MicroStart: A Guide for Planning, Starting and Managing a Microfinance Programme.

CHAPTER THREE
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E. ACCOUNTING

1. Major Elements
2. Balance Sheet
3. Income statement
4. Transaction Journal
5. Sample Transaction Journal
6. Paper Trail

(1) Major Elements

Good accounting practices are an important cornerstone in building a successful microfinance project. Accounting records are the starting point for measuring performance, revising your budget, and reporting progress. An effective accounting system allows for clear-sighted management rather than guesswork. Moreover, financial reporting will inspire confidence from donors or other sources of loan capital.

Detailed accounting instruction is beyond the scope of this guide. However, your project will follow the same general accounting principals as any business. The regular, part- time services of a professional accountant will be invaluable. An accountant can set up your accounting system, can help you hire a full-time bookkeeper, and can provide initial bookkeeper training.

Accounting is simply the process of recording financial transactions, grouping them by category, and summarizing the results for a certain time period. The Bookkeeper will be responsible for recording all financial transactions in a Transaction Journal on a day-to-day basis. This process is described below using examples of typical transactions.

If the transactions are properly described and the amounts are accurate, an outside Accountant can use them to prepare professional reports. The Accountant will classify inflows and outflows and summarize the activity in a Financial Statement. A Financial Statement includes:

The Balance Sheet:
a snapshot of what your project is worth at a moment in time. It summarizes your assets (what you own) and your liabilitie s (what you owe) to demonstrate your net worth (the difference between what you own and what you owe).

The Income Statement:
 a report of financial activity during a particular time period such as a month or a year. It summarizes revenues (what you earned) and expenses (what you spent) to arrive at net surplus or deficit (what's left from your earnings after subtracting what you spent). If the period results in a net surplus, this is added to retained surplus and your net worth is increased. Look at the outline below to see how categories are grouped together and summarized in a Financial Statement.

(2) Balance Sheet

ASSETS LIABILITIES AND NET WORTH
Liquid assets
Cash
Bank accounts
Loan loss reserve account
Interest receivable
Loans receivable
Loans in arrears
Liabilities
Accounts payable
Interest payable
Loans payable
Reserve for loan loss
Fixed assets
Furniture
Office equipment
Vehicles and bicycles
Net worth
Contributed funds
Retained surplus


(3) Income statement


REVENUES EXPENSES
Loan fees

Membership fees

Interest earned on loans

Bank interest earned

Office overhead

Rent

Electricity and water

Salaries

Supplies

Copies

Telephone

Travel and meals
Field Expenses

Field Agent salaries

Vehicle expenses

Depreciation
Loan Expenses

Bad debts

Interest on borrowed funds


(4) Transaction Journal

Bookkeeping involves the day-to-day tracking and handling of money whereas accounting classifies and summarizes these inflows and outflows. The Accountant may recommend that the Bookkeeper be responsible only for bookkeeping. This will depend on the volume of activity and the skill level of the Bookkeeper In an active project, bookkeeping tasks require full-time attention. These tasks include:

  • making bank deposits;
  • paying bills and salaries;
  • filing deposit slips and invoices;
  • filing Transfer Reports from the field;
  • posting transactions to the Transaction Journal.

If the Bookkeeper is more highly trained, s/he may also be responsible for posting amounts to the proper accounting categories.

At the heart of the Bookkeeping process is the Transaction Journal, used to record all the money flowing in and out. It will include inflows such as loan payments and outflows such as salaries. Entries must be made to the Transaction Journal with enough detail so that the inflows and outflows can be classified to the proper category.

As mentioned earlier, it is likely that an outside Accountant will be retained to prepare periodic Financial Statements. At the start of your first lending cycle, this Accountant should meet with the Bookkeeper to explain how certain routine transactions are to be posted so that the proper category breakdowns are used. For example, inflows from loan payments must be entered into the Transaction Journal in two categories. The principal amount received will be one entry and the interest amount will be a separate entry.

The Bookkeeper must be diligent in maintaining the Transaction Journal. If not, it will be nearly impossible to prepare Financial Statements, to report regularly to donors, or to measure the performance.

Follow these simple rules regarding the Transaction Journal:

  • Post an entry for every dollar received or spent;
  • Record amount accurately. Double cheek your work.;
  • Handle recurring transactions consistently each time they occur;
  • Retain and file a deposit slip for each dollar received;
  • Retain an invoice for each dollar paid out.

The entries made in the Transaction Journal are used by the outside Accountant to prepare a trial balance, income statement, and balance sheet.

(5) Sample Transaction Journal



__ DATE PAYER/PAYEE DESCRIPTION IN OUT REF.
1 01 Jan Reserve Bank Account Transfer to Petty Account __ 1,500.00 transfer
2 02 Jan Rising Sun Group weekly payment Total principal 850.00 __ deposit 01
3 02 Jan Rising Sun Group weekly payment Total interest 85.00 __ deposit 02
4 02 Jan Town of Jasmina Prepaid office rent, Jan. __ 50.00 CK #101
5 03 Jan Bicycle Shop Purchase new tires __ 10.00 CK #102
6 03 Jan Road Runners Group Loan disbursement __ 500.00 w/draw
7 03 Jan Su Yung Salary __ 25.00 CK #103
8 04 Jan Lee Bok Salary __ 15.00 CK #104
9 04 Jan Lucky Seven Group Loan application fees 3.00 __ deposit 03


Please see attachment XII of the Tool Kit for forms.

(6) Paper Trail

0nce a transaction is posted to the Transaction Journal, a corresponding document should be filed in its proper place. Be sure each transaction is dated. Mark invoices with the check number and the date it was paid. A good filing system will include documents for every transaction, filed by date and grouped within the following folders or record books:

Bank Accounts

Loans Receivable

  • Record of Payments (collected in the Ledger)
  • Transfer Reports
  • Non-payment Reports and Summary of Bad Debts
  • Loans Payable

Promissory notes to banks lending loan capital

Fixed Assets

  • Receipts for furniture, office equipment, motor vehicles and bicycles
  • Depreciation schedules

Invoices filed alphabetically by vendor

  • Rent receipts
  • Electricity and water bills
  • Invoices for supplies, telephone, postage, and other office expenses

Personnel Records

  • Staff time sheets
  • Expense reports for meals and travel.
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