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Table of contents
Section Description Page
1 BACKGROUND 1
1.1 Introduction 1
1.2 Objectives 1
1.3 Administration of the manual 2
1.4 Revision and amendment 2
2 ACCOUNTING SYSTEM 3
2.1 General………………………………………………………………………………………………............... 3
2.2 Financial Data’s Records & source document………………………….......…………………... 3
2.2.1 Finance Department Own records & source documents…………………………..…….... 3
2.2.2 Other’s Records & source Document……………………………………………...………………. 3
2.3 Journalizing and Accounts…………………………………….....……………………………………. 4
2.3.1 Accounts………………………………………………………………………………............…………….. 5
2.3.2 Chart of Account……………………………………………………………………………..........……… 7
2.3.3 Journalizing of transactions………………………………………………………………………….. 7
2.4 Financial Data processing…………………………………………………………………………..... 7
2.4.1. Account system………………………………………………………………………………........…….. 7
3 INTERNAL CONTROL SYSTEMS…………………………………………………………….......... 9
3.1 General……………………………………………………………………………………………….......... 9
3.2 Control Over cash…………………………………………………………………………………........ 10
3.2.1 General policies procedural guides and internal control……………………………….. 10
3.2.2 Cash collection……………………………………………………………………………………......... 12
3.2.2.1 Cash receipt voucher and cash/credit sales invoices……………………………………. 13
3.2.3 Cash payment………………………………………………………………………………………....... 13
3.2.4 Advance payments…………………………………………………………………………………..... 15
3.2.5 Bank Account………………………………………………………………………………………........ 16
3.3 CONTROL OVER RECEIVABLE…………………………………………………………………..... 17
3.3.1 Trade Receivables………………………………………………………………………………......... 17
3.3.2 Receivable from other sources…………………………………………………………………... 17
3.3.3 Accounting system and internal control……………………………………………………... 17
3.3.4 Uncollectible and doubtful accounts……………………………………………………………. 18
3.4 CONTROL OVER INVENTORIES………………………………………………………………..... 19
3.4.1 Methods of inventory control…………………………………………………………………… 20
3.4.2 Purchasing and cost of inventory……………………………………………………………….. 21
3.4.3 Stock valuation………………………………………………………………………………….......... 22
3.4.4 Inventory Reporting ………………………………………………………………………….......... 22
3.5 CONTROL OVER PLANT ASSETS……………………………………………………………….. 23
3.5.1 General……………………………………………………………………………………………........ 23
3.5.2 Acquisition of plant assets………………………………………………………………………. 23
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3.5.3 Control over Fixed Asset………………………………………………………………………… 24

3.5.4 Accounting Records……………………………………………………………………………… 24
3.5.4.1 Depreciation……………………………………………………………………………………….... 24
3.5.4.2 Additional cost of plant assets……………………………………………………………… 25
3.5.4.3 Construction in progress………………………………………………………………………… 25
3.5.4.4 Plant asset Acquired by gift…………………………………………………………………… 26
3.5.4.5 Retirement , Disposal & Exchanges………………………………………………………… 26
3.5.5 Fixed Asset Reporting…………………………………………………………………………… 26
3.6 LIABILITIES………………………………………………………………………………………........ 26
3.6.1 Recognition and valuation of current liabilities……………………………………... 27
3.6.2 Control Over Liabilities…………………………………………………………………………. 27
3.6.3 Payroll Liabilities………………………………………………………………………………... 27
3.6.3.1 Control Over Payroll…………………………………………………………………………….. 28
3.7 RECOGNITION OF REVENUE…………………………………………………………………………. 29
3.7.1 General……………………………………………………………………………………………...... 29
3.7.2 Revenue Recognition…………………………………………………………………………….. 30
3.7.3 Control of Sales Revenue………………………………………………………………………… 30
3.8 Control Over Expenses…………………………………………………………………………… 32
3.8.1 General……………………………………………………………………………………………....... 32
3.8.2 Expense Recognition…………………………………………………………………………….. 32
3.8.3 Control over Expense…………………………………………………………………………….. 33
4 REPORTING………………………………………………………………………………………........ 34
4.1 General……………………………………………………………………………………………....... 34
4.2 External Audit……………………………………………………………………………………..... 35
4.3 Prior period adjustment………………………………………………………………………… 35
5 SUMMARY………………………………………………………………………………………….... 36
5.1 Sample Operating formats ……………………………………………………………….... 37

If it is any abbreviation write it

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1. BACK GROUND
1.1. Introduction
Accounting is an information system that identifies records and provides essential information about
economic events of an organization to interested users or various individuals or groups for their use in
making informed judgments XXX-Company & decisions. Accounting provides the techniques for
gathering economic data and the language for communicating these data to different individuals and
institutions.
Investors in business need information about its financial status and its future prospect. Bankers and
suppliers appraise the financial soundness of a business organization and assess the risks involved
before making loans & granting credit.
Government agencies are concerned with the financial activities of the business for the purpose of
taxation and regulation. Employees and their union representatives are also vitally interested in the
stability and profitability of the organization that hires them.
Individuals who depend up on and make the most use of accounting are those charged with the
responsibility for directing the operations of enterprises. They are often referred management.
Management relay upon accounting information for day to day operations conducting as well as for
assisting and evaluation current operation and in planning future events.
1.2. Objectives
This manual is to serve as a reference document for XXX-------COMPANY major financial policies and to
provide the company’s accounting staff as a general procedural guideline, for processing various
business transactions and financial events in a proper and consistent manner. Moreover it helps to
increase the efficiency of processing financial information flow so as to make informed decision.
Generally it aims to ensure that:-
1. The accounting system provides a reliable basis for the preparation of financial statements.
2. There exists adequate internal control system for wise use of company resources.
3. There exists reliable data processing and reporting methods.
4. The financial data processing and reporting method meet regulatory and statutory
requirements.
5. There exists cost effective system of internal control.
6. Internal control systems and data processing methods are meeting future needs of the company.
7. Reliable information is produced on a timely fashion for management decision making.
8. The accounting system is tailored to the organization structure and activities of the Company.

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1.3. Administration of the Manual

It is believed that policies, procedures, internal controls and applications stated in the manual will be
adhered to the company. Top managements of the company i.e. the Board of Directors & Executive
management team of the company are responsible for the Proper implementation, Custody and
alteration of this manual.

1.4. Revision & Amendment - This manual can be revised in view of the following
a. To accommodate effect of growth & expansion for which no provision is made in the manual.
b. When the specific provisions in the manual are outlawed by laws of the government.
c. When the specific provisions in the manual are not in agreement with the underlying &
genuine commercial realities of the company.
d. When the management believes that amendment is necessary.
e. In all cases, the amendment shall be made as follows:
 If it is a policy issue and laws of the government, it shall be approved by General Assembly
& his Representative.
 If it is a procedural matter, it shall be revised or amended by the management committee
of the Company.

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2. THE ACCOUNTING SYSTEM

2.1. General
Accounting system includes the entire network of communications used by a business organization to
provide needed information. The way in which management is given the information for use in
conducting the financial affairs of the business and in reporting to owners, creditors, and other
interested parties will be carried out through accounting system.
XXX-------COMPANY has implanted Peachtree Accounting software for financial data processing and
reporting.
2.2. Financial Data’s, Records & Source Document
An accounting system starts with the occurrence of a business transaction. The occurrence of that
transaction has to be recorded initially. This initial record of a business transaction is named as source
document. The source document of XXX-------COMPANY resides from different cost center and source
(suppliers and customers). Cost center means each department/service/ division of XXX-------COMPANY
major activity centers where resources are deployed to get a given output. The type and nature of source
documents differs each other. Concerning these, finance department has to clearly identify the type of
source document to be obtained from individual source, whether it is within the company or outside the
company. After identification of the type of document to be obtained from its source, regulation shall be
established about when and how to deliver them to finance department. Some of the documents to be
availed to finance department for the accomplishment of accounting activities are going to be described
below.
2.2.1. Finance Departments Own records and Source Document
These refer those documents originated and or finalized by the department itself. These are:-
 Cash receipt Vouchers  Credit sales invoices
 Cheque payment Vouchers  Debit and credit notes
 Petty Cash Payment Vouchers  Bank Credit & Debit advice
 General Journal Vouchers
 Cash sales invoices
2.2.2 Other’s Records & Source Documents
These in turn refers those documents originated and or finalized by other department and shall be
transferred to finance department with their own appropriate copies. The following source documents
under each cost center are described based on the assumption that these divisions can be exist when the
factory starts production.
A. General Store
 Goods receiving Vouchers

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 Goods Issue Vouchers

 Goods Return Vouchers
 Goods Disposal Vouchers
 Fixed Asset Receiving Vouchers
 Fixed Asset Issue Vouchers
 Fixed Asset Return Vouchers
 Fixed Asset Disposal Vouchers
 Finished Product receiving Voucher
 Finished Product Issue Voucher
 Finished Product Transfer out Voucher
 Finished Product Transfer in Voucher
 Finished Product Return Voucher
 Finished Product Breakage and Disposal Voucher
B. Spare Part Store
 Goods receiving Vouchers of Spare Parts.
 Goods Issue Vouchers of Spare Parts.
 Goods Return Vouchers of Spare Parts.
 Goods Disposal Vouchers of Spare Parts.
Remember that- General Item refers those items necessary for the general purpose of XXX-------COMPANY.
Like Stationery, Cleaning, Uniform, safety materials etc.
C. Production
 Material Consumption report
 Work in process movement report
 Production Report
D. Commerce Department
 Approved Purchase orders with the necessary attachments.
 Approved contract agreements
E. Human Resource Department
 Attendance Summary Sheets
 Payroll related things like promotion, Demotion. Termination etc letters and data’s.
2.3. Journalizing and Accounts
2.3.1. Accounts
The type of record traditionally used for the purpose of recording individual transactions is an account.
An account is an individual accounting record of increases and decreases in a specific asset, liability, or
owner’s equity item. Based on their characteristics the accounts are usually grouped in to two. These are

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balance sheet accounts and profit & loss statement accounts. Balance sheet accounts also classified in to
asset, liability and capital accounts. On the other hand profit and loss accounts are also classified in to
expense and revenue accounts.

A. Asset Accounts
Any physical thing or right (tangible or intangible) that has a monetary value is an asset. Assets are
divided in to two groups for the purpose of presenting on balance sheet (i.e. current and noncurrent
/plant). Current assets refer those which have useful life of one year and less. While noncurrent refers
those assets which have a useful life of more than one Year.
B. Liability Accounts
Liabilities are amounts owed to others relating to loans, extensions of credit, and other obligations
arising in the course of business. It includes debts owed to outsides and is frequently described on the
balance sheet by titles that include the word payable. These liabilities are grouped in to current lasting
one year & less and long-term liabilities (lasting for more than one year).
C. Capital (Owners Equity)
It is the owner’s “interest” in the business or residual claim against the assets of the business after total
liabilities are deducted.
D. Revenues
This is the gross increase in capital as a result of sales of merchandise, performance of
services for customers, rentals of property, lending of money and other business and
professional activities entered for the purpose of earning income.
E. Expenses
Expenses are expired costs that have been consumed in the process of producing revenues.
2.3.2. Chart of Accounts
Listing of the accounts in a ledger is chart of account. Ledger is a group of accounts. XXX-------COMPANY chart of
account has four parts. The first part is main account, the second part is Subsidiary account. It is name of the
accounts. The main and subsidiary accounts are represented by four digit decimal numbers.
Main account indicates the account type in the chart. Each account has certain groups based on their
characteristics. The group name is main account. Cost center indicates the occurrence and control area of the
account. Subsidiary account stands for individual accounts within a group of accounts. Chart of account of XXX---
-CAMPANY PLC is vast, because of the nature of the business. For reference purpose it shall be available in a
separate form. For sample purpose the style is shown below.
1. Asset Type

1101-000-0001 cash on hand from cashier X

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1101 Stands for main account i.e. cash on hand

000 Stands for code of cost center (General account division)
0001 Stands for subsidiary ledger
The description will be name of the cahier
2. Liability type

2101-000-0001 Trade creditor X

2101 Stands for main account Trade payable/creditor group
000 Stands for cost center code (General Account)
0001 Stands for subsidiary ledger
The description will be name of the trade creditor

3. Capital account
3301-000-0001 Share holder x
3301 Stands for share holder main account
000 Stands for cost center code (General Account)
0001 Stands for subsidiary ledger
The description will be name of the shareholder
4. Revenue account
4101-000-0001 Sales of shop x
4101 stands for cash sales of products
000 stand for cost center
0001 stands for subsidiary ledger
The description will be name of the shop

5. Expense and cost of sales account

5101-000-0000 Cost of sale account type
5101-0000-0001 directs material X
5101 Stands for direct material
000 Stands for cost center code (Barley handling and storage)
0001 Stands for direct material X
The description will be name of the material
6101-000-0001 Expense type X
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6101 Stands for expense group X

000 Stands for cost center code (Selling & distribution)
0001 Stands for the name of the expense
The description will be name of the expense

2.3.3 Journalizing of transactions

Entering transaction data in the journal is known as journalizing. The journalizing process of XXX-------
COMPANY is going to be taken place based on purchasing, payment, material issuing, cash collection procedures
and statutory requirements like GAAP, financial accounting standards, auditing standards, etc….
In addition, Ware house and direct sales procedures, Regulatory body proclamations & regulations, Accounting
procedure and other related procedures and work instructions are equally important.
XXX-------COMPANY system of recording financial transactions is double entry accounting. Double entry
accounting refers a system of keeping a firms financial records where by each transaction affects two or more
accounts with equal debit and credits. A debit is an entry on the left side of an account. A credit is an entry on a
right hand side of an account. A basic concept of double entry accounting is that debits and credits must be
equal. A second concept is that asset account is increased by a debit entry. The first step of the journalizing
process is identification of business transaction. The next step will be checking the availability of the necessary
documents. The final step will be recording journal entry using chart of account. Here every one must be aware
of that the necessary documents and related procedural guidelines are met during journalizing. Unless the
related procedural guidelines and preconditions are met the journalizing process shall be stopped and further
investigation of the transaction will be carried out by the person who is going to journalize the transaction. The
journalizing process also requires the availability of consecutive and pre numbered documents.
2.4. Financial Data Processing and Control
In the design and implementation of an accounting system, selection of appropriate method of
processing and control of financial transactions is the decisive part. The reason is to avoid:
 Delay in decision making.
 Improper utilization of resources
 In effective and inefficient way of record keeping and reporting
 Weak internal control system
XXX-------COMPANY has established Peachtree Accounting system so as to process and control financial
transactions/ data’s occurred at a given point of time.
2.4.1 Account System
It accommodates the following information:-
 Business transactions (journals)
 Subsidiary and general ledgers
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 Trial balance
 Financial reports (Balance sheet & Income statement) etc.
Activities to be carried out under account system are:-

1. Maintain basic data like (to be used as a default information):

- Company Information Including accounting period starting from January 1 and ending in
December 31.
- Period set up (budget year, month)
- Journal codes (General journal, Payment journal, receipt journal etc).
- General ledger codes
- Subsidiary ledger codes
- Bank accounts
- Payable and receivable accounts for special control
- Report type to produce user defined reports at demand
- User defined report parameters
2. Data Entry
Transaction Registration
Transactions to be encoded under this system are:-
 Payment Vouchers (Both cheque & Petty cash)
 Cash receipt Vouchers
 General journal Vouchers
 Bank Credit & Debit Advices
Opening Register
It helps to register opening trail balance of a business organization at the time of starting
the system.
Bank Reconciliation
- To reconcile book of records with that of bank statement, it is helpful to enter the
necessary data so as to get reconciled bank accounts as much as possible.
Generate Opening Balance
- When we are in need of taking the preceding year closed balance as opening balance of
the consecutive years, this part is mandatory to perform this task.
3. Report List
The types of reports to be obtained from the system are:-
1.Subsidiary ledger reports
2.General ledger reports

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3.Transaction by date
4.Trail balance report
5.User defined reports
- Balance sheet based on our parameter
- Profit & loss based on our parameter
- Owners equity statement, and
- Cash flow statement.
3. INTERNAL CONTROL SYSTEMS
3.1 General
An enterprise’s internal control structure consists of the policies and procedure established to provide
reasonable assurance that the enterprise’s goals and objectives will be achieved. It Safeguards an organization’s
assets and enhances the accuracy and reliability of accounting records. The purpose of a system of internal
controls is to ensure that assets that belong to the business enterprise are received when tendered are
protected while in the custody of the enterprise, and are used only for authorized business purposes. Such
system consists of administrative control and accounting control.
Administrative control includes, but is not limited to, the plan of organizations, the procedures and records that
are concerned with the decision processes leading to management’s authorization of transactions. Such
authorization is a management function directly associated with the responsibility for achieving the
objectiveness of the organization and is the starting point for establishing accounting control of transaction.
XXX-------COMPANY has established various administrative control systems like payment procedures, collection
procedure, purchasing procedure, material issuing procedure, sales procedure (for ware house and direct
selling), product realization procedure and so on, to ensure resource utilization is for the purpose of company’s
objective and goal.
Accounting control comprises the plan of organization and the procedures and records that are concerned with
the safeguarding of assets and the reliability of financial records and consequently are designed to provide
reasonable assurance that:
a) Transactions are executed in accordance with managements general or specific authorization
(verification & checking)
b) Transactions are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles or any other criteria applicable to such
statements and to maintain accountability for assets.
c) Access to assets is permitted only in accordance with management’s authorization.
d) The recorded accountability for assets is compared with the existing assets at reasonable
intervals and appropriate actions are taken with respect to any difference.

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A system of internal control is not designed primarily to detect errors but rather to reduce the opportunity for
errors or dishonesty to occur. In an effective system of internal controls no one person should carry out all
phases of a business transaction from beginning to end. The system of internal control frequently may be
improved by physical safeguards. Computers help to improve the efficiency and accuracy of the record keeping
functions.
If an attempt is made to design a ’’full proof’’ system of internal controls, it should be remembered that
management’s primary responsibility is profitable operations of the business enterprise.
Therefore, the cost of the system of internal controls must be balanced against the benefit to be derived in
preventing errors and losses.
3.2 Control over cash
Cash includes Coins, currency, checks, money orders, and money on hand or on deposited at a bank or similar
depository. Internal control over cash is imperative to safeguard cash and assures the accuracy of the
accounting records for cash. Because cash is a means of acquiring goods and services, control of cash is of major
importance in any business enterprise. In addition careful scrutiny of cash transactions is required, because
cash may be readily misappropriated. Management of cash generally centered on forecasting and internal
control.
The responsibilities of XXX-------COMPANY finance department with respect to cash are:
1. To assure that there is sufficient cash to carry on the operations
2. To invest idle cash and
3. To prevent loss of cash due to theft or misappropriation.
Cash forecasting is necessary for proper planning of future operations and to assure that cash is
available when needed but not it is excessive.
While internal controls are necessary to assure that the cash is used for proper business purposes and
not wasted, misused, or stolen. XXX-------COMPANY finance department has responsibility for
controlling and protecting all assets of the company. However, special problems may exist in controlling
cash. Because of its highly liquid nature.
One of the major devices for maintaining control over cash is the bank account. To get the most benefit
from a bank account all cash received must be deposited in the bank and all payments must be made by
check and payment authorization (through authorized letters and CPO’S) except recurring and smaller
expenditures of the business. When such system is strictly followed a double record of cash will be
maintained, one by the business and the other by the bank. XXX-------COMPANY has bank accounts (both
saving and current accounts)
3.2.1 General Policies, Procedural guides and internal control.
Cash management is one of the most important aspects of the company asset management to manage
this cash the following policies procedural guides and internal control has to be made.

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 All collection shall be made against pre-numbered official company cash receipt voucher or
cash sales invoice.
 All collection should be made timely.
 Cheque receipt must be in the name of the company
 Cash and cheque collected should be kept under safe custody and shall be insured against
all possible risk with maximum amount.
 Cashier shall not have part in the preparation or access to the accounting records
interfacing their daily routines.
 Cash receipt voucher shall not be issued until cheque of customers is honored by the bank
and remitted to the company account.
 No receipt shall be issued for collection of cash sales or credit settlement transferred
through bank unless the customer so demand.
 Only money and other valuables, the receipt of which is fully evidenced by document shall
be kept in the cashier’s safe.
 Senior person in the finance department shall make cash count at regular interval to
ascertain that policies are adhered.
 The internal audit shall make surprise cash count for better internal control over cash.
 All cash and other valuable items found in excess at the time of count shall be considered
as company’s asset, receipt voucher shall be issued against the excess amount and
quantity.
 All payments must meet regulatory and statutory requirements and obligations.
 Cash collection should be deposit in bank daily.
 Company’s cashier shall be escorted by security guard when carrying of cash in excess of
birr 50,0000 to and from company premises.
 Payments shall not be effected from daily cash collection.
 Collection from all credit sales shall be made as per the agreement with the agent within
the prescribed date.
 All collection of other income shall be evidenced by proper authorization for prices on the
basis of competitive offer and be supported by cash receipt voucher.
 All collection shall be deposited only in the saving bank account of the company.
 All customers’ cheques should be deposit to the bank within the next working day of
receiving the cheque.
 Under no circumstances shall blank cheque be signed any of the signatories.
 The maximum single payment that can be effected from a petty cash fund shall be birr ------
--- and any payment more than birr ------------- must be by cheque.

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 All posted checks shall be presented to bank on their date of maturity.

 Issuance of check shall be made by two signatory,
 The limit of authority shall be:
 The finance manager with the general manager above birr ---------------------------
 The finance manager with deputy general manager up to ---------------------------------
 The finance department representative other than finance manager with general manager or
deputy general manager up to --------------------------.
3.2.2 Cash collection
• XXX--COMPANY has procedural guide for collection of cash. Only designated personnel should be
authorized to handle or have access to cash receipts. The main activities to be carried out to control
collection of cash are:
 The reason and kind of collection has to be identified first
 For sales type collection cash sales invoice must be prepared and approved
 For other type of collection general account head has to issue a memorandum about the
reason of collection to the cashier
 The cashier has to stamp, received with tanks for cash sales invoice and prepared cash
receipt voucher (for collection other than sales type)
 The general account head has to arrange the necessary conditions for deposit of cash.
 Responsible finance official has to be assigned to verify collection and deposit of cash.
 After depositing the collected cash the cashier has to provide the deposit slip with the cash
receipt voucher and sales invoice for the person assigned to verify the equivalence of the
deposited amount with the collected amount.
 If there is any deviation the verifier shall inform to the cashier. At times the reason for
deviation is not identified he/she has to inform immediately to his boss. This will be going
to happen the day after its collection not more than that.
 After verification of the deposited amount with collection the records has to be filled with
their own pre numbered sequence for reference.
 Supplementary references for this are:
 Warehouse selling procedure
 Direct selling procedure
 Cash collection procedure
 Payment procedure
 Cash collection work instructions etc.

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3.2.2.1 Cash receipt voucher and Cash/Credit sales Invoice

To collect cash from customers, employees, and others for goods sold and services rendered XXX-------
COMPANY uses two documents. The documents are cash receipt vouchers and cash sales Invoice. Cash
receipt voucher serves for collection of cash other than sales. While cash sales Invoice also serves for
collection of cash from customers for goods sold to them. On the other hand customers may deposit cash
directly to our bank account, for this case credit sales invoice will be prepared instead of cash sales
invoice. This has an advantage of safeguarding cash by transferring the risk of holding cash. On the
contrary great care has to be made during this condition. Either confirmation from bank must be
obtained, or the customer holds the deposit advice.
Essential activities to be carried out here:
 Before having cash receipt voucher and cash sales invoice permission has to be requested
from revenue & customs authority.
 These vouchers shall be printed in their own pre numbered sequence and must be kept in
the custody of financial records and document control center.
 Issuance shall be against signature and after verifying that previous issues, if any have
been returned.
 The custodian shall maintain up-to-date record of receipts and issuance of the pads using
the document follow-up form.
 Before use pads shall be verified by internal auditor for correctness and completeness of
the pads.
 During issuance the pads shall be in the order of numerical pre number
 Physical count of documents should be taken at least monthly and the results should be
compared with the records. Any variance shall be thoroughly investigated immediately
without undue delay.
 Deletion and alteration of figures on documents is strictly forbidden.
 All cancelled documents shall be marked “VOID” and issued to the custodian except a copy
to be attached with pad.
3.2.3 Cash payment
Payment is with drawl of cash for goods or services rendered. To effect cash payment XXX-
COMPANY has three systems for control purpose. The systems are cheque payment, Bank
transfer payment and petty cash payment systems. Cheque payment shall be effected for goods or
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services with value of more than birr --------------, on the other hand for values of birr ------------
and less the payment shall be made though petty cash payment system. For reliability of this
system there is a payment procedure. For both cases the payment has to be made with the
approval of the authorized persons.
Necessary condition to be considered in relation to payments:
 Pre-numbered Cheques should be used and each Cheque should be supported by an
approved invoice or other document.
 XXX.COMPANY has to establish a petty cash fund for smaller and recurring
expenditures. The limit can be based on management Decision.
 To make the purchasing process purposeful purchase fund has to be established based on
the purchasing manual of the Company.
 All payments shall be effected with the approval of the authorized person.
 The responsible persons make every payment as per the payment procedure.
 Cheques shall be requested from bank with the authorization of the delegated signatories.
 Cheque pads shall be verified for its correctness up on receipt from the bank’s counter.
 The custodian of cheques can be the general accountant or disbursement accountant.
 Cheques shall be issued to the person in charge of its preparation up on return of used or
cheque stabs.
 The movements shall be controlled by using document follow up form.
 Spoiled and cancelled cheques shall be stamped “void” and retained in the cheque book.
 The authorization of payments shall be made on pre numbered payment vouchers. Pre
numbered cheque payment vouchers for cheque payments and pre numbered petty cash
payment vouchers for petty cash payments.
 Payment vouchers shall be kept under the custody of the financial records & document
control center.
 The issuance of payment vouchers shall be made up on return of the previous issue. And it
must be issued to the person in charge of its preparation.
 Like other documents payment vouchers shall be controlled through document follow up
form.
 Physical count of these documents shall be made at least once in a month.
 Under no circumstance shall blank cheques be signed by any of the signatories.
 Cheques issued as payable to government organizations can be stamped “AC payee only”.
 At the time of issuing signed and approved cheques the payee has to sign on the payments
voucher together with his name.

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 After payment is effected the documents shall be delivered to financial records &
document control center.
 All payments must meet regulatory and statutory requirements and obligations.
 Unless all the necessary source documents are fulfilled, payments shall not be effected.
Related documents to be used as a reference:
 Payments procedure
 Payment work instruction
 Purchasing manual
 Purchasing procedure
 Human resource manual
 Authorized documents like purchase orders, contract agreements.
 Various formats etc.
3.2.4 Advance payments
To facilitate the operations of the Xxx.company, advance payment mechanism has been
established. Advance payment refers payments made in advance for those operations that need
immediate outlay of cash to get accomplished. This payment shall be settled the day after the
accomplishment of the operations. These include travel advance, fuel advance, salary advance
and purchase advance. Their payment will be made from a fund established for this purpose.
This fund is revolving fund. To authorize these type of payments the necessary source
documents shall be a valid like for travel and per diem advance- travel and payment request
form has to be filled and approved by immediate supervisor and department manager of the
person whom to travel.
The amount of the fund to be established shall be based on the finance department proposal.
List of necessary activities to be performed here are:
 Finance department shall raise the proposal for establishment of the fund.
 The management committee of XXX-COMPANY has to approve the fund.
 After the fund is established the department has responsibility of controlling and
administrating this fund properly.
 The payment shall be effected through suspense payment voucher.
 Like cheque and petty cash payment voucher the necessary source documents shall be
fulfilled to make payments.
 When we say necessary the source documents shall indicate urgency of the task to be
performed and otherwise.
 Those source documents that need approval by the concerned party shall be approved
first.

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 The suspense voucher can be authorized by the finance manager and/ or general account
head.
 The fund shall be counted once in a month and be reported if there is any variance.
 A person who have advance not settled must not be entitled additional payment.
 Per diem Advance should be settle after completing of the work within 3 working days
 Salary Advance should be settled with that month
 Purchase Advance should be settled within 3 working days after the goods and service
Received by store man.
 This fund shall be paid for those activities that need urgency of payments of cash.
Related documents and procedures to be considered here:
 Payment procedure
 Suspense payment work instruction & approved TOR.
 Purchasing procedure and manual
 Human resource manual
 Collective agreement and administrative manual
 Suspense payment voucher
 Travel and payment request form
 Payment work instruction
 Etc
3.2.5 Bank accounts
The use of bank minimizes the amount of currency that must be kept on hand and contributes
significantly for a good internal control over cash. XXX-COMPANY has bank accounts to safeguard its
cash by using a bank as a depository and as a clearing house for checks received and checks written and
more over to safe guard and control the movement of cash and to minimize risk of holding too much
cash in the company premises safe box. XXX-COMPANY has opened bank accounts as per the layout of
the customers and operations to be performed. Unless the bank accounts are controlled and managed
effectively and efficiently they have also draw backs and risks. Finance department is responsible for the
management and control of cash at bank. To ensure the effective & efficient management and control of
cash at bank the following activities shall be adhered.
 Payment shall be made as per the payment procedure of XXX-COMPANY.
 Without the singing of the authorized person no payment of cash will be effected through
cheque and ordering letters.
 Finance department in general and general account in particular have the responsibility of
collecting bank credit and debit advices timely.

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 Payment from bank accounts can be made through cheque or approved letters by the
authorized persons.
 Finance department has the responsibility of issuing daily cash movement report to the
concerned parties.
 The report shall be prepared without undue delay (i.e. the next day morning shall be the
reporting period).
 Monthly reconciliation of accounts shall be under taken within five days after the last day
of the month. And if there is any deviation it has to be investigated thoroughly within the
next five days.
 Excess cash shall be kept in saving accounts and/or to be invested otherwise.

3.3 Control Over receivable

Receivables are Amounts due from individuals and other companies. The balance sheet of every business
enterprise includes a variety of claims from other parties that generally provide a future inflow of cash. These
claims are receivables. They arise from transaction and events such as sales of goods or services on credit ,
loans made, subscriptions obtained from investors for capital stock or bonds, income tax refunds, claims
resulting from litigation , and amounts due from leasing of assets.
Receivables from customers frequently represent a substantial part of a business enterprise’s current assets.
Poor screening of applicants for credit or an inefficient collection policy may result in large losses consequently
strong accounting control and effective management of receivables are typical characteristics of most profitable
enterprises.
XXX-COMPANY has two types of receivables. These are trade receivable and receivable from miscellaneous
sources.
3.3.1 Trade receivables
These types of receivable are the most common receivables result from revenue generating activities such as
credit sale of Finished malt. These are going to happen when the Company wants to increase sales volume or
customers/agents want to expand the market area. It also arises when the Company recruited new agents.
These types of receivables are directly related to the main purpose of the Company.

3.3.2 Receivable from other sources

The type of receivables results from transactions not directly related to, sale of products and services. For
example short term advances to affiliated companies, sub-contractors, staff loan, Insurance and rent
prepayments, etc. These types of receivables are mostly collected within the budget year.

3.3.3 Accounting system and internal control

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Business enterprises with a large volume of credit sales usually computerize their accounting records. A
computerized system enables the operator to record the credit sale post to the controlling and subsidiary
accounts in a single operation. Such a system also facilitates the preparation of financial statement.

An effective internal control system of receivable comprises the following.

 Equivalent amount of guarantee shall be held at the time of providing credit to customers
 Schedule of trade credit has to be made for control purpose.
 Follow up of the credit schedule shall be taken place and finance department has the
responsibility of following the credit schedule.
 It shall be provided based on the credit policy of the company.
 Regulatory and statutory requirements shall be met at the time of contract agreement of
the credit transactions.
 At the end of the month the amount receivable from each customer is summarized in a
statement form. The statement of customers shall be mailed to the customer or informed.
 Sales of goods and related cash collections shall be an integral part of handling each
customer’s receivable.
 Trade receivables shall be recorded when sales are made and title to the goods passes.
 Receivables from services shall be recorded only as services are performed.
 Receivables shall not be recorded when a customer’s order is received or when goods are
produced.
 Generally prior to granting credit to customer, finance department has the responsibility of
investigating the completeness of necessary precondition.
 Adjustments to receivable account shall be authorized or reviewed by responsible party.
 Effective collection procedures shall be established to insure timely collection of
receivables and to minimize losses.
 It demands the proper use of controlling account and the account receivable ledger.
 Analysis of receivables should be done according to the age.
Related documents and procedures to be used are:
 Sales procedures (Both warehouse and direct)
 Cash collection procedure
 Credit policy of the company
 Regulatory requirements
3.3.4 Uncollectible and doubtful accounts
Due to various reasons some part of the receivable account may be found uncollectible. Uncollectible
shall be managed accordingly based on the nature of the receivables. Before it is said uncollectible
efforts has to be made to get collected and the reason has to be investigated. Receivables that will not be
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collected have zero value. These accounts will be separated as doubtful and a provision has to be made
for these. The objective in the estimation of doubtful accounts is to prevent an over statement of assets
and revenue in the period in which they are overcome.
An effective way to test the adequacy of the allowance for doubtful accounts and to estimate doubtful
accounts expense is to make an analysis of accounts receivable by age group and probability of
collection. Aging of receivables is a summary that classifies the balances of all receivables according to
whether the amounts are not yet due or are past due by varying lengths of time. An estimate of the
average collation experience for each age class provides a basis for estimating the portion of outstanding
trade receivables that may prove to uncollectable. Based on that report the responsible person can
control the uncollectible.
To write off uncollectible from the balance sheet the following has to be made.
 Investigation and reason of the uncollectablity shall be documented by finance department.
 Make sure that unusual and infrequent events are happened on the customers.
 Business condition during investigation.
 Make sure that there is no possible alternative to collect receivables.
 The individual receivable accounts to be written off by finance manager in a given
accounting period shall be not more than -------------------- Birr.
 Accounts to be written off by finance manager shall be reported to the management
committee with detailed justifications.
 The sum of individual accounts to be written off by management committee of the Company
shall not exceed birr ------------------- in a given accounting period.
 Amounts exceeding birr ------------------- shall be written off by Board of directors.
 The process shall be based on regulatory and statutory requirements.
3.4 Control over Inventories (STOCKS)
Inventories consist of finished goods ready for sale to customers, work in process goods which are partially
completed and held in the various stages of production, by products, Scraps and raw materials including
components on hand waiting to be used in production. Inventory items are acquired, placed in production,
converted to a finished product and sold by a manufacturing enterprise. The sales of finished products are main
source of revenue for manufacturing enterprises. XXX-COMPANY major source of revenue is generated from
Malt sales. These are existing finished product of XXX-COMPANY.

XXX-COMPANY Inventories are grouped in to:

 Finished products
 Input materials
 Spare parts
 Containers
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 General items and

 Work in process inventories
 Finished goods are items that are completed and ready for sales and include the same cost
elements as those in goods in process.
 Work in process /Good in process refers items partially completed products and includes the cost
of direct material, indirect material labor and factory overheads.
 Input materials refers basic commodities or other products obtained directly from natural
resources or acquired from others, which will be incorporated physically in to the finished
product.
 Containers are items used for holding finished products till the end users.
 General items are those items used for general purpose of the company.

3.4.1 Methods of Inventory Control

XXX-COMPANY has two methods of ascertaining the inventory quantities on hand. These are periodic
and perpetual methods.
The periodic system relies on a physical count of the goods on hand at the basis of control, management
decisions, and financial reporting. Although this method may give accurate results on a specific date
there is no continuing record of the inventory. To fill the gap of this method XXX-------COMPANY has
applied perpetual inventory system. The perpetual inventory system requires a continuous record of all
receipt and withdrawal of each item of inventory. This method provides a better basis for control than is
obtained under periodic system. When the perpetual inventory system is used, a physical count of the
goods owned by XXX-COMPANY must be made periodically (for those items that the responsible officials
are able to count within three days at most) to verify the accuracy of the inventories reported in the
accounting records.
Any discrepancies discovered must be corrected so that the perpetual inventory records are in
agreement with the physical count.
Activities to be carried out:
 Cost and budget division of Finance Department is responsible for the control and management of
inventories to achieve the company’s objective.
 There must be pre numbered stock receipt and issue voucher.
 These documents shall be controlled using document follow up form.
 The Custody of these vouchers can be general item store.
 The vouchers must be issued in their own pre numbered sequence.

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 Physical count of input materials, finished products, and empty containers shall be made monthly at
every place where they are.
 Receiving of goods purchased shall be as per the purchasing procedure & manual.
 Issue shall be as per the company’s material issuing procedure.
 Variance between physical count and perpetual records shall be reported and cleared within ten days
after count.
 The inventory control and physical count takers shall be different official
 All procedural guides related to inventories shall be referred for control of inventory.
 Sales procedures (warehouse & direct selling)
 Property handling procedure
 Purchasing procedures
 Item disposal procedure
 Purchasing manual
 Material issuing procedure
 Other work instructions and reference.
3.4.2 Purchasing and cost of Inventory
Cost of inventory is made up of the purchase price and all expenditures incurred in acquiring such item.
These costs include transport, insurance, custom duties, transit charges, and so on. XXX-------COMPANY
purchase inventories locally and abroad. The cost of goods to be purchased from locally includes invoice
price plus some material costs incurred till company’s premises. The materiality shall be more than 20
percent of the invoice price. And these additional costs shall be easily traceable to the item purchased.
Cost of inventory to be purchased from abroad includes.
 FOB price
 Bank charges
 Marin or air cargo insurance charge
 Air/ sea /ocean freight charge
 Transit service charge
 Custom duties (import tax, sur tax, and the like)
 Inland transport charge
 Other charges like interest and others.
But these costs are considered as cost of goods or inventories purchased when the agreement b/n the
supplier and buyer (XXX-COMPANY) are agreed to do so. Cost and budget division of the company is
responsible for the cost identification and accumulation of items purchased and received.
Duties and responsibilities:
 Responsible person shall be assigned for accumulating and allocation of costs.

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 The person assigned to accumulate and allocate costs shall open files for items to be
purchased from abroad.
 The filing shall be using purchase orders and keeping copy of other related documents
together with cost accumulation and proration sheet.
 The responsible person for determination of cost of inventories shall check first the
completeness of the receiving voucher.
 The completeness refers the availability of the necessary information on it. The voucher
needs to have purchase requisition number, purchase order number, invoice number,
suppliers name, date, the inspectors name and signature (the person requested for purchase
of the item), remarks (if any), list of the items description together with unit of measures
and quantity, and name and signature of the store handler.
 The necessary information’s on the receiving voucher shall be clearly stated and written.
 Approved purchase orders together with original goods receiving voucher copy shall be
attached with the payment voucher unless the payment is paid in advance as a down
payment.
 The person responsible for determining cost of inventories must check the availability of
necessary documents from payment vouchers. If the documents are not complete the
variance shall be investigated immediately without un- due delay.
 Adjustments for cost of inventories shall be taken with the knowledge of the cost and budget
division head and /or finance manager.
 Costs other than invoice price for locally purchased items shall be included when they are
exceeding from the materiality principle of inventories stated above. And shall be traceable
to the specific item.
Documents to be used as a reference:-
 Purchasing Manual
 Purchasing procedure
 Payment procedure
 Cost accounting manual
 Store handling procedure
3.4.3 Stock Valuation
One of the most significant problems in determining inventory cost comes about when identical units of
a certain commodity have been acquired at different unit cost during the period. In such cases it is
necessary to determine the unit price of the items issued and on hand. To solve this problem XXX-------
COMPANY uses a moving average method of stock valuation. Under this method of valuation costs shall
be charged against revenue according to the moving average unit costs of goods issued to production or

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for consumption. The same moving average unit costs are used to determine cost of the ending
inventory. This is because of the reason that valuation system of inventories has significant effect on
both balance sheet and profit and loss statement preparation. This method is used for raw materials and
other purchased stock items. Finished products and work in process are valued based on the cost of
production report. The cost of production report is prepared using process cost systems of the
Company.
3.4.4 Inventory Reporting
XXX-------COMPANY inventories shall be reported periodically in balance sheet as well as in internal
purpose reports. The objectives are to reveal the type, the relative liquidity, and the basis of valuation of
inventories. Investment in Inventories shall be determined on a basis consistent with that of preceding
years. If a change is made in the method of determine inventory cost the change shall be explained fully
as to its effect on the current and prior years’ financial statements.
The reporting shall be based on regulatory and statutory requirements like, income tax proclamation of
government of Ethiopia, financial reporting standards, FASB requirements etc.
3.5 Control Over Plant Assets
3.5.1. General
Assets are resources owned by a business which are used in carrying out such activities as production,
consumption and exchange including current and plant assets. Whereas plant assets are tangible
resources owned by a business enterprise that are permanent in nature to be used in the normal
operation of the business and not intended for sale to customers in the ordinary course of the business.
These assets are classified on balance sheet as plant assets or fixed assets. These include equipments,
furniture, tools, machinery, Land improvements, building and land etc. Length of life must be capable of
repeated use or benefit and are expected to last more than one Year.
Assets acquired for resale in the normal course of the business like container cannot be characterized as
plant assets regardless of their durability on the length of time they are held. These types of assets are
titled as investments. XXX-------COMPANY considers assets as plant or fixed assets when the following
are satisfied:-
 Useful life more than one year.
 Assets not ready for resale at anytime in the future.
 Value shall be birr 1,0000.000 and above
 Even if the acquisition cost of furniture & equipments are less than birr 1,0000.000 they
have to be considered as fixed assets.
3.5.2. Acquisition of plant Asset

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Plant assets are recorded at cost in accordance with the cost principle. Cost of acquiring a plant asset
includes all expenditures necessary to acquire the asset and make it ready for its intended use like
purchase price, freight costs, and installation costs.
These costs include:-
 Invoice price
 Transport
 Transit costs (costs incurred in the process of transporting from seller to buyer
premises)
 Installation costs
 Repair and maintenance
 Expansion and upgrading
Costs other than invoice price shall be capitalized (considered as cost of that plant asset). The
capitalization policy of XXX-------COMPANY shall be accounted as per the regulatory and
statutory requirements. Like proclamation No.286/20002 and GAAP.

3.5.3. Control over Fixed Asset

Effective control system shall be established to ensure:-
 The use of plants assets for the company operation.
 The availability of a given fixed asset
 The safeguard and that all acquired plant assets are registered and controlled.
Duties and responsibilities in relation to fixed assets
 Fixed assets shall be booked in the financial records on receipt of the items by the company
against official receiving documentary evidence.
 Receipt of fixed assets shall be descriptive and justifiable for control.
 The supply department shall affix identification number on all its fixed assets.
 A fixed asset register shall be maintained by both finance and supply department for easy
control and identification of the items.
 The register shall contain valuable information such as:-
 Description
 Identification Number
 Date of Acquisition
 Acquisition Cost
 Location of the beholder
 Accumulated Depreciation
 Beginning and ending book value
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 Depreciation for the period

 Remarks
 Reference etc.
 The register shall be reconciled and agreed with both financial records and counts.
 Sales or disposal of fixed assets shall not be affected prior to approval of board of directors.
 If the asset disposed was bought on duty free basis the buyer shall be notified of the case
and the duty shall be paid by the buyer.
 Ownership documents (title deeds) shall be kept by responsible officials of the company.

3.5.4. Accounting Records

3.5.4.1 Depreciation and amortization
Depreciation is allocation of the cost of a plant asset to expense over its useful (service) life in a rational
and systematic manner. A plant asset is a bundle of future services. The cost of acquiring such an asset is
a measure of the amount invested in future services that will be provided by the asset. At the time of
acquisition, cost is also an objective measure of the exchange value of an asset. Cost is used as a basis of
recording and reporting plant assets, because it is reliable and measurement of the investment in the
future. As the plant asset is used in operations portion of the original cost is used up. The unused
position said to be carrying value /book value. The used portion of the cost will be reported to income
statement, while the unused portion is going to be reported on balance sheet as investment in fixed
asset.
The used portion is usually said to be depreciation. There are many types of depreciation calculation
methods. XXX-------COMPANY uses straight-line & pooling method to calculate plant assets depreciation
by which depreciation is the same for each year of the asset’s useful life based on proclamation number
286/02, article No 23 for both financial reporting and income tax reporting purpose the company can
establish another method of depreciation calculation suitable for the company’s nature and character.
The depreciation calculation rates are:-
o Land improvement and building 5% Straight line
o Intangible assets 10% Straight line
o Plant and Machinery 20% On book value of the pool
o Vehicles 20% On book value of the pool
o Furniture and equipment 20% On book value of the pool
o Computer & accessories 25% On book value of the pool
3.5.4.2. Additional Cost of plant assets
Expenditures for acquiring plant assets or for addition to plan assets and expenditures that adds to the
useful life of plant assets for more than one accounting period are capital expenditures. Such

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expenditures shall be added to the cost of plant assets or capitalized and to be depreciated. These
includes additions, betterments and extra ordinary repairs when we say additions those costs or items
added to existing plant assets to increase its useful life. Betterments are expenditures that increase
efficiency or capacity for the remaining useful life of a plant asset. Extra ordinary repairs are the type of
repairs of plant asset that have potential of increasing its useful life.
Therefore, additions betterments and extra ordinary repairs shall be added to or capitalized and
depreciated based on the depreciation policy of the company. But things to be considered here is to what
extent it shall be capitalized unless the income tax law and other regulations hinder to do so, cost of
additions, betterments and extra ordinary expenditures shall be added to the cost of plant assets when
the amount of expenditure is more than 20% of the book value or depreciation base of the asset
(proclamation No 286/02 art No.23).
3.5.4.3. Construction In Progress
Usually a building, machine or equipment may be constructed by a business enterprise for its own use.
Either this is an economical method of acquisition or the quality or specifications of the asset may be
controlled better if the asset is self constructed. A number of issues arise during determination of the
cost of the asset completed.
Under this case, the cost of constructing this type of project shall be accumulated in a ledger specified to
the project. The costs to be accumulated here are direct costs and indirect costs. Direct costs include
those costs directly related to construction of the project i.e. material labor design, engineering etc.
Indirect or overhead costs are those costs not directly related with the project. Like supervisors of the
project who have another duty, fuel for vehicles serving some other additional purpose of the company
etc. Therefore, after completion of the construction project the accumulated cost shall be closed to the
fixed asset account. These cost includes all direct costs and indirect costs to the limit of their traceability
to the project and otherwise.
3.5.4.4 Plant Asset acquired by Gift
If XXX-------COMPANY receives an asset with zero cost, the asset should be recorded at its current fair
value determined on the basis of the best evidence available.
3.5.4.5. Retirement, Disposal and Exchanges
When a plant asset is retried, disposed or exchanged the accumulated depreciation on the assets, first is
brought up to date. The second requirement is to remove from the accounting records all ledger account
balances relating to the asset and to recognize any gain or loss from the disposal of the asset.
The accounting procedure for retirement, disposal and exchange of fixed assets shall be based on article
23 of pro.No.286/02.
3.5.5 Fixed Asset reporting

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Fixed assets shall be presented on balance sheet by their own book value at the end of the accounting
period.
3.6. Liabilities
Liabilities are existing debts and obligations which creditor claims against assets of the company.
Usually they are presented on balance sheet by the name payable. Money claims against a firm may
originate in many ways such as purchase of inventories and service on account, loan from banks (both
short term and long term) etc. At any particular movement, a business may also owe its employees for
salaries and wages accrued banks and creditors for interest accrued, and government agencies for taxes.
Liabilities are recorded when obligations are incurred and are measured at the amounts to be paid or at
the present value of these amounts. They have two forms. These are current and long term liabilities.
The distinction between current and long term liabilities is important in an evaluation of the financial
position of a business enterprise and its ability to meet maturing obligations.
Thus current liabilities include obligations for items that have entered in to the operating cycle. Such as
payables to suppliers and employees, cash advance from customers, accruals of rents, taxes etc.
Obligations incurred outside of the operating cycle and not payable in one year are long term. Like long
term bank loan, bonds etc.

3.6.1. Recognition and Valuation of current liabilities

XXX-------COMPANY liabilities refer future cash out flows that result from past transactions and events.
And that may be measurable with reasonable accuracy. Measurement is taken place at the time it is
incurred. The source of measurement can be contract agreements signed by the authorized person,
services rendered by the supplier, credit sales raised by the sellers etc.
3.6.2. Control over Liabilities
Liabilities are obligations of the company. Hence they are obligations; they may have penalties, when
they become overdue. The penalty may be financial or activities that going to halt some party the
company’s operation. These all might have significant impact in the performance of the company. Thus,
responsibility shall be assigned to the person who is able to control over liabilities.
Duties and Responsibilities:-
 Liabilities shall be recorded when they are incurred (Accrual Bases).
 A separate measurement of record shall be maintained (subsidiary & general ledgers).
 Follow-up has to be made on records.
 Report on liabilities has to be prepared on periodically (aging and justifiable other reports).
 Reconciliation with creditors shall be made at least quarterly.
 Credit notes shall be raised to creditors timely if the liability is justifiable and reasonable.
 Tax obligations shall be paid timely without undue delay.
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 Settlements shall be made as per the agreement with the creditors.

 Necessary supporting documents shall be availed prior to recording.
3.6.3 Payroll Liabilities
Monthly payroll preparation is one of the regular tasks of finance department in general and general
account division in particular. It has many calculations and mathematical approaches to produce a given
individual employee pay of a month. So that systematic way of handling this task is vital for effective and
efficient accomplishment of monthly payroll preparation.
At any particular time a business may owe its employees. This type of liability arises from payroll
related transactions. Payroll refers to the total amount paid to employees for a certain period. Payroll
expenditures are usually significant for several reasons. The first reason, employees are sensitive to
payroll errors or irregularities and maintain good employee moral requires that the payroll be paid on a
timely, accurate basis. The second reason, payroll expenditures are subject to various federal and
regional regulations. The final reason, the amount of these payroll expenditures and related payroll
taxes has a significant effect on the net income of most businesses.
Although the degree of importance of such expenses varies widely, it is not usual or fair for a business to
expend nearly a third of its sales revenue for payroll and payroll related expenses in developed
countries.
3.6.3.1. Control Over payroll
 Salary and benefit payment shall be according to the organization structure, administrative
and collective agreement of the company.
 Salary of employees shall be paid periodically based on the collective agreement, work
rules and contact of employment.
 Wages for daily labor and contract employees can be paid based on the contractual
agreement of each party.
 Payroll shall be prepared at head office for both branch and head office employees unless
otherwise.
 The basis of payments shall be attendance sheet compiled by human resource department.
 Salary and wages shall be paid only for work done unless otherwise provided by relevant
law.
 Human resource department has to issue the compiled attendance sheet to finance
department five days before the pay day.
 Changes and adjustments occurred during the payroll period shall be given to finance
department timely (before five days). These are promotion, demotion, letters, summary
sheets etc.
 General account division has to keep all source documents needed for payroll preparation.

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 Payment can be effected by any means as per the agreement between the employee and
the company.
 Unless otherwise agreed salary and wages shall be paid on working days and at the place
of work or via banks.
 Whenever overtime work is appropriate. It shall be authorized by general manager of the
company.
 When overtime works are allowed, overtime hours shall be recorded on overtime sheet
and approved by responsible persons.
 If overtime payment shall be made with periodical salary payments it shall be given to
finance department five days before pay day.
 Overtime calculation shall be based on labor law proclamation and collective and
administrative agreements.
 In case where the day for payment fall on Sunday or a public holiday the day for payment
shall be the previous day.
 Unless otherwise provided by law or collective agreement or administrative manual, salary
and wages shall be paid directly to the worker or to a person delegated by him/her.
 The salary and wages of workers shall not be deducted, attach or set off except where it is
provided otherwise by law or collective agreement or work rules or in accordance with a
court order or a written agreement of the worker.
 The amount in aggregate that may be deducted at any one time from the workers wage
shall in no case exceed one third of his basic salary unless he/she is agreed to do so with
written evidence.
 Previous period payroll shall be processed and recorded to the ledger before starting the
next payroll.
 Unclaimed salaries shall be evidenced by official cash receipts and/or deposited to
company’s bank account within seven day from the date of withdrawal.
 A list of employees of each cost center shall be provided to finance department quarterly
from human resource department.
 Salary advances paid to employees shall be collected within the period of its payment from
his/her own salary.
 Employees provided advance payment to accomplish certain operations of the company
shall settle their own advance payments prior to salary payment otherwise general
account division has to held the salary of these type of individual till settlement of the
advance.

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 Senior staff of general account division who is not involved in payroll preparation shall
check periodical payrolls using previous period payroll as a reference.
 Payment shall be made by a person who has no part in the preparation of payroll or
through a bank.
 Payroll deductions shall be paid to the concerned party timely.
 The Pension contribution shall be paid based on Government proclamation
 The Provident fund shall be paid based on the labor law and the collective agreements.
3.7. XXX-COMPANY basis of accounting system Recognition of Revenue
3.7.1. General
Revenue is in flow or enhancement of assets of a business enterprise or settlement of liabilities or both
during an accounting period from delivering or producing goods, rendering services or other activities
that constitute the enterprises ongoing major or central operations. Revenues generally result in
increase in cash and receivables. It is necessary to identify events and transactions that resulted in
inflows of economic resources from customer and measure the value of inflows in terms of a uniform
standard of measurement such as money. In today’s more complex and uncertain business environment
accountants are faced with two tasks relating to revenue. These are when revenue is realized and at
what amount of dollar value.(recognition)
Generally the objective of every business organization is to generate income that will provide owners
with a return on investment (i.e. profit). The major source of revenue for Xxx.company PLC is from sale
of XXX.
3.7.2. Revenue Recognition
Revenue is measurable value of goods and services that a business enterprise transfers to its customers
and clients. And it should be realized. Realization refers the process of converting none cash assets to
cash or claims to cash. To record given revenue, a measurable transaction (i.e. sales) or an event (i.e.
service) has to be completed or is sufficiently finalized.
Finally the realized revenues shall be recognized revenue in the accounting records. Thus revenue is
recognized in XXX-COMPANY at a specific stage of the earning process, When the following realization
conditions are met:-
1. Sufficient reliable evidence exists - for instance invoices shall be approved based on sales
procedures of the company.
2. The earning process is complete or vertically complete refers all the necessary costs have
been known with reasonable accuracy for goods and services to be rendered.
3. Collection of the claims from customers and clients who have purchased goods and services
is reasonably assured.
3.7.3. Control of Sales revenue

33
 ----------------------------------P.L.C

Major sources of revenue for XXX-------COMPANY are sales of XXX. Sales of these items are
performed through warehouse selling.
Activities to be considers during selling
- There must be cash or bank deposit slip or approved contract agreement (for the
case or credit sales) prior to preparation of sales invoices.
- Sales invoices shall be prepared by sales section of the company.
- After preparation the sales invoice shall be checked and approved by the responsible
officials of finance department.
- The casher has to collect the cash (for the case of cash sales) based on collection
procedure of the company.
- After collection of cash, sales section has to issue loading order to finished product
store of the company.
- The sales section has to write sales invoice number and other related references on
the loading order.
- Finished product store has to prepare finished product issue voucher and gate pass
simultaneously with reference of loading order received from sales section.
- The property administrator has to approve both gate pass and finished product store
issue voucher after recognizing the necessary preconditions are completed and
viable for issue.
- The approved issue vouchers must be sent to the concerned party the day after its
approval and issue of the product is going to be effected immediately.
- After receipt of the issue voucher responsible official of the general account division
has to attach it with the invoice. Hereafter the sales transaction is completed and all
the documents will be given to the financial documents and records control center.
- The responsible official of the company has to encode sales transaction in the
appropriate software of management information system (sales system).
- General account division has to follow-up the data encoding, data processing and
verification of sales system.
- Sales transactions must be encoded daily after the approval of invoices.
- Daily sales report shall be prepared based on approved invoices.
- Credit sales shall be executed based on the credit policy of the company.
- If sales is made on credit the necessary preconditions like approval of contract
agreement and collaterals shall be completed.
- Credit sales shall be given when:-
- Urgent need of satisfying market demand is required.

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 ----------------------------------P.L.C

- The customer is not possible to cover the market demand due to cash other
constraint and the collection is immediately as much as possible.
- A separate follow-up schedule shall be prepared for credit sales transaction.
- A responsible person (in general account division of the company) shall be assigned
to control and report about the customer/agents subsidiary account.
- The assigned official shall be separated from sales invoice checking and approval.
- Report about customer/ agents subsidiary ledger accounts shall be made at least
monthly.
- Matured collections shall be reported on time so as to reduce uncollectable.
- The contract agreement of agents shall be recorded in the follow-up sheet of
customer.
- No sales will be made to customers who are not able to pay back receivables at
maturity date. And general manager has to know simultaneously.

3.8 - Control over Expenses

3.8.1 - General
Expenses are decreases in owner’s equity that result from operating the business or the out flows or using up of
assets or incurrence’s of liabilities during an accounting period from the sale of goods or the rendering of
services. It includes all cost of assets consumed or services used in the process of earning revenue.
Initially, costs are incurred to acquire assets and as assets are consumed or as the cost expires through time it
becomes expense of the business.
Expenses are recognized in the accounting records when:-
 A business enterprises economic benefit is consumed in revenue-earning activities.
 It becomes evident that previously recognized future economic benefits of assets have been
reduced or eliminated.
 Liabilities are incurred without associated economic benefits.
3.8.2 - Expense Recognition
In the measurement of net income of the XXX-COMPANY principles underlying the recognition of expenses are
very important. Expenses incurred by XXX-COMPANY or any other business enterprise during an accounting
period may be classified in to:-

 Costs directly associated to revenue recognized in the period like, salary, materials
used etc.

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 ----------------------------------P.L.C

 Costs associated with the period on the basis other than a direct relationship with
revenue (depreciation and amortization etc).
 Costs that cannot reasonably be associated with any other period.
To recognize these expenses the following principles provide us a guideline.
1. Associate cause and effects of this expense
Under this principle costs may be recognized as expenses based on a presumed direct association with
specific revenue. Costs that appear to be related to specific revenue are recognized as expenses
concurrently with the recognition of the related revenue. Examples are direct cost of production, sales
and distribution costs like commission and transport etc.
2. Systematic and Rational allocation of expenses
If a direct means is not available to associate cause and effect of costs it may be recognized as expenses
based on an orderly allocation to the accounting period in which the costs appear to be expired and
assumed to provide benefits. This approach involves assumptions as to the pattern of benefits and as to
the relationship between costs and benefits received.
The allocation base selected shall be perceived as reasonable and shall be applied systematically.
Examples are indirect costs, depreciation, amortization, insurance costs, etc.

3. Immediate Recognition of expenses

Under this approach expenses are recognized in the current accounting period when:-
1. Costs incurred in the current period are not expected to provide any future benefit.
2. Costs deferred as assets in earlier periods no longer provide benefits and
3. Allocation of costs to revenue or to accounting period is impractical or is considered to
serve no useful purpose.
This principle requires amounts paid to settle litigations to be recognized as expenses in the period they
are incurred.
Examples include general and administrative expenses, research and development costs, deferred in
earlier periods that have lost their service potential etc.
Therefore, accountants of the XXX-COMPANY recognize expenses based on the above principles.
Application of these principles requires costs to be associated:-
 With revenue on the basis of cause & effects.
 If not associated with the cause & effect of revenue, a systematic and rational allocation
of the costs is attempted.
 If these two are not feasible costs are expensed as incurred or as soon as the expiration
of the service potential becomes evident.

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 ----------------------------------P.L.C

3.8.3. Control over Expenses

When costs are recognized as expenses it reduces the capital or assets of the business or increase
liability. To reduce the capital as well as assets of the business reasonable and tangible evidence must be
acquired. To assure the reasonableness of expenses efficient control system must be established.
To control efficiently expenses of the XXX-------COMPANY the following duties and responsibly must be
taken place.
 Responsible official must be assigned from cost & budget decision of the company.
 The assigned official is responsible for follow-up of expense transactions of the company.
 He/ She is responsible to assure all expenses are right and incurred by the company with
full evidences indicating the viability of their occurrence.
 Reports must be produced timely, at least monthly or on demand.
 Appropriate measures shall be taken in connection with reports.
 Recognition of revenues must be based on the above principles and other regulatory and
statutory requirements.
 The responsible person must carry out the follow-up activities as per various company
procedures and regulatory and statutory requirements.
 The follow-up must ensure the efficient use of resources through maximization of profit
of the company.
 The responsible official also provides budget versus actual expense report monthly.
 The recognition and recording of expenses shall be made as per the budget established
at the beginning of the period.
 The responsible official must be separated from cash collection and payment activities
moreover segregated from receivable controlling activities.
 The company uses accrual basis of accounting.
4. REPORTING
4.1. General
Each and every economic events of a business to be expressed in monetary terms shall be processed
through accounting systems. The processed economic events have to be communicated to users for
decision making. The communication might be through reporting. Users can be external or internal. The
internal users are owners, management, board of directors, employees, labor unions etc, while the
external users are investors, banker’s suppliers, customers, government agencies etc. Since accounting is
the language of business these information’s has to be reported to users as per their need. Even though
the type and number of reports are not limited, XXX-------COMPANY has several types of reports.
These are:-
 Financial Statements

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 ----------------------------------P.L.C

- Balance sheet
- Profit and loss statement
- Cash flow statement
 Management reports
- Financial statement analysis reports
- Budget reports
- Daily control reports of cash
- Daily control reports of sales
- Weekly control reports of cash
- Weekly control reports of sales
- Monthly control reports of inventory
- Monthly control reports of receivable
- Monthly control reports of payables
- Monthly control reports of Sales and cash
- Monthly control reports of expense
- Monthly budget follow-up reports etc on demand
- Special reports on demand
- Selling price proposal reports
- Cost & benefit analysis of a certain project
- Cost & benefit analysis of activities need special attention
- Status reports of projects and activities
- Regulatory reports
- Tax reports
- Government related reports
The report style and parameter of XXX-COMPANY shall be based on regulatory and statutory
requirements. Like GAAP, tax regulations, international financial reporting standards, etc. These are not
the only reports to be expected from, but some.
4.2. External Audit
To provide reliable and confident report to users many companies engage an agreement with qualified
professionals of accounting. This activity is said to be external audit. During external audit the following
activities must be considered.
1. The company must have its annual financial statements audited by known and highly qualified
external auditors.
2. As per the memorandum of association the shareholders must appoint external auditors.

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3. A complete set of the financial statements together with supporting schedules must be submitted to
the external auditors before the audit starts.
4. The external auditors shall be provided with all information and explanations pertinent to the audit
and every effort shall be made to assist the auditors.
5. Management of the company shall discuss on external audit reports and appropriate action shall be
taken immediately.
6. Follow-up on preventive and remedial actions shall be made on the audit findings.
7. The auditor shall submit its report to the General Assembly of the shareholders.
4.3. Prior Year Adjustment
After closing and reporting financial activities of an accounting period some adjustments of expenses
related to it will be occurred during the current period. These types of adjustments are said to be prior
year adjustments. To recognize the adjustments the following conditions must be met:-
 There must be reliable and tangible evidence of the transaction.
 It must be identified that the transaction is related to the previous accounting period.
 The reason for becoming let is justified.
Prior year adjustments can be reported either together with the current period statements or separately
from the current period statements.
Regarding this:-
- If the amount is less than twenty thousand, it shall be reported and recorded with the current
period transaction.
- When the amount is greater than or equal to twenty thousand it has to be recorded and reported
separately from the current period transaction.
The recording shall be made in accordance with the related laws and regulations.
5. Summary
To identify, classify, record, summarize, interpret, control and report business transactions there must be
guideline. XXX-------COMPANY has prepared this manual to be used as a reference document to process
accounting data in a useful and consistent manner.
Activities not clearly stated here shall be referred in the related procedures, work instruction and other manuals
of the Company.
The Company shall have an attest plan where in the authority limits for the various positions are clearly defined.
Activities requiring approval of within each department shall be identified and the positions responsible to:-
- Initiate the activities
- Review or check the activities
- Authorize the activities
- Approve the activities

39
 ----------------------------------P.L.C

Shall be stated in the attest plan or if possible on the related procedures and work instruction of activities.
Diffusion
- Tiret Finance service
- General manager
- Finance Department
- Management Representative
- General account
- Cost and Budget

40
 ----------------------------------P.L.C

Annexes

Annex 1: Chart of Accounts for xxx company

Cost center Name of department

000

01

02

03

04

05

Description

A/c No Assets A/c type

1100-000-1101 Cash on hand-cashier Cash

1100-000-1102 Petty cash-cashier Cash

1100-000-1103 Cash at bank-CBE Cash

1100-000-1104 Cash at bank-Abay Bank Cash

1100-000-1105 Payroll fund-cashier Cash

1200-000-1201 Work /Travel/ advance-cashier A/R

1300-000-1301 Staff loan-cashier A/R

1400-000-1401 Sundry debtors A/R

1500-000-1501 VAT receivable A/R

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 ----------------------------------P.L.C

1500-000-1502 Withholding tax receivable A/R

1600-000-1601 Furniture & fixture Fixed asset

Accumulated
1600-000-1602 Accumulated dep.-furniture & fixture depreciation

1600-000-1603 Stationary & office supplies Current assets

1600-000-1604 Prepayments Other current assets

1700-000-1701 Vehicles Fixed assets

Accumulated
1700-000-1702 Accumulated depreciation-vehicles depreciation

1700-000-1703 Plant, machinery & Equipment Fixed assets

Accumulated depreciation-plant, machinery & Accumulated

1700-000-1704 equipment depreciation.

1700-000-1705 Building Fixed assets

Accumulated
1700-000-1706 Accumulated depreciation-building depreciation.

1800-000-1801 Raw material inventory Inventory

1800-000-1802 Work in progress inventory Inventory

1800-000-1803 Finished goods inventory Inventory

Liabilities

2100-000-2101 Income tax payable A/P

2100-000-2102 Pension payable A/P

2100-000-2103 VAT payable A/P

2100-000-2104 Withholding tax payable A/P

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 ----------------------------------P.L.C

2200-000-2201 Sundry creditors A/P

2300-000-2301 Retention payable A/P

Capital

3100-000-3101 Capital Equity-doesn’t closed

3100-000-3102 Retained earnings Equity-R/Earnings

3100-000-3103 Dividends Equity gets closed

Revenue

4100-000-4101 Sales income Income

4100-000-4102 Interest income Income

4100-000-4103 Sales of bid documents Income

4100-000-4104 Income from penalty Income

4100-000-4199 Other income Income

Material & Labor costs

5100-000-5101 Raw material costs Cost of sales

5100-000-5102 Direct labor costs Cost of sales

5100-000-5103 Indirect labor costs Cost of sales

5100-0005104 Indirect material cost Cost of sales

5100-000-5105 Cost of sales-Freight Cost of sales

5100-000-5106 Cost of sales-salary & wages Cost of sales

Expenses

6100-000-6101 Salary & other payments

6100-000-6101 Salary expense for permanent employees Expense

43
 ----------------------------------P.L.C

6100-000-6102 Salary expense for contract employees Expense

6100-000-6103 Pension expense Expense

6100-000-6104 Overtime payments Expense

6100-000-6105 Bonus and Incentive Payments Expense

6200-000-6201 Allowance & benefits

6200-000-6201 Acting allowance Expense

6200-000-6202 Transport allowance Expense

6200-000-6203 House rent allowance Expense

6200-000-6204 Position allowance Expense

6200-000-6205 Telephone allowance Expense

6200-000-6206 Life insurance expense Expense

6200-000-6207 Medical expense Expense

6200-000-6208 Annual leave payment Expense

6200-000-6209 Payment for funeral Expense

6200-000-6210 Uniform & clothing Expense

6200-000-6211 Transfer allowance Expense

6200-000-6212 Desert allowance Expense

6200-000-6213 Cash shortage allowance Expense

6200-000-6214 Indemnity & compensation Expense

6200-000-6215 Other allowance Expense

Training

6300-000-6301 Local training Expense

44
 ----------------------------------P.L.C

6300-000-6302 Foreign training Expense

6400-000-6401 Perdium & Travelling

6400-000-6401 Perdium expense Expense

6400-000-6402 Travelling expense Expense

6500-000-6501 Current supplies

6500-000-6501 Stationary & office supplies expense Expense

6500-000-6502 Cleaning materials expense Expense

6600-000-6601 Logistics & service

6600-000-6601 Printing & advertising expense Expense

6600-000-6602 Gas oil & lubricants expense Expense

6600-000-6603 Vehicle repair, maintenance & spare parts Expense

6600-000-6604 Vehicle registration Expense

6600-000-6605 Parking service Expense

6600-000-6606 Entertainment expense Expense

6600-000-6607 Maintenance For office, machine & equipment Expense

6600-000-6608 Maintenance For household equipment Expense

6600-000-6609 News paper, magazine, etc Expense

6600-000-6610 Professional service Expense

6600-000-6611 Office rent expense Expense

6600-000-6612 Car rent expense Expense

6600-000-6613 Machine rent expense Expense

6600-000-6614 Purchase of soft ware Expense

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 ----------------------------------P.L.C

6600-000-6615 Insurance expense Expense

6600-000-6616 Clinical equipments Expense

6600-000-6617 Transportation expense Expense

6600-000-6618 Loading & unloading expense Expense

66000-000-6619 Consultant and Audit fee Expense

6700-000-6701 Utilities

6700-000-6701 Electricity expense Expense

6700-000-6702 Telephone, fax, and Internet expense Expense

6700-000-6703 Water expense Expense

6700-000-6704 Postal service expense Expense

6700-000-6705 Law & related expense Expense

6800-000-6801 Other services

6800-000-6801 Interest expense Expense

6800-000-6802 Tax expense Expense

6800-000-6803 Bank service expense Expense

6800-000-6804 Depreciation expense Expense

6800-000-6805 Payment for board of director Expense

6800-000-6806 Penalty expense Expense

6800-000-6807 Social service expense Expense

6800-000-6808 Miscellaneous expense Expense

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 ----------------------------------P.L.C

Annex 2: Sample Formats for xxx company

የ----------------ሰራተኞች ማህበራዊ ግንኙነት እና መረዳጃ ማህበር

የገንዘብ መክፈያ ሰነድ

lØ` ____________
No.
K _____________________________ k” _____________
Pay to Date
݃^h ________________________
Address
¾Ñ”²u< SÖ” uòÅM _______________________________________________________________
Amount in words ____________________________________________________________________

w`/Birr

U¡”Áƒ ____________________________________________
Reason ____________________________________________
Š¡ lØ` _____________________________________________
Cheque No. ____________________________________________
_____________ ________________ ________________
Á²Ò˨< Á[ÒÑÖ¨< ÁìÅk¨<
Prepared by Verified by Authorized by
ŸLà ¾}Ökc¨<” Ñ”²w }kwÁKG<
I received the above amount eU/Name

ò`T/Signature
KH>Xw Y^ ›ÑMÓKAƒ
For Accounts Use Only

Account No. Dr. Cr.

e`߃ Width = 15.1Cm

ª“¨< - KìHò Height = 21Cm

1— ¢ú Ø^´ No. of copies = 2

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 ----------------------------------P.L.C

XXX----Campany P.L.C
Cash Sales Invoice/¾እÏ uእÏ iÁß Å[c˜
VAT Invoice
ADD: Wereda Gonder Kebele 20 House No. ________ No. _____________
¨[Ç kuK? ¾u?ƒ lØ` lØ`
VAT Reg. No. ___________________ Date __________
¾}.እ.ታ.lØ` k”
Tax Identification No. ------------------------
¾ታ¡e SKÁ lØ`
Date of Registration 10-Dec-20008
¾}S²Ñuuƒ k”
TO: ___________________________________
K
ADD: Woreda ___________ Kebele ______ House No. _______ VAT Reg. No. __________ TIN No._________ Reg. Date __________
¨[Ç kuK? ¾u?ƒ lØ` ¾}.እ.ታ.lØ` S.lØ` ¾U´Ñv k”

Quantity Description Unit of Measure Unit Price Birr Total Price Birr
w³ƒ ´`´` SKŸ=Á Á”Æ ªÒ ÖpLL ªÒ

Sub Total

VAT(____)

Other(____)
ÖpLL iÁß

Total Cash
Sales

Amount in Words: _________________________________________________________________________________

_________________________________________________________________________________________________

________________________ _______________________ _________________________

Prepared by Checked by Approved by
Á²Ò˨< ¾S[S[¨< ÁìÅk¨<

_______________________
Casher’s Name & Signature
¾Ñ”²w }kvà ስምና ò`T

Account No. Dr. Cr.

Distribution e`߃
Original -Customer ª“¨< ’ß KŸóÃ
1st copy -General Account 1— ¢ú NU^© KÖpLL H>dw
2nd copy-Distribution 2— ¢ú ›[”ÕÈ e`߃ ¡õM Width = 21.5 Cm
3rd copy -Sales Data Encoder 3— ¢ú KiÁß S´Òu= Height = 30.4 Cm
4th copy -Pad 4— ¢ú KØ^´ No. of copies = 5

48
 ----------------------------------P.L.C

Xxx.company P.L.C
Petty Cash Payment Voucher
የጥቃቅን ወጭ መክፈያ ሰነድ

K ________________________________ lØ`____________
No.
Pay to
w`/Birr k” _____________
Date:
¾Ñ”²u< SÖ” uòÅM _______________________________________________________________
Amount in words

U¡”Áƒ __________________________________________________________________________
Reason
Á²Ò˨< ____________________ ያረጋገጠው __________________ ÁìÅk¨< ______________
Prepared by Checked by Authorized by

¾}kvà eU“ ò`T

Receiver’s Name ____________________

Signature

KH>dw e^ ›ÑMÓKAƒ
For Accounts Use Only

Account No. Dr. Cr.

e`߃ Distribution:-
-ª“¨< -KóÓ”e Original - Finance
-1— ¢ú - KØ^´ 1st - Pad

Width = 21Cm
Height = 15.2 Cm
No. of copies = 2

49