Small-Scale and Micro Irrigation Support Project IRRIGATION WATER USERS ASSOCIATION TRAINING MODULE 4

Transcription

1 Small-Scale and Micro Irrigation Support Project IRRIGATION WATER USERS ASSOCIATION TRAINING MODULE 4 Financial Management, Audit and Irrigation Service Fees Policy November 2016 Agriteam Canada Consulting Ltd.

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3 IRRIGATION WATER USERS ASSOCIATION TRAINING MODULE 4 Financial Management, Audit and Irrigation Service Fees Policy For the Small Scale and Micro Irrigation Project (SMIS) Prepared by Amhara SMIS Team in cooperation with Government PIT members Version 1.0 November 2016

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5 Table of Content Table of Content... 1 Acronyms... iii 1 INTRODUCTION Capacity Building of Irrigation Water Users Association (IWUA) in Financial Management Capacity Building of IWUA in Administrative and Financial Audit Capacity Building of IWUA in Assessment, Billing and Collection of Irrigation Service Fee Modules and Numbering FINANCIAL MANAGEMENT TRAINING (FMT) Module FMT 1: Introduction of Financial Management of IWUA Introduction Accountability and Transparency Measures Financial Resources of IWUAs Expenditures of IWUA Petty Cash and Bank Accounts Financial Books of IWUA Annual Budget Financial Statements Annual Account Internal Audit of Financial Management of IWUA Module FMT 2: Basic Principles of Accounting Introduction Definition and Basic Principles of Accounting Summary of Accounting Terms Module FMT 3: General Journal and Books General Journal Financial Books of IWUA Module FMT 4: Annual Budget, Financial Statements and Annual Account Annual Budget of IWUA Financial Statements of IWUA Annual Account of IWUA TRAINING IN FINANCIAL AND ADMINISTRATIVE AUDIT (AT) Module AT-1: Inspection and Audit of Non-Financial Records of IWUA Purpose of Inspection of Audit of IWUA Records Functions and Powers of the Audit of the Audit Committee Inspection and Audit of Non-Financial Records i P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

6 3.1.4 Audit of Annual Work plan Audit of Annual Report Module AT-2: Inspection and Audit of Financial Records of IWUA Inspection and Audit of General Journal of IWUA Inspection and Audit of Financial Books of IWUA Audit of Annual Budget Audit of Financial Statements of IWUA Audit of Annual Account TRAINING IN IRRIGATION SERVICE FEE POLICY Basic Principles Assessment of Water Charges Level of ISFs Billing of Water Charges Collection of Irrigation Service Fees Effective incentives and Sanctions for Collection of ISFs REFERENCES ii P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

7 Acronyms BoA ISF IWUA O&M Bureau of Agriculture Irrigation Service Fee Irrigation Water User Association Operation and Maintenance iii P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

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9 1 INTRODUCTION 1.1 Capacity Building of Irrigation Water Users Association (IWUA) in Financial Management To ensure that the financial management of the IWUA itself is undertaken correctly and effectively, formal and on-the-job training as well as technical support and advice for the members of the Management Committee, office bearers and any employed staff must be provided. Based on the assessed training needs, the following training modules covering the following topics related to financial management must be conducted: Training Module Topics Target Group Duration Financial Management No. 1 Basic principles of financial management All Management Committee members Control Committee members 1 day Financial Management No. 2 Bookkeeping and accountancy Preparation of annual budget and financing plan Mobilisation of financial resources Filing and maintenance of financial records Management of bank account and petty cash Preparation of financial statements and annual balance sheet Importance of establishing a Reserve Fund IWUA Chairperson IWUA Treasurer Administrative staff (if any) 1.2 Capacity Building of IWUA in Administrative and Financial Audit 2 days In addition to the one-day training in basic principles of financial management (Financial Management Module No.1), the supervisory staff and IWUA Promoter also have to conduct a oneday training course for the newly elected members of the Control Committee covering the following topics: Role, tasks and responsibilities of Control Committee Procedures for internal inspection and audit of non-financial records Procedures for internal inspection and audit of financial books and accounts Preparation of audit report 1.3 Capacity Building of IWUA in Assessment, Billing and Collection of Irrigation Service Fee The supervisory body staff have to assist the Management Committee members with the development of an appropriate ISF policy for their IWUA. Before the Management Committee members proceed with the formulation of appropriate procedures for the assessment, billing and collection of ISF, the supervisory body staff and the IWUA Promoter have to conduct a one-day training course for all Management Committee members covering the following topics: Transparent and equitable system for assessment and collection of ISF Composition of ISF Appropriate method(s) for assessment of ISF Appropriate procedures for collection of ISF 1 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

10 Recording of collected/paid ISF Recovery of outstanding ISF 1.4 Modules and Numbering Up to now (November 2016), four Irrigation Water Users Association Training Modules have been prepared: Module 1: Orientation to General Assembly Members Module 2: Governance Module 3: Administration Management Module 4: Financial Management, Audit and Irrigation Service Fee Policy (this document) Module 4 consists of several sub-modules. For Financial Management Training (FMT): Module FMT 1: Introduction of Financial Management of IWUA Module FMT 2: Basic Principles of Accounting Module FMT 3: General Journal and Books Module FMT 4: Annual Budget, Financial Statements and Annual Account For training in Financial and Administrative Audit (AT): Module AT-1: Inspection and Audit of Non-Financial Records of IWUA Module AT-2: Inspection and Audit of Financial Records of IWUA The last separate sub-module is for training in Irrigation Service Fee Policy. In this document, the above subdivision is used as separate chapters and paragraphs. 2 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

11 2 FINANCIAL MANAGEMENT TRAINING (FMT) 2.1 Module FMT 1: Introduction of Financial Management of IWUA Objectives: To enhance the knowledge of the participants of the training course about the main principles and aspects of the financial management of their IWUA and the purpose and structure of the main financial records to be maintained by the IWUA, including the purpose and importance of the Annual Budget and Annual Account. Topics: Introduction of main activities and purposes of financial management Accountability and transparency measures Financial resources of IWUA Payment procedure Receipt Voucher IWUA expenditures Payment procedures Cash Payment Voucher Petty Cash and Bank Account(s) Financial Books of IWUA General Journal Cash Book Bank Book ISF Register Annual Budget Financial Statements Revenue & Expenditure Statement Balance Sheet Annual Account Internal audit of financial management of IWUA Target Group: All members of IWUA Management Committee and Control Committee Materials: Flip charts/powerpoint presentation, handouts, examples Duration: 2 3 hours Introduction Management and administration of IWUA funds is a responsible task. The Management Committee, in particular the IWUA Chairperson and Treasurer are jointly responsible for the management of the financial resources of the IWUA.? Ask the participants of the training course which specific activities must be carried out under the financial management of their IWUA and write the answers on a flipchart or a whiteboard. 3 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

12 The financial management of an IWUA includes the following activities: receiving and recording revenues authorizing, making and recording payments managing funds (in petty cash and/or bank account) preparing periodic financial statements preparing a budget It is the task of the IWUA Treasurer to maintain an adequate financial administration in order to keep track of IWUA s revenues and expenditures in an orderly and effective way and in accordance to accepted standards. The Management Committee must keep a proper financial administration for the following reasons: Management Committee works with funds collected from the members and they have a right to know how these funds are spent (transparency). Management Committee must be able to explain and justify the use of the IWUA funds to the IWUA members, who have provided these funds through the payment of the ISFs and to avoid that the IWUA funds are misused funds (accountability) Accountability and Transparency Measures? Ask the participants of the training course which measures could ensure accountability and transparency concerning the financial management of their IWUA and write their answers on a flipchart or whiteboard. The IWUA must take the following measures to ensure accountability and transparency with regard to its financial management: Publish all decisions and documents regarding the financial management of the IWUA, such as the approved Annual Report, Annual Work Plan and Annual Budget, on a notice board in the IWUA Office and/or at public places in the village(s). This gives every member of the IWUA the opportunity to inform him/herself about the proposed and actual revenues and expenditures as well as the financial situation of their IWUA. Separate the responsibility for the bank accounts and the financial administration, which means that the IWUA Chairperson only authorises payments and the IWUA Treasurer is responsible for making the actual payments, managing the petty cash and maintaining the financial administration. Bank cheques and transactions should require the signature of no less than two persons. The ISF policy of the IWUA must be simple and transparent, preferably based on a flat rate per unit of land, so that each farmer can easily calculate how much he/she as well as his/her neighbours have to pay as ISF to their IWUA. Financial records and books of the IWUA must be periodically inspected the Control Committee and the results must be reported to the IWUA members during the Annual Meeting of the General Assembly of the IWUA. Balance Sheet and the Revenue & Expenditure Statement should be prepared by a qualified accountant 4 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

13 2.1.3 Financial Resources of IWUAs? Ask the participants of the training course from which possible sources their IWUA may get funds and write their answers on a flipchart or whiteboard. The funds of the IWUA may come from various sources, such as: payment of registration fee by farmers to become members of the IWUA payment of ISFs by members of the IWUA payment of fines (penalties) by members of the IWUA acquisition of loans from financial institutions, such as banks and credit cooperatives provision of donations and grants by individuals or institutions provision of subsidies by Government or any other institution or person revenues from lease or sale of assets owned by the IWUA Revenues from fishery and /or lease paid for the fishing rights in the reservoir of the IWUA managed irrigation scheme could be a financial resource for the IWUA as well. Payment Procedures Usually, the members of the IWUA must pay their ISFs and any fines directly to the IWUA Treasurer, who is responsible to collect and record all payments made to the IWUA. It also happens that farmers pay their ISFs to the IWUA Chairperson, IWUA Secretary and/or any other member of the Management Committee. The IWUA Management Committee may consider the temporary employment of one or more Collectors, who will be responsible for the collection of the due ISFs among all farmers within the command area of the IWUA. Another option is to delegate the responsibility for the collection of ISFs to the WUG Leaders.? Ask the participants of the training course why their IWUA must use receipt vouchers and write their answers on a flipchart or whiteboard. Receipt Voucher When the IWUA Treasurer, Collector(s) and/or WUG Leaders receive a cash payment from any member of the IWUA, he/she must issue a receipt to the person paying the money. A receipt must contain the following details: exact amount of money paid name of person paying the amount of money name of the person receiving the paid amount of money purpose of the payment (i.e., ISFs, membership fee) date of the payment signatures of the payer and receiver of the amount of money Receipts must always be made in duplicate, using a carbon paper. The original receipt voucher is given to the person who makes the payment, while the copy remains in the receipt book. Based on the receipt book, the IWUA Treasurer must register the received payment in the Cash Book of the IWUA. 5 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

14 Rule: Person who pays money gets the signed original receipt voucher as proof of payment Person who receives money gets a copy of the receipt voucher The following measures must avoid misuse of the receipt book: receipt book must have pre-printed pages back of each page of the receipt book must have a stamp and the signatures of the IWUA Chairperson and IWUA Treasurer all copies of the receipts must remain in the receipt book in case of a made mistake, the receipt voucher must be made non-valid by putting a large cross over the original and copy and both the original and the copy must remain in the receipt book to facilitate checking Bank Statements The IWUA Treasurer must collect the periodic (monthly) statements of the IWUA bank account(s) and enters all bank transactions in the Bank Book of the IWUA Expenditures of IWUA? Ask the participants of the training course for which purposes the funds of their IWUA should be used and write the answers on a flipchart or whiteboard. The funds of the IWUA can be used for the following purposes: execution of maintenance and repair works payment of salaries of executive staff and hired labour payment of meeting and administrative costs, including stationary procurement and/or lease of equipment, machinery and/or vehicles O&M of any equipment, machinery and/or vehicles owned and leased by the IWUA provision of training for (newly elected) members of the Management Committee and Control Committee and/or employed executive staff financing of rehabilitation and/or improvement works repayment of loans Payment Procedures For all cash and bank payments by the IWUA, the IWUA Chairperson only authorises payments and the IWUA Treasurer is responsible for making the actual payments. With regard to making payments on behalf of the IWUA, the IWUA Chairperson and Treasurer have the following tasks and responsibilities: IWUA Chairperson Sign for approval of all payments Co-sign all bank transfer orders (i.e. cheques) IWUA Treasurer Manage safety box with the petty cash Manage bank and cash books Keep cheque book Co-sign all bank transfer orders (i.e., cheques 6 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

15 Cash Payment Voucher Before the payment, the IWUA Treasurer fills out the payment data on a cash payment voucher, which is similar to the receipt voucher, but does not need to be numbered. The IWUA Chairperson must sign the completed cash payment voucher for approval. Without the IWUA Chairperson s signature, the payment should be regarded as a private payment by the IWUA Treasurer and not as a payment made by the IWUA. To make the payment, the IWUA Treasurer must ask the person, who receives the money, to sign the payment voucher before the amount of money is actually paid. The IWUA Treasurer must keep the original cash payment voucher and the copy of the cash payment voucher must be given to the person who received the money. After the payment, the IWUA Treasurer must record the cash payment in the Cash Book and file the (original) cash payment voucher. Rules: Person who pays money gets the signed original receipt voucher as a proof of payment Person who receives money gets a copy of the receipt voucher Petty Cash and Bank Accounts Petty Cash? Ask the participants of the training course what the main purpose of Petty Cash is and write the answers on a flipchart or whiteboard. The purpose of the Petty Cash is to make day-to-day cash payments. The amount of cash money kept in the Petty Cash of the IWUA must be limited in order to avoid loss of money. If the amount of money in the Petty Cash is more than ETB 1,000, the IWUA Treasurer must deposit the excess amount in the IWUA bank account. Bank Accounts? Ask the participants of the training course how many bank accounts their IWUA has opened and for which purpose and write the answers on a flipchart or whiteboard. The IWUA must have two bank accounts: An O&M Account in its name, in which all paid ISFs and any other service charges are deposited. A Reserve Fund Account, in which the paid entrance/membership fees, fines and excess of revenue over expenditure are deposited. O&M Account The O&M Account is used to finance the execution of the O&M activities as well as the management of the IWUA itself. Reserve Fund Account Each IWUA must establish its Reserve Fund Account, which must be used to finance any emergency repairs, rehabilitation and improvement works and/or procurement of equipment, machinery or vehicles. 7 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

16 2.1.6 Financial Books of IWUA? Ask the participants of the training course which financial records should be kept by IWUA and write the answers on a flipchart or whiteboard. To ensure that the financial management of the IWUA is carried out in an accountable and transparent manner, the IWUA must have the following financial records: General Journal Cash Book Bank Book ISF Register General Journal To facilitate the reporting and recording of financial information, the IWUA must record all transactions in chronological sequence in a General Journal, whereby each recording made in the General Journal is called journal entry. Cash Book The Cash Book is one of the most important tools in financial administration. All revenues and expenditures (payments) are recorded in the Cash Book and the balance is calculated at the end of each month. Bank Book All bank transactions must be recorded in the Bank Book of the IWUA. The Bank Book is almost similar as the Cash Book, but the last column for remarks is changed to show the balance of IWUA s bank account after each transaction. Normally, the bank issues a statement with an overview of all deposits and withdrawals once every month. In case that the bank does not issue monthly statements, the IWUA Treasurer should go to the bank once a month to ask for a statement or printout of all transactions conducted during the previous month. ISF Register ISFs are the main source of revenue for the IWUA and it is recommended to have a separate register for the invoiced and collected ISFs. Bookkeeping refers to the maintenance of the general Journal, Ledger and Books of the IWUA Annual Budget? Ask the participants of the training course what must be described in the Annual Budget of the IWUA and write the answers on a flipchart or whiteboard. The Annual Budget is an estimate of the total revenues and expenditures for the new financial year of the IWUA. The IWUA Treasurer, with the assistance of the IWUA Chairperson, IWUA Secretary and other members of the Management Committee, must prepare the Annual Budget in the month of May or June. Following the review by the Control Committee in May or June, the Management 8 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

17 Committee must present the Annual Budget to the IWUA members during the Annual Meeting of the General Assembly in June or July. The main reasons for preparing the Annual Budget are: to determine the amount of funds required to operate and maintain the irrigation, drainage and associated infrastructure within the command area of the IWUA area and the management of the IWUA itself for the coming financial year; to ensure transparency by presenting the Annual Budget to the IWUA General Assembly for review and approval; and to have an instrument to monitor the financial performance of the IWUA. A good and valid Annual Budget should be: realistic and sufficiently accurate; simple and clear but without too much detail; and transparent and understandable to ordinary IWUA members. It is almost impossible to predict the exact revenues and expenditures of a IWUA for the entire financial year in advance. Many factors can have an adverse effect on the accuracy of planned revenues and expenditures in the Annual Budget, in particular unforeseen damage to irrigation, drainage and/or associated infrastructure within command area of the IWUA that requires repair work. During the year, the IWUA Treasurer should monitor the actual revenue and expenditure and compare these with the planned and approved amounts in the Annual Budget. If the planning were accurate, the actual revenue and expenditure would not differ (too) much from the amounts in the Annual Budget. If the difference between the actual and planned revenues and expenditures becomes large, the IWUA Treasurer should inform the Management Committee in order to review the situation and prepare adjustments to the Annual Budget as required Financial Statements? Ask the participants of the training course which financial statements must be prepared by their IWUA at the end of the financial year and write the answers on a flipchart or whiteboard. At the end of each financial year, the IWUA must prepare the following two financial statements in order to formally report on the financial status of the IWUA: Revenue & Expenditure Statement Balance Sheet Revenue and Expenditure Statement The Revenue Statement of the IWUA reports: all revenues and all expenses of the IWUA during the reporting period excess of revenue over expenditure or excess of expenditure over revenue for the reporting period In order to ensure its solvency, the IWUA must deposit any excess of revenue over expenditure in the IWUA Reserve Fund Account to be used for emergency repairs, investments in building and equipment or rehabilitation and improvement of the irrigation, drainage and associated infrastructure within its command area. 9 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

18 Balance Sheet The Balance Sheet, also known as Statement of Financial Position, indicates the financial status of the IWUA at a particular point in time, which is normally the end of the financial year. The Balance Sheet reports: all assets, all liabilities and capital of the IWUA at the end of the reporting period; and total assets equal the sum of total liabilities plus capital of the IWUA Annual Account At the end of each financial year, the IWUA Treasurer must prepare the Annual Account, in which the actual revenues and expenditures are compared with the planned revenues and expenditures in the Annual Budget. The Annual Account has the same format as the Annual Budget, although an additional column is added for the actual revenue and expenditure Internal Audit of Financial Management of IWUA IWUA members have the right to check the financial dealings of their Management Committee and the correctness of the financial administration of their IWUA. In addition to the external audit carried out on behalf of the supervisory body, an internal audit of the financial management on behalf of all IWUA members must also be conducted.? Ask the participants of the training course what the main tasks of the Control Committee are and write the answers on a flipchart or whiteboard. For this purpose, the IWUA members directly elect the 3 to 5 members of the Control Committee. The Control Committee has the responsibility to carry out periodical (quarterly) audits of the financial administration, including the inspection of the main financial records. During the month of May or June, the Control Committee must inspect the Annual Account together with other financial records of the IWUA (i.e., Cash Book, Bank Book) for the closed financial year. The Control Committee must review all supporting receipts and invoices, which have been kept in file, to find out whether: financial records are maintained correctly revenues and expenditures are correctly entered in the books money available in cash and in the IWUA bank account(s) correspond with the balance found in the Cash Book, Bank Book and Annual Account. Following the completion of its internal audit of the financial administration of the IWUA, the Control Committee must report its findings, conclusions and recommendations directly to the IWUA members during the Annual Meeting of the General Assembly in June or July. At the end of the training session, a handout with a summary of the main aspects of the financial management of the IWUA in simple local language must be distributed among all participants. 10 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

19 2.2 Module FMT 2: Basic Principles of Accounting Objectives: To make the participants of the training course familiar with the aims and basic principles of accounting, including the terms used in accounting. Topics: Introduction Definition and Basic Principles of Accounting Financial Viability Assets Liabilities Summary of Accounting Terms Target Group: IWUA Office Bearers (i.e., Chairperson, Deputy Chairperson, Secretary and Treasurer), other members of the IWUA Management Committee and the Control Committee members Materials: Flip Charts/PowerPoint presentation, handouts, examples, exercises Duration: 2 hours Introduction It is important that the IWUA has a simple accountancy and bookkeeping system that will guarantee full transparency and accountability with regard to the management of the financial resources and assets of the IWUA by the Management Committee Definition and Basic Principles of Accounting? Ask the participants of the training course what the main aims of accounting could be and write the answers on a flipchart or whiteboard. Accounting is defined as the system for providing financial information for the following three main aims: to record and report all financial information to report about the financial status at the end of each month, quarter and/or financial year to provide financial information to be used for making decisions regarding ongoing or future activities Financial Viability The overriding goal of financial management for the IWUA is financial viability, which is measured in terms of liquidity and solvency. Liquidity refers to the capacity of the IWUA to generate sufficient financial resources to meet all its (financial) obligations within a period of one year (short-term). Solvency refers to the capacity of the IWUA to generate sufficient financial resources over the next 5 to 10 years to meet major (cash) expenditures that will occur within this period (long-term). 11 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

20 Assets An asset is any resource owned by the IWUA with economic value that can somehow help the IWUA to provide its (irrigation) services to its customers, who all farmers within its command area.? Ask the participants of the training course which assets could be owned by their IWUA (plenary or small group discussion) and write the answers on a flipchart or whiteboard. O&M Tools and Equipment With regard to the O&M of the irrigation infrastructure within its command area, the IWUA could own the following tools: bucket shovel wire brush scraper water level trowel float pickaxe wheel barrow hammer chisel grease gun and oil can Office Furniture and Equipment For its administrative and financial management, the IWUA may own the following assets: furniture, including chairs, table(s), desk(s) filing cabinet calculator typewriter/computer with printer (mobile) telephone(s) file folders and safe box Building(s) One of the most important assets owned by the IWUA may be the building, where its office and store are situated. Normally, a distinction is made between current assets and fixed assets and they are specified in the following table: All cash owned by the IWUA in its Petty Cash and its bank accounts Non-paid ISFs for irrigation services supplied on credit (on account) and non-paid fines to be paid to the IWUA All items kept in stock (i.e., building materials, stationary, spare parts) by the IWUA 12 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

21 Current Assets All cash owned by the IWUA in its Petty Cash and its bank accounts Non-paid ISFs for irrigation services supplied on credit (on account) and non-paid fines to be paid to the IWUA All items kept in stock (i.e., building materials, stationary, spare parts) by the IWUA Fixed Assets Land and building(s) owned by the IWUA Tools and equipment owned by the IWUA Furniture owned by the IWUA Vehicle(s) owned by the IWUA Liabilities Liabilities are outsider claims and they refer to all (financial) obligations (i.e., debts) that the IWUA has to outside persons and entities (i.e., banks, companies, Government), which are called creditors. A creditor has a claim or legal right to a part of the assets until the IWUA, which is the debtor, has paid the debt to the creditor.? Ask the participants of the training course what the liabilities of their IWUA could be and write their answers on a flipchart or whiteboard. The most common liabilities of the IWUA may be as follows: money owed to suppliers of goods and/or services (non-paid bills) money owed to employed executive staff and/or labourers (non-paid salaries) money owed to financial institutions, such as banks (outstanding loans) Recording of Financial Transactions The recording and reporting of financial information is one of the three aims of accounting. To facilitate the reporting and recording of financial information, the IWUA must record all transactions in chronological sequence in the General Journal, whereby each recording made in the General Journal is called journal entry. Following the entering of each transaction in the General Journal, the respective IWUA records (i.e., Asset Register, Stock Register) and IWUA Books (i.e., Cash Book, Bank Book and ISF Register) must be updated as well. Bookkeeping refers to the maintenance of all financial records and books of the IWUA Summary of Accounting Terms The following terms are commonly used in accounting: Accounting Term Asset Liability General Journal Definition Any resource owned by the IWUA with economic value that can somehow help the IWUA to provide its (irrigation) services to its customers All (financial) obligations (i.e., debts) that the IWUA has to outside persons and entities (i.e., companies, Government), also known as outside claims Record for entering each transaction, so called journal entries 13 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

22 Revenues Expenses Transaction Liquidity Solvency Accounting Term (Financial) Viability Creditor Debtor Account/Note receivable Account/Note payable Definition Cash received or entitled to receive in exchange for the provision of goods or services Costs made to generate revenues Any event that affect the financial position of the entity (i.e., IWUA) and that can be reliably recorded Capacity to generate sufficient financial resources to meet all (financial) obligations within a period of one year (short-term) Capacity to generate sufficient financial resources over the next 5 to 10 years to meet major (cash) expenditures that will occur within period of time (long-term) Overriding goal of financial management measured in terms of liquidity and solvency Any person or entity having a claim or legal right to a part of the assets until the owner of the assets (i.e., IWUA) has paid the debt Any person or entity (i.e., IWUA) owing money to the creditor until the debt has been paid Amount of cash to receive from debtor within a certain time after the delivery of the good or service as a verbal promise/promissory note, which is considered an asset Amount of cash to pay to creditor within a certain time after the delivery of the good or service as a verbal promise/promissory note, which is considered a liability At the end of the training session, a handout with a summary of the basic principles of accounting in simple local language must be distributed among all participants. 14 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

23 2.3 Module FMT 3: General Journal and Books Objectives: To make the participants of the training course familiar with the purpose, structure and use of the General Journal and IWUA Books. Topics: General Journal General Journal Format Financial Books of IWUA Cash Book Bank Book ISF Register Target Group: IWUA Office Bearers (i.e., Chairperson, Deputy Chairperson, Secretary and Treasurer) and other members of the IWUA Management Committee Materials: Flip Charts/PowerPoint presentation, handouts, examples, exercises Duration: 2-3 hours General Journal? Ask the participants of the training course what a general journal is and write their answers on a flipchart or whiteboard. The General Journal is a record for recording all transactions in chronological sequence, whereby each recording made in the General Journal is called journal entry. For recording a journal entry in the General Journal, adequate information about each transaction is required. Journal entries can only be made if: Amount of money involved is known with a reasonable certainty Timing of the transaction is known with a reasonable certainty Exchange by at least one party involved in the transaction has taken place The process of entering a transaction in the General Journal follows the following two basic steps: identify transaction from source documents, such as bank deposit slips and receipts enter the transaction in the journal, including a brief explanation for the journal entry: o under revenue if the IWUA has received money (enter the IWUA) o under expenses of the IWUA has paid money (left the IWUA) Although the general journal of the IWUA has already been described briefly in the FMT module on introduction of Financial management of IWUA, the trainer must present and explain this important financial record of IWUA to the participants of the training course once more 15 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

24 General Journal Format The following example shows how entries to the General Journal are made: GENERAL JOURNAL OF IWUA FINANCIAL YEAR 2015 Page 1 Date Short Description of Transaction Voucher/Receipt Revenue Expenses Number(s) (ETB) (ETB) (1) (2) (3) (4) (5) 15 January Payment of membership rate of ETB 100/member 1 to 50 5, January Payment of salary for January to Irrigation Technician February Cash purchase of office equipment 352 1,500 4 February Purchase of stationary on account 401 1, February Payment of ISF by Mr. Amara Yirsam for 1.5 ha February Payment of ISF by Mr. Desta Aragaw for 1.0 ha February Payment of salary for February to Irrigation Technician Page number of the General Journal appears in the upper right corner Financial year appears in column 1 right under the heading Date Date of every transaction is recorded in column 1 under the heading Date Short description of the financial transaction is recorded under the heading Short Description of Transaction Corresponding numbers of the voucher or receipt are recorded in column 3 under the heading Voucher/Receipt Number(s) Amount received by the IWUA is recorded in column 4 under the heading Revenue Amount paid by the IWUA (in cash or on account) is recorded in column 5 under the heading Expenses Exercise : After the presentation and explanation of the General Journal, the participants of the training course must be given the opportunity to practice with the preparation of a General Journal as an exercise Financial Books of IWUA? Ask the participants of the training course which financial books their IWUA must maintain and write their answers on a flipchart or white board. In addition to the General Journal, the IWUA must also keep the following financial books for the day-to-day management of its financial resources: Cash Book Bank Book ISF Register 16 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

25 Although the Cash Book, bank Book and ISF Register have already been described briefly in the FMT Module on introduction of Financial Management of IWUA, the Trainer must present and explain these financial books of the IWUA to the participants of the training course once more. Cash Book The Cash Book is used to record all cash revenues and expenditures (payments). The Cash Book should be closed after every page, or at the end of each month. Closing the Cash Book means that the columns of (cash) revenues, (cash) payments (expenditure) and balance are added up at the bottom of the page. The calculated balance must be exactly the same amount as the amount of cash held by the IWUA Treasurer as petty cash. The calculated balance is carried forward to the following page of the Cash Book, which means that the Opening Balance must be entered at the top of each page of the Cash Book under the column with the heading Balance. An example of the IWUA Cash Book follows: CASH BOOK FOR IWUA Sequence No.: Reporting Month: Year 20 No. Date Description Revenues (ETB) Payments (ETB) Balance (ETB) Totals: Signature of IWUA Treasurer: Signature of IWUA Chairperson: To ensure accountability and transparency, the Control Committee must check the Cash Book periodically (quarterly) in order to assess if: Cash Book is properly maintained by the IWUA Treasurer There is no discrepancy between the actual amount in the petty cash and the reported balance in the Cash Book 17 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

26 Bank Book All bank transactions must be recorded in the Bank Book of the IWUA. The Bank Book is almost similar as the Cash Book, but the last column for remarks is changed to show the balance of IWUA s bank account after each transaction. BANK BOOK FOR IWUA Sequence Number: Reporting Month: Year 2015 No. Date Description Deposits (revenue) Withdrawals Balance (ETB) (payments) (ETB) (ETB) Balance previous month 11, Deposit from petty cash 5,000 16, Transfer to supplier of furniture 6,500 9, Withdrawal for petty cash (cheque no. 15) 4,000 5, Withdrawal for petty cash (cheque no. 16) 2,000 3, Deposit from petty cash 12,000 15, Balance at end of this month 15,500 Total 17,000 12,500 Money taken from the bank to put in the petty cash should be recorded under withdrawals (payments) in the Bank Book and as revenue in the Cash Book. Money deposited in the bank should be booked as expenditure in the Cash Book and under deposits in the Bank Book. Normally, the bank issues a statement with an overview of all deposits and withdrawals once every month. In case that the bank does not issue monthly statements, the IWUA Treasurer should go to the bank once a month to ask for a statement or printout of all transactions conducted during the previous month. ISF Register ISFs are the main source of revenue for the IWUA. Therefore, the IWUA must have a separate register for the invoiced and collected ISFs. The ISF Register may have the following format: Name of IWUA: Approved ISF: ETB/ha: Financial Year: 2015 No. Name of Farmer ISF Invoice Payment of ISFs Size of Amount Cumulative Land (ha) No. Date Amount ETB ETB (ETB) 1 Amare Tilahun Sisay Melkamu Berhane Zeleke Hailu Molla Total The above example shows that some farmers paid their due ISFs in one instalment (Ato Hailu Molla), whereas others pay in two or more instalments. This example also shows easily that not all due ISFs have been paid as the total amount of invoiced ISFs is ETB 500, whereas the total amount of paid 18 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

27 ISFs is ETB 450. Three of the four farmers have paid their due ISFs, but Ato Berhane Zeleke still has to pay ETB 50. Exercise After the presentation and explanation of the Cash Book, ISF Register and Bank Book, the participants of the training course must be given the opportunity to practice with the preparation of the Cash Book, ISF Register and Bank Book as an exercise. At the end of the training session, a handout with a clear description of the main aspects of the General Journal and IWUA Books in simple local language must be distributed among all participants. 19 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

28 2.4 Module FMT 4: Annual Budget, Financial Statements and Annual Account Objectives: To enhance the knowledge of the participants of the training course about the purposes and structure of the Annual Budget, Financial Statements and Annual Account of the IWUA. To develop the skills of the participants of the training course to prepare the Annual Budget, Financial Statements and Annual Account of the IWUA. Topics: Annual Budget of IWUA Financial Statements of IWUA Revenue & Expenditure Statement Reserve Fund Account Balance Sheet Asset Valuation Annual Account of IWUA Target Group: IWUA Office Bearers (i.e., Chairperson, Deputy Chairperson, Secretary and Treasurer) and other members of the IWUA Management Committee Materials: Flip Charts/PowerPoint presentation, handouts, examples, exercises Duration: 6 hours (2x3 hours) Annual Budget of IWUA? Ask the participants of the training course what must be described in the Annual Budget of the IWUA and write their answers on a flipchart or white board. Although the Annual Budget of the IWUA has already been escribed briefly in the FMT Module on introduction of Financial management of the IWUA, the Trainer must present and explain the Annual Budget of the IWUA to the participants of the training course once more. The Annual Budget is an estimate of the total revenues and expenditures for the new financial year of the IWUA. The IWUA Treasurer, with the assistance of the IWUA Chairperson, IWUA Secretary and other members of the Management Committee, must prepare the Annual Budget in the month of March or April. Following the review by the Control Committee in May or June, the Management Committee must present the Annual Budget to the IWUA members during the Annual Meeting of the General Assembly in June or July. The main reasons for preparing the Annual Budget are: to determine the amount of funds required to operate and maintain the irrigation infrastructure within the command area of the IWUA area and the management of the IWUA itself for the coming financial year to ensure transparency by presenting the Annual Budget to the IWUA General Assembly for review and approval to have an instrument to monitor the financial performance of the IWUA. 20 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

29 A good and valid Annual Budget should be: realistic and sufficiently accurate simple and clear but without too much detail transparent and understandable to ordinary IWUA members. It is almost impossible to predict the exact revenues and expenditures of an IWUA for the entire financial year in advance. Many factors can have an adverse effect on the accuracy of planned revenues and expenditures in the Annual Budget, in particular unforeseen damage to irrigation infrastructure within command area of the IWUA that require repair work. During the year, the IWUA Treasurer should monitor the actual revenue and expenditure and compare these with the planned and approved amounts in the Annual Budget. If the planning were accurate, the actual revenue and expenditure would not differ (too) much from the amounts in the Annual Budget. If the difference between the actual and planned revenues and expenditures becomes large, the IWUA Treasurer should inform the Management Committee in order to review the situation and prepare adjustments to the Annual Budget as required. The Annual Budget is normally subdivided into the following categories: ANNUAL BUDGET FOR IWUA Financial Year: 20 Revenues 1 Membership Fees 2 ISFs 3 Donations, Subsidies and grants 4 Loans 5 Penalties/fines 6 Sale and/or lease of assets owned by IWUA 7 Other revenues Total Expenditures 1 Administrative and meeting costs (i.e., stationery, communication, photocopy) 2 Operation costs (i.e., salaries of O&M staff and hired labour) 3 Maintenance costs (i.e., spare parts, repairs, hired labour) 4 Payment of taxes 5 Purchase and/or lease of furniture, equipment, machinery, vehicles 6 Rehabilitation and/or improvement works 7 Training costs 8 Repayment of loans 9 Other costs Total Amount (ETB) Amount (ETB) Exercise: After the presentation and explanation of the Annual Budget, the participants of the training course must be given the opportunity to practice with the presentation of an Annual Budget as an exercise. 21 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

30 2.4.2 Financial Statements of IWUA? Ask the participants of the training course which financial statements must be prepared for their IWUA and write their answers on a flipchart or white board. At the end of each financial year, the IWUA must prepare the following financial statements in order to formally report on the financial status of the IWUA: Revenue & Expenditure Statement; and Balance Sheet Although the Financial Statement of the IWUA have already been described briefly in the FMT Module on Introduction to Financial Management of IWUA, the Trainer must present and explain the two Financial Statements of the IWUA to the participants of the training course once more. Revenue & Expenditure Statement. Revenue & Expenditure Statement of the IWUA reports: all revenues and all expenses of the IWUA during the reporting period; balance of the reporting period: positive balance if the total revenues exceed total expenses negative balance if the total expenses exceed total revenues An example of the IWUA Revenue and Expenditure Statement follows: REVENUE AND EXPENDITURE STATEMENT FOR IWUA FINANCIAL YEAR ENDED,20 Revenue ETB ETB Service revenue (collected ISF) 150,000 Total revenues 150,000 Expenses Maintenance expenses 80,000 Salary expenses 30,000 Office expenses 17,500 Total expenses 127,500 Balance 22,500 The balance of the IWUA is ETB 22,500, which is simply the difference between the total revenues (ETB 150,000) and total expenses (ETB 127,500). Reserve Fund Account In order to ensure its solvency, the IWUA must deposit its positive balance in its Reserve Fund Account to be used for emergency repairs, investments in building and equipment or rehabilitation and improvement of the irrigation infrastructure within its command area. Exercise After the presentation and explanation of the Revenue and Expenditure Statement, the participants of the training course must be given the opportunity to practice with the preparation of Revenue and Expenditure Statement as an exercise. 22 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.

31 Balance Sheet The Balance Sheet, also known as Statement of Financial Position, indicates the financial status of the IWUA at a particular point in time, which is normally the end of the financial year. The Balance Sheet illustrates the basic Accounting Equation: Assets = Liabilities + Capital.? Ask the participants of the training course what the Balance Sheet must report and write their answers on a flipchart or white board. The Balance Sheet reports: all assets, all liabilities and all capital of the IWUA at the end of the reporting period; and total assets equal the sum of total liabilities plus capital of the IWUA. An example of the IWUA Balance Sheet follows: BALANCE SHEET FOR IWUA FINANCIAL YEAR ENDED JUNE 30,2015 Assets Liabilities Current Assets ETB Liabilities ETB Cash 170,000 Account payable 10,000 Account receivable 25,000 Long-term liabilities - Total current assets 195,000 Total liabilities 10,000 Fixed Assets Capital Equipment 150,000 Membership fee 540,000 Building 430,000 Balance 225,000 Total Fixed Assets 580,000 Total capital 765,000 TOTAL ASSETS 775,000 TOTAL LIABILITY AND CAPITAL 775,000 The Accounting Equation for the IWUA at the end of the financial year is as follows: CURRENT AND FIXED ASSETS (ETB 775,000) = LIABILITIES (ETB 10,000) + CAPITAL (ETB 765,000) Asset Valuation The value of assets in Financial Statements is based on what is paid at the time of purchase (historical or acquisition cost), which is considered to be objective. In order to keep it simple, the IWUA must register all its assets against historical/acquisition costs in its Financial Statement. The IWUA must not use any other asset valuation method. Exercise: After the presentation and explanation of the Balance Sheet, the participants of the training course must be given the opportunity to practice with the preparation of the balance sheet Annual Account of IWUA? Ask the participants of the training course what must be described in the Annual Account of the IWUA and write their answers on a flipchart or white board. In addition to the two above-mentioned Financial Statements, which are presented in the Annual Report of the IWUA, the IWUA Treasurer must also prepare an Annual Account at the end of each financial year. In the Annual Account, the actual revenues and expenditures are compared with the 23 P a g e IWUA Training Module Agriteam Canada Consulting Ltd.