Basic accounting unit3

THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Accounting Framework
Posting and Processing Transactions
Year- End Adjustments and Provisions
Preparing Final Accounts
Introduction to Financial Reporting Standards
Published Accounts
MODULE COVERAGE
1
Financial Ratios and Projections
Elements of Taxation

OF BANKING &
FINANCIAL SERVICES
UIBFS
At the end of each financial year, a bank prepares and presents its financial
statements that show its financial performance over the financial period
and the financial position at the close of the year.
This is intended to show how prudently the financial resources have been
managed.
At a minimum, financial statements of a banking institution include:
(i) The Balance Sheet - showing the organisation’s financial position as at the
end of the period
(ii) The Profit and Loss Account/Income Statement -showing performance for
a stated period and the resulting profit or loss realized during the period
(iii)The Cash flow Statement showing the movement of cash in and out of
the organization for a stated period.
(iv)Loan Portfolio / Asset Quality Report (by whatever name a bank chooses
to call it) showing the detailed updates on the status of the loan portfolio.
Below is a detailed description of the four components of the financial
statements.
2

OF BANKING &
FINANCIAL SERVICES
UIBFS
The Balance Sheet
The Balance sheet is a snap shot of a bank’s asset and liability position at a point in
time. It reflects:
What the bank owns and what is owed to it (assets), what it owes other persons or
entities (liabilities)
The difference between the two above is the equity or the net worth. It is the capital
or the claim on the bank by its owners.
Categorization of balance sheet items
Current Assets – These are assets that are owned by the bank and which are expected
to last for not more than a year in their current form. They are all assets that are
expected to expire, be used up or change form within one year.
Non-current Assets / fixed assets – These are assets that are owned and held by the
bank, expected to last for more than one year in their current form.
Current Liabilities – These are debts / obligations of the bank which must be settled in
the next 12 months from the balance sheet date.
Non- Current Liabilities/Long term liabilities- These are debts or obligations that must
be settled after more than one year from the balance sheet date.
Equity- This represents the owners/ shareholders funds in the bank. Equity is the total
claim on the business by its owners. Equity = Total Assets – Total Liabilities.
3

OF BANKING &
FINANCIAL SERVICES
UIBFS
Typical current assets of a bank:
• Cash
• Deposits in financial institutions
• Deposits with BoU
• Loan portfolio
• Capital market investments securities
• Government securities
• Other short term assets
Typical non-current assets of a bank:
• Long term investments
• Fixed assets
• Accumulated depreciation
• Net fixed assets
• Total assets
Typical current liabilities of a bank:
• Customers’ deposits
• Amounts due to other banks
• Due to BoU
• Due to other institutions
• Other current liabilities
Typical non-current liabilities of a bank:
• Time deposits > 1 year
• Long term bonds issued
• Long – term debt
• Other long – term liabilities
4

OF BANKING &
FINANCIAL SERVICES
UIBFS
Typical equity items in a bank’s
balance sheet:
• Paid up share capital (funds
injected in the bank by
shareholders as capital)
• Retained profit/ revenue reserves
(undistributed profit
accumulated)
• Special reserves (special capital
accounts created for statutory or
other purposes)
• Other capital accounts
Below is a simple example of a
typical balance sheet structure.
5

OF BANKING &
FINANCIAL SERVICES
UIBFS
ASSETS UGX
Current Assets:
• Cash on hand and in banks (a )
• Deposits in Financial Institutions (b)
• Short Term Investments (c)
• Gross Loan Portfolio (d)
• Less: Loan Loss Reserve (e)
• Other Short Term Assets (f)
Total Current Assets –g (sum a to f)
6

OF BANKING &
FINANCIAL SERVICES
UIBFS
ASSETS UGX
Non Current Assets
• Long term investments (h)
• Fixed assets (i)
• Less: Accumulated Depreciation (j)
• Net fixed assets (k): (i-j)
Total Non Current Assets (l): (h+k)
TOTAL ASSETS – m (g+l)
7

OF BANKING &
FINANCIAL SERVICES
UIBFS
EQUITY AND LIABILITIES UGX
Current Liabilities
• Customers’ deposits
• Amounts due to other banks
• Due to BoU
• Due to other institutions
• Other current liabilities
Total Current Liabilities (n)
Non Current Liabilities
• Time deposits > 1 year
• Long term bonds issued
• Long – term debt
• Other long – term liabilities
Total Non Current Liabilities (o)
Total Liabilities (p) XX
8

OF BANKING &
FINANCIAL SERVICES
UIBFS
EQUITY UGX
Paid up share capital
Retained profit/ revenue reserves
Special reserves
Other capital accounts
Total Equity (q)
TOTAL LIABILITIES & EQUITY (p+q) XX
Note: In a balance sheet, assets should always be equal to
the sum of liabilities and equity.
9

OF BANKING &
FINANCIAL SERVICES
UIBFS
The Income Statement
• The Income Statement is a summary
of incomes earned and expenses
incurred during the financial period,
with the bottom line being the profit
or loss realized.
• The Income Statement, which is also
known as Profit and Loss Account,
summarizes all the financial effects of
transactions during a specific period
of time, usually a month, quarter or
year.
• It records the income that was
received and expenses incurred
during the period, showing the profit
earned or loss incurred (difference
between income & expenses).
Categorization of income statement
items
• Income
• Operating expenses
• Net income from operations before
tax
• Net income from operations after tax
• Financing expenses
• Grant income (if applicable)
Typical components of a bank’s income
• Interest income from loans
• Fee income from loans
• Income from investments
• Other operating income
• Total operating income
10

OF BANKING &
FINANCIAL SERVICES
UIBFS
Interest income from loans - This is interest received on loans advanced by the bank
to its customers. Interest income can be recorded on accrual basis (interest due
but not yet received) or cash basis (when the cash is received).
Fee income from loans - These are fees and commissions, including penalty fees (if
applicable) received on loans advanced by the bank.
Income from investments -This is revenue from interest, fees, dividends or other
payments generated by financial assets other than the loan portfolio. Examples
are interest earned on bearing deposits with other institution, certificates of
deposits, Treasury Bills and Government Bonds, and dividends earned from the
bank’s equity investments in other organizations. This includes not only interest
received in cash but also interest accrued but not yet received.
Other operating income - Revenue generated from sources other than the above.
This may include rent received, commission on services to other organizations,
fee income unrelated to loans (e.g. money transfer/remittance fees, charges for
school fees collection, commission/fees charged for electricity & water bills
collection.
Total operating income - This is the summation of all operating income during the
period or year-to-date.
11

OF BANKING &
FINANCIAL SERVICES
UIBFS
Financing Expenses - These arise where an institution acquires debt in form of a loan,
issues a bond or other debt instrument on which it pays interest and/or fees.
Financing expenses are costs the bank pays to access and use such debt. Examples
of financing cost are interest on loans payable, loans (payable) processing fees
and commitment fees and interest paid on bond issued by the bank.
Below is a list of the line items under financing expenses of an income statement:
i. Interest and fees paid on loans (market and concessional)
ii. Interest and fees paid on bonds
iii. Interest paid on fixed deposit, savings and current accounts (where applicable)
iv. Interest paid on borrowings from BoU.
v. Total financing expenses (sum of all the above)
Gross financial margin- This is the difference between what is earned by the bank by
providing financial services and its financing costs. It therefore, reflects how well
the bank is performing in terms of generating a sufficient ‘spread’, which is the
difference between total operating revenue and total financing expenses.
Gross Financial Margin = Total Operating Revenue – Total Financing Expenses
12

OF BANKING &
FINANCIAL SERVICES
UIBFS
Provision for Loan Losses - A provision is an expense account created for potential loss
in asset value or crystallization of claims against the bank.
• The loan loss provision is an example of such, created in anticipation of potential
default by borrowers of some loans. This is a non-cash expense that creates or
increases the loan loss reserve on the balance sheet.
• This expense may be comprised of general and specific provisions. The general
provision is calculated as a percentage of the value of the Gross Loan portfolio
that is at risk of default based on aging analysis.
• Specific provisions are made for specific loans. It is common to use the term
provision for loan losses and loan loss reserve interchangeably. To avoid
confusion between this expense and the loan loss reserve, analysts prefer to use
the term reserve for the balance sheet account (accumulated provisions over the
years as the loan portfolio quality changes), and the term provision for the
expense account (additional or incremental loan loss reserves created during the
accounting period).
• It is also helpful to include the word expense when referring to this latter account.
The provision for loan loss expense should always be separated from other
operating costs.
13

OF BANKING &
FINANCIAL SERVICES
UIBFS
Net Financial Margin (NFM) - Represents the difference between the incomes
generated from the portfolio and other investments, and the costs directly
associated with those investments during the period (Financing expenses and
provision for loan losses). This represents the amount of income available to
cover operating expenses for the period or year-to-date.
Operating expenses - Operating expenses include the following items; (costs incurred
by the bank in its operations, other than financing or capital costs).
i. Personnel expenses
ii. Rent and utilities
iii. Travel and transport
iv. Stationery and office supplies
v. Other operating expenses
vi. Depreciation (a non-cash expense that is determined by estimating the useful
life of each asset and expensing a portion of the useful life for the period).
Depreciation represents a decrease in the value of property/assets and accounts for
the portion of useful lifetime that is expensed during each accounting period.
Net Income from operations before tax-
Net Income from Operations =Total Operating Income - Total Expenses.
14

OF BANKING &
FINANCIAL SERVICES
UIBFS
Income Taxes - These include all taxes paid on net income or other measure of profits
as defined by tax authorities. Income tax for a bank, like is the case with any
other incorporated entity is levied on net profit. It is known as corporation tax.
In Uganda, this is currently 30% of pre-tax profit.
Net income from Operations after Tax = Net profit from operations - tax
Grant income
A grant is a donation made by an organization or person to the bank.
Major categories are;
i. Grant income for loans to specific causes/ sectors
ii. Grant income for fixed assets
iii. Grant income for operating expenses
iv. Un restricted grant income
Grant income is usually:
Recorded on the Income statement for memorandum purposes only.
Not included in the retained surplus / deficit current year
15

OF BANKING &
FINANCIAL SERVICES
UIBFS
Grant income for loans –
These are funds donated to the Banking Institution to capitalize the loan
fund, that is, which are restricted to use as lending funds and cannot be
used for operating expenses.
This amount may be disclosed on the Income Statement for memorandum
purposes only and is not included in the retained surplus/deficit. It
normally goes to the balance sheet as separate item, commonly called
“Revolving Funds” under liabilities or equity.
Grant income for fixed assets –
These are funds donated to the Banking Institution to purchase fixed assets,
which are restricted to fixed asset purchases and cannot be used for
operating expenses.
This amount is usually disclosed on the Income Statement for memorandum
purposes only and is not included in the retained surplus/deficit of the
current year.
It should prudently, go to the equity portion of the balance sheet as a non –
distributable reserve.
16

OF BANKING &
FINANCIAL SERVICES
UIBFS
Grant income for operating expense. –
These are funds donated to the bank to cover operating expenses and
supplement earned income. This amount is recorded on the Income
Statement for memorandum purposes only and is not included in the
retained surplus/deficit. It goes to the balance sheet as a reserve.
Unrestricted grant income –
Unrestricted funds donated to the bank to cover any need including funds for
loan capital, purchase of fixed assets, or operating shortfalls.
This amount is recorded on the Income Statement for memorandum
purposes only and is not included in the retained surplus/ deficit
Total grants received - This represents all the grant income to support the
delivery of financial services (and non –financial services if applicable).
Net Income after Grants (for the period) - Summation of net income after tax
and total grants received after the period.
17

OF BANKING &
FINANCIAL SERVICES
UIBFS
Typical Income Statement Structure
Income UGX
• Interest and fee income
• Investment income
Total operating income
Operating Expenses
• Personnel expenses
• Rent & Utilities
• Travel & Transport
• Depreciation
• Stationary & Office Supplies
• Other operating expenses
Total Operating Expenses
Net Income from Operations xxx
Financing expenses UGX
• Interest and charges paid on loan
• Interests paid on customer deposits
Total financing expenses
Gross Financial Margin
Provision for Loan Losses
Net Financial Margin
Total income xxx
Less: Income Tax
Net income after tax
Grants received
Income after grants for period xx
18

OF BANKING &
FINANCIAL SERVICES
UIBFS
The Cash Flow Statement
A cash flow statement is a logical summary statement of how cash flowed in and out
of the business (bank) during the reporting period. Information about the cash
flow is useful in providing users of financial statements with a basis to assess the
ability of the enterprise to generate cash and other liquid assets and its utilization
of the cash.
The economic decisions that are taken by users require an evaluation of the ability of
an enterprise to generate cash and cash equivalents and the timing and certainty
of their generation.
Typical Components of a cash flow statement;
Cash flow from operating activities
These are the principal revenue producing activities of the enterprise. The amount of
the cash flows arising from operating activities is an indicator of the extent to
which the operations of the enterprise have generated sufficient cash flows to
repay loans, maintain the operating capability of the enterprise, pay dividends
and make new investments without recourse to external sources of financing.
Cash flows from operating activities are primarily derived from the principal revenue-
producing activities of the enterprise. Therefore, they generally result from the
transactions and other events that enter into the determination of net profit or
loss.
19

OF BANKING &
FINANCIAL SERVICES
UIBFS
Investing Activities
These are cash flows that represent the extent to which expenditures have been
made for resources intended to generate future income and cash flows.
Examples include cash payments to acquire equity or debt instruments in other
companies/ enterprises. They involve acquisition and disposal of long term assets
and other investments.
Financing Activities
These are activities that result in changes in the size and composition of equity capital
and borrowings of the enterprise. They are useful in predicting claims on future
cash flows arising from financing activities.
Cash and Cash Equivalents
Cash comprises cash on hand and demand deposits (current accounts with other
banks and with BoU).
Cash equivalents are short term, highly liquid investments that are readily convertible
to known amounts of cash and which are subject to an insignificant amount of
changes in value.
Cash equivalents are held for the purpose of meeting short term cash commitments
rather than for investment or other purposes.
20

OF BANKING &
FINANCIAL SERVICES
UIBFS
Benefits of Cash flow Information
Information about the cash flow of an enterprise is useful in providing users of
financial statements with a basis to assess the ability of the enterprise to maintain
healthy liquidity. The economic decisions that are taken by users require an
evaluation of the ability of the enterprise to generate cash.
A cash flow statement, when used in conjunction with the rest of the financial
statements, provides information for this. It indicates the reporting entity’s
liquidity, solvency and ability to manage liquid assets in order to adapt to
changing circumstances and opportunities.
Historical cash flow information is often used as an indicator of the amount, timing
and certainty of future cash flows. It is also useful in checking the accuracy of past
assessments of future cash flows and in examining the relationship between
profitability and net cash flow and the impact of changing prices.
The difference between the income statement and the cash flow statement are:
1. The income statement includes all costs incurred or reasonable income earned,
whether or not the actual cash has changed hands while the cash flow
statement only includes actual cash inflows and outflows.
21

OF BANKING &
FINANCIAL SERVICES
UIBFS
2. The income statement only includes revenue and expenditure items which
affect the profits, while a cash flow statement includes all cash-involving
transaction- including capital expenses like fixed asset acquisition or disposal.
3. The income statement includes estimated non-cash expenses like fixed asset
depreciation and provisions, which the cash flow statement does not include.
4. The income statement is the aggregated (average) incomes or costs over a
period of time (usually a year) while the cash flow statement is period by period
(daily, weekly or monthly) incomes or costs as they occur.
Preparing the cash flow statement
There are two methods for preparing the cash flow statements.
a. The direct method; by which major classes of gross cash receipts and gross cash
payments are analyzed to determine where each cash movement should be
reported in order to arrive at the net cash effect for that particular line item for
the period.
b. The indirect method, which works back from net profit or loss, adding or
deducting non cash transactions, deferrals or accruals and items of income or
expense associated with investing and financing cash flows to arrive at net cash
flow. Both methods yield the same result.
22

OF BANKING &
FINANCIAL SERVICES
UIBFS
Cash Inflows:
• Interest and fee income
• Investment income
• Cash from capital
investment inflows
• New loans payable
• Donations/Grants
Total cash inflows xxx
Cash outflows:
• Financing expenses
• Investments
• Operating expenses
• Non operating expenses
Total cash out flows xxx
Net Cash flow xxx
Opening Cash Balance xxx
Closing Cash Balance xxx
23
Preparing the cash flow- Direct method

OF BANKING &
FINANCIAL SERVICES
UIBFS
Cash Flow from Operations:
• Cash receipts/repayments from
clients
• Cash paid to employees
• Cash paid for operating expenses
• Taxes paid
• Interest paid
Net Cash Flow from Operations
Cash Flow from Investing Activities
• Purchases of non current assets
• Proceeds from sale of non current
assets
• Purchases of stock or other securities
• Proceeds from the sale or
redemption of investments
Net Cash Flow from Investing Activities
• Cash Flow from Financing Activities
• Proceeds from loans, notes, and other
debt instruments
• Installment payments on loans or
other debt repayment
• Cash received from the issuance of
stock or equity in the business
• Dividend payments, purchases of
treasury stock or returns of capital
Net Cash Flow from Financing
Activities
Net increase in cash & cash equivalents
for the period
xxx
Cash & cash equivalents (beginning of
period) xxx
Net cash flow (end of the period) xxx
24
Preparing the cash flow- Indirect Method

OF BANKING &
FINANCIAL SERVICES
UIBFS
Loan portfolio reports
Although it is not a mandatory requirement by the accounting profession, the
portfolio report is vitally important for any financial institution. A portfolio report
provides information about the lending activity of a bank. It provides information
about the volume and quality of the portfolio. It usually also includes other key
portfolio performance indicators (e.g. outreach, concentration and spread).
A portfolio report should present the health of the portfolio, scale of late payment on
loans of the end of the reporting period, and any measurement of late payment
should be thoroughly explained. Information in a portfolio report usually includes:
a. Number and value of loans outstanding at the end of the period
b. Total value and number of loans disbursed during the period
c. Outstanding balance of loans to different sectors
d. Number and value of outstanding loan balances in arrears, value of payments in
arrears
e. Value of loans written off during period
f. Portfolio aging analysis
g. Pending loans (not yet booked in the system)
h. Re-scheduled loans
i. Information on loan terms, loan officers, savings accounts and balances, etc.
25

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