Final Revised FM 1. Procedure Manual V18-010715 - FMS Update

Ethiopian Road Construction Corporation (ERCC)
JUNE 2015
ERCC Financial Management Manual
PREAMBLE
Objective: The objective of this Accounting Procedures manual is to establish financial
management system that helps for the efficient and economic utilization of
resources available to Ethiopian Road Construction Corporation, hereinafter, ERCC,
which enables of resources from misuse and enable ensuring preparation of
efficient, accurate quality and timely financial information systems
Applicability: The Financial Procedures Manual will be applied in ERCC Head Office and in all its
Construction and Maintenance projects /units.
Responsibility: The Finance Department and all delegated projects/ units shall be responsible for
the proper execution of this manual.
Conflict: If there are conflicts between the requirements of this manual and the provisions
of other directives, procedures, or guidelines issued by ERCC, the provisions of this
manual shall prevail. However, if there is a conflict between Proclamations and
regulations governing the establishment and operation of ERCC, against this
Procedures manual, the proclamation shall prevail.
If there are conflicts between this manual and requirements of the funding
organization regarding a specific project, the funding organization’s requirements
shall be fulfilled if it feels the procedures of this manual do not meet its minimum
requirements.
Effective date: This manual shall be effective from July 8,2015.
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Terms of Definitions
The following are Terms of Definitions used in the procedures' section of the manual.
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TABLE OF CONTENTS
PREAMBLE................................................................................................................................................1
TERMS OF DEFINITIONS.................................................................................................................................2
1. INTRODUCTION.............................................................................................................8
2. GENERAL ACCOUNTING PRACTICES......................................................................10
2.1. BOOKS OF ACCOUNTS..........................................................................................................10
2.2. SOURCE VOUCHER................................................................................................................10
2.3. JOURNAL VOUCHERS............................................................................................................10
2.4. LEDGER ACCOUNTS...............................................................................................................11
2.5. UNUSED ACCOUNTING DOCUMENTS.................................................................................11
2.6. COMPUTERIZATION OF ACCOUNTS....................................................................................12
3. CHART OF ACCOUNTS.................................................................................................16
3.1. CODING SCHEME...................................................................................................................17
3.2. DESCRIPTION OF THE ACCOUNTS................................................................................................25
4. CASH COLLECTION.................................................................................................................. 51
4.1. CASH RECEIPT FROM SALES.................................................................................................................51
4.2. CASH RECEIPT FROM OTHERS...........................................................................................................51
4.3. INTERNAL CONTROL OVER COLLECTION/RECEIPT OF CASH.......................................................51
4.4. RECORDING CASH RECEIPTS.............................................................................................................53
4.5. JOURNAL ENTRIES:...................................................................................................................................53
5. DISBURSEMENT....................................................................................................................... 54
5.1. CHECK DISBURSEMENT.......................................................................................................................54
5.2. BANK TRANSFERS (USING LETTER)..................................................................................................58
5.3. RECORDING CHEQUE DISBURSEMENTS...........................................................................................58
5.4. BANK RECONCILIATION......................................................................................................................59
5.5. PETTY CASH..........................................................................................................................................60
5.6. PURCHASE FUND..................................................................................................................................64
5.7. CASH PAYMENT AT PROJECT SITE....................................................................................................65
6. ACCOUNTS RECEIVABLE........................................................................................................ 67
6.1 TRADE RECEIVABLES / TRADE DEBTORS..............................................................................................67
6.2 STAFF RECEIVABLES............................................................................................................................68
6.3 TRAVEL ADVANCE......................................................................................................................................68
6.4 LOCAL PURCHASE ADVANCES.....................................................................................................................69
6.5 PREPAYMENTS......................................................................................................................................69
6.6 SUNDRY RECEIVABLES........................................................................................................................69
6.7 PROVISION OF DOUBTFUL ACCOUNTS.............................................................................................69
6.8 WRITE-OFF OF RECEIVABLES.............................................................................................................69
6.9 JOURNAL ENTRIES...............................................................................................................................70
7 STOCK........................................................................................................................................ 71
7.1. DEFNITION............................................................................................................................................71
7.2. AQUSITION AND VALUATION.............................................................................................................72
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7.3. INTERNAL CONTROL..............................................................................................................................73

7.4. INTERNAL CONTROL OVER FUEL AND LUBRICANT........................................................................75
7.5. PHYSICAL COUNT.................................................................................................................................76
7.6. ANNUAL STOCK TAKING/INVENTORY PROCEDURE........................................................................76
7.7. REVIEW / RECONCILIATION.....................................................................................................................79
7.8. DISPOSAL.............................................................................................................................................. 79
7.9. JOURNAL ENTRIES...............................................................................................................................79
8 FIXED ASSETS.......................................................................................................................... 81
8.1. INTERNAL CONTROL..................................................................................................................................81
8.2. RECORDING.............................................................................................................................................. 82
8.3. JOURNAL ENTRY........................................................................................................................................84
9 INTANGIBLE ASSETS.............................................................................................................. 87
10 PAYROLL.................................................................................................................................... 89
10.1. INTERNAL CONTROL OVER PAYROLL...........................................................................................................89
10.2. PAYROLL FUND......................................................................................................................................... 91
10.3. JOURNAL ENTRIES.....................................................................................................................................91
11. UTILITIES.................................................................................................................................. 92
12. PER DIEM & TRAVEL EXPENDITURES................................................................................93
12.1. INTERNAL CONTROL................................................................................................................................93
12.2. RECORDING.............................................................................................................................................93
13. TAXES & LEGAL LIABILITIES................................................................................................ 94
13.1 PROFIT TAX PAYABLES..................................................................................................................................94
13.2 INCOME TAX FROM EMPLOYMENT...............................................................................................................94
13.3 WITHHOLDING TAX.............................................................................................................................95
13.4 VALUE ADDED TAX (VAT)....................................................................................................................96
13.5 PENSION FUND PAYABLES.........................................................................................................................97
14. BRANCH AND HEAD OFFICE ACCOUNTING.......................................................................99
14.1 HEAD OFFICE RESPONSIBILITY:.................................................................................................................99
14.2 TRANSACTION BETWEEN HEAD OFFICE AND BRANCH.................................................................................99
14.3 JOURNAL ENTRY......................................................................................................................................100
15. PERIOD END AND YEAR END PROCEDURES...................................................................102
15.1 YEAR END ACTIONS.................................................................................................................................102
15.2 YEAR-END PROCEDURE............................................................................................................................102
15.3 PETTY CASH AND PURCHASE FUNDS........................................................................................................102
15.4 CASH AT BANK........................................................................................................................................103
15.5 DEBTORS................................................................................................................................................104
15.6 INVENTORY.............................................................................................................................................105
15.7 FIXED ASSET...........................................................................................................................................106
15.8 CREDITORS / PAYABLES..........................................................................................................................106
15.9. HEAD OFFICE AND BRANCH ACCOUNT....................................................................................................107
15.10 BACK UP AND PRINTING..........................................................................................................................107
15.11 CONSOLIDATION.....................................................................................................................................107
16. ANNUAL FINANCIAL STATEMENTS...................................................................................108
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16.1 QUALITATIVE CHARACTERISTICS OF INFORMATION IN FINANCIAL STATEMENTS........................................................108

16.2 FINANCIAL STATEMENTS PRESENTATION..................................................................................................110
16.3 MANAGEMENT REPORT............................................................................................................................122
17. MANAGEMENT ACCOUNTING............................................................................................. 123
17.1. CASH FLOW FORECASTS..........................................................................................................................123
17.2. INTERIM REPORTS...................................................................................................................................125
17.3. Financial Analysis...................................................................................................................................129
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1. INTRODUCTION
The Financial Management & Accounting Procedures manua, which is Part 2 of the
Financial Mangement Systems of ERCC, it contains internal control procedures, segregation
of duties within the financial management system, the accounting entry, reporting and
other pertinent financial management procedures. To assist managers and the Board of
Directors, the General Manager and the Managenemt body at all levels, accurate, complete
and timely information on financial performance of different business units, utilization of
financial resources, budgetary controls, and other similar issues are very vital. In addition,
the submission of such financial information at the right quality, on atimely basis to
regulatory bodies and the appropriate stakeholders is equally important and mandatory.
Accordingly, this Financial Management & Accounting Procedures serves as a guide in the
process of financial management, recording, analyzing and summarizing, accounting
transactions in such a way that it enables the generation of financial information for both
internal and external users and for the procedure part contains details of steps to be
followed consistently and repetitively approach to accomplish various financial management
activities. Accordingly, the procedures on collection, disbursement, inventory and fixed
asset valuation, recording, disposal, financial report preparation financial analysis and the
accounting and internal controls are explained in the procedure part of this manual.
The procedural part of the financial management manual describes the step by step
procedures of the implementation of the various financial management policies indicated in
first part of the manual. This section explains the procedures, the internal controls, and the
accounting entry and formats to be used for the various components of financial
management. This part contains procedures on books of accounts, source vouchers and
computer operation.
Chapter 3 contains the chart of schemes, the classification and description of main
categories of accounts. Chapter 4 and 5 cover all cash aspects including sales, collections,
disbursement and the internal control procedures, the relevant journal entries and special
procedures on bank reconciliation and petty cash system. Other funds, such as payroll fund
and purchase funds are explained.
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Chapter 6 covers procedures and internal controls over receivables including trade
receivables, staff receivables, staff advances, purchase advances, prepayments, provision
for doubtful accounts and write-off.
Chapter 7 to 9 covers the acquisition, recording, transfer, disposal, physical count other
internal control procedures on stock, fixed assets and intangible assets. Chapter 10-13
covers special procedures and internal controls on certain types of payments including
payroll, utilities, perdiem, taxes and other legal liabilities.
Chapter 12 deals with branch and head office accounting. Chapter 15 describes the detail
period end and year end procedures to be taken into account before printing of interim and
yearend financial reports. Chapter 16 describes the procedures, especially on the
preparation of the annual financial reports in line with IFRS. The last chapter, Chapter 17
discuss on management accounting reports including interim financial reports and financial
analysis.
Finally, organizational structure of ERCC which includes Financial Management Department

structure, the formats for presentation of financial statements and the accounting
documents (forms) to be used are annexed at the end of the procedural manual.
In the policy part of the financial management manual it is elaborated that the pertinent
budgetary issues and pointed out the development of a separet budget manual. Thus,
budgetary control is not addressed in a comprehensive manner.
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2. GENERAL ACCOUNTING PRACTICES

2.1. BOOKS OF ACCOUNTS
2.1.1. As indicated in the policy, ERCC shall maintain books of accounts by projects and branches
and will have a consolidated book at ERCC level. Computerized accounting system shall be
used.
2.1.2. The books should include both the actual transaction and budget information.
2.2. SOURCE VOUCHER

Definition and type
2.2.1. Source vouchers are those documents that are prepared by ERCC to describe or evidence
accounting transactions from which computer data entry will be mad. Examples are, check
payment vouchers, petty cash payment vouchers, cash receipts, cash and credit sales
invoices, journal vouchers and store issue vouchers.
Pre-numbering, Approval, Filing, and Control

2.2.2. Such documents must be pre-numbered, signed for preparation, checking and approval and
prepared in an adequate number of copies for accounting and control purposes. All relevant
supporting documents such as ERCC’s Purchase order, Purchase requisition, supplier's
invoices, goods received notes, payee's receipts and acknowledgement of receipt of goods,
etc., should be attached there-with as essential documentary evidence of the transactions
concerned.
2.2.3. The original and all copies of cancelled vouchers, other than the pad copy, must be filed
with the Finance copy.
2.2.4. Adequate control must be exercised over the custody and issue of unused vouchers. See
Section 2.5 of Financial Management Procedure Manual
2.2.5. Computer Entry: The journal entries on the source vouchers are posted into the
computerized accounting system by the designated staff, which has the access password, to
execute such operation after the documents are duly approved.
2.2.6. Conversion Rates: The conversion rates used to convert non-Birr currencies are the
bank's cash selling rate prevailing at the date on which the transaction takes place.
2.3. JOURNAL VOUCHERS

2.3.1. Journal vouchers will be used to record all transactions not evidenced by other
recording documents, like Purchase and per diem advance settlements, periodic
adjustments (accruals...) and correcting and reversing entries.
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2.3.2. Journal vouchers should be pre-numbered and prepared in two copies, one copy
with supporting documents attached being filed in numerical sequence for posting,
the other remaining in the pad.
2.3.3. The Finance Manager or the Finance Team leaders as applicable should approve
journal vouchers before they enter into the computer database. The accountant who
entered the transaction into the computer system will sign for posting.
2.3.4. Journal vouchers should be in the format illustrated (Annex 1/A), as this format
facilitates identification and recording of ledger entries.
2.4. LEDGER ACCOUNTS

Ledger accounts comprise general ledger accounts and subsidiary ledger accounts, which contain
detailed information in support of the general ledgers.
2.4.1. Posting of transactions to ledger accounts must be made daily from the cash receipts, IPCs,
check payment vouchers , Journal Vouchers, credit purchases and store receipts & issues.
2.4.2. Subsidiary accounts like account receivable, account payables, inventory and jobs must be
recorded using the integrated modules and there is no need to have detail general ledger
account. In ACCPAC for instance, customers detail ledger is maintained under the Account
Receivable (AR) module and hence, there is no need to have a detail general ledger account
by customers.
2.4.3. Descriptions of entries in each data entry windows should be brief and clear, the nature of
the entry being fully described so that the ledger itself could be self-explanatory ledger. It
is not correct to repeat the accounts heading, nor should descriptions such as "fuel
expense", "stationery", "transfer" etc., be used. It will be more meaningful if we indicate the
vehicle plate number
2.5. UNUSED ACCOUNTING DOCUMENTS

2.5.1. Unused pads must be kept in the store. Control over all unused vouchers must be exercised
by the Finance Department by maintaining a separate Memorandum Records of Unused
Vouchers for each type of voucher, with the following format.
Received Issued Used Pads

No. of pads in Hand
Returned
Voucher No
No. Of Pad
- Voucher
Issued to
Issue no
Date
No. number
Ref of From To From To
Da
pads Date Initial
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2.5.2. Unused vouchers should be issued only on the approval of the Finance Manager / Finance
Team leaders against return of an equal number of used pads. Quantities issued should not
be in excess of immediate requirements.
2.5.3. Periodic surprise inventories of unused documents on hand should be taken and reconciled
with the registers of unused documents by the Team leader/delegated senior finance
personnel.
2.6. COMPUTERIZATION OF ACCOUNTS

For any technical procedure on the usage of the system refer the user guide manual for the
adopted ERP computerized accounting system.
2.6.1. ERP software should be acquired in line with the financial management policy of ERCC
2.6.2. First time use of an ERP: when a new ERP system is adopted by ERCC, the following
procedure will be conducted. It is important to carefully read the implementation guidelines
of the ERP software in addition to the following general procedure.
2.6.2.1. Customization
o Chart of accounts: If the chart of accounts needs customization for the best use of the
software the modifications has to take place first. Once the modification completed,
Mapping of the new chart with the older chart of accounts need to be done to ease
opening balance entry.
o Customization of the classification and identification of inventories, customers, vendors,
fixed assets and jobs for the best use of the software. The job ID to be provided for each
project has to be identical with the job (project) reference number provided by the
Engineering Department. Similarly the ID for inventory items has to be communicated to
store control people who are responsible for the receipt and issuance of inventory.
2.6.2.2. Importing of chart of accounts: Once the customization completed, chart of account has
to be imported to the system as it is the basis for the customization of other functionalities
including inventory, customers, vendors, jobs and fixed assets.
2.6.2.3. Company setting
o Defining the accounting period
o Determination of segmentation and closing options
o Definition of options (basis of accounting, accounting periods, foreign currency options, etc
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o Activating multicurrency and budget features
2.6.2.3.1. Setting the option
o Inventory: at least inventory valuation methods (FIFO, average etc), classification by type of
inventory, nature of inventory, location setup, integration of inventory accounts (stock
accounts, Cost of goods sold accounts, consumption accounts, sales accounts, adjustment
accounts as applicable to the specific ERP) against General Ledger Accounts.
o Account Receivables and Account Payables: The account payables and receivables
modules have to be setup at least for Payment terms, Aging analysis category, credit limits,
customer / vendor type and General Ledger Integration.
o Jobs: Active projects have Fixed Asset to be classified by type and subcategory category.
Major categories are construction and maintenance. Sub category could be regions and type of
clients. Jobs need to be broken down by phases and cost codes in accordance with the
approved bill of quantity of the project.
o Fixed Assets: The options for depreciation methods, frequency of deprecation calculation
need to be determined. In most of the ERPs, depreciation methods can be setup by the
category. ERCC has fixed assets category described in Section 11.1.7 of the Policy Manual. The
classification in the fixed asset module should be in line with this classification. Depending on
the ERP, additional book may be allowed for the purpose of depreciation for taxation. If that is
the case, additional depreciation book need to be maintained in accordance with Ethiopian Tax
law to make it easy for the year end provision for tax liability computation.
2.6.2.4. Opening Balance Entry
o Opening balances for General Ledger accounts , which is the trial balance of the previous
period (or year) has to be entered into the ERP, General ledger module in accordance with
the ERP’s user manual. The entered opening balance has to be checked and reconciled with
the printed trial balance before posting.
o Subsidiary opening balances for inventory, fixed assets, customers, vendors, jobs and fixed
assets should be entered into the ERP’s respective modules. Before positing of opening
balances, the entered data has to be reconciled against the general ledger balance. For
example, the total value of inventory opening balance details recorded in the inventory
control modules should reconcile against the opening balance in the General ledger for
inventory.
o Some ERP software, like ACCPAC, required a procedure to delete the General ledger journal
created for the opening balance so that the inventory opening balance will not have impact
of the GL opening balances. It is important to refer the ERP user manual before processing
opening balance entry for subsidiary items.
2.6.3. Security Setup
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2.6.3.1. After completion and reconciliation of opening balances against the subsidiary modules,
the next step is to determine the segregation of duties among the staff at ERCC head
office level, district/RMP and project /RCP levels. The segregation of duties needs to be in
line of the position, skill and qualification of the staff.
2.6.3.2. Roles have to be defined in line with the organizational structure and manning of the
Finance Departments and Teams.
2.6.3.3. Roles are then assigned to individual Finance Department staff members. Finance Team
leaders and the Finance Department Manager need to have an administration privilege for
critical operations including security setup, backup, restoring, import and export.
2.6.4. Transaction Processing
2.6.4.1. In a situation where online transaction processing is in place, then records are updated
following a periodic batch posting. Until such time, ERCC will continue to use manual
prime source documents including payment vouchers, sales vouchers and receiving and
issuing documents. These prime documents have to be entered into the system on a daily
basis. Transactions entered have to be posted latest on a weekly basis following review of
the data entered. Edit lists printed for verification and the subsequent correction have to
be approved by the respective heads of the unit.
2.6.4.2. Periodic reconciliation: Periodically, accountants have to be reconciled against secondary
sources such as bank statements, physical counts, customers and vendor statements and
project status reports.
2.6.5. Reporting
2.6.5.1. Monthly reports have to be generated from the system. To simplify reporting and avoid
unnecessary time wastage for reformatting of reports, it is essential to design the
required type of reports within the ERP system. The types of financial reports are
discussed under section 17.2 - 17.3 this manual. The user manual of the ERP should be
referred on how to design and customize reports.
2.6.6 Administration: The Finance Manager and the respective Finance Team leaders are
responsible for ensuring the proper administration of the ERP system.
2.6.6.1 Security:
o The audit trail feature of the ERP should have to be activated before the implementation
of the security system
o Only authorized personnel should have access to the system.
o The access right (which is part of a module to access) and the type of right (add, edit,
delete, full access etc) shall be given based on the role and position of a staff. For
example, an internal auditor will have a read access only.
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o Periodically, the Finance Manager/ Finance Team leaders should enforce the change of
user passwords and redefinition of the roles of the users as required.
o It is strictly forbidden to use a password of a colleague to access the ERP system
2.6.6.2 Backup:
o The data has to be backed up on a daily basis in a separate backup media and should
be kept outside the server room.
o Monthly backups should be taken and kept in a separate location under the control of
the finance team leaders and finance manager. Backup files should be kept in a
fireproof safe box
o Annually backup has to be taken before and after closing procedures in a separate
backup media where the media clearly marked with the dates and where the backup
was conducted before or after closing. The version of the ERP software should also
be indicated in the backup media. The backup media be kept in a fireproof safe box
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2.6.7 Consolidation
2.6.7.1 Consolidation of accounts of Road Construction Projects (RCP)/ Road Maintenance Projects
(RMP or District) will be consolidated with the head office account preferably through a
wide area network. Until such arrangement realized, branch accounts will be consolidated
on a monthly basis through the consolidation feature of the ERP. When the ERP doesn’t
have a consolidation feature, then branch transactions will be imported to the central
account on a monthly basis following reconciliation of head office and branch accounts.
2.6.7.2 It is important to follow the user guideline of the ERP manual for consolidation
2.6.8 Year End Procedure required before closing of ERP yearend transaction (Refer Section 15
for detail year end procedures)
2.6.8.1. Year end closing procedures of accounts has to be accomplished in line with the user guide
of the ERP. These are common checklists that are takne into account before closing:
 Completing bank reconciliation
 Reconciliation of vendor and customer balances
 Reconciliation of branch and head office accounts
 Adjustment to inventory shortages and overages
 Adjustment to fixed assets (disposal, acquisitions, transfer, out of service etc)
 Clearing of odd balances from the ledger
 Clearing of suspense accounts, if any
 Reconciliation of Goods in Transit accounts
 Transfer of Construction in progress accounts to fixed assets, if completed
 Transfer of unbilled cost of constructions from Construction cost to asset
accounts.
2.6.8.2 To avoid subsequent adjustments after closing, closing procedure has to take place
following the completion of the audit for the year. Adjustments after the audit, if any, have
to be posted.
3. CHART OF ACCOUNTS
The chart of account is designed so that it can accommodate future expansions. Some of
the accounts included in the chart of accounts may be used only when they are essential to
use them. For example, Long term bank loans accounts will be used only when ERCC
borrow money from banks.
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Accounts Sub Category Description
start with
11 Cash and cash equivalents
12 Debtors
13 Inventory /General
14 Construction/Maintenance Materials &
3.1. Supplies CODING
15 Vehicles & Equipments Parts & Supplies
SCHEME
16 Other Materials & Supplies
3.1.1. Broad 17 Branch Head Office Account Classification
18AccountsFixed Asset & Investments Category
19
start with Intangible & Deferred Tax Assets
1 21 TradeAssets
Creditors
2 22 StaffLiabilities
Creditors
3 23 Tax and Related Liabilities
Capital
4 24 Accruals
Revenue
5 25 Sundry Creditors Direct Cost
Construction
6 26 BankMaintenance
Loans ( current liability)
Direct Cost
7 27 LongOther
TermDirect
Liabilities
Cost /construction material
31 Paid Production
up Capital& Equip. Maint./
8 32 Legal Reserves
Indirect/Project overhead Cost/
9 33 Other Reserves
Administrative & General
34 Retained Earnings office overhead/
Expense/head
41 Construction Revenue
3.1.2. Sub 42 Maintenance Revenue Classification of
accounts 43 Sales of construction Materials (For assets,
liabilities, 44 Equipmnet Rental Income Capital, Revenue
and Cost of 45 Other Rental Income Sales ) shown in
table 2. 46 Consultancy Income
Table 2: 47 Sales of Scrap Accounts sub
48 classification
49 Other income
51 Road Construction Project Activity Cost

511 Direct Labor
521 Direct Material and Supplies
531 Equipment Costs – Own equipment
541 Equipment Costs – Rented Equipment
3.1.3. 551 Subcontract Costs Segmentation /
Account Sets:
The 61 Road Maintenance Project Activity Cost chart of Accounts
of 611 Direct Labor ERCC has three
621 Direct Material and Supplies sections. The first
631 Equipment Costs – Own equipment section
641 Equipment Costs – Rented Equipment represents the
651 Subcontract Costs
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71 Other Direct Cost/Construction Material

Production , Equip. Maint./
main General Ledger accounts, the second section represents the Subsidiary ledger
accounts and the third section represents the location codes. The chart of accounts
have a maximum length of 15 characters excluding the separators which may be
required depending on the type the ERP used.
Controling/ Subsidiary/ Sub-Item/ Location
Genral Ledger Activity Code Exp.Code Codes
Account
Account Length XXX XXXXXX XX XXXX
Example 1 – Salary for permanent Employees at Collection and Disbursement Team Unit
3.1.4. Under the Finance Department)
Segment no 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
911-000000- 9 1 1 - 0 0 0 0 0 0 - 0 1 - 1 1 3 2
01-1132
Controling/GL account Subsidiary/Activity Sub- Item/Expense Code

Location
Note: Hyphens are used as a separator for legibility

Example 2 – Bitumen/asphalt stock at Deghabour Shekosh Project will be coded as:-
141-000000-00-3244
Example 3 – Construction Revenue of Denen Gode Project will be coded as:-

411-000000-00-3130
Example 4 – Salary of contractual employee for site clearing & grabbing activity at Gambella
Tang Project will be coded as:-
511-002100-02-3147
Example 5 – Salary of contractual employee for emankment of construction activity at

Mytsebri Shire Project will be coded as:-
511-004400-02-3167
Example 6 – Bitumen material cost at Mytsebri Shire project in asphalting activity will be
coded as:-
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511-006100-21-3167
Eample 7 – Travel & Perdiem Expense of Head Office Internal Audit staff will be coded
as:-
911-000000-86-1022
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Location Codes Location codes refers to offices (GM office), DGM for Support, DGM for
Engineering, departments/ teams, districts and projects
Old New Location

Location Group New location Location Name
Code Code Code
1000-1099 1010 Board Of Directors
1020 General Manager

1021 GM Office
1022 Safety and Insurance Team
1023 Women and Youth Affairs Team
1030 Internal Audit Department
1031 Internal Audit DepartmentOffice
1032 Financial Audit Team
1040 Planning & Business Development Department
1041 Planning & Business Development Department Office
1042 Planning Team
1050 Organizational Development Department
1051 Organizational Development Department Office
1052 Organizational Development Team
1060 Communication Department
1061 Communication Department Office
1062 Communication Tean
1070 Ethics Department
1071 Ethics Department Office
1072 Ethics Team
1080 Legal Service Department
1081 Legal Service Department Office
1082 Legal Service Team
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1100-1199 1100 DGM for Support
1101 DGM for Support Office

1102 Medical Team
1110 ICT Team
1120 HRFM /Human Resource Facility Department

1121 HRFM Department Office
1122 HRFM Team
1123 Personnel
1124 Facility Management Team
1125 Record Administration Unit
1126 General Service Team
1130 Financial Management Department

1131 Financial Management Department Office
1132 Collection & Disbursment Team
1133 General and Cost Accounting Team
1134 Property and Materials Management Team
1140 Procurement and Supplies Department

1141 Procurement and Supplies Department office
1142 Procurement Team 1
1143 Procurement Team 2
1144 Supply Team
1200-4999 1200 DGM Engineering

1201 DGM for Engineering Office
1202 Env’t, Occupational Safety & Health Team
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1203 Road Sign & Marking Team

1210 Road Design & Construction Department
1211
Road Design & Construction Department Office
1212 RC Project Management Team
RC Project Management Desk

Contract Administration Desk
1213 Road Design Team
1214 Bridge Design Team
1250 Bridge Construction Project Team
1251 Bridge Construction Project Team Office
1260 Road Maintenance Department
1261 Road Maintenance Department Office
1262 RM Project Management Team 1
1263 RM Project Management Team 2
1270 Equipment Admin. & Maintenance Department
1271 Equipment Admin. & Maintenance Department Office
1272 Equipment Administration Team
1273 Central Plant & Equipment Maintenance
1274 Componant Rebuilding Unit
1275 Fabrication Modification Unit
1276 Equipment Maintenance Unit
1277 Insurance Team
1278 Equipment Administration Representatives
3000-3999 Road Construction Project

3110 Shekosh-Kebridehar
3120 Kebridehar-Dennen
3130 Dennen-Gode
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3140 Gambela-Itang-Jekawo
3150 Zarim-Mytsebri
3160 Mytsebri-Shire
3170 Cancho-Derba-Becho
3180 Jimma Town
3190 Kong-Begondi-Wenbera
3200 Kuraz-Shuger Development
3210 Adama-Awash-Mille
3220 Dima-Rada
3230 Shire-Airport
3240 Degehabur- Shekosh
3250 Wezeka-Gidole
4000-4999 Road Maintenance Projects

4001 Adigrat
4101 Alemgena
4201 Combolcha
4301 Debre Markos
4401 Dire Dawa
4501 Gondar
4601 Jimma
4701 Nekemte
4801 Shashemene
4901 Sodo District
3.1.5. evenue, costs and expenses are more appropriate for location classification for all items
than balance sheet items. Location classification at the level of balance sheet will be
applicable if and only if, the balance sheet account can be specifically dedicated for the
location.
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3.2. Description of the Accounts
3.2.1. Cash (11)

3.2.1.1 All cash accounts start with 11. Cash comprise cash and cash equivalents that include
cash at bank (111), cash on hand (112), petty cash (113), payroll fund (114) and
purchase fund (115) and Cash in transit (119). Account no 117 to 118 are dedicated for
new cash accounts other than those stated above. Where there is more than one
custodian for these types of cash accounts, separate Ledger Account should be
maintained. Ledger cash accounts should not remain in the name of persons who have
ceased to be cashiers. If there are balances on any of the cash account in the name of ex-
staff members, they should be transferred to the appropriate payable or receivable
account.
3.2.1.2 Purchase fund account represent small amount fund kept in the hands of purchasers to
effect payments for small purchases. Cash in transit account is used to record cash
transfers from head office or any branches of ERCC but not reported by bank before the
end of the reporting month.
3.2.2. DEBTORS (12)

3.2.2.1 All debtors accounts star with 12. The main categories of debtors:- Staff debtors (121),
trade debtors (122), retention receivables - short term (123), pre-payments and
deposits (124), advance to suppliers (125), tax receivables- withholding (126),
receivables - vat (127), sundry debtors (128) and provision for doubtful accounts (129).
3.2.2.2 Individual Staff debtors, short term retention receivables, prepayments and deposits,
advances made to suppliers shall be recorded by the name of the debtors. The
subsidiary accounts shall be maintained under the respective ledger accounts. Individual
trade debtors shall be maintained under the Account Receivable module; hence detail
chart account number shall not be maintained for trade debtors.
3.2.2.3 VAT receivable is recorded when ERCC purchases goods, services and works from VAT
registered supplier. Withholding tax receivables will be recorded when supplier withholds
2% of tax from the revenue proceeds of ERCC. VAT receivables and Withholding tax
receivables will not have a subsidiary ledger as Ethiopian Revenue and Custom Authority
is the only entity that ERCC may have such relation. Tax receivable accounts should be
off-set against the VAT payable account on a monthly basis. By the end of the year,
withholding tax receivable will be net-off against the provision for taxation to the extent
of the period’s tax liability.
3.2.2.4 Account number 128 may be used for a new debtor’s category which is significant
enough to be categorized separately, otherwise, all accounts which cannot be classified
in any of the debtors group will be regarded as sundry debtor.
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3.2.3. STOCK
3.2.3.1. Stocks at ERCC are all inventorable items mainly purchased for internal consumptions.
Such inventorable maerials and Supplies in stock are classified broadly under Sub-
Classification 13 to 16.
GL accounts between 131-139 are assigned for all that are classified unber General:
Unbilled construction in progress (131), intercompany inventory in transit (132), import in
transit (133) and Provision for stock obsolescence (139). Unbilled construction in progress
is cost of construction and maintenance contracts for which payment certificate is yet to be
accounted. Inter-Branch/ project inventory in transit will be recognized when goods are
transferred from head office to branches/projects or vice versa or between
branches/projects but when goods have not yet reached & received by the store at the end
of the reporting period. Imports in transits are goods in transits mainly from foreign
purchase transactions.
3.2.3.2. GL account numbers between 141-149 are assigned for those catagorized under
"Construction/Maintenance Materials & Supplies"; Accounts 151-159 are assigned for stcks
classified under "Vehicles and Equipment Parts & Supplies"; Accounts 161-169 assigned for
those catagorized under "Other Materials & Supplies".
For the details refer the Charts of accounts stated under 3.2.12.
Further Details of inventories by each line item will be maintained under the Inventory
Control Module of the ERP.
3.2.3.3. Account number that starts with 17 are assigned to to those accounts that are sub-
classified under "Branch - Head Office".
3.2.4. Fixed Assets & Investments

3.2.4.1. Fixed assets are categorized as Road Machinery and Equipment (181), Motor Vehicles and
Other transport vehicles (182), Workshop Equipment and Tools (183), Engineering and
Laboratory Equipment (184), Furniture and Equipment (185), Building and Structures
(186), Other Fixed Assets (187 Fixed Assets in Transit (188) and Intercompany fixed
assets in transit (189).
3.2.4.2. The corresponding Accumulated depreciation account of each category of fixed assets will
be maintained next to the main fixed asset accounts. The subsidiary account for assets is
00000 and the subsidiary for accumulated depreciation is 00001.
3.2.4.3. Details of fixed assets will be maintained using the ERP fixed asset module.
3.2.4.4. Own Construction in Progress account (157), will be maintained for each individual site
with a subsidiary of four sub accounts as material, labor, subcontracts and others. The
construction in progress accounted will be transferred into the appropriate fixed assets
25 | P a g e
account upon completion of the construction against official document certifying the
completion.
Please note that construction costs related to Road Construction and Road Maintenance are not
classified as fixed assets as they do not belong to ERCC.
3.2.4.5. Costs incurred in connection with the purchase of fixed assets not received will be
recorded as fixed asset in transit (158). This may happen often when the fixed assets is to
be imported from abroad. Fixed assets transferred from one branch office or head office
to another branch office or to head office are recorded as Intercompany Fixed Assets In
transit (159) if the asset has not reached its destination before the end of the reporting
period.
3.2.5. Intangible Assets And Investments

3.2.5.1. Intangible Assets (16) are recorded in the year of expenditure at cost and will have a
contra account of Accumulated Amortization by each intangible asset. The asset accounts
are identified by a subsidiary of 00000 and the accumulated amortization account will be
identified with a subsidiary account suffix of 00001.
3.2.6. Branch Accounts

3.2.6.1 Investment in branches (18) is used to record investment in branch when resources are
transferred from head office to branches. Branch accounts will be credited when resources
flow from branches to head offices or to other branch offices. Branch accounts are
maintained by the ERCC head office only.
3.2.6.2 The inter-branch account will have subsidiary accounts by name of Branch. Inter branch
accounts are used to capture transaction in relation to resource flows between branches
under ERCC. Inter-branch accounts will be closed to the head office/branch account at the
end of the year following reconciliation of head office and branch accounts.
3.2.7 Other Assets
3.2.7.1 Other Assets accounts which cannot be categorized under the above assets accounts and
which need to be presented separately, will be created under other asset (19). These
accounts must be non-current assets. Deferred tax assets (191) are classified under Other
Asset accounts.
3.2.8 Creditors/Payables
3.2.8.1. Liabilities related to suppliers categorized as Trade Creditors 211, Retention Payables
(212), and Deferred Revenue (213). Deferred Revenues are advance payment received
from customers for which no service was given or goods delivered before the end of the
reporting period.
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3.2.8.2. The Staff Creditors (22) group of accounts includes Unclaimed Salary (220), Family
Allotment (221), Cash Indemnity Payable (222), Great Renaissance Dam
contribution(223), Court Order Payments (224), Credit Association (225), Labor Union
(226), Edir 227), Sport Clubs (228) and Others (229),
3.2.8.3. Tax Liabilities and other government obligations are classified under 23. This group
includes Withholding tax payables (230), Income tax payables (which is tax from
employment income) (231), VAT payables (232), Profit Tax Payables (233), Pension
Fund Payables (234), Cost sharing (235), Dividend Payable (236), and Dividend Tax
Payables (237. Account number 238 and 239 are spared for future use.
3.2.8.4. Accruals are categorized under 24. Accrued liabilities sub categorized as Accrued
Employee benefits (240), Accrued Utilities (241), Accrued Perdiem and Salaries (242) and
Accrued rental payments (243). Account group 244-249 are reserved for future use if
additional set of accruals are required to be maintained in a separate group.
3.2.8.5. Transactions which cannot be classified in the above category will be accounted under
Sundry Creditors (25). Deferred Tax liabilities (250) and deposits payables (251) are sub
groups under Sundry Creditors. Deposit payables are cash received by ERCC as a
collateral or guarantee for the services, contract performances or leasing of resources or
other similar engagements.
3.2.8.6. Bank loans classified into two groups. Bank loans classified as current liabilities (26)
which matures in less than a year including bank loans less than a year (260) and
portion of the current maturity of long term loan (261). The long term bank loan (27)
classified as short term loans (270) (which are loans with a term between 1 year and 3
years, and long term loan (271) which has a term of more than 3 years. Each specific
loan should be recorded separately by loan agreement (specifying the name of the bank
as well).
3.2.8.7. Commitments to credit purchases of services, goods and works should be made against a
reliable cash availability forecast (Policy 15.1.6.)
3.2.9 Capital, Reserves, Head Office Account.

3.2.9.1. Capital accounts include Paid up Capital (311), Legal Reserve (312), Other Reserves
(313), Head office Account (398) and Retained Earnings (399). Other Reserves are
reserves for special purpose as indicated in the Public Enterprise Proclamation
No.25/1992, Chapter 6, and Article 29.
3.2.9.2. Head office accounts will be maintained by branches. The Head office account will be
credit when branches receive resources from head office and will be debited when they
transfer resources to head office.
3.2.9.3. Annual Net income or net loss of branches will be closed to the head office account.
Whereas the head office will adjust its retained earning account against branch accounts.
The net income of the head office will be closed to Retained Earnings Account,
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3.2.10 Revenue and Cost of Sales
3.2.10.1 Revenue accounts are classified based on major category of revenues including
Construction Revenue (411), Maintenance Revenue (421), Sales of Construction Materials
(431), Equipment Rental Income (441), Other rental income (451), Consultancy fees (461
Sales of scrap (471) and Other income (491).
3.2.10.2 Other rental incomes are rental incomes other than equipment rental income. For
example, rental income from of ERCC’s building and premises will be accounted under
other rental income.
3.2.10.3 Cost of sales account grouped into Cost of Construction (511), Cost of maintenances
(521), Cost of sales of construction materials (531), Direct Cost of rented Equipment (541)
and Direct costs of rented facilities (551).
3.2.10.4 Cost of sales accounts will be affected only to the extent of revenue recognition. That
means, Cost of Construction will be accounted to the extent cost of construction
materials that Payment certificate is accounted. Similarly, Direct Cost of equipment rental
(labor, fuel and depreciation) will be charged to the duration where the equipment was
leased.
3.2.11 Cost of Construction
3.2.11.1 Costs of construction accounts are treated in detail to assist the cost accounting for
construction projects. The accounts have the following broad category:
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Account Description Explanation

Category
51 Road Construction Project Activity Cost
511 Direct Labor Staff costs – those directly involved in the construction
activities. Staff cost include salaries, benefits, uniforms,
outfits etc and for each subsidiary account is affixed with
their location or project - XXXX- 01-XXXX-19.*1
521 Direct Material and Including cement, bitumen, reinforcement steels,
Supplies corrofated iron , etc
531 Equipment Costs – When ERCC’s equipment are used for construction,
Own equipment depreciation, fuel, maintenance and equipment related
costs will be charged under this category
541 Equipment Costs – Applicable costs for rented equipment will be charged
Rented Equipment under this category based on the agreement. For example
If fuel and lubricant is a responsibility of ERCC’s then fuel
cost will be charged in addition to rental fees/
551 Subcontract Costs When ERCC contracted out part of its construction or
maintenance activities, the cost of subcontracting will be
charged under this account
561 Project Contra Account This account will serve as a contract account for overhead
allocation and Cost of sales accounts for road construction
and road maintenance costs. Refer the cost accounting
manual for more information.
61 Road Maintenance Cost
611 Direct Labor Staff costs – those directly involved in the maintenance
outfits etc and for each subsidiary/activity account is
affixed with their location or project -
631 Equipment Costs – When ERCC’s equipment are used for maintenace
Own equipment activities, depreciation, fuel, maintenance and equipment
related costs will be charged under this category
1
represent construction projects series & activities performed per the BOQ
29 | P a g e
651 Subcontract Costs When ERCC contracted out part of its maintence
661 This account will serve as a contract account for overhead
allocation and Cost of sales accounts for road construction
and road maintenance costs. Refer the cost accounting
manual for more information.
71 Other Direct Cost/Construction Material Production , Equip.
Maint./
711 Direct Labor Staff costs – those directly involved in the construction
outfits etc and for each subsidiary account is affixed with
their location or project
731 Equipment Costs – When ERCC’s equipment are used for construction,
Own equipment depreciation, fuel, maintenance and equipment related
costs will be charged under this category
751 Subcontract Costs When ERCC contracted out part of its construction or
811 Indirect Indirect Labor represents labor costs of Supervisors and
Labor/Overhead/ other indirect staffs deployed for the construction and
maintenance activities
821 General Project These costs include the cost incurred in relation to
Expenses facilities at the project site (staff residents, canteen
services, cost of support vehicles, laboratory costs,
buildings and other establishments in connection with the
project etc
3.2.12 Software Specific Accounts
Special Accounts (Like clearing, adjustment and dummy accounts) may be opened when
required by the ERP as recommended in the user guide of the software.
30 | P a g e
Ethiopian Road Construction Corporation

Chart of Account
Main Accounts
Elements Subsidiary
of Sub Account
GL Account Account Number
Financial classification
Statement
1 Assets
11 Cash
111 Cash at Bank
112 Cash on Hand
113 Petty Cash
114 Payroll Fund
115 Purchase Fund
116 Cash Advance – Project site
117 Cash in Transit
118 Letter of Credit
12 Debtors
121 Staff Debtors
122 Trade Debtors
123 Retention Receivables - Short term
124 Prepayments and Deposits
125 Advance to Suppliers
126 Tax Receivables – Withholding
127 Tax Receivables – VAT
128 Sundry Debtors
129 Provision for doubtful Accounts
13 - 16 Inventory
13 General
131 Unbilled Construction in progress
132 Inter-project inventory in transit
133 Import in transit
134 Own Construction Under Progress

139 Provision for stock obsolescence
Construction/Maintenance Materials
14
& Supplies
31 | P a g e
Elements Subsidiary
of Sub Account
Statement
141 Bitumen/Asphalt
142 Cement
143 Structural Reinforcement Steel
144 Pipes & Culverts
145 Corrugated Iron Sheet
146 Sand, grace Stonebn& Cinders
147 Electrical Supplies
148 Lumber & Wood
Miscellaneous Construction Materials &
149 Supplies
Vehicles & Equipment Parts &

15
Supplies
151 Spare Parts
152 Tyres & Tubes
153 Benzene
154 Diesel/Naphtha
155 Oils & Lubricant
156 Kerosene & Butane
Miscellaneous Vehicles and Equipment
157
Parts
158 Fixed Asset In-transit
16 Other Materials & Supplies

161 Stationery &Office Supplies
162 Janitorial Supplies
163 Small Tools & Apparatus
164 Clothing & Linen Supplies (Uniforms)
Chemicals, Medical and Laboratory
165 Supplies
Miscellaneous & Other Materials &
166 Supplies
Branch Head Office & Intangible &

17
Deferred Tax Assets
171 Branch Account - Cash Transfer
172 Branch Account - Inventory Transfer
32 | P a g e
Elements Subsidiary
of Sub Account
Statement
173 Branch Account - Fixed Asset Transfer
174 Good Will
175 Deferred Tax Assets
176
177
18 Fixed Asset & Investments

181 Building & Structures
182 Computers & Related Softwares
183 Road Machinery & Equipment
Motor Vehicles & Other Transport
184 Vehicles
185 Shop Equipment & Tools
186 Engineering & Laboratory Equipment
187 Office Furniture & Equipment
188 Other Fixed Assets
189 Inter-project fixed Asset in Transit
19 Accumulated Depreciation
191 Building & Structures
192 Computers & Related Softwares
193 Road Machinery & Equipment
Motor Vehicles & Other Transport
194
Vehicles
195 Shop Equipment & Tools
196 Engineering & Laboratory Equipment
197 Office Furniture & Equipment
198 Other Fixed Assets
199 Inter-project fixed Asset in Transit
2 LIABILITIES
21 Trade Creditors
211 Trade Payables
33 | P a g e
Elements Subsidiary
of Sub Account
Statement
212 Retention Payables
213 Deferred Revenue
214
22 Staff Creditors
221 Unclaimed Salary
222 Family Allotment
223 Cash Indemnity Payable
224 Court order payment
225 Credit Association
226 Labor Union
227 Edir
228 Sport Club
229 Others
23 Tax and Related Liabilities

231 Withholding Tax Payables
232 Income Tax Payables
233 VAT Payables
234 Profit Tax Payables
235 Pension Fund Payable/Employer Share/
236 Pension Fund Payable/Employee’s Share/
237 Cost Sharing
238 Dividend Payable
239 Dividend Tax Payable

24 Accruals
241 Accrued Employee Benefits
242 Accrued Utilities
243 Accrued Perdiem and salaries
244 Accrued rental payments
245 Accrued spare parts payments
246 Other Accrued payments
25 Sundry Creditors
251 Deferred Tax liabilities
252 Deposits payables
34 | P a g e
Elements Subsidiary
of Sub Account
Statement
253 Net Salary Payable
26 Bank Loans ( current liability)

261 Bank loan –Less than a year
262 Current Maturity of Long Term Loan
27 Long Term liabilities

271 Short term loans (above 1 year)
272 Long Term loan

3 Capital
311 Paid Up Capital
321 Legal Reserves
331 Other Reserves
349 Retained Earnings Account

4 Revenue
411 Construction Revenue
421 Maintenance Revenue
431 Sales of Construction Materials
441 Equipment Rental Income
451 Other Rental Income
461 Consultancy Income

471 Sales of scrap
481
491 Other Income
5 Road Construction Project Costs
51 511 Activity Exp Direct Labor

XXXXXX 01 Salary - permanent employee
XXXXXX 02 Salary - Contractual employee
XXXXXX 03 Overtime Expense
XXXXXX 04 Pension (Employer Contribution)
XXXXXX 05 Allowances – Housing
35 | P a g e
Elements Subsidiary
of Sub Account
Statement
XXXXXX 06 Allowances – Hardship
XXXXXX 07 Cash indemnity
XXXXXX 08 Training expenses – Local
XXXXXX 09 Training expenses – Foreign
XXXXXX 10 Workers' Compensation Insurance
XXXXXX 11 Medical Expense/Medical Insurance
XXXXXX 12 Annual Leave
XXXXXX 13 Food Supplies
XXXXXX 14 Clothing and linen supplies
XXXXXX 15 Other employee benefits
XXXXXX 16 Bonus&insentives
XXXXXX 17 Length Labour Expense
52 521 Direct Material and Supplies

XXXXXX 20 Sub Contract
XXXXXX 21 Bitumen
XXXXXX 22 Cement
XXXXXX 23 Structural reinforced steel
XXXXXX 24 Corrugated iron
XXXXXX 25 Sand, gravel, stone, cinders
XXXXXX 26 Electrical supplies
XXXXXX 27 Lumber wood
XXXXXX 28 Miscellaneous materials
XXXXXX 29 Ppe andCurvelts
XXXXXX 41 Laboratory Chemicals and Supplies
XXXXXX 42 Medical supplies
53 531 Equipment Costs - Own equipment

XXXXXX 62 Depreciation.expense/Road machineries

and equipments/
XXXXXX 63 Depreciation.expense/Motor&

TransportVehicles/
XXXXXX 64 Depreciation.expense/Shop Equipment

&Tools/
XXXXXX 65 Depreciation.expense/
36 | P a g e
Elements Subsidiary
of Sub Account
Statement
Engineering&Lab.Equipments/
XXXXXX 51 Repair-Machineries
XXXXXX 52 Repair-Vehicles
XXXXXX 55 Out side Repair&service-Machineries
XXXXXX 56 Out side Repair&service-Vehicles
XXXXXX 32 Fuel /Benzine/
XXXXXX 33 Fuel /Diesel/
XXXXXX 34 Oil and Lubricants
XXXXXX 31 Tires and tubes
XXXXXX 30 Spare Parts
XXXXXX 35 Kerosene&Butane
XXXXXX 71 License and Registration
Equipment Costs - Rented

54 541
Equipment
XXXXXX 70 Rental Expense
55 551 Subcontract Costs

XXXXXX 20 Cost of Subcontract
6 Road Maintenance Cost

61 611 Direct Labor
37 | P a g e
Elements Subsidiary
of Sub Account
Statement
18 For Future Use
19 For Future Use

XXXXXX 21 Bitumen
XXXXXX 22 Cement
63 631 Equipment Costs - Own equipment


and equipments/

TransportVehicles/

&Tools/

38 | P a g e
Elements Subsidiary
of Sub Account
Statement

64 641
Equipment

OtherDirectCosts/Cnstructionmaterials production&Equipment
7
maintenance/
71 711 Direct Labor
18 For Future Use
19 For Future Use
39 | P a g e
Elements Subsidiary
of Sub Account
Statement
XXXXXX 21 Bitumen
XXXXXX 22 Cement
Equipment Costs - Own equipment

73 731

and equipments/

TransportVehicles/

&Tools/

40 | P a g e
Elements Subsidiary
of Sub Account
Statement

74 741
Equipment

8 81 811 01-19 Project Indirect Labor (OverHead)

000000 01 Salary - permanent employee
000000 02 Salary - Contractual employee
000000 03 Overtime Expense
000000 04 Pension (Employer Contribution)
000000 05 Allowances – Housing
000000 06 Allowances – Hardship
000000 07 Cash indemnity
000000 08 Training expenses – Local
000000 09 Training expenses – Foreign
000000 10 Workers' Compensation Insurance
000000 11 Medical Expense/Medical Insurance
000000 12 Annual Leave
000000 13 Food Supplies
000000 14 Clothing and linen supplies
000000 15 Other employee benefits
000000 16 Bonus&insentives
000000 17 Length Labour Expense
000000 18 Occasional Labour Expense
19 For Future Use
82 821 General Project expenses

20 - 29 Construction Materials & Supplies
000000 20 Sub Contruct
41 | P a g e
Elements Subsidiary
of Sub Account
Statement
000000 21 Bitumen
000000 22 Cement
000000 23 Structural reinforcing steel
000000 24 Corrugated Iron
000000 25 Sand,Gravel,Stone,Cinder
000000 26 Electric Materials
000000 27 Lumber Wood
000000 28 Miscellanous materials
000000 29 Pipe and Culvert
30 - 39 Equipment Parts & Supplies

000000 30 Spare Parts
000000 31 Tires & Tubes
000000 32 Fuel – Benzine
000000 33 Fuel - Diesel
000000 34 Oil & Lubricants
000000 35 Kerosene & Butane
000000 36 Workshop Supplies
37 For Future Use
38 For Future Use
39 For Future Use
40 For Future Use
40 - 49 Other Supplies
000000 41 Chemicals & Lab Supplies
000000 42 Medical Supplies
000000 43 Janitorial Supplies
000000 44 Office Supplies
000000 45 Tools and Apparatus
46 For Future Use
47 For Future Use
48 For Future Use
49 For Future Use
50 - 59 Repair & Maintenance

000000 50 Repair – Building
000000 51 Repair – Machineries
42 | P a g e
Elements Subsidiary
of Sub Account
Statement
000000 52 Repair – Vehicles
000000 53 Repair – Furniture & Equipment
000000 54 Other Repairs
000000 55 OutsideRepair&Service/Machineries/
000000 56 OutsideRepair&Service/Vehicels/
000000 57 OutsideRepair&Service/Other Fixed
Assets/
58 For Future Use
59 For Future Use
60 - 69 Depreciation Expense
000000 60 Depreciation – Building&Structure
000000 61 Depreciation–Computer&Related Soft
ware
000000 62 Depreciation–Road
Machineries&Equipment
000000 63 Depreciation–Motor&Transport Vehicles
000000 64 Depreciation – Shop Equip. & Tools
000000 65 Depreciation - Engineering and
Laboratory Equipipments
000000 66 Depreciation – Off. Furnit. & Equip.
000000 67 Depreciation – Other Fixed Assets
68 For Future Use
69 For Future Use
70 - 95 Other Expenses
000000 70 Rental Expenses
000000 71 License & Registeration
000000 72 Audit Fees
000000 73 Legal Fees
000000 74 Professional Fees
000000 75 Penalties
000000 76 Utility Expense/Electricity/
000000 77 Utility Expense/Water/
000000 78 Donation & Sponsorship Expense
000000 79 Board Fees
000000 80 Bad Debts Expense/Receivable/
43 | P a g e
Elements Subsidiary
of Sub Account
Statement
000000 81 Inventory Loss
000000 82 Advertising & Promotion
000000 83 Communication Exp.(Tel, Intern, Post)
000000 84 Entertainment
000000 85 Occasional Sponser ship
000000 86 Travel and per diem
000000 87 Fares and Transportation
000000 88 Property Insurance
000000 89 Medical Test Education Including HIV
000000 90 Freight and Storage
000000 91 Land & Municipal Tax
000000 92 Loss on Asset Disposal
000000 93 Printing and Reproduction
94 For Future Use
95 For Future Use
96 - 99 Financial Expenses
000000 96 Bank Charges
000000 97 Interest Expenses
000000 98 Cash & Fidelty Insurance
000000 99 Miscellaneous Expenses
9 Admin. & General Expenses

91 911
01-19 Salaries and Benefits
000000 01 Salary - permanent employee
000000 02 Salary - Contractual employee
000000 03 Overtime Expense
000000 04 Pension (Employer Contribution)
000000 05 Allowances – Housing
000000 06 Allowances – Hardship
000000 07 Cash indemnity
000000 08 Training expenses – Local
44 | P a g e
Elements Subsidiary
of Sub Account
Statement
000000 09 Training expenses – Foreign
000000 10 Workers' Compensation Insurance
000000 11 Medical Expense/Medical Insurance
000000 12 Annual Leave
000000 13 Food Supplies
000000 14 Clothing and linen supplies
000000 15 Other employee benefits
000000 16 Bonus&insentives
000000 17 Length Labour Expense
000000 18 Occasional Labour Expense
19 For Future Use
20 - 29 Construction Materials & Supplies

000000 20 Sub Contruct
000000 21 Bitumen
000000 22 Cement
000000 23 Structural reinforcing steel
000000 24 Corrugated Iron
000000 25 Sand,Gravel,Stone,Cinder
000000 26 Electric Materials
000000 27 Lumber Wood
000000 28 Miscellanous materials
000000 29 Pipe and Culvert
30 - 39 Equipment Parts & Supplies

000000 30 Spare Parts
000000 31 Tires & Tubes
000000 32 Fuel – Benzine
000000 33 Fuel - Diesel
000000 34 Oil & Lubricants
000000 35 Kerosene & Butane
000000 36 Workshop Supplies
37 For Future Use
38 For Future Use
39 For Future Use
40 For Future Use
45 | P a g e
Elements Subsidiary
of Sub Account
Statement
40 - 49 Other Supplies
000000 41 Chemicals & Lab Supplies
000000 42 Medical Supplies
000000 43 Janitorial Supplies
000000 44 Office Supplies
000000 45 Tools and Apparatus
46 For Future Use
47 For Future Use
48 For Future Use
49 For Future Use
50 - 59 Repair & Maintenance

000000 50 Repair – Building
000000 51 Repair – Machineries
000000 52 Repair – Vehicles
000000 53 Repair – Furniture & Equipment
000000 54 Other Repairs
000000 55 OutsideRepair&Service/Machineries/
000000 56 OutsideRepair&Service/Vehicels/
000000 57 OutsideRepair&Service/Other Fixed
Assets/
58 For Future Use
59 For Future Use
60 - 69 Depreciation Expense
000000 60 Depreciation – Building&Structure
000000 61 Depreciation–Computer&Related Soft
ware
000000 62 Depreciation–Road
Machineries&Equipment
000000 63
Depreciation–Motor&Transport Vehicles
000000 64 Depreciation – Shop Equip. & Tools
000000 65 Depreciation - Engineering and
Laboratory Equipipments
000000 66 Depreciation – Off. Furnit. & Equip.
46 | P a g e
Elements Subsidiary
of Sub Account
Statement
000000 67 Depreciation – Other Fixed Assets
68 For Future Use
69 For Future Use
70 - 95 Other Expenses
000000 70 Rental Expenses
000000 71 License & Registeration
000000 72 Audit Fees
000000 73 Legal Fees
000000 74 Professional Fees
000000 75 Penalties
000000 76 Utility Expense/Electricity/
000000 77 Utility Expense/Water/
000000 78 Donation & Sponsorship Expense
000000 79 Board Fees
000000 80 Bad Debts Expense/Receivable/
000000 81 Inventory Loss
000000 82 Advertising & Promotion
000000 83 Communication Exp.(Tel, Intern, Post)
000000 84 Entertainment
000000 85 Occasional Sponser ship
000000 86 Travel and per diem
000000 87 Fares and Transportation
000000 88 Property Insurance
000000 89 Medical Test Education Including HIV
000000 90 Freight and Storage
000000 91 Land & Municipal Tax
000000 92 Loss on Asset Disposal
000000 93 Printing and Reproduction
94 For Future Use
95 For Future Use
96 - 99 Financial Expenses
000000 96 Bank Charges
000000 97 Interest Expenses
000000 98 Cash & Fidelty Insurance
000000 99 Miscellaneous Expenses
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4. CASH COLLECTION
Cash is the most liquide asset and hence it requires the most efficient system of
administration, recording and controlling. Cash receipts originate from road construction,
road maintenance, sales of construction materials, consultancy services, rents or
maintenance of machinery, sales of scraps and other receivables etc.
Cash may be collected in cheques, cash or bank transfer. Deposit Slips, Bank Credit Advice, Bank
Statement and Bank correspondences are the basic documents in connection with banking
transactions.
4.1. CASH RECEIPT FROM SALES

4.1.1. Cash received from Sales of road construction works, road maintenance works, renting or
maintenance of machinery and other properties, sales of construction materials, scraps
and other items will be evidenced by VAT Cash Sales Invoice (Annex 3-1). However, cash
received in connection with Credit VAT invoice that has been issued earlier will be
evidenced by Cash Receipt Voucher. Invoicing and cash receiving functions should be
handled by different persons. The person in charge of preparing Cash VAT sales invoice (a
person other than a cashier) shall prepare Cash VAT sales in three copies and pass it to
the cashier. The Cashier Accountant collects the money; submits the original invoice to the
customers and pass the first copy to the accounts section together with the deposit slip.
4.2. CASH RECEIPT FROM OTHERS

4.2.1. Cash collection for the settlement of credit sales and from any source other than sales
(refund of staff advance, insurance claim collection, and retention collection) should be
evidenced by pre-numbered and serially sequenced Cash Receipt Voucher (Annex 3-2). It is
prepared in three copies of different colors. It should be pre numbered, printed or written in
ink (not in pencil) and distributed as follows:
 The original is issued to the customer.

 The second copy is sent to Accounts.
 The third remains in the pad.
4.3. INTERNAL CONTROL OVER COLLECTION/RECEIPT OF CASH

4.3.1. Cash receipt shall be collected by officially designated Cashier Accountant and deposited
intact daily in ERCC accounts at bank.
4.3.2. Collection made at District and project offices are transferred intact to head office.
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4.3.3. Cash collections should have supporting documents to be attached with the copy of receipt
used by accounts section to prepare deposit voucher.
4.3.4. Cash Receipt Voucher should not be prepared for collection directly transferred to ERCC’s
account. Confirmation letter shall be issued to the customers.
4.3.5. Handling cash receipts and keeping records shall be separated.
4.3.6. The cashier accountant should not have access to accounting documents and records
except cash receipts currently in use, bank slips and deposit reports.
4.3.7. Accounting personnel should not have access to cash. New Cash Receipt pads shall be
issued to the cashier accountant upon return of the used one.
4.3.8. Personal cheque shall not be accepted unless certified by the drawer bank.
4.3.9. Unused Cash Receipt Vouchers shall be kept in locks under close supervision and control of
the finance section, and a new pad should be issued to a Cashier accountant only after
ascertaining that all the leaves of the previously issued cash receipt pad are accounted for.
4.3.10. Cash in safe and in transit shall be adequately covered by insurance.
4.3.11. Cash should not be kept in the safe box in excess of the sum insured.
4.3.12. For confirmation of receipt, Cashier Accountant shall initial cash receipt voucher.
4.3.13. Cash overages shall be treated as other income and a shortage shall be treated as
receivable and reported to the DGMs/Finance Manager/ Team Leader for appropriate
actions.
4.3.14. It is not allowed to effect payments from cash collection.
4.3.15. Efforts should be made to confirm that payer has sufficient bank balance.
4.3.16. Deletions and alterations of Cash Receipt Vouchers shall be avoided.
4.3.17. All cash collections should be deposited intact on the date of collection or the following day.
4.3.18. Surprise cash count should be made at irregular intervals, and Cashier Accountant should
not keep third party funds in Company’s safe.
4.3.19. Bank deposits of cash should be checked against VAT Cash Sales Invoice and cash receipts
by preparing Daily Cash Collection & Deposit report (Annex 3-3) in two copies which
summarizes VAT Cash Sales Invoice and Cash Receipts Vouchers, and bank deposits. The
original with supporting document is for the accounts section and the second copy for
cashier accountant. Cashier accountant and a finance staff should sign the report for its
preparation, checking and accuracy.
4.3.20. Request for printing receipt pads shall be made by the Finance Manager and approved by
the DGM for , Support.
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4.3.21. Before ordering for new Cash Receipt Voucher to be printed,a letter of acknowledgment (go
ahead) should be obtained from the concerned Sub-city Ethiopian Revenue and Custom
Authority (ERCA).
4.3.22. The purchaser should check the correctness and completeness of the receipt pads before
delivery to the storekeeper. If the purchaser or the storekeeper detects error, they should
inform the Finance Manager in writing immediately.
4.3.23. Cashier Accountant should check receipt pads for their completeness before receiving them.
4.3.24. Incorrect receipt should be defaced by writing the word “VOID” or “CANCELLED”. The
original and copies together forwarded to accounts one copy should be filed on the pad.
4.3.25 Ensure periodically the existing internal control has safeguarded cash receipt and employees
understand and follow them.4.3.28 In the event of a burglary or theft of funds, immediately
notify to team leader, internal audits and if serious is the case to police.
4.4. RECORDING CASH RECEIPTS

4.4.1. Each cash and check receipt transaction is recorded in the prime documents of Cash Receipt
Voucher, VAT Cash Sales Invoice and bank credit advices.
4.4.2. The posting of cash collections should be made directly from the Cash Receipt Voucher, VAT
Cash Sales Invoice and bank credit advices.
4.4.3. Cash receipts data shall be entered into computer properly and timely using the ERP
accounting software.
4.4.4. Entered data must be checked in detail with source documents as to their numerical
sequence, correctness of description, amounts and accounts coding before approval for
posting.
4.5. Journal Entries:

4.5.1. For Cash Receipt from Income:
Cash on Hand /Bank XXXX-
Revenue XXXX-
VAT Payable XXXX-
4.5.2. For Cash Receipt from others:
Cash on Hand/Bank XXXX-
A/R, Staff, etc XXXX-
4.5.3. For Bank Credit Advice:
Cash in Bank XXXX-
A/R XXXX-
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Note that this entry is made with the assumption that a Credit VAT invoice was prepared
before or after the transfer is made to the bank account of ERCC by the customer.
4.5.4. For Cash Deposit in the Bank:
Cash in Bank XXXX-
Cash on Hand xxx
5. DISBURSEMENT
5.1. CHECK DISBURSEMENT
5.1.1. Disbursement deals with the accounting procedures and internal controls concerning
payment out of cash funds in hand and bank accounts. Cash funds include petty cash funds,
cash withdrawn for payments at project sites and purchase funds.
Bank Disbursements: Cheque Payments and bank transfers
Cash Disbursements: Petty Cash Payments
5.1.2. Payments made in cash and cheque shall be evidenced by pre-numbered payment
vouchers, where the voucher is to be approved by designated officials.
5.1.3. For all payments, sufficient supporting documentation should be presented being attached
to the respective payment vouchers. The following documentation need to be available at
the minimum:
 Approved “Request for Payment” (refer annex 4-1 for the format to be used)
 Invoices for the purchase of goods and services. The invoice shall have the following
information:
o Vendor name, address, Invoice number, Invoice date, TIN and VAT registration
numbers (if vendor is VAT registered).
o Description of items/service with the quantity and unit price as applicable.
o Applicable tax (VAT or turnover tax)

o Additional charges such as freight, handling, etc.
o Payment terms,
When a supplier issues a fiscal receipt (a cash register machine receipt), attachment invoice should
be requested as the receipt may not contain all the above information. Invoice has to be in
conformity with legal requirements.
 Evidences of the receipt of goods (Goods Receipt Note) and a certificate of the user
department as to the receipt of services. The description indicated in the Request for
Payment may be sufficient for small service purchases.
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 When payment is to be made to an employee for reimbursement or for persons who

have no official invoice, the recipient must sign on payment voucher for proof of
payment.
5.1.4. INTERNAL CONTROL OVER CHEQUE DISBURSEMENT
5.1.4.1. All disbursements of more than Birr 2000.00 shall be effected by cheque.
5.1.4.2. Request for new cheque pads shall be initiated by the finance officer responsible for the
preparation of cheques using formats provided by the bank and the request to be
approved by the authorized Signatories.
5.1.4.3. Cheques are collected from the Bank by the Finance manager/Finance team leader or any
one of the signatories in his/her absence. When signatory, other than the Finance,
collects a cheque, he/she will deliver the check in the day of collection to the person
delegated by the Finance Manager/Finance team leader.
5.1.4.4. Unused Cheque Pads should be safeguarded against theft or misuses. They should be
kept in safe place under the custodianship of one of the signatories. Also a register of
unused cheque book should be used for the purpose of tracking their use.
Date Date Used
Received Serial No. Date Receipt Stabs Signature
from Bank From To Issued Name Signature Returned for Return
5.1.4.5. Only one check book should be issued at a time (to the junior finance officer in charge of
preparing the check) for cheque preparation against return of a completed check book
stub, which should be reviewed by the Finance Manager/Finance Team Leader for
completeness. The Junior Finance Officer, who is responsible for the preparation of
cheques, should sign in the register of unused cheques books for receipt of the new
cheque book and the Finance Manager/Finance Team Leader for the return of the stubs.
5.1.4.6. Collection and Disbursement Team Leader ensures the availability of sufficient fund in the
bank account before disbursement is made by cheque.
5.1.4.7. Cheque shall only be prepared against Request for Payment form (format Annex 4-1) in
one copy with attached, which shall be approved for payment by the designated
officials, authorized by requesting Department/ Team and verified by the Finance
Manager/Finance Team Leader.
5.1.4.8. Upon submission of approved Request for Payment, the designated finance officer shall
prepare a pre-numbered Direct Payment Voucher/ DPV (Annex4-2) in five copies. In the
futre, depending on the type of the software to be used, the DPV shall be generated with
sequential number instead of pre-printed ones .
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5.1.4.9. When payments are computed the relevant deductions and withholdings have to be
taken into account depending on the nature of the payment.
Retention to be withheld when payments are effected to subcontractors in accordance with the
agreement and the advance payments are to be adjusted accordingly if any advance payments
have been provided earlier
Withhold the appropriate amount from payments that are subject to the withholding taxes (refer
the taxation section of this manual)
5.1.4.10. There should be two signatories whereby one of the signatory is from Finance
Department/Financial Team and the other signatory from the authorized Management
signatories to sign on cheques. For the purpose of this manual, signatories are classified
as A and B. Cheque must be signed by a combination of A and B.
The followings are signatories from category A and B:
 Head office level
o Category A: Collection and Disbursement Team Leader/ Finance Manager of ERCC
with
o Category B: ERCC General Manager and the DGM for Support?
 Project/District Level
o Category A: Finance Team Leader / Finance Officer with
o Category B: Project /District Manager and Operation team leader
5.1.4.11. It is important to note that cheque authorization should not be mixed up with
procurement approval. The approval threshold for endorsement of procurement
evaluation results should be determined in accordance with the procurement manual of
ERCC.
5.1.4.12. Authorized persons who make preparation and signing of cheques have the following
responsibilities:
o
To ensure that supporting documents are complete and originals;
o
To ensure that payment are made according to the Corporation’s disbursement
policies;
o To ensure that proper approval is made for the requested payment by the
relevant Department/Team head as applicable;
o To ensure that the payment request is checked for availability of unused and
uncommitted budget;
Cheque Payments Steps
 To ensure accuracy of cheques (in line with summary the
voucher, whether the amounts in words and - Initiate “Request for Payment” in
figures are correct, the date and the name of - Review for budget availability the
payee are properly written. - Review documents for validity and
completeness of the request
- When approved, process DPV 53 | P a g e
- Cheque preparation
- Approval of the cheque
- Deliver the cheque
-Record the transaction
5.1.4.13. If the payment request is not supported by adequate documentation, the finance officer
will return the request form to the requesting division with a remark.
5.1.4.14. Check book stubs should be completed with payee's name, amount, direct payment
voucher number and the check stub should be initialed by the authorized signatories.
5.1.4.15. The original DPV together with supporting documents should be filed in order. If certain
supporting documents are filed in sequence due to their peculiar nature, such as
contractual agreements and procurement files, the document reference or the file
number has to be cross referenced with the Payment Voucher in such a way that these
documentation can be easily accessed for reference.
5.1.4.16. Blank cheques must never be signed by signatories.
5.1.4.17. Cheques shall be pre-numbered and bear the name of the Corporation whether printed
by the order of ERCC or issued by banks.
5.1.4.18. Incorrect cheques shall be marked “VOID” or “CANCELLED” and signatures on the
cancelled cheque must be defaced. Cheque shall be released only to the payee or his
authorized representative upon presentation of an official receipt or signing on the DPV.
The power of attorney of an official representative and his ID card should be copied and
attached to the voucher when personal cheques are paid to a person other than the
name indicated in the cheque.
5.1.4.19. Direct payment vouchers and supporting documentation should be stamped PAID and
the DPV No. and date inserted by the person who prepares the checks.
5.1.4.20. Access to accounting records by persons who sign cheque shall not be allowed and those
who handle accounting records shall not have access and authority to sign cheques.
5.1.4.21. A Cheque payment of a single transaction should not be split.
5.1.4.22. Advance payment in cheque for purchase should be settled in 15 days. However,
advances made from branches/projects should be settled not later than 21 days.
5.1.4.23. Check should not be prepared in the name of signatories except those personal payments
(Salary, per diem and the likes).
5.2. BANK TRANSFERS (USING LETTER)

Bank Transfers may be made using official letters of ERCC. The letter is addressed to the bank
requesting for transfer of money. The letter should indicate the name of the
District/project/beneficiary and the name of the Bank Branch and of the bank account (if
required).
5.2. 1. The requesting Department, which initiates the transfer, should fill in the Request for
Payment form and get the approval from the relevant Department/unit head. The
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internal control procedures for the preparation of cheques apply also for bank transfers
payments.
5.2. 2. Letter requests to Bank for cash transfer are to be approved by the cheque signatories.
Bank transfer letters should be prepared in two extra copies. One copy will be retained
by accounts where the supporting documentations are to be attached. The other copy
will be filed in central archive within the respective offices (Head office, districts and
projects).
5.2. 3. The bank notifies the payment action for the requests by sending debit advices
specifying the amount charged to the Corporation’s bank accounts. The senior finance
officer should check the debit advice against the letter and Request for Payment.
5.3. RECORDING CHEQUE DISBURSEMENTS

5.3.1. Cheque and bank transfers should be recorded into the ERP system accurately and timely.
The bank transfer requesting letter together with the debit advice should be attached as a
supporting document.
5.3.2. Journal Entries: For Check payment/Bank Debit Advice: The appropriate asset account
(receivable or stock or fixed assets, or the liability account if it is settlement of payable, or
the expense account if the payment is for expense or cost) will be debited and the cash at
bank account will be credited.
 Purchases of services and goods or settlement of liability
Asset/Liability/Expense/Cost XXXX-
VAT receivables (if VAT invoice received) XXXX-
Cash in Bank XXXX-
 Payment to a subcontractor (First advance payment)

Advance to contractors’ XXXX-
VAT receivables (if VAT invoice received) XXXX-
Cash in Bank XXXX-
 Payment to a subcontractor (Based on Payment Certificate)

Costs XXXX-
Receivables (if VAT invoice received) xx
Cash in Bank XXXX-

Advance to Contractors xx
Retention Payable xx
5.4. BANK RECONCILIATION

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Bank reconciliation shall be prepared monthly in five days from the end of the month. The
reconciliation will be between the bank statement and the bankbook, which is to be generated from
the ERP system. If the ERP bank reconciliation features are not used in what so ever cases, an
alternate bank book should be maintained for the purpose of bank the reconciliation.
5.4.1. Before conducting the reconciliation activities, the finance officer responsible for the
reconciliation has to make sure that all the advices reflected in the bank statement are
collected by him or the person in charge of collecting statements and advices from bank.
5.4.2. The reconciliation should give a complete and satisfactory explanation of the differences
between the bank’s record and the company’s record.
5.4.3. The records are reconciled by adjusting bank balances to book balances for outstanding
cheques and deposit in transit. (Annex 4-3).
5.4.4. Monthly reconciliation should be prepared by an accounting staff that is not involved in
preparing and approving vouchers or writing cheque. It shall be approved and signed by the
Finance Manager/Team Leader.
5.4.5. Check all cheque payments and payments against the bank statement and process adjusting
entry accordingly.
5.4.6. Cancelled checks should be kept attached to the check stub.
5.4.7. Bank statements should be filed for future reference.
5.4.8. Unexplained difference between bank and book record should investigated and resolved
immediately.
5.4.9. Banks do not issue advices for some expenses such as bank service charges. These
expenses shall not be carried over as reconciling items and proper accounting entry should
be processed immediately.
5.4.10. All reconciling items should be recorded and cleared in the subsequent month if not in the
current month.
5.4.11. Cheques drawn more than six (8) month prior to the date of reconciliation are considered to
be long outstanding and will be written back to operating funds.
5.5. PETTY CASH

A petty cash fund is a fund established to meet petty and recurring expenses which would not
normally require the writing of cheques. Petty cash operations should follow the imprest system
where cash on hand plus the documents paid out of the fund should equal to the established
petty cash fund.
5.5.1 Internal Control Over Petty Cash
Internal control procedures and recording of petty cash fund is generally similar to that of
chequepayments
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5.5.1.1 The Petty Cash fund is established for the purpose of effecting small and immediate
payments
5.5.1.2 Petty cash should be kept on the imprest system whereby the cashier accountant is
advanced a float of a fixed amount, which will always be represented by cash or
vouchers.
5.5.1.3 Petty cash fund shall be established on imprest system whereby the cashier is
advanced a float of a fixed amount, which will always be represented by cash or vouchers.
The Petty cash fund will be used for effecting single payments below Birr 2,000.
5.5.1.4 Petty cash float at the level of head office is Birr 80,000 and Birr 50,000 at the level of
district. The size of the float may be revised in accordance with the volume of
transaction, when approved by the Finance Manager.
5.5.1.5 Departments at head office level may establish their own petty cash fund, where the
petty cash limit to be determined by the Finance Manager. A dedicated cashier will be
assigned when departments are provided with cashier for the purpose.
5.5.1.6 For small payments where the exact amount of payment is not known, the payment
may be effected using a suspense voucher which is to be replaced against invoices. A
suspense voucher should not be prepared for more than Birr 2,000 and should not be
used for salary advances.
5.5.1.7 Suspense advances must be approved and paid using a Suspense Voucher in one
copy (sample format Annex 4-5), adequately documented and settled within ten days
of payment. A detailed list of all pending suspense vouchers must be submitted to the
senior finance officer and Team Leader for review at the time of replenishment.
5.5.1.8 Once the suspense voucher is replaced with Petty Cash Payment Voucher (or
refunded in full) it has to be returned to the person signed for receiving the cash on
the suspense. The person has to check and destroy the form.
5.5.1.9 Petty cash payment should be replenished when 80% of the fund is paid. The petty
cash replenishment request should be replenished in two days from the date of
request.
5.5.1.10 Petty cash payments are effected using a pre-numbered petty cash payment voucher
(format Annex 4-4).
5.5.1.11 Cashiers should not have access to the accounting records or check books other than
petty cash payment vouchers, petty cash report and request forms, cash receipts
and bank deposit slips.
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5.5.1.12 Custodians of petty cash funds are solely responsible for the safety of such fund and
must at all times secure the approval of the finance manager/team leader when
effecting payment.
5.5.1.13 Petty cash funds shall not be used for personal expenses or be intermingled with
personal funds.
5.5.1.14 Any overage in petty cash fund will be considered as company fund (after scrutiny of
the cause), and under no circumstances will the custodian be entitled to claim such
overage as his/her personal fund. All such excess shall be deposited to the
company’s bank account.
5.5.1.15 Payments from petty cash must be requested using a Payment Request Form,
invoice, payment order and slip and signed by the requesting Department
Manager/Team Leader. and the cashier accountant/assistant accountant recorded on
pre-numbered petty cash vouchers in two copies (format Annex 4-4) attached then
authorized and approved by designated officials.
5.5.1.16 When it is not possible to get official (formal) receipts for payments, it is essential to
prepare internal invoice (format Annex 4-8) to be approved by the requesting division
manager /team leader before presented to accounts for settlement. The recipient of
the cash should sign for receiving.
5.5.1.17 Documents supporting each disbursement and the petty cash vouchers shall be
stamped PAID or defaced by cashier accountant to prevent reuse.
5.5.1.18 Periodic surprise counts should be made by the Collection and Disbursement Team or
by senior finance officer when delegated.
5.5.1.19 The custodian should fully cooperate with the demands of the Internal Auditor n
cases where the auditor makes a surprise cash count.
5.5.1.20 All paid vouchers/receipts and petty cash report and request must be stamped
REPLENISHED and referenced to the direct payment voucher number and date by
which replenishment was effected.
5.5.2 Accounts Recording (Petty Cash)
5.5.2.1 The cashier accountant will record payments daily in numerical sequence on a “Petty
Cash Summary and Replenishment Request” (form Annex 4-8), in two copies. The
original, attached with the supporting documents being given to the accounts when
replenishment is requested. The other copy will remain with the cashier. The amount
of the petty cash float will be brought forward in the Balance column, the balance
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being diminished by each payment made so that it always reflects the value of cash
and suspense vouchers on hand.
5.5.2.2 When the petty cash on hand balance diminish to about 20% of the float total, the
petty cashier will complete the Petty Cash Report and Request for replenishment.
5.5.2.3 The senior finance officer should count the cash on hand, inspect the suspense
vouchers, agree them with the schedule prepared by the cashier accountant and
agree the totals with those reported on the Petty Cash Report and Request and
forwarded to the Finance Manager/Team Leader for approval.
8-15 to be used for all cash counts.
5.5.2.4 The senior finance officer will check the Petty Cash Report and Request for correctness
and he/she must also review the schedule of pending suspense vouchers to ensure
that advances are being cleared within the prescribed time limit. The Finance
Manager/Team Leader then approves the summary and forward to the accountant
who is in charge of check preparation.
5.5.2.5 The senior finance officer who checked the Petty Cash Report and Request form
should sign for receiving of the petty cash documents from the cashier accountant on
the petty Cash Request & Replenishment Form.
5.5.2.6 Replenished Petty cash payment vouchers are coded entered into the ERP as a single
transaction in the Account Payable module. The DPV will be the reference for the
transaction entry and each petty cash payments will be entered line by line. When a
petty cash payment voucher has more than one debits or credit entries, additional
lines will be used.
5.5.2.7 The Petty Cash Report and Request should be filed with the petty cash vouchers to
which they relate in a separate petty cash payments file and not filed with the check
payment vouchers.
5.5.3 Journal Entries;
5.5.3.1 On Establishment of petty cash
Petty Cash Fund /Custodians/ XXXX-
Cash In Bank XXXX-
5.5.3.2 On replenishment of petty cash
Expense/Asset/Liability XXXX-
Cash In Bank XXXX-
5.5.4 Summary of Petty Cash Cycles
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* Division should be read as Department
Departments, which have their own cashiers, are (on cashier for each):
 Finance Department
 Procurement and Supply
 HRM & Facility Management Department
 Equipment and Maintenance Administration Department
 Operation ( For both maintenance and construction)
5.5.5 Settlement of Petty cash
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5.6. PURCHASE FUND

At the district and project level, purchase fund account will be established in the name of the
purchaser for purchases of a single transaction of up to Birr 1500.
5.6.1 INTERNAL CONTROL (Purchase Fund)
5.6.1.1 The purchaser shall be the custodian of the fund.
5.8.1.2 The purchase fund float is Birr 10,000. It is subject to revision depending on the size and
frequency of each district/project small transaction which cannot be captured through
bulk purchasing plans of Procurement Department. The change to the purchase fund
float shall be approved by the Finance Team Leader and District/Project Manager.
5.6.1.3 The fund is replenished upon submission of Purchase Fund Summary and
Replenishment Request (format Annex 4-8) together with valid supporting documents
(Purchase requisitions, purchaser orders, invoices, goods receiving notes etc). The
expenditure summary is prepared in two copies and the top copy together with the
supporting document will be forwarded for replenishment and the purchaser will retain
copy.
5.6.1.4 Purchasers are solely responsible for the safety of such fund and must at all times
secure the approval of the manager/team leader when effecting purchases.
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5.6.1.5 Without the settlement of the earlier fund advanced, no new fund will be released.
5.6.2 RECORDING
5.6.2.1 The supporting document should be attached to the voucher where the fund is
replenished and Stamped “Replenished”.
5.6.2.2 The finance officer in charge of compilation of the accounting records will sign on the
expenditure summary form for the receipt of the documents.
5.6.2.3 On the purchase fund journal voucher where the purchase fund is replenished, the
journal entry will be to debit the appropriate expense accounts and credit the
purchase fund account.
5.8.2.4 Journal Entries;
 On Establishment of the Purchase funds;
Purchase Fund /Purchasers/ XXXX-
Cash In Bank XXXX-
 On Replenishment of the Purchase funds;

Expense/Asset/Liability XXXX-
Purchase Fund /Purchasers/ XXXX-
5.7. CASH PAYMENT AT PROJECT SITE

Large sum of money may be withdrawn in the name of a cashier where a permanent cashier is not
assigned at project sites. The purpose of cash includes per diem, wages and purchase of local
items (example: sands). Such payments are handled by mobile cashiers.
5.7.1 INTERNAL CONTROL (Cash payment at project site)

5.8.1.1 The amount of cash to be withdrawn should in accordance with on a cash requirement
request by the project manager.
5.1.2 The project / district finance team /finance officer should review the legitimacy of the
payment request and the finance team leader should approve before a Cheque is
prepared. The finance officer and the finance team leader must ensure that the cashier
settle earlier cash advance before processing the cash payment request in the name of
the same cashier.
5.1.3 The recipient of the payment at the project site should sign on the appropriate forms
designed for the purpose and when it is a purchase of goods, it should be evidenced by
a legitimate invoice.
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5.1.4 Cashier must settle the advance in three days from the date of return from the project
site.
5.1.5 The advance is settled using Cash Advance Settlement Form (Annex 4-9) together with
valid supporting documents (Purchase requisitions, purchase orders, invoices, goods
receiving notes, wage payment sheet etc). The expenditure summary is prepared in
two copies and forwarded to accounts for review and approval.
5.1.6 Once, the payment documents get the acceptance and approval of finance unit, the
finance officer, who reviewed the documents, should sign for receipt of the documents
from the cashier at the bottom of the Cash Advance Settlement Form and should
provide the copy of this form to the cashier as evidence of settlement.
5.1.7 The supporting documents should be Stamped “Paid”.
5.7.2 RECORDING
5.8.2.1 Cash advanced to mobile cashiers are recorded as Cash Advances by the name of the
cashier.
5.8.2.2 The finance officer in charge of compilation of the accounting records will sign on the
expenditure summary form for the receipt of the documents.
5.8.2.3 On the Direct Payment Voucher where the cash advance is settled, the journal entry
will be to debit the appropriate expense/cost accounts and credit the Cash advance account.
5.7.3 Journal Entries:
On advancing the cash to the cashier
Cash Advance /Custodians/ XXXX-
Cash In Bank XXXX-
On Settlement of the cash advance

Expense//Asset//Liability XXXX-
Cash Advance XXXX-
6. ACCOUNTS RECEIVABLE
Accounts receivable, or receivables are monies due to the company which have not yet
been received/collected. They include receivables from sales of services and materials, staff
receivable, deposits and prepayments, sundry receivables etc.
Accounts receivable procedures govern the recording, collection, analysis and reporting of
cash receipts on account. Accounts receivable is a significant asset for the company and
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must be carefully managed to ensure efficient and effective collection of all debts owed to
the company.
6.1 TRADE RECEIVABLES / Trade Debtors

8.1.1 Trade Receivables (Trade Debtors) are receivables that arise from sales of road
construction and road maintenance service, sales of construction materials or provision of
rental services on credit.
8.1.2 The payment terms on road construction and maintenances should be clearly indicated in
the construction contracts. Credit Sales of other goods and services should be based on a
prior approved purchase orders from customers or contracts. Sales contracts should
include the following information to the minimum:
 General and specific conditions of the contract.
 Type of sales goods /service
 Duration
 Total amount
 Terms of payment
 Interest on delay of payment
 Signature of both parties
8.1.3 The Collection and Disbursement team should prepare timely VAT Credit Sales
Invoices with a format per (Annex 5-1) for approved payment certificates and for
goods and other services provided not later than 2 days. 8.1.4 Follow-up of collection
from trade debtors
8.1.4.1 Collection and Disbursement team should follow-up the collection of trade receivables
when they are due. The Account Receivable module will be the source of information
for the follow-up as it generates reports on overdue customer balances.
8.1.4.2 Past due accounts will be reviewed weekly by the collection and disbursement team
leader or by the assigned finance officer.
8.1.4.3 Weekly receivable analysis report should be submitted to the ERCC Finance Manager
and DGMs and monthly to the GM of ERCC by aged category. The age category will be
as follows:
 Receivables not over due
 Less than 30 days overdue
 Between 31-80 days overdue
 Between 81-90 days overdue
 Between 90 – 120 days
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 Over 120 days overdue

8.1.4.4 In addition, the Collection and Disbursement Team should report the movement of
Trade Debtors in summary and details on a weekly basis which shows the opening
balance, credit sales for the week and collection from credit sales during the week and
the outstanding balance to the Finance Manger.
6.2 STAFF RECEIVABLES

6.2.1. Staff advances are advances given to employees of ERCC in anticipation of settlement at
a later date. It includes travel advances and staff loans.
6.2.2. Loan to staff members will be administered in accordance with the administration manual
of ERCC.
6.2.3. Up on processing of employees termination pay, due care should be exercised to deduct
any outstanding debt before settling final payment.
6.3 Travel Advance

6.3.1Travel and per diem advances represent money advanced to employees of the company
for approved business travel outside their duty station. The rate and detailed procedure
shall be specified in the Administration manual.
6.3.2 Travelers (staff) should fill travel request (Annex 5-2) before departure and it has to be
approved by authorized official before processing advance payment.
6.3.3 Advances for per diem is paid only after ascertaining the previous travel advance has
been settled.
6.3.4 Travelers should complete a travel voucher (format per Annex 5-3) and get the
approval of their respective Department heads or team leaders as applicable before
submission to finance for settlement.
6.3.5 Travelers should submit the approved travel expense report up on return from trip and
a Finance Officer from Collection and Disbursement Team / Finance team should verify
and forward the report to the authorized official for approval. If the traveler spends
more than the advance and overspending is approved, a petty cash voucher or direct
payment voucher is prepared for the difference. Any balance not utilized should be
returned to the cashier and a cash receipt voucher is prepared.
6.4 Local Purchase Advances

6.4.1 Purchase advance, which cannot be covered from the established purchase fund may
be advanced to a purchaser. Purchase advances shall be given upon clearance of the
prior advance, if any.
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6.4.2 Advances shall be cleared upon submission of the relevant documents including suppliers’
invoices and Goods Receiving Note.
6.5 PREPAYMENTS
6.5.1 Prepayments are payments made in advance in relation to services such as insurance
premium and rent. The agreement should be kept in a safe place by a custodian assigned
for that purpose. An adjusting entry should be made periodically to transfer the expired
portion to an expense account.
6.6 SUNDRY RECEIVABLES

6.6.1 Sundry receivables are those which do not arise from trade, travel, purchases or
prepayments. They mostly emanate from advance payments to third parties for service
or goods before having received ordered services or goods. These advances have to be
authorized by the DGMs/Project Manager.
6.7 PROVISION OF DOUBTFUL ACCOUNTS

6.7.1. At the end of the fiscal year, the Collection and Disbursement Team should provide for
doubtful accounts with the following rates. These rates may be revised based on
experiences (trends) when approved by the Finance Manager of ERCC.
 One year old – 15%
 Two years old – 40%
 Three years and above - 80%
6.8 WRITE-OFF OF RECEIVABLES

6.8.1 Writing-off an accounts receivable is sensitive and should therefore be subject to strong
internal accounting controls. Collection and Disbursement unit must make every
reasonable effort to collect an outstanding account before a write-off.
6.8.2 Write-off of receivables will be accounted when approved by the designated official as
outlined in the policy part of this manual.
6.8.3 A debt is considered to be uncollectible when it meets one of the following criteria:
 All reasonable collection efforts have been exhausted.
 The cost of further collection action will exceed the amount recovered.
 The debt is legally without merit or cannot be substantiated by evidence.
 The available assets or income (current or anticipated) are insufficient.
 The debt was discharged in bankruptcy.
 The applicable statute of limitations for collection of the debt has expired.
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 The debt has been compromised in the best interests of the ERCC .
6.8.4 Collection and Disbursement Team should propose long outstanding receivables which
meet one of the above criteria to be written off. The proposal, after being reviewed by
the Finance Manager of ERCC will be submitted to the DGMs and GM of ERCC.
6.8.5 The accounting record for write-off will be effected against approved write-off letter
issued by the GM of ERCC.
6.8.6 Writing-off the receivable for accounting purposes does NOT discharge the debt owed to
ERCC and does not cancel the legal obligation of the debtor to pay the debt.
6.9 JOURNAL ENTRIES

6.9.1. When services rendered or goods are delivered on credit
Accounts Receivable (with Subsidiary) XXXX-
Sales XXXX-
VAT Payable XXXX-
6.9.2. Receipt of cash/Cheque or bank transfer for settlement of credit sales

Cash / Cash at Bank XXXX-
Accounts Receivable (with Subsidiary) XXXX-
6.9.3. When provision for doubtful accounts are provided

Bad Debts Expense XXXX-
Provision for doubtful accounts XXXX-
6.9.4. When receivables are written-off

Provision for doubtful accounts XXXX-
Accounts Receivable (with subsidiary) XXXX-
6.9.5. When a written-off account is collected

Cash in Bank XXXX-
Bad Debts Expense/ Retained Earnings XXXX-
If the collection is performed for accounts that have been written-off, the bad debt expense will
be credited and cash will be debited. If the already written off account is collected after a year,
then retained earning account will be credited instead of bad debt expense.
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6.9.6. Upon giving a purchase advance

Purchase Advance (with purchaser name) XXXX-
Cash or Cash in Bank XXXX-
6.9.7. Upon settlement of advances

Stock/Expense/Cost XXXX-
Purchase Advance (with purchaser name) XXXX-
6.9.8. When payment is made as prepayment

Prepaid rent/Insurance etc XXXX-
Cash in Bank XXXX-
6.9.9. To transfer expired portion to expense

Rent / Insurance / Expense etc XXXX-
Prepaid Rent/Insurance etc XXXX-
7 STOCK
7.1. DEFNITION
7.1.1. Stocks are construction inputs and consumable materials (Cement, Spare parts,
Stationery, Fuel & lubricant etc), which are not qualified for definition of fixed assets.
7.1.2. This section covers issues on inventory management from acquisitions, receiving, storing,
distributing and disposing of stock. Procurement & Supply Department /team in General
and the stores keeper in particular are responsible for receiving, stocking and issuing of
materials and supplies.
7.2. AQUSITION AND VALUATION

7.2.1. Stock items are purchase in accordance with the Procurement Policies and Procedures
Manual and should be supported by an approved budget of ERCC.
7.2.2. Stock items purchased are valued at purchase price. Value Added Taxes are not part of the
cost of stock/inventory. Transportation costs incurred for local purchase of stock items are
recorded as periodic expense, as the amount is not significant enough to make it part of the
inventory cost. However, cost of imported items includes relevant import related costs such
as insurance, bank charges, transportation costs, custom charges and others. Thus, these
costs will be part of the stock cost.
7.2.3. Construction materials produced in house, including gravels are valued based on the
relevant cost of manufacturing as outlined in the Cost accounting manual.
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7.2.4. Finance Department should maintain foreign purchase file copies for frequent reference
and unit cost computations.
7.2.5. Imported Items Costing/Valuation
7.2.5.1 Procurement and Supply Department is responsible for the provision of copies of all foreign
purchase transaction documentation to Disbursement and Collection team. The
Disbursement and Collection Team should maintain foreign purchase file for each operations
and should be numbered and filed properly.
7.2.5.2 When a foreign purchase operation completed (that is when goods are received by ERCC’s
warehouse), the Collection and Disbursement unit should prepare the cost sheet for the
imported items and has to make sure that all relevant cost components are incorporated.
Any missing cost element should be investigated with the assistance of Procurement and
Supply Department. Commonly, inland transport fees may not be paid as transporters may
not request their payment promptly.
7.2.5.3 After ensuring that all costs of import are accounted, unit cost of imported items should be
computed by Collection and Disbursement team and to be verified by Procurement Supply
Department. Unit costs of imported items are computed in accordance with the Cost sheet
and unit cost computation sheets with a format per (Annex 8-1) and (Annex 8-2)
respectively.
7.2.5.4 Unit costs computed are basis for recording the Receipt Ticket into the ERP inventory
module.
7.2.6 Stock movements (Stock returns, consumption and ending stock) are valued at a moving
average costing method. However, when the carrying cost of inventory is higher than the
market value, the yearend stock will be valued at market value (based on lower of cost or
market value principle). The loss on valuation will be debited to administration expense
against the stock account.
7.2.7 Donated Stock items are recorded at agreement value. If there is no value indicated in the
agreement, the market value shall be the value of the stock. The Finance Department shall
be responsible for assigning the estimated.
7.3. INTERNAL CONTROL

Receiving
7.3.1. All stock items purchased should be evidenced by Receiving Ticket with a format per (Annex
8-3). Districts and projects use similar format with district / project name. The original copy
of the Receiving Ticket will be issued to accounts through purchaser where the purchaser
pass the original Receiving Ticket together with supporting documents to accounts, the first
copy will be issued to the warehouse, one copy will be retained by the procurement and the
last copy remains in the pad. The receiving clerk should sign for the preparation of
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Receiving Ticket after checking that the items received are in accordance with the purchase
requisition, purchase order, supplier invoices, delivery order and shipping documents (if
any) in terms of quantity, quality, specifications and size, receiving unit. The supervisor will
sign for checking of the item received by the receiving clerk and the correctness of the
Receiving Ticket. The store keeper will sign for receiving the items and updating bin cards.
Finally, cardex section supervisor will sign for entries have been completed on stock card.
When full version of ERP is adopted by ERCC, cardex system will be replaced by Inventory
Control module.
7.3.2. Name of supplier, date of receiving, Purchase requisition number, Purchase order number,
supplier invoice number, detail specification of items purchased, unit of measures, quantity
and other information’s should be filled in the Receiving Ticket.
7.3.3. Construction Materials produced by ERCC not meant for stocking (such as gravel, sand,
Stone) which will be directly issued to the workstation should be recorded in
Receiving/Issuing Ticket with a format per (Annex 8-4) in four copies. The original copy will
be issued to the driver, first copy will be issued to accounts to compute cost of material, and
one copy will be retained by the store keeper and the last copy retained in the pad.
7.3.4. The purchaser will submit the original copy of the Receiving Ticket together with the
remaining supporting documents (invoices, purchase orders etc) to the Finance Division for
the settlement of the advanced for purchase.
7.3.5. Damaged goods and shortages of delivery should be remarked in the Receiving Ticket. Such
shortages and damages should be reported immediately to Property and Supply manager
and insurance officer in the same day.
Requisition
7.3.6. Store Requisition is initiated by staff in the user Department/project/team and approved by
the head of the requesting Department/team and authorized by Department Manager /
Project manager with a format per (Annex 8-5) in five copies. The Store Requisition should
be pre-numbered and serially sequenced. The original and first two copies of the Store
Requisition are issued to the warehouse; the third copy will be issued to Procurement and
the last pad copy retained by the originator or requester
7.3.7. The requesting Department/team has to fill in the Store Requisition the name of the
requesting Department /team, clearly indicate the specific type of materials with detail
descriptions (like Notebook – small or big size instead of Notebook only), model and part
number when applicable, the quantity required and unit of measure, Date on which the
Department/team is wishing to receive the items.
Transfers and Issues
7.3.8. When there is a transfer of stock from one warehouse to another (Central Warehouse,
District, Project and Work Execution), the receiving store needs to fill in and get the
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approval from the Department/project manager. In such cases, stocks are issued against
approved Store Requisition to be filled by the requesting Department /team.
8.3.9 Transfer of stock from one warehouse to another warehouse shall be made against
Shipping Ticket (following the approval of Store Requisition) with a format per (Annex 8-8)
in four copies. The Shipping Ticket should be prepared by the store clerk, authorized by the
warehouse supervisor and signed for receiving by the driver/delegated person. The original
copy of the shipping ticket is submitted to accounts and the first copy will be issued to the
receiver, the second copy retained by warehouse and the last copy remained with the pad.
8.3.10 Store request and Shipping documents for transaction between district/project warehouses
and central warehouse should be produced for the inventory control system and should be
approved by the District/project manager and signed by the store keeper and the
supervisor.
8.3.11 Consumable stocks (except spare parts) are issued to users from store against Issue Ticket
(following the approval of Store Requisition) with a format per (Annex 8-8) in four copies.
Issue Ticket is prepared by store clerk authorized by warehouse supervisor and signed for
receiving by the user. The original copy of the issue ticket will be issued to the warehouse,
first copy of issue ticket submitted to account, the second copy issued to the user/
questioner and the last copy remained with pad.
7.3.12 Spare parts are issued to users from store against Parts Requisition and Issue Ticket with a
format per (Annex 8-8) in four copies. Issue Ticket is prepared by store clerk authorized by
warehouse supervisor and signed for receiving by the user/requester. The original copy of
the issue ticket will be issued to the warehouse, first copy to accounts, second copy to the
user/ requester and the last copy remains in the pad.
7.3.13 The store keeper should deliver the requested items if available in stock or should
communicate to the requesting Department/team if the item is out of stock on the same
day, the approved Store Requisition is received
Stock Returns
7.3.14 Stocks from project/work execution center shall be returned to store using Return to Stock
Ticket (format Annex 8-9) that is prepared in four copies. The original shall be given to the
deliverer, one copy to the warehouse, one copy to accounts and the last copy shall remain
in the pad.
Stock Control Record
7.3.15 The store keeper should maintain a bin card (format Annex 8-10) for each stock item. The
Bin card should contain the full description of the item (including the specification) the item
code, shelf number, date of receiving, and issuing, quantity received and issued and the
running balance of the item. Bin card has to be recorded perpetually and immediately upon
finalizing of the store documents (Receiving, shipping and issuing documents).
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7.3.16 Stock records are maintained by Finance Department using ERP inventory module
segregated by stores and item groups. Where the software is not operational, Property and
Supply should maintain equivalent store control ledger, either manually or using other
means of depending on the situation. Cardex section under Procurement & Supply
Department shall also maintain stock cards (format Annex 8-11).
7.4. INTERNAL CONTROL OVER FUEL AND LUBRICANT

7.4.1. Procurement and Supply Department is responsible for the enforcement of all procedures
governing the receipt, use, inspection, security and records pertaining to Fuel & Lubricant
and the enforcement of all safety regulations.
7.4.2. When fuel is delivered to the store, the store keeper will first check the fuel log; take a
reading using the applicable measuring devise (e.g. deep stick line) to determine the
amount of fuel that can be accepted.
7.4.3. The store keeper will see that the delivery and the handover are performed in his
presence throughout the process. Compare numbers of meter and then sign on the
dispatch and Receiving Ticket.
7.4.4. If discrepancy is identified, the store keeper should immediately notify the supervisor,
providing details on the variance in liter, invoice number, truck number, shipping
/order number, and district/project name.
7.4.5. Extreme care must be exercised to prevent wastage of fuel caused by an overflow
when storage tanks are being filled, which results in both a fire hazard and destruction
of property.
7.4.6. When fuel is issued to stationed vehicles using Daily Fuel Oil Report (Single Unit) with
a format (Annex 8-12) in two copies, before issuing the fuel the store keeper examine
the approval of requisition. Daily Fuel and Oil Report is prepared by store clerk, which
is approved by warehouse supervisor and signed for receiving by the user.
7.4.7. Fuel is issued to vehicles not stationed or that comes from other district/project using
Daily Fuel and Oil Report (Multi Unit) format (Annex 8-13) in two copies. The store
keeper examines the approval of requisition before issuing the fuel. Daily Fuel and Oil
Report is prepared by store clerk, approved by warehouse supervisor and signed for
receiving by the user.
7.4.8. Fuel is to be dispensed only into vehicle tanks and the quantity issued, the date and
the plate number of the vehicle are recorded in the appropriate space on the report by
the store clerk. When fuel is requested and issued to other services or purposes,
details of the issuing unit and the purpose should be recorded in the report.
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7.4.9. Separate summary of report should be prepared for fuel issued to rental /third party
property. The report together with the supporting document will be a basis to account
reimbursement (refund) on billings with customers/suppliers.
7.4.10. Log book/sheet should be prepared by the driver/machine operator for follow-up the
utilization of fuel and oil by each division/team/work execution. Log book/sheet should be
authorized by the designated officials.
7.5. PHYSICAL COUNT

Interim Physical count
7.5.1. Stocks at the central, district and project warehouses should be counted on a sample basis
for selected items as proposed by Finance Team once in a month. The basis of selection
of sample items to be counted should be mainly on the basis of 80/20 approach. This is to
mean that 20% of the items in the stock are representing 80% of the stock value of the
items. Stock items for the real estate are counted fully without the application of 80/20
approach.
7.5.2. Appropriate cutoff procedure has to be made to make sure that no stock movement takes
place during the count. The counting team has to sign at the back of the last used stock
receiving, issuing and shipping tickets just before the count.
7.5.3. Stock counted will be checked against the stock record maintained in the cardex and
inventory control module of the ERP.
7.6. ANNUAL STOCK TAKING/INVENTORY PROCEDURE

Advance Preparation
Count Team
7.6.1. Counting Team, with a minimum of seven members should be assigned by the DGMs (for
head office), and District/Project Manager before the end of the fiscal year. The inventory
team will be drawn from at least one from each Department/Team. One of the
representatives should be from the Finance.
7.6.2. The team should discuss on stock taking procedures issued by the Finance
Department/Team.
7.6.3. Before the date of the count, the team should ensure that the layout of store is suitable
(good layout, sufficient space to move around, easy to count, etc) for count and
appropriate measuring tools are available for items with a different unit of measures
(meters, weight, litters etc).
Finance Department and Auditor
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7.6.4. Finance Department should prepare the list of stock items on hand at the end of the fiscal
year from the inventory control of the ERP (or from the stock card for items, where a
manual stock record is established).
7.6.5. Finance Department should inform the external auditors well in advance to witness the
physical count
Store Keeper
7.6.6. The store keepers in each warehouse are responsible for the arrangement of the stock in
an orderly manner and creating a suitable layout for counting.
7.6.7. The store keepers have to make sure whether items received or issued recently are
supported by documents.
7.6.8. The store keepers should separately place third party stock, if any.
7.6.9. The store keeper has to remind user departments/teams to submit their request for stock
earlier before the start of the count as it is difficult to issue during stock taking process.
During Stock Count
7.6.10. The physical count may be commenced on the last two weeks of the fiscal year or long
before depending on the size of the stock.
7.6.11. The team members should sign for cut-off at the back of the pad copy of stock movement
vouchers (including Receiving Ticket, Issue Ticket, Shipping Ticket, and Return to Stock
Ticket etc).
7.6.12. The team will be responsible for the counting of the stock and completing the physical count
sheet with a format (Annex 8-14).
7.6.13. The store keepers will assist in locating the items to be counted.
7.6.14. The count team should open some sealed cartons or containers to determine the quantity
and type of contents (i.e., identity, model number, physical characteristics, etc.) and
agree these to the description on carton or container and to the physical inventory count.
7.6.15. The count team watches for empty boxes, spaces in the middle of stockpiles, etc.
7.6.16. The count team should note seemingly excessive, slow-moving or damaged inventory
for later review.
7.6.17. The count team should ascertain that third party stocks or previously scrapped materials are
not included in the physical inventory taken by the count teams.
7.6.18. The store should be sealed by a paper signed by the count team during breaks for lunch
and closure hours.
7.6.19. Recount may be undertaken to ensure that overages and shortages are realistic and
dependable.
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7.6.20. The count sheet should be completed by the count team and signed by the counters and
the store keeper. Any overages and shortage during the count should be noted in the
count sheet.
After count
7.6.21. The count team should report on the stock taking to the DGMs/Project Manager/District
Manager. The report should at least cover the following issues:
 List of overages and shortages
 Significant amount of obsolete, slow-moving, excess, damaged or unusable
stocks, scrap materials have been counted according to written instructions
 Summary of cut-off (Voucher name and last used number)
 Weaknesses and strength noted in the stock keeping and control
 The accomplishment of the count team
 Problems encountered dung the count.
 Recommendation
7.6.22. The DGM for Support /Project Manager/District Managers shall approve the count report
and forward with a covering letter to the ERCC GM. Management decisions on the count
report shall be communicated to the Finance Department and the respective Finance
Teams.
7.6.23. Where Inventory Module of the ERP software is not fully functional, the Finance
Department/Finance Team should value stock counted based on moving average valuation
method after receiving the copy of the physical count report. Otherwise, count data
should be fed into the ERP inventory modules.
7.6.24. The appropriate adjustment account for stock shortage and overage should be entered into
the system. Where no inventory module is in use, the Finance Department/Team
determines the value of year end stock and the value of stock recorded as overage and
shortages.
7.6.25. After investigation, overages have to be recorded with Receiving Ticket.
7.6.26. The DGM for Support should issue instructions on the treatment of shortages noted
during the annual physical count in 30 days after the closing of the fiscal year based on the
decision of the ERCC management following the physical count report as indicated in section
8.8.22 above.
7.7. REVIEW / Reconciliation

7.7.1 Appropriate measures, should be taken for discrepancies found between the stock record
and physical count. Recount should be made when necessary.
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7.7.2 Compensating or offsetting of stock shortage and overage for identical items with a
variation of weight and size differences is not allowed.
8.8.3 Stock shortages, which results from inherent nature of the product will be adjusted against
consumption, if the variance is within the acceptable range. This applies to stock items such
as fuel, oil and lubricant, reinforcement bars (when receiving is in weight and issuance is in
pieces), etc.
7.7.4 The shortage as a result of leak or waste for each product need to be determined based on
actual experience. Procurement & Supply Department is responsible for the determination of
normal acceptable wastage (loss) level of such products. Custodians will be accountable for
stock shortages in excess of the acceptable leakage or wastage level.
7.8. DISPOSAL
8.8.1 Stock should be disposed in accordance with the Property and Equipment Disposal Manual
of ERCC. The manual describes the manner in which users request for disposal, the role of
Property team, the disposal committee, the DGMs, GM and Board of ERCC.
10.8.2 Disposal of significant stock should be communicated to Revenue and Custom Authority
(when the value of the items to be disposed is significant) well in advance so that they
witness the disposal.
10.8.3 Stock account will be adjusted based on approved stock disposal document.
7.9. JOURNAL ENTRIES

7.9.1. For purchase of stocks locally
o Purchase in Cash
Stock XX
Cash XX
o Purchase on credit
Stock XX
Account payable XX
7.9.2. For purchase of imported stocks
o When various costs are incurred:
Goods In Transit XX
Cash XX
This transaction may be passed when L/C first margin is paid, final is paid, insurance is paid,
transit, bank charges are paid, inland transports, and transits services, etc are paid.
o When goods are received and once ensured that all costs are accounted, the
following journal entry will pass
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Stock XX
Good in Transit (specific subsidiary account) XX
7.9.3. For transfer/shipping of stocks from warehouse to warehouse

o Transfer within the same cost center
Actual Journal entry is not required when Inventory control modules are used and when the
transfer is within the same cost center (example: From one of the head office store another head
office store).
Stock /Receiver/ XX
Stock/ Issuing/ XX
o Transfer between different cost center: From head office to branches
 Recording at head office

Branch account XX
Stock XX
 Recording at branch / Project
Stock XX
Head Office XX
7.9.4. For issuance of stocks
Expense / Cost XX
Stock XX
7.9.5. Inventory Adjustment following physical count / stock reconciliation

o If the shortage is within the approved leakage (shortage) range
Expense / Cost XX
Stock XX
o If the shortage is in excess of the approved leakage (shortage) range
Stock shortage (Expense)/ Staff Receivables XX
Stock XX
The extra loss will be recorded as administration cost/ expense (as cost of inefficiency) if the loss
cannot be traceable to any one of the staff involved in the process. If the loss or shortage is
attributed to a staff and when the Manager of ERCC or the Human Resource Manager endorses it,
the shortage will be recorded as a receivable from the staff.
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8 FIXED ASSETS
As defined in section 11.1 of the Policy Manual, Fixed Asset is defined as an "item" of a capital
nature with a useful life of over one year that costs Birr 2,000 and above before VAT (if goods) or
Birr 50,000 above before VAT if construction / Works for own use.
8.1. Internal Control

8.1.1 Property and Material Management Team is responsible for ensuring that all fixed assets
are recorded.
8.1.2 Fixed assets should be properly classified as fixed asset on its own, upgrades or add-ons
as per section 11.1 to 11.3 of the Policy Manual.
8.1.3 Each fixed asset should be tagged with a unique systematically designed identification
number where this number is also recorded in the Fixed Asset Register as indicated in the
policy part of this manual.
8.1.4 When purchased fixed assets are acquired, they should be provided with identification
numbers and the number shave to be shown in the Fixed Asset Receiving Report and
Fixed Asset Issue Report.
8.1.5 Fixed asset purchase request should be supported by budget and the requisition for fixed
asset to be completed (form Annex 8-4) and should be verified by the budget
officer/accountant for budget availability.
8.1.8 Fixed Asset acquisition (whether purchased or granted) should be evidenced using Fixed
Asset Receiving Ticket (format Annex 8-3). Original Copy of the receipt report should be
attached together with supporting documents (invoices and others) for accounting
recording.
8.1.8 The store keeper will see (witness) the delivery taking place and if possible, ensures that the
assets are fully delivered by the vendor/driver or purchaser. He/she will ensure that the
documentation (invoice, purchase order) are in line with the asset received before singing
the dispatch. Once, verified, then the store keeper will sign on the dispatch and issue the
Receiving Ticket.
8.1.8 Fixed assets are issued to users using Fixed Assets Issuing Report ( Sample format Annex 8-
5). The Fixed Asset Issuing Report is a basis for recording subsidiary fixed asset register by
name of custodian.
8.1.9 When fixed assets are returned to Store by a user, Fixed Asset Return Ticket (format Annex
8-8) should be prepared and one copy to be provided to the users who return the assets.
8.1.10 When Fixed Assets are issued for maintenance, Fixed Asset Issue Ticket for maintenance
should be completed and approved by the designated official as per the Property
Management Manual of ERCC. Proper follow-up should be exercised to ensure that such
items are maintained timely and returned kto ERCC premises. Property and Material
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Management Team should prepare annual report of properties in the hands of third
parties for maintenance.
8.1.11 Other internal control issues in connection with disposal of fixed assets transfer of fixed
assets between branches and projects, lending of fixed assets to other organizations,
securing of title deeds and the likes are addressed in the property management manual of
ERCC.
8.2. Recording
8.2.1. The value of the Fixed Asset is the purchase cost plus direct costs incurred to bring
the asset to the premises of the organization and to a usable condition. Fixed Asset
acquired in the form of grant shall be recorded as indicated in section 11.5.2 of the policy
part of this manual.
8.2.2. Recording of Fixed Asset under construction are recorded as construction in progress. The
thresholds are explained in the policy part of this manual (section 11.8.1).
8.2.3. Add-ons and upgrades are recorded under the category of the main asset where it is going
to be appended or fitted in. Departments are responsible to justify in writing whether an
upgrade and add-on have implication on the useful life of the asset so that Finance
Department could adjust accordingly the remaining life of the asset.
8.2.4. Where an upgrade extends the useful life of the asset, relevant documentation including the
Fixed Asset Register, the ERP asset recording system and the asset card to be adjusted
accordingly. The remaining book value plus the additional value of the upgrade will be
divided to the new remaining useful life to determine the new annual depreciation.
8.2.5. When upgrade doesn’t extend the life of an asset, then the additional cost will be expensed.
8.2.6. Finance Department shall maintain Fixed Asset Register. The head office of ERCC is
responsible to have a master Fixed Asset Register for all assets of ERCC. Districts and
project offices are responsible to maintain Fixed Asset Register for assets under their
custody.
8.2.7. Borrowing costs directly attributable to the acquisition the fixed assets are capitalized as
indicated in the policy part of this manual.
Impairment of Assets
8.2.8. At the end of each reporting period, ERCC Finance Department in collaboration with the
relevant departments should assess whether there is any indication that an asset may be
impaired (i.e. its carrying amount may be higher than its recoverable amount). IAS 38 has a
list of external and internal indicators of impairment. If there is an indication that an asset
may be impaired, then the asset's recoverable amount must be calculated. [IAS 38.9]
8.2.9. The following are external and internal indication for impairment
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 External sources:
o market value declines
o negative changes in technology, markets, economy, or laws
o increases in market interest rates
o net assets of the company higher than market capitalization
 Internal sources:
o obsolescence or physical damage
o asset is idle, part of a restructuring or held for disposal
o worse economic performance than expected
For further list of indications, it is good to refer IAS 38 .

8.2.10. Investment property (land or building or both) held to earn rentals or for capital
appreciation or both are measured at depreciated cost less any accumulated impairment
losses unless it is classified as a non-current asset held for sale. This procedure applies to
intangible assets (leases and others) and goods wills. This procedure is as per IAS 38.
Impairment Loss = Carrying amount of an asset – Its recoverable amount
 Carrying amount: the amount at which an asset is recognised in the balance sheet
after deducting accumulated depreciation and accumulated impairment losses
 Recoverable amount: the higher of an asset's fair value less costs of disposal*
(sometimes called net selling price) and its value in use
 Fair value: the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date (see IFRS 13 Fair
Value Measurement)
 Value in use: the present value of the future cash flows expected to be derived from an asset
or cash-generating unit.
For simplicity detail procedures are not incorporated in this manual. Details are available at IAS 38.
8.2.11. Fixed Assets are recorded as an asset in the period of purchase and depreciated in
accordance with the depreciation rate indicated in the policy part of this manual.
8.2.12. Minimum book value for in use fixed asset, but completed its depreciation life, shall retain
Birr 10 as a book value until its disposal.
8.2.13. Revaluation of fixed assets will be conducted in accordance with the financial policy of
ERCC.
8.2.14. At the end of each reporting period, assets are reviewed to look for any indication that an
asset may be impaired. If impairment is indicated, the asset's recoverable amount is
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calculated and the corresponding impairment loss to be computed and journalized in the
period.
8.2.15. Once in a year comprehensive physical count of Property and Equipment should be made.
8.2.16. Property unit of ERCC finance will generate a list of fixed assets from the register (or from
the ERP fixed assets module) to assist the physical count process.
8.2.17. The physical count should be conducted with the supervision of Finance
Department/Finance Team though the counting committee has the prime responsibility for
the overall preparation, counting and reporting of the count result.
8.2.18. The Fixed Asset Register and module should be updated and the appropriate journal entry
should be recorded for the shortage and overages of fixed assets count.
8.2.19. A Fixed Assets may be disposed when conditions stated in the policy part of this manual
are satisfied and in accordance with the Property and Equipment Disposal manual of ERCC.
(11.14)
8.2.20. Property and Equipment segregated (held) for sale shall be measured at the lower of
carrying cost and fair value less costs to sell.
8.2.21. The record of the Property and Equipment should be adjusted by the value of the disposed
assets. Such non-current assets held for sale (whether individually or as part of a disposal
group) are not depreciated. Property and Equipment held for sale are classified separately in
the balance sheet.
8.2.22. If a disposed asset is sold, it should be evidenced using a VAT invoice.
8.3. Journal Entry

8.3.1. Purchase of fixed assets
Fixed Asset (by category – example Vehicle) XXX
Cash / Account Payable XXX
8.3.2. Fixed Assets received in the form of grant
Fixed Asset (by category – example Vehicle) XXX
Other Income / Expense /Cost XXX
When the grant related to a certain commitment to be discharged by ERCC, then the
relevant expense account or income account should be credited. If not traceable, other
income account will be debited. (It is important to refer IAS 20)
8.3.3. Construction in Progress: When materials purchased, labor cost paid or other overheads are
incurred:-
Construction in Progress (by subsidiary account) XXX
Cash / Stock / Account payable XXX
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8.3.4. When add-ons and upgrades are purchased

Fixed Asset (the related fixed assets account) XXX
In addition, the subsidiary fixed asset record (the particular item upgraded or the add-on
inserted should be updated at the ERP fixed asset system). If an engine is replaced for a
vehicle, the Cost of the Vehicle will be updated by the value of the upgrade and the above
general journal entry will pass.
8.3.5. Borrowing costs that are directly attributable to fixed assets acquisition
Construction in progress XXX
Cash XXX
When a debit advice is received from bank in connection with a loan for the construction
of a fixed assets or acquisition of a fixed assets, then the appropriate fixed asset or
construction in progress account will be debited.
8.3.6. Recognition of impairment loss
 When the asset was not revaluated earlier
Impairment loss (Administration Expense) XX
Accumulated Impairment loss XX
 When the asset was revalued earlier

Revaluation reserve XX
Fixed Asset XX
Adjust depreciation for future periods as the value of the fixed assets declined.
8.3.7. Revaluation
 If the value is higher than the carrying amount
Fixed Assets XX
Revaluation Reserve XX
 If the value is lower than the carrying amount
Expense (impairment loss) XX

Fixed Assets XX
Note that this expense will not be tax allowable according to Ethiopia tax law .
 When a repeated revaluation results in a high value (that has been impaired previously
and expenses were recognized)
Fixed Assets XX
Income from revaluation XX
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8.3.8. Depreciation
 Depreciation of an asset not revalued earlier
Depreciation expense XX
Accumulated Depreciation XX
 Depreciation of an asset revalued earlier

Depreciation expense (to the extent of historical cost) XX
Revaluation Reserve (for the portion of revalued amount) XX
8.3.9. Shortage/ Overage of Fixed Assets - following a physical count

 Shortage
Expense/ Staff Debtor / Insurance Claim XX
Fixed Asset XX
The expense or staff debtor or insurance claim receivable may be recorded in accordance with
the decision of the management as to the causes of the shortages
 Overage
Fixed Asset XX
Other income XX
8.3.10. Disposal of fixed assets

 At a value higher than the book value of the assets
Cash /Proceeds XX
Value Added Tax XX
Fixed Asset XX
Gain on disposal of fixed assets XX
 At a value lower than the book value of the assets
8.3.11. When properties segregated for sales

Fixed Assets for sale (at book value) XX
Fixed Asset XX
No depreciation will be computed after transfer of the fixed assets from the fixed asset
group into fixed assets for sales account
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Cash /Proceeds XX
Loss on disposal of fixed assets XX
Value Added Tax XX
Fixed Asset XX
8.3.12. When properties segregated for sales

Fixed Assets for sale (at book value) XX
Fixed Asset XX
No depreciation will be computed after transfer of the fixed assets from the fixed asset group
into fixed assets for sales account.
9 INTANGIBLE ASSETS
9.1 An intangible asset, whether purchased or self-created, is recognized if: it is probable that
the future economic benefits that are attributable to the asset will flow to the entity; and
the cost of the asset can be measured reliably.
9.2 The record and recognition of intangible assets shall be in accordance to the financial
management policy of ERCC, which is elaborated in section 12.1.2 & 3 to thepolicy part of
this manual.
9.3 For the purpose of management accounting and efficient measurement of project costs and
activities, internal charge rate between head office and branch offices and among branch
offices will be based on approved rates as indicated in section 13 of the Financial
Management Policy manual .
9.4 Financial leases, when ERCC is a lessee:

As defined in Section 13.2.5 of the policy part of the manual will be recorded as follows:
o Asset and liability are recognised at the lower of the present value of minimum lease payments
and the fair value of the asset;
Example: ERCC purchased a lease from Addis Ababa City Government at a 20% advance payment
of Birr 1 million, where the remaining amount to be paid in the coming 10 years every year at an
interest rate of 12%. The table shows the annual interest rate, the amount of current maturity of
long term debt and the long term lease payable portion. Journal entry explained din the following
section
Income
Balance sheet
Statement
Beginning Principals Ending
Year Repayment Current Long Term
Balance Interest paid Balance
Maturity Lease Payable
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of long
Expense
term loan
F: G:
C: D:
E: (principal to (Ending balance -
A B: (Ax12%) Equal (Installment
(A-D) be paid Principal to be
installment - Interest)
next year) paid next year
(808,9 3 255,2
1 4,000,000 480,000 38) (228,938) ,882,083 89 3,518,884
(808,9 3 285,9
2 3,882,083 452,848 38) (255,289) ,518,884 24 3,230,851
(808,9 3 320,2
3 3,518,884 422,013 38) (285,924) ,230,851 35 2,910,818
(808,9 2 358,8
4 3,230,851 388,802 38) (320,235) ,910,818 83 2,551,953
(808,9 2 401,8
5 2,910,818 349,284 38) (358,883) ,551,953 02 2,150,251
(808,9 2 449,9
8 2,551,953 308,234 38) (401,802) ,150,251 08 1,800,344
(808,9 1 503,8
8 2,150,251 258,030 38) (449,908) ,800,344 95 1,198,449
(808,9 1 584,3
8 1,800,344 204,041 38) (503,895) ,198,449 83 841,088
(808,9 841,0
9 1,198,449 143,584 38) (584,383) 841,088 88 -
(808,9
10 841,088 85,850 38) (841,088) (0) - -
9.5 Finance leases — When ERCC is a lessor (property owner to lease its asset)
 receivable is recognized at an amount equal to the net investment in the lease;
 financial income is recognized based on a pattern reflecting a constant periodic rate of
return on the lessor's net investment;
9.6 Monthly or periodic payments for operating leases are recorded as expenses
9.7 Journal Entry
9.8.1 Recognition of acquired (purchased) intangible assets
Intangible asset (copy right, patent right, good will…) XX

Fixed assets (components of the purchased business unit – if applicable) XX
Cash / Account Payable XX
9.8.2 Recognition of self-created intangible assets (if qualified as per IFRS)
Intangible asset (copy right, patent right, good will…) XX

Accumulated Costs / Expenses XX
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Accumulated costs (example project costs for research and development if it was recorded as an
asset primarily), or crediting the expense account which it was debited in connection with the
intangible assets.
9.8.3 Amortization of intangible assets
Amortization Expense XX
Accumulated Amortization XX
9.8.4 Purchase of land on lease (financial lease)
 At the time of advance payment (based on the above example)

Leased land 5,000,000
Lease Payable 5,000,000
Long Term Lease Payable 1,000,000
Cash 1,000,000
 At the time of installment payment (Year 1 based on the above example)
Lease payable 228,938
Interest on lease Payment 480,000
Cash 808,938
 Transfer of the next year lease payment (principal portion) to current maturity of long term
loan at the end of year 1.
Long Term Lease Payable 255,289
Current Maturity of Long Term Lease Payment 255,289
10 PAYROLL
Payroll is prepared by Collection and Disbursement Team / Finance teams of ERCC based on the
monthly personnel data supplied by Human Resource Department or the respective personnel
teams.
10.1. Internal control over payroll

10.1.1 Payroll database should be updated and processed by a designated finance officer and
should be protected with password
10.1.2 Human Resource Faciliteis Administration Department/Personnel Administration Team is
responsible for the issuing of changes to the personnel records on the same date the letter
is issued. Changes to personnel records include:
 Employment
 Dismissal / Resignation / Termination
 Transfer
 Promotion / demotion
 Salary increment
10.1.3 Collection and Disbursement Team / Finance Team should file HR documentations in good
order for future reference.
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10.1.4 The team leaders and department heads are responsible to ensure that absenteeism are well
taken and reported to HR. HR is responsible to collect payroll sheets on a weekly basis and
compiles on a monthly basis.
10.1.5 Overtime payments s hall be authorized in advance. (Over time Approval Form Annex 9 -
4) and actual overtime work has to be approved by the respective Department heads
(format Annex 9-3) before transferred to HR for review and compilation.
10.1.8 Recurrent payroll information, like overtimes, fines, absenteeism, and annual leave and
the likes has to be passed by HR & Facility Management Department t/Personnel
Administration Team ( format Annex 9-2) to Finance before the 20th day of the month.
10.1.8 Employee name, rate, arithmetic accuracy etc. of payrolls should be checked by senior
finance officer other than those who prepared them.
10.1.8 Payrolls shall prepare using Annex 9-1 format, in two copies, get signed for preparation,
checking and approval. The following delegated authorities sign on a payroll sheet.
 The finance officer who prepares the payroll

 The Collection and Disbursement team leader / finance team leader
 The Finance Manager of ERCC / The branch or project manager
10.1.9 After the approval of the payroll sheet, finance shall transfer the net pay of employees to
their respective saving accounts. The first salary payment for newly recruited employees
and partial salary payments for outgoing employees may only be paid in cash or cheque
using vouchers. Otherwise, all salary payments should be effected to through bank.
10.1.11 Payroll deductions should be properly accounted for and paid to the appropriate
government body before due date.
10.1.12 Work records should be checked and approved by persons not involved with payroll
preparation.
10.1 Only the net amount of cash required for payment of salary should be drawn from the
bank, deductions from payrolls being credited to creditors' accounts (or staff debtors'
accounts in the case of loan) and subsequently settled by cheque for the appropriate
creditors including the pension and tax liabilities.
10.2 Salaries should only be paid to third parties on the written instruction of the employee
concerned.
10.2.1 Unpaid salary that is unclaimed for ten days must be deposited at bank immediately.
Subsequent payment should be effected from petty cash or by cheque.
10.2.2 Finance Department / Finance Team should review at least twice a year that the payroll
database is in line with the basic personnel documents issued by HR.
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10.2. Payroll Fund

10.2.1 In a situation where payment through bank is not suitable to employees (project staff with
no bank in close proximity and temporary employees), salary and wage may be paid in
cash. The cash withdrawn for the payment of salary is referred as payroll fund.
10.3.2 Payroll Fund is the net salary pay of all employees that is drawn from the bank in the name
of the Cashier Accountant who is responsible to pay salary to employees. DPV shall be
prepared in the name of the cashier for approved payroll.
10.3.3 The Cashier signs on the Direct Payment Voucher to acknowledge receipt of the payroll
fund written in his/her name.
10.3.4 Employees should sign for the receipt of the pay on the pay sheet (payroll sheet . Unpaid
Salar outstanding for 10 days , starting from the first pay day, should be transferred to
the main cash account by producing a cash receipt voucher. Returned unclaimed salaries
should be deposited to ERCC bank account.
10.3.5 Future claim of unclaimed salary by employees will be paid using the appropriate voucher
(DPV of petty cash payment voucher).
10.3.Journal Entries
10.4.1 When a check is issued in the name of the Cashier Accountant for salary payment
Payroll Fund XXXX-

Cash in Bank XXXX-
10.4.2 After payment of approved payroll sheet is delivered to the finance officer:
Salary Expense XXXX-

Overtime XXXX-
Allowances XXXX-
Income Tax Payable XXXX-

Pension Fund payable XXXX-
Other Deductions XXXX-
Payroll Fund XXXX-
When Salary is unclaimed for ten days:
Cash on Hand XXXX-
Unclaimed salary Payable XXXX-
Based on the cash receipt voucher
10.4.3 When the cashier deposit the unclaimed salary into bank
Cash in Bank XXXX-

Cash on Hand XXXX-
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10.4.4 When employee claims his salary subsequently:
Unclaimed Salary Payable XXXX-

Cash/Bank XXXX-
10.4.5 When Income Tax , pension and other deductions are paid to the beneficiaries:
Income Tax Payable / Pension Payable / other payables XXXX-

Cash/Bank XXXX-
11. UTILITIES
Utilities bills should be collected and settled (e.g. from Ethiopian telecom, Ethiopian Electric
Power Corporation, Addis Ababa Water & Sewerage Authority) by the General Service
officer.
11.1 The Personnel and General Service Officer should check all bills/invoices received for utilities
(i.e. water, electricity, telephone etc...) against meter readings, and relevant records. The
Personnel and General Service Officer then passes to Finance for payment by filling the
Request for Payment form (See Section 4) including the information as to the unit to be
charged. The payment is effected as per procedures of payment outlined in section 4 above.
11.2 The Department which is in charge of the telephone is responsible to identify personal calls,
if any and note on the Bill so that the accounts could debit the appropriate staff account.
The call value (including VAT) should be deducted from the user staff’s next salary.
11.3 At the end of the year utility expenses will be accrued and shown in the balance sheet as
accrued liability, and as utility expense or overhead costs to the appropriate expense and
cost accounts.
11.4 Utility payments (water & electricity) specifically related to a certain Department
/district/project should be approved by the respective managers and settled accordingly.
12. PER DIEM & TRAVEL EXPENDITURES
12.1. INTERNAL CONTROL

12.1.1. Travel requests should be dully filled and approved by Department /District/project
Manager.
12.1.2. All official travel shall be filled, requested and authorized in writing on the Travel Order
and Request for Advance Payment form (Annex 9-1) in two copies. The Travel Order shall
be authorized by immediate supervisor and approved by Department/district/project
manager.
12.1.3. Earlier drawn travel advance must be cleared before another travel advance is given.
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12.1.4. Per Diem rate is determined in accordance according to the Human Resource Manual of the
corporation.
12.1.5. The traveler should complete and submits a Travel Voucher Settlement Form (Annex 9-2)
within five days of his/her return from the travel. The settlement form has to be prepared
by the traveler (finance may assist) in two copies, authorized by Department/team head,
checked by finance officer, approved by the General/district/project manager.
12.1.6. The traveler shall attach receipts for any additional expenses claimed to the Travel Voucher
Form, except for per diem. The traveler then signs the travel report and settlement form,
and passes to his/her supervisor and manager for approval.
12.1.7. The senior finance officer shall check the validity of the supporting documents. Where any
errors are found, the Travel Voucher Form should be returned to the traveler with a memo
listing the errors or omissions.
12.1.8. If there is additional payment to be given to the traveler, the appropriate payment voucher
will be prepared. If the traveler is to return any his excess advance, he/she will return the
cash against Cash Receipt Voucher.
12.1.9. Finally the Finance team leader signs on the settlement form and issue a copy as
settlement evidence to the traveler.
12.2. RECORDING
12.2.1. All per diem advance payments are initially charged to staff debtor account by the name of
the staff. Approved Travel Expense Reports shall be submitted for the settlement of the
advance payment and the appropriate expense or cost account will be debited and the staff
advance account will be credited.
13. TAXES & LEGAL LIABILITIES

Finance Department/Team should follow-up for changes to tax laws, regulations and
directives in connection with employment income tax, profit tax, withholding taxes,
allowable and non-allowable expenses, taxable and non-taxable incomes.
13.1 Profit Tax Payables

13.1.1. Profit Tax Payables should be paid soon after submission of the annual financial statements
to Ethiopian Revenue and Custom Authority, not later than Tikimit 30 following the end of
the fiscal year.
13.1.2. Separate schedule should be prepared to compute profit tax payable with the following
format:
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ETB ETB
A. Profit Before tax (Net Income before Tax) XXXX-
X
Add: Depreciation computed as per the internal depreciation rate XXX
of ERCC
Unallowable Expenses (Entertainment, penalties…) XXX
Prior Year Adjustment (revenue related prior period) XXX
B. Sub Total XXX
Less: Depreciation expense based on rates for tax purpose (XXX)
Dividend Income Received from other investments (XXX)
Prior year Adjustment (Expenses related to prior period) (xxx)
C. Sub Total (XXX)
Taxable Income (A+B-C) XXXX-
X
Profit Before tax (30%) (XXX)
Net Income After Tax XXXX-
13.1.3. Withholding tax retained by customers should be netted - off from the total tax liabilities to
determine the outstanding tax payables to ERCA.
13.2 INCOME TAX from Employment

13.2.1 Income taxes should be withheld from employees according to the income tax law. Income
Tax Proclamation 288/2002 provide the following rates to be used for the computation of
monthly taxes to be withhold from payroll:
Ranges in Birr Tax Rate
From To
0 150 Exempt
151 800 10%
851 1400 15%
1401 2350 20%
2351 3550 25%
3551 5000 30%
5001 Above 35%
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13.2.2 Finance Department has to follow-up changes to the tax tables
13.2.3 Income tax withheld should be paid to the appropriate Revenue and Custom Authority office
within thirty days from the end of the month concerned.
13.2.4 The balance of the Income tax payable at the end of each month should only be that of the
previous month and that there should not be any unsettled balance due to the Revenue and
Custom Authority.
13.2.5 Apart from the payroll, the Finance Officer should make sure that income tax deductions for
partial salary and related payments effected on Payment Vouchers (for newly employed and
leaving staffs) are also accounted when settling income tax liabilities.
13.3 WITHHOLDING TAX

13.3.1. As per Proclamation no 288/2002, ERCC is required to withhold 2% of the gross amount of
payment they make to tax payers providing goods and services:
 Supply of goods involving above Birr 10,000 in any one transaction or one supply
contract;
 Rendering of services involving above Birr 500 in one transaction or one service
contract (list of services is detailed in Proclamation No. 288/2002).
13.3.2. ERCC should collect 30% withholding tax instead of 2% for those service providers or
suppliers of goods or works who couldn’t submit a Tax Identification Number Certificate.
13.3.3. According to the Income Tax law, ERCC has the responsibility to withhold such taxes with a
serially sequenced pre-numbered receipt (Annex 12-1 Format). ERCC should transfer the
collection within ten days from the end of collection month to the respective Revenue and
Custom Authority Office by filling a withholding tax return form supplied by the authority.
13.3.4. When customers withheld from the payment due to ERCC as a withholding tax, ERCC
finance should collect the withholding tax receipts of the customers/clients and should file
properly in a separate box file. These receipts are evidences for profit tax advance
payments, to offset from the annual profit tax payable and to be presented to ERCA for
review when requested.
13.4 VALUE ADDED TAX (VAT)

13.4.1 ERCC is required by law to collect value added tax of 15% from customers sales of
services and goods. The value added taxes collected from customers are referred as VAT.
On the other hand, ERCC pays value added tax when it purchases goods and services
from a VAT registered suppliers. The VAT paid by ERCC when it purchases is referred as
input VAT.
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13.4.2 Input VAT (VAT) paid on Purchase: VAT receivables are incurred on purchase of goods
from VAT registered suppliers and during import of goods. The cost of the goods
purchased should be recorded net of VAT, where the corresponding input VAT
component should be recorded as VAT receivables.
13.4.3 Output VAT (VAT collected during sales): VAT payables are collected from VAT Cash Sales
and VAT Credit Sales invoices. VAT collected during sales should be recorded as VAT
payables. Output VAT may not be collected when goods and services are sold to a public
body (public organization), as they are required to withhold VAT payables by themselves.
13.4.4 VAT returns should be completed and submitted every month to Revenue and Customs
Authority whether there is VAT transaction in the previous month with the appropriate
timing of submission depending on the month’s VAT balance:
 If there is no VAT transaction for the month, the VAT return should be submitted to
Revenue and Customs Authority in the first 10 days of the subsequent month.
 If ERCC is expecting a refund from Revenue and Customs Authority (when the input
VAT of the month is exceeding from output VAT of the month), the VAT return
should be submitted before the 20th day of the next month.
 If ERCC has a net payable balance of VAT to Revenue and Customs Authority (where
the output VAT is exceeding the input VAT), the return should be submitted before
the 30th day of the next month.
 Note that the month refers the Ethiopian calendar month.
13.4.5 VAT return details; including the sales summaries and VAT purchase detail notes should
be filed properly together with copy of the VAT return in a suitable filing system (like in a
box file).
13.4.6 At the end of the each month/fiscal year, transfer one of the VAT account (VAT Payable or
VAT receivable) to the account with a higher balance. If for instance, the balance of the
VAT payable at the end of the month/fiscal year is higher than the balance of VAT
receivable, the VAT receivable account should be credited and VAT payable should be
debited (by the amount of the ending balance of the VAT Receivable).
13.5 Pension Fund Payables

13.5.1 New employees who satisfy the legal requirement for pension scheme should be
registered immediately in the month of employment. Human Resource Development
Department is responsible for the follow-up of the registration of new recruits for social
security scheme.
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13.5.2 Collection and Disbursement Team/ Finance team should compute properly both the
employee and ERCC’s contribution for social security fund in accordance with the
prevailing rates and should transfer the fund to the appropriate agency timely.
13.8 Cost Sharing

13.8.1 HRD should communicate to finance when new employees that graduated from public
universities are recruited, if they are liable to any unpaid college fees. Finance deducts
the cost sharing port on monthly basis for a period of 12 months until the outstanding
balances are paid.
13.8 Journal entry

13.7.1. Withholding tax retained by customers/clients
Cash XXX
Withholding Tax Receivables XX
Sales / Account Receivables XXX
13.7.2. Provision of tax liabilities

Retained Earnings XXX XXX
Provision for Taxation XXX
13.7.3. Closing of Withholding Tax Receivables to provision for taxation accounts

Provision for Taxation (Profit Taxa Payables) XXX
Withholding Tax Receivables XXX
13.7.4. Purchase of goods and services

 where input VAT can be claimed (That is where input VAT Can be offset against output )
Stock / Cost XXX
VAT Receivables XXX
 where input VAT cannot be claimed according to the VAT Proclamation

Stock / Cost XXX
The VAT component will be part of the cost as the input VAT will not be claimed in this case.
13.7.5. VAT Sales
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 Sales to government organizations (Where output vat is withheld by the government

organization itself)
Cash /Account Receivables XXXX-
Sales XXXX-
VAT payables will not be recorded on government organization accounts, for purchases of
services and goods from ERCC since they assume responsibility of payment of such taxex to
the Revenues and Customs Authority on their own.
 Sales other than Government Organizations
Cash /Account Receivables XXXX-
Value Added Tax Payables XXXX-
13.7.6. Payment of VAT to ERCA

Value Added Tax Receivable XXXX-
Cash XXXX-
13.7.7. Offsetting of VAT receivables or payables accounts

 If the annual VAT payables exceed the VAT receivables balance
VAT Payables XXX
VAT Recevables XXX
 If the annual VAT receivables exceeds the VAT payable balance

VAT Recevables XXX
VAT Payables XXX
13.7.8. Retaining withholding tax from payments to suppliers / contractors /

consultants
Stock / Expenses/Cost/Account Payable XXX
Withholding tax payables XX
Cash XXX
13.7.9. Settlement of Withholding Tax payables
Withholding tax payables XX

Cash XX
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14. Branch and Head Office Accounting

The accounting recording of ERCC is a decentralized one, where ERCC head office and its
branch, project and district offices should maintain complete books of accounts. To ease
recording of transaction between head office and branches, branch and head office accounts
will be instituted.
14.1 Head office Responsibility:

Head office has a responsibility to monitor if the account of branch office is in good shape and
should provide support as required for a complete, up to date and reliable financial reporting is in
place.
14.2 Transaction between Head Office and Branch

14.2.1. Transactions between head office and branch offices should be evidenced by debit note
and credit note with a format (Annex 13-1 and 13-2).
14.2.2. Debit notes and credit notes will be issued by the branch or head office, whichever initiated
the transaction. The relevant copies of the source documents (example invoices) should be
attached with the debit or credit advices when sent to the receiving branch or head office.
Debit and credit notes should be narrated with sufficient information and should refer the
prime document (Journal Voucher No, DPV number, Cash Receipt Number, etc) of the
issuing body.
14.2.3. Accounts between branches and head office and amongst branches should be reconciled
on a monthly basis.
14.2.4 When resources transferred among branch offices, the branch sending the resources
should debit the receiving branch subsidiary account against the asset transferred and the
receiving branch should debit the resource received and credit the subsidiary branch
payable account of the branch which sends the resources.
14.2.5 Branch accounts debited and credited for inter-branch resource transfer should be
reconciled by the respective branch offices on a monthly basis.
14.2.6 When resources sent around the end of a month may not reach the receiving branch, the
receiving branch should debit the appropriate in transit account (cash in transit, goods in
transit or fixed assets in transit). However, in-transit accounts should be followed up and
cleared in subsequent two to three days.
14.2.7 By the end of the year, subsidiary branch accounts debited and credited by branch offices
should be closed against head office account after reconciliation and the applicable note
(debit or credit note) should be issued by the head office to the respective branch offices.
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14.2.8 Revenue and expense accounts at branch offices should be closed to head office account.
Head office is responsible to issue the appropriate debit or credit note to the respective
branches for the closing.
14.3 Journal Entry

14.3.1 When resources are transferred from head office to a branch office:
 In the book of Head office:
Branch (by name of branch) XX
Stock, cash, fixed assets etc XX
 In the book of Branch office:

Stock, cash, fixed assets etc XX
Head Office XX
14.3.2. When Head Office collects revenue on behalf of the branch

Cash XX

Head Office XX
Account Receivables XX
14.3.3 When head office pays the liabilities of a branch office

Cash XX

Account Payables XX
Head Office XX
14.3.4. Closing of branch subsidiary accounts debited or credited by branch offices for the transfer
of resources among themselves
Head office account may be debited or credited depending on the balance of the subsidiary
branch accounts debited or credited by the respective branch offices.
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 In the book of Branch office: (when the subsidiary branch accounts have an overall
debit balance
Head office XX
Branch accounts (with credit balance) XX

Branch accounts (with debit balance) XX
 In the book of Branch office: when the subsidiary branch accounts have an overall
debit balance
Branch accounts (with credit balance) XX
Head office XX
Branch accounts (with debit balance) XX
14.3.5 Closing of the retained earning accounts (profit and loss accounts) of branch offices against
the head office account
 When there is overall profit

o In the accounts of branch office
Revenue XXX
Expense XXX
Head office Account XXX
If the ERP close revenue and expense accounts to the branches retained earning accounts, then
instead of revenue and expenses, the retained earnings account will be debited.
 In the accounts of the head office
Branch (with the name of the branch) XXX
Retained Earnings account XXX
 When there is overall loss

o In the accounts of branch office
Revenue XXX
Head office Account XXX
Expense XXX
If the ERP close revenue and expense accounts to the branches retained earning accounts, then
instead of revenue and expenses, the retained earnings account will be credited.
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o In the accounts of the head office
Retained Earnings account XXX

Branch (with the name of the branch) XXX
15. Period End and Year End Procedures

The purpose of period end and year end procedure is to ensure completeness of financial reports
and that no un cleared suspense and un reconciled accounts are reported in the interim and annual
financial statements. Period end and year end procedures must be accomplished. In addition ,
proper documentation for the interim and annual financial statements, journals and trial balances to
be printed and kept in softcopy.
15.1 Year end actions

Year end actions are directed to settling of advances, payables, prepayments, clearing of
suspense, reconciling all asset and liability accounts and expressing the year's operation in to
the form of credible, meaningful financial information. The Finance Department and all Team
leaders should begin the clean-up and reconciliation process 30 days before 8th of July each year
and at least every quarter. However, the reconciliation of bank accounts, customers’ accounts,
vendors’ accounts and suspense should be conducted on a monthly basis in 8 days from the end of
the month.
15.2 Year-end procedure

Year-end procedure should be all rounded and compressive and must be organized by the Finance
Manager and Team leaders at all levels.
15.3 Petty Cash and Purchase funds

15.3.1. Cash in the hands of the cashier (in safe box) should be counted by the end of each month
and should agree with the cash on hand ledger and the cash book maintained by the
cashier. To avoid bulk cash count, cashier should deposit cash in hand before the end of
the month. When the last day of the month fall on Sunday or holiday, the count will be
conducted in the previous working day.
15.3.2. Petty Cash fund and purchase funds shall be fully settled by the end of the fiscal year and
no petty cash and purchase fund balance should be held in the hands of cashiers. The
cashier deposits the unused petty cash fund into bank. The petty cash vouchers and the
deposit slip will be accounted in the period.
The journal entry will be:
Expenses/payables / costs / Stocks XXX
Cash at bank (unused but deposited petty cash amounts ) XX
Petty cash fund XXX
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The petty cash replenishment and request form will be used. This time, there is no need for
replenishment of petty cash.
15.3.3. Suspense vouchers, if any, should be transferred to staff debtor accounts if it is not
possible to settle before the end of the year. Disbursement and Collection Team/Finance
Team, should avoid the use of suspense vouchers during the last two weeks of the last
month of the fiscal year. The journal entry for suspense vouchers not settled before the
end of the year (if any) will be as follows:
Staff debtor (in the name of the staff who has drawn the suspense) XX
Petty cash fund - in the name of the cashier XX
15.3.4. Petty cash fund and purchase fund will be reinstated in the beginning of the following
fiscal year.
15.4 Cash at Bank

15.4.1. Bank accounts have to be reconciled monthly within five days from the end of the month.
15.4.2. Outstanding cheques have to be verified that they are not a result of accounting errors.
Long outstanding cheques rolled over from several months should be verified with
whatever means.
15.4.3. Deposit in transit accounts should be checked whether these are related to bank’s
omission. Large amount of deposits in transits should be verified by the Finance Team
leader or Finance Department Manager of ERCC to make sure that such deposits have
reached the bank in the following two days.
15.4.4. Unknown debits and credits from the bank statements of ERCC should be investigated by
seeking advices from bank before compilation of the interim and annual financial reports.
In addition to the need for a complete financial reporting, clearing of unknown deposits
and credits is vital in ensuring that such balances are not related to any errors or
fraudulent activities.
15.5 Debtors
15.5.1. Trade Debtors
At least every quarter, the trade receivable account of major customers and at least once
in a year, the accounts of all customers have to be reconciled. The reconciliation will be
conducted through exchange of statement of accounts. ERCC should take the initiation for
the reconciliation.
15.5.2. Staff Debtors
Staff debtors account should be reconciled every three months\quarterly. Staff with a
balance should be notified 10 days before the end of the quarter so that they can report if
they don’t agree with the balance. Receivables which are overdue for settlement should be
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deducted from the salary of the staff. When overdue staff debtor receivables are in excess
of Birr 3,000, the matter should be referred to HRD for administrative action.
15.5.3. Prepayments
Prepaid for rent, insurance and other services should be adjusted for the expired portion on
a monthly basis. Prepayments should be checked against contract agreements and policies
(if insurance) by the end of the year to make sure that the expired portion of the advance
payment has been transferred to the appropriate expense accounts.
15.5.4. Retention receivables
should be reviewed at least once in a year as part of year end procedure to make ascertain
whether these are receivables. If they are overdue, the Collection and Disbursement Team
should follow-up the refund of the retention receivable in collaboration with the relevant
department.
15.5.5. Deposits in connection with envisaged services should be reviewed whether they are valid
or ERCC should claim them back at least once in a year.
15.5.6. VAT receivables together with VAT payables should be reconciled against the monthly
VAT return on a monthly basis. The yearend net VAT payable or net VAT receivable should
be reconciled with yearend VAT return balances
15.5.7. Withholding Tax receivables should be reconciled with the withholding tax receipts
collected from customers and clients during the period. The details on the withholding tax
receivable ledger should be summarized in the following format and kept together with
the withholding tax receipt files.
Withholding
Amount
Date tax receipt Customer / Client name
withheld
no
15.5.8. Provision for doubtful accounts

As indicated in the receivable section of this manual, provision for doubtful accounts should be provided
by the end of the year as part of year end procedure. In addition, long outstanding receivables
determined by the managementand board of ERCC should be written off.
15.8 Inventory
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15.6.1. Monthly and quarterly sample physical counts should be reconciled against the record with
inventory module of the ERP and the stock card, bin card of stock keepers, and where the
inventory module is not functional, reconciliation with the cardex should be conducted as
indicated in the inventory section of this manual. Overage and shortages should be adjusted
before compiling interim reports.
15.6.2. Stock overage and shortages following the annual physical count should be adjusted as
indicated in the inventory section of this manual before the compilation of the annual
financial report.
15.6.3. Provision for stock obsolescence to be computed as per the procedure indicated in the
inventory section of this manual.
15.6.4. Inventory valuation loss when the market values of a stock is higher than the carrying cost
of the inventory to be adjusted as outlined in inventory section of this manual
15.6.5. Letter of credit: Goods in transit accounts for those imported items received in full should
be closed to the respective inventory account at least quarterly. The Goods in Transit
account should be nil for all goods received by the end of the year. Cost sheets should be
reviewed whether there is no missing cost component before transferring GIT accounts into
stock account. When missing cost element are found (such as inland transport, custom fees,
transit fees), Finance Department should seek documentation, if not available, estimates for
these costs shall be obtained so that the full cost of imported items to be accounted
(accrued if not paid) and the GIT account to be closed.
15.8 Fixed Asset
15.7.1. By the end of the year, the fixed asset register and the fixed asset ledger should be
reconciled. Assets disposed should be checked whether they are marked on the fixed
asset register and the appropriate journal passed.
15.7.2. Fixed assets and properties, which are segregated not to be used anymore should be
reclassified as fixed asset for disposal and should be deducted from the fixed asset
category and the associated depreciation expense should be computed only to the extent
they had been in service.
15.7.3. Depreciation should be computed for all active assets and for those which have been used
partly in the year.
15.7.4. Depreciation schedule for the purpose of the financial books should be reconciled against
the depreciation schedule in accordance with the Income Tax Proclamation.
15.8 Creditors / Payables
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15.8.1. Review all payables accounts to ensure that if the figures are accurate and still a liability.
Bid deposit, performance bond any other deposits payables should be reviewed for
correctness and validity.
15.8.2. Accrue for goods and services received to 8 th of July. These include machinery rent
payables, power, telephone, transportation, transit and custom fees, staff perdiem, salaries
and wage payables.
15.8.3. Advances received from clients (customers) should be adjusted for the portion where no
goods and services provided as unearned revenue (deferred revenue).
15.8.4. Retention payables that had been withheld from subcontractors or contractors should be
reviewed whether it is really payable and to be reconciled with the respective contractors
by the end of the year.
15.8.5. Interest payables, which are not accounted should be computed based on the loan
agreement and accrued interest to be journalized. This is likely to happen for the seven
days between July 1 to July 8 of the fiscal year as banks often compute and charge the
account by the end of a month. The journal entry will be:
Interest Expense XX
Accrued Interest Payable XX
15.8.6. Similarly, interest on lease payments should be computed based on the lease payment
schedule.
15.8.7. Lease payables should be checked against the lease repayment schedule.
15.8.8. Current Maturity of long term loan including bank loans and lease liabilities to be computed
and reclassified as “current maturity of long term loan”. The calculation for the current
maturity of long term loan is just the principal portion of the following year repayments.
15.8.9. Deferred tax liabilities and assets to be computed and the appropriate journal entry to be
effected.
15.9. Head Office and Branch Account

15.9.1. Head office and branch accounts should be reconciled before the issuance of interim
and annual financial reports
15.9.2. In-transit accounts identified as reconciling items during reconciliation of branch and
head office accounts should be journalized to the respective in transit account.
15.9.3. The branch subsidiary accounts in the books of the branch offices should be closed
to the head office account at the end of the year.
15.9.4. The net income of the branch offices should be closed to the head office account by
branch offices and to branch accounts by the head office.
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15.10Back up and Printing

15.10.1 Back up of the ERP system is essential after completing all the adjustments and when the
interim financial report and the annual financial reports are ready for printing.
15.10.2 At least three backup files should be taken and kept in a separate safe location.
15.10.3 The following reports should be printed and also kept in a pdf or other suitable format:
 Journals (all journals)
 Ledgers
 Trial Balance
 Financial statements
 Reconciliations
 Registers
 Customer, vendor, inventory and fixed assets ledger
15.10.4. Closing procedure will be conducted after completion of all the above activities. Unless the
ERP system prohibits use of the following year recording, it is wise to wait for some time
until the external auditing to be completed before closing of the fiscal year so that any
possible adjustments found during the audit to be accounted in the same period.
15.11Consolidation
15.11.1 Consolidate financial statements of ERCC should be prepared by combining the different
project and district accounts. Until such time that wide area network is operational,
branch and project accounts are consolidated every month through the consolidated
feature of the ERP software.
15.11.2 Before processing consolidation of branch accounts, branch has to be reconciled as part
of period end and yearend procedure.
15.11.3 Branches and project should submit their backup to the ERCC head office in 5 days from
the end of every month so that timely periodic reports could be produced at the level of
head office
16. Annual Financial Statements

This section explains the objective of financial statements, particular matters to be considered in
the preparation of the financial statements, the format in which such statements should be
presented and the information to be disclosed in the notes. Financial statements should also be
accompanied by a Management Report which identifies the reasons for major variations from
previous periods by means of ratios analyses and textual explanation.
The objective of financial statements of ERCC is to provide information about the financial position,
performance and cash flows of the corporation that is useful for economic decision-making by a
broad range of users who are not in a position to demand reports tailored to meet their particular
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information needs. Financial statements also show the results of the stewardship of management
and the accountability of management for the resources entrusted to it.
It is the intention of the management of ERCC to adopt IFRS step by step over the coming few
years to address its envisaged international operation which demands more financial management
responsibility and accountability. The Finance Department is responsible to determine every year to
adopt more procedures and standards taking into account the staff and other organizational
capacities.
16.1Qualitative characteristics of information in financial statements 2

The Qualitative Characteristics of information in financial statements includes relevance, materiality,
reliability, substance over form, completeness and comparability. These characteristics explained in
the subsequent sections.
16.1.1 Understandability: The information provided in financial statements should be presented
in a way that makes it comprehensible by users who have a reasonable knowledge of
business and economic activities and accounting and a willingness to study the information
with reasonable diligence. However, the need for understandability does not allow relevant
information to be omitted on the grounds that it may be too difficult for some users to
understand.
16.1.2 Relevance: The information provided in financial statements must be relevant to the
decision-making needs of users. Information has the quality of relevance when it is capable
of influencing the economic decisions of users by helping them evaluate past, present or
future events or confirming, or correcting, their past evaluations.
18.1.3 Materiality: Information is material—and therefore has relevance—if its omission or
misstatement could influence the economic decisions of users made on the basis of the
financial statements. Materiality depends on the size of the item or error judged in the
particular circumstances of its omission or misstatement. However, it is inappropriate to
make, or leave uncorrected, immaterial departures from the IFRS to achieve a particular
presentation of an entity’s financial position, financial performance or cash flows.
18.1.4 Reliability: The information provided in financial statements must be reliable.
Information is reliable when it is free from material error and bias and represents
faithfully that it either purports to represent or could reasonably be expected to
represent. Financial statements are not free from bias (i.e. not neutral) if, by the
selection or presentation of information, they are intended to influence the making of a
decision or judgment in order to achieve a predetermined result or outcome.
18.1.5 Substance over form: Transactions and other events and conditions should be
accounted for and presented in accordance with their substance and not merely their
legal form. This enhances the reliability of financial statements.
2
1. IASB's Conceptual Framework
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18.1.8 Completeness: To be reliable, the information in financial statements must be complete

within the bounds of materiality and cost. An omission can cause information to be false
or misleading and thus unreliable and deficient in terms of its relevance.
18.1.8 Comparability: Users must be able to compare the financial statements of an entity
through time to identify trends in its financial position and performance. Users must also
be able to compare the financial statements of different entities to evaluate their relative
financial position, performance and cash flows. Hence, the measurement and display of
the financial effects of like transactions and other events and conditions must be carried
out in a consistent way in the corporation over time. In addition, users must be informed
of the accounting policies employed in the preparation of the financial statements, and of
any changes in those policies and the effects of such changes. Specifically ERCC should
apply Consistency of accounting policy3;
 Accounting policies (ex. inventory valuation, depreciation methods) are applied
consistently to similar transactions.
 An accounting policy is changed only if the change results in reliable and more
relevant information or compliance to accounting standards and regulations.
 If a change in accounting policy is required by an accounting standard where
ERCC follows, the pronouncement's transitional requirements are followed. If
none are specified, or if the change is voluntary, the new accounting policy is
applied retrospectively by restating prior periods.
 If it is impracticable to determine period-specific effects for retrospective
application, the new accounting policy is applied as of the beginning of the
earliest period for which retrospective application is practicable and cumulative
adjustments are made to balances at the beginning of that period. The new
accounting policy is applied prospectively from the start of the earliest period
practicable when the entity cannot determine the cumulative effect of applying
the policy to all prior periods.
 Changes in accounting estimates (e.g. change in useful life of an asset) are accounted for
in the current year, or future years, or both (no restatement).
 All material prior period errors are corrected by restating comparative prior period amounts
and, if the error occurred before the earliest period presented, by restating the opening
statement of financial position.
18.1.8 Timeliness: To be relevant, financial information must be able to influence the economic
decisions of users. Timeliness involves providing the information within the decision time
frame. If there is undue delay in the reporting of information it may lose its relevance.
Management may need to balance the relative merits of timely reporting and the
provision of reliable information. In achieving a balance between relevance and reliability,
3
IAS 8
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the overriding consideration is how best to satisfy the needs of users in making economic
decisions.
18.1.9 Balance between benefit and cost: The benefits derived from information should
exceed the cost of providing it. The evaluation of benefits and costs is substantially a
judgmental process. Furthermore, the costs are not necessarily borne by those users who
enjoy the benefits, and often the benefits of the information are enjoyed by a broad
range of external users.
16.2 Financial Statements Presentation

16.2.1. Financial statements of ERCC should be prepared based on fundamental principles
established for the preparation of financial statements includes going concern
assumption, consistency in presentation and classification, accrual basis of accounting,
and materiality4.In addition, assets and liabilities, and income and expenses, are not
offset unless offsetting is permitted or required by another policy statement in this
manual.
16.2.2. A complete set of financial statements comprises 5:
 income Statement and other comprehensive income;
 a statement of financial position;
 a statement of changes in equity;
 a statement of cash flows;
 Accounting Policies and Notes to the accounts
16.2.3. Annex 15.1 illustrates the format to be used for the preparation of the annual financial
statements. The corresponding notes in the financial statement formats are explained in
the subsequent sections under accounting policies and notes to the accounts.
16.2.4. Income Statement and other comprehensive income
This section presents the corporation to present its total comprehensive income for a period
i.e. its financial performance for the period. It sets out the information that is to be
presented in the statement and how to present it (the form).
18.2.4.1 Format
The corporation should show in this statement only the main income and expense categories,
the detailed make-up of such categories being shown in the notes. An example of this
statement the format is given in Annex 15-1.
18.2.4.2 Revenue
Revenue should be stated in the Income Statement and other comprehensive income as one
figure. As the Corporation has different revenues such as Construction Revenue, Maintenance
4
IAS 1
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5
IAS 1
Revenue, Rental Income and Sales of Construction Materials the total of them should be
shown on the Income Statement and other comprehensive income, while the make-up of the
revenues total by revenue type and project may be disclosed in the notes to the accounts.
ERCC recognize income from construction of roads and maintenance of roads based on IAS 11,
Construction Contracts. IAS 11 recognizes only the percentage of completion method of
recognition of revenues and expenses.
ERCC shall disclose as per IAS 11, Construction Contracts
 The amount of contract revenue recognized as revenue in the period
 The methods used to determine the contract revenue recognized in the period
 The methods used to determine the stage of completion of contracts in progress at the
balance sheet date
 For contracts in progress at the balance sheet date
 The aggregate amount of costs incurred and recognized profits, less recognized losses, to
date
 Advances received
 Retentions
 The gross amount due from customers for contract work as an asset
 The gross amount due to customers for contract work as a liability
In the meantime income from Rental Income and Sales of Construction Materials are measured
as per IAS 18 Revenue. Revenue is to be measured at the fair value of the consideration
received or receivable. In most cases, the value is easily determined by the sales contract after
taking into account trade discounts or rebates.
As per IAS 18, Revenue the following should be disclosed;

The accounting policies adopted for the recognition of revenue, including the methods for
determining stage of completion for the rendering of services
The amount of each significant category of revenue recognized during the period, including
 Sale of goods
 Rendering of services
 Interest
 Dividends
 The amount of revenue recognized from the exchange of goods or services included in
each category.
18.2.4.3 Cost of Sales
Cost of Sales should be shown as one figure in the Income Statement and other
comprehensive income, the make-up being disclosed by way of note. Such note should
show the project cost (cost of construction), cost of construction materials sold and cost of
rented machineries. Full details of all project cost (Cost of construction) should be shown,
and distinction being made between direct materials, direct labor and overhead cost in the
note.
18.2.4.4 Other Income
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Other income should include miscellaneous items of income other than main operation, e.g.
sales of scrapes; gain on disposal of property, plant and equipment, dividend income etc.
The make-up need only be disclosed by way of note if the total is material.
18.2.4.5 Marketing and Administration Expenses

Full details of all administration and selling expenses should be disclosed in the notes to the
accounts. It is not, however, necessary to detail insignificant amounts, which should be
grouped as "miscellaneous".
The value of items included under the heading "miscellaneous" should not exceed 5% of the
total administration or selling expenses. In addition, other expenses such board fee, audit
fee etc. regardless of the amount the expense.
18.2.4.8 Financial Charges
Where interest is paid under more than different types of credit facility e.g. bank short term
loan, long term loans etc., the make-up should be disclosed by way of note.
Bank charges, other than on goods in transit, should be included in administration expenses
and not with financial charges.
18.2.4.8 Net Profit before Taxation
The working of profit tax computation should be shown in the notes to the account.
16.2.4.8 Provision for taxation
Detail schedule of the tax liabilities should be disclosed, which shows the adjustment of
ERCC’s net income before tax to arrive to a taxable income. Allowable and unallowable
expenses and revenues will be adjusted.
16.2.4.9 Comprehensive Income
This is a requirement of IFRS. It is advisable to skip this part of the report until ERCC fully
adopts IFRS unless Finance Department deemed it useful to incorporate .
16.2.5. A statement of financial position

This section sets out the information that is to be presented in a statement of financial
position and how to present it (the form). The statement of financial position (sometimes
called the balance sheet) presents the corporation’s assets, liabilities and equity as of a
specific date—the end of the reporting period.
Format
16.2.5.1 The statement of financial position should be presented in vertical format showing the
non-current assets, current assets, total assets, equity, non-current liabilities, current
liabilities and total equity and total liabilities.
16.2.5.2 For clarity of presentation the detail on the statement of financial position should be
limited to the main asset and liability classifications of material amounts, supporting
detail being given by way of notes to the accounts as indicated in Annex 15- 1.
18.2.5.3 Inventory
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Inventory and goods in transit should be shown in one total in the financial position. The
make-up is being disclosed by way of note. The amounts of each major inventory category
e.g. materials, construction materials (for sale), spare parts and other stores should be
shown. Any provision for obsolescence should be shown as a deduction from the sub-total
of the inventory items. Goods in transit are being also disclosed separately. (refer the chart
of account)
As per IAS 2 Inventories the financial statements should disclose;
 Accounting policies adopted for measuring inventories and the cost flow
assumption (i.e., cost formula) used
 Total carrying amount as well as amounts classified as appropriate to the entity
 Carrying amount of any inventories carried at fair value less costs to sell
 Amount of inventory recognized as expense during the period
 Amount of any write-down of inventories recognized as an expense in the period
 Amount of any reversal of a write-down to net realizable value and the
circumstances that led to such reversal
 Circumstances requiring a reversal of the write-down
 Carrying amount of inventories pledged as security for liabilities
18.2.5.4 Debtors
Debtors should be shown as one total in the financial position. The make-up is being
disclosed by note. Items which should, if material, be disclosed in the note, may include,
trade debtors, staff debtors, advance payments and other debtors and prepayments .
Provision for doubtful debts, if any, should always be shown by way of note as a deduction from
debtors, only net debtors being shown on the financial position .
18.2.5.5 Property ,Plant and Equipment
Only the total book value of property, plant and equipment should be shown in the financial
position. The make-up of this figure by cost and depreciation for each major class of asset,
showing the movement during the year (acquisition, additions, transfer and disposal) should
be shown by way of note.
IAS 18 property, plant, and equipment require disclosures with respect to each class of
property, plant, and equipment is extensive and comprise ;
 Measurement bases for determining gross carrying amounts
 Depreciation methods
 Useful lives or depreciation rates used
 Gross carrying amount and accumulated depreciation (aggregated with accumulated
impairment losses) at the beginning and end of the period
 Additions
 Assets classified as held for sale
 Acquisitions through business combinations
 Increases and decreases arising from revaluations and from impairment losses and reversals
thereof
 Depreciation
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 Existence and amounts of restrictions on ownership title

 Assets pledged as security for liabilities
 Assets in the course of construction
 Contractual commitments for the acquisition of property, plant, and equipment
 Compensation for assets impaired, lost, or given up
If property, plant, and equipment are stated at revalued amounts, these items must be specified;
 The effective date of the valuation
 Whether an independent valuator was involved
Methods and significant assumptions used in assessing fair values
The extent to which fair values were measured by reference to observable prices in an active
market, recent market transactions on an arm’s-length basis, or were estimated using other
techniques
 For each class of asset revalued, the carrying amount that would have been recognized if
the class had not been revalued
 The revaluation surplus, indicating the change for the period and any restrictions on
remittance to the government
18.2.5.8 Intangible Assets
Intangible assets at ERCC are accounted for using a cost model. Under the cost model, assets
are carried at cost less any accumulated amortization and any accumulated impairment losses.
IAS 38 Intangible assets require these disclosures for each class of intangible asset:
 Whether useful lives are indefinite or finite and, if finite, the useful lives or amortization
rates used
 The amortization methods used
 The gross carrying amount and accumulated amortization and impairment losses at the
beginning and end of the period
 The line items in the income statement in which amortization is included
 Additions
 Increases or decreases during the period resulting from revaluations
 Impairment losses
 Reversals of impairment losses
 Amortization recognized during the period
 For assets with indefinite useful lives, the carrying amount of the asset and the reasons
supporting such an assessment
 Description, carrying amount, and remaining amortization period of any intangible assets
that are material to the entity’s financial statements
 The existence and carrying amounts of intangible assets whose tile is restricted or pledged
as security for liabilities
 Contractual commitments for the acquisition of intangible assets
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 Intangible assets acquired by way of government grant and initially recognized at fair value,
including their fair values, their carrying amounts, and whether subsequently carried under
the cost or revaluation model
 The amount of research and development expenditure expensed during the period
In addition to the preceding disclosures, ERCC should disclose (Recommended by IFRS) the
description of any fully amortized intangible assets that are still in use and of any significant
intangible assets controlled by the entity but are not recognized as assets as they failed to meet the
recognition criteria.
16.2.5.7 Investment Property
Investment property (land or building or both) held to earn rentals or for capital appreciation or
both are measured at depreciated cost less any accumulated impairment losses unless it is
classified as a non-current asset held for sale.
Even if an ERCC measures an investment property under the cost model it is still required by IAS 40
investment property to disclose the fair value of the investment property in the financial
statements.
As per IAS 40 investment properties, ERCC shall disclose;
 Depreciation methods used
 Useful lives or depreciation rates used
 A reconciliation of the opening and closing gross carrying amounts and the
accumulated depreciation and impairment losses, showing
 Additions, showing separately acquisitions and subsequent expenditure
 Impairment losses recognized and reversed
 Transfers to and from inventories
 The fair value of investment property and, if fair value cannot be reliably
measured
 Explanation as to why fair value cannot be reliably measured
 Range of estimates, if possible, within which the fair value is highly likely to fall
 Disposals of investment property not carried at fair value
16.2.5.8 Creditors
Creditors should be shown in one total in the financial position. The make-up is being
disclosed by way of note. Items which may, if material, be disclosed in the note, will
include, trade creditors, foreign suppliers, sundry creditors, taxes payable (e.g. employment
taxes, VAT and withholding taxes, etc.) deferred revenue and accruals.
Where current maturity of long term loans includes arrears of unpaid installments and
interest, this fact should be disclosed in a note to the in order to draw attention to the fact
that the security given for the loan may accounts be endangered.
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16.2.5.9 Provision for Taxation

Provision for taxation comprises the provision for taxation on the profits of the year under
review plus any arrears of unpaid taxation. Computation of current year taxation as per the
income tax law should be clearly disclosed on this part of the note. The amount of any
material arrears of unpaid taxation from previous years should be disclosed by note. Such a
note should also, where possible, disclose the last year to which assessments have been
finalized with the Ethiopian Revenue and Custom Authority (ERCA).
The amount of any taxation assessments under appeal, not provided for, must be disclosed
in the contingent liabilities note.
18.2.5.10 State Dividend Payable

The amounts of state dividend payable declared by the Board of ERCC/Ministry of
Transportation of the Corporation should be disclosed separately on the financial position.
18.2.5.11 Short Term Loans

Short-term loans comprise overdraft, term loans, merchandise loans, advance on bills or
other similar bank loan facilities whose term does not exceed one year and current maturity
of long term loans .Where there is more than one loan, only the total need be shown on the
balance sheet, the make up being disclosed in the notes to the accounts. If, however, there
is only one loan then it should be described on the financial position.
The nature of the security given and important part of terms of the loan in respect of such
loans should be disclosed in the notes.
16.2.5.12 Long Term Loans

Long term loans are loans that are not repayable in full within one year from the date of the
loans. Such loans comprise part of the financing of the Corporation and should accordingly
be included in the financial position. Where there is more than one long term loan, it should
be disclosed separately in the financial position. A note to the accounts also should
distinguish the sources of the loan. Other information, which should be given in respect of
each loan is;
 From whom loan was obtained

 Year obtained and period of the loan
 Repayment terms
 Interest rate
 Security
18.2.5.13 Paid up Capital, Reserves and Retained Earning
These will each be shown separately in the financial position. No explanation note is
required unless there has been a change in paid up capital during the year. The movement
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of legal reserves and other reserves (if any) account and the amount of authorized capital
should be disclosed in the notes.
This section explains a statement of changes in equity which shows the changes in the
corporation’s equity for a period. An example of a statement of changes in equity format is
given in Annex 13-1.
18.2.8 A statement of changes in equity
This section explains a statement of changes in equity which shows the changes in the
corporation’s equity for a period. An example of a statement of changes in equity format is
given in Annex 13-1.
18.2.8 A statement of cash flows
This section sets out the information that is to be presented in a statement of cash flows
and how to present it. The statement of cash flows provides information about the changes
in cash and cash equivalents of the corporation for a reporting period, showing separately
changes from operating activities, investing activities and financing activities.
18.2.8.1 Form
ERCC prepares the cash flow statement under the indirect method.
An example of a statement of cash flows format is provided as per Annex 15-1.
The statement of cash flow should list the Corporation’s cash flows for the fiscal period
classified under the following headings as operating activities, investing activities and
financing activities:-
18.2.8.2 Operating activities
Under the indirect method, the first item presented is the net income (or loss) for the year
as reported in the income statement. Noncash items of revenue and expense are added or
deducted to arrive at net cash provided by operating activities. For instance, depreciation on
property, plant, and equipment is added back because these expenses reduce (increase) net
in-come (loss) for the year without affecting cash from operating activities. Similarly, gain
on sale of property, plant, and equipment is deducted from net income for the year because
it does not affect cash flow from operating activities. Changes in inventory, accounts
receivable, and other operating assets and liabilities are used to convert the accrual basis
net income (loss) for the year to arrive at cash flows from operating activities.
18.2.8.3 Investing activities

Investing activities include the purchase and disposal of property, plant, and equipment and
other long-term assets, such as investment property. They also include purchase and sale of
debt and equity and debt instruments of other entities that are not considered cash
equivalents or held for dealing or trading purposes. Investing activities also include cash
advances and collections on loans made to other entities. This, however, does not include
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loans and advances made by banks and other financial institutions to their customers that
would be classified as “operating activities” as they are cash flows from these entities’
principal revenue-producing activities.
Common examples of cash flows relating to investing activities are;
Cash Inflows
a. Proceeds from disposal of property, plant, and equipment
b. `Proceeds from disposal of debt instruments of other entities
c. Proceeds from the sale of equity instruments of other entities
Cash Outflows
 Purchase of property, plant, and equipment
 Acquisition of debt instruments of other entities
 Purchase of equity instruments of other entities (unless held for trading purposes or
considered to be cash equivalents)
18.2.8.4 Financing activities

Financing activities include obtaining resources from and returning resources to the owners.
Also included in this category is obtaining resources through borrowings (short term or long
term) and repayments of the amounts borrowed .
Common examples of cash flows relating to financing activities are;

Cash Inflows
a. Proceeds from additional paid capital from government
b. Proceeds from issuing debt instruments
c. Proceeds from bank borrowings
Cash Outflows
a. Payment of state dividends to the government
b. Repayment of principal portion of debt, including finance lease obligations
c. Repayment of bank borrowings
16.2.7.5 Noncash Transactions
IAS 8 requires that noncash investing and financing activities should be excluded from the cash
flow statement and reported “elsewhere” in the financial statements, where all relevant information
about these activities is disclosed. This requirement is interpreted as the necessity to disclose
noncash activities in the footnotes to financial statements instead of including them in the cash flow
statement.
Common examples of noncash activities are;
a. Conversion of government debt to equity
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b. Increment of paid up capital from reserve/accumulated profit

c. Issuance of addition paid capital to acquire property, plant, and equipment
18.2.8 Notes (Refer Annex 15-1 for a comprehensive Note)

The purpose of the notes to the accounts is:
 to disclose the major accounting policies followed by the Corporation;
 to show whether the financial statements have been prepared incompliance with the IFRS;
 to provide details of the make-up or clarification of items appearing in the financial
position and in the statement of income and other comprehensive income statement, and
 to disclose information on matters such as commitments or contingencies which may
affect the interpretation of the financial statements but are not reflected therein.
The notes to the accounts are an integral part of the financial statements and must be prepared by
the Corporation’s management at the same time as the financial position, income Statement and
other comprehensive income and cash flow statement.
16.2.8.1 Accounting Policies Note
IFRS require that in order to facilitate the understanding of financial statements, the Accounting
policies followed for items judged material or critical in determining the profit or loss for the year
and in stating the financial position should be disclosed in a note to the accounts. The Accounting
Policies note will always be Note 1 of the notes to the accounts (See Annex 15-1).
Finance Department should follow-up changes and requirements in IFRS and should include
additional notes and disclosures in addition to those stated in this manual.
Accounting policies normally disclosed in this note will include some or all of the following:
1a. Property, plant and equipment
Basis of statement of property, plant & equipment and calculation of depreciation including the
annual depreciation rates used for each classification of fixed assets detailed in the note on the
make-up of property, plant equipment.
Any other unusual accounting policies such as the capitalization of repair costs should be disclosed.
1b.Inventory
Basis of valuation of inventory for each classification of inventory is detailed in the note on the
make-up of inventory. Basis of provision for inventory obsolescence if other than the estimation by
management of the actual provision required to reduce individual stock items to their estimated
realizable value; i.e. a note will only be required if the provision is created on an arbitrary basis
such as a percentage of the value of stock.
1c.Debtors
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Basis of provision for doubtful debts if other than a realistic estimate by management of
collectability of each individual debt; i.e. a note will only be required if the provision is created on a
non-specific basis such as a percentage of outstanding debtors.
In addition, any other accounting policy should be disclosed and cross referenced to the financial
position note column.
Commitments Note
In order to enable the reader of the financial statements to determine the adequacy or
otherwise of the Corporation’s liquidity position, a note should be made of all material
commitments for which provision has not been made in the accounts. The most common types
of commitments are:
 Commitments for capital expenditure on the construction of buildings or the supply of
machinery.
 Unpaid margins on letters of credit opened for goods that had not been shipped at
balance sheet date and, where material, the value of goods ordered for payment on
arrival under inward documentary bills for collection.
 Unpaid amount of long term leasehold land.
 Unpaid amount of value of shares subscribed in other organizations.
 The note should disclose the approximate financial amounts of each commitment.
Contingent Liabilities Note
A contingent liability is a potential liability the existence of which will be confirmed only by the
occurrence or non-occurrence of an uncertain future event. Common examples of contingent
liabilities are disputed tax assessments under appeal; threatened or pending litigation for damages;
liability under guarantees to third parties or on promissory notes discounted.
All material contingent liabilities should be disclosed in a note to the accounts, showing;
 the nature of the contingency,
 the uncertainties which may affect the outcome, and
 a reasonable estimate of the financial effect should the contingency become and actual
liability.
Events after the Balance Sheet Date Note
As per IAS 10, Events after the Balance Sheet Date, post–balance sheet events are categorized into
“adjusting” and “non-adjusting” events.
Adjusting events are those post–balance sheet events that provide evidence of conditions that
actually existed at the balance sheet date, albeit they were not known at the time. Financial
statements should be adjusted to reflect adjusting events after the balance sheet date.
Typical examples of adjusting events are;
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 The bankruptcy of a customer after the balance sheet date usually suggests a loss of
trade receivable at the balance sheet date.
 The sale of inventory at a price substantially lower than its cost after the balance sheet
date confirms its net realizable value at the balance sheet date.
 The sale of property, plant, and equipment for a net selling price that is lower than the
carrying amount is indicative of an impairment that took place at the balance sheet
date.
 The determination of an incentive or bonus payment after the balance sheet when an
entity has a constructive obligation at the balance sheet date.
 A deterioration in the financial position (recurring losses) and operating results
(working capital deficiencies) of an entity that has a bearing on the entity’s continuance
as a “going concern” in the foreseeable future.
Dividends proposed or declared after the balance sheet date should not be recognized as a
liability at the balance sheet date. Such declaration is a non-adjusting subsequent event and
footnote disclosure is required, unless immaterial. Actually, in the case of ERCC, dividends are state
dividend to paid to the relevant government ministry or public body.
The date when the financial statements were authorized for issue, and who gave that
authorization. If the entity’s owners have the power to amend the financial statements after
issuance, this fact should be disclosed.
Comparative Figures Note
Except when IFRS permits or requires otherwise, ERCC shall disclose comparative information in
respect of the previous comparable period for all amounts presented in the current period’s
financial statements. ERCC shall include comparative information for narrative and descriptive
information when it is relevant to an understanding of the current period’s financial statements.
Comparative prior-period information is presented for amounts shown in the financial statements
and notes.
The financial statements of any one-year should include the comparative figures for the
immediately preceding year. Such comparative figures being taken from the financial statements of
that year.
Where, however, the basis of accounts recording or of presentation of the financial statements has
changed in the current year it may be necessary to reclassify the comparative figures of the
previous year in order to facilitate comparison. Where such a reclassification of the preceding year's
figures has been made this fact should be disclosed in a note to the accounts.
16.3Management Report
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The annual financial statements should be accompanied by a short management report prepared
and signed by the Finance Manager and the DGM for Support of ERCC.
 Financial position
The financial position the report should explain the reason for any significant changes in assets
and liabilities from the previous year and comment on the overall financial situation of the
Corporation. Financial position ratios (liquidity ratios such as current ration, quick ratio and
Debt/equity Ratio, Fixed assets/Capital ratio) should be included for the current and previous
year, with explanations for significant variances. (Please refer section 12 of this manual for
detail financial analysis)
 Income Statement and other comprehensive income
Regarding Income Statement and other comprehensive income account, the report should
comment on changes in income, cost of sales, gross profit, expenses and net profit, both as
compared to the previous year and to budget. To facilitate understanding, items should be
expressed as common size percentages of sales, particularly the gross profit percentage and
ratios of significant expense items such as direct materials. Material changes in individual
expense items should be explained where appropriate.
 Capital and efficiency ratios
Return on Capital Employed, Return on Capital Invested, Net Asset Turnover and Fixed Asset
Turnover Capital and efficiency ratios for the current and preceding year should be included in
the report with explanations for significant variances.
17. Management Accounting
17.1. Cash Flow Forecasts

Cash flow forecasting is an essential aspect of financial planning as it is these plans which
indicate the ability of the Corporation to generate sufficient cash flow to meet its commitments
as they fall due and thus to remain in business. This aspect of planning should be emphasized,
the only cash flow statement in general use being an annual one prepared. For practical
purposes, an annual forecast is more or less useless for management as it fails to reflect the
changing needs for cash funds at different times of year for settlement of taxes and other
obligations and for meeting other exceptional non-recurring payments .
18.1.1 Annual Cash Plan
In order to provide management with a long range forecast of cash requirements for the year,
the forecast must be broken down by quarters and included in Br. 000's on an Annual Cash
Plan. The Annual Cash Plan should be prepared in June immediately following the budget year
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to which it relates in order that it may be as accurate as possible. The forecast must integrate
with the income and expense figures included in the other budget plans by the Corporate
Planning and Business Development Department. The Annual Cash plan presents the overview
of the whole year's activities and will indicate in advance when cash required are likely to be
encountered and bank facilities, if not already available, may be required. It will also indicate
whether existing overdraft facilities, which should be noted on the forecast, are adequate or if
they are more than necessary in which case they may be reduced so as to avoid unnecessary
commitment charges.
The Finance Manager will review the Annual Cash Plans submitted by each section to ensure
that existing credit facilities are adequate and to arrange additional facilities, where
necessary.
An example of an Annual Cash Plan format is given in Annex 18-1 attached.
17.1.2 Quarterly Cash Flow Forecast
The Annual Cash Plan is prepared for overall cash management. The cash flow shall be re-
forecasted quarterly to provide management with up-to date accurate information as to
available cash resources and subsequent commitments and collections. The actual outcome of
cash flow should be analyzed against the budget and should be reported to the management.
Preparation of this report will be made as follows:
18.1.2.1 The forecast of the sources and application of cash for each quarter will be made at
least one full month in advance. In practice, this may conveniently be done at the same
time as the preceding quarters actual and variance is being recorded, as this will
facilitate forecasting. For example, the forecast of the first quarter of the coming year
cash forecast would be prepared in the beginning of June when second and third
quarter actual figures and variance were being recorded. The reports of two quarters
will thus be in use at any time.
18.1.2.2 After the end of each quarter, when the last quarter's actual and variance with forecast
are known the report will be "closed" by inclusion of the appropriate quarter's original
forecast from the annual cash flow plan and recording the three month's totals of the
forecasts and actual for comparison.
18.1.2.3 Each quarter every district and project will prepare a cash flow forecast and will send to
Head office Finance Department and a copy to the corporate planning and business
development department.
18.1.2.4 The Finance Department review cash flow forecast (requirements of districts/projects) in
light of the annual budget and subsequent approved supplements. When there is disparity
between the forecast and the budget, districts and prject should justify and may require
the approval of GM.
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18.1.2.5 Approved quarterly cash flow forecasts should be consolidated at Finance Department
level to determine whether additional finances or credit facilities are required or unused
cash resources to be invested in a temporary instrument.
18.1.2.8 A copy of the completed quarterly report together with textual explanations for any
significant variances should be forwarded to the DGMs and GM for their attention. Short
falls in revenue collections and unprecedented cash requirements to be discussed by
management for immediate actions.
17.2. Interim Reports
18.2.1 Interim financial reports

18.2.1.1 An interim financial report is intended to provide an update of the last annual
report. Thus the corporation should prepare such financial reports as Income
statement (by project, district, or a consolidated one), Balance sheet, project
progress reports, cash flow statements, etc at least on a quarterly basis.
18.2.1.2 Districts and projects are required to submit interim financial reports on a monthly
and quarterly basis.
18.2.1.3 Before submission of interim financial reports, districts and projects should
reconcile their branch district accounts against the head office account on a
monthly basis through exchange of statement of accounts. The period end
procedure indicated in section 14 if this manual should be considered to ensure
complete and quality financial report
18.2.1.4 Finance Department has to deliver the interim financial reports with the minimum content
requirement as indicated in the following section together with financial analysis to
managers of ERCC at all levels, including the Board of Directors through the GM.
Minimum content of consolidated interim financial reports (if quarterly) include 6:
condensed statement of financial position;
condensed statement of comprehensive income presented either as a condensed single
statement or a condensed separate income statement and a condensed statement of
comprehensive income;
condensed statement of changes in equity;
Condensed statement of cash flows; and selected explanatory notes.
6
IAS 34: IAS 34 applies only when an entity is required or elects to publish an interim financial report in
accordance with IFRSs. Local regulators (note IAS 34) mandate: which entities should publish interim
financial reports; how frequently; and how soon after the end of an interim period.
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18.2.2 Daily/Weekly Reports

18.2.2.1 Daily and weekly financial reports’ content will be determined in accordance with the
needs of the management at all levels. The following are necessary daily and weekly
reports to be presented. Additional reports may be designed or existing one maybe
customized on demand basis.
Responsible
Report Name Purpose Deadline Users Format
units
Daily Cash Position To know cash Collection and Every Finance Manager Annex
Report position of Disbursement morning Collection & 18-1
ERCC. Team Disbursement
Team Leader Head,
DGM, Support
Weekly Account To Collection Monda Finance Annex 18-
Receivable Status follow-up and y morning Manager 2
receivables disbursement following Collection and
Team Head the week Disbursement
Head
Weekly Collection Better Collection Monda Finance Annex

and Disbursement cash and y morning Manager, 18-3
summary management disbursement following Collection and
– updating of Team Head the week Disbursement
cash forecast DBM ,Support
18.2.3 Monthly /Quarterly Reports

18.2.3.1 Management information reports comprise those reports and ratios for DGMs and DGMe
(Deputy General Manager, Engineering) and GM and other relevant Head office, District
and project managers that are not related to budget and will include the following:
17.2.4 Monthly Progress Reports on Status of Accounts
18.2.4.1 All districts and projects must submit to their management and Head office
Finance Department, monthly Progress Reports on Status of Accounts, which
provides information on all aspects of the district and project accounting and
inventory recording.
18.2.4.2 These reports must be carefully reviewed at corporation level, for follow-up and
immediate rectification action where districts and projects fail to keep accounts/inventory
recording up to date.
18.2.4.3 Debtors reports
The Finance Department/ financial management teams should continue to report to the DGM/GM /
District and Project managers on a monthly and quarterly on the balances due from customers any
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other debtors with balances in excess of Br. 25,000 if not older than a month. Debtor balances in
excess of BR. 200 should be reported if older than a month. However, in order to provide greater
information, the make-up of the balances brought forward or carried forward should be analyzed by
age, as follows:
Age Analysis
0-3 4- 8 8 - 12 Over 12
Months month months months
Trade s
Staff
Deposits and
Prepayments
Others
Movement of Trade Debtors
Previous month This month
Beginning Trade Receivable
Total Value of IPC issued

Total Collection
Less: Cash collection from road
contracts
Ending Balance : Receivable
17.2.4.4 The debtors’ report which will be prepared by the Disbursement and Collection Team/
Finance Team should be accompanied by a note where necessary, drawing the attention
of the Finance Manager / DGMs /GMe / District /Project managers any particular
problems encountered in collecting from the specified debtors and as to the reasons for,
and action taken, in respect of any balances more than three months old.
17.2.4.5 The aged debtor report and ratios submitted will be reviewed at corporation level to
ensure that debts are being regularly collected and that adequate follow-up action is
being taken in respect of old outstanding balances. The trend of this ratio must be
closely monitored to ensure that outstanding credit is not increasing faster than income,
and that the aggregate credit period is within limit as per the contract and agreements.
17.2.4.6 Monthly Taxes and Financial Obligations

The districts and projects should follow up the balances due for profit tax, VAT and
withholding tax and other financial obligations, and report them to the Finance Manager at
Head Office.
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The Finance Manager/Collection and Disbursement Team Leader will review the reports
submitted and verify by reference to the cash flow reports for timely settlement of the taxes
dues and financial obligations in accordance with the law or settlement plan.
17.2.4.7 Project Profitability Report
In addition to the monthly and quarterly financial reports, a year to date progressive project
profitability report should be submitted by projects and districts. The report will have the
following format. Individual project reports will be submitted to the respective project
management team.
Project Name: _________________ Year to date Year to date Variances
Budget actual
Revenue (IPCs issued so far)

Direct Project Cost/ Estimates to date
Gross Profit earned / Gross Loss
Gross Profit %
The Cost and General Accounts Team will consolidate these reports and submit to the
Finance Manager of ERCC, where this report will be submitted to management through
him/her.
Road Construction Road Maintenance Total %
Road Construction Road Maintenance Total %
P1 P2 P3 P4 P5 P1 P2 P3 P4 P5
Revenue (IPCs issued so
Direct
far) /Project Cost/
GrossEstimates
Profit toearned
date /
GrossGross
ProfitLoss
%
Separate analysis report should be submitted to explain significant discrepancies noted in any of
the projects in terms of anticipated gross profit and actual gross profit. The analysis will be
conducted in collaboration with the relevant project finance team. It is also the responsibility of
the project manager to provide a written explanation for significant variances.
18.2.4.8 Machinery Utilization
Districts and projects should continue to report to the Corporation’s Finance Manager, by a copy,
monthly on the existing monthly down Time Report. Districts and projects should prepare and
submit the following ratios monthly regarding machinery utilization:
124 | P a g e
 Value of rent income/estimate income per machine both for the month and
cumulatively with comparison to standard.
 Value of income/estimate income per working hour, both for the month and
cumulatively with comparison to standard.
 Machine capacity utilization percentage, both for the month and cumulatively with
comparison to standard.
 Machine hour time due to breakdown as a percentage of total machine hours both for
the month and cumulatively.
 Machine hour down time due to utility cuts or other extraneous events as a percentage
of total machine hours both for the month and cumulatively.
Standard will have to be established for each machinery or type of machinery against which actual
performance may be monitored.
These reports and ratios should be prepared by Technical Managers and approved by the district or
project Managers.
The DGM for Engineering and DGM for Support will review the monthly reports on machine down
time and ensure that proper action has been taken to remedy faults.
17.3. Financial Analysis

Financial analysis is a process of evaluating relationships between component parts of financial
statements to obtain a better understanding of the firm’s financial condition and performance. The
focus of financial analysis is on key figures in the financial statements and the significant
relationship that exists between them.
18.3.1 Finance Department of ERCC shhall financial analysis based on the quarterly and annual
financial reports. The analysis will be submitted to management soon after the submission
of the quarterly financial reports and together with the yearend financial report. The
analysis will have the following objectives:
 Assess how efficiently the corporation uses its assets and how it finances them;
 Evaluate the extent of labor efficiency, material and machine utilizations in projects and
maintenance;
 Assess the liquidity position of the corporation;
 Review the status of the corporation in terms of capacity to pay its debts;
 Evaluate performance (profitability, timely completion of projects, quality 7, etc) over time;
 What changes are needed to improve future performance?
7
Can be assessed by tracking rework costs and by analyzing the trend and percentage of retention
receivables collection
125 | P a g e
18.3.2 Approaches for the analysis: The following approaches will be adopted when conducting
financial analysis:
1. Time serious: Time series analysis (trend analysis) is the evaluation of the firm’s financial
performance over time using ratio analysis. Any significant year to year changes can be
evaluated to assess whether they are indicative of major problem .
 Benchmark comparison: Comparison against similar companies engaged in road
maintenance and road construction, especially those which are in a more or less similar
level of operation. The comparison can be in the same point in time or over the years or
a combination of both.
 Comparison against the industry standard: Ratios of ERCC will be compared
with the national industry average and with international norms specific to the
construction sector. If the deviation from the industry average is significant to either side
(positive or negative) in-depth investigation needs to be done.
 Common size ratio
17.3.3 Basis of analysis:
18.3.3.1 Root causes why a gross profit decrease or increase, a root cause where the liquidity
position of ERCC is getting better or worse is much more meaningful to the
management than the preparation of mere ratios. It is not the objective of the analysis
to show the management just the ratios. Rather, “the why?” important which helps
management to take the appropriate strategic decision.
18.3.3.2 Both internal and external data will be used as a basis for the analysis.
Internal information sources:
Financial statements (both interim and annual financial statements), management accounting
reports, performance activity reports on both road maintenance and road construction on
deployment of resources for the construction of the period level of output,standards of input and
outputs used by ERCC are a basis for analysis and documentation in this connection should be
available.
External information sources:
Market survey on cost of inputs (labor, materials, machinery, etc), market price for road
construction and maintenance, trends in the sector, strategy documents of major customers and
government, changes in policy, competition environment, competition for resources etc.
18.3.4 Ratios:
Financial ratios to be used for the purpose of ERCC categorized into four:- liquidity ratio,
activity ration, leverage ratio and profitability ratio.
18.3.4.1 Liquidity Ratio
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Definition
Liquidity ratio measures the ability of the corporation to meet its short term obligations and reflects
its short term financial strength. It is a measure of whether the corporation’s current assets are
sufficient to pay its current liabilities.
Application
These ratios are applicable only to ERCC as unit since financial resource management including
allocation of these resources among districts and project are centralized and thus, will not be
applied to districts and project.
Formula
Current ratio =
Quick ratio =
Quick ratio measures short term solvency by removing the least liquid asset which inventory
(Stock).
Sources of information
Detailed balance sheet for the current period and for the last three periods (if the analysis is for the
year, it is good to have three years back balance sheet information to conduct the time serious
analysis (trends).
The norm
Current ratio of 2:1 and Quick Ratio of 1.5:1 regarded as a norm for a better liquidity position.
Finance Department of ERCC may set ERCC’s target ratio.
Precautions
 When computing liquidity ratio, long term receivables (example: retention receivables
which will not be collected in one year from the reporting date) and long term
liabilities (ex. Retention payables which will not be paid in one year from the date of
reporting) should be excluded from the calculation.
 Stock includes Goods in Transit Accounts. Please check those letters of Credit opened
for the purchase of fixed assets are not erroneously categorized under goods in
transit.
 Odd balances, if any, should be rearranged to the appropriate classification before
computing the ratios. For example, abnormal balance on receivables should be
positioned as current liabilities and abnormal balances on current liabilities should be
treated as receivables.
Calculate
127 | P a g e
Aver
Benchma
Peri
Tar
Industry
od
Current
rk
ERCC’s
Norm
P -1
P -2
P -3
Current Assets
Current
Liabilities
Stock
Current Ration 2:1
Quick Ratio 1.5:1
Analysis
In interpreting and analyzing the current ratio, the following should be considered among other
things:
 The current and quick ratios help determine how much in current asset is available for every
one birr of current liabilities;
 The ratios have to be analyzed over time, against benchmarks, norms, industry averages
and ERCC’s targeted ratio.
 This ratio should be analyzed in terms of creditors (example banks) potential impression as
to the short term credit worthiness of ERCC, when ERCC has a demand for short term
financing.
 The analysis also should also take into account implication on the corporation’s relationship
with its suppliers as well as its subcontractors or any party who receives payment after
delivering goods or after providing services.
 Consider the ERCC’s investment plans on fixed assets and the means of financing them and
the stage of projects. The fact that during the expansion phases of organizations, more
current assets (especially cash) will be wired to fixed assets and investments, reducing
current assets that will be used to pay off current liabilities should not be overlooked.
 Higher current and quick ratio doesn’t necessary imply that ERCC is doing well. Excess
liquidity should be reinvested for future revenue generation. Thus, it is important to weight
the importance of maintaining good relationship with suppliers, subcontractors and with
those who provide machineries on rental basis, etc versus other priority activities that
consume more cash like acquisition of more fixed assets and the like.
 The quality of liquidity ratio depends on the quality of receivables. If receivables are taking
longer to be collected, regardless of the ratio, ERCC may still be able to be in difficult
situation to settle its bill on time. Account Receivable collection period (refer the activity
ration section of this manual) also helps to measure how soon account receivables are
converted into cash.
 The balance of trade debtors (which has something to do mainly with advance to
subcontractors and the like) and retention receivables may not be easily converted to cash
hence are not readily available to settle obligations. Thus, it is important to consider such
128 | P a g e
facts in evaluating the corporation’s real capacity to pay short term obligations from within
the corporation’s operational sources. Accordingly, it is good to see a more meaningful
analysis excluding those items of current assets that will not be converted to cash easily and
directly within a short period of time such as stock, prepayments, staff debtors and trade
debtors and liabilities that will not require a cash outlay for settlement, particularly advance
from clients.
 In most of the cases, receivables (such as contract receivable and retention receivable) and
Payables (particularly Advance payable, etc) account significant portion of total current
assets and total current liabilities of construction companies. Thus it is important to provide
detailed analysis of these for management. Accordingly the following table is prepared to
give an idea about the possible compositions of the receivables of Ethiopia Road
Construction Corporation.
 When conducting a trend analysis over changes to liquidity ratio, it is worth noting the
trends with summary of the following items:
% over total Assets

Current P P P
Period (P)
Current Assets
Cash and Bank Balances
Staff Debtors
Trade Debtors
Retention Receivables - Short term
Prepayments and Deposits
Advance to Suppliers
Tax Receivables
Sundry Debtors
Provision for doubtful accounts
Material & Supplies
Goods in transit
Current Liabilities
Trade Debtors
Bank loans
Other payables
Retained Earning
Other Balance Sheet items
Fixed Assets and Construction in Progress
Other Non-current Assets
Capital (Capital and retained earnings)
Recommendations
The analyst should recommend (based on the analysis on the findings) the appropriate
interventions for efficient liquidity management.
18.3.4.2 Activity Ratios
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Definition
Activity ratios/turnover ratios measure how efficiently the corporation manages its assets including
working capitals, non-current assets and sales. It also measures the speed at which various
accounts are converted in to sales or cash.
Formula
a) (ACP) Average collection period (days’ sales outstanding): The ratio measures the duration
where credit sales have been outstanding. To give an example, it is the date on which
approved IPOs are submitted and actual cash received.
ACP =
 Where ARTO is Average Receivable Turnover, computed as: Total Credit sales / average
account receivables.
 Average receivable can be easily computed by adding the beginning and ending
receivables for the period and dividing it by two.
 To be more specific, the Average collection period can be specifically computed by
segment; that is for construction, rental business etc. If segmental analysis to be
conducted, then the relevant receivables and credit sales should only be included in the
computation.
b) Inventory turnover (ITO): Measures the inventory items are ordered repeatedly and also for
how long an inventory has been in store (Inventory holding period).
ITO =
Inventory Holding Period (IHP) =
 The analysis will be more meaningful if conducted by category of inventory based on the
information from Inventory module of the ERP software.
c) Fixed Assets Turnover Ratio (FATO): Measures the contribution of 1Birr investment on fixed
assets to the generation of sales and net income. To be more specific, it is also possible to
measure the contribution of 1 Birr investment on construction equipment on revenue from
road construction and maintenance.
FATO = or
FATO=
d) Total Assets Turn Over /TATO/ Ratio: Similar with the above, and measures the contribution
of investment of 1Birr in Asset (regardless of its nature) to total sales.
130 | P a g e
TATO = Sales/Total Assets or
TATO= Net Income/ Total Assets
Application
These ratios are primarily applicable at the head office level. To the extent that receivables,
inventory items, revenue and costs are identifiable at the level of project and districts, the ratios
could be used cautiously.
Balance sheet, Income statement, Fixed asset Registers, Inventory reports (from the ERP),
customer ledgers and reports/ stock control card, other various reports, etc
Precautions
It is advisable to compute ACP by excluding such receivables as staff debtors, purchase
advance, but particularly retention receivables as they can only be collected after the
defect liability period (a year from the date of provisional acceptance);
Make sure stocks of subcontractors are not included as an inventory of the corporation
If there are construction projects where the client is responsible to supply stock,
exclude the revenue from such specific project while computing ITO and also
consider the corporation’s purchasing policy during interpretation/analysis
 Take care of the effect of depreciation and having old or new equipment, machinery
etc on FATO and TATO ratios. Assets which are not in use for whatever reason
(whether ready for disposal or no more deployed during the period) should be
excluded from the value of Fixed Asset.
Calculate
Peri
Industry
Ave
Benchm
Tar
ark
Current
od
ERCC’s
Norm
P -1
P -2
P -3
Average Inventory
Average Account
Receivables
Credit Sales
Cost of Sales
ACP
ITO
FATO against total Sales
FATO Against Net income
131 | P a g e
TATOTAL against total

Sales
TATO Against Net income
Analysis
Inventory Turnover or Stock Holding Period
 Indicate the trend of the ERCC’s inventory turnover ratio;
 Point out whether inventories were or were not fast moving enough to be converted into
cost of sales;
 Analyze for how long stocks were stored on average; look into the root cause or possible
implications based on the result; also identify the specific types of stock and the district or
project (s) that hold inventory for long period of time (inventory stock card or count sheet
or reports may be used here)
 Assess the amount and type of stock kept in different stores and plan as to how to utilize
them before new purchases are initiated or advice the possible risks of being out of stock in
various projects;
 Relate this ratio with the liquidity status of the corporation and explore possible miss use as
well as damages to the stocks and
 It is also important to see the trend of stock to total asset; stock to total income (revenue),
stock to construction expenses, etc
 Inventory turnover should be evaluated in light of material management and the analyst
should look into how optimum is the current stock size. Concepts of Economic Order
Quantity, Just in time and other inventory models to be judged from ERCC perspective.
 Investigate whether low inventory turnover related to limitation with procurement system
(poor planning, limited linkage with department, acquisition of inferior qualities, not proper
computation of stock requirements by user departments etc...)
Receivable Holding period/Average Collection Period

 Indicate how long it takes for the corporation to collect various receivables particularly
construction contract receivables;
 Examine the effectiveness of the cash collection strategy of the corporation;
 Analyze the causes for delays in collection (if any) or actions that help foster collection such
as assigning cash collection officers, possible revision on contracts, etc
 The ratio should also be judged from the collection policy of ERCC and agreed up on
contractual agreements entered into clients. It is important to examine whether longer
account receivable holding periods related to rectifiable management issues.
Fixed Assets Turn over /FATO/Ratio:
 Indicate how the corporation uses the increase in fixed assets for increasing its sales or
construction revenue; see the % increase in fixed assets and sales;
132 | P a g e
 If the figures indicate underutilization of the fixed assets, assess if there were
mismanagement on fixed assets or if there were frequent failures in those fixed assets or if
fixed assets were kept idle, etc and comment on fixed asset acquisition plan and budgets.
 If fixed assets are underutilized, those operators and other employees working with and by
those fixed assets will be inefficient and ineffective, which in turn will be a cost to the
company, so such analysis should be incorporated. On the other hand a higher utilization
rate may suggest underinvestment in fixed assets, having too old assets and/or reliance on
rented fixed assets, etc.
 Indicate how much revenue and net income has been earned for one birr investment in
fixed assets.
Total Asset Turnover (TATO) Ratio:

 Indicate how much revenue and net income has been earned for one birr investment in
total assets.
 Generally, the higher the ERCC’s total asset turnover, the more efficiently its assets have
been used.
Recommendations
 Assess the amount and types of stock kept in different stores and propose as to how to
utilize them before new purchases are initiated or advice the management about the
possible risks of being out of stock in various projects, inventory planning, procurement
planning and execution, etc.
 If stock purchase is decentralized, compare the acquisition price of major similar stocks
across districts and projects and recommend possible control over deviations.
 Advice management whether the corporation should go for renting of fixed assets or
acquisition.
17.3.4.3 Leverage Ratio
Definition
These ratios measure the extent to which ERCC finances itself with debt as opposed to equity.
Application
These ratios are primarily applicable at the head office level. It will particularly be important if the
corporation will use Debt in financing its operations.
Formula
a. Debt Ratio= Total Debt/Total assets
Indicate the percentage of total assets financed by debt funds (also indicate whether most
of the debt is short term or long term in nature).
b. Debt Equity Ratio=Total debt/ Total Equity
This ratio indicates the amount of Birr long term and short term creditors are contributing
for each one Birr equity contribution.
133 | P a g e
c. Times Interest Earned Ratio= EBIT/Interest

This indicates how much operating income has been generated for each one Birr of interest
expense. The ratio also called interest coverage ratio.
Balance sheet, loan agreements and various reports
Precautions
 Consider if borrowing is within the jurisdiction of the ERCC’s Management;
 Leases are part of long term liabilities
 Make sure that current maturity of long term loan is transferred into current liabilities before
computing these ratios.
Calculate
Peri
Industry
Ave
Benchm
Tar
ark
Current
od
ERCC’s
Norm
P -1
P -2
P -3
Long Term Liabilities
(Debts)
Equity (Capital, Reserves
and retained earnings)
Debt Ratio
Debt Equity Ratio
Times Interest Earned
Ratio
Analysis
Debt ratio
 Leverage can help magnify earnings to the ERCC but also could be risky in case it fails to
pay it back.
 Associate this ratio with the analysis for buying or renting of various machineries, etc
Debt –to – Equity ratio
 Look for Debt to Equity ratio trend and comment and advise management as to the
implications of such trends. For example, the higher the Debt-to-equity ratio would imply
more risk for the company in meeting some fixed charges like interest, loan repayments, etc
or the risk of running out of cash under conditions of adversity may be the potential
consequence. On the other hand it would manifest the potential for promoting earnings
using a tax deductible cost of capital (interest expense).
Times Interest Earned ratio
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 This indicates how much operating income has been generated for each one Birr of interest
expense.
Recommendations
 The analysis should explain the reason for any significant changes in liabilities and assets
from the previous quarter or year and comment on the overall financial situation of the
corporation.
 The analyst should recommend the short term and long term interventions in order to
restructure the debt and equity of ERCC based on the analysis.
18.3.4.4. Profitability Ratio
Definition
Profitability ratios provide an overall evaluation of performance of the corporation and it’s
Management. Profitability ratios show the combined effects of liquidity, Asset Management, and
Debt Management on operating results. Profitability ratios measure the overall management
effectiveness in generating profit on sales, total assets and owner’s equity.
Application
These ratios can be applied at the project, district and/or at the head office levels.
Formula
a. Gross Profit Margin= Gross Profit/Construction Revenue
b. Profit Margin= Net Income/Construction revenue
c. Return on Investment (ROI) = Net Income/Total Assets
d. Return on Equity /ROE/=Net Income/Total Equity
Income statement and Balance sheets are the main sources of information for profitability ratios.
In addition, detail project based segmental reporting are very essential to conduct in-depth
analysis by segments.
Precautions
 If the corporation set the level of normal rework costs, abnormal reworks should be
analyzed separately as they indicate inefficiencies, thus are treated as losses than as cost of
construction.
 Make sure that all revenue and expenses are accrued for the period, including payment
certificates.
 When conducting segmental profitability analysis, make sure that overhead costs and other
shared costs are allocated to the respective segments.
Calculate
135 | P a g e
Peri
Industry
Ave
Benchm
Tar
ark
Current
od
ERCC’s
Norm
P -1
P -2
P -3
Gross Profit Road Construction
Gross Profit Road Maintenance
Gross Profit Construction Materials
Gross Profit Equipment Rental
Gross Profit Other rented Assets
Gross Profit Consultancy
Total
Gross Profit Margin
Profit Margin
Return on Investment (ROI)
Return on Equity /ROE
Analysis
Gross profit margin:
 Indicate the gross margin the corporation managed to earn from one Birr of revenue
 Analyze the gross profit margin by maintenance and construction division and further by
each projects.
 Analyze management’s effectiveness in pricing its services, generating revenue and in
controlling construction costs.
 Compare the results against the bill of quantity (anticipated gross profit) per projects and
activities (work items).
 The analysis should also take into account to what extent are loss making projects are
financed by profit making projects and should propose how to price expensive projects .
Operating Profit Margin:
 Indicate the operating profit per Birr of net construction income.
 When there is a significant variation of trends between the gross profit and operating profit
margins, then further analyze which administration and marketing costs contribute for the
significance variations.
Return on investment (return on assets):
The company generates a return of ------ cents on each Birr invested in its assets for the fiscal year
(period) ----.
 Indicate the corporation’s change in size (as measured by total assets) and whether its
earnings after taxes change proportionately (the trend on ROI will help reveal this)
136 | P a g e
 Specific return on investment can also be computed for specific projects, for example
acquisition of earth moving machineries against their return in the form of replacing rental
costs and even income generated from these items by renting out to others.
Return on equity (Return on net worth)
 The corporation generates ----- cents for every Birr in equity. This will enable management
to evaluate if the amount of return can justify the need for additional investment
economically apart from the corporations social responsibilities.
Recommendations
 Indicate the major costs (by category such as labor cost, cost of stocks, Machinery cost
etc) of the corporation across projects and districts as well as for the company as a
whole; over time and in comparison to other similar organizations (benchmarks). This
would help to pinpoint where management should give more attention to.
 For Road construction, Revenue and cost per kilometer should be analyzed over time as
the project is in progress. Such information would help in setting prices across the
stages of the construction of similar future projects.
 To facilitate understanding, expense items should be expressed as common size
percentages of net construction income/revenue, and significant changes in individual
expense items should be explained.
137 | P a g e

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Ethiopian Road Construction Corporation (ERCC)

Effective date: This manual shall be effective from July 8,2015.

7.3. INTERNAL CONTROL..............................................................................................................................73

16.1 QUALITATIVE CHARACTERISTICS OF INFORMATION IN FINANCIAL STATEMENTS........................................................108

Finally, organizational structure of ERCC which includes Financial Management Department

2. GENERAL ACCOUNTING PRACTICES

2.2. SOURCE VOUCHER

Pre-numbering, Approval, Filing, and Control

2.3. JOURNAL VOUCHERS

2.4. LEDGER ACCOUNTS

2.5. UNUSED ACCOUNTING DOCUMENTS

Received Issued Used Pads

2.6. COMPUTERIZATION OF ACCOUNTS

o Determination of segmentation and closing options

o Activating multicurrency and budget features

2.6.2.3.1. Setting the option

51 Road Construction Project Activity Cost

71 Other Direct Cost/Construction Material

Controling/GL account Subsidiary/Activity Sub- Item/Expense Code

Note: Hyphens are used as a separator for legibility

Example 3 – Construction Revenue of Denen Gode Project will be coded as:-

Example 5 – Salary of contractual employee for emankment of construction activity at

Old New Location

1000-1099 1010 Board Of Directors

1020 General Manager

1100-1199 1100 DGM for Support

1101 DGM for Support Office

1120 HRFM /Human Resource Facility Department

1130 Financial Management Department

1140 Procurement and Supplies Department

1200-4999 1200 DGM Engineering

1203 Road Sign & Marking Team

RC Project Management Desk

3000-3999 Road Construction Project

4000-4999 Road Maintenance Projects

3.2. Description of the Accounts

3.2.1. Cash (11)

3.2.2. DEBTORS (12)

3.2.4. Fixed Assets & Investments

3.2.5. Intangible Assets And Investments

3.2.6. Branch Accounts

3.2.9 Capital, Reserves, Head Office Account.

3.2.10 Revenue and Cost of Sales

3.2.11 Cost of Construction

Account Description Explanation

3.2.12 Software Specific Accounts

Ethiopian Road Construction Corporation

Vehicles & Equipment Parts &

16 Other Materials & Supplies

Branch Head Office & Intangible &

18 Fixed Asset & Investments

23 Tax and Related Liabilities

26 Bank Loans ( current liability)

27 Long Term liabilities

5 Road Construction Project Costs

51 511 Activity Exp Direct Labor

52 521 Direct Material and Supplies

53 531 Equipment Costs - Own equipment

Equipment Costs - Rented