FINANCIAL ACCOUNTING

PUBLIC SECTOR ACCOUNTING

INTRODUCTION
Public sectors organizations include
a) Central governments
b) Local Authorities
c) Parastatals
d) Charitable organizations

Government public sectors organizations drive their specific powers from

parliament and their responsibilities are ultimately to parliament. This
accountability to parliament takes a variety of forms.

OBJECTIVES OF PUBLIC SECTORS ACCOUNTING

1. To provide financial information for determining and predicting the flows,
balances and requirements of short term financial resources of the
government unit.
2. To provide financial information useful for determining and predicting the
economic condition of the government unit and changes therein.
3. To provide financial information useful for monitoring performance under
terms of legal. Contractual and statutory requirements.
4. To provide information useful for planning and budgeting and predicting the
impact acquisition and allocation of resources to achieve of operational
objectives.
5. To provide information useful for evaluating organizational performance.

USERS OF PUBLIC SECTOR INFORMATION.

Users of public sectors accounting information include:

 The parliament and government departments.
 Tax payers and the general public
 Investors and Grantors.

Their needs fall into three broad categories.

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Financial Viability
This need refers to the ability of an organization to continue its operations in an
effective manner. It considers the availability of sufficient funds for the
governmental body and strength of tax base.

Fiscal Compliance
This refers to the extent to which any public sectors organizations have compiled
with the condition laid down in its authority to spend.

Management performance
This refers to the need to know whether money was spent wisely or effectively. It
is concerned with the output only.

More specifically, financial reporting for public sectors organizations should

provide information to meet the following broad needs:

Fulfilling government’s duty to be publicly accountable by:

(i) Providing information to determine current year revenues were sufficient
to pay the expenditure for the current year current years
(ii) Demonstrate whether resources were obtained and used in accordance
with entity’s legally accepted budget.
(iii) Providing information to assist users in assessing the service efforts,
costs and accomplishments of the governmental entity.

Assists users in evaluating operating results:

(i) Providing information about sources and uses of financial resources.
(ii) Providing information about its physical and other non-financial
resources having useful lives that extend beyond the current year,
including information that can be asses the service potential of these
resources.
(iii) Disclosing legal of contractual restrictions on resources and the risk of
potential l of resources.

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Assist users in assessing level of services that can be provided:
(i) Providing information about its financial position and condition.
(ii) Providing information about its physical and other non-financial
resources having useful lives that extend beyond the current year.
Including information that can used to assess the service potential of the
recourses.
(iii) Disclosing legal or contractual restrictions of resources and the risk of
potential l of resources.

NATURE OF GOVERNMENT UNITS

Organizations to service the citizenry
Governmental units exist to serve the citizens subject to their jurisdictions. Thus,
citizens a whole should establish governmental units through the constitutional
process. In contrast, business enterprises are created by only a limited number of
individuals.

General absence of the profit motive

With the exception, governmental units render services to the citizenry without the
object of profiting from services. Business enterprises are motivated to earn profits

Taxation as the principal source of revenue

The citizens subject to governmental unit’s jurisdiction provide resources to
governmental units principally through taxation. Many of these taxes are paid on a
s assessment basis. There are no comparable revenue sources for business
enterprises.

Impact of the legislative process

Operations of government units are for the most part initiated by various legislative
enactments such as operating budget, borrowing authorizations and tax levies.
Business enterprises also are affected by federal state and local laws and
regulations but such a dire extent

Stewardship for services.

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A primary responsibility of governmental units in financial reporting is to
demonstrate adequate stewardship for resources provided by their citizenry.
Business has a comparable responsibility to their owners, but not to the same as
governmental units.

The five foregoing characteristics of governmental units are major determinants of

accounting standards for such units.

ACCOUNTING STANDARDS FOR GOVERNMENTAL UNITS

(International Public Sector Accounting Standards)
The IPSASs are accounting reporting guidelines for the preparation and
presentation of general purpose financial reports of public entities.

The IPSASs prescribe the manner in which general purpose financial statements
should be presented to ensure comparability both with the entity’s financial
statements of previous periods and with the financial statements of other public
entities.

THE ACCOUNTING ENTITIES FOR GOVERNMENTAL UNITS

Governmental accounting system should be organized and operated on a fund

basis.
A Fund is defined as a fiscal accounting entity with self-balancing accounts
recording cash and other financing resources, together with all related liabilities
and other financial resources, and changes therein, which are segregated for the
purpose of carrying on specific activities or attaining certain objectives in
accordance with special regulations, restrictions or limitation.”
Contrast the accounting entity of governmental accounting with the business
enterprises; the economic entity. Seven types of funds can be identified as shown
below. Two accounting groups can be identified:

GOVERNMENTAL FUNDS
1) The general funds are used to account resources except these required to be
accounted for in another funds.

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 2) Special revenue funds are used to account for the proceeds of specific
revenue sources (other than expendable trusts or major capital projects) that
are legally restricted to expenditure for specified purpose.
3) The capital projects fund is used to account for financial resources to be used
for the acquisition or construction of major capital facilities (other than those
financial by proprietary funds and trust funds)
4) Debt services funds are used to account for the accumulation of resources
for, and the payment of general long-term debt principal interest.

An important example of a debt service funds is a sinking fund. These funds

created with the purpose of the repayment of public debts Mostly, these funds set
by the approval of parliament. Annual appropriations are made to these funds. The
amount appropriated is invested to earn some interests. When any public debt
matures, the sinking fund is used to redeem the debt.

PROPRIETARY FUNDS
Enterprises funds are used to account for operations:
a) That is financial and operated in a manner similar to private business
enterprises where the intent of the governing body is that the cost (expenses,
including depreciation) of providing goods or services to the general public
on a continuing basis be financed or recovered primarily through user
changes; or
b) Whether the governing body has decided that periodic determination of
revenue and earned expenses incurred and/or net income is appropriate for
capital maintenance, public policy, management control, accountability or
other purposes.

A useful type of enterprise fund is the Revolving Fund. These are funds set up by
the approval of parliament and provide the financial resources for achieving some
specified objectives.

The initial appropriation in these funds is made out of the consolidated Fund, The
receipts generated in such funds are automatically used by the respective
enterprises in accordance with the positions of the Act that set up the fund (e.g.
Famine Relief Fund);

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Internal Service Funds are used to account for the financing of goods or services
provided by one department or agency to other departments or agencies of the
government unit, or to other governmental units, on a cot-reimbursement basis.

FIDUCIARY FUNDS
Trust and Agency Funds are used to account for assets held by a government unit
in a trustee capacity or as an agent for individuals, private organizations, other
governmental units, and/or to other funds. These include:
a) Trust Funds
b) Pension Funds and
c) Agency Funds

Kenyan examples of trust funds include the NSSF, NHIF, widows and orphans
pension fund etc.

ACCOUNTING GROUPS

The General Fixed Assets Account Group

Fixed Assets related to specific proprietary funds or trust funds should be
accounted for through those funds. All other fixed assets of a governmental unit
should be accounted for though the general fixed account group.

The general long-term Debt Account Group

Long-term liabilities of proprietary funds and trust funds should be accounted for
through those sounds. All other unmatched general king term liabilities of the
governmental unit, including special assessment debt for which the government is
obligated in same, manner, should be accounted for through the general long-term
debt account group.

NOTE
a) The governmental funds account for financial resources of a government
unit that are used in day to day operations.
b) The proprietary funds carry our governmental unit activities that closely
resemble the operations of a business enterprise.

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 c) Fiduciary funds account for resources that are not owned by a governmental
unit, but are administered by the unit as a custodian or fiduciary.

Financial Accounting Techniques

 Cash Accounting
 Budgetary Accounting
 Commitment Accounting
 Fund Accounting
 Accrual Accounting

Cash Accounting
This system recognizes only cash inflows and outflows. The resulting financial
statements are essentially summarized cash books. The sales and purchases are
only recognized when cash is received or paid. This system does not include
accruals of any kind. Many public sectors and non-profit organizations (e.g.
charitable organizations) use this system.

Budgetary accounting
This is a presentation technique which requires the preparation of operating
accounts in the format of the budgets. Most public sector organizations use this
technique. The main purpose of budgetary accounting is to emphasize the role of
the budget in the cycle of planning-control-and accountability

Accruals Accounting
Accruals accounting requires that revenue and costs be recognized as they are
earned or incurred and some public sector organizations follow this system.

Commitment Accounting
This is accounting system recognizes transactions when the organization has
committed them. Transactions are recognized when orders are issued or received,
not at the later stage when cash is paid or received. Under this system the
organization recognizes the issue of an order as a commitment to incur the
expenditure and the account continuously record commitments. The main purpose
of commitment accounting is the budgetary control rather than financial reporting.

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Two common techniques to implement commitment accounting are a vote book
and encumbrance accounting.

MODIFIED ACCRUAL BASIS OF ACCOUNTING

This method is appropriate for accounting for the four governmental funds. For
agency funds and for expendable trust funds while the conventional accrual basis
of accounting issued for the two proprietary funds, non-expendable trust funds and
pension able trust funds.

Revenue recognition under the modified accrual basis of accounting:

Revenues and other governmental fund financial resource increments (e.g. bonds
issue proceeds) are recognized in the accounting period in which they become
susceptible to accrual-that is, when they become both measurable and available to
finance expenditures of the fiscal period. Available means collectible within the
current period or soon enough thereafter to be used to pay liabilities for the current
period.
Expenditure, recognition under modified accrual;
The measurement focus of governmental fund accounting is upon expenditures
decrease in net financial resources rather than expenses. Most expenditures and
transfers out are measurable and should be recorded when the related liability is
incurred. Transfers of financial resources among funds should be recognized in all
funds affected in the period in which the inter fund receivable(s) and payable(s)
arise.

Revenues
Few revenues of the four governmental funds and expandable trust funds are
susceptible for accrual. This is because most taxes and fees are not billable in
advance of the service or granting of a permit/license. Perhaps the only accrued
revenue is properly taxes (where they exist). Therefore, the cash basis of
accounting is appropriate for many revenues of the four governmental funds
(general, special revenue, capital projects and debt service) and expendable trusts.

Expenditures
Because of the lack of emphasis on operating results, funds other than the account
for authorized expenditures of the government’s resources, rather than accounting

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for expenses of operations. There is no attempt to match expirations against
realized Revenue in funds other than the two proprietary funds enterprise funds
and internal service funds). As a result; depreciation expense is recognized only in
enterprises funds and internal funds and, if appropriate in certain trust funds.
Similarly, there is no doubtful taxes expense in the general fund or in special
revenue funds, because tax revenue susceptible to accrual are recognized in the
amount net of the estimated uncollectible portion of the related receivables.

The Consolidated Fund.

This is the main fund operated by the Government. By the terms of the Exchequer
and Audit ACT (Revised 1980) all Government “revenue” must be put into this
fund and no money may be taken out of it without the authority of parliament. The
word “revenue” above is inverted commas because it has a specialized meaning
within Government it excludes income which a Ministry is allowed to keep for
itself in order to cover part of its own expenses (the technical term for this second
type of income is “Appropriations - in aid”).

TOTAL EXPENDITURE IS FINANCED BY FUNDS FROM THE

CONSOLIDATED FUND (EXCHQUER ACCOUNT) AND APPROPRIATION
IN AID.

Each year parliament votes on the “Estimates” or the “Appropriation Bill”

which set out: -
(a) The estimated total of the Government revenue for the coming financial year
(1st July to 30th June)
(b) The amount of money which each ministry expects to be allocated for its
needs in that financial year

When the Bill has been passed enacted it becomes the Appropriation Act for the
year thus in the appropriation act for 2014/2015 Parliament authorized as gross of
K95 002 150 for the Ministry of Health (this was in respect of Recurrent
Expenditure - see below) this was described in the 2004/2005 estimates of
Recurrent Expenditure as follows: -

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 Gross (TOTAL EXPENDITURE) 95,002,150
Appropriations-in-aid 2,280,350
Net Vote (CONSOLIDATED FUND) 92,721,900

In other words, the Ministry was authorized to spend 95,002,150 in total with
92,721,900 being supplied from central funds (coming out of the consolidated
fund) and the remainder coming from the Ministry’s own Appropriation-in-aid.

Appropriation-in-aid
This is the amount generated by a government department from its internal
activities. Example of Appropriation-in-Aid inside the Ministry of Health Are
Hospital Boarding Fees)
X-ray FEES
Laboratory Fees
Rent from Institutional Houses

Consolidated Fund Services

Certain Government expenditure does not have to be voted every year by
parliament because Parliament has already given its approval for the specific items
concerned in the past. These items are known as Consolidated Fund Services and
include;
Salaries and allowances of the judiciary
Subscriptions to International Bodies
Payment of pensions to Civil servant
Payments of National Debt

Sources of Government Revenue

Internal Sources
a) Direct taxation Indirect Taxation
b) License Fees
c) Fines and Penalties
d). Income from Property
External Sources
1. Loans
2. Grants

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The main revenue are taxes, government borrowing (both borrowing domestic and
foreign) and grants. See Out below is a summarized version of the 2013/2014
Recurrent Estimates

Recurrent revenue estimates: 2013/2014 K$ (Millions)

Customs and Excise 298.5
Income Tax 370.0
VAT Tax 437.0
Import Duty and Other Taxes 107.4
1,212.9
Miscellaneous (15 different classes) 169.9
Total 1,382.8

The Development Revenue Estimates for the same year were K$645 million. If
look at the totals for the 2013/2014 Expenditure Estimate given below we can see
that a shortfall of K$ 266.1 million is expected. This gap will be bridged by
recourse to borrowing wither from abroad or on the domestic market. Domestic
borrowings usually take the form of Treasury bills (borrowings from the public
evidences by notes or bills drawn on the treasury),

Government Expenditure
The annual Expenditure Estimates (see above) consists of two parts. The Recurrent
Expenditure estimate and the Development Expenditure estimates and in fact, the
whole of Government Accounting follows this division. In the Annual estimates
for 2013/2014 the net amount of Recurrent Expenditure was set at K$ 1,420.8
million and the net amount of development Expenditure was K$1,292.0 million.

Recurrent Expenditure
This is expenditure on the day-to-day business of government (in commercial
accounting it would be called “revenue expenditure” as opposed to “capital
expenditure”). Recurrent expenditure may be described as “maintenance
expenditure as it covers items concerning the maintenance or operations of existing
Government services (e.g. some items of Recurrent Expenditure are the salaries of
the vast majority of Government officers the cost of traveling allowances and
expenses electricity and telephone and postage expenses).

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Development Expenditure
Development Expenditure is any expenditure concerning new projects (equivalent
to “capital expenditure” in commercial accounting. Included in development
expenditure would be the construction of a dam the building of a hospital together
with the necessary equipment, or the construction of a new road (but not the
maintenance of an existing road - that would be classified as recurrent
expenditure).

Recording Government Revenue Expenditure

Cash Basis for Government accounting

The main point to note about government Accounting is that “cash based” that is it
limits itself to transactions which have been entered in the Cash Book and
moreover counts the whole of any amount entered in the Cash Book as relating to
that financial year. (There are certain minor exceptions to the above statement, but
they will be ignored here.) Thus the government Accounting proper has no
personal accounts for debtors and creditors (seeing that no cash has been paid by or
to them, and the Government sells or buys goods or services for direct payment by
cash or cheque) nor does it have accruals or prepayments, nor the related Sundry
Debtors or Sundry Creditors accounts. Another important point is that government
Accounting does not make any distinction between fixed assets and day-to-day
expenditure - there are no special accounts for fixed assets, the only special
treatment is to record them in registers for memorandum purposes; apart from that
they are entered in expenditure accounts (Recurrent or Development, as the case
may be), just like any other expenditure.

A further important point follows seeing that fixed assets accounts do not exist,
there is no such thing either as depreciation in government Accounting. The effect
of passing- fixed assets through the usual expenditure accounts is to write them off
in the year of purchases.

Because he is already conditioned by his knowledge of commercial accounting, the

student may be puzzled by this treatment of fixed assets and by the corresponding
lack of depreciation, what he must bear in mind is that government accounting is

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not aiming at a Profit & Loss Account nor any other form of profit statement and
therefore it does, not need to attempt to divided artificially the benefits of “capital”
expenditure over financial years nor to assets the loss in value of that asset in
particular year.
A further consideration is also the immense practical difficulty of putting a value
each year on vast fixed assets such as say, the Mombasa Road.

Accounts of an Individual Ministry

A part from the differences imposed by its cash-system, Government Accounting
is very similar to commercial accounting. It uses double entry book-keeping, with
debit and credit because of the Vast number of transactions which occur in
operation of Government business tasks are often separated, with the result that
one clerical officer may make nothing but debit entries throughout his working
day, another but credit entries and neither may be aware of the existing of the
double-entry system. The actual operating of the double entry system is also
obscured by the fact that the entering of the other leg of the transaction is
sometimes effected by the computer, unseen by the clerical officer- but the double
entry system is there, nevertheless.

Revenue (Income)
In accordance the normal rules of double entry bookkeeping cash received is
debited to the Cash account and the amount which gave the benefit is credited.
Thus, in the accounts for Ministry X, the receipts of Kshs 5,000 it’s recorded as
follows:
Debit: Paymaster General a/c (cash a/c) 5,000
Credit: Revenue Account 5,000

Paymaster General (PMG)

*PMG A/c is the Cash A/c of Ministries “PMG is the recognized abbreviation for
“Paymaster General. All revenue (apart from Appropriations-in-Aid) must be
transferred immediately to the Consolidated Fund (see above) funds received will
be paid over straight way to the Treasury (which administers the Consolidated
Fund for the Government; the name of the account within which the treasury
administers the Consolidated Fund is the “Exchequer A/c”), the bookkeeping entry

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to the accounting will then be a credit to Exchequer A/c and a corresponding Debit
to PMG A/c.
Debit: Paymaster General’s a/c (PMG A/c) 5,000
Credit: Revenue A/c 5,000

Debit: Exchequer A/c 5,000

Credit: PMG A/c 5,000

At the end of each financial year, each Ministry which has collected funds on
behalf of the Government make out a “Statement of Revenue” showing how much
revenue it has collected the year, how much it has remitted to the Treasury and
what balance of unremitted funds is awaiting transfer.

Expenditure
Remember that a ministry operates within the strict limits of the Vote allocated to
it by Parliament and that the funds made available to the Ministry come from two
sources.
 Firstly, the Government itself (from the Consolidated Fund which collects
together
 Secondly the ministry own appropriations-in-Aid (the income which
Parliament authorizes a Ministry to retain to help to pay part of the
Ministry’s own expenses).

The accounting system used in keeping the accounts of an individual Ministry is

designed to reveal whether the Ministry is keeping within the limits of its voted
expenditure or not.
An annotated version of Government Accounting in an individual Ministry is given
at the end of the chapter. The example has been simplified so as to lay bare the
basic pattern of the double-entry bookkeeping system used in Government.

Accounting another simplification is that it ignores the Vote on Account. This is

the amount of funds voted to each Ministry by Parliament in advance of passing
the Appropriation Act and which is usually equal to one half of the amount
requested in the estimates which are in the process of vying deliberated by
parliament.

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An important principle of Government Accounting cannot be over stressed. This
principle is that a ministry must operate strictly within the limits imposed by
parliament; it is not allowed to spend more than the amount authorized by
parliament; and its authority to incur expenditure lasts only for the duration of the
financial year and ends to 30th June each year, if a Ministry under spends in a
Financial year or if there are any excess receipts a Ministry may not retain the
available funds and spend them, but should surrender them to the exchequer (the
Treasury) and eventually, redistributed among the Ministries as determined by
parliament.

If a Ministry overspends the only body empowered to ratify this overspending is

parliament in a subsequent financial year, the matter is presented to parliament in
the form of an “Express Vote” and Parliament decides whether to approve the
excess or whether to recover the money from the officer responsible for exceeding
less value.
Paymaster General (PMG)
The PMG is an office rather than an officer, and no person bears the Paymaster
General. The functions of the PMG are carried out by a section of the Treasury.
The functions of the office are as follows:
a) It is the principal paying agent of the Government, and is generally speaking
the “banker” for all Government departments as regards voted expenditure
and payment of consolidated Fund Services
b) It arranges with the Treasury at regular intervals (usually twice a month) for
funds be withdrawn from the Exchequer and put to the credit of the PMG’s
A/c with the Central Bank of Kenya.
c) it allows authorized signatories from ach Ministry or department to draw
cheques on this account.
d) It keeps records of the above transactions and at least once a month, sends
statements to the Accounting officers (i.e. the Permanent Secretaries, in most
Ministries) of each accounting unit together with supporting vouchers.
e) It receives monthly reconciliations of these statements from Accounting
Officers
f) It supplies the Treasury with the following;

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  A monthly statement and balance sheet of all statements held
by the PMG’s Department and
 Yearly a summary accounting and balance sheet at the end of
each financial year.

It must be note that the PMG a/c is in fact just one bank account a single bank
account, which is kept at the Central Bank of Kenya and administered by the
PMG’s office in the treasury; and the ministries are authorized to draw on this
single PMG A/c and from the information supplied by the Central Bank of Kenya
the PMG’s office is able to analyze the different payments and receipts to allocate
them to various Ministries and send them monthly statement.

Cash and Bank Book

There are significant differences between Commercial Accounting and
Government as regards the operation for the Cash/Bank Book (from now onwards
referred to simply as the “Cash Book”. These are:
a) Restricted analysis; the Government Cash Book makes an analysis only
between “Cash” and “Bank”. It has no analysis columns for different
categories or classes of revenue or expenses as are fund in commercial
accounting.
b) The usage of the Cash Column cheque received are considered as cash and
they are banked when a cheque is received the bookkeeping entry is
DR Cash Column CR Revenue a/c
Or Appropriation-in-Aid a/c
When they are banked, an entry is made:
DR. Bank Column CR Cash Column

One of the benefits of this procedure is that it facilitates the physical control of
cash and cheques; at any moment the cashier or his supervisor can count the
contents of the cash box and check the total value (cash plus cheques) against the
balance shown in the Cash Column.
This principle applies also to “RD” cheques but only in the Districts. In the
Districts, a cheque that has been dishonored prompts the following entry:
DR Cash Column CR Bank Column

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In Ministries, However, a suspense account is used and the entry is:

DR RD Cheques suspense A/c CR Bank Column

Three Cash Books are kept one for each of Recurrent Expenditure, Development
Expenditure and Deposit.

Vote Book
Together the Cash Book and the Vote Book form the backbone of the Government
Accounting System. Nearly all the original entries which record the business of
Government pass through these two books. There is, however, an important
qualification to make to the last point the Vote Book is not really a “book of prime
entry” because the Vote Book is actually a set of “memorandum” accounts and is
itself not part of the double entry system. This is because of the way in which the
computer system operates, but this will be explained shortly. Firstly, what is the
Vote Book? Well. It is a loose leaf book that contains a sheet for each “item”
(subdivision or account) of a Vote in particular Ministry or District so for instance,
there is a page for “Travelling and Accommodation Expenses and another page for
“Purchase of Additional Equipment”.

Operation
At the beginning of the Financial year, the Vote Book Controller (the Officer who
operates the Vote Book) written in the Following information.
 Name of the all holder - This is the Officer entrusted with the “AIE”
 (Authority to incur Expenditure” and no funds may be committed or spent
until this AIE has been received)
 Name and computer code number of the account (item of the vote)
 Total amount voted by Parliament for the item

In the course of the year the Vote Book Controller enters the following de tails in
respect of each transaction.
a) Commitments: These are the expected costs of any orders placed for goods
or services, or the amount of any imprest given, and a running total is kept.

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 b) Payments: these are evidenced by payment vouchers and whenever a
payment is made the corresponding commitment is cancelled as with
commitment a running total is maintained;
c) Running total or combined payments and unconcealed commitments and
d) Current statement of balance available on the Vote (this balance available is
equal to the original Vote less the cumulative combined total of payment and
unconcealed commitments to date).

It can be seen that the above system, when operated properly, makes it very
difficult for excess spending to occur - the balance available has to be ascertained
even before an order is placed, no payment can be made it the balance available is
sufficient, and each month the Vote Book Controller suppliers the AIE-holder with
a statement of the balance available on his vote.

The Vote Book is a memorandum account (an account for memory purposes only).
The entries in the different columns are vital importance in themselves, but they do
not form part of the double-entry system, and persons maintaining the Vote Book
does not need to know anything about debits r credits. How, then, does this
information become part of the double entry system? This is achieved through the
operation of the computer pregame, the original documents which are used for the
entries in the Vote Book are passed to the data-capture section a Vote Book is
subsequently entered as accredit in the Cash Book; when that payment voucher is
keyed into the computer, the computer effects the double-entry

DR Expenditure Item (in Vote Book) coded

CR. Cash Book – Paymaster General a/c

Each month the computer produces complete ledger accounts from the information
it has stored and it is the responsibility of the Vote Book Controller then to
reconcile his manual VOTE Book with the computerized ledger account.

The Vote Book is a memorandum account and not part of the normal double entry
accounting. Total funds allocated to a specific purpose and the amounts spent are
compared from time to time. This ensures a control that expenditure will not
exceed amounts appropriated. Example

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A/c No. AlE No.
Allocation
Commitments Payments
Date Supplier Ref Estimated Date Payment Total Total Balance
cost voucher amounts payments available

AlE means authority to incur Expenditure

Note: Vote books are not balanced because it is not an account

ACCOUNTING ENTRIES FOR THE GENERAL FUNIACCOUNT

Recording the budget
Dr. Estimates Revenues
Dr. Estimated Other Financing Sources
Cr: Appropriation
Cr. Estimated other Financing Uses
Cr. Budgetary Fund Balance

Note: that all these are memorandum accounts that will be closed after issuance of
financial statements.

Encumbrances and Budgetary Control

Because of the need for the expenditure of Government units to be in accordance
with appropriations of governing legislative bodies and encumbrances accounting
technique is used for the general Fund and special revenue funds. And sometimes
for capital projects funds.

An encumbrance is the earmarking of an appropriation to indicate that funds are

committed. It means that an order has been placed but payment has not been
effected. This prevents the administrator of the budget from committing more cash
than he has authority to commit. When a purchase order for goods or services is
issued to a supplier, a journal entry as follows is made. -
DR. Encumbrances

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 Cr. Fund balance-reserved for encumbrances

When the supplier invoices for the ordered merchandise or services is received by
the governmental units it is recorded and the related encumbrance is reversed.
Dr. Expenditure
Cr. Voucher Payable

Dr. Fund Balance Reserved for Encumbrances

Cr. Encumbrances

The encumbrance technique is a memorandum method for assuring that the total
expenditure for fiscal year does not exceed appropriations. Encumbrance journal
entries are not necessary for normal expenditures such as salaries and wages,
utilities and rent. The encumbrance technique used in accounting for governmental
units has no counterpart in accounting for business enterprises.

Sources of Government Revenue

GOVERNMENT EXPENDITURE

Recurrent
Revenue expenditure incurred by government on normal activities

Development
Incurred for the establishment of new infrastructure agricultural and industrial
projects, water, power projects, roads etc. This is essentially the Capital Budget.

STEPS IN GOVERNMENT ACCOUNTING

1) Annual estimates of both expenditure and revenue are prepared by the
various ministries and submitted to treasury. Treasury the consolidates the
budget often with consultation with the ministry of planning.
2) Presentation of the budget in June. Budget has estimates of government and
expenditure for the year beginning 1° July to 30th June Proposals in budget
are debated in parliament (Finance Bill) (Starting 2000, a three-year budget
plan is presented to parliament for approval).

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 3) Committee of ways and means.
This is a committee of the National assembly which is responsible for the
debate on the government’s annual budget proposal as presented by the
ministry of Finance. The functions of the committee include: -

 To ensure that sources of revenue to the exchequer by the government

are sound - viable and suitable.
 To consider the various methods to be used in collecting the
government revenues with a view to maximize their collections.
 To ensure that the proposed uses of funds from the Exchequer are the
public interest and there are sufficient controls and proper steps are
taken by the government to ascertain in that the fund is used as
intended.

4) Spending by Ministries.
Specific amounts are appropriate by parliament to different ministries, which
should be used to perform their duties. Ministries should not spend amounts
in excess of their appropriations without the approval of parliament. In ach
ministry exists a function control intended to ensure that spending is
according to appropriations and - for correct purposes. Starting 2000 this
function has been strengthened by the development to very ministry of
finance officer employed by and answerable to treasury. The finance officers
are responsible for ensuring that each ministry spends only its
appropriations.

5) Audit by Kenya National Audit Office.

The Kenya National Audit Office (formally Controller and Auditor General)
is responsible to audit accounts of various government departments. The
main purpose of this audit is to ensure that all moneys appropriated have
been spend for correct purposes. This report is presented to the government
together with the annual appropriation accounts.

Public Sector Accounting Page 21

 6) Public accounts committee (PAC).
The PAC consists of members of parliament. The Pac -deals with issues
raised by the Kenya National Audit Office in their report. The PAC is tabled
in parliament and the treasury is responsible for implementing its
recommendations.
7) Supplementary estimates.
Occasionally estimates approved by parliament in the annual budget may
turn out to be considerably out of target. Supplementary estimates can then
be prepared and submitted to parliament for approval in the normal manner.

8) Annual Estimates. Towards the end of the Government’s fiscal year, it will
be time to prepare annual estimates for the preceding year and the cycle will
start.

Note: all cheques received by the government departments are considered as ash
and these are entered in the cash column on debit side of the cashbook. These
cheques are banked later on and then a debit made to the Bank and a credit to cash.

Year-end Accounts
By 1st October each year for months after the end of the financial year, each
Ministry must present its final accounts to the controller and Auditor-General.
a) Statement of Revenue
b) Appropriation Account and
c) Funds Accounts
These relate to the various funds administered by different ministries and are not
dealt with here because fund accounting is done on purely-commercial lines
(producing for each fund an Income and Expenditure A/c and a Statement of
Assets and Liabilities).

Ministry of Health
Appropriation account for the year ending 30th June 2014
Expense details Approved Actual Amount Amount
estimate expenditure under overspent
spent
Personal emoluments XX XX XX XX

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 Traveling expenses XX XX XX XX
Gross total vote XX XX XX XX
Less: appropriation in aid Approved Approved
(A-I-A) estimates receipts
Less: appropriation in aid XX XX
(A-I-A)
Net total vote XXX XXX

STATEMENT OF REVENUE / REVENUE ACCOUNT

Revenue account shows the estimates and actual receipts in respect of specific
revenue head of the government. The significant differences between estimated
and actual-receipts are explained by the accounting office in the form of footnotes
to the revenue account.
Ministry of Culture and social services
Statement of revenue
For the year ending 30th June 2014
Estimated Actual
receipts receipts
Total XXX XXX
Add balance at beginning of fiscal XX XX
year
Payments to exchequer (XXX) (XXX)
Balance at end of fiscal year XXX XXX

ANNUAL ACCOUNTS
1. General Account of Vote (GAV) account
2. Exchequer account

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 3. Cash (PMG) account
4. Appropriation Account
5. Revenue Account
6. Income and Expenditure account
7. Statement of Assets and Liabilities

General Account on vote. GAV shows the amounts authorized by parliament to a

specific vote and tot expenditure incurred during a particular year.

Exchequer Account. This account records the amounts authorized from the
consolidated fi.md regarding a specific vote and amounts withdrawn from this
account by the Paymaster General.

Cash (PMG) Account. This account records the withdrawals from exchequer and
amounts spent during a particular year.

Journal Entries
A mount Authorized in the vote on account
Dr. Exchequer
Cr. GAV A/c

Amounts withdrawn
Dr. Paymaster General A/c
Cr. Exchequer A/c

To record actual expenditure

Dr: Expenditure A/c
Cr: Cash (PMG) Account

Annual expenditure accounted for

Dr: GAVA’c
Cr: Expenditure A/c
Appropriations in Aid (MA) receipts
Dr: Cash (PMG) A/c
Cr: A-I-A A/c

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Appropriations in aid accounted for
Dr: A-I-A A/c
Cr: GAV A/c
(Compare closing expenses into profit and loss summary in businesses enterprises)

Excess appropriations in aid receipts over the approved estimates

Dr: GAV A/c
Cr: Excess Appropriations in Aid A/c

Annotated examples of Government Accounting

Data: for the financial year 2013 — 2014, the Ministry of Population Control had
the following budget
Kshs. (million)
Gross Expenditure....,, 750
Appropriation-in-Aid 36
Net Vote 714

In the course of the year actual results were as budgeted

Required:
Show how the above information was recorded in the accounts of the Ministry.
INCOME AND EXPENDITURE A CCOUNT
Public sector department involved in providing some commercial services prepare
income and expenditure accounts. This account is similar to the income and
expenditure accounts of non-trading organizations and is prepared in lied of the
profit and loss statement.

Organizations that prepare income and expenditure are for example NSSF, NHIF,
and Window and orphans scheme.

STATEMENT OF ASSETS, AND LIABILITIES

A statement of assets and liabilities is similar to the balance sheet of commercial
enterprises. Each accounting unit prepares a consolidated statement of its assets
and liabilities as at June 30 each year. Some of the above compilations occur every
year, those that involved “assets” and “liabilities”: Debts owed to or by the

Public Sector Accounting Page 25

Ministry) result in balances outstanding year-end On the asset and liability
accounts (those accounts which do not concern income and expenditure, because
the income and expenditure accounts will, of course have been written off the
(GAV A/c These remaining outstanding balances are presented in a “statement of
Assets and liabilities”. This similar to the Balance Sheet used in commercial
accounting. It lists all the assets and liabilities of the Ministry at a given pointing
time, all the debit balance are assets and all the credit balances are liabilities. As in
a balance sheet, by convention the liabilities are presented on the left hand side and
the assets on the right.

ACCOUNTS OF STATE CORPORATIONS

Legislative provisions
State corporations are established in Kenya according to the provision of the State
Corporation Act (Cap 446) some state corporations have established by special acts
of parliament.

Example: ports Authority: post office savings bank posts and telecommunications;
railways; power and lighting company ltd.

The main provision of the state corporations in respect of annual accounts are
stated under:
(i) Every state corporation should prepare its revenue and expenditure
accounts for the financial year not later than the end of February every
year
(ii) This account should be accompanied by proposals for funding all projects
to be undertaken by the corporations in the following year
(iii) All annual estimates and proposals for funding projects should both be
implemented until Minister and Treasury have approved them Sec 13
states that the assets of a state corporation if they are current assets in th6
normal course of business carried out by that corporation may be
disposed off.
(iv) Every state corporation should keep proper books in order to record the
property, undertakings, funds, activities, contracts, transactions and other
business of the cooperation.

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 (v) Section 13 (3) requires the accounts of every state corporation to be
audited and reported annually by the audit General (Corporations) in
accordance with Sec 29 (2) of the Exchequer and Audit Act (Cap 412).

The act holds the board of directors of a state corporation responsible for the
proper management of the affairs of a state corporation and accountable for the
moneys, the financial and the management of state corporations as per section 15
(1) of the act.

Sec 16 (1) requires that every state corporation to make provision for the renewal
of depreciating assets by the establishment of funds and for contribution to such
reserve and stabilization funds as may be necessary.

FINAL ACCOUNT
1) Revenue Account
This account is also called the revenue and expenditure accounts. This account
shows the details of total income and expenditure of a state corporation for any
particular financial year.
It is prepared in lieu of profit and the loss statement.

2) Net Revenue Account

Some corporations prepare this account. It is prepared in lieu of appropriation of
profit and loss account.

3) Balance sheet
Balance sheet of a state corporation gives the details of the assets and liabilities of
the corporation at a specific date.

State Corporation in Kenya prepare their final accounts in the form of published
accounts a prescribed in the companies Act (486).

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 EXERCISES

Question one
Records maintained by Ministry gave the following information at the close of
business on
30th June 2014
Approved Actual
estimates expenditure
£ £
Gross expenditure 8,897,100 9,419,724
Approved Actual
estimates receipts applied
Appropriations-in-Aid (48,800) (48,800)
Net total Vote 8,848,300 9,370,924

The following additional details are given:

i) All amounts approved in the estimates were withdrawn from the Exchequer
ii) Assume no cash, book balance (‘MG) was brought forward on 1/7/2003
iii) Actual amount of A-in-A provided was realized

Required:
a) Show separately the bookkeeping entries;” involving the above amount as
they would appear in the following accounts. Exchequer ‘Account,’ general
account o Vote (GAV), Paymaster General Account, Heads and Items and
Appropriations-in-Aid Account.

b) Show necessary closing of the year entries using the accounts given in (a)
above.

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Question two
The following details are available from the records of the Cultural services
department which the charged with the collection of sundry revenue for the year
ended 30 June 2004.
Estimated Actual
Revenue receipts
£
Motor vehicle driving license 94,000 420,000
Cattle trader’s licenses 60,400 40,300
Registration for banks licenses 900,000 860,000
Scrap metal dealer’s licenses 3,600 4,000
Oil drilling licenses 18,000 4,000
Miscellaneous licenses 9,200 1,000

The following additional information is available:

(i) Supplementary estimates were passed during the year indicating:
 Reduction of £8,000 on drilling licenses:
 Reduction of £3,200 on miscellaneous licenses:
 An addition to £340,000 on motor driving licenses due to amend to
the Act.

(ii) The amount paid to the Exchequer during the year was £1,200,000,
which the balances carried forwarded on 30 June 2004 was £1,264,000
(iii) Cash in transit and with agents on 30 June 2004 was £ 7,200 and £6,300
respectively.
(iv) Oil drilling revenue.in arrears at the end of the year was as follows:
o For the current year £3,000
o For the past one year £6,000
o Outstanding for more than two years £1,300

Required:
a) Prepare a Revenue statement, suitable for publications, for the year
ended 30 June 2004.
b) Comment on the balances of revenue on hand

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