Comprehensive Guide to Accounting in Georgian Budgetary Institutions

Regulation and Funding of Budgetary Institutions

• Approval of Maintenance Expenses: The amount of maintenance costs for organizations funded by local budgets is approved by the Municipal Council (Sakrebulo).
• Regulatory Authority: The accounting of organizations on budget funding is regulated by the relevant normative acts issued by the Minister of Finance of Georgia.
• Methodological Framework: Budgetary organizations conduct their accounting (on paper or via electronic systems) based on the methodology and Chart of Accounts determined by instructions approved by the Minister of Finance of Georgia.
• Accounting System Context: The accounting system of budgetary organizations is an integral part of the overall budgetary system of the country. It is not a private sector management model or a strictly internal system for the tax inspectorate.
• Subject of Accounting: The subject of accounting includes financial and non-financial assets, the sources of their formation, and all economic facts/transactions.
• Budgetary Classification: Accounting is founded on budgetary classification, which reflects the socio-economic content of budget revenues and expenditures, facilitating precise planning and execution.
• Budget Expenditures Definition: These represent the monetary funds used by the government to ensure the financial fulfillment of its tasks and functions.

Fundamental Accounting Principles and Definitions

• Analytical Accounting: This is a detailed level of accounting that records every specific detail of accounting activities.
• Synthetic Accounting: Also known as generalized accounting, it reflects economic resources and processes only in monetary terms.
• The Double-Entry Principle: This principle dictates that every economic operation is recorded on two different accounts — in the debit of one and the credit of another — for an equal amount.
• Debit Definition: In the context of the accounting equation, a debit represents an increase in assets, a decrease in liabilities, or a decrease in the value of capital.
• Economic Events: These are events that reflect the creation, transformation, exchange, transfer, or liquidation of value.
• Classification of Events: Economic events affecting an organization's financial position and results are divided into operations (transactions) and other events.
• Other Economic Flows: This refers to changes in the volume or value of an asset or liability that do not result from a specific transaction (e.g., market value fluctuations).
• Basis of Documents: Budgetary organizations must perform accounting based on documents proving economic events, which can be in material or electronic forms.
• Primary Documents: These must be prepared at the moment of the economic event or immediately upon its completion and must be submitted to the accounting department no later than the next working day.
• Accounting Information Characteristics:
  • Reliability: Implies impartiality, neutrality, and truthfulness of the information.
  • Relevance: The utility of information in influencing user decisions by helping evaluate past, present, or future activities.
  • Materiality: Linked to the significance of information in decision-making.
• Going Concern Assumption: The assumption that the organization has neither the intention nor the necessity to liquidate or drastically reduce its activities in the near future.

Georgia’s Chart of Accounts and Account Types

• Chart of Accounts Definition: A systematized list where every account is assigned a specific cipher or number.
• Permanent Accounts: These include accounts within the Asset, Liability, and Capital sections.
• Departmental Structure of the Chart of Accounts:
  • Section 1: Fully dedicated to Assets.
  • Section 2: Fully dedicated to Liabilities.
  • Section 3: Covers Net Assets/Capital.
• Nature of Funding Accounts: Accounts for funding received from the budget are passive; receiving funds is recorded in the Credit, while decreases or account closures are recorded in the Debit.
• Revenue Operations: These occur when there is an increase in assets or a decrease in liabilities.
• Closing of Accounts: At the end of the reporting period, expense accounts are closed against capital accounts.
• Revenue Definition (per IPSAS 1): The total amount of economic benefit or service potential received during the period, resulting in an increase in net assets/extending beyond owner contributions.
• Expense Definition (per IPSAS 1): The decrease in economic benefit or service potential through asset outflow, consumption, or incurring liabilities, resulting in a decrease in net assets unrelated to distributions to owners.

Accounting Methods and Standards (IPSAS/სსბასს)

• Acronym (სსბასს): Stands for Public Sector International Accounting Standards (International Public Sector Accounting Standards).
• IPSAS 1: Regulates the presentation of financial statements in the public sector.
• IPSAS 2: Regulates the Statement of Cash Flows.
• IPSAS 3: Sets rules for accounting policies, changes in accounting estimates, and errors.
• IPSAS 12: Regulates inventory accounting rules in the public sector.
• IPSAS 17: Governs the accounting of fixed assets.
• Cash Method: Transactions are recorded only when cash is actually received or paid.
• Accrual Method: Transactions are recognized when they occur, regardless of cash flow. Organizations must record funding received within budgetary assignments using both cash and accrual methods for reporting.
• Accounting Policy: The set of principles, bases, assumptions, rules, and practices used for preparing and presenting financial statements. Management and the chief accountant are legally responsible for its selection and application.

Operations and Transactions

• Types of Operations: These are categorized as Exchange and Non-exchange.
• Exchange Operations: When an entity receives assets/services or settles a liability by giving approximately equal value (in goods, services, or other assets) in return.
• Non-exchange Operations: When an entity receives value without giving approximately equal value in exchange, or vice versa.
• Barter Operations: Occur when two entities exchange goods, services, or assets of equal value (other than cash).
• Accounting Form (Memorial-Order): Under this form, documents are systematized chronologically and formalized by memorial-orders.
• Cards: These are blanks made of thin cardboard printed with tables, used for individual records.

Cash, Bank, and Cash Equivalents

• Composition: Includes cash in the petty cash box, current bank accounts, and cash equivalents.
• Cash Equivalents: Highly liquid short-term financial investments with a maturity of $3$ months or less from the date of acquisition.
• Petty Cash Documentation:
  • Receipt: Formalized by a Cash Receipt Order (Salaros Shemosavlis Orderi), signed by the chief accountant and cashier.
  • Withdrawal: Formalized by a Cash Disbursement Order (Salaros Gasavlis Orderi).
  • Registration: All transactions are chronologically registered in the Cash Book (Salaros Tsigni).
• Cash Limit: The maximum amount of cash an organization is legally allowed to keep in the petty cash box at the end of the working day.
• Salary Distribution Deadline: Cash received from the treasury for salary payments must be distributed within a maximum of $3$ working days (including the day of receipt).
• Accounting for Shortages: A cash shortage discovered during an inventory (due to cashier fault) is recorded as: Debit $1-13-7700$ (Claims for shortages) and Credit $1-11-1100$ (Cash in petty cash).
• Foreign Currency: Receiving foreign currency as physical cash in the petty cash box is generally prohibited for budgetary organizations.
• Treasury Single Account (TSA): Goods-cash and transit sub-accounts are used for tracking the movement of funds for budgetary organizations.
• Account Entries:
  • Transferring cash from petty cash to the treasury account: Debit $1-11-2140$, Credit $1-11-1100$.
• Letters of Credit (Akreitivi): An instruction from the buyer's bank to the supplier's bank to pay the supplier under conditions specified in the application.
• Deposits: Funds placed in commercial banks or non-bank institutions. While the bank acquires ownership, for the budgetary organization, these are recorded as financial assets and financial liabilities simultaneously at the moment of placement.

Inventory and Stocks (Material Reserves)

• Definition: Short-term non-financial assets used for internal consumption, sale, or providing services.
• Evaluation at Balance Sheet: Inventories are reflected at cost, including all costs associated with acquisition, production, and processing.
• Fundamental Rule: Inventories must be reflected at the lower of cost and net realizable value.
• Initial Cost Components: Includes purchase price, transportation, loading/unloading, and other direct costs.
• Valuation Methods (Allowed in Georgia):
  • FIFO (First-In-First-Out): Assumes the items purchased first are the ones consumed first.
  • Weighted Average Cost: Calculated by dividing the total cost of similar items available by the total number of items.
• Account Codes:
  • Raw materials and supplies: $1-14-1100$.
  • Goods for sale: recorded in the debit of $1-14-4000$.
• Entries:
  • Purchasing stationery with cash: Debit $2-13-4100$, Credit $1-11-1100$.
  • Issuing materials for internal office use: Debit $5-20-0000$ (Goods and Services Expense), Credit $1-14-1100$.
  • Receiving materials from a supplier on credit: Increases the debit of the inventory account and increases the credit of the supplier liability.
• Inventory Audit: The process of describing actual stock levels and comparing them to accounting records is called "Inventory" (Invetarizatsia).

Fixed Assets (Non-financial Assets)

• Definition of Fixed Assets: Assets held for more than one year, used for production, supply of services, or administrative purposes.
• Initial Valuation: Always recorded at historical cost (purchase price plus all installation/delivery costs).
• Depreciation (Amortization): The systematic and consistent reduction of an asset's value over its useful life.
  • Account for Accumulated Depreciation (Machinery/Equipment): $1-28-2000$.
  • Account for Accumulated Amortization (Intangible Assets): $1-28-5000$.
• Exceptions: Land (Mitsa) is not subject to depreciation because it has an indefinite useful life.
• Maintenance vs. Capitalization:
  • Current Maintenance/Technical Repair: Recorded as an operational expense of the current period; does not increase asset value.
  • Capital Improvement/Modernization: Significantly improves technical characteristics; these costs are capitalized (added to the asset's book value).
• Asset Write-off: Formalized by a "Fixed Asset Liquidation Act" due to full amortization, obsolescence, or physical destruction.
• Fair Value: Assets received as a gift (at no cost) are recorded at their fair (market) value at the date of acquisition.
• Specific Asset Types:
  • Low-Value Long-Term Assets: These are items costing less than $500$ GEL but used for more than one year. These are classified as part of non-financial assets or material reserves depending on internal policy.
  • Historical Values: Includes items like gold products (account $1-27-1100$) or paintings recognized as artworks (Debit $1-27-1200$, Credit $4-45-1000$).
  • Uncultivated Biological Resources: Includes virgin forests, animals, and plants that can be commercially exploited and protected.
• Entries:
  • Depreciation of buildings: Debit $5-41-0000$ (Depreciation Expense), Credit $1-28-1200$ (Accumulated Depreciation - Buildings).
  • Receiving a computer for a prepaid amount: Debit $1-22-2210$, Credit $1-15-1200$ (Prepayments).

Receivables, Prepayments, and Investments

• Claims (Receivables): Debt owed to the organization by individuals or legal entities.
  • Current (Short-term): Expected to be fully covered within $1$ year ($12$ months) from the reporting date.
  • Long-term: If the real term of coverage exceeds one year per contract, it is reflected in account $1-21-3000$ (Other long-term financial assets).
• Recognition of Asset: A claim is an asset if it serves as a means of value accumulation and provides economic benefits to its owner.
• Short-term Financial Investments: Includes assets like purchased securities with a holding period not exceeding $1$ year.
• Business Trips (Mivlineba):
  • Funds issued in advance to accountable persons are recorded on synthetic code $1-13-7500$.
  • Costs for travel, hotels, and per diems ultimately represent Current Period Operating Expenses.
  • The document submitted by the employee upon return is the "Advance Report" (Avansis Angarishi).
  • Entries:
    • Returning unspent cash to the box: Debit $1-11-1100$, Credit $1-13-7500$.
    • Recognition of approved actual trip expenses: Debit $5-20-2000$ (Travel Expenses), Credit $1-13-7500$.
• Loans Issued: Funding issued as a loan for $6$ months from the bank account: Debit $1-13-7500$, Credit $1-11-2411$. Loan interest paid by a budgetary organization is recorded as an expense.

Payroll and Taxation

• Salary Components: Includes base salary, compensations, rank pay, bonuses, supplements, and honors.
• Basis for Accrual: The primary official basis for calculating salaries is the Time Sheet (Tabeli) and the approved Staffing Table (Shashtato Ganrigi).
• Current Liabilities: Salaries owed to staff are reflected in the Credit of account $2-13-3100$.
• Taxation:
  • Income Tax: Currently $20\%$ in Georgia. It is withheld at the source of payment and transferred to the State Budget. Entry: Debit $2-13-3100$ (Salary Liability), Credit $2-13-2100$ (Income Tax Liability).
  • Pension Contribution (Employee): The $2\%$ withheld from the employee's salary is a liability to the Pension Agency. Entry: Debit $2-13-3100$, Credit $2-13-3950$.
  • Pension Contribution (Employer): The organization's own $2\%$ contribution is an expense. Entry: Debit $5-13-0000$ (Employer's Social Contributions), Credit $2-13-3940$ (Employer's Pension Liability).
• VAT (Added Value Tax): A mandatory contribution to the budget on the value-added part at all stages of production and distribution of goods/services.
• Profit Tax: For organizations engaging in economic activity, the final profit tax is preceded by quarterly payments based on the previous quarter's actual results.
• Penalties: Fines, sanctions, and fees for non-payment or late payment of taxes are recorded under the specific tax type or account $6430$ (Sanctions, Fines, Fees).

Grants and Transfers

• Classification: Grants are divided into Current and Capital grants.
• Forms: Can be in monetary form or non-financial (in-kind) grants.
• Sources: Includes international organizations, foreign governments, and other levels of state government.
• Current Grants: These are not dependent on the acquisition of assets by the receiver and are often used to cover current operating expenses.

Error Correction and Reporting

• Methods of Correction:
  1. Corrective (Korekturi): Physical correction (if allowed).
  2. Additional Entry: Adding the missing amount.
  3. Technical Storno (Ukuchanatserebi): Reversing the incorrect entry.
• Timing: Errors discovered during the current year before the balance sheet is finalized are corrected via storno or additional entries. Errors discovered from previous years after reporting are corrected by adjusting the starting balance of Retained Earnings/Capital at the beginning of the period.
• Retrospective Application: Applying a new accounting policy to transactions as if that policy had always been in place.
• Components of Financial Statements: A full set includes the Statement of Financial Position (Balance Sheet), Statement of Financial Result, Statement of Cash Flows, etc.

Historical Figures and Quotes in Accounting

• Luka Pacioli: Often associated with the foundations of double-entry bookkeeping.
• Johann Wolfgang von Goethe: Described double-entry bookkeeping as "one of the most beautiful discoveries of the human mind."
• Berthold Auerbach: "Gaining money requires heroism, keeping it requires prudence, spending it requires art."
• Dmitri Mendeleev: "Without clearly increased industriousness, there are no talents, no geniuses."
• Ilia Chavchavadze: "Our powerlessness is created as someone else's power, our ignorance has turned into someone else's knowledge…"
• Chabua Amirejibi: "There is no such salary that suffices a man; a man must suffice the salary… the more they give you, the more you will want."

Practical Examples and MCQ Logic

• Unfinished Production: Costs of materials, labor, and resources used while production is incomplete are recorded in the Debit of the "Unfinished Production" account.
• Economic Activity Revenue: If an organization receives $3000$ GEL rent in advance on September $10$ for a period due on October $15$, only the portion earned is recognized on October $15$.
• Prepaid Profit Tax: If an organization has a debit balance of $12000$ GEL in the prepaid profit tax account, this represents a Claim (Receivable) against the budget.
• Direct Asset Costs: Costs for delivery, site preparation, installation, and de-installation are all considered direct costs of an asset purchase.
• Operating Expense Categories: Travel, office, representation, food, and medical expenses are grouped under account $5-20-0000$ (Goods and Services).