accounts.
Example: The normal balance of all asset accounts is debited

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Journalizing Business Transactions
When a business transaction takes place, source documents will be obtained and recorded. The
accounting record in which a transaction is initially recorded is known as a journal.
journal. The journal
is therefore referred to as “The book of original entry”.

The process of recording a business transaction in the accounting record is called journalizing.
journalizing.
The Journal commonly used to record all types of transactions is the General Journal. This
Journal includes the following parts, entered step by step.
1. The date of the transaction
2. The title of the account debited
3. The title of the account credited
4. The amount of debit and credit
5. Brief explanation of the entry or reference to the source document.
Look at the following General Journal and notice where each of the above information is found.
Journal page
Date Description P.R Debit Credit

Year

Month Day Debited account title XXX XX

Credited account title X XX XX

Explanation

There are also other types of Journals like, known as special journals that are used to record
specific types of transactions. The cash Journal, for instance, is used to record only transactions
affecting cash. The General Journal is used for illustrations in this chapter.

Steps in Journalizing a Transaction

The following steps should be followed in recording a transaction in the journal.

1. Record the date - Insert the year, the month, and the date as shown above.
2. Record the Debit- Insert the account debited in the description column and the amount of
debt in the debit column.
3. Record the credit- Insert the account credited below the debited account and indented to
the right in the description column and the amount of credit in the credit column.
4. Explanation- Write a brief explanation or reference to the source document in the
description column, when necessary.
Each one set of debits and credits for a transaction is called a journal entry.
entry.

26 | P a g e
In recording a business transaction answer the following questions based on the transaction to be
recorded may help you.

a) Which accounts are affected?

b) Each account is increased or decreased?
c) Which account is debited and which is credited?
d) Prepare the complete journal entry.
Example. On January 10,2003 Tamget P.L.C paid Birr 6,000 to its employees as a salary for the
first week of the year.

This business transaction will be analyzed and recorded as follows.

a) Which accounts are affected? Answer: Cash and Salary Expense.

b) Each account is increased or decreased? Answer: cash is decreased and salary expense is
increased.
c) Which account is debited and which is credited? Answer: Salary Expense is debited
because the increase in expenses is recorded on the debit side. And cash is credited because
a decrease in assets is recorded on the debit side.
d) Prepare the complete Journal entry.

2003 Description
Jan. 1 Salary expense 6000 00
0
Cash 6000 00
Payment of salary

Note: A journal entry is the complete presentation of the record in the journal.

Progress Exercise - 1
Journalize the following transaction by answering 4 questions suggested above.
 On January 11, 2003 Tamget bought a building for Birr 150,000 on credit.

Illustration
To illustrate the complete accounting cycle, we will consider the following list of selected
transactions. The transactions were completed by Bati Transport in the month of January 2003.
January 1. Ato yimer took Birr 450,000 from his personal savings and deposited it in the name of
Bati transport.
January 2. Bati Transport purchased two used trucks for Birr 150,000 each, on cash.
January 4. Bati Transport received a check for Birr 650 for services given to Alem
Trading.
January 4. Received an invoice for truck expenses Birr 90.

27 | P a g e
January 11. Paid Birr 600 for the Awash Insurance Company to buy an insurance policy for
its trucks.
January 16. Ato Yimer issued a check for Birr 9,400 to the workers as a salary for
two weeks.
January 20. Bati trading Billed Muradu Supermarket for goods transported from
Djibouti to Gondar Birr 2,650
January 21. Ato Yimer wrote a check for birr 450 to have one of the trucks repainted
January 21. Bati trading purchased stationary materials and other supplies of Birr 740 on
account
January 22. Office equipment of Birr 11,600 is bought on account.
January 23. Purchased an additional truck for Birr 250,000 paying birr 100,000 in cash
and issuing a note for the difference.
January 23. Recorded services billed to customers on account birr 14,600.
January 25. Received cash from customers on account Birr 15,000.
January 27. The owner withdrew Birr 500 in cash for his personal use.
January 28. Paid Birr 9,400 to workers as a salary for the last two weeks of the month.
January 30. Paid telephone expense of Birr 95 and electric expenses of Birr 125 for the
month.
January 30. Paid other miscellaneous expenses Birr 50.
January 31. Paid Birr 4,000 as a rent for a building used for office space.
These transactions are journalised as follows:

Date Description Debit Credit

2003 Cash 450,000
Jan.1 Yimer Capital 450,000
To record investment by owner
2 Truck 300,000
Cash 300,000
Purchase of trucks
4 Cash 650
Service Income 650
Cash received from customers
4 Truck Expenses 90
Accounts Payable 90
Service received in advance
11 Prepaid Insurance 600
Cash 600
Purchase of insurance policy
16 Salary Expense 9,400
Cash 9,400
Payment of salary
20 Accounts Receivable 2,650
Service Income 2,650
Provision of service
21 Truck Expense 450
Cash 450

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 Cash paid to repaint truck
21 Supplies 740
Accounts Payable 740
Purchase of supplies of account
22 Office Equipment 11,600
Accounts Payable 11,600
Purchase of equipment
23 Truck 250,000
Cash 100,000
Notes Payable 150,000
Purchase of truck
23 Accounts Receivable 14,600
Service Income 14,600
Provision of service on account
25 Cash 15,000
Accounts Receivable 15,000
Collection of cash
27 Drawings 500
Cash 500
Owner withdrawals
28 Salary Expense 9,400
Cash 9,400
Payment of salary
30 Utilities Expense 220
Cash 220
Payment for telephone, electricity
30 Miscellaneous Expenses 50
Cash 50
Payment for various expenses
31 Rent Expense 4,000
Cash 4,000
Payment of Rent

Posting from the Journal to the Ledger

After the information about a business transaction has been journalized, that information is
transferred to the specific accounts affected by each transaction. This process of transferring the
information is called posting.
posting.

An account could be of two types; the two-column account and the four-column account. We
will use the four-column account for our illustration. The two forms of accounts are given
below.
The two-column account:
Account Account number
Date Item P. Debit Date Item P.R Credit

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 R

The four-column account:

Account Account number
Date Item P.R Debit Credit Balance
Debit Credit

The steps in posting are given below:

1. Record the date and amount of Dr. and Cr. Entry to the account
2. Insert the Journal page number in the P.R (Post Reference) column of the account.
3. Insert the account number in the P.R column of the journal.
Note. The P.R Column is used for reference purposes. The P.R column of the journal shows
whether the entry is posted and the account to which it is posted. In the account, the P.R Column
shows the Journal page number from which the entry was brought.

The group of accounts used by an organization is called ledger.

ledger.

Illustration.
Illustration. As mentioned above, to illustrate the posting process the four column account is
used and the entries to the cash account are posted as follows.

Account Cash Account Number

Balance
Date Item P.R Debit Credit Debit Credit
2003 450,000 00 450,000 00
Jan 1
2 300,000 00 150,000 00
4 650 00 150,650 00
11 600 00 150050 00
16 9,400 00 140650 00
21 450 00 140200 00
23 100,000 00 40200 00
25 15,000 00 55200 00
27 500 00 54200 00
28 9,400 00 45300 00
30 220 00 45,080 00
30 50 00 45,030 00
31 4,000 00 41,030 00

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Note.
Note. The item column is usually left blank. In some cases the word balance is written when the
account is carried foreword to a new page.

The Trial Balance

After the posting phase is completed, we have to verify the equality of the debit and credit
balances. This is done through the use of the ‘Trial Balance’. A trial balance is a two column
listing of the accounts in the ledger and their balance to make sure that the total of debit balances
equals the total of credit balances.
The trial balance for our illustration, Bati Transport is presented bellow. The amounts are taken
from the balances of the accounts after all the transactions have been posted. Therefore, after
posting the above transactions, you should get the final balances shown on the trial balance in the
end.

Bati Transport
Trial Balance
January 31, 2003

Cash 41,030 00
Accounts Receivable 2,250 00
Supplies 740 00
Prepaid Insurance 600 00
Office equipment 11,600 00
Truck 550,000 00
Accounts payable 12,430 00
Notes payable 150,000 00
Yimer capital 450,000 00
Yimer drawing 500 00
Service income 17,900 00
Salary expense 18,800 00
Rent expense 4,000 00
Utilities expense 220 00
Maintenance expense 450 00
Truuck expense 90 00
Miscellaneous expense 50 00
Total 630,330 00 630,330 00

Proof Provided by the Trial Balance

The trial balance debit totals and credit totals are equal implies that the accounting work is more
likely to be free from any one or more of the following errors.

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 1. Error in preparing the trial balance including
-Addition error
-The amount of an account balance was in correctly listed on the trial balance
- A debit balance was recorded as a credit or vice versa
- A balance was entirely omitted.

2. Error in posting, including

- An erroneous amount was posted to the account.
- A debit amount was posted as a credit or vice versa
- A debit or credit posting was omitted

Limitations of the Trial Balance

The trial balance amounts are equal doesn’t mean that the accounting work is free from error.
That is, there are errors that may take place without affecting the trial balance totals. Some
examples are mentioned below:
- Failure to record a transaction or to post a transaction
- Recording the same erroneous amount for both the debit and the credit parts of a
transaction.
- Recording the same transaction more than once.
- Posting part of a transaction to the correct side but the wrong account.
Note: All these errors have the same affect (increasing or decreasing) on the debit totals and
credit totals

Adjustments

All the transactions recorded above in the journalizing step are the result of daily transactions.
Other transactions result from the passage of time or from the internal operations of the business.
For example, insurance premiums are paid for a certain period of time and expire during that
time period. Another example is office supplies such as paper, pens & pencils.

At the end of the period the balances in accounts such as supplies and prepaid insurance must be
brought up to date. The supplies account balance, for example, must be credited by the
consumed part of the supplies, debiting supplies expense.
Example. Stationary materials totaling Birr 1,900.00 were purchased and recorded during the
year. At the end of the year, only Birr 150 of the supplies are left in hand.
The adjusting entry prepared at the end of the year to adjust the supplies account will be

1990 Supplies expense 1,750

Dec31 Supplies 1,750

Note: 1. Adjustments are dated as the last day of the year.

2. The accounting year here – we assume, runs from January 1- December 31.

Additional examples on adjustments will be given below under the topic ‘worksheet’

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 The Accrual Basis and the Cash Basis of Accounting

1. The cash basis of accounting – In this basis of accounting revenues are reported in the
period in which cash is received and expenses are reported in the period in which cash is
paid. Net in come will, therefore, be the difference between the cash receipts (Revenues) and
cash payments (expenses). This method will be used by organizations that have very few
receivables and payables. For most businesses, however, the cash basis is not an acceptable
method.
2. The accrual basis of accounting – Under this method revenues are reported in the period
in which they are earned, and expenses are reported in the period in which they are incurred.
For example, revenue will be recognized as services are provided to customers or goods sold
and not when cash is collected. Most organizations use this method of accounting and we
will apply this method in this course.

The Matching Principle

We have discussed three concepts and principles in accounting in unit one. Now we will see one
more principle, the matching principle. This principle states that the expense of a period have to
be matched with the revenue of that period regardless of when payment is made. In order to do
this, the accrual basis of accounting requires the use of an adjusting process at the end of the
period so that revenues and expenses of the period will be determined properly.

Worksheet for Financial Statements

Most of the data required to prepare the accounting reports (financial statements) is now
gathered. The data will now be presented in a convenient form. The worksheet is a large
columnar sheet prepared to arrange in a convenient form all the accounting data required to
prepare financial statements. The worksheet has a heading and a body.

The heading has three parts:

i) Name of the Organization

ii) Name of the form (worksheet)
iii) Period of time covered.

The body contains five main parts each of them with two main columns. These parts are

1. The trial balance

2. The adjustment
3. The adjusted trial balance
4. The income statement
5. The balance sheet.
The worksheet for Bati Transport is given below. The five parts of the body are discussed as
follows. You are advised to read and understand the discussions before you look at the respective
columns of the worksheet.

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 Bati Transport
Work Sheet
For th3e month ended jan.31,2003

Account Title Trial Balance Adjustment Adjusted Trial Income Balance sheeet
balance statement
1 Cash 41,030 41,030 41,030
©
2 Accounts receivable 2,250 7,400 9,650 9,650
(a)
3 Supplies 740 340 400 400
(b)
4 Prepaid Insurance 600 450 150 150
5 Office equipment 11,600 11,600 11,600
6 Truck 550,000 550,000 550,000
7 Accounts payable 12,430 12,430 12,430
8 Notes payable 150,000 150,000 150,000
9 Yimer Capital 450,000 450,000 450,000
10 Yimer drawing 500 500 500
©
11 Service income 17,900 7,400 25,300 25300
12 Salary expense 18,800 18,800 18,800
13 Rent expense 4,000 4,000 4,000
14 Utilities expense 220 220 220
15 Maintenance expense 450 450 450
16 Truck expense 90 90 90
17 Miscellaneous 50 50 50
Expense
18 630,330 630,330
(a)
19 Supplies expense 340 340 340
(b)
20 Insurance expense 450 450 450
21 7290 7290 636,830 636,830
22 Net income
23 25300 25300 613,330 613,330

1. The trial balance column – this is the same trial balance we have prepared before. The trial
balance column of the work sheet can be brought direct from the ledger or from a separate trial
balance.
2. The Adjustment column – As mentioned previously, some account balances have to be
adjusted at the end of the year.

The accounts in the ledger of our illustration that require adjustment and the adjusting entry for
the accounts are presented below.

a) Supplies – The supplies account has a debit balance of Birr 740. The cost of supplies in hand
on July 31 is determined to be Birr 400. The following adjusting entry is required to bring the
balance of the account up to date:

Supplies expense…………………………….340
Supplies……………………………………..340

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b) Prepaid insurance – Analysis of the policy showed that three – fourth of the policy is
expired. That is only Birr 150 of the policy is applicable to future periods. The adjusting entry
to transfer the expired part of the insurance to expense will be.

Insurance expense ……………………….450

Prepaid insurance………………………..450

c) Service Income – At the end of the month unbilled fees for services performed to clients
totaled Birr 6,500.

This amount refers to an income earned but to be collected in the future. The journal entry to
record it will be
Accounts receivable………………………….6,500
Service income………………………………6,500

All the above adjusting entries will be inserted in the adjustment column of the worksheet in
front of the accounts affected.

Note – The letters a, b & c are used to cross-reference the debits and credits to help future review
of the worksheet.

3. The Adjusted Trial Balance Column – The accounts that require adjustment are now
adjusted. Transferring the trial balance column amounts combined with the adjustment column
amounts will complete the adjusted trial balance column of the worksheet.

4. The income statement and the balance sheet columns – Transfer the income statement
account balances (revenue &expenses) to the income statement and balance sheet account
balances (Asset, Liability &owners equity) to the balance sheet columns. Note that what we
have to transfer is the adjusted trial balance column amounts, to the corresponding columns.

Look at the 22nd row. It shows the net income for the month and it is added to the two columns
(Income statement Dr. and balance sheet cr.) as a balancing figure.
Financial statement preparation
After the work sheet is completed financial statements could be prepared easily. In chapter one
we have discussed four basic financial statements prepared by most organizations. Here, we will
prepare three of these statements for Bati Transport form the worksheet.

1. Income statement All the data required to prepare the income statement is brought
from the worksheet.
Bati Transport
Income statement
For the month ended. Jan 31, 2003

Service Income …………………………………………………………Birr 25,300

Operating expenses
Salary expense………………………..Birr 18,800

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 Rent “…………………………………….4,000
Maintenance expense ……………………… 450
Insurance “ ……………………………450
Supplies “ …………………………….340
Utilities “……………………………..220
Truck “ …………………………….. .90
Miscellaneous “………………………………50
Total operating expense………………………………………24,400
expense………………………………………24,400
Net Income…………………………………………………Birr 900

2. Statement of owner’s equity – This statement shows the beginning balance of capital and the
changes that affected it.

The balance of the owners equity account (Yimer capital) in the worksheet may not be the
beginning one. Therefore, the ledger has to be reviewed to see if there was an additional
investment during the priod or not. In our illustration there is no additional investment.

Bati Transport
Statement of Owner’s equity

For the month ended January 31, 2003

Yimer capital January 1, 2003………………………………Birr 450,000

Net income for the month………………….birr 900
Less:
Less: Withdrawal…………………………………...500
Withdrawal…………………………………...500 400
Yimer capital, January 31, 2003……………….…………….Birr 450,400

3. Balance sheet – The data to prepare this statement will be taken from the worksheet and the
other financial statements. Note that assets and liabilities are classified as current and non –
current.
Bati Transport
Balance sheet
January 31, 2003

Assets
Current Assets:

Cash…………………………………………Birr 41, 030

Accounts Receivable…………………………….. 9,650
Supplies…………………………………………… 400
Prepaid insurance…………………………………….150
insurance…………………………………….150
Total current assets……………………………………………Birr 51,230

Plant Asset (None-Current Assets):

Assets):

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Office equipment……………………………..Birr 110,600
Truck………………………………………………550,000
Truck………………………………………………550,000 561,600
Total asset………………………………………………………Birr 612,830

Liabilities
Current liabilities

Accounts payable……………………………..Birr 12,430

Non-current liabilities
Notes payable……………………………………..150,000
payable……………………………………..150,000

Total liabilities……………………………………………………Birr 162,430

Owner’s equity

Ato Yimer Capital…………………………………………………………….. 450,400

Total liability and owners equity………………………………………….Birr 612,830

The closing process

Some of the accounts in the ledger are temporary accounts used to classify and summarize the
transactions affecting capital (owners equity). These accounts will be closed after financial
statements are prepared. That is, their balances will be transferred to the Capital account. The
temporary accounts that have to be closed are revenue, expense and withdrawal accounts.

Steps in closing:
1. Closing revenue accounts - Debit each revenue account by its balance and
credit the ‘Income Summary’ account by the total revenue for the period.
Note: Income summary is an account used to close revenue and expense accounts. This account
will immediately be closed to the capital account at the end of the closing process.
2. Closing expense accounts – Debit the income summary account by the total
of expenses for the period and credit each expense account by its balance.

3. Closing the income summary account – Income summary will be closed to

the capital account. The balance of his account depends on the nature of operation; credit if
result is profit and debit if result is loss.
4. Closing Withdrawal – Debit the owners equity account by the total of
drawings for the period and credit the drawing account.

The temporary accounts of Bati transport are closed as follows.

2003 Income summary………………….25,300

January Service income…………………………………25,300
31 Closing revenue

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 31 Salary expense………………………..18,800
rent expense……………………………4,000
Maintenance expense………………….. 450
Insurance expense………………………..450
Supplies expense…………………………340
Utilities expense………………………….220
Truck expense …………………………… 90
Miscellaneous expense…………………….50
Income expense…………………………………24,400
Closing expenses

2003 Income summary………………900

January 31 Yemer Capital………………………..900
Closing income summary
31 Yimer capital…………………...500
Yimer drowing………………………..500
Closing with drowal

The above closing entries have transferred the balance of the temporary accounts to the
permanent capital account.
Post closing trial Balance

After the closing entries have been journalized and posted, a trial balance is prepared to prove
the equality of the general ledger before recording the new year’s transactions. It should be
noted that this trial balance includes only balance sheet accounts. This is because the temporary
income statement accounts are closed during the closing process. This trial balance is called the
post – closing trial balance.
balance.

In practice the ledger balance after closing may be checked by a simple calculator print out rather
than a formal trial balance. The post closing trial balance for Bait Transport is presented below.

Bati Transport
Post – Closing trial balance Jan 31, 2003

Cash……………………………………………Birr 41,030
Accounts Receivable ………………………………...9,650
Supplies…………………………………………………400
Prepaid insurance……………………………………….150
Office equipment……………………………………11,600
Truck……………………………………………….550,000
Accounts payable…………………………………………………….Birr 12,430
Nots payable……………………………………………………………..150,000
Yimer capital……………………………………………………………..450,400
capital……………………………………………………………..450,400
Total……………………………………Birr 612,830 Birr 612,830

38 | P a g e
 Course Title: Develop Understanding of Taxation

Chapter One
1. Identify and discuss the role of taxation in the Ethiopians economy

1.1. The purpose of taxation in the Ethiopians economy at the local, State and federal level
and how this compares with other countries is explored and discussed
A tax is “a compulsory charge imposed by the government without any expectation of direct
return in benefit ".In other words, a tax is a compulsory payment or contribution by the people to
the Government for which there is no direct return to the taxpayers.

A tax has the following characteristics:

1. Tax is a Compulsory Contribution: Tax is a compulsory contribution by the taxpayers to the

government.
2. Benefit is not the Basic Condition: For the payment of tax, there is no direct return or quid pro quo
to the taxpayers. That is, people cannot expect any return in benefit for tax paid by them.

39 | P a g e
3. Personal Obligation: Tax imposes a personal obligation on the taxpayers. When a person becomes
liable to pay the tax, it is the duty of him to pay it and in no way he can escape from it.
4. Common Interest: The amount of tax received from the people is used for the general and
common benefit of the people as a whole.
5. Legal Collection: Tax is the legal collection. It can be levied only by the Government both
Central and State.
6. Element of Sacrifice: Since the tax is paid without any return in benefit, it can be said that
there is the prevalence of sacrifice in the payment of tax.
7. Regular and Periodical Payment: The payment of tax is regular and periodical in nature. It
is levied for a fixed period usually a year.
8. No Discrimination: Tax is levied on all people without any discrimination of caste, creed
etc. but according to their ability to pay.
9. Wide Scope: Tax is levied not only on income but also on property and commodities. To
enhance the revenue and to bring all the people under the tax net, the Government imposes
various kinds of taxes.

The purpose of taxation includes but is not limited to:

 financing government activity
 maintaining equity in the national economy
 promoting efficiency where markets fail to control pollution or health dangers
 social infrastructure
 social services.

Objectives of Taxation
Tax objectives are goals that are to be achieved through the taxation system. Tax objectives are
intimately connected with overall economic and non-economic policies of the government, fiscal
policy, institutional and other circumstances faced by the economy. As a result, the objectives of
a tax system in a developed country tend to differ significantly from those in an underdeveloped
country.

The following are generally considered objectives of taxation.

1. To raise revenue for government expenditures:

2. Stability of income and employment:
3. Promoting economic growth:
4. Reduce unemployment and regional disparities:
5. Equity and resource mobilization
6. Enhancement of standard of living:
7. Encouragement of Exports:
8. Capital Accumulation:
9. Creation of Employment Opportunities:

40 | P a g e
 10. Preventing Harmful Consumption:

Chapter -Two

2. Ethiopian Tax system

2.1 Budget Structures in Ethiopia

Budget is a time bound financial program systematically worked out and ready for execution in
the ensuing fiscal year. It is a comprehensive plan of action, which brings together in one
consolidated statement all financial requirements of the government. Thus, budget is an annual
statement of receipts and payments of a government.

The government budget represents a plan/forecast by government of its expenditures and

revenues for a specified period. Commonly government budget is prepared for a year, known as
a financial year or fiscal year. In Ethiopia, the fiscal year is from July 7 of this year to July 6 of
the coming year (Hamle 1- Sene 30 in Ethiopian calendar).

Budget structures are the formats that organize budget data. Budget data could be classified in
different ways and for different purposes. In the early days, for instance, budget classification
focused on providing a better understanding of the intentions and purposes of government for
which funds were planned and to be spent. Later on, the budget structures started to be influenced
largely by the issue of accountability. That is, in addition to providing information on what the
government proposed to do; the budget structures indicate the full responsibility of the spending
agency. To this end the budget head or nomenclature of the budget are mostly mapped to each
spending agency.

This should not, however, imply unnecessarily extended and detailed structure (or mapping).
Perhaps, due consideration must be taken to make the structure manageable and appropriate. The
first classification of the budget is between revenue and expenditure.

2.1.1 Revenue Budget

It represents the annual forecast of revenues to be raised by government through taxation and
other discretionary measures, the amount of revenues raised this way differ from country to
country both in magnitude and structure, mainly due to the level of economic development and
the type of the economy.

In Ethiopia, the revenue budget is usually structured into three major headings: ordinary
revenue, external assistance, and capital revenue. Hence, the funds expected from these three
sources are proclaimed as the annual revenue budget for the country. The revenue budget is
prepared by the Ministry of Finance (MoF) for the federal government and by Finance Bureaus
for regional governments.

Ordinary revenues include both tax and non-tax revenues. The tax revenues categorize direct
taxes such as personal income tax, rental income tax, business income tax, agricultural income

41 | P a g e
tax, tax on dividend and chance wining, land use fee and lease on one side. On the other side,
there are indirect taxes including excise tax on locally manufactured goods, sales tax on locally
manufactured goods, service sales tax, stamps and duty and taxes on foreign trade customs duty
on imported goods, duty and tax on coffee export. Non-tax revenues include charges and fees,
investment revenue, miscellaneous revenue (e.g. gains) and pension contribution. The second
major item in revenue budget is external assistance. It includes cash grants; these are grants
from multilateral and bilateral donors for different structural adjustment programs; and technical
assistance in cash and material form. The third item is capital revenue. This could be from
domestic (sales of movable properties and collection of loans), external loan from multilateral
and bilateral creditors mostly for capital projects, and grants in the form of counterpart fund.

Government expenditures for administration and developmental activities are handled through the
expenditures budget. These expenditures are categorized into recurrent and capital expenditures.

2.1 Major Types of Taxes existing in Ethiopia

2.1.1 Direct Taxes
2.1.1 Tax on Income from Employment / Personal Income Tax
Every person having income from employment in any government or other private organization or non
Governmental organization, such as NGOS, and if his/her is income from employment includes any
payments or gain in cash or in kind which he/she receives from employers is supposed to pay income tax
as per the following table.
 New income tax rate
No Employment Income /Per-months/ Deduction In Birr
Tax Rate (%)  
  From Birr To Birr  
None
0 600 Exempted (Non-
1
taxable)
2 601 1650 10 60
3 1651 3200 15 142.50
4 3201 5250 20 302.50
5 5251 7800 25 565.00
6 7801 10900 30 955.00
7 Over 10900   35 1500.00
 
Examples of Calculation on Payroll Tax Rate in Ethiopia
Example 1
Gross Salary = Br. 1000
Income taxable=Basic Salary x Tax Rate -Deduction
Tax: 1000 x 10% - 60 = Br. 40
Income Tax = Br. 40
Example 2 
Gross Salary = Br. 8000
Income taxable=Basic Salary x Tax Rate -Deduction

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Tax: 8000 x 30% - 955 = Br. 1435
Income Tax = Br. 1445
 New income tax rate

No Employment income (Income per month) Tax rate Deduction in birr

Over Birr To Birr % Birr
1 0 150 Exempt threshold
2 151 650 10 15.00
3 651 1400 15 47.50
4 1401 2350 20 117.50
5 2351 3550 25 235.00
6 3551 5000 30 412.50
7 Over 5000 ***** 35 662.50
Example 1): Ato Alemu received a monthly Salary of Birr 1200 during the year 2003, and then
the amount of tax liability and the amount received by him after the withholding of tax by the
employer from his salary would be:
Solution:
 Taxable income :
=birr 1,200
 Employment tax ( tax liability) =taxable income*rate-deduction
=1200*15%-47.50
=132.50
 Amount received by employee =Gross pay-deduction (tax)
=1200-132.50
=1067.50
Example 2) the following data relate to the income of X, Y, and Z for the month of Hamle.
Emp Compensation
loyees Basic Transportati Housing Reimbursed Position Over
salary on allowance allowan medical Allowanc time
(birr) (birr) ce allowance(bi e (hours
(birr) rr) (birr) )
X X 600 240 - - - 15
Y Y 1400 240 400 200 - 8
Z Z 1800 240 400 - 150 9

Additional information, “X” is entitled to receive 130% and Y and Z receive 120% each for over
time. Assume number of working days 140.

Required: compute the taxable income and tax payable of X, Y and Z

Solution:

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  Over time payment =regular per our payment*over time payment * over time
worked
X=600/140 *1.3 *15 hours=83.57
Y=1400/140*1.2*8 hours=96.00
Z=1800/140*1.2*9 hours=138.86
 Taxable payment of =basic salary + over time + taxable allowance
X=600 + 83.57=683.57
Y=1400+96=1496
Z=1800+138.86+150=2088.86
 Tax payable (employment tax) =taxable income * rate
X=683.57*15%-47.5=55.04
Y=1496*20%-117.50=181.70
Z=2088.86*20%-117.50=300.30

Employment income shall include any payments or gains in cash or in kind received from
employment by an individual. Employers have an obligation to withhold the tax from each
payment to an employee, and pay the Tax
Authority the amount withheld during each calendar month. In applying the procedure, income
attributable to the months of Nehassie and Pagume shall be aggregated and treated as the income
of one month. If the tax on income from employment, instead of being deducted from the salary
or wage of the employee, is paid by the employer in whole or in part, the amount so paid shall be
added to the taxable income and shall be considered as part thereof.

The following categories of income shall be exempt from payment of personal income tax:
 Income from employment received by casual employees who are not regularly
employed provided that they do not work for more than one month for the same employer
in any twelve months;
 Pension contribution, provident fund and all forms of retirement benefits contributed
by employers in an amount that does not exceed 15% of the monthly salary of the
employee;
 Subject to reciprocity, income from employment, received for services rendered in the
exercise of their duties by diplomatic and consular representatives, and other persons
employed in any Embassy and who are national of that state and bearers of diplomatic
passports;
 Payments made to a person as compensation or gratitude in relation to personal injuries
suffered by that person or death of another person;
 Amounts paid by employers to cover the actual cost of medical treatment of employees;
 Allowances in lieu of means of transportation granted to employees under contract of
employment;
 Hardship allowance;
 Amounts paid to employees in reimbursement of traveling expenses incurred on duty;
44 | P a g e
  Amounts of travelling expense paid to employees recruited from elsewhere than the
place of employment on joining and completion of employment or in case of foreigners
travelling expenses from or to their country, provided that such payments are made
pursuant to specific provisions of the contract;
 Allowance paid to members and secretaries of board of public enterprises and public
bodies as well as to members and secretaries of study groups set up by the Federal or
 Regional Government;
 Income of persons employed for domestic duties.

2.1.2 Business Profit Tax

This is the tax imposed on the taxable business income / net profit realized from entrepreneurial
activity. Taxable business income would be determined per tax period on the basis of the profit
and loss account or income statement, which shall be drawn in compliance with the generally
accepted accounting standards. Corporate businesses are required to pay 30% flat rate of
business income tax. For unincorporated or individual businesses the business income tax
ranges from 10% - 35%.
Unincorporated or individual businesses are taxed in accordance with the following schedule
below:

The short cut method of computing business income tax is provided below.

Taxable Income Deduction

From To Rate
0 1,800 O Nil
1,801 7,800 10% 180
7,801 16,800 15% 570
16,801 28,200 20% 1,410
28,201 42,600 25% 4,950
42,601 60,000 30% 7,950
60,001 and above 35%

Example: Computation of business profit tax

Business Net Profit per year/Taxable Income = 70,500.00 Birr
- Business Profit Tax = 70,500 Birr x 35% tax rate = 24,675 Birr
- Deduction = 24,675 Birr - 7,950 Birr deduction fee
- Tax payment = 16,725.00 Birr
In the determination of business income subject to tax in Ethiopia, deductions would be allowed
for expenses incurred for the purpose of earning, securing, and maintaining that business income
to the extent that the expenses can be proven by the taxpayer.

45 | P a g e
The following expenses shall be deductible from gross income in calculating taxable income:
 The direct cost of producing the income, such as the direct cost of manufacturing,
purchasing, importation, selling and such other similar costs;
 General and administrative expenses connected with the business activity;
 Premiums payable on insurance directly connected with the business activity;
 Expenses incurred in connection with the promotion of the business inside and outside
the country, subject to the limits set by the directive issued by the Minister of Revenue;
 Commissions paid for services rendered to the business;
 Sums paid as salary, wages or other emoluments to the children of the proprietor or
member of the partnership shall only be allowed as deduction if such employees have the
qualifications required by the post.

The following categories of income would be exempted from payment of business income tax:
 Awards for adopted or suggested innovations and cost saving measures;
 Public awards for outstanding performance;
 Income specifically exempted from income tax by the law in force in Ethiopia, by
international treaty or by an agreement made.
Penalty for understatement of tax:
 If the amount of tax shown on a declaration understates the amount of tax required to be
shown, the taxpayer is liable for a penalty in the amount of 10% of the understatement or
50% if the understatement is considered substantial. The understatement is considered
substantial if it exceeds 25% of the tax required to be shown on the return or 20,000 Birr;
 The penalty shall continue to apply until, the Appeal Commission or a Court, as the case
may be shall have rendered its final decision.
Penalty for late payment:
A taxpayer who fails to pay tax liability on the due date is subject to:
 A penalty of 5% of the amount of unpaid tax on the first day after the due date has
passed; and
 An additional 2% of the amount of tax that remains unpaid on the first day of each
month thereafter.
2.1.3 Tax on Income from Rental of Buildings
This is the tax imposed on the income from rental of buildings. If the taxpayer leased furnished
quarters, the amounts received attributable to the lease of furniture and equipment would be
included in the income and taxed. The tax payable on rented houses would be charged at the
following rates:
 On income of bodies 30% of taxable income
 On income of persons according to the following schedule

Taxable income from rental of building Tax rate Deduction in

No (Income per year) birr

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 Over Birr To Birr % Birr
1 0 1,800 Exempt threshold
2 1,801 7,800 10 180
3 7,801 16,800 15 570
4 16,801 28,200 20 1410
5 28,201 42,600 25 2820
6 42,601 60,000 30 4950
7 Over 60,000 ***** 35 7,950

Example: Computation of Rental Income Tax

Net profit per-year/Taxable Income 38, 000.00 Birr
- Rental Income Tax = 38,000 Birr x 25% tax rate = 9,500 Birr
- Deduction = 9,500 Birr -2,820 Birr deduction fee
- Tax payment = 6,680 Birr
Conditions of payment:
 The owner of a building who allows a lessee to sub-lease is liable for the payment of the
tax for which the sub-lessor is liable, in the event the sub-lessor fails to pay;
 When the construction of a rental building is completed or when the building is rented,
the owner and the builder are required to notify the administration of the Kebele in which
the building is situated about such completion and the name, address, and tax
identification number of the person or persons subject to tax on income from rental of
building;
 The Kebele administration has the obligation to communicate the information obtained
to the appropriate tax authority.
2.1.4 Tax on Interest Income on Deposits
Every person deriving income from interest on deposits shall pay tax at the rate of 5%. The
payers are required to withhold the tax and account to the Tax Authority.
2.1.5 Dividend Income Tax
Every person deriving income from dividends from a share company or withdrawals of profits
from a private limited company shall be subject to tax at the rate of 10%. The withholding agent
shall withhold or collect the tax and account to the Tax Authority.
2.1.6 Tax on Income from Royalties
‘Royalty income’ means a payment of any kind received as a consideration for the use of, or the
right to use, any copyright of literary, artistic or scientific work including cinematography films,
and films or tapes for radio or television broadcasting. Royalties’ income shall be liable to tax
at a flat rate of 5%. The withholding agent who effects payment shall withhold the foregoing
tax and account to the Tax Authority. Where the payer resides abroad and the recipient is a
resident, the recipient shall pay tax on the royalty income within the time limit set out.
2.1.7 Tax on Income from Games of Chance
Every person deriving income from winning of games of chance (e.g.,lotteries, tombolas, and
other similar activities) shall be subject to tax at the rate of 15%, except for winning of less
than 100 Birr. The payer shall withhold or collect the tax and account to the Tax Authority.

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2.1.8 Tax on Gains of Transfer of Certain Investment Property
This is the tax payable on gains obtained from the transfer (sale or gift) of building held for
business, factory, office, and shares of companies. Such income is taxable at the following rates:
 Building held for business, factory, and office at the rate of 15%;
 Shares of companies at the rate of 30%.
Gains obtained from the transfer of building held for residence shall be exempted from tax
provided that such building is fully used for dwelling for two years prior to the date of transfer.
Any person authorized by law to accept, register or in any way approve the transfer of capital
assets shall not accept, register or approve the transfer before ascertaining that the payment of the
tax has been duly effected.

2.1.9 Tax on Income from Rental of Property

The taxable income under this category is income derived from casual rental of property
(including any land, building, or moveable asset) not related to a business activity. This type of
income is subject to tax at a flat rate of 15% of the annual gross income.

2.1.10 Rendering of Technical Services outside Ethiopia

All payments made in consideration of any kind of technical services rendered outside Ethiopia
to resident persons in any form shall be liable to tax at a flat rate of 10% which shall be
withheld and paid to the Tax Authority by the payer. The term “technical service “means any
kind of expert advice or technological service rendered.

2.1.11 Agricultural Income Tax

According to Proclamation No. 152 of 1978 individual farmers and agricultural producer-
cooperatives earning up to Birr 600 per annum are required to pay 10 Birr. The tax rates on
every additional income vary from 10% to 89% for income above 600 Birr.
In line with the economic policy and structural set up of the Federal Democratic Republic of
Ethiopia, the former tax on income from agricultural activities and the land use rent was revised
in 1995. Since income tax from this source is allocated to Regional States in consonance with the
provisions of the new constitution of 1994, each Regional State is entitled to issue a
Proclamation providing for such a tax and rent.
Accordingly, the Oromia Regional State has promulgated Proclamation No. 8/1995 that revised
agricultural income tax rates schedule and rural land use fee. As for the payment of income tax
from agricultural activities other taxpayers, except state farms, shall pay at the following rate.

Agricultural Income Tax per Proclamation No. 8/1995, Oromiya

No. Annual Taxable Income Tax Rate

1 up to 1,200 Birr 15
2 1,201 - 5,000 5%
3 5,001 - 15,000 10%
4 15,001 - 30,000 20%

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 5 30,001 - 50,000 30%
6 over 50,000 40%

2.1.12 Land Use Tax

According to Proclamation No. 77/1976 and No. 152 /1978 individual farmers, who are not
members of producer’s cooperatives, are required to pay a land use fee of Birr 10 per hectare
per annum. Whereas government agricultural organizations are paying 2 Birr per hectare per
annum. Presently regional states have their own land use rent systems. For instance, according to
the Proclamation No. 8/1995 of Oromiya, rural land held for agricultural activities is subject to
land use rent payment on annual basis. The annual land use rent payable by a farmer shall be
Birr 10 for the first hectare and Birr 7.50 for each extra hectare of land. Meanwhile state
farming enterprises shall pay Birr 15 for each hectare of their land holdings. Land use rent is
to be collected between the 1st of Hidar and the 30th of Miazia of the year.

2.2 Indirect Taxes

2.2.1 Turnover Tax
The Turnover Tax would be payable on goods sold and services rendered by persons not
registered for Value Added Tax. The rate of Turnover Tax is
 2% on goods sold locally;
 for services rendered locally:
o 2% on contractors, grain mills, tractors and combine-harvesters;
o 10% on others.
A person who sells goods and services has the obligation to collect the Turnover Tax from the
buyer and transfer it to the Tax Authority. Hence, the seller is principally accountable for the
payment of the tax. In accordance with the Turnover

Tax Proclamation No. 308/2002, the following would be exempted:

 Sale or transfer of dwelling used for a minimum of two years, or the lease of a dwelling;
 Rendering of financial services;
 Supply of national or foreign currency and of securities;
 Rendering by religious organizations of religious or other related services;
 Supply of prescription drugs specified in directives issued by the relevant government
agency, and the rendering of medical services;
 Rendering of educational services provided by educational institutions;
 Supply of goods and rendering of services in the form of humanitarian aid;
 Supply of electricity, kerosene and water;
 Provision of transport;
 Permits and license fees;
 Supply of goods or services by a workshop employing disabled individuals (if more
than 60% of the employees aredisabled);

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  Supply of books.

2.2.2 Excise Tax

It is believed that this tax should be imposed on luxury goods and basic goods, which are
demand inelastic. It is also believed that imposing the tax on goods that are hazardous to health
and which are causes to social problems will reduce the consumption thereof.

2.2.3 Value Added Tax (VAT)

VAT is a tax on consumer expenditure. It is collected on business transactions and imports. A
taxable person can be an individual, firm, company, as long as such a person is required to be
registered for VAT.
Most business transactions involve supplies of goods or services. VAT is payable if they are:
 Supplies made in Ethiopia;
 Made by a taxable person;
 Made in the course or furtherance of a business;
 Are not specifically exempted or zero-rated.

The Value Added Tax would be levied at the rate of 15% of the value of:
 Every taxable transaction by a registered person;
 Every import of goods, other than an exempt import; and
 Import of services.

A person who carries on taxable activity and is not registered is required to file an application
for VAT registration with the Authority if:
 At the end of any period of 12 calendar months the person made , during that period,
taxable transactions the total value of which exceeded 500,000 Birr; or
 At the beginning of any period of 12 calendar months there are reasonable grounds to
expect that the total value of taxable transactions to be made by the person during that
period will exceed 500,000 Birr.
There is a VAT invoice prepared by the Ministry of Revenue containing the following
information:
 Full name of the registered person and the purchaser, and the registered;
 Person’s trade name, if different from the legal name;
 Taxpayer identification number of the registered person and the purchaser;
 Number and date of the VAT registration certificate;
 Name of the goods shipped or services rendered;
 Amount of the taxable transaction;
 Amount of the excise on excisable goods;
 Sum of the VAT due on the given taxable transaction;
 Issue date if the VAT invoice, and
 Serial number of the VAT invoice.
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2.2.3.1 Advantages of Value Added Tax
The VAT has the following advantages.
A. Easy to Administer
B. Effective and Efficient
C. Neutrality
D. Reduce Tax Evasion
E. Possibility of Crosschecking
F. Less Tax Burden
G. Encourages Exports
H. Improves Productivity

2.2.3.1 Disadvantages of VAT

A. Not a Simple and Easy System
B. Requires Advanced Economic Structure
C. Possibility of Tax Evasion
I. Lesser Revenue
F. Additional Burden
G. Inflationary in Nature

2.3. Double taxation

Double taxation occurs when the Government levies taxes on the same base in more than one
way. Hence, double taxation can be defined as, “taxation of the same tax base twice either by
one authority or by different authorities”. Here, the two taxes should be levied with reference to
the same period.
A. Examples of Double Taxation
1. Mr. X earns his income in Etiopia and U.S.A. If both the Governments levy taxes on his
entire income, it is considered as double taxation i.e. international double taxation,
because he has to pay tax in two countries on the same income.
2. The Government of a country levies taxes on the profits of a company before the
distribution of dividends. Thereafter, it taxes the individual shareholders on the dividends
received by them. Then it becomes a double taxation. Here the company and shareholders
are taxed on the same income.

B. Kinds of Double Taxation

Kinds of Double taxation

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Double Taxation by the different Authority Double Taxation by the same Authority

International Double Federal Double 1. Taxation on capital and income.

Taxation. Taxation. 2. Taxation on both debtors and creditors for the

1. Taxes levied 1.Taxes levied by amount of loan.
by the govt. of two two Govt. of the 3. Taxation on profits before
different countries same country ie distribution and on dividends
Union & States. after distribution.

Black Money
Black money is a complex phenomenon. It has various connotations such as unaccounted
incomes, tax-evaded incomes, undisclosed wealth and unrecorded gain and suppressed or
number two accounts transactions. It is earned by violating the laws and going against the
conscience by the very name itself. We can understand how the money is earned and this money
carries a secret behind it.

2.5.Types of Taxpayers
Taxpayers are classified into the following three major categories:

Category “A”Taxpayers
This category of taxpayers includes:
a) Any company incorporated under the laws of Ethiopia or in a foreign country;
b) any other business having an annual turnover of Birr 500,000 or more.

Category “A“taxpayers are required to submit to the Tax Authority, at the end of the year, a
balance sheet and a profit and loss statement and the following details:
a) Gross profit and the manner in which it is computed;
b) general and administrative expense;
c) depreciation expense; and
d) provisions and reserves.

In addition, these taxpayers should register with the Tax Authority the type and quantity of
vouchers they use before having such vouchers printed. Any printing press before printing
vouchers of taxpayers shall ensure that the type and quantity of such vouchers is registered with
the Tax Authority.

Category “B”Taxpayers
Unless already classified in category “A”, any business having an annual turnover of over Birr
100, 000 would be classified under Category “B” taxpayers. This category of taxpayers should
submit to the Tax Authority profit and loss statement at the end of the year.
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 Category “C”Taxpayers
Unless classified in Categories “A” and “B”, those businesses whose annual turnover is
estimated up to Birr 100, 000 are classified under this category of taxpayers.

Course Title: Develop Understanding of Ethiopian Financial System and Markets

Chapter-1
1. An overview of Financial System
1.1. The role of financial system in the Economy
Meaning of Financial System
The economic development of a nation is reflected by the progress of the various economic units,
broadly classified into corporate sector, government and household sector. There are areas or
people with surplus funds and there are those with a deficit.
According to Prasanna Chandra, “financial system consists of a variety of institutions, markets
and instruments related in a systematic manner and provide the principal means by which
savings are transformed into investments”.
A financial system or financial sector functions as an intermediary and facilitates the flow of
funds from the areas of surplus to the areas of deficit. A Financial System is a composition of
various institutions, markets, regulations and laws, practices, money manager, analysts,
transactions and claims and liabilities.
Financial system comprises of set of subsystems of financial institutions, financial markets,
financial instruments and services which helps in the formation of capital. It provides a
mechanism by which savings are transformed to investment.
Financial System;

Figure 1 flow of financial system

The financial system is concerned about money, credit and finance -the three terms are
intimately related yet are somewhat different from each other
Thus financial system is a set of complex and closely interlinked financial institutions, financial
markets, financial instruments and services which facilitate the transfer of funds.

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Financial institutions mobilize funds from suppliers and provide these funds to those who
demand them.
Similarly, the financial markets are also required for movement of funds from savers to
intermediaries and from intermediaries to investors. In short, financial system is a mechanism by
which savings are transformed into investments.

Functions of Financial System

1. Saving function: An important function of a financial system is to mobilize savings and
channelize them into productive activities. It is through financial system the savings are
transformed into investments.
2. Liquidity function: The most important function of a financial system is to provide money
and monetary assets for the production of goods and services.
3. Payment function: The financial system offers a very convenient mode of payment for goods
and services. The cheque system and credit card system are the easiest methods of payment in
the economy. The cost and time of transactions are considerably reduced.
4. Risk function: The financial markets provide protection against life, health and income risks.
These guarantees are accomplished through the sale of life, health insurance and property
insurance policies.
5. Information function: A financial system makes available price-related information. This is a
valuable help to those who need to take economic and financial decisions.
6. Transfer function: A financial system provides a mechanism for the transfer of the resources
across geographic boundaries.
7. Reformatory functions: A financial system undertaking the functions of developing,
introducing innovative financial assets/instruments services and practices and restructuring the
existing assts, services etc, to cater the emerging needs of borrowers and investors (financial
engineering and re engineering).
8. Other functions: It assists in the selection of projects to be financed and also reviews
performance of such projects periodically. It also promotes the process of capital formation by
bringing together the supply of savings and the demand for investible funds.

Role and Importance of Financial System in Economic Development

 It links the savers and investors. It helps in mobilizing and allocating the savings
efficiently and effectively. It plays a crucial role in economic development through
saving-investment process. This savings – investment process is called capital formation.
 It helps to monitor corporate performance.
 It provides a mechanism for managing uncertainty and controlling risk.
 It provides a mechanism for the transfer of resources across geographical boundaries.
 It offers portfolio adjustment facilities (provided by financial markets and financial
intermediaries).
 It helps in lowering the transaction costs and increase returns. This will motivate people
to save more.
 It promotes the process of capital formation.
 It helps in promoting the process of financial deepening and broadening.
Structure of Financial System
Financial structure refers to shape, components and their order in the financial system. The
financial system can be broadly classified into formal (organized) financial system and the

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informal (unorganized) financial system. The informal financial system consists of individual
money lenders, groups of persons operating as funds or associations, partnership firms consisting
of local brokers, pawn brokers, and non-banking financial intermediaries such as finance,
investment and chit fund companies. The formal financial system comprises financial
institutions, financial markets, financial instruments and financial services.

Figure 2 Structure of Financial System

1.2. Financial Asset : role and Properties
An asset is any resource that is expected to provide future benefits, and thus possesses economic
value. Assets are divided into two categories: tangible assets with physical properties to some
future economic benefits. An intangible asset with no physical properties represents a legal claim
to some future economic benefits. The value of an intangible asset bears no relation to the form,
physical or otherwise, in which the claims are recorded.
Financial assets, often called financial instruments, are intangible assets, which are expected
to provide future benefits in the form of a claim to future cash. Some financial instruments are
called securities and generally include stocks and bonds.
Examples of financial assets are cash, investments in the bonds and equity issued by other
entities, receivables, and derivative financial assets.
Any transaction related to financial instrument includes at least two parties:
1. The party that has agreed to make future cash payments and is called the issuer;
2. The party that owns the financial instrument, and therefore the right to receive the
payments made by the issuer, is called the investor.

1.3. Financial Markets: role, classification and participants

Financial market deals in financial securities (or financial instruments) and financial services.
Financial markets are the centers or arrangements that provide facilities for buying and selling of
financial claims and services. These are the markets in which money as well as monetary claims
is traded in. Financial markets exist wherever financial transactions take place. Financial
transactions include issue of equity stock by a company, purchase of bonds in the secondary
market, deposit of money in a bank account, transfer of funds from a current account to a savings
account etc.
The participants in the financial markets are corporations, financial institutions, individuals and
the government. These participants trade in financial products in these markets. They trade either
directly or through brokers and dealers. In short, financial markets are markets that deal in
financial assets and credit instruments.
Functions of Financial Markets:

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The main functions of financial markets are outlined as below:
1. To facilitate creation and allocation of credit and liquidity.
2. To serve as intermediaries for mobilization of savings.
3. To help in the process of balanced economic growth.
4. To provide financial convenience.
5. To provide information and facilitate transactions at low cost.
6. To cater to the various credits needs of the business organizations.

Classification of Financial Markets:

There are different ways of classifying financial markets. There are mainly five ways of
classifying financial markets.
1. Classification on the basis of the type of financial claim: On this basis, financial markets
may be classified into debt market and equity market.
 Debt market: This is the financial market for fixed claims like debt instruments.
 Equity market: This is the financial market for residual claims, i.e., equity instruments.
2. Classification on the basis of maturity of claims: On this basis, financial markets may be
classified into money market and capital market.
 Money market: A market where short term funds are borrowed and lend is called money
market. It deals in short term monetary assets with a maturity period of one year or less.
Liquid funds as well as highly liquid securities are traded in the money market. Examples
of money market are Treasury bill market, call money market, commercial bill market
etc. The main participants in this market are banks, financial institutions and
government. In short, money market is a place where the demand for and supply of short
term funds are met.
 Capital market: Capital market is the market for long term funds. This market deals in
the long term claims, securities and stocks with a maturity period of more than one year.
It is the market from where productive capital is raised and made available for industrial
purposes. The stock market, the government bond market and derivatives market are
examples of capital market.
In short, the capital market deals with long term debt and stock.
3. Classification on the basis of seasoning of claim: On this basis, financial markets are
classified into primary market and secondary market.
 Primary market: Primary markets are those markets which deal in the new securities.
Therefore, they are also known as new issue markets. These are markets where securities
are issued for the first time. In other words, these are the markets for the securities issued
directly by the companies. The primary markets mobilize savings and supply fresh or
additional capital to business units. In short, primary market is a market for raising fresh
capital in the form of shares and debentures.
 Secondary market: Secondary markets are those markets which deal in existing
securities. Existing securities are those securities that have already been issued and are
already outstanding. Secondary market consists of stock exchanges. Stock exchanges are
self regulatory bodies under the overall regulatory purview of the Govt. /SEBI.
4. Classification on the basis of structure or arrangements: On this basis, financial markets
can be classified into organized markets and unorganized markets.
 Organized markets: These are financial markets in which financial transactions take
place within the well established exchanges or in the systematic and orderly structure.

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  Unorganized markets: These are financial markets in which financial transactions take
place outside the well established exchange or without systematic and orderly structure or
arrangements.
5. Classification on the basis of timing of delivery: On this basis, financial markets may be
classified into cash/spot market and forward / future market.
 Cash / Spot market: This is the market where the buying and selling of commodities
happens or stocks are sold for cash and delivered immediately after the purchase or sale
of commodities or securities.
 Forward/Future market: This is the market where participants buy and sell
stocks/commodities, contracts and the delivery of commodities or securities occurs at a
pre-determined time in future.
6. Other types of financial market: Apart from the above, there are some other types of
financial markets. They are foreign exchange market and derivatives market.
 Foreign exchange market: Foreign exchange market is simply defined as a market in
which one country’s currency is traded for another country’s currency. It is a market for
the purchase and sale of foreign currencies.
 Derivatives market: The derivatives are most modern financial instruments in hedging
risk. The individuals and firms who wish to avoid or reduce risk can deal with the others
who are willing to accept the risk for a price. A common place where such transactions
take place is called the derivative market. It is a market in which derivatives are traded. In
short, it is a market for derivatives.
1.4 Lending and borrowing in Financial system
Economists John Gurley and Edward Shaw pointed out that each business firm, household, or
unit of government active in the financial system must conform to:
R – E =∆∆FA –∆∆D
Where R = Current income receipts
E = Expenditures out of current income
∆FA = Change in holdings of financial assets
∆D = Change in debt and equity outstanding
So, for any given time period, each economic unit must fall into one of three groups:
 Deficit- budget unit (DBU):
E > R, so ∆D >∆FA (net borrower of funds)
 Surplus-budget unit(SBU):
R > E, so ∆FA >∆D (net lender of funds)
 Balanced-budget unit(BBU):
R=E, so ∆D=∆FA (neither net lender nor borrower)
1.6. Financial Institution
A financial institution is an establishment that conducts financial transactions such as
investments, loans and deposits. Almost everyone deals with financial institutions on a regular
basis. Everything from depositing money to taking out loans and exchanging currencies must be
done through financial institutions. Here is an overview of some of the major categories of
financial institutions and their roles in the financial system.

Commercial Banks
The word BANKING has been defined as “Accepting for the purpose of lending and investment
of deposits of money from the public repayable on demand or otherwise”.Commercial banks

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accept deposits and provide security and convenience to their customers. Part of the original
purpose of banks was to offer customers safe keeping for their money.
Commercial banks also make loans that individuals and businesses use to buy goods or expand
business operations, which in turn lead to more deposited funds that make their way to banks. If
banks can lend money at a higher interest rate than they have to pay for funds and operating
costs, they make money.
Functions of Commercial Banks
The important functions of commercial banks are explained below:
I. Primary Functions
These are further classified into 2 categories
i) Accepting Deposits: -
Deposits are the capital of banker. Therefore, it is first Primary function of the banker. He
accepts deposits from those who can save and lend it to the needy borrowers. The size of
operation of every bank is determined by size and nature of Deposits. To attract the saving from
all sort (categories) of individuals,
Commercial banks accept various types of deposits account they are:
a) Fixed Deposits
b) Current Deposits
c) Saving Bank account
d) Recurring Deposits
ii) Lending Loans: -
The 2nd important function of the commercial bank is advancing loans.
Bank accepts deposits to lend it at higher rate of interest. Every Commercial
Bank keep the rate of interest on its deposit at lower level or less that what he charges on its
loans which is as NIM (Net Interest Margin). The banker advances different types of loans to the
individual and firms. They are: -
 Overdraft
 Cash Credit
 Term Loan
 Discounting Bill
II) Secondary Functions
i) Agency functions:
Bankers act as an agent to the customers it means he performs certain functions on behalf of the
customers such services are called Agency Services. Example:
 Bank pay electricity bill, water bill, Insurance Premium etc.
 They guide the customer in Task Planning.
 Bank provides safety locker facility.
 Pay salaries of customer’s employees.
ii) General Utility Services: -
Bankers are the past of society. They offer: several services to general public they are:-
 It provides cheap remittance (transfer) facilities.
 The banks issue traveler cheque for safe travelling to its customers.
 Banks accepts and collects foreign Bills of Exchanges.
 Other than these services the bankers also provide ATM services, Internet Banking,
Electronic fund transfer (EFT), E-Banking to provide quick and proper services to its
customers.

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 iii) Credit Creation: -
It is a unique function of Commercial Banks. When a bank advances loan to its customer if
doesn’t lend cash but opens an account in the borrowers name and credits the amount of loan to
that account. Thus, whenever a bank grants loan, it creates an equal amount of bank deposits.
Creation of deposits is called Credit Creation. In simple words we can define Credit creation as
multiple expansions of deposits. Creation of such deposits will results an increase in the stock
deposits. Creation of such deposits will results an increase in the stock of money in an economy.
Classification of Non-Banking Financial Institutions
Nonbank Financial Institutions
The following institutions are not technically banks but provide some of the same services as
banks.
Savings and Loans
Savings & Loan Associations - Also known as thrifts, these are financial institutions that
specialize in savings type deposits, mortgages and other loans. They can serve both consumers
and businesses; however, by law, thrifts can have no more than 20 percent of their lending in
commercial loans. They are often mutually held, meaning that the depositors and borrowers are
members with voting rights.

Savings and loan associations, also known as S&Ls or thrifts, resemble banks in many respects.
Most consumers don't know the differences between commercial banks and S&Ls.

Credit Unions
Credit Unions - Credit unions differ from banks and other financial institutions in that those
who have accounts in the credit union are its members and actual owners. These member-owned
financial cooperatives are democratically controlled by its members, and operated for the
purpose of offering its members economical financial services.

Credit unions are another alternative to regular commercial banks. Credit unions are almost
always organized as not-for-profit cooperatives. Like banks and S&Ls, credit unions can be
chartered at the federal or state level.

Shadow Banks
The housing bubble and subsequent credit crisis brought attention to what is commonly called
"the shadow banking system." This is a collection of investment banks, hedge funds, insurers
and other non-bank financial institutions that replicate some of the activities of regulated banks,
but do not operate in the same regulatory environment.
CHAPTER TWO
INTEREST RATES DETERMINATION AND FINANCIAL MARKETS

Interest rate is a rate of return paid by a borrower of funds to a lender of them, or a price paid
by a borrower for a service, the right to make use of funds for a specified period. Thus it is one
form of yield on financial instruments. Two questions are being raised by market participants:
 What determines the average rate of interest in an economy?
 Why do interest rates differ on different types and lengths of loans and debt instruments?

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Interest rates vary depending on borrowing or lending decision. There is interest rate at which
banks are lending (the offer rate) and interest rate they are paying for deposits (the bid rate). The
difference between them is called a spread.
Real interest rate is the difference between the nominal rate of interest and the expected rate of
inflation. It is a measure of the anticipated opportunity cost of borrowing in terms of goods and
services forgone.
The dependence between the real and nominal interest rates is expressed using the following
equation:
i =(1+ r)(1+ ie) – 1
where i is the nominal rate of interest, r is the real rate of interest and ie e is the expected rate of
inflation.
Example: Assume that a bank is providing a company with a loan of 1000 thous. Euro for one
year at a real rate of interest of 3 per cent. At the end of the year it expects to receive back 1030
thous. Euro of purchasing power at current prices.
However, if the bank expects a 10 per cent rate of inflation over the next year, it will want 1133
thous. Euro back (10 percent above 1030 thous. Euro). The interest rate required by the bank
would be 13.3 per cent
i =(1+ 0,03)(1 + 0,1) - 1 = (1,03)(1,1) - 1 = 1,133 - 1=0,133 or 13,3 per cent

Forward interest rates are rates for periods commencing at points of time in the future.
They are implied by current rates for differing maturities. For example, the current 3- month
interest rate and the current 6-month interest rate between them imply a rate for a 3- month
period which runs from a point in time three months from the present until a point in time six
months hence.
The forward 3-month rate for a period commencing three months from the present is the rate
which, when compounded on the current 3-month rate, would yield the same return as the
current 6-month rate.

For example if the 3-month rate is 9% p.a. and the 6-month rate is 10% p.a., the forward rate is
shown as x in equation:
(1,0225)(1 + x) =1,05
The forward rate is calculated as:
x=(1,05/1.0225) - 1 = 0,0269 which is 2.69% over three months and hence 10.76% p.a.

THE FINANCIAL MARKETS

The Organization and Structure of Markets
Broadly speaking, markets can be classified in to Factor markets, Product market and financial
markets.

a) Factor markets: - are markets where consuming units sell their labor, management skill, and
other resources to those producing units offering the highest prices, i.e. this market allocates
factors of production (Land, labor and capital – and distribute incomes in the form of wages,
rental income and so on to the owners of productive resources.

b) Product market: - are markets where consuming units use most of their income from the
factor markets to purchase goods and services i.e. this market includes the trading of all
goods and services that the economy produces at a particular point in time.

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c) A financial market is a market where funds are transferred from people who have an
excess of available funds to people who have a shortage. Financial markets such as the
bond and stock markets are important in channeling funds from people who do not have
a productive use for them to those who do.

Structure of Financial Markets

The various structures of financial markets are discussed below.
Exchanges and Over- the – Counter Markets

Organized Exchanges (Auction) Markets

An auction market is some form of centralized facility (or clearing house) by which buyers and
sellers, through their commissioned agents (brokers), execute trades in an open and competitive
bidding process. The "centralized facility" is not necessarily a place where buyers and sellers
physically meet.

Over-the-counter (OTC) markets

An over-the-counter market has no centralized mechanism or facility for trading. Instead, the
market is a public market consisting of a number of dealers spread across a region, a country, or
indeed the world, who make the market in some type of asset. That is, the dealers themselves
post bid and asked prices for this asset and then stand ready to buy or sell units of this asset with
anyone who chooses to trade at these posted prices.

Primary and Secondary Markets

Primary Market
It is a financial market in which new issues of a security such as a bond or stock are sold to
initial buyers by the corporation or government agency borrowing the funds
The primary markets for securities are not well known to the public because the selling of
securities to the initial buyers takes place behind closed doors.
Secondary Market
Itis a financial market in which securities that have been previously issued (and are thus second
handed) can be resold.
When an individual buys a security in the secondary market, the person who has sold the security
receives money in exchange for the security, but the corporation that issued the security acquires
no new funds.

Debt and Equity Market

Debt Market
This is a financial market where debt instruments such as bonds or mortgages, which are
contractual agreements by the borrower to pay the holder of the instruments fixed dollar amounts
at regular intervals ( interest and principal payments) until a specified date (the maturity date),
when a final payment is made.
Equity Market
It is a financial market where equity securities, such as common stock, which are claims to share
in the net income (income after expenses and taxes) and the assets of a business, are traded.
Equities usually make payments (dividends) to their holders and are considered long- term
securities because they have no maturity date.

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Money and Capital Markets
The Money Market
The money market is a financial market in which only short term debt instruments (maturity of
less than one year) are traded. Money market securities, which are discussed in detail latter, have
the following characteristics.
 They are usually sold in large denominations
 They have low default risk
 They have smaller fluctuation in prices than long- term securities, making them safer
investments
 Widely traded than long- term securities and so more liquid.
The Capital Market
Capital market is a financial market for debt and equity instruments with maturities of greater
than one year. They have far wider price fluctuations than money market instruments and are
considered to be fairly risky investments.
Capital Markets can be classified in to two broad categories; the bond market and the equity
(stock) markets
The Bond Market
The bond market is composed of longer-term borrowing debt instruments than those that trade in
the money market. These instruments are some times said to comprise the fixed income capital
market.
A bond is a security that is issued in connection with a borrowing arrangement. The borrower
issues (sells) a bond to the lender for some amount of cash; the bond is in essence the “IOU” of
the borrower. The arrangement obligates the issuer to make specified payments to the bond
holder on specified dates. A typical bond obligates the issuer to make semiannual payment of
interest called, coupon payments, to the bond holder for the life of the bond. These are called
coupon payments because, in pre computer days, most bonds had coupons that investors would
clip off and present to the issuer of the bond to claim the interest payment. When the bond
matures, the issuer repays the debt by paying the bond’s par value (or its face value). The
coupon rate of the bond determines the interest payment: The annual payment equals the coupon
rate times the bond’s par value. The coupon rate, maturity date, and par value of the bond are
part of the bond indenture, which is the contract between the issuer and the bond holder.

Types of Bonds
Long term bonds traded in the capital markets include government (Treasury) bonds, Corporate
bonds, municipal bonds, and foreign bonds.
The Stock Market/ Equities Market
Equities represent ownership shares in a corporation. Each share of common stock entitles its
owners to one vote on any matters of corporate governance put in to a vote at the corporation’s
annual meetings and to a share in the financial benefits of ownership.
Types of Stock/Equity
There are two most important forms of equity investments; these are the common stock /ordinary
shares (in America) and preferred stock/ preference shares (in British terminologies).
Common Stock/ Ordinary shares
Common stock, as an investment has the following basic characteristic features

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  Residual claim means stockholders are the last in line of all those who have a claim on
the assets and income of the corporation.
 Limited liability means that the most shareholders can lose in the event of the failure of
the corporation is their original investment.
 Obligations: Their liability is limited.
 Voting Right: Each share of a common stock provides the holder with one vote in the
election of board of directors and on other decision making activities.
 Dividends: Payment of dividends to shareholders is at the corporation’s board of directors
discretion
 Preemptive Rights: Allows common stock holders to maintain their proportionate
ownership in the corporation when new shares are issued.

Preferred Stock/ Preference Shares

Preferred stock has features similar to both equity and debt. Like a bond, it promises to
pay to the holder a fixed stream of income each year. In this sense, preferred stock is
similar to an infinite-maturity bond, that is, perpetuity. It also resembles a bond in that it
does not give the holder voting power regarding the firm’s management.

The Derivatives Market

Firms are exposed to several risks in the ordinary course of operations and when borrowing
funds.
The instruments that can be used to provide such protection are called derivative instruments.
The term derivatives refers to a large number of financial instruments, the value of which is
based on, or derived from, the prices of securities, commodities, money or other external
variables. These instruments include futures contracts, forward contracts, option contracts, and
swap agreements.
Futures Contract: A futures contract is an agreement between a buyer/ seller and an established
exchange or its clearinghouse in which the buyer/seller agrees to take/make delivery of
something at a specified price at the end of a designated future date. The thing that the two
parties agree either to take or make the delivery is referred to as the underlying for the contract
or simply the underlying. The price at which the parties agree to transact in the future is called
the futures price and the designated date at which the parties must transact is called the
settlement date or delivery date.
Forward Contracts: A forward contract, just like a futures contract, is an agreement for the
future delivery of the underlying at a specified price at the end of a designated period of time.
Options
An option is a contract in which the writer of the option grants the buyer of the option the right,
but not the obligation, to purchase from or sell to the writer an asset at a specified price within a
specified period of time (or at a specified date). The writer, also referred to as the seller, grants
this right to the buyer in exchange for a certain sum of money, which is called the option price or
option premium. The price at which the asset may be bought or sold is called the exercise price
or strike price. The date after which an option is void is called the expiration date. As with a
futures contract, the asset that the buyer has the right to buy and the seller is obligated to sell is
referred to as the underlying.

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When an option grants the buyer the right to purchase the underlying from the writer (seller), it is
referred to as a call option, or call. When the option buyer has the right to sell the underlying to
the writer, the option is called a put option, or put.
Swaps
In addition to forwards, futures, and options, financial institutions use one other important
financial derivative to manage risk. Swaps are financial contracts that obligate two parties
(counter parties) to the contract to exchange (swap) a set of payments (not assets) it owns for
another set of payments owned by another party.
The amount of the payments exchanged is based on some predetermined principal, called the
notional principal amount or simply notional amount. The amount each counterparty pays to
the other is the agreed-upon periodic rate times the notional amount.
A swap is an over-the-counter contract. Hence, the counterparties to a swap are exposed to
counterparty-risk.
The most widely used types of swaps include interest rate swaps, currency swaps, and
commodity swaps.
Module Title:-Develop understanding of debt and consumer credit

CHAPETR ONE
1. Identify and discuss the role of credit in society
The role of consumer credit includes:
 Enabling approved applicants the ability to purchase items (goods and/or services) where
the cost of the item exceeds current savings available.

1.1. The concepts and terminology of credit provided by a financial institute and debt
incurred by a borrower are analysed and discussed

1. Bank is an institution for depositing money, lending, exchanging and safeguarding money.
2. Borrow is taking and uses money from a person or a lender and agrees to pay it all back.
3. Cooperative (credit society) is place that operates like a bank. It is where bank accounts are
held and where money is kept safely. It is owned by its members.
4. Buy now, pay later Payments is the amount of money you do not have to be making until
the end of an interest-free period. Then you pay the full amount, plus fees and charges.
5. Consumer lease is lets you rent an item (for example, a home computer or television) over a
period of time. You make regular rental payments (usually monthly) until the lease is over.
Credit Money you borrow that you have to pay back. It lets you get goods or services
before you pay for them in full.
6. Credit card is a card that lets you buy things (goods and services) up to an approved credit
limit. You get one from a lender (credit provider). You are charged fees and interest when
you use your credit card.
7. Credit contract is a legal agreement between two or more people and a lender. It tells you
how much you have borrowed from the lender and how much you have to pay back every
month.
8. Credit limit is the maximum amount of credit you can use.
9. Credit union is a place that operates like a bank. It is where bank accounts are held and
where money is kept safely. It is owned and controlled by people who use its services.
10. Debt Money is the money you owe and need to pay back.

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11. Debt collector is a person who collects debts from people who owe money. If you fall
behind with your credit repayments and do not contact your lender, a debt collector may
contact you.
12. Fees and charges A cost by an organisation to customers for various services and penalties.
13. Financial counselor is a Financial Counsellor provides free, confidential and independent
help with your finances. credit
14. Fixed rate is a fixed rate that allows you to have an interest rate on your loan that stays the
same.
15. Interest Payment for the use of money over time. You earn interest by lending your money.
If you borrow money, interest is the amount you pay to borrow the money.
16. Interest-free deal It is a payment arrangement where you do not have to pay interest for a
set period. You usually make regular repayments during the interest-free period. Any money
outstanding at the end of the interest-free period will incur interest, often at a very high rate.
17. Interest-free loans are loans where you are not charged any interest.
18. Interest rate is the amount you pay to borrow money or the amount you charge to lend
money.
19. Late payments are making a payment after it is due.
20. Lender (credit provider) is organization you enter into a credit agreement with.
21. Mortgage broker is a person who arranges for borrowers to get money from a lender who
looks for the best mortgage.
22. Rent to buy is a purchasing arrangement where you buy an item by renting it for an amount
of time. You make regular rental payments, for example, every month over 3 years. At the
end of the rental period, you pay an amount to finalize the purchase
23. Repayments is a regular amounts of money you pay back for your own loan (includes the
amount of money you borrow, interest, fees and charges).
24. Secondary card allows your partner or other family members, for example, to buy goods or
services using your credit.
25. Store card is used in some large stores or retail groups issue their own cards. You use them
like credit cards but you usually pay higher interest for doing so.

1.2. The historical and current role of consumer credit within society is identified and
advantages and disadvantages of credit use are analysed and discussed

Advantages and disadvantages of credit

Advantages:
 obtain and can use purchased item immediately
 minimises the need to carry cash or write cheques
 allows for instalment payments on expensive items
 convenient form of payment when travelling, especially overseas
Disadvantages:
 may increase cost of items purchased due to interest accrued
 usually attracts other fees such as account servicing fees
 can lead to compulsive buying habits

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  creates a false sense of wealth.

1.3. The impact of consumer debt on the national economy is analysed and discussed

How the National Debt Affects Everyone.

Consumer debt reduces the amount of tax revenue available to spend on other governmental
services, because more tax revenue will have to be paid out as interest on the national debt. Over
time, this shift in expenditures will cause people to experience a lower standard of living, as
borrowing for economic enhancement projects becomes more difficult. Over time, this will
cause people to pay more for goods and services, resulting in inflation.

It create dilemma is known as the crowding out effect, and tends to encourage the growth in the
size of the government, and the simultaneous reduction in the size of the private sector.

Finally, as the risk of a country defaulting on its debt service obligation increases, the country
loses its social, economic and political power. This in turn makes the national debt level a
national security issue.

CAHPTER TWO

2. Identify and discuss the range of credit options available

2.1. Types of credit facilities used by businesses are analysed and compared

Fixed:
 personal loans
 leases including mobile phones, cars, business premises, office equipment including
personal computers
 hire purchase
 'buy now, pay later' schemes
Revolving:
 credit cards
 store cards
 overdraft

2.2. Types of credit facilities used by individuals are analysed and compared

Types of Consumer Credit & Loans

The two basic categories of consumer credit are open-end and closed-end credit.

Open-end credit, better known as revolving credit, can be used repeatedly for purchases that
will be paid back monthly, though paying the full amount due every month is not required.

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Closed-end credit is used to finance a specific purpose for a specific period of time. They also
are called installment loans because consumers are required to follow a regular payment
schedule (usually monthly) that includes interest charges, until the principal is paid off.

Types of Loans
Loan types vary because each loan has a specific intended use. They can vary by length of time,
by how interest rates are calculated, by when payments are due and by a number of other
variables.

Mortgages
Mortgages are loans distributed by banks to allow consumers to buy homes they can’t pay for
upfront. A mortgage is tied to your home, meaning you risk foreclosure if you fall behind on
payments. Mortgages have among the lowest interest rates of all loans.

Auto Loans
Like mortgages, auto loans are tied to your property. They can help you afford a vehicle, but you
risk losing the car if you miss payments. This type of loan may be distributed by a bank or by
the car dealership directly but you should understand that while loans from the dealership may be
more convenient, they often carry higher interest rates and ultimately cost more overall.

Personal Loans
Personal loans can be used for any personal expenses and don’t have a designated purpose. This
makes them an attractive option for people with outstanding debts, such as credit card debt, who
want to reduce their interest rates by transferring balances. Like other loans, personal loan terms
depend on your credit history.

Payday Loans
Payday loans are short-term, high-interest loans designed to bridge the gap from one paycheck
to the next, used predominantly by repeat borrowers living paycheck to paycheck. The
government strongly discourages consumers from taking out payday loans because of their high
costs and interest rates.

Consolidated Loans
A consolidated loan is meant to simplify your finances. Simply put, a consolidate loan pays off
all or several of your outstanding debts, particularly credit card debt. It means fewer monthly
payments and lower interest rates. Consolidated loans are typically in the form of second
mortgages or personal loans.

Cash Advances
A cash advance is a short-term loan against your credit card. Instead of using the credit card to
make a purchase or pay for a service, you bring it to a bank or ATM and receive cash to be used
for whatever purpose you need. Cash advances also are available by writing a check to payday
lenders.
 Borrowing from Friends and Family

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  Small Business Loans
 Borrowing from Retirement & Life Insurance
 Student Loans
 Home Equity Loans

2.3. Differences between unsecured and secured loans are analysed and discussed
Differences between unsecured and secured loans

A secured loan is supported by an underlying asset while an unsecured loan is not.

Unsecured loans attract higher interest rates due to increased risk to the lending institution.
2.4. Implications of default on secured loans are explained to the client
Implications of default

 any shortfall in sale of repossessed asset against outstanding loan amount must be paid by
borrower
 repossession of the underlying asset by the lending institution.

CHAPTER THREE
3. Identify and discuss costs of using credit

3.1. Fees and costs associated with different types of credit options are analysed and
compared
Fees and costs associated with different credit options may include:


account servicing fees

credit purchase fees

late payment fees

loan establishment fees

withdrawing from a foreign Automatic Teller Machine (i.e. the ATM of a lending
institution other than your own).
3.2. The features and associated risks of fixed versus variable interest rates are analysed
and compared

Fixed Interest Rate is an interest rate that will remain at a predetermined rate for the entire
term of the loan, no matter what market interest rates do. This will result in payments remaining
the same over the entire term.
Variable Interest Rate is an interest rate that moves up and down based on the changes of an
underlying interest rate index.

Fees and costs may be analysed and compared using:

 manually, comparing fees and costs drawn from tables and charts provided by
financial institutions and analysed using a calculator
 online, web-based, calculation tools
 software applications such as spreadsheets.

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3.3. Ways to compare advertised interest rates and the effects of fees and charges are
analysed and discussed
Ways to compare advertised interest rates may include:

 informing the client of the 'comparison rate' which includes all associated fees and
charges.

CHAPTER FOUR
4. Analyse and discuss the effective use of consumer credit
4.1. Ways to avoid excessive or unmanageable debt are analysed and discussed
Ways to avoid excessive or unmanageable
1. Stop the behavior that got you into debt.

2. Save some cash now.

 Cut your spending.

 Stop buying all those unnecessary snacks.
 Raising cash through other means.
 Take a part time job.
3. Make a budget and stick to it.

4.2. Strategies to minimise fees on credit are identified and discussed

Strategies to minimise fees on credit may include:

 consolidating savings and credit facilities with the one institution where account
servicing fees can be cancelled out
 knowing how many free transactions come with the card
 paying the minimum monthly instalment on time.

4.3. The importance of meeting minimum payments on credit cards is analysed and
discussed

Making the total minimum payment each month means you avoid a late payment fee and ensures
you can keep using your card. The terms of your contract require you to pay this minimum
amount, otherwise we can put a block on your card to stop you from using it. If you’re struggling
to make the minimum payment, talk to us as soon as possible to see how we can help you.

4.4. Ways to avoid credit card fraud are identified, analysed and discussed
Ways to avoid credit card fraud include:

 not disclosing Personal Identification Number (PIN) to anyone

 selecting a PIN only the card holder would know
 signing the back of the credit card.

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 CHAPTER FIVE
5. Manage personal credit rating and history

Credit reference reports refers to a reports established and maintained by credit reference
agencies which record all negative events (i.e. defaults) listed by creditors against debtors.
A credit reference agency collects, matches, derives, merges, and supplies data to organizations
to help them make decisions about whether to give, or continue to give credit to individuals
and/or businesses.

5.1. The role of credit reference agencies is analysed and discussed

Paying the minimum amount doesn’t stop us from charging you interest. If you only pay this
amount you’ll be charged a month’s worth of interest calculated on your balance each day for
that statement period. You will also lose your interest-free days for the next statement period,
meaning interest charges will keep adding up.

Making the minimum payment also doesn’t help you pay off your credit card quickly. In fact,
only paying the minimum amount each month means it could take you a really long time to pay
it off. Even if you’ve reached your credit limit and stop using it for purchases, the interest keeps
building so a minimum payment only reduces your debt a little.

5.2. The purpose and use of credit reference reports in assessing loan applications is
analysed and discussed

Credit reference reports refers to a reports established and maintained by credit reference
agencies which record all negative events (i.e. defaults) listed by creditors against debtors.

Lending institutions use the information held by the credit reference agencies (CRAs) to assess
whether they should lend money to consumers, and in some cases, at what price credit should be
offered. Experian defines the role of a credit reference agency as follows:

A credit reference agency collects, matches, derives, merges, and supplies data to organisations
to help them make decisions about whether to give, or continue to give credit to individuals
and/or businesses. They create and hold databases of people and/or businesses operating within
the country in which they operate.

Experian notes that "Experian does develop and provide credit scores but most lenders will use
their own, although they use Experian scores as part of their decision process. CRAs do not set
lending policies within lending institutions or set the level of risk a lending institution may be
prepared to accept

5.3. Implications of establishing a poor credit history are analysed and discussed
Implications of establishing a poor credit history may include:

 higher interest rate penalties

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  inability to obtain finance in the future
 may disadvantage applications for rental accommodation
 necessity to obtain guarantor in future loans.

5.4. The right to access and methods of obtaining own credit reference file may include:
Methods of obtaining own credit reference file may include:
 writing,
 emailing or telephoning the relevant agency requesting a copy of your file,
 having provided relevant details to identify self

Course Title:-Develop and Use a Personal Budget

1. Analyzing and Discussing Budgeting as a Financial Tool

1.1 Analyzing and Discussing the Role of Budgeting in the Lives of Different Groups and
the Importance of Budgeting Appropriately to Meet Expense and relating to Different
Stages of Life

The different groups who may budget may include:

 families
 governments
 individuals:
 single
 married
 elderly
 students
 Tourists, travelers.

Different stages of life may include:

 approaching and during retirement
 buying your first home
 moving out of home
 starting a family
 studying
Budgeting is the most basic and  the most effective tool for managing your money.  Yet, most
people avoid doing it because it is additional work, much like cutting your lawn or fixing the
roof.  Budgeting also connotes that you have to give up and stop yourself from enjoying stuff.

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What budgeting actually does is clearly show you how you allocate your money and present you
the choices on what stuff to enjoy – based on your financial limitations.  It will save you the grief
of overspending and being too much in debt. Budgeting does not stop you from enjoying stuff, it
ensures that you enjoy stuff when you want it.

Although budgeting is indeed more work, it pays off with many life-enhancing benefits:

Benefits of Budgeting
1.   Gives you control over your money – A budget is a way of being intentional about the way
you spend and save your money
2.  Keeps you focused on your money goals
3.  Makes you aware what is going on with your money
4  Helps you organize your spending and savings
5.  Makes you decide in advance how your money will work for you.
6.  Enables you to save for expected and unexpected costs – Budgeting allows you to plan to
set aside money for emergency costs.
7  Enables you to communicate with your significant others about money – If you share your
money with your spouse, family, or anyone, a budget can communicate how you use money as a
group. 
8.  Provides you with an early warning for potential problems – When you budget and take a
“big picture” view, you will see potential money problems in advance, and be able to make
adjustments before the problem appears.
9.  Helps you determine if you can take debt and how much – Taking debt is not necessarily a
bad thing if the debt is necessary or you can afford it
10.  Enables you to produce extra money – In budgeting, you get to identify and eliminate
unnecessary spending like late fees, penalties and interests.  These seemingly small saving can
add up over time.
1.2 Analyzing and Discussing the Importance of Setting Financial Goals
Financial goals may include:

 accumulating a set amount of money by a specified date in the future for the purposes of:
 purchasing assets
 financing holidays, educational expenses, home renovations and other known future
expenses
 establishing a deposit for an investment such as a home or investment property
 aiming to repay existing debts and be debt free
 establishing a regular savings plan
 handling income and expenditure responsibly and avoiding financial difficulties.
1.3 Analyzing and Discussing Obstacles that Might Prevent Financial Goals and
Exploring Type of Behaviors and Skills Required for Successful Budgeting
Obstacles that might prevent financial goals being achieved may include:

 being unemployed, particularly long term unemployed

 insufficient income to afford items that are beyond the individual's means

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  unexpected circumstances such as:

 losing a job
 falling ill
 not being able to work.
Behaviours and skills required for successful budgeting may include:

 controlled spending

 disciplined approach to money

 organisational skills

 record keeping skills.

2. Developing a personal budget

Budget refers to:

 a calculation of all projected income and expenditure for period of time (e.g. on a weekly or
monthly basis)

 showing all projections versus actual income and expenses for the period and monitoring
variances.

2.1 Recording All income and Expenses for a Six Month Period to Assist in Estimating
Expenditure Requirements
2.2 Developing and Establishing a Spreadsheet for Recording All Budget Information to
Record Income and Expenditure for a Relevant Period of Time
A spreadsheet may:

 be simple or complex depending upon the extent of the individual's finances

 have one section for recording all money received as income and another section
for expenses both variable and fixed

 have a section to record the difference between income and expenses for the period,
this being the surplus or deficit financial situation for the period.
2.3 Identifying All Sources of Income and Regular Fixed Expenses and Variable Expenses
for the Specified Period and Listing in a Personal Budget Using the Budget
Spreadsheet
Sources of income may include

 interest on investments, dividends

 proceeds from sale of assets

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 social security benefits, pensions, allowances, child assistance
 wages, commission, bonuses, tips.

Fixed expenses may include:

 fees:
 school and university fees
 bank fees
 insurance
 loan repayments (if loan is based upon fixed interest rates) such as:
 personal loans
 car loans
 credit card debts
 Higher Education Contribution Scheme
 public transport
 rent
 subscriptions to:
 magazines
 newspapers
 clubs
 travel including public transport, petrol
Variable expenses may include:
 car maintenance
 living expenses such as:
 food
 clothing
 medical
 loan repayments if loan is based upon variable interest rates
 miscellaneous expenses such as:
 gifts
 recreation
 entertainment
 fines
 mobile telephone
 mortgage repayments
 utilities such as:
 water
 gas
 electricity
 telephone.

2.4 Subtracting Total Expenses Recorded from the Total Income to Determine a Surplus
or Deficit Budget for the Specified Period
2.5 Exploring Reasons for a Deficit Budget are Explored and Investigating ways to
Reduce Expenses or Increase Income
Ways to reduce expenses may include:

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  comparing prices for essential items

 monitoring use of utilities such as electricity, gas and water

 moving back home

 reducing expenditure on discretionary items such as expensive clothing,

magazines, eating out

 share accommodation

 using cheaper modes of transport.

Ways to increase income may include:

 combining part-time work with studying

 investigating eligibility for student allowances or other relevant government

benefits

 taking on a part-time job or holiday work.

2.6 Exploring Allocation of Surplus Funds Towards Saving and Meeting identified
Financial Goals

Tips to Develop a Budget

1. Gather every financial statement you can. This includes bank statements, investment
accounts, recent utility bills and any information regarding a source of income or
expense. The key for this process is to create a monthly average so the more information
you can dig up the better.

2. Record all of your sources of income.

3. Create a list of monthly expenses.

4. Break expenses into two categories: fixed and variable. Fixed expenses are those that
stay relatively the same each month and are required parts of your way of living. They
included expenses such as your mortgage or rent, car payments, cable and/or internet
service, trash pickup, credit card payments and so on. These expenses for the most part
are essential yet not likely to change in the budget.

Variable expenses are the type that will change from month to month and include items
such as groceries, gasoline, entertainment, eating out and gifts to name a few. This
category will be important when making adjustments.

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 5. Total your monthly income and monthly expenses.

6. Make adjustments to expenses. If you have accurately identified and listed all of your
expenses the ultimate goal would be to have your income and expense columns to be
equal. This means all of your income is accounted for and budgeted for a specific
expense.

7. Review your budget monthly. It is important to review your budget on a regular basis to
make sure you are staying on track. After the first month take a minute to sit down and
compare the actual expenses versus what you had created in the budget. This will show
you where you did well and where you may need to improve.

Sample List of Expenses

Sample Low Income Budget

Monthly Income: Br. 2,000

Expenses Amount Total

Home  
 Rent         Br. 600 Br. 650
 Servant wage                  Br. 50
Car  
 Insurance         Br. 40
Br. 205
 Gas  Br. 80
 Maintenance          Br. 50
Utilities
 Electric bill Br. 30
 Water bill Br. 15 Br. 150
 Cell phone bill Br. 45
 Cable/internet Br. 60

Food
Br. 300
 Dinning out Br. 350
Br. 50
 Groceries
Personal
Br. 60
 Clothes
Br. 30 Br. 140
 Hair Care
Br. 50
 Medical        
Other
Br. 50
 Gifts Br. 100
Br. 50
 Entertainment        
Total Br. 1,560
Income         Br. 2,000

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- Expenses         Br. 1,560
 = Br. 440 Unbudgeted income
 - Br. 200 contigent money (10% of Br. 2,000 monthly income)
 - Br. 200 Savings (10% of Br. 2,000 monthly income)
 = Br. 40 Surplus to spend as you wish
Downloaded from http://www.wikihow.com

Sample High Income Budget

Monthly Income: Br. 9,000

Expenses Amount Total

Home
Br. 1800
1. Mortgage
 Br. 100 Br. 1950
2. Maintenance        
3. Property taxes        
Br. 50
Car Br. 400

1. Payment Br. 75
2. Insurance         Br. 725
3. Gas Br. 150
4. Maintenance        
 Br. 100
Utilities Br. 150

1. Electric bill Br. 50

2. Water bill Br. 420
3. Cell phone bill Br. 100
4. Cable/internet
Br. 120
Food
Br. 600
1. Dinning out Br. 950
2. Groceries Br. 350

Personal
Br. 200
1. Clothes
Br. 150 Br. 450
2. Grooming
3. Medical        
Br. 100
Other Br. 150 Br. 1050

1. Gifts

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 Br. 200
2. Entertainment        
3. Vacation
Br. 200
4. Charity                
Br. 500
Total Br. 5,545
Income         Br. 9,000
- Expenses         Br. 5,545
= Br. 3,455 Unbudgeted income
- Br. 1,350 Contingent money (15% of Br. 9,000 monthly income)
- Br. 1,800 Savings (20% of Br. 9,000 monthly income)
= Br. 305 Surplus to spend as you wish
3. Implementing and Monitoring the Personal Budget

3.1 Recording Implemented Actual Expense and Income

Actual expenses and income for the period during which the budget is implemented are recorded
and compared to budgeted expenses and income with any differences in budgeted and actual
amounts looked at and the budget modified where necessary
Sample of monitoring personal budget.

Deductions Budget Actual Difference

0.00 0.00
Savings (to set aside) Br. 0.00
Br. Br.
0.00 0.00
Child Support, Alimony, etc. Br. 0.00
Br. Br.
0.00 0.00
Family Deduction Br. 0.00
Br. Br.
0.00 0.00
Total Br. 0.00
Br. Br.

Housing Budget Actual Difference

0.00 0.00
Rent or Mortgage Payment Br. 0.00
Br. Br.
0.00 0.00
Utilities Br. 0.00
Br. Br.
0.00 0.00
Home Insurance & Taxes Br. 0.00
Br. Br.
0.00 0.00
Home Repairs (to set aside) Br. 0.00
Br. Br.

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Housing Budget Actual Difference
0.00 0.00
Other Br. 0.00
Br. Br.
0.00 0.00
Total Br. 0.00
Br. Br.

Differen
Food Budget Actual
ce
Br. Br.
Groceries 0.00 0.00 Br. 0.00

Br. Br.
Eating Out 0.00 0.00 Br. 0.00

Br. Br.
Coffee & Bar 0.00 0.00 Br. 0.00

Br. Br.
Other 0.00 0.00 Br. 0.00

Br. Br.
Total 0.00 0.00 Br. 0.00

Education Budget Actual Difference

Br. Br.
Tuition 0.00 0.00 Br. 0.00

Br. Br.
Books & Fees 0.00 0.00 Br. 0.00

Br. Br.
Supplies 0.00 0.00 Br. 0.00

Br. Br.
Other 0.00 0.00 Br. 0.00

Total Br. Br. Br. 0.00

0.00 0.00
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Education Budget Actual Difference
0.00 0.00

3.2 Discussing Handy Hints for Managing the Personal Budget

Handy hints may include discussing:

 how to avoid getting into financial difficulties

 how to minimise fees and charges imposed by financial institutions

 how to use credit card debt effectively

 the problems of impulsive buying, particularly when under peer pressure

 ways to cut back on spending or change negative spending habits.

Tip to cut expense

1. Cut out coupons for the things you usually buy at the store, and not for the things
you do not need.
2. Write a grocery list, so you do not forget anything and it helps you stay on target
and not get sidetracked.
3. Buy non-name brand items or store brand items. These items are usually the same
quality as top brand names. You can save an average on thirty percent.
4. When on the highway use cruise control. You save fourteen percent on gas with an
average saving of seven percent. This would come out to about twenty cents discount on
each gallon.
5. Limit the amount of driving. You could carpool or catch a bus.
6. Combine trips, you could do several short trips in one longer trip. For example,
designate Thursday for errand day. Get everything done that day, than you will not have
to make wasted trips continuously throughout the week.
7. Stop wasting your money on lottery tickets.
8. Do not dine out. A family of four eating at a fast food restaurant would cost somewhere
around twenty-five birr. If you take two trips per week, it would total to fifty birr. Over
the course of the year, you would spend about two thousand six hundred birr. If you were
to dine out at let’s say “Tibs” it would cost you around forty birr, overall the course of the
year it would be four thousand birr. Instead, prepare meals at home to save money.
9. Don’t buy alcohol. You could save twenty percent on your bill.
10. Use coupons. Many restaurants offer coupons.
11. Know about breaks for kids. Kids eat free on some nights at certain restaurants. Check
with the restaurant before traveling, to ensure this is part of their policy.

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 12. Turn off the lights when you are not in the room. Being conservative with the
thermostat and air-drying clothes and dishes. Instead of regular lights, put in compact
florescent bulbs.
13. Keep your car well maintained. A well-tuned engine burns less gas. Get all the junk out
of the trunk. For every two hundred and fifty pounds your engine hauls, the car loses
about one mile per gallon.
14. Pay with cash. Sometimes the store may charge you more money, if you use a credit
card. Check the specific store before your visit, to ensure whether they charge or not is
true.
15. Buy a fuel-efficient car.
16. Take a shower, instead of taking a bath. It uses less water, and thereby decreases the
amount of water that is used. And since water runs through a pump(that is powered by
electric), this will increase your electric bill.

3.3 Conducting Ongoing Review of the Budget

Ongoing review of the budget is conducted to ensure it remains relevant and to ensure updates
are incorporated if necessary

Module Title: Develop and Use a Savings Plan

This unit describes the performance outcomes, skills and knowledge required to develop and
implement a savings plan to achieve identified goals, including identifying savings goals,
understanding the role of the savings plan, the risk/return relationship and how to determine
appropriate savings vehicles to maximize savings.

1. Discussing the Place of Saving and Investing Today

1.1 Discussing the Impact of Increasingly High Cost of Living in Society
use examples from the domestic environment
1.2 Discussing Increasing Levels of Consumer Debt in Ethiopia
with reference to relevant current issues
Consumer debt may refer to:
 credit card debt
 mobile telephone debt
 mortgages on residential and investment properties
 personal loans to purchase:
 motor vehicles
 travel
 domestic white goods
 store credit
 student loans including the Higher Education Contribution Scheme.
1.3 Analyzing and Discussing the Importance of Setting Financial Goals and Developing a
Saving and Investment Plan at Different stages of an Individual's Life

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Financial goals may include:
accumulating a set amount of money by a specified date in the future for the purposes of:
 purchasing assets
 financing holidays, educational expenses, home renovations and other known future
expenses
 establishing a deposit for an investment such as a home or investment property
 aiming to repay existing debts and be debt free
 establishing a regular savings plan
 handling income and expenditure responsibly and avoiding financial difficulties.

You may be asking yourself why is there so much pressure tosave money. If you have enough to
pay for everything you need, why should you worry about putting any aside each month? There
are a variety of reasons to begin saving money. Different people save for different reasons. Here
are seven reasons that you may consider saving your money.
1. Save for Emergency Funds
It is important to have an emergency fund set aside to cover unexpected expenses. This could
cover an unexpected car repair, your emergency appendectomy or a sudden job loss. Ideally your
emergency fund should be about three to six months of your expenses. If you are just starting out
you should put aside at least br.1000.00 for this. In addition to your emergency fund you need to
make sure you have a plan and good insurance in place to help you survive the unexpected
financial events in your life.
2.Save for Retirement
Another important reason to save money is your retirement. The sooner you start saving for
retirement, the less you will have to save in the future. You can put your money to work for you.
As you continue to contribute overtime you will be earning more interest on the money you
have, then you put in each month. You should at least be contributing up to your employer's
match and eventually you will want to contribute ten to fifteen percent of your gross income.
3. Save for a Down Payment for a House
A third reason to save money is for a down payment on a house. Your negotiating power goes a
lot farther when you have a significant down payment towards your home. You will receive
better interest rates, and be able to afford a bigger home. You can determine how much you save
towards this each month depending on your circumstances.
4. Save for Vacations and Other Luxury Items
A fourth reason to save money is to have fun. You can save up for your tour of Gonder or that
Tana Monarchy cruise. Your negotiating power is stronger if you have cash in hand on bigger
purchases. Even if you save up for your vacation, you should try save on your vacation expenses.
5. Save for a New Car
A fifth reason is to purchase a car with cash. You will be amazed at how much money you can
free up in your budget if you do not always have a car payment. You can also negotiate the price
of the car much lower if you are willing to pay cash at the dealership.
6. Save for Sinking Funds
A sixth reason is to set up your sinking funds. A sinking fund is money you set aside for future
repairs or improvements on your car, home or other possessions. This planning can help you to
stop dipping into your emergency fund every time you need to fix your car.
7. Your Education

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A seventh reason to begin saving money is for your future education. Each year more people
return to school to earn their masters or doctorate degrees. You may also consider saving for
your child's education when the time comes
1.3 Analyzing and Discussing Different Attitudes to Savings and Investment and
Exploring the Individual's Own Spending Habits

Attitudes to savings and investment differ and may encompass those who:
 believe it is essential in order to manage their money and achieve future financial
goals
 lack interest in or the discipline to save and therefore live from one pay packet to the
next
 occasionally think about saving but who do not take active steps to save.
Talking About Money
Money is a common problem regardless of your income, age or education. Sometimes a lack of
income causes money hassles and arguments. More often inadequate discussion about money
and our feelings about money is the root of financial problems.
When household members have different attitudes about spending and saving money, or when
unrealistic goals are attempted, there is a potential for conflict. Preventing and overcoming
money problems takes honest and open communication. It also takes time and effort.
Be willing to arrange a specific time when all household members can talk about money. Choose
a location where you won’t be interrupted. Meet on a regular basis instead of waiting until
problems
When talking about money:
✓ Clearly identify the issue at hand.
✓ Recognize that whoever earns the money doesn’t also earn the right to dictate how it should
be spent.
✓ Let each household member freely state wants, needs and personal feelings.
✓ Listen carefully.
Communication about money is critical for a spending/savings plan to work for the entire
household. When people don’t talk about money, even the most workable spending/savings plan
may face ruin.

2. Understanding Risk as It Relates to Saving and Investing

Risk refers to: the level of uncertainty associated with a particular savings or investment product.
2.1 Explaining and Demonstrated the Concept of Risk and Risk Versus Return

The concept of risk versus return refers to the general truth that:-
 the higher the risk of the investment, the higher the expected return
 the lower the risk of the investment, the lower the expected return.

2.2 Determining an Individual's Risk Profile Based on Current and Future Requirements
and the Individual's Level of Risk Aversion
Risk profile refers to:
the level of risk an individual is comfortable with when investing the money.
2.3 Identifying, Assessing and Discussing the Impact of Inflation on the Earnings Power of
Money

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 Inflation refers to:
 the cost of living, indicated by the inflation rate
 the percentage change in the Consumer Price Index which is a quarterly survey of the
retail price of a basket of goods and services consumed by the general population.

3. Developing Your Own Savings Plan

3.1 Identifying and Quantifying Personal Savings Goals into Birr Amounts and
Arranging in Order of Priority
The first step of developing a spending/savings plan is to identify your goals. If your goals are
identified first, all your money won't be spent with little or none saved. By identifying goals first,
you will realize what you want to save toward and it will get you in the habit of saving. Goals
may include saving for emergencies, buying school clothes, paying off the balance on a credit
card, buying a new or used car, or saving for a child’s education.
Encourage each member in your household to think of goals, including short-term (less than 1
year), intermediate (1-5 years) and long-term (more than 5 years). List all the goals from each
person in the household in the "Identifying Goals Chart" below.

Identifying Goals Chart

During Step 2 of developing a spending/savings plan you'll be deciding on the goals you want to
save toward. Discuss the short-term, intermediate, and long-term financial goals listed on the
"Identifying Goals Chart”, on the above chart, with the members of your household. If all
household members agree on the financial goals, they will be more willing to work toward
reaching each goal. Ask them to state their most important short- term, intermediate and long
term goal. Agree on the goal(s) all of you will try to achieve. Be willing to listen and as a group
settle differences.
List the agreed upon priority goal(s) on the "Personal Budget plan" (UC 08). Set a date when
each goal will be reached (example: down payment for a car September 20 or build an
emergency fund). Determine the total birr amount for each goal. To get the approximate monthly
savings, count the number of months from now to the target date and then divide the total birr
amount by that number of months. You now know the approximate amount of money that is
needed to be saved each month in order to reach each goal.
Eventually you’ll be incorporating the priority goal(s), including building or maintaining an
emergency fund, into your spending/savings plan. An emergency fund is so important because
we never know when we’ll need money to pay an unexpected bill, buy tires for the car, etc. From
time to time, re-evaluate your goals to determine if they are still important and realistic. This will
renew your commitment to reaching them. Should you need more room, copy the Monthly
Savings Chart onto a separate piece of paper and be sure to include these amounts in the Total
Monthly Savings below.

Goals need to be:

 specific
 measurable
 achievable
 realistic
 timely.

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aching material for calculating the amount needed to achieve identified financial goals is
prepared on a separate sheet of paper
3.2 Investigating the Range of Financial Product Options Available to Maximize Earnings
on Savings
The range of financial product options available to maximize earnings on savings are
investigated and the most appropriate is selected according to own requirements

Product options may include:

 basic savings account
 cash management trusts
 fixed term deposits
 investments in debentures and secured and unsecured stock
 online bank accounts offering higher rates of return.
Requirements to consider when selecting a financial product for savings or investment may
include:
 account keeping fees, ongoing fees and charges and other non-government
fees and charges
 additional services offered
 ease of access to funds
 level of risk involved
 locality of the institution
 minimum opening balance required
 potential tax implications
 rate of interest earned
 reputation of the financial institution
 term to maturity.
Types of Savings Accounts
Financial Institutions and Savings Accounts
The amount of interest your money earns in a savings account often depends on the type of
financial institution you have selected and the type of account. Banks and credit unions are
different animals. While banks are commercial businesses, credit unions are typically non-profit
cooperative organizations that are organized for specific groups of people. For example, state
employees usually have access to a State Employees Credit Union. Typically, loans are less
expensive at credit unions, but interest rates may not always be as high as what you can get at a
bank. This isn't always the case, though. Currently, some credit union interest rates are higher
than what you will find at some banks. Sometimes credit unions also pay interest on accounts
that banks usually don't pay interest on, like checking accounts. But, you have to be a member in
order to open an account.
Banks usually offer two types of savings accounts: a basic savings account, and a money market
account.
 The basic savings account (sometimes called a passbook savings account) will usually
have either no minimum balance requirement or a low one, but will offer a very low
interest rate (meaning your money won't earn that much). In previous year, the average
interest rate at banks for basic savings accounts was three percent. A typical basic savings
account lets you withdraw your money whenever you want.

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  Money Market accounts usually pay more money in interest, but will typically require
you to have more money in the account. You also may be limited to how many
withdrawals you can make in a month. Sometimes, in addition to the withdrawals, you
can also write up to the three checkson a money market account each month.
Costs Involved
Sometimes, but not always, banks charge fees for having a savings account. The fee may be low
-- like a birr a month -- or it may be higher or it could even be based on your balance. For this
reason, you should always shop around and compare what different banks are offering. Things
you should look at include:
 Fees and services charges on the account
 Minimum balance requirements (Some banks charge a fee only if you don't keep a certain
amount of money in your account at all times.)
 Interest rate paid on your balance

Types of Bank Accounts

Depository institutions may offer a great variety of accounts, but they generally fall within one of
these five types of bank accounts:
Checking Accounts
A checking account is a type of bank account from which you use checks to withdraw your
money. You may use checks to pay your bills, purchase products and services (at businesses that
accept personal checks), send money to friends and family, and many other common uses. You
can also use checks to transfer money into accounts at other banks and financial institutions. You
have quick, convenient, and, if needed, frequent-access to your money. Typically, you can make
deposits into the checking account as often as you choose. Many banking institutions will enable
you to withdraw or deposit funds at an automated teller machine (ATM) or to pay for purchases
at stores with your ATM card.

Some checking accounts pay interest; others do not. A regular checking account - frequently
called a demand deposit account - does not pay interest, while a negotiable order of withdrawal
(NOW) checking account does.

Banks and financial institutions may impose fees on checking accounts, besides a charge for the
checks you order. Fees vary among banks. Some institutions charge abank account maintenance
or flat monthly fee regardless of the balance in your checking account. Other institutions charge
a monthly fee if the minimum balance in your checking account drops below a certain amount
any day during the month or if the average balance for the month drops below the specified
amount. Some banks charge a fee for every transaction in your bank account, such as for each
check you write or for each withdrawal you make at an ATM. Many institutions impose a
combination of these banking fees.

Although a checking account that pays interest may appear more attractive than one that does
not, it is important to look at fees for both types of checking accounts. Often checking accounts
that pay interest charge higher bank fees than do regular checking accounts, so you could end up
paying more in fees than you earn in interest.

Money Market Accounts

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Most banks and financial institutions offer a type of interest-bearing account that allows you to
write checks called a money market account. This type of bank account usually pays a higher
rate of interest than a checking or savings account does. Money market accounts often require a
higher minimum balance to start earning interest, but they frequently pay higher rates for higher
balances. Withdrawing funds from a money market account may not be as convenient as doing
so from a checking account. With a money market account, each month, you are limited to some
transfers to another account or to other people, and only three of these transfers can be by check.
As they do with checking accounts, most banks and financial institutions impose fees on money
market accounts.
Savings Accounts
Another type of bank account, a savings account, allows you to make withdrawals, but without
the flexibility of using checks to do so. As with a money market account, the number of
withdrawals or transfers you can make on the savings account each month is limited.

Many banking institutions offer more than one type of savings account -- for example, passbook
savings and statement savings. With a passbook savings account you receive a record book in
which your deposits and withdrawals are entered to keep track of transactions in your savings
account; this record book must be presented when you make deposits and withdrawals. With a
statement savings account, the bank regularly mails you a statement that shows your withdrawals
and deposits for the savings account.

As with other types of bank accounts, a bank may assess various fees on savings accounts, such
as minimum balance fees.
Certificate of Deposit, CD, Time Deposits
Time deposits, often called certificates of deposits or CDs, are also among the various types of
bank accounts commonly offered. They usually provide a guaranteed rate of interest for a
specified term, such as one year. Banks and financial institutions offer certificates of deposit that
allow you to choose the length of time, or term, that your money is on deposit. CD terms can
range from several days to several years. Once you have chosen the term you want, the bank will
generally require that you keep your money in the certificate of deposit account until the term
ends, that is, until "maturity". Some banks will allow you to withdraw the interest you earn even
though you may not be permitted to take out any of your initial deposit (the principal).

Because you agree to leave your funds for a specified period, the bank may pay you a higher rate
of interest than it would for a savings or other type of bank account. Typically, the longer the
term, the higher the annual percentage yield.
Sometimes a bank allows you to withdraw your principal funds before maturity, but a penalty is
frequently charged. Penalties vary among banks, and they can be hefty. The penalty could be
greater than the amount of interest earned, so you could lose some of your principal deposit.
A bank will notify you before the maturity date for most certificate of deposit accounts. Often
certificates of deposit renew automatically. Therefore, if you do not notify the bank at maturity
that you wish to take out your money, the certificate of deposit will roll over, or continue, for
another term.
Basic or No Frill Banking Accounts
Many institutions offer a type of bank account that provides you with a limited set of services for
a low price (often referred to as "basic" or "no frill" accounts). Basic accounts give you a

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convenient way to pay bills and cash checks for less than you might pay without an account.
They are usually checking accounts, but they may limit the number of checks you can write and
the number of deposits and withdrawals you can make. Interest generally is not paid on basic
accounts. Compare basic and regular checking accounts for the best deal in low fees or low
minimum balance requirements.
Credit Union Accounts
Credit unions offer accounts that are similar to accounts at other depository institutions, but have
different names. Credit union members have "share draft" accounts (rather than checking),
"share" accounts (rather than savings), and "share certificate" accounts (rather than certificate of
deposit).

Name:__________________________
Date:___________________________
Criteria for Choosing a Bank or Credit Union
When shopping for someplace to keep your money, it’s important to look for the one that fits
your needs the best. You’ve already located one bank and one credit union near where you live
or go to school, and you’ve accessed their websites. Use information from those websites to
answer the following questions. These will help guide you to choose thebest option.
Step 1:
Find information to match all six criteria
Criteria: Account Optionsyour ranking: _____
What types of accounts are available? What other services do they offer that you would be
interested in?
Bank:_______________________________________________________________________
________________________________________________________________________
Credit Union:__________________________________________________________________
________________________________________________________________________
Criteria: Requirements to Open an Accountyour ranking:______
You have to be a member to open an account at a credit union – what are the requirements for
membership at the credit union you’ve chosen? What is the minimum birr amount you can open
a checking/shareaccount with at both the bank and credit union? What else is necessary to open
an account?

Bank:______________________________________________________________________
________________________________________________________________________
Credit Union:_________________________________________________________________
________________________________________________________________________
Criteria: Interest Ratesyour ranking: _____
Choose three types of accounts to compare. Write what type of account it is and what the interest
rate is for each.
Name Bank Credit Union Rate
Account 1:_______________________ _________________ __________
Account 2:_______________________ _________________ __________
Account 3:_______________________ _________________ __________
Criteria: Customer Service your ranking: ____

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What are your impressions, based on the website, of the customer service provided by the
depository institution? ____
Bank:_______________________________________________________________________
________________________________________________________________________
Credit Union:__________________________________________________________________
________________________________________________________________________
Criteria: Safetyyour ranking: _____
Are the bank and credit union you’ve chosen insured by state or federal laws? ____
Bank:_________________________________________________________________
Credit Union:___________________________________________________________
Criteria: Convenienceyour ranking: _____
How close is the savings institution?
Does it offer its customers on-line access to theiraccounts?
Does it have ATM’s in the area? ____
Bank:_______________________________________________________________________
________________________________________________________________________
Credit Union:__________________________________________________________________
________________________________________________________________________
4. Implementing Your Own Savings Plan
4.1 Researching the Requirements to Open an Account and Provide Evidence of Personal
Identity
The Requirements to open an account and provide evidence of personal identity are researched
and steps taken to gather the necessary documentation
The requirements to open an account include providing personal identification from a range of
sources which may comprise but not limited to:
 Kebele/woreda ID cards;
 Farmers associations’ ID cards;
 Employment and pension ID cards;
 School, college and university ID cards;
 Driver’s/operator’s licenses;
 Tax identification ID card;
 Passports;
 Work or residence permits; and
 Foreign-nationals-of-Ethiopian-origin ID card, together with a valid passport.
 Ethiopian Community ID.
4.1 Opening Relevant Savings Accounts or Other Investigated Financial Products
Relevant savings accounts or other investigated financial products are opened and the savings
plan implemented and monitored for a short period of time
Saving Account Opening Procedure
A. For Literate Customer
 Interview and identifying customer interview
 Customer fills in opening application form
 Customer must sign three identical signature on application form and on two specimen
cards
 Customer must present two recently taken picture of himself/herself and write the name ,
A/c number of the customer on the back of the photos

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  Register name of customer on register book and assign an account number
 Telling customer to fill in deposit voucher by indicating account number
 Pass book is prepared in the name of the customer, address like kilil, zone, kebele, house
number should be filled,
 Accept telephone fixed or mobile, neighbor or relatives,
 If ID of customer is not kebele type put the name of the organization/company in place of
occupation rather than specific jobs.
 Pass the document after finalizing to supervisors for checking and approval
 Upon approval, the documents are passed to PC operator for posting
 Distinguish on pass book if AND account, AND/OR account, For accounts and non-
interest bearing
 If non-interest bearing register on mandate file
 If the account is a joint fill our joint account declaration form
 After posting pass to internal auditors for checking
 After pass the pass book, ID’s and deposit voucher to receiving teller
 Application forms and specimen cards will be filed under supervision of auditor
B. For Illiterate Customers
 Same procedures can be applied for illiterate customer in addition to the following
 Illiterate person puts his right hand thumb on two signature cards, application should be
attested by rubber stamp bearing “signed before me”
 Attach one photograph on one specimen signature card and the other on the passbook
bearing seal of the branch usually crossing stamps
 Pass all documents to the supervisor for approval
 Pass to PC operator for posting
 After verifying initialing, the document are passed to the auditor
 Then pass the pass book, ID’s and deposit voucher to receiving tellers
 One specimen signature card is forwarded to the auditors and the remaining will be kept
with signature verifier
C. For Blind Customer
 Same procedures used for opening an account for literate person also applied
 But, when a blind customer withdraw, two witness must be present, one from customer
side and other from bank side who must be senior staff
 The two witness should be witness the transaction and sign to the effect on the voucher
Withdrawals
a) For literate customer (no comment)
b) For illiterate customers
 Bank staff should fill the voucher and let him/her put his/her right hand thumb print
on the voucher
 Identify the customer against his/her photograph on the pass book and verify by
stamping on the voucher near his/her finger print “signed before me” stamp
 Forward the pass book and voucher to PC
 Then to auditors and paying tellers.
Loss of Pass Book
 Fill the declaration form
 Verify the customer against signature on specimen signature card
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  Open a new saving account
 Transfer the outstanding balance of old account to the newly opened one

Adjustments to the Savings Goal are made where it is realized that the goal is unattainable

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