Learning

Accounting for microfinance institutions

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This Accounting study guide was written by Joanna Ledgerwood and Kerri Moloney and published by Calmeadow in 1996. The RFILC is grateful for the authors’ permission to reproduce it in downloadable form here. The material may be copied or adapted to meet local needs without permission from CALMEADOW, provided that the parts copied are distributed free or at cost – not for profit. Please credit Joanna Ledgerwood and Kerri Moloney. 1996. Financial Management Training for Micro-Finance Organizations: Accounting. Toronto, Canada: CALMEADOW for those sections copied.

The guide was developed to help people working in the micro-finance field to obtain basic accounting and financial management skills. It is intended for field and Head Office staff of micro-finance organizations; micro-finance consultants; and members of the donor community who would like to understand how micro-finance organizations report and monitor their activities. The guide is not meant to be an in-depth accounting course. It is designed simply to provide users with the basics of accounting, so that they can understand financial statements better.

The Accounting guide explains how transactions are recorded and summarized and outlines the three most commonly used financial statements: the Balance Sheet; the Income Statement; and the Statement of Changes in Financial Position. Each lesson contains questions and exercises, for which answers can be found in the accompanying Solutions to Exercises document. The final component of the package is an accounting case study which enables you to consolidate your learning by completing a General Journal, a General Ledger, Trial Balance, Income Statement and Balance Sheet for a lending organization.

Currencies used in the examples and exercises include: Bolivia Boliviano (Bs); Philippines Peso (P); Vietnam Dong (VD); Bangladesh Taka (Tk); American or Canadian Dollar ($); South Africa Rand (Rd); Guatemala Quetzal (Q); Kenya Shilling (Ksh); Dominican Republic Peso (RD$).

Resources

Lesson 1: Definition of Accounting

The purpose of this lesson is to introduce the concepts of accounting, what it is used for and who uses it. You will develop a basic understanding of the role accounting plays and why it is important to create accounting records and how they aid in the financial management of a credit operation. Basic accounting principles and the most widely used financial statements - the Balance Sheet, the Income Statement and the Statement of Changes in Financial Position are introduced. Topics include:

  • Definition of accounting
  • Role of accounting
  • Basic accounting concepts
  • Financial statements
Lesson 2: The Balance Sheet

The purpose of this lesson is to introduce the Balance Sheet and explain its components: Assets, Liabilities and Equity (Fund Balance; Reserve Balance). The relationship between these components will be explained.

You will develop a basic understanding of how the Balance Sheet is created and how the operations of the organization are recorded on the Balance Sheet. You will also see how the Balance Sheet is “static” in nature. Topics include:

  • The Balance Sheet
  • The Accounting Equation
  • Assets
  • Liabilities
  • Equity
  • Comparative Balance Sheet
Lesson 3: The Income Statement

The purpose of this lesson is to introduce the Income Statement and to define revenue and expenses. The relationship between revenue and expenses and their affect on the Income Statement will be explained.

You will become familiar with definitions of items commonly seen on the Income Statement and how the Income Statement is created. You will develop an understanding of how the Income Statement reflects transactions for a specified period of time rather than at a specific “point-in-time”. Topics include:

  • The Income Statement
  • Revenue
  • Expenses
  • Comparative Income Statement
Lesson 4: Recording Changes in Financial Position

The purpose of this lesson is to examine how the various activities of the organization’s credit operations are recorded. Double-entry accounting is discussed and the methods of recording various transactions are presented. Voucher preparation and journal entries are explained for both Balance Sheet accounts (Assets, Liabilities and Equity) and Income Statement accounts (Revenue and Expenses). In addition, the importance of the Cash account and corresponding periodic bank reconciliations are discussed.

You will develop a good understanding of how to record transactions and what the terms “debit” and “credit” refer to in accounting terms. An understanding of generally accepted accounting principles and accounting methods will be achieved. Topics include:

  • Double-Entry Accounting
  • Voucher Preparation
  • Journal Entries
  • Recording Assets, Liabilities and Equity Transactions
  • Recording Revenues and Expenses
  • Cash Account and Bank Reconciliation
Lesson 5: Summarizing Changes in Financial Position

The purpose of this lesson is to examine how the various activities of the organization’s credit operations are recorded. Double-entry accounting is discussed and the methods of recording various transactions are presented. Voucher preparation and journal entries are explained for both Balance Sheet accounts (Assets, Liabilities and Equity) and Income Statement accounts (Revenue and Expenses). In addition, the importance of the Cash account and corresponding periodic bank reconciliations are discussed.

The purpose of this lesson is to show how to summarize the transactions which were recorded during the last lesson. The General Ledger and ledger accounts are explained leading to account balances and finally a Trial Balance. From the Trial Balance, adjustments are made resulting in final account balances which are transferred to the corresponding accounts on the financial statements.

You will develop a good understanding of how transactions move from individual records to the creation of the Balance Sheet and Income Statement. Topics include:

  • the General Ledger
  • Ledger Accounts
  • Account Balances
  • Trial Balance
  • Adjustments
Lesson 6: Relationship between Financial Statements

The purpose of this lesson is to introduce the Statement of Changes in Financial Position and to explain the relationship between the Balance Sheet and the Income Statement. In particular, the equity component of the Balance Sheet and changes to it will be examined.

You will learn how to create a Statement of Changes in Financial Position and how to identify each transaction or event as being a cash or a non-cash item. You will also be able to relate the three financial statements to each other and to see how each transaction or event which occurs at the organization has an effect on one or all statements. Topics covered include:

  • Statement of Changes in Financial Position
  • Equity Fund Balance
  • Investments by Owners
  • Income (profits)
  • Distributions to Owners
Accounting Case Study

The purpose of this case study is to provide an exercise which consolidates all the elements that have been covered in this accounting study guide. You are asked to imagine you are a loan fund manager and are required to produce a set of interim financial statements for presentation to the Board of Directors. The exercise includes preparation of a general journal, general ledger, trial balance, income statement and balance sheet. Answers are provided in a separate document.

Accounting Study Guide: Solutions to Exercises

This document contains the solutions to the exercises in the six lessons that comprise the Accounting Study Guide.

Case Study Answers
Pre-Test

The purpose of this test is to give people considering using the accounting study guide a better sense of the topics to be covered and their current level of understanding. You should not be concerned if you cannot answer some or any of the questions because that is what the study guide is for - to teach you the basics of accounting for microfinance institutions. If you can answer the questions in the Pre-Test easily, then you may not need to work through this study guide.

Sample Accounts

This document contains the following sample accounts for use with the Accounting Study Guide:

Balance Sheet

Comparative Balance Sheet

Statement of Income and Expenditure

Comparative Statement of Income and Expenditure

Statement of Changes in Financial Position