Accounting Basics for

Recording Transactions

Section 200

Page No.
ACCURATE AND CURRENT RECORDS
ESSENTIAL
PURPOSE OF RECORDS
BASIC ACCOUNTING RECORDS
Double-Entry System
Types Of Accounts

BRIEF OUTLINE OF THE PRESCRIBED

ACCOUNTING SYSTEM
MODIFIED CASH BASIS
ACCRUAL BASIS
THE BASIC CREDIT UNION ACCOUNTING SYSTEM
DESCRIBED

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Records Of Original Entry And Record Of Final Entry

The Records Of Original Entry
The Record Of Final Entry

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BASIC CONCEPTS AND GENERAL PRINCIPLES

SEPARATE ENTERPRISE
GOING CONCERN CONCEPT
MONETARY BASIS FOR ACCOUNTING
CONSISTENCY IN ACCOUNTING FROM PERIOD
TO PERIOD
TIMELY RECOGNITION IN ACCOUNTING
RECORDS
MATERIALITY
CONSERVATIVE ACCOUNTING
INTERNAL CONTROL
COMPLETE RECORDING OF INCOME AND
EXPENSES
ACCOUNTING BASIS
ACCOUNTING AND DIVIDEND PERIODS
FISCAL YEAR

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ACCOUNTING PROFESSION
PRONOUNCEMENTS
HIERARCHY OF GAAP STANDARDS
HIERARCHY OF REGULATIONS

GENERAL LEDGER, SUBSIDIARY LEDGERS,

AND ACCOUNT RECONCILIATIONS
CHART OF ACCOUNTS
GENERAL LEDGER
SUBSIDIARY LEDGERS
ACCOUNT RECONCILIATIONS

PRINCIPLES AFFECTING THE RECORDING OF

ASSETS
Accounting Manual for Federal Credit Unions

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Section 200

UNDER THE MODIFIED CASH BASIS OF

ACCOUNTING
Assets General Basis for Recording
Cash Unrestricted or Restricted
Loans
Investments
Fixed Assets
Depreciation
Prepaid Expenses and Deferred Charges
Assets Pledged

Accounting Basics for Recording Transactions

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UNDER THE ACCRUAL BASIS OF ACCOUNTING

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Income on Loans
Income on Investments
Amortization of Premium or Discount on Securities
Purchased

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PRINCIPLES AFFECTING THE RECORDING OF

LIABILITIES

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UNDER THE MODIFIED CASH BASIS OF

ACCOUNTING
Liabilities General Basis for Recording
Accounts Payable
Notes Payable
Accrued Interest Payable
Dividends Payable
Interest Refund Payable
Accrued Expenses
Accrued Dividends
Deferred Credits
Liabilities Secured by Liens
Contingent Liabilities

UNDER THE ACCRUAL BASIS OF ACCOUNTING

Accrued Interest Payable
Accrued Expenses

PRINCIPLES AFFECTING EQUITY

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NET INCOME
UNDIVIDED EARNINGS
DIVIDENDS
APPROPRAITION FOR LOSS CONTINGENCIES
DONATIONS
SHARES AS EQUITY

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PRINCIPLES AFFECTING THE RECORDING OF

INCOME AND EXPENSES

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UNDER THE MODIFIED BASIS OF ACCOUNTING

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General Rules for Recording Income and Expenses

Basis for Recording Income
Basis for Recording Expenses
Tangible Fixed Asset Expenses
Amortization of Deferred Charges
Equipment Rental Expense
Loan Losses
Other Gains and Losses
Cash Overage and Shortages
Donations

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Accounting Basics for Recording Transactions

Section 200

Pension Plan Costs

NCUA Insurance Guaranty

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UNDER THE ACCRUAL BASIS OF ACCOUNTING

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Income on Loans
Income on Investments
Accrued Expenses
Accrued Interest on Loans Included in Valuation Allowance

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FINANCIAL STATEMENTS

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PURPOSE
REQUIRED STATEMENTS

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Statement of Financial Condition

Statement of Income
Notes to Financial Statements
Disclosures About Fair Values of Financial Instruments

OPTIONAL STATEMENTS

DEFINITIONS OF TERMS

ACCURATE AND CURRENT RECORDS

ESSENTIAL
PURPOSE OF RECORDS
The transactions of the credit union are compiled in
its records which serve as a source of information
needed by the directors to properly manage the
credit union. The accounting records also serve as
the basis for reports to the members and interested
third parties. Therefore, it is essential that the records be accurate, current, and that they show the
true financial condition of the credit union. Prompt
preparation of reports will aid the credit union in
achieving its objectives and fulfilling the purposes
for which it was formed.
BASIC ACCOUNTING RECORDS
Bookkeeping may be defined as the systematic recording of the financial transactions of a business
in a suitable form. To accomplish this, a welldefined system of accounts is necessary.
Double-Entry System

Accounting Manual for Federal Credit Unions

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Statement of Members Equity (including Other Comprehensive Income)

Statement of Cash Flows

FULL AND FAIR DISCLOSURE REQUIRED

FULL AND FAIR DISCLOSURE DEFINED
REQUIRED CERTIFICATION

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All federal credit unions should use a double-entry

accounting system. In this system each transaction
results in at least two entries: a debit (or entry on
the left side of an account ledger) and a credit (or
entry on the right side of an account ledger). If the
transaction requires several debits and credits, the
total of the debits and the total of the credits must
be the same. In other words, for every debit entry
there must be an offsetting credit entry and vice
versa. Following this rule and determining that the
total debits equal the total credits can keep the records in balance.
Record financial transactions as journal entries
consisting of debits and credits. Every transaction
affects at least two accounts. Accounting principles assign each type of account a normal debit or
credit balance. The normal balance coincides with
what is done to increase the balance in the account.
For example, asset accounts are increased with debits; therefore, the normal balance in an asset
account is a debit.
Debit refers to the left side of an account and credit
refers to the right side. Calculate the account balance from the totals of the debit and credit sides of
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Section 200

an account and subtract the smaller sum from the

larger; and the difference is called the balance of
the account. Debits and credits affect asset and
expense accounts in one way and liability, equity,
and revenue accounts in the opposite way.

Accounting Basics for Recording Transactions

Liabilities which are not promptly paid when

due,

Dividends and interest refunds applicable to the

accounting period but not yet paid,

Deferred income or expenses applicable to future periods,

Estimated losses to be sustained on loans outstanding,

Estimated unrealized losses associated with

mutual fund investments, and

Depreciation on fixed assets.

Types Of Accounts

The "Asset Accounts" record what the credit union

owns. These include cash, loans, investments, etc.
These accounts, as well as the expense accounts,
normally have debit balances.
The "Liability Accounts" record what the credit
union owes and the "Equity Accounts" reflect the
members ownership interests. Together these accounts include notes payable, members' shares,
undivided earnings and reserves. The "Liability
Accounts" and "Equity Accounts" as well as the
income accounts normally have credit balances.
A brief general rule for debits and credits is: Debit
the increase of an asset, the reduction of a liability
or equity account, or the payment of an expense;
credit the reduction of an asset, increase of a liability or equity account or, receipt of income.

BRIEF OUTLINE OF THE PRESCRIBED

ACCOUNTING SYSTEM

The foregoing exceptions to maintenance of accounting records on a strictly cash basis are
designed to recognize in the accounts certain significant financial transactions not involving the
concurrent receipt or disbursement of cash and to
reflect their effect in financial reports prepared
from the accounts. In unusual circumstances, there
may be other significant non-cash financial transactions that should be recorded. Therefore, the above
list is not all-inclusive.
Credit unions for which adoption of the accrual
basis of accounting is not required or practicable
should use the modified cash basis of accounting.
ACCRUAL BASIS

The accounting records of federal credit unions

should be maintained on either of two accounting
bases: namely, the modified cash basis or the accrual basis. The accrual basis of accounting is
recommended for credit unions with assets totaling
$2 million or more at the end of the accounting period.

The accrual basis of accounting refers to that method under which liabilities and expenses are
recorded when incurred, whether or not paid, and
income is recorded when earned, whether or not
received. It is intended that credit union accounting be maintained on the accrual basis by all credit
unions for which they deem such basis practicable.

MODIFIED CASH BASIS

Generally under a cash basis of accounting, income
is recorded and accounted for when actually collected and expenses are accounted for when
actually paid. Under the modified cash basis prescribed herein, the accounting is based on the
actual receipts and disbursements of the credit union except that provisions should be made to
reflect:

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Generally accepted accounting principles require

the accrual basis of accounting.
THE BASIC CREDIT UNION ACCOUNTING
SYSTEM DESCRIBED
For credit unions following either the accrual basis
or the modified cash basis of accounting, the majority of entries originate with the receipt or
disbursement of cash. Other entries are relatively

Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

few in number and consist generally of adjustments

or transfers between accounts, establishment and
maintenance of an allowance for loan losses, writeoffs of bad loans, and recording depreciation of
tangible fixed assets. In addition, credit unions
following the accrual basis of accounting should
make entries to record accrued income and expenses.
Records Of Original Entry And Record Of Final
Entry

A bookkeeping system can be broken down into

two distinct parts: Records of Original Entry (the
Journal and Cash Record) and Records of Final
Entry (the General Ledger). In addition, the Cash
Received Voucher or its equivalent and the Journal
Voucher or its equivalent serve as memorandum
records of the original transactions and the sources
of entries in the Journal and Cash Record.

Section 200

computing the net balance for each account. The

result obtained shows the current balances of the
credit union's accounts and the results of operations
for the period.
Sometimes, when a General Ledger account summarizes a large number of transactions, it is
necessary to provide detailed information about this
account with a record known as a Subsidiary Ledger. The Individual Share and Loan Ledgers are
examples of subsidiary records which show the
detailed share and loan transactions with each
member. The Share and Loan accounts in the General Ledger reflect the total transactions with all
members. These General Ledger accounts are
called Control Accounts since they act as a control
or check over the numerous postings to the individual or subsidiary ledgers. Subsidiary records are
balanced with related control accounts on a monthly basis and the reconcilement, or other proof of
balancing, is retained.

The Records Of Original Entry

The Records of Original Entry are diaries of the

transactions as they occur. The Journal and Cash
Record is the main record used for this purpose.
Each day's cash receipts, disbursements and other
transactions are entered in the Journal and Cash
Record in chronological sequence. Thus, a running
history of each day's transactions are kept and may
be summarized as needed.
At the end of a given period, usually the month
end, the total of all transactions pertaining to each
account can be obtained by totaling the debit and
credit columns of the Journal and Cash Record.
The accuracy of the entries can be proved in part by
balancing the debit columns against the credit columns.
The Record Of Final Entry

The Record of Final Entry is the General Ledger.

This record serves as a means of summarizing the
entries in a form that will enable the bookkeeper to
prepare reports on the results of operations to date.
Entries in the General Ledger consist of posting
(simply transferring) the debits and credits (either
individually or in total at the end of the month) for
each account in the Journal and Cash Record to the
corresponding account in the General Ledger and
Accounting Manual for Federal Credit Unions

BASIC CONCEPTS AND GENERAL

PRINCIPLES
The basic concepts and general principles of the
detailed accounting principles and standards for
federal credit unions are:
SEPARATE ENTERPRISE
Each credit union is a separate corporate enterprise
requiring the maintenance of comprehensive accounting records and financial reporting practices
to provide meaningful information to members,
officers, directors, the supervisory committee, the
National Credit Union Administration (NCUA),
and interested third parties.
GOING CONCERN CONCEPT
Each credit union should normally maintain its accounts as a "going concern" on the basis that its
operations will continue indefinitely. Therefore,
assets and liabilities should represent the value to
the credit union as a "going concern" and should
not present liquidation values.
Whenever unusual circumstances indicate a limited
life for a credit union, e.g., if the credit union liquiDecember 2002
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Section 200

dates, the "going concern" concept no longer applies. As a result, a statement of realistic assets and
liabilities and appropriate revenues and expenses
may require adjustments. These adjustments could
include:

Re-evaluation of the loan portfolio to recognize

discounts on sales of loans,

Evaluation of the realizable value of fixed assets in liquidation, and

Re-evaluation of the carrying value of deferred

charges and deferred credits, etc.

MONETARY BASIS FOR ACCOUNTING

State account values in terms of the dollar amounts
involved at the time transactions occur. Recording
each transaction in terms of dollar units provides
the best feasible indicator of its relative impact on
the overall operations of the credit union. It also
permits identification of the amount of assets, liabilities, equity, income, or expenses represented by
the transaction.
CONSISTENCY IN ACCOUNTING FROM
PERIOD TO PERIOD
Follow consistent accounting practices from one
accounting period to the next. Should a material
change in accounting treatment occur, disclose the
facts on credit union financial statements. Include
the dollar effect upon the balance sheet and the
changes in net income for the period. For example,
if a credit union converts to the accrual system of
accounting because assets exceed $10 million, it
should make a complete conversion at one time and
report the conversion on the current period financial statements.
TIMELY RECOGNITION IN ACCOUNTING
RECORDS
Record accounting transactions in a timely manner
so all material information applicable to each accounting period shows in the records. Provide for
estimated losses to be sustained in the collection or
conversion of loans and other assets via charges
against current expenses to properly recognize the
reasonable value of assets, liabilities, and shareDecember 2002
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Accounting Basics for Recording Transactions

holders equity in accounting records and financial

reports. Estimate amounts for accruing income or
expenses if actual amounts are not known and cannot be determined readily. Absorb differences
between the actual and estimated amounts in the
operations of the subsequent accounting period.
MATERIALITY
Recognize material facts relating to credit union
financial activity in the accounts and report them
on financial statements. GAAP provides that a
statement, fact, or item is material if, giving full
consideration to the surrounding circumstances as
they exist at the time, it is of such a nature that its
disclosure, or the method of treating it, would be
likely to influence or to "make a difference" in the
judgment and conduct of a reasonable person. The
accumulation of many small items, each of which
in itself would not be "material, would be "material" if the overall effect would tend to influence the
judgment and conduct of a reasonable person.
CONSERVATIVE ACCOUNTING
Maintain accounting records on a conservative basis. Make reasonable provisions in the accounts for
potential losses on assets and for the settlement of
liabilities. Do not materially overstate nor understate its assets, liabilities, revenues or expenses.
INTERNAL CONTROL
Adopt appropriate measures of internal control to
improve the dependability of accounting records.
These measures must include:

An organization plan to provide, to the extent

feasible, segregations of duties so different employees will handle the operational, custodial
and accounting functions;

A system of authorization and recording procedures adequate to provide reasonable

accounting control over assets, liabilities, income and expenses;

The employment of personnel capable of performing duties and responsibilities; and

Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

A supervisory committee to conduct effective

and timely audits of records and accounts including verification of members' accounts, with
assistance provided, where needed, by an independent auditing firm.

COMPLETE RECORDING OF INCOME AND

EXPENSES
Record income, expenses, gains, and losses in income and expense accounts and show them on the
Statement of Income for the accounting period.
Income and expense accounts should include actual
and estimated loan and other asset losses.
ACCOUNTING BASIS

Section 200

If adoption of the accrual basis is not required

or practicable, use the modified cash basis.
Under the modified cash basis, accounting is
based upon the cash receipt and disbursement
transactions except to make provision to reflect:
a) Liabilities not paid promptly when due;
b) Dividends and interest refunds applicable to
the accounting period but not yet paid;
c) Deferred credits and charges applicable to
future periods;
d) Estimated losses to be sustained on loans
outstanding and other risk assets; and
e) Depreciation of fixed assets.

GAAP requires the accrual basis of accounting because it provides the most complete and
informative record of financial activities. The accrual basis refers to recording liabilities and
expenses when incurred, whether or not paid, and
income when earned, whether or not received.
Credit unions with less than $10 million in assets
do not have to adopt the full accrual basis of accounting. The alternative method is the modified
cash basis of accounting. When a credit unions
assets reach $10 million or greater, management
must convert to the accrual basis of accounting.

ACCOUNTING AND DIVIDEND PERIODS

Accounting periods may be monthly, quarterly,
semiannually, or annually depending on the period
selected by the credit union to close its books.
Each credit union must close its books at least annually at the end of the fiscal year. Federal credit
unions may choose to close the books at the end of
each regular share account dividend period unless
dividends are paid more frequently than monthly.
FISCAL YEAR

Determine the proper accounting basis using the

following guidelines:

If assets total $2 million or more at the end of

the accounting period, adoption of the accrual
basis is recommended;
If the board of directors deems the accrual basis practicable, use the accrual basis;
If following the accrual basis, credit unions
with less than $10 million in assets may apply
the cash basis to particular accounts where the
results would be only insignificantly different
from the accrual basis. For this purpose, "insignificantly" refers to differences which would
not be considered important for a proper evaluation of condition or operations of the credit
union; and

Accounting Manual for Federal Credit Unions

The fiscal year of all federal credit unions should

track the calendar year beginning on January 1 and
ending on December 31.

ACCOUNTING PROFESSION
PRONOUNCEMENTS
Alternatives to the accounting principles authorized
by the NCUA - for certain types of transactions are provided for adoption at the option of any credit
union with less than $10 million in assets. These
alternatives provide the flexibility required for
meaningful accounting under a variety of circumstances in credit unions of different size and scope
of operations. Absolute uniformity is not required
so long as each credit union conforms its accounting to authorized generally accepted accounting
principles. Consistency in accounting from period

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Section 200

to period and disclosure of material accounting

changes is necessary.
The Financial Accounting Standards Board
(FASB), the Accounting Standards Executive
Committee (AcSEC) of the American Institute of
Certified Public Accountants (AICPA), and their
committees establish generally accepted accounting
principles (GAAP), accounting guidelines, and preferred accounting treatment for various activities.
Credit unions should refer to such accounting profession pronouncements for guidance where a
particular activity is not addressed by this manual
or other NCUA publications. Credit unions may
adopt such accounting profession pronouncements
provided they are not inconsistent with the principles, standards, and procedures set forth herein or
statutory or regulatory requirements.
Refer activities unique to credit unions and not addressed in existing accounting industry literature or
in NCUA publications to an independent accountant for review and comment. Copies of the
correspondence should be maintained in the credit
union's files.

Accounting Basics for Recording Transactions

Technical Bulletins; pronouncements of other professional associations or regulatory agencies;

AICPA Technical Practice Aids, and accounting
textbooks, handbooks, and articles.
HIERARCHY OF REGULATIONS
The NCUA issues guidance in multiple forms. As
management refers to the various forms of guidance, it is important to utilize the hierarchy of
regulations:
1. Federal Credit Union Act,
2. NCUA Rules and Regulations,
3. NCUA Interpretive Ruling and Policy Statement (IRPS) if the IRPS was issued for notice
and comment, it has the same force a the NCUA
Rules and Regulations, and
4. All other forms of regulatory guidance including:

Federal Credit Union Bylaws,

HIERARCHY OF GAAP STANDARDS

NCUA Letters to Credit Unions,

External sources such as the FASB issue accounting standards in multiple forms. Following is the
hierarchy of standards:

NCUA Instructions,

The NCUA Accounting Manual, and

1. FASB Statements and Interpretations, APB

Opinions, and AICPA Accounting Research Bulletins;

NCUA General Counsel Opinions.

2. FASB Technical Bulletins, AICPA Industry

Audit and Accounting Guides, and AICPA Statements of Position;
3. Consensus positions of the FASB Emerging
Issues Task Force and AICPA Practice Bulletins;
4. AICPA accounting interpretations, Qs and
As published by the FASB staff, as well as industry practices widely recognized and prevalent; and
5. Other accounting literature, including FASB
Concepts Statements; AICPA Issues Papers; International
Accounting Standards Committee
Statements; GASB Statements, Interpretations, and
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GENERAL LEDGER, SUBSIDIARY

LEDGERS, AND ACCOUNT
RECONCILIATIONS
CHART OF ACCOUNTS
Federal credit unions must design their own chart
of accounts. Management is responsible for reporting financial information to the NCUA on the
periodic Call Report. Therefore, we recommend
the credit unions chart of accounts closely mirror
the Call Report for ease of reporting. Use the prescribed financial report forms in Section 900 as a
guide for financial reports intended for posting to
members.
Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

Whatever chart of accounts numbering system

management adopts for its general ledger accounts,
it should permit the classification of transactions in
at least the detail required to properly complete the
NCUA call report forms.

Section 200

UNDER THE MODIFIED CASH BASIS OF

ACCOUNTING
The principles and standards of accounting relating
to assets of federal credit unions following the
modified cash basis of accounting are set forth below.

GENERAL LEDGER
Assets General Basis for Recording

The general ledger is a comprehensive record of

individual accounts on the chart of accounts. The
chart of accounts is a listing of general ledger account numbers and account names. The general
ledger accounts contain entries pertaining to a specific asset, liability, equity, income, or expense.
Some computer systems will print various levels of
detail for general ledger reports. Subsidiary ledgers
and account reconciliations support the general
ledger.
SUBSIDIARY LEDGERS
Subsidiary ledgers store the details of certain general ledger accounts. Subsidiary ledgers support
general ledger accounts. Use of subsidiary ledgers
may reduce the number of general ledger accounts.
The fewer the number of accounts, the easier it is to
avoid errors and find them when they occur. Subsidiary ledgers are often set up for loans, cash,
investments, prepaid expenses, fixed assets, shares,
equity, income, and operating expenses. The better
the system of organizing account details in subsidiary ledgers, the easier it is to avoid errors and find
them when they occur.
ACCOUNT RECONCILIATIONS
Account reconciliations prove account balances on
a regular basis. Staff will typically prepare these at
least monthly. Accounts such as corporate investments may require reconciliation weekly or daily.
Reconciliations are not necessary for all accounts.
Managements written policy or procedures will
guide staff to complete reconciliations appropriate
for the credit union.

PRINCIPLES AFFECTING THE

RECORDING OF ASSETS

Accounting Manual for Federal Credit Unions

Record assets at their cost to the credit union, normally. There are some exceptions to this rule, e.g.,
available-for-sale and trading securities.
Cash Unrestricted or Restricted

Record restricted cash on deposit or on hand in

separate accounts from other cash accounts. Show
each category of restricted cash separately on financial reports, other than change funds or petty
cash.
Loans

Record the unpaid balances of loans outstanding

and other receivables. Maintain appropriate valuation allowance accounts to cover estimated losses.
Under the accrual basis of accounting, amortize net
loan origination fees and costs over the life of the
related loans using the interest method. Under the
modified cash basis of accounting, at a minimum,
amortize origination fees over 10 years or the life
of the loan, whichever period is shorter.
Investments

Record investments and related transactions based

on the principles and standards described below.
Generally, depository instruments are recorded at
amortized cost while securities are recorded as follows:

Classify debt and equity securities purchased

and held principally for the purpose of selling
them in the near term as trading securities and
report at fair value through the income statement.

Classify debt securities (not equity) management has the positive intent and ability to hold
to maturity as securities held-to-maturity and
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Section 200

report at amortized cost, i.e., cost adjusted for

the amortization of premiums or the accretion
of discounts.

Classify debt and equity securities not classified as either trading or held-to-maturity
securities as securities available-for-sale. Report at fair value through a separate component
of equity in the balance sheet, Accumulated
Unrealized Gains/Losses on Available-for-Sale
Securities, an item of Other Comprehensive Income.
Amortize premiums paid for securities using
the interest method by periodic entries offsetting income on investments over the period
from acquisition to maturity. Record amortization on a timely basis corresponding to the
recording of the related income. If interest on
investments is recorded at the time the income
is received by cash payments, record the premium amortization similarly.
Record discounts on securities using the interest method as income over the period from
acquisition to maturity by periodic entries
augmenting income from investments. Coordinate entries to record the write-off of
discounts with the recording of the related income.
Record income earned on investments as income when received. An exception is income
automatically reinvested in common trust investments, marketable equity securities, bank
passbook accounts, savings and loan shares,
which should be recorded as an increase in the
carrying value of the investments when notice
of income credits are received by the credit union; the offsetting credit should be to income
from investments; and
Record accrued interest purchased on bonds
and securities as an asset and clear it by an offset against interest received when the first
interest payment on the related securities is received.

Refer to Section 300 of this manual for more detailed information regarding investments.

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Accounting Basics for Recording Transactions

Fixed Assets

Record fixed assets in accordance with the following principles:

Record acquisitions of tangible fixed assets at

cost. The acquisition cost is the net purchase
price of the asset plus all incidental costs necessary to put the asset in condition for use, such
as freight and installation cost. If management
exchanges property for an asset, record cost as
the amount of cash paid plus the recorded
amount of the asset surrendered. Do not recognize a gain, if any, on the transaction; do
recognize the entire loss on the exchange, if
any. If management acquires property via exchange without cost, use the fair market value
as the cost;

Establish a dollar value limit, i.e., $250, under

which management records tangible property
purchases as current expense even though the
items may be serviceable for more than 1 year;

Show cost of land (and land improvements)

separately from the cost of the buildings and
other improvements. In combination purchases, record the cost of land based on a fair
market value estimate;

Depreciation

Fixed asset depreciation is a system of distributing

the cost and other basic values of fixed assets less
salvage over the estimated useful life of the unit
(which may be a group of assets) in a systematic
and rational manner. Record depreciation in each
accounting period by debiting expense and crediting valuation allowance accounts under either of
two bases:

Use the unit depreciation basis to record depreciation over the estimated useful lives of
assets based on the cost of the assets less estimated salvage value. For assets having a
remaining use, the depreciation shall not exceed the carrying value of the asset less:
a) the salvage value, or
b) $1.00.
Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

Maintain a depreciation record for each depreciable item. Management may use either the
straight-line, declining balance, or the sum of
years' digits methods for the purpose of computing the periodic amounts of the depreciation to
be charged; and

Under the composite basis, record depreciation

continuously based on established composite
rates. The accumulated depreciation allowance
account under the composite-life method of
depreciation cannot exceed the related fixed assets account.

Prepaid Expenses and Deferred Charges

Record costs affecting subsequent accounting periods as prepaid expenses, if material in amount, and
amortize them over the accounting periods to
which applicable. Examples include insurance
premiums, stationery and supplies, advances for
accounting services, annual share insurance premium, NCUA operating fee, and organization costs.
Amortize deferred organization costs over a period
not extending beyond the year incurred and the two
subsequent fiscal years.
Assets Pledged

Disclose the nature and extent of credit union assets

pledged to secure debts in the financial statements.

Section 200

Amortization of Premium or Discount on Securities Purchased

Whether management accrues interest on investments monthly, quarterly, semiannually, or

annually, record the premium amortization based
on the same time periods. Likewise, accrete discounts on securities via periodic entries increasing
accrued income from investments. Record entries
to write-off the discount within the same periods of
time.

PRINCIPLES AFFECTING THE

RECORDING OF LIABILITIES
UNDER THE MODIFIED CASH BASIS OF
ACCOUNTING
Liabilities General Basis for Recording

Record known liabilities at their actual amounts or,

if the actual amounts are not known, record them
based on reasonably accurate estimates.
Accounts Payable

Record all bills due and unpaid as accounts payable

if not paid before the end of the period.
Notes Payable

Apply the principles and standards of the modified

cash basis of accounting except as noted below.

Record funds borrowed to show the outstanding

amount payable on the notes. Include balances of
senior liens on assets repossessed or foreclosed
where the credit union acquires title subject to the
prior liens.

Income on Loans

Accrued Interest Payable

Accrue interest earned each month or dividend period on loans outstanding, as a debit to assets and a
credit to income. Do not accrue interest on loans 3
months or more delinquent.

If management records accrued interest, the offsetting charge is the expense account, Interest on
Borrowed Money. Recording accruals of interest
due on notes payable is not required.

Income on Investments

Dividends Payable

Accrue income on investments each month or dividend period based on the time the investments were
held and the income was not received.

Upon declaration of a dividend, record the actual or

estimated amount payable as a liability unless the
dividend is paid or credited to share accounts in the

UNDER THE ACCRUAL BASIS OF

ACCOUNTING

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December 2002
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Section 200

last month of the dividend period. Offset the

charge to Dividend Expense or Accrued Dividends
Payable.
Interest Refund Payable

Upon declaration of an interest refund, record the

actual or estimated amount payable as a liability
unless the refund is paid or credited to share accounts in the last month of the dividend period.
Offset the charge to Interest Refunds. Management
may record estimated interest refunds monthly.
Accrued Expenses

When expenses are not paid promptly, accrue them

as liabilities and debit expenses. When disbursement takes place, reverse these liabilities. Except
for dividends, credit unions following the modified
cash basis are not required to accrue expenses and
allocate the costs to the periods benefited.

Accounting Basics for Recording Transactions

Liabilities Secured by Liens

Report the nature and extent to which particular

liabilities are secured by a lien on assets on the financial statements.
Contingent Liabilities

A contingency is an existing condition, situation, or

set of circumstances that may or may not result in a
gain or loss to the credit union. The amount of the
resulting gain or loss will be determined by future
event(s). Accrue the amount of a contingent loss
by charges to expense if:

Prior to issuing financial statements, it is probable a loss will actually occur because an asset
was impaired or a liability was incurred on the
date of the financial statements; and

Management can make a reasonable estimate

of the resulting loss.

Accrued Dividends

Whenever management specifies or contracts a dividend rate on any type of account in advance,
accrue the expense monthly or at the end of the
shortest dividend period offered by the credit union
on any type of account. The only exception to this
rule is, accruals are never required more frequently
than monthly.
Dividends in any dividend period cannot exceed:
a) Undivided earnings available at the beginning
of the period;
b) Plus - net income (or less net loss) before dividends for the current dividend period.
Deferred Credits

Deferred credits include discounts on FHA loans

and discount on loans purchased from other credit
unions. Record deferred credits separately and
amortize by crediting income during subsequent
periods as the income is earned. Report the
amounts of discounts on loans recorded as deferred
credits as deductions from the related asset accounts in financial reports.

December 2002
Page 12

Note: Estimate the amount of the accrued contingent loss realistically based on all information
available. If some amount within a range appears
at the time to be a better estimate than any other
amount within the range, that amount shall be accrued. If no amount within the range is a better
estimate than any other amount, however, the
minimum amount in the range shall be accrued.
If both of the above conditions are not met but a
reasonable possibility exists that a loss may have
been incurred, or if the estimated amount is not
material, a contingent loss need not be accrued but
disclosed as a note to the financial statements.
Examples of contingent liabilities are pending or
threatened litigation, selling loans with recourse,
guarantees of the indebtedness of others, and
agreements to repurchase assets sold previously.
UNDER THE ACCRUAL BASIS OF
ACCOUNTING
The principles and standards applicable to the modified cash basis of accounting apply under accrual
basis of accounting, except as follows.

Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

Accrued Interest Payable

Record in each month or dividend period the accrued interest payable on notes and mortgages with
an offsetting debit to interest expense.
Accrued Expenses

Examples of accrued expenses are dividends and

salaries. Accrue expenses to allocate costs to the
periods benefited. Record the accruals normally
each month or dividend period so all significant
expenses are shown on financial reports provided
to directors and members.

Section 200

Do not treat normal recurring corrections and adjustments which are the natural result of the use of
estimates inherent in the accounting process as prior-year adjustments. Normal recurring corrections
include changes in estimated loan losses, accumulated depreciation on disposed assets, and estimated
dividends. These changes are properly recorded as
transactions affecting the current year in the appropriate income and expense accounts.
The
determination of net income for the period must
include all items of profit and loss recognized during a period, including accruals of estimated loss
from loss contingencies.
DIVIDENDS

PRINCIPLES AFFECTING EQUITY

NET INCOME
The net income or loss for the current accounting
period should represent the difference between all
income and expense items.

Declare and pay dividends to shareholders from

current income, plus any available balances of undivided earnings. Charge the dividends as a current
year expense. Management should use caution in
expending undivided earnings to meet current operating expenses, particularly for payment of above
market dividends. Rather, credit unions should
strive to build capital.

UNDIVIDED EARNINGS
At the close of each accounting period, close the
income and expense accounts into the Net Income
(Loss) account. Then transfer the balance of the
Net Income (Loss) account to Undivided Earnings.
Debit or credit undivided earnings with amounts
required to establish or adjust other appropriation
accounts, including the appropriation for loss contingencies or the special appropriation for losses
established when so ordered by the NCUA Board.
Other direct charges or credits to undivided earnings only include error correction for material
amounts which represent adjustments affecting prior accounting periods. Material errors in such
financial statements could include arithmetic mistakes, the misuse or deletions of information,
mistakes in the applications of accounting principles or procedures, and improper interpretations of
the accounting aspects of major transactions. Error
correction should not result in the restatement of
the prior year's financial statements to disclose the
error correction but should be reflected in current
period financial statements and those going forward.

Accounting Manual for Federal Credit Unions

APPROPRIATION FOR LOSS

CONTINGENCIES
Management can establish an appropriation for
contingencies for possible or unforeseen decreases
in the value of assets or for other unforeseen or indeterminate liabilities not otherwise shown on the
credit union's records. Any such appropriation established only as a precautionary measure will
represent a segregation of undivided earnings and
should be so classified in financial reports. Do not
use contingency appropriations as a substitute for
valuation requirements for the amount of currently
estimated losses on loans or other assets. When the
net loss during any accounting period exceeds
available undivided earnings, reduce the appropriation for loss contingencies and/or other
segregations of undivided earnings to offset such
excess.
Even if management established an Appropriation
for Loss Contingencies for a particular liability or
expenditure, do not charge such expenditures directly to the appropriation. Record the loss or cost
as an operating expense.

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Section 200

Establish the Appropriation for Loss Contingencies

for a particular event by a debit to Undivided Earnings. When the event occurs, or the liability is
paid, credit the balance of the account back to Undivided Earnings.
Transfers from the
Appropriation for Loss Contingencies to Undivided
Earnings must be in amounts equal to costs charged
to expenses during an accounting period, thereby
eliminating any reduction in Undivided Earnings
which would have occurred due to the contingency
taking place.

Accounting Basics for Recording Transactions

GAAP requires inclusion of all contributions made

or
received
in
expense/income
when
made/received. Contributions include many of the
donations credit unions receive (i.e., office space,
telephone services, data processing support); and
some volunteer services (i.e., some accounting/auditing services, some legal advice, etc.).
Under GAAP:

Recognize some contributions simultaneously

received and used as both a revenue and an expense in the period received and used (i.e.,
sponsor-contributed utilities); and

Treat contribution of office space as above

(i.e., revenue and expense) as long as the sponsoring entity could discontinue providing the
space at any time. If the sponsoring entity provides the facility for a specified period of time
(i.e., 5 years), the promise must be set up as a
receivable at its fair value.

DONATIONS
GAAP affects how credit unions with $10 million
or more in assets measure and disclose donated
assets and services on their financial statements.
Credit unions under $10 million in assets may follow GAAP or the regulatory-basis of accounting
described herein. Regardless of the method used,
management must consistently apply the method
they choose, GAAP or regulatory-basis, as outlined
in this section.
From a regulatory perspective, NCUA considers
the donation of assets and services from a sponsor
to a credit union as a reciprocal transfer (i.e., in
return, sponsor gets the fringe benefit to employees
of on-site financial services). Thus, management
does not have to report the donation of assets and
services by the sponsor on their financial statements. From a GAAP perspective, management
must recognize the fair value of the contributed use
of facilities or other services as both a revenue and
an expense in the period received and expended.
Under GAAP, record donations and gifts received
(including donations made for the specified purpose of enabling the credit union to pay dividends)
as income and show them as part of net income for
the current month. The regulatory approach provides as an exception to the foregoing, if a credit
union receives a gift of a tangible fixed asset of
substantial value (i.e., a building or a computer) in
order to exclude such amounts from current income
and undivided earnings, offset the entry for the fair
market value of the asset recorded in the fixed asset
account to Donated Equity. Depreciate these donated assets via charges to expense over their
remaining useful lives.

December 2002
Page 14

Recognize contributed services as both a revenue

and an expense if the services received:
1) Create or enhance non-financial assets, or
2) Require specialized skills, are provided by individuals possessing those skills, and are typically
purchased if not donated.
For example, if the above two conditions are met,
GAAP requires recognition of an audit performed
by uncompensated Supervisory Committee members as a revenue and an expense on the credit
unions books.
SHARES AS EQUITY
Classify shares as equity in the Statement of Financial Condition:

The Federal Credit Union Act, as amended by

the Competitive Equality Banking Act (CEBA)
of 1987, legally defines shares as equity;

Shares function as equity and represent ownership; and

Share dividends are based on earnings and are

not guaranteed.
Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

In some jurisdictions, boards of directors may allow individual members to deposit more than the
members ownership interest. In these cases, management should properly classify excess shares as
liabilities on the Statement of Financial Condition.

Section 200

Expense depreciation of fixed assets over the useful

lives of the assets under the unit or the composite
basis.

When management computes depreciation on a

unit basis, eliminate the amount of the retired
asset together - including any related depreciation allowance.
Record any material
difference between the net amount realized
from disposition and the net carrying value of
the depreciable assets as an "other gain or loss"
and show it in financial reports separate from
regular operating income or expense; and

When management computes depreciation on a

composite-life basis, credit the cost of retired
units to the appropriate fixed asset account;
charge the same amount less salvage value to
the allowance for depreciation account. Do not
recognize gain or loss in the accounts since
items in the group will retire both before and
after expiration of the estimated average life.
When retirements are abnormal or unusual,
record gains or losses in the accounts, similar
to the unit basis since composite rates do not
anticipate such retirements.

PRINCIPLES AFFECTING THE

RECORDING OF INCOME AND
EXPENSES
UNDER THE MODIFIED CASH BASIS OF
ACCOUNTING
The principles and standards of accounting relating
to income, expenses, gains, and losses of federal
credit unions following the modified cash basis of
accounting are set forth below.
General Rules for Recording Income and Expenses

Record all income, expenses, gains, and losses affecting each accounting or dividend period through
income and expense accounts. To correct an error
affecting prior accounting period operations, refer
to GAAP.
Basis for Recording Income

Amortization of Deferred Charges

Record income periodically as received. Record

fees and late charges as income when received.

Examples of deferred charges include prepaid insurance, leasehold improvements, and organization
expenses. Include debits in expenses each month
or dividend period for amortization of deferred
charges.

Basis for Recording Expenses

Expenses are the uses and consumption of goods

and services in the process of producing income.
Pay and record expenses related to current operations promptly when due. Record all expenses
incurred but not paid at the end of the month as
current month expenses: as accounts payable or
accrued expenses. Record significant amounts of
expenses paid or accrued if applicable to future
periods as prepaid or deferred expenses and amortize them over the periods to which they apply.
Tangible Fixed Asset Expenses

Accounting Manual for Federal Credit Unions

Equipment Rental Expense

Charge rental charges under equipment leases directly to expense unless they represent installment
purchases of fixed assets. If a rental agreement
represents an optional purchase contract the credit
union plans to exercise by purchasing the equipment, record the cost of the equipment as a fixed
asset and a liability. Thereafter, payments made
will reduce the liability amount, and management
will record appropriate depreciation expense. Refer to GAAP for further guidance.

December 2002
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Section 200
Loan Losses

Accounting Basics for Recording Transactions

Record losses on loans and related assets as described below:

overage or shortage in negotiable instruments a

"cash overage or shortage" and record the appropriate adjustment at least prior to the close of each
month.

Donations

Charge off loan losses as they occur, with the

approval of the board of directors, by debits to
Allowance for Loan Losses. Record recoveries
on loans charged off, as they occur, as credits
to Allowance for Loan Losses;

Refer to the discussion in Principles Affecting the

Recording of Equity.
Pension Plan Costs

Establish and maintain Allowance for Loan

Loss to reflect the estimated amount of losses
on:
(1) Originated member loans.
(2) Loans purchased from other credit unions.
(3) Lease receivables.

The value of the allowance account should be adjusted monthly or at the end of the regular share
dividend period, if longer than monthly. For this
purpose, management should determine the amount
of the allowance adjustment based on a logical,
documented, defensible method which will result in
the estimation of all probable losses inherent in the
loan portfolio as a given date, and (losses) which
are reasonably estimable.
Other Gains and Losses

Normally include other gains and losses when determining periodic net earnings or losses. Report
non-recurring gains or losses (those unrelated to
ordinary credit union activities) separately as nonoperating income or expense on periodic income
and expense statements. For example, charge a
gain or loss from the sale of a credit union office
building, and any loss charged off on a note or contract taken in connection with a sale of credit union
office quarters to Other Losses.
Cash Overage and Shortages

Record cash overages and shortages from the processing of cash transactions as debits or credits to
expense daily. Adjust the cash over and short expense accounts whenever the reason for the cash
overage or shortage is determined. Consider any

December 2002
Page 16

Pension plan accounting is beyond the scope of this

publication. Seek assistance from an independent
accountant.
NCUA Insurance Guaranty

Do not record any guaranty provided by the NCUA

to a credit union to make it insurable under Title 11
of the Federal Credit Union Act, as amended. This
guaranty represents a claim by the credit union
against the NCUA which is payable only in the
event of liquidation of the credit union and then
only to the extent needed to reduce or eliminate
loss claims against the Title 11 share insurance
fund. Amortize guaranties through charges to expense in accordance with the terms of the guaranty
agreement.

UNDER THE ACCRUAL BASIS OF

ACCOUNTING
The principles and standards of accounting applicable to the modified cash basis of accounting
apply under the accrual basis of accounting, except
as follows:
Income on Loans

Record interest income earned each month or dividend period on loans outstanding as income and as
an asset although it may not have been received.
Many computerized loan systems will calculate the
amount to accrue. Maintain supporting documentation for the accrual.
Income on Investments

Management should record income as noted:

Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

Record income for investments in savings and

loan associations and other credit unions in
each month or dividend period the investments
are held and the interest or dividend income
was not received. For example, accrue the
amount of each quarterly or other distribution
applicable to each dividend period as Accrued
Income on Investments with an offsetting entry
to Income from Investments;
Record income for mutual fund and common
trust investments as income for the month or
dividend period based on the time the investments are owned. Adjust the amount each
month or dividend period as required based on
the change in value. If management receives
income during the period, record the amount as
the actual amount of interest earned for the
preceding period;
Record income for other investments each
month or dividend period based on the actual
time the investments are held and interest or
dividend income was not received. Recognize
the amount earned as income and as an asset.
Accrue interest earned on the general type of
government securities each month or dividend
period based on the applicable portion of the
semiannual interest. Accrue interest on appreciation-type savings bonds in each month or
dividend period based on the pro rata amount
of the bond appreciation for the period shown
on the bond's table of redemption values. Accrue interest on loans to other credit unions,
certificates of deposit and deposits in other
credit unions to record interest earned each
month or dividend period based on the actual
time the investments or deposits are held; and
Record differences between the amount of income accrued and actual income in the
appropriate accounts when income is received.

Accrued Expenses

Expense accruals include, but are not limited to,

charges to expense for unpaid salaries, uncompensated leave, dividends, supervisory committee
audit, taxes, and interest on borrowed funds. Pay
or accrue expenses and match them against periodAccounting Manual for Federal Credit Unions

Section 200

ic revenues with offsetting credits, where necessary, to cash, payables, or accrued expenses.
Accrued Interest on Loans Included in Valuation Allowance

Include an amount to cover potential losses on accrued interest receivable from loans in the
valuation allowance for estimated losses on outstanding loans. Do not accrue interest on any loans
3 months or more delinquent. Reverse previously
accrued interest on such loans via appropriate entries to Accrued Interest and Interest Income.

FINANCIAL STATEMENTS
PURPOSE
Federal credit unions financial statements must
present their financial position fairly as of a particular date. This is the most important external
function of the accounting process. Financial
statements must be posted in a conspicuous location for the information of members at each credit
union location and as required by the NCUA. The
results of operations for a particular period must
follow GAAP if assets are $10 million or more.
Other credit unions may follow GAAP and must
follow the principles prescribed herein. Management uses financial statements to:

Make sound decisions,

Effectively manage the credit union, and

Show how management has carried out its

stewardship to shareholders, creditors, and others having an interest in the credit union.

REQUIRED STATEMENTS
Management must prepare two financial statements
every month for internal and external use. These
statements are:

Statement of Financial Condition, and

Statement of Income.

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Section 200

Accounting Basics for Recording Transactions

Statement of Financial Condition

The Statement of Financial Condition (balance

sheet) and notes thereto should show the financial
condition of the credit union as of the date it represents. The statement should:

Recognize the basic concepts of the principles

and standards of accounting by showing, on a
conservative basis, assets and liabilities including
contingent
losses,
appropriate
classifications of credit union equity; and identify any significant changes in the supporting
accounting practices from those used in the
previous presentation;
Provide valuation allowances as deductions
from related assets to show estimated amounts
of losses as well as depreciation on tangible assets. Management should include estimated
losses to be sustained in collateral collection or
value realization;
Separate unrestricted cash and restricted cash,
and identify the nature and extent of any assets
pledged or hypothecated;
Reflect the nature and extent to which specific
liabilities are preferred liens on assets; i.e., indicate for any real estate mortgage the
particular assets pledged as security;

Statement of Income

This statement and notes thereto should reflect all

income, expenses, gains, and losses of the credit
union for the period for which prepared. It should:

Reflect the results of operations in accordance

with GAAP or at a minimum, the principles
prescribed herein;

Segregate regular operating income, expense,

gains, and losses from any extraordinary income, expense, gains, or losses;

Include within regular operations, increases

and decreases in the valuation allowance established for estimated losses on loans and loan
assets; and

December 2002
Page 18

Include as income all fees and charges made to

members and borrowers.

Notes To Financial Statements

The objective of notes to financial statements is to

provide information not sufficiently described
within the body of the financial statements. Notes
to financial statements are an integral part of the
statements and should provide:
a) A description of significant accounting policies
followed;
b) An explanation of changes in methods or techniques of handling accounting transactions;
c) An explanation of creditors' rights to specifically pledged assets;
d) A disclosure of contingent assets and liabilities,
restrictions on dividend payments, and executory
contracts; and
e) The market value of investments.
Disclosures About Fair Values of Financial Instruments

Credit unions with less than $10 million is assets

may wish to disclose, either in the body of the financial statements or in the accompanying
footnotes, the fair values of financial instruments
on their statements of financial condition. GAAP
generally exempts all entities with assets of $100
million or less from fair value disclosure requirements.
The disclosure may be advisable for all financial
instruments, both assets and liabilities, recognized
and not recognized in the statement of financial
condition, for which it is practicable to estimate
fair value. Refer to GAAP for guidance. It details
procedures for estimating the fair value of "financial instruments" and illustrations for applying the
disclosure requirements about fair value of financial instruments. For those affected credit unions,
we recommend management obtain a copy of
GAAP and prepare a financial statement footnote
including the methods for establishing the fair valAccounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

Section 200

ue of the assets, liabilities, and equity. These

methods should provide the basis for the dollar estimates of the fair value. Retain historical records
of your fair value calculations based on these
methods and maintain an overall policy documenting these methods. If it is not practicable to
estimate the fair value of a particular financial instrument, disclose in the footnote the pertinent
characteristics of the instrument and the reason for
impracticability of setting a fair value (i.e., it would
be excessively expensive to estimate).

Credit unions with more than $10 million in assets

may complete this statement quarterly or at the end
of the regular share account dividend period (if the
period is longer than quarterly) and present it with
other financial statements. Management prepares
this statement to report a measure of all changes in
equity resulting from recognized transactions and
other economic events of the period other than
transactions with owners in their capacity as owners.
This statement must accomplish two
objectives:

Federal credit unions must provide fair value information on the quarterly/semiannual NCUA Call
Reports. Include fair value information on the
statement of condition as management and the independent auditing firm agree (i.e., if you are
seeking an unqualified opinion).

a) Classify items of Other Comprehensive Income by their nature in a financial statement; and
b) Display the accumulated balance of Other
Comprehensive Income separately from Retained
Earnings and Additional Paid-in Capital in the equity section of a Statement of Financial Condition.

OPTIONAL STATEMENTS
The following statements are optional for credit
unions under $10 million. Post these statements
with the required statements if management prepares them. Prepare the first two on a quarterly
basis or at the end of the regular share account dividend period (if the dividend period is longer than
quarterly). Prepare a Statement of Cash Flows at
least annually:

Statement of Members Equity,

Statement of Other Comprehensive Income

(can be combined with Statement of Equity),
and

Statement of Cash Flows.

Statement of Members Equity

This statement and notes thereto should show

changes in total earnings during the period reported.
At managements option, prepare this
statement quarterly or at the end of the regular
share account dividend period (if the period is
longer than quarterly) and present it with other financial statements.
Statement of Other Comprehensive Income (can

be combined with Statement of Equity)

Accounting Manual for Federal Credit Unions

Other Comprehensive Income is total non-owner

changes in equity during a period from transactions
and other events and circumstances. It includes all
changes in equity during a period except those resulting from investments by owners and
distributions to owners.
Statement of Cash Flows

This statement provides relevant information about

cash receipts and cash payments during the reporting period and supplements the Statement of
Financial Condition and the Statement of Income.
At managements option, prepare the Statement of
Cash Flows at least annually under the accrual basis of accounting. Management may prepare the
statement more frequently. Federal credit unions
not using the accrual basis of accounting may prepare this statement.
The Statement of Cash Flows, when used with the
related disclosures and other financial statements,
should help to assess:
a) Management's ability to generate positive future cash flows;
b) Management's ability to meet its obligations,
pay dividends, and determine its need for external
financing;

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Section 200

Accounting Basics for Recording Transactions

c) Reasons for differences between net income

and associated cash receipts and cash payments;
and

Unless the context requires otherwise, the following terms have the meaning indicated in this
section:

d) Effects on the credit union's position of both its

cash and non-cash investing and financing transactions during the reporting period.

Accrual Basis of Accounting matches financial statement recognition with the period of
occurrence. Under this basis of accounting, management records income when earned and expenses
and liabilities as incurred regardless of the actual
receipt of payment or disbursement.

More information pertaining to the Statement of

Cash Flows, and its preparation and illustrations are
found in Section 900 of this manual.
FULL AND FAIR DISCLOSURE REQUIRED
The financial statements described above shall provide full and fair disclosure of all assets, liabilities,
appropriations, and retained earnings. A limited
number of valuation allowance accounts may be
necessary to fairly present all income and expenses
and the overall financial position for the reporting
period.

Accrued Interest refers to Interest earned on

loans, investments, or notes or mortgages payable,
which has not been received or paid by the credit
union. Management may accrue interest periodically on a time period consistent with the financial
statements.
Amortization refers to the systematic write-down
of prepaid and deferred expenses over a predetermined period of time, such as the write-down of an
insurance premium or bond premium.

FULL AND FAIR DISCLOSURE DEFINED

"Full and fair disclosure" is the level of disclosure a
reasonable person would provide to a member of a
credit union, a creditor, or the NCUA in order to
fairly inform them of the financial condition and
the results of operation. Management provides full
and fair disclosure by preparing financial statements consistent with this accounting manual or
GAAP as long as GAAP is not inconsistent with
regulatory requirements.
REQUIRED CERTIFICATION
When presenting financial statements to members,
creditors, and the NCUA, include a declaration by
the treasurer and the president that the report is true
and correct to the best of their knowledge and belief, and presents fairly the financial position and
the results of operations for the reporting period. In
the absence of the president, any other officer designated by the board of directors may make such
declaration.

DEFINITIONS OF TERMS

Collateral refers to real or personal property

pledged as partial or full security on a debt including completed documentation for repossession and
sale of the collateral in the event of default. A comaker may be accepted in lieu of collateral to further secure a debt.
Composite Depreciation Basis refers to depreciating a group of fixed assets using a rate based
on the estimated average useful lives of the assets.
No depreciation is recorded when the accumulated
depreciation allowance equals the book value of the
fixed assets.
Deferred Charge or Deferred Expense refers
to an expenditure not recognized as a cost of operations during the period incurred, it is carried
forward and written off in one or more future periods. Often it includes prepaid expenses such as
insurance premiums, stationery, and office supplies.
Deferred Credit refers to revenue or income received or recorded before it is earned. It includes
income held in suspense until:

(presented alphabetically)

December 2002
Page 20

Determination and deduction of offsetting

charges,
Accounting Manual for Federal Credit Unions

Accounting Basics for Recording Transactions

Completion of a period of time (such as collection of a related doubtful receivable), or

Identification occurs.

Section 200

Donated Equity is a regulatory accounting term

that refers to equity in a credit union arising from
contributions of real or personal tangible property
(fixed assets).
Appropriation for Loss Contingencies refers
to an appropriation of accumulated earnings set
aside for possible decreases in the book values of
assets or other undetermined liabilities not otherwise reflected on the books. Establish contingency
appropriations as a precautionary measure only and
include as a part of equity, as they represent isolations (appropriations) of undivided earnings.
Undivided Earnings refers to accumulated postclosing accumulated net income after distributions
to members, adjustments affecting prior period operations, appropriations required by law, and
appropriations authorized by the credit union
board.
Valuation Allowance refers to an account representing management's judgment as to possible loss
or decline in value within a specific class of assets
such as loans or fixed assets.
Modified Cash Basis of Accounting refers to
a blend of the cash basis of accounting and the accrual basis of accounting.
It is a form of
accounting based on actual receipts and disbursements and includes provisions for:
a) Liabilities not paid when due;
b) Unpaid dividends and interest refunds applicable to the accounting period;
c) Deferred credits and charges applicable to future periods;
d) Estimates of anticipated losses on loans outstanding and other risk assets; and
e)

Depreciation of fixed assets.

Accounting Manual for Federal Credit Unions

December 2002
Page 21