AC 518 HAND-OUTS
GOVERNMENT ACCOUNTING
AND AUDITING TNCR
The National Government of the Philippines
The government is the largest financial organization in terms of assets, liabilities, capital, sources of income and items of expenditures. It is also the largest entity in terms of number and quality of personnel, facilities and instrumentalities, which are used to serve the social, political and economic needs of the nation. The government has as many departments, commissions or offices as necessary to be able to carry out its functions, like promotion of social welfare, development of national wealth, defense of the state from internal and external aggression, promotion of justice, promotion of trade and industry, general government and protection of private rights of the people.
Government Accounting Defined(Section 109 of PD 1445)
Government Accounting encompasses the processes of analyzing, recording, classifying, summarizing and communicating all transactions involving the receipt and disposition of government funds and property and interpreting the results thereof. Government accounting is a service activity.
Three (3) types of governmental organizational units:
National Government Unit(LGU) – are agencies that includes all departments, bureaus, offices, boards, commissions, councils state colleges and universities.
Local Government Unit(NGAs)- political subdivisions of the Philippines having substantial control over local affairs, consisting of provinces, cities, municipalities and barangays.
Government Owned or Controlled Corp(GOCC)- are agencies organized by law or pursuant to law, vested with functions relating to public needs whether government or propriety in nature, owned by the government directly or through its instrumentalities either wholly or, where applicable as in case of stock corporation, to the extent of at least fifty one % of its capital stock.
FUNCTIONS OF GOVERNMENT ACCOUNTING
To provide quantitative information primarily financial in nature about the operations of the government, both national and local, to be used by the administration in making decisions for a more effective and efficient public service.
OBJECTIVES
1.To provide quantitative information concerning past operations and present conditions.
2.To provide a basis for guidance for future operations.
3.To provide for control of the account of public entities and officers in the receipt, disposition
and utilization funds and properties, and
4.To report on the financial position and the result of the operations of the government agencies
for the information of all persons concerned.
Users of Government Accounting Information:
The General public or citizenry
The Governing and oversight bodies: The President, Cabinet, COA, Legislative Body.
The managers/administrators who are in-charge of carrying out the policy and daily conduct of government affairs.
The students of public finance
The resource providers of the government such as:
Donors or grantors
Lenders, suppliers and employees whose main concern is to know whether the government can pay its obligations to them.
DISTINCTIONS BETWEEN GOVERNMENT AND COMMERCIAL ENTERPRISES
1. Ownership - Private enterprises are owned by a relatively few stockholders, partners, or owners. The government represent the entire people in a given community.
2. Purpose - Private enterprises are organized primarily to make profits. The government is set up mainly to render service at lowest possible cost to its constituents.
3. Organization - The organization of a private enterprise is a succession of authority and responsibility starting from its stockholders who delegate them to a duly elected board of directors which in turn organize its own staff of officers in whom the responsibility of managing the affair of business is reposed. The responsibility and authority of a government entity in our system lies in Congress.
4. Financing - Private enterprise is supported for its finance primarily by the voluntary contribution from its members or stockholders which constitute as their share of capital or investment in the business. The government is vested the exclusive right to demand involuntary contributions from its constituent in the form of taxes.
5. Income - In private enterprise, the capital investment of stockholders are made to generate return in the form of profits for services rendered or good sold. The government which is organized primarily to render service, cannot make profits on the services it renders. To support the estimated annual cost of government, taxes are levied.
DISTINCTION BETWEEN GOVERNMENT AND COMMERCIAL ACCOUNTING
Objective –
CA – is geared towards income measurements aside from control of company
resources,
GA - is control of government funds to see to it that they are properly utilized and
provide data to management for decision.
2. Basis of Accounting -
CA – either cash or accrual method is used but not a combination of both.
GA - the modified accruals basis of accounting is used.
Preparation of periodic reports –
CA – Statement of Financial position, Statement of Cash Flows
GA - Balance sheet, statement of income and expenses, statement of government
equity and statement of cash flows.
Control Mechanism –
CA – none
GA – Fund accounting, obligation accounting and CDC accounting
Books of Accounts –
CA - only one set is kept
GA - two books are kept (a) Regular Agency (RA) Book and (b) National
Government(NG) Books.
As to accounts and transactions –
CA - Nominal and Real Accounts are used.
GA - includes budgetary accounts such as Appropriation, Allotments and
Obligations are maintained.
Source of Accounting practice and procedures –
CA - dictated by nature of business and policies of management
GA - laws, rules and regulations
Decision-making Process in Government
The decision-making process in government is an important aspect of the environment of state accounting because accounting information is intended to be useful in making economic decisions and in making reasoned choices among alternative courses of action.
The ultimate authority for decision-making in the Philippine government rests with the people. This authority is exercised through duly elected representatives, acting as agents of the people. It is the sovereign right of the people to change them if the authority is misused or abused.
The President, as chief executive, formulates national policies, which specify the goals of government and determine the courses of action that the government should take in different aspects of public affairs.
On the basis of national policy, the President submits a budget to the legislative body for consideration and processed until approved and passed into a law.
At all levels of government, decision-making should comply with existing laws and regulations. Questions and issues involving the settlement of money claims, determination of dispute or settlement of a controversy on the issue as to legality and/or propriety of such claims are submitted for resolution to the COA in connection with the discharge of its audit function. Questions involving legal interpretation and/or application of law are submitted for decision to the courts.
Salient Features of Government Accounting
The financial resources of the Government are very limited. It relies heavily on collected taxes. This means that it has to operate through a system of fiscal and accounting controls. The following control mechanisms adopted as sub-systems of government accounting are not adopted in commercial accounting:
Fund Accounting
Obligation Accounting
Cash Disbursement Ceiling (CDC) Accounting
Fund Accounting. A fund is a sum of money or other resources set aside for the purpose of carrying out specific activities or attaining certain objectives in accordance with specific regulations, restriction, and limitations.
The two major classification of funds as to purpose for which they may be used:
General Fund – one which is generally available for all functions of the
government.
2. Special Fund - one which, by legislative action, segregates specified revenues
for limited purposes.
Obligation Accounting. As a control mechanism of government accounting system, obligation accounting provides the ceiling of the maximum extent by which an agency can incur obligations or commit the resources of the government in the performance of its functions. With obligation accounting, an agency can operates only within the amount actually released to it by the DBM, which is within or covered by the amount approved appropriation.
Obligation accounting refers to the accounting practice, procedures and techniques for recording obligations in the government.
Cash Disbursement Ceiling Accounting. The cash disbursement ceiling accounting is another control mechanism of government accounting system. The cash operations of the government under the cash disbursement ceiling accounting are limited within the boundaries of the appropriations release to government agencies in the form of allotments, and any additional amount granted by the DBM to liquidate or pay existing valid obligation.
Accounting Responsibility - Under PD 1445, accounting responsibility for all government funds and property is entrusted, immediately and primarily, to the head of the government agency or office. It is the duty of the head of the agency to take reasonable steps to minimize, if not to avoid the risk of losses, defalcations and other types of irregularities in the utilization of all government resources (to safeguard the resources of the government under his custody) and periodic reporting to concern authorities. His responsibility, however, is supervised by higher authorities and government bodies.
The officer in possession or custody of government funds or property by reason of his duties are accountable for the safekeeping thereof. As such, he shall be properly bonded.
The Head of the agency is made immediately and primarily responsible for all government funds and property pertaining to his agency. Secondary responsibility is made to rest on the persons entrusted with the actual possession or custody of the funds or property. They are the accountable officers and are immediately responsible to the agency head.
The imposition of primary responsibility on the agency head for government funds and property is in keeping with the concept of fiscal responsibility which now lodge with agency head.
The head of the agency shall exercise the diligence of a good father or a family in supervising accountable officers to prevent the incurrence of loss of government funds and property, otherwise, he shall be jointly and solidarily liable with the person primarily accountable thereof.
Although supervisory work of government accounting is vested upon to the Commission on Audit, accounting responsibilities in the government, by virtue of the provision of the Constitution of the Philippines, laws, Presidential Decrees and other issuances, are shared primarily by the Commission on Audit(COA), Department of Budget and Management, (DBM), Department of Finance (Bureau of Treasury) and government agencies.
The Commission on Audit serves as the external auditor of the government agencies. It is a constitutional office and its mandates are provided in Section 2, Art. IX-D of the 1987 Constitution of the Philippines. The COA examine, audit and settle all accounts pertaining to revenues or receipts and expenditures or uses of government funds and property, keeps the general accounts of the national government , prescribes the standard chart of accounts, promulgates accounting rules and regulations and exercise technical supervision over the accounting functions of each agency. The office is mandated by the Constitution to submit to the President and the legislative body within the time frame fixed by law, an annual audit report of the government, its subdivision, agencies and instrumentalities including government owned or controlled corporations and recommend measures necessary to improve efficiency and effectiveness.
The DBM is responsible for the design, preparation, and approval of the accounting systems of government agencies, determines the accounting and other item of information needed to monitor budget performance and assess effectiveness of the agency operation. It prescribes the forms, schedules of submission and other component of reporting system
needed to accomplish and submit the required information. It acts on agencies' recommendations for the modification or changes to prescribed systems for procedures to effect simplicity and/or meet the requirements of the peculiarities of the agencies concerned. It approves the Agency Budget Matrix and issues the allotments to agencies in accordance with the approved budget and issues Notice of Cash Allocation.
The Bureau of Treasury (BTr) performs banking function for the national government. It receives and keeps government funds, controls the disbursements thereof and maintain accounts of the financial transactions of national government agencies. It is required to prepare and submit to the COA and other fiscal activities, a daily statements of cash receipts, disbursements and fund balances in the National Treasury.
The National Government Agencies (NGAs) consist of various organizational units such as departments, bureaus, commissions, boards, offices, tribunals, councils, institutions, state colleges or universities and establishments.
These agencies are required to establish and maintain a system of accounting for their financial resources and operation in accordance with pertinent rules and regulations. Accounts should be kept in such details as is necessary to meet the need of agency management and furnish information to fiscal and control agencies such as COA, DBM and BTr.
Relationship between Accountability, Responsibility and Authority
Accountability is the obligation of a public officer/employee to answer for the responsibility conferred on him/her. It is her Responsibility to respond to the concerns of individuals or groups, the public he/she is to serve, within the overall context of his/her obligations for which he/she has the appropriate Authority.
In government, authority is often used interchangeably with the term "power". However, their meanings differ: while "power" is defined as 'the ability to influence somebody to do something that (s)he could not have done', "authority" refers to a claim of legitimacy, the justification and right to exercise that power.
Accountability Requirements From Public Officer/Employees
Section 1 of PD 1445 provides:"It is the declared policy of the State that all government resources shall be managed, expended and utilized in accordance with law and regulations and safeguard against loss or wastage through illegal or improper disposition, with a view to ensuring efficiency, economy and effectiveness in the operations of government. The responsibility to see to it that such policy is faithfully adhered to rests directly with the chief or head of the government agency concerned."
This declaration articulates the concern of the state for the safekeeping of the public's resources. It focuses on how the resources shall be handled by those given the public trust to manage, spend or use such resources.
Pursuant to this policy the State requires from public officers and employees the following:
Compliance with laws and regulations
Laws and rules
Agency policies
Agency manuals of operations; and
Provisions of contracts, MOA
Safeguarding of government resources from loss and waste
Achieving goals and objectives
Assertions of Compliance with Accountability Requirements
When public officers and employees submit to the Commission their transactions, accounts, financial reports and statements and other performance and operation reports, they are asserting or claiming that they have complied with the foregoing accountability requirements.
What is Assertions?
Assertion is the expressed or implied representation by management that is reflected in their transactions, accounts, financial statements, records, reports and that they are claiming that they have complied with the accountability requirements of the state policy.
Assertions on Compliance with Laws and Rules
When expenditures, disbursements, receipts and collections are reported to the appropriate authorities, management is making claim that so much amount has been disbursed or so much amount have been collected in payment of goods and services received or rendered in accordance with laws, rules, applicable policies and practices.
Assertion on Resources Duly Safeguarded
When the agencies issue their financial reports and statements they are asserting the following:
Existence or Occurrence - This deals with whether assets or liabilities of the audited agency actually exist at a given date, and whether recorded transactions have occurred during the given period.
Completeness – This deals with whether all transactions and accounts that should be presented in the financial statements are included.
Rights and Obligations - This deals with whether assets are actually owned by the agency and liabilities are the obligation of the agency at a given date.
Valuation or Allocation - This deals with whether or not the asset, liability, revenue and expenses components have been included in the financial statements at appropriate
amounts.
Presentation and Disclosure – This deal on whether particular components of the financial statements are properly classified, described and disclosed.
Assertions on Achievement of Goals and Objectives (Performance or Value for Money Accountability)
When the agencies prepare and submit to proper authorities their reports on the performance of an activity or a project, the agency is asserting that they used and managed the resources for that activity or project in an economical, efficient and effective manner.
Performance of government entities is measured from the point of view of economy, efficiency and effectiveness.
Economy refers to the reasonableness of cost incurred. Measuring economy will determine whether the agency has been performing at the least possible cost or under the terms most advantageous to the government.
Efficiency refers to the relationship between goods or services produced and resources used to produce them. The measurement of efficiency involves the determination of whether an agency is managing or utilizing its resources in an efficient manner as well as establishing the causes of any inefficiencies, including inadequacy in management information systems, administrative procedures or organizational structure.
Effectiveness is concerned with the relationship between the outputs and the goals of the agency. Measuring effectiveness will determine whether the desired results are achieved, whether the objectives set by the agency are met, and whether the agency has considered alternatives that yield desired results at a lower cost.
Generally Accepted (State) Accounting Principles
Accounting principles are propositions, a general law or rule adopted, which on the basis of reasons, demonstrated usefulness and general acceptance as the best way of carrying out the function and achieving the objectives of financial accounting.
Objectives:
Guide the accountants in identifying, measuring and communicating financial accounting information;
Assure proper reporting and reasonable degree of uniformity and comparability among the financial statements of different government entities; and
Provide auditors with the framework for making judgment about the fairness of financial statements on the basis of some uniform standards.
Significant differences in principles between state accounting and commercial accounting:
Government activities are non-profit oriented;
State accounting places greater emphasis on accountability, stewardship and control; and
State accounting is based on laws, rules and regulations.
A principle is generally accepted if it has substantial authoritative support. There are two sources of support: primary and secondary sources
Primary sources:
Pronouncement of the Commission on Audit - COA is mandated by the Philippine Constitution to promulgate accounting rules and regulations to facilitate the keeping and enhance the informational value of the accounts of the government.
Provision of law - Sec. 112 of the PD 1445 provides that generally accepted accounting principles should be observed in government accounting entities as provided they do not contravene existing laws and regulations.
Secondary source:
From the pronouncements and issuances by other government agencies.
The Government Auditing Code of the Philippines requires that each government agency shall record its financial transactions and operations in conformance with the generally accepted accounting principles and accordance with pertinent laws and regulations. The principles to be followed by government entities includes the following:
The accounts of the agency shall be kept in such detail and at the same time be adequate to furnish the information needed by fiscal or control agencies of the government.
The highest standard of honesty, objectivity and consistency shall be observed in the keeping of accounts to safeguard against inaccurate or misleading information.
The government accounting system shall be on double-entry basis with the general ledger in which all financial transactions are recorded, Subsidiary record shall be kept where necessary.
The Chart of Accounts has three-digit coding system and provides for responsibility accounting.
The Chart of Accounts categorizes Personal Services, Maintenance and Other Operating Expenses and Financial Expenses as Expenses, obligation charged to capital outlay are recorded to appropriate asset accounts when the liability and the payment are taken-up.
Matching Principles, The principle that requires the matching of revenues and expenses is adopted.
Modified accrual method is used
Depreciation accounting for property, plant and equipment using the straight line method is followed.
Allowance for doubtful accounts is taken up. Dormant accounts are transferred o a separate registry,
Asset method is followed for prepaid expenses.
On financial statement:
Fairness of presentation – this refer to the overall propriety of disclosing financial information. Full disclosures in financial aspects requires observance of the standards of reporting.
Compliance – the report shall be in accordance with prescribed government requirements and international accounting standard of reporting.
Timeliness – all needed reports shall produced promptly to be of maximum usefulness.
Usefulness – financial reports shall be carefully designed to present information that is needed and useful to reports users.
Obligation accounting is modified, allotments and obligations are no longer journalized. Separate registries are maintained to control these accounts and the appropriation.
All lawful expenditures and obligation incurred during the year shall be taken up as accounts of that year.
MANUAL ON THE NEW GOVERNMENT ACCOUNTING SYSTEM
For National Government Agencies
ACCOUNTING POLICIES
Sec. 1. OBJECTIVES OF THE MANUAL. The New Government Accounting System (NGAS) Manual presents the basic policies and procedures; the new coding system; the accounting systems, books, registries, records, forms, reports, and financial statements; and illustrative accounting entries to be adopted by all national government agencies effective January 1, 2002. The objectives of the Manual are to prescribe the following:
a. Uniform guidelines and procedures in accounting for government funds and property;
b. New coding structure and chart of accounts;
c. Accounting books, registries, records, forms, reports and financial statements; and
d. Accounting entries.
Sec. 2. COVERAGE. This Manual shall be used by all national government agencies.
Sec. 3. LEGAL BASIS. This Manual is prescribed by the Commission on Audit pursuant to Article IX-D, Section 2 par. (2) of the 1987 Constitution of the Republic of the Philippines which provides that:
"The Commission on Audit shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefore, and promulgate accounting and auditing rules and
regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties".
BASIC FEATURES AND POLICIES
Sec. 4. BASIC FEATURES AND POLICIES. The NGAS has the following basic features and policies, to wit:
a. Accrual Accounting. A modified accrual basis of accounting shall be used. Under this method, all expenses shall be recognized when incurred and reported in the financial statements in the period to which they relate. Income shall be on accrual basis except for transactions where accrual basis is impractical or when other methods required by law.
b. One Fund Concept. This system adopts the one fund concept. Separate fund accounting shall be done only when specifically required by law or by a donor agency or when otherwise necessitated by circumstances subject to prior approval of the Commission.
c. Chart of Accounts and Accounts Codes. A new chart of accounts and coding structure with a three-digit account numbering system shall be adopted. (See Volume III, The Chart of Accounts)
d. Books of Accounts. All national agencies shall maintain two sets of books, namely:
Regular Agency (RA) Books. These shall be used to record the receipt and utilized of Notice of Cash Allocation (NCA) and other income/receipts which the agencies are authorized to use and to deposit with Authorized Government Depository Bank (AGDB) and the National Treasury. These shall consist of journals and ledgers, as follows:
Journals
* Cash Receipts Journal (CRJ)
* Cash Disbursement Journal (CDJ)
* Check Disbursement Journal (CkDJ)
* General Journal (GJ)
Ledgers
* General Ledgers (GL)
* Subsidiary Ledgers (SL) for:
* Cash
* Receivables
* Inventories
* Investments
* Property, Plant and Equipment
* Construction in Progress
* Liabilities
* Income
* Expenses
National Government (NG) Books. These shall be used to record income which the agencies are not authorized to use and are required to be remitted to the National Treasury.
These shall consist of:
* Cash Journal (CJ)
* General Journal (GJ)
* General Ledger (GL)
* Subsidiary Ledger (SL)
With the implementation of the computerized agency accounting system, only the General Journal shall be used together with the ledgers by both books.
e. Financial Statements. The following statements shall be prepared:
* Balance Sheet
* Statement of Government Equity
* Statement of Income and Expenses
* Statement of Cash Flows
Notes to Financial Statements shall accompany the above statements.
f. Two-Money Column Trial Balance. The two - money column trial balance showing the account balances shall be used.
g. Allotment and Obligation. Obligation accounting is modified to simplify procedures in the incurrence and liquidation of obligations and the recording of the budgetary accounts (allotments and obligations incurred and liquidated). Separate registries shall be maintained to control the allotments and obligations for each of the four classes of allotments, namely:
* Registry of Allotments and Obligation - Capital Outlay (RAOCO)
* Registry of Allotments and Obligations - Maintenance and
Other Operating Expenses (RAOMO)
* Registry of Allotments and Obligations - Personal Services (RAOPS)
* Registry of Allotments and Obligations - Financial Expenses (RAOFE)
h. Notice of Cash Allocation (NCA). The receipts of NCA by the agency shall be recorded in the books as debit to account "Cash-National Treasury, Modified Disbursement System (MDS)" and credit to account "Subsidy Income from National Government". (Refer to the latest issuance by DBM as regards to releases of NCA)
i. Financial Expenses. Financial expenses such as bank charges, interest expenses, commitment charges and other related expenses shall be separately classified from Maintenance and Other Operating Expenses (MOOE).
j. Perpetual Inventory of Supplies and Materials. Supplies and materials purchased for inventory purpose shall be recorded using the perpetual inventory system. Regular purchases shall be coursed thru the inventory account and issuances thereof shall be recorded as the take place except those purchased out of Petty Cash Fund which shall be charged directly to the appropriate expense accounts.
k. Valuation of Inventory. Cost of ending inventory of supplies and materials shall be computed the moving average method.
l. Maintenance of Supplies and Property, Plant and Equipment Ledger Cards. For appropriate check and balance, the Accounting Units of agencies, as well as the Property Offices, shall maintain Supplies Ledger Cards/Stock Cards by stock number and Property, Plant and Equipment Ledger Cards/Property Cards by category of property, plant and equipment, respectively.
m. Construction of Assets. For assets under construction, the Construction Period Theory shall be applied for costing purposes. Bonus paid to the contractor for completing the work ahead of time shall be added to the total cost of the project. Liquidated damages charged and paid for by the contractor shall be deducted from the total cost of the project. Any related expenses incurred during the construction of the project, such as taxes, interest, license fees, permit fees, clearance fee, etc. shall be capitalized, and those incurred after the construction shall form part of operating costs.
n. Registry of Public Infrastructures/Registry of Reforestation Projects. For agencies that construct public infrastructures, such as roads, bridges, waterways, railways, plaza, monuments, etc., and invest on reforestation projects, a Registry of Public Infrastructures (RPI). Registry of Reforestation Projects (RRP) shall be maintained for each specific infrastructures/reforestation project.
A Registry of Public Infrastructures - Summary shall be maintained for each classification of projects. Examples are:
* Registry of Public Infrastructures - Bridges (RPIB)
* Registry of Public Infrastructures - Roads (RPIR)
* Registry of Public Infrastructures - Parks (RPIP)
A Schedule of Public Infrastructures/Reforestation Projects shall be prepared at year-end and included in the Notes to Financial Statements.
o. Depreciation. The straight-line method of depreciation shall be used. Depreciation shall start on the second month after purchase of the property, plant and equipment, and a residual value equivalent to ten percent of the purchase cost shall be set-up. Public infrastructures/reforestation projects as well as serviceable assets that are no longer being used shall not be charged any depreciation.
p. Reclassification of Assets. Serviceable assets no longer being used shall be reclassified to "Other Assets" account and shall not be subject to depreciation.
q. Allowance for Doubtful Accounts. An Allowance for Doubtful Accounts shall be set up for estimated uncollectible trade receivables to allow for their fair valuation.
r. Elimination of Contingent Accounts. Contingent accounts shall no longer be used. All financial transactions shall be recorded using the appropriate accounts. Cash shortages and disallowed payments, which become final and executory, shall be recorded under receivable accounts "Due From Officer and Employees" or "Receivables-Disallowances/Charges", as the case may be.
s. Recognition of Liability. Liability shall be recognized at the time goods and services are accepted or rendered and supplier/creditor bills are received.
t. Interest Accrual. Whenever practical and appropriate, interest income and/or expense shall be accrued and recognized in the books of accounts.
u. Accounting for Borrowings and Loans. All borrowings and loans incurred shall be recorded to the appropriate liability accounts.
v. Elimination of corollary and negative journal entries. The use of corollary and negative journal entries shall be stopped. Acquisition/Disposition of assets shall be debited/credited to the appropriate assets accounts. If an error is committed, correcting entry to adjust the original entry shall be prepared.
w. Petty Cash Fund. The Petty Cash Fund shall be maintained under the imprest system. As such, all replenishment shall be directly charged to the expense account and at all times, the Petty Cash Fund shall be equal to the total cash on hand and unreplenished expenses. The Petty Cash Funds shall not be used to purchase regular inventory/items for stock.
x. Foreign Currency Adjustment. Cash deposits in foreign currency and outstanding foreign loans shall be computed at the exchange rate prescribed by the Bangko Sentral ng Pilipinas at balance sheet date. The total cash deposits and foreign loans payable shall be adjusted at the end of each month and any gain or loss on foreign exchange shall be recognized. The subsidiary ledger for foreign currency obligations shall reflect appropriate foreign currency in which the loan is payable. The liability shall be expressed both in the foreign and local currency.
ACCOUNTING SYSTEM
Sec. 5 General Accounting Plan. The General Accounting Plan (GAP) shows the overall accounting system of a government agency/unit. It includes the source documents, the flow of transactions and its accumulation in the books of accounts and finally their conversion into financial information/data presented in the financial reports.
The following accounting systems are:
a. Budgetary Accounts System;
b. Receipts/Income and Deposits System;
c. Disbursement System; and
d. Financial Reporting System
Budgetary Accounts System - The Budgetary Accounts System encompasses the processes of preparing the Agency Budget Matrix (ABM), monitoring and recording of allotments received by the agency from the DBM, releasing of Sub-Allotment Release Order (SARO- to Regional Offices (RO) by Central Office (CO), issuance of Sub-SARO to operating units (OUs) by the RO and recording and monitoring obligations.
Budgetary Accounts - Consist of the appropriations, allotments and obligations. Appropriations refer to the authorization made by law or other legislative enactment for payments to be made with funds of the government under specified conditions and/or for specified purposes. Appropriations shall be monitored and controlled through registries and control worksheets by the DBM and COA, respectively.
Agency Budget Matrix (ABM) - The ABM refers to a document showing the disaggregation of agency expenditures into components like, among others, by source of appropriation, by allotment class and by need of clearance.
THE NATIONAL BUDGET
Government budget defined
A government budget is a plan for financing the government activities of a fiscal year prepared and submitted by responsible executive to a representative body whose approval and authorization are necessary before the plan can be executed. It is more than mere estimate or statement of receipts and expenditures; it is a definite proposal to be approved or rejected.
Basically, budgeting is planning and controlling. Careful plans for the future should be laid and those who direct the operation of the government must be held strictly responsible for carrying out the plan.
Purposes of budgeting:
Establish in advance the objective or end result of the budget period.
Provides the means of coordinating the activities of the various sub-divisions and departments of the business.
Provide a period-to-period basis of comparison to show whether the plan is being realized and if not realized indicate when changes must be made if current objectives are to be obtained.
To serve as basis for orderly management of public finances.
Fundamental Principles of Fiscal Operations
Budget activities are governed by legal provisions/fundamental principles relating to the financial transactions and operations of the government. The principles, as provided for by law are:
No money shall be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority;
Government funds or property shall be spent or used solely for public purposes;
Trust funds shall be available and may be spent only for the specific purpose of which the trust was created;
Fiscal responsibility shall, to the greatest extent, be shared by all those exercising authority over the financial affairs, transactions, and operations of the government agency;
Disbursements or disposition of government funds and property shall invariably bear the approval of the proper officials;
Claims against government funds shall be supported with complete documentation;
All laws and regulations applicable to financial transactions shall be faithfully adhered to; and
Generally accepted principles and practices of accounting as well as of sound management and fiscal administration shall be observed, provided they do not contravene existing laws and regulations.
The Budget as the Framework of the Accounts
The budget is an estimate of the proposed expenditures for specified purposes and
period, and embodies the means of financing them during the same period. It provides the means for controlling the estimated amounts to be raised as well as the proposed amounts to be spent for specified objects. It is a program that guides all activities relating to collections and expenditures; It is the framework of the accounts by which the transactions affecting such collections and expenditures shall be recorded; thus, the proper classification of income and expenditures should be reflected in the accounts so that recorded data may give adequate support to future budget estimates.
Linkage Between Government Budgeting and State Accounting
A close linkage exists between government budgeting and state accounting. The accounting system provides the essential information needed to make resource allocation decisions, monitor budgetary performance, and assess the effectiveness of operations. The budget provides the framework within which transactions should be recorded, classified and summarized in the accounting system to permit comparison of actual results with budgeted standards.
A substantial output of the accounting system pertains to accountability reports needed to monitor performance in the execution and accountability phases of the budgetary process. The content, form, and other requirements of such reports are prescribed by the DBM. The Commission on Audit issues rules and regulations that may be applicable when the reporting requirements affect accounting functions.
Kinds of Budgets
As to Nature
Annual Budget – a budget which covers a period of one year. It is the basis of an annual appropriation.
Supplemental budget – a budget which purports to supplement or adjust a previous budget which is deemed inadequate for the purpose for which it is intended. This is the
basis for a supplemental appropriation.
Special budget – a budget of special nature and generally submitted in special forms on account of the fact that itemizations are not adequately provided in the Appropriation Act or that amounts are not at all included in the Appropriations Act.
As to Basis
Performance Budget – a budget emphasizing the programs or services conducted and based on functions, activities and projects which focus attention upon the general character and nature of the work to be done, or upon the services to be rendered, rather than the things to be acquired, such as personal services, supplies and equipment. It is management-oriented measures actual or estimated results in the basis, terms of benefits accruing to the public and their costs.
Line-Item Budget – a budget the basis of which are the objects of expenditures such as salaries and wages, travelling expenses, freight, supplies, materials and equipments, tec.
As to Approach and Technique
Zero-Based Budgeting – a process which requires systematic consideration of all programs, projects and activities with the use of the defined ranking procedures. In ZBB, activities are analyzed and presented in "decision packages" or key budgetary inclusions.
The term "zero-base" refers to the yearly analysis, evaluation and justification of each activity, project or program, starting from a "zero" performance and budgeting level. ZBB does not accept the prior year's budget as a starting point for analysis. The analysis of the levels of funding and performance as well as the expected impact of the objectives at each level will give enough leeway for management to decide whether to eliminate entirely a low priority to make way for a new one or to cut back the performance and funding level of the program to permit another to expand.
Incremental Approach – a budget where only additional requirements need justification. It focuses on analysis of incremental changes in the budget and may be done within the context of performance and program budgeting.
Capital Budgeting Approach - a budgeting technique which consists of a two-tiered strategy, as follows:
c.1 Setting a baseline budget that will correspond to the minimum level of operating requirements at which each agency of the national government will be able to perform its basic functions; and
c.2 Prioritization of the allocable balance (i.e. what is left of the budget ceiling after deducting the baseline budget) among the proposed projects and programs of agencies.
Agency baseline – refers to the cost of performing regular agency functions, including an
allowance for inflation, but excluding the cost of non-recurring programs and
projects.
Government-wide baseline – refers to the budget impact of decisions or policies
enunciated by the government that require priority funding. These items are not
traditionally reflected in the individual budgets of agencies but are shown as
a lump sum to be distributed later on the basis of prescribed rules or procedures.
Examples are:
Proposed salary adjustment
Miscellaneous personnel benefits, including retirement benefits
Mandatory allocations to local governments
Projected level of support to GOCCs
Estimated provisions for contingencies due to calamity, foreign exchange fluctuations and other adjustments
FAPs baseline – refers to the budgetary requirements, of ongoing programs/projects with
foreign financial assistance.
Priority Program/Project Fund - the remaining balance after deducting the baseline
budget requirements of the national government.
4. Other forms of budget
a. Regional budgeting – is a budget prepared consistent with the regional organization of
the national government, wherein the DBM identifies by region the expenditures
of government agencies and releases funds also on a regional basis.
b. Long-term budget – is a budget prepared for a four or five year period or longer; longer
range estimate of revenue and expenditures requirements.
c. Key Budgetary Inclusions – refer to the financial commitments of agencies pertaining to a
budget year. KBIs are maintained for the purpose of (1) controlling major financial
commitments so that funds are not misappropriated or to prevent juggling of funds,
(2) to disclose the funds and have a clear picture of the expenditures; and (3) to track
down a mandatory obligations and insure funding of priority projects.
National Budget System
The National Budget System consists of the methods and practices of the government for planning, programming and budgeting. It shall include the adoption of sound economic and fiscal policies and the execution of the programs and projects geared towards the accomplishment of political, economic and social objectives. Its primary concern is the availability and use of money to provide the services required or expected from the government.
Legal Basis of the Budget System
The legal basis of the current national budget system is the Budget Reform Decree or PD No. 1177. The first premise of the Budget Reform Decree is that the national budget is an instrument for development and as such requires careful design and implementation of budget preparation, legislation, execution and accountability.
What is a national budget?
A national budget is the government's estimate of its income and expenditures. It is the financial translation of the program and projects that best promote the development of the country. It is what the government plans 1) to spend for its programs and projects and 2) where the money will come from. It is based on what the government thinks it will spend during the year and the sources of what it hopes to have as funds either from the revenues or from borrowings with which to finance such expenditure.
On what is our national budget spent?
Our national budget is allocated for the implementation of various programs and projects, the operation of government offices, payment of salaries of government employees and payment of public debts. These expenditures may be looked at in terms of expense class, sector, implementing unit of government and region.
Expenditures by expense class show how much is provided for:
Current operating expenditures – appropriations for the purchase of goods and services for the conduct of normal government operations within a budget year (e.g. salaries, maintenance and other operating expenses, interest payments etc.)
Capital outlays – appropriations for the purchase of goods and services the benefits of which extent beyond the budget year and which add to the assets of government including investments in the capital stock of government owned-or controlled corporations.
Net Lending – net advances by the national government for the servicing of government guaranteed corporate debt and loans outlays by the national government to government corporations; and
Debt amortization – contribution to the sinking fund which is utilized for principal repayment of our loans.
How may a national budget affect the country's life?
The national budget also serves as a stabilization role. It pumpprimes the economy, that is, when the economy is in recession and private sector activity is weak, the government through its budget speeds up and increases its spending. The intention is to stimulate demand for goods and purchases and the creation of more job opportunities.
Conversely, during economic booms when the private sector is active and economic growth is high, the government through the budget, assumes a more conservative spending, taxing, and borrowing stance so as not to compete with the private sector in the demand for goods and credit. The objective is to slow down the rise in interest rates and prices, and avoid overheating the economy.
Furthermore, the budget serves as a tool for the redistribution of the country's financial resources. This is most clearly manifested ion the sustained funding for the social services sector. Through various social programs especially those targeted for the poor, the government hopes to raise the rate of return on human capital; provide immediate relief to the needy; and extend better opportunities for slef-help, livelihood and employment activities.
Why does the budget increase?
Expenditures may increase or decrease depending on the government's policy of how much it would like to put into the economy. The more the government intends to raise the country's level of development, the more expenditure rise.
Furthermore, the maturity of the country's debt also determines the size of the budget and how it differs from year to year. When the loans which were incurred in the past fall due, scheduled payments for a given year are included in the year's expenditure program. Also, government's assumption of liabilities of government corporation and financial institutions contributes to the increase in the allocation of debt servicing. These, in turn, increase the budget deficit which contributes to higher interest payments and a bigger over-all budget.
Commodity price increase equated to inflation also require that the budget be adjusted so that it would still be able to buy the quantity of goods and services that the government is aiming for.
What are the major sources for our national budget?
There are two major sources of funds: 1) revenues and 2) borrowings.
Revenues consist of tax and non-tax collections.
Tax revenues are classified as follows:
a. excise tax
b. license and business taxes
c. income taxes
d. import duties
e. other taxes and duties
Non-tax revenues include fees and service incomes of various government
agencies, foreign grants, including those from the sale of transferred,
surrendered and privatized assets by the Asset Privatization Trust and the
Presidential Commission on Good Government.
Borrowings come from domestic and foreign sources. Domestic borrowings are
sources from the auction of Treasury bills, notes and bonds. Foreign borrowings,
in turn are classified either as project and program loans being offered by foreign
creditors such as the Asian Development Bank and the International Bank for
Reconstruction and Development. Project loans are foreign loans obtained to
finance a specific project such as the building of roads or bridges, while Program
loans are multi-purpose foreign loans for the enhancement of a specific sector and
conditioned on basic changes in certain economic, monetary or fiscal policies,
among others.
Why does the government borrow from foreign sources? Why can't it make do with what is collected locally.
Our government has to provide for the requirements of capital outlays projects such as roads and bridges, that are important to the attainment of our development objectives. In effect, capital outlays are investments for continuous economic activities and for future expansions. They generate local production and income.
Relying only on domestic or local resources to finance such projects will limit our government's capacity to provide these needed support. If the government takes too large a share of domestic resources, local private demand will have less for their own projects and activities. As a result, credit will be tight, interest charges will be high and prices of goods and services will go up.
The absence of a long-term domestic capital market and the limited savings in the country, moreover, render the domestic resources insufficient to finance the enormous requirements of development. By borrowing from foreign sources, the government takes advantage of long-term loans which are readily available abroad with lower interest rates in international capital markets.
It should be emphasized that our national government uses borrowing proceeds solely to finance carefully selected capital projects supportive of the country's development goals. Wisely chosen and efficiently implemented, these projects are expected to build up the productive capacity of our economy and eventually pay back the loans obtained.
BUDGET PROCESS
How is the government budgeting undertaken?
Government budgeting is undertaken using a process that consists of four (4) phases, namely: 1) budget preparation
2) budget legislation or authorization
3) budget execution or implementation
4) budget accountability or review
Budget Preparation
This process starts with the determination of budgetary priorities and activities guided by our national development plan, within the ceilings or constraints imposed by available revenues and borrowing limits and inclusion of amounts needed for approved priorities and activities into the expenditure levels.
The Development Budget Coordinating Committee (DBCC) determines the overall expenditure levels, the revenue projections, the deficit levels and the financing plan. The DBCC submits these to the Cabinet and to the President for approval.
The DBCC is composed of the Budget Secretary as Chairman and the Economic Planning Secretary, the Bangko Sentral ng Pilipinas and the Finance Secretary as members. It is assisted by an Executive Technical Board.
Once approved, the DBM issued a Budget Call, a document reminding the different agencies in the government to prepare their respective budgets in accordance with approved overall budget ceilings and parameters. Upon receipt of the budget call, the agencies are also expected to have already started conducting their own internal budget consultations to firm up and to fit in their departmental plans and priorities for the specific year with the overall sectoral development strategy of government, as laid down in the Medium Term Development Plan.
DBM hold consultations with agencies to set indicative expenditure ceiling of department or agencies as set by DBCC to be used in preparation of official budget estimates to avoid. minimize bloated agency budget proposal
Agencies issue guidelines to their regional offices which are expected to conduct regional budget hearings with RDC and NGO. In this hearing, programs, plans and priorities in the regions are reviewed which will be incorporated in the budget proposal.
The regional offices submit their RDC – approved budget to their respective head offices in Manila which, in turn, collate all the regional budget proposals submitted by their different regional offices all over the Philippines and consolidate these into a single agency budget proposal of the department.
The DBM conducts consultation-workshops with RDCs and department heads on their criteria for the allocation of the agency budget to their regional offices. The intention is to ensure that
the regional distribution of the national budget is consistent with the development plans and directions of the regions. This is in line with the allied policies of decentralization and creating greater popular participation in government concerns.
The DBM then undertakes a series of review activities to evaluate the merits of the budget proposals and determine the areas where possible cuts could be made. The objective is to make the overall expenditure level consistent with that determined by the DBCC and approved by the President.
Budget Legislation or Authorization
The President submits the overall budget that he/she approved to Congress in the form of a detailed Expenditure Program (National Expenditure Program) accompanied by the Budget of Expenditures and Sources of Financing, The President's Budget Message and the Regional Allocation of the Expenditure Program.
In Congress, the proposed budget goes first to the House of Representatives, which assigns the task of initial budget review to its Appropriations Committee.
The House Committee summons the different national agencies of the government to explain and to justify their budget. The proposed budget is then presented to the House Body as a bill (Gen. Appropriations Bill).
From the House of Representatives, the budget bill goes to the Senate and is referred to the Senate Finance Committee. The Senate Finance Committee, likewise, asks the various agencies to explain their respective budgets as contained in the budget bill. It then proposes amendments to the House Budget Bill to the Senate Body for approval.
To thresh out differences and arrive at a common version, a conference committee is created composed of members coming from both houses.
Once a common budget bill has been approved by both houses voting separately, it is submitted to the President for signing into law. It then known as a General Appropriations Act., which mandates the DBM, as the staff arm of the President to execute or implement the expenditures program.
Budget Execution or Implementation
This is the operational aspect of budgeting. After the President signs the GAA into law, the DBM requires the different agencies of government to prepare the Agency Budget Matrix (ABM) to be accompanied by the Annual Cash Program.
The allotment (based on the ABM) is the authority of the government agency to incur obligations and enter into contract. It is possible that sometimes the allotment is issued for the funding of projects even if these will take one year to finish. This is done to enable the agency to enter into contracts and begin the projects. However, pursuant to DBM Circular Letter #2008-11, the releases of Notices of Cash Allocation (NCAs) is being modified. NCAs to
cover regular requirements of agencies shall be comprehensively released with a monthly breakdown of NCA requirements of the agency receiving NCA directly from DBM. Basis of releases is the Monthly Cash Program (MCP), a budget execution document, reflects the monthly disbursement requirement of OUs.
All NCAs programmed and credited for the month whether part of the comprehensive release or constituting the additional NCA releases, shall be valid only until the last working day of the said month, thus, any un utilized NCA corresponding to the book balance (net of outstanding checks) shall automatically lapse at the end of that month.
DBM shall provide the MDS-GSB and agency concerned, a monthly schedule of the NCA releases, ex. Monthly NCA requirement of the agency.
Upon receipt of the NCA, the MDS-GSB shall ensure that the amount programmed for the month, if there is any, shall be credited immediately to the Regular MDS accounts of the agency. Thereafter, the NCA requirements for the subsequent months shall be credited on the first working day of the month consistent with the schedule to be provided by DBM.
The NCA specifies the maximum amount of withdrawal that an agency can make from the government servicing bank for the period indicated.
DOF and DBM will meet every month to confirm or adjust the estimated cash availability and the program of NCA releases. In the event that cash balance of the government reaches a level where the budget cost cannot be met, DBM implements the across-the-board budget reduction.
(Refer to the DBM Circular Letter #528 for the guidelines of NCA Releases for FY 2011)
Budget Accountability
This refers to the evaluation of actual performance and initially approved work targets. Obligation incurred, personnel hired and work accomplished are compared with the plans and targets submitted by the agencies at the time that their respective budgets are prepared. This work is entrusted with the DBM and COA.
Budget accountability is concerned with tracking and monitoring of actual expenditures, revenue, assets and liabilities of the government and is carried out largely through the accounting function. It consists of the periodic reporting by agencies of their performance, top management review of government activities and the fiscal and policy implications, and the actions of the COA in assuming the fidelity of officials and employees in the handling of receipts and expenditures.
Accounting for budgetary accounts
Budgetary accounts consists of the appropriations, allotments and obligations. Appropriations refers to an authorization made by law or other legislative enactment, directing the payment of goods and services out of government funds under specified conditions or for special purposes. Allotment is the authorization issued by the DBM to the agency, which allows it to incur obligations for specified amounts, within the legislative appropriation.
In order that the appropriation may be released, the agency, in consultation with the DBM, is required to prepare and to submit the Agency Budget Matrix (ABM), the official document used as the basis in the release of the obligational authority. This is prepared by appropriation/financing sources to support expenditures to be made during the year broken down by allotment class/expenses. The ABM shall contain, among others, the following information:
The amount to be released categorized under "Not Needing Clearance" column,
The amount that will be released through the issuance of Special Allotment Release Order (SARO) categorized under "Needing Clearance" column including continuing appropriations based on the Statement of Allotments, Obligations and Balances (SAOB).
An Annual Cash Program, which shall provide cash to finance the programs reflected in the ABM and the prior year's accounts payable, is also submitted with the ABM. Upon approval of the total comprehensive release by the DBM, it will be released to the agency.
For request "Non-Needing Clearance", the Notice of Cash Allocation (NCA) is issued as requested. Pursuant to the Tax Remittance Advice (TRA) system as provided in Joint Circular No. 1-200 of the DOF, DBM and COA dated January 3, 2000, the NCA released to the agency
is reduced by the amount of the taxes withheld to be remitted by the DBM for the Agency thru the TRA based on the request of the agency duly supported by the Summary of Taxes Withheld (STW).
Control and Recording of Appropriations, Allotments. Obligations and the NCA
The COA does not journalize the appropriations. The control of the release of allotments and the NCA shall be made by the DBM and the BTr, thru the registries that they shall maintain. The Agency shall also monitor the allotments and the obligations it incurs in the registry that it shall also maintain.
The agency shall journalize the NCA it receives as debit to Cash-National Treasury-MDS and credit to Subsidy Income from the National Government. In effect it identifies the share of the agency in the income of the National Government.
Records of the DBM
Upon the approval and issuance of the ABM and the SARO, the DBM shall enter the pertinent data on releases for each government agency in the Registry of Appropriations and Allotments (RAPAL). The DBM shall maintain the Registry of Allotments and NCA (RANCA) for the allotments and the NCA issued to the agency. The RANCA shall be the control and monitoring record of the DBM and shall furnish the BTr a copy of the NCA.
Records of the BTr
Upon receipt of the NCA from DBM, the BTr shall enter it in the Registry of NCA and Replenishment (RENREP). It shall also enter the transfer of cash from its bank account(s) to the appropriate MDS account.
Records of the Agency
Upon receipt of the approved ABM and ARO, the Budget Officer shall record the allotment to the respective registries through the Allotment and Obligation Slips (ALOBS). Although the agency will not journalize its appropriation and allotments, it shall maintain four registries for the obligations it incur:
Registry of Allotment and Obligations – Capital Outlay (RAOCO)
Registry of Allotment and Obligations – Maintenance and Other Operating Expenses (RAOMO)
Registry of Allotment and Obligations – Personal Services (RAOPS)
Registry of Allotment and Obligations – Financial Expenses (RAOFE)
Recording of Allotments
Upon receipt of the approved ABM and ARO, it shall be recorded in the respective registries through the Allotment and Obligation Slips (ALOBS). Separate registries shall be maintained for the four classes of Program/Project/activity(PPA) to wit:
RAO-PS
RAO-MO
RAO-CO
RAO-FE
Accounting of Obligations:
Obligation refers to a commitment by a government agency arising from an act of a duly authorized official which binds the government to the immediate or eventual payment of a sum of money. The agency is authorized to incur obligations only in the performance of activities which are in pursuits of its functions and programs authorized in appropriation acts/laws within the limit of the ARO.
The Head of the Requesting Unit shall prepare the Obligation Request (ObR) or Budget Utilization Request (BUR) and Disbursement Voucher. He shall certify on the necessity and legality of charges to appropriations/allotment under his direct supervision as well as the validity, propriety and legality of supporting documents.
The Head of the Budget Unit shall certify the availability of allotment and obligations incurred in the ObR or budget and utilization in the BUR. Obligations shall be taken up in the registries maintained by the Budget Unit through the ALOBS prepared/processed by the office. The Budget Officer verifies the completeness of the documents. If complete, then prepares the ALOBS. Verifies the availability of the allotment based on the RAOs. If no allotment is available, returns the documents to the office concerned, if there is an available balance of allotment to cover the obligations, prepares the ALOBS and record in the appropriate RAOs.
The obligation is recognized and will be entered in the appropriate RAO when the obligation is incurred as evidenced by the approved ALOBS. Obligations shall be posted in the "Obligation Incurred" column of the RAOs to arrive at the balance of allotment still available at a given period. There is no need to prepare a new ALOBS for corrections/adjustments made by the accounting unit after the processing of the claims but before payment is made.
Adjustment in the RAOs shall be effected thru a positive entry (if additional obligation is necessary) or a negative entry (if reduction) in the Obligation Incurred column.
The Head of the Accounting Unit, for contract or purchase order, shall certify the availability of funds based on the ObR or BUR duly certified by the Budget Officer and certify the availability of cash and completeness of supporting documents in the DV.
A new ALOBS for the following adjustments of obligations as negative entries in the Obligation Incurred column shall be made:
Refund of cash advance granted during the year;
Overpayment of expenses during the year;
Disallowances/charges which become final and executory
To support the negative entries, a certified copies of OR for the overpayment/refunds shall be furnished to the Budget Unit.
The Accountant shall credit "Cash-National Treasury-MDS" each time a payment is made charged against the NCA and debit the specific account being paid for, either asset or expense account.
Illustrative Entry:
Receipt of Allotment Posting in the allotment column to the respective
Registries.
Incurrence of obligation Posting in the obligation column of the RAO's
Ex. RAOPS for PS obligations or expenditures
Notice of Cash Allocation(NCA) specifies the maximum amount of withdrawal that an agency can make from the National Treasury through the issuance of MDS checks or other authorized mode of disbursement. This is issued by DBM based on the Annual Cash Program or as requested and prescribed under the Modified Disbursement System (MDS).
Upon receipt of the NCA, the accountant shall record in the books as:
Cash-National Treasury, MDS 106 XX
Subsidy Income from National
Government 631 XX
Income/Collections and Deposits System
This system covers the processes of acknowledging and reporting income/collections, deposits of collections with Authorized Government Depository Bank (AGDB) or through the AGDB for the account of the Treasurer of the Philippines, and recording of collections and deposits in the books of accounts of the agency.
The sources of income and collections made by Agency are:
Taxes 4. Borrowings
Operating and Service Income 5. Miscellaneous Receipts
Grants and Donations
Methods of Accounting for Income:
Accrual Method – used when income is realized (earned) during the accounting
Period regardless of cash receipt. Account Receivable is set up
and the general or specific income accounts according to nature
and classification are credited.
Modified Accrual – income of an agency is recorded as "Deferred Credits to Income"
and the appropriate receivable account is debited. The income
account is recognized upon receipt of collection and the "Deferred
Credits to Income" account is adjusted accordingly.
Cash Basis - shall be used for all other taxes, fees, charges and other revenues
where accrual method is impractical. The income account is
credited upon collection of the cash or its equivalent.
All collecting officers shall deposit intact all their collections with AGDB daily or not later than the next banking day and shall record all the deposits made in the Cash Receipts Record.
Only National Government Agencies shall maintain two sets of books:
Regular Agency books – this shall be used to record the regular transactions
of the agency like the receipt and utilization of Notice of Cash
Allocation (NCA), and collections of income and other receipts
which the agency are authorize to use. This shall consist of journals and
ledgers, as follows:
Journals:
Cash Receipts Journal (CRJ)
Cash Disbursement Journal (CDJ)
Check Disbursement Journal (CkDJ)
General Journal (GJ)
Ledgers:
General Ledger (GL)
Subsidiary Ledgers (SL)
National Government books – this shall be used to record collections, which
the agency cannot use but are required to be remitted to the Bureau of
the Treasury. These shall consist of the following:
Cash Journal
General Journal
General Ledger
Subsidiary Ledger
Receipt and Collection Process
The Collecting Officer (CO)receives payment from creditors and issues Official Receipt.
The CO records collections in Cash Receipt Record.
The CO deposits collections.
The CO records deposit in Cash Receipt Record.
The CO prepares the Report of Collections and Deposits and forwards to accounting unit with copies of official receipts and validated Deposit Slips.
The accounting unit prepares Journal Entry Voucher (JEV) and records in the Cash Receipts Journal.
Types of collections as to authority to use:
Without authority to use.
With authority to use.
Authority with limitations
Income from sale of equipment.
Grants and donations intended for agency use.
Miscellaneous collections.
Illustrative Accounting Entries:
Without Authority to Use (NG Bks)
As a general rule, all revenues regardless of amount and frequency of collection are to be remitted to the National Treasury. Such income shall be recorded in a separate books of accounts NG Books.
Receipt of cash payment of hospital fees
Cash – collecting officers 102 xxx
Due to National Treasury 411 xxx
Hospital fees 596 xxx
Remittance to the treasury
Due to National Treasury 411 xxx
Hospital fees 596 xxx
Cash-collecting officers 102 xxx
With Authority to Use (RA Bks)
For agencies which are authorized to use income for their operations, the collections shall be recorded as income in the Regular Agency (RA) books
Collection of prior year's receivables
Cash- collecting officers 102 xx
Accounts Receivables 121 xx
Issuance of bill for the rent of an office space.
Accounts Receivables 111 xx
Rent/Lease income 574 xx
3, Record collection of rent payment.
Cash – collecting officer 102 xx
Accounts Receivable 111 xx
Record deposit in the bank.
Due from National Treasury 122 xx
Cash – collecting officer 102 xx
Release of NCA by DBM after request is be made to the Bu of Treasury to use the deposited collections as augmentation of MOOE.
Cash-National Treasury, MDS 106 xx
Due from National Treasury 122 xx
Record disbursement for the repair (use of income).
Repairs and Maintenance -Buildings
and other Structures 804 xx
Cash-National Treasury, MDS 106 xx
Cash from another agency to implement its project (Inter-agency Transferred Funds). Under existing regulations, the collections made by an Implementing Agency (IA) of cash from a source agency (SA) to implement the latter's project shall be remitted by the recipient agency, the IA, to the BTr. The IA shall request the necessary NCA from the DBM)
6.a Receipt of the check from the SA.
Cash – collecting officers 102 xx
Due to Other NGAs( SA) 416 xx
6.b Remittance of cash to the BTr
Due from National Treasury 131 xx
Cash-collecting officers 102 xx
6.c Receipt of NCA from DBM
Cash-National Treasury, MDS 106 xx
Due from National Treasury 131 xx
6.d Purchase of technical equipment
Technical & Scientific Machinery
And Equipment 226 xx
Cash-National Treasury, MDS 106 xx
6.e Submission of liquidation report to the SA.
Due to Other NGAs 416 xx
Technical and Scientific
Machinery & Equipment 226 xx
If there is still a balance or refund of fund balances of completed projects.
Due to Other NGAs 416 xx
Cash-National Treasury, MDS 108 xx
Authority with Limitations
If the authority is subject to the limitation that any excess shall be remitted to the National Treasury, such collections for seminar and convention fees, the collections shall be recorded in the NG books. The expenses shall be journalized, the balance/excess to be remitted to the National Treasury.
Record collection of (ex.)seminar fees.
Cash – collecting officer 102 xx
Seminar/Training fees 622 xx
Record deposit of collection.
Cash in Bank – Local Currency 111 xx
Cash – collecting officer 102 xx
Record payment of expenses.
Office supplies expense 755 xx
Cash in Bank – Local Currency 111 xx
To close the balance or unused income in RA and transfer to NG Bks.
Seminar/training fees 622 xx
Cash in Bank–Local Currency 111 xx
Record transfer in the NG Bks the unused collections.
Cash – collecting officer 102 xx
Due to NT 411 xx
( Seminar/Training fees 622- xx
Record remittance of excess to the Bu of Treasury through bank.
Due to NT 411 xx
(Seminar/training fees 622 xx)
Cash – collecting officer 102 xx
Income from Sale of Equipment
Proceeds from the sale of non-serviceable, obsolete and other unnecessary equipment, including cars, vans and the like, may be requested for appropriation to purchase a new one and for the repair and maintenance of existing vital equipment. It should be noted that the purchase of cars and vans is subject to the prior authority required under the existing rules.
Illustration:
The Agency A of the national government sold a non-serviceable car with the following information:
Cost P500,000
Accumulated depreciation 250,000
Sales Price 300,000
The proceeds from sale were accordingly remitted to the National Treasury through the bank. The agency received Special Allotment Release Order (SARO) in the amount of P500,000 for the purchase of a new car with Notice of Cash Allocation (NCA) in the amount of P450,000, net of withholding tax of P50,000. After approval of the purchase order issued, the motor vehicle was delivered and accordingly, paid in full, net of withholding tax. The said tax was afterwards remitted to the Bureau of Internal Revenue through a Tax Remittance Advice (TRA).
To record sale of motor vehicle.
Cash – collecting officer 102 300,000
Accumulated Depreciation-
Land Transport Equipt 314 250,000
Land Transport Equipment 214 500,000
Gain on Sale of Asset 623 50,000
Record Remittance of collection to the NT through the bank:
Gain on Sale of Asset 623 50,000
Government Equity 471 250,000
Cash – Collecting Officer 102 300,000
Receipt of SARO for the request to purchase a new one:
Record in the RAOCO under the Allotment Received column.
Record the NCA received:
Cash – NT, MDS 107 450,000
Subsidy Income from NG 631 450,000
To record obligation in the RAOCO:
Post the amount of obligation in the Obligation Column of the RAOCO.
To record accounts payable for the motor vehicle delivered:
Land Transport Equipment 214 500,000
Accounts Payable 401 500,000
To record full payment of obligation:
Accounts Payable 401 500,000
Due to BIR 412 50,000
Cash – NT, MDS 107 450,000
To record remittance of withholding tax through TRA.
Due to BIR 412 50,000
Subsidy Income from
National Government 631 50,000
EXERCISES:
VSMMC received an inter-fund transfer from DOH, Region 10, to implement a medical mission
program in the amount of P200,000. The funds was intended to purchase the needed equipments.
The project ended with a fund balance of P15,000 and was returned to the source agency together
with the liquidation report and turn-over of equipments.
The Bureau of Plant Industry conducted a seminar regarding "Horticulture". The agency
collected a total amount of P100,000, which was deposited with the agency depository bank and
paid the following expenses of the seminar: Office Supplies, P25,000; Rent, P 20,000; and Printing
and Binding, P7,000. The excess of the amount collected was appropriately remitted to the NT.
REVISED CHART OF ACCOUNTS UNDER THE NGAS
Chart of Accounts – is a list of account titles and codes that guides the bookkeeper in recording
government transactions.
It provides the framework within which the accounting records are
constructed.
Standard Chart of Accounts (SGCA) – is a list of general ledger accounts prepared for the use of National, Local and Government Owned or Controlled Corporations design to achieve the objectives of uniformity in accounting and reporting, facility in consolidating financial reports and adaptability in computerization.
It consists of Balance sheet accounts and Budget/Operation accounts.
Coding – the systematic assignment of number, letters or other symbols to distinguish items
within a given classification from each other.
Purposes: 1. To save time and clerical work in recording items of accounts, funds,
projects, allotments and expenditures;
2. To facilitate location of accounts in the general and subsidiary ledger;
3. To facilitate systematic arrangement and classifying of accounts; and
4. To comply with the requirements of mechanized accounting.
The Chart of Accounts consists of three-digit codes grouped as follows:
Accounts Account Codes
Assets 100-299
Asset Contra Accounts 300-399
Liabilities 400-499
Equity 500-549
Income 550-699
Tax Revenue –
National Taxes 550-579
Local Taxes 580-599
General Income –
Permits and Licenses 600-609
Service Income 610-629
Business Income 630-649
Subsidy Income 650-659
Other Income 660-679
Gain or Loss Accounts 680-699
Expenses 700-999
Personal Services 700-749
MOOE 750-969
Financial Expenses 970-999
ACCOUNTING FOR DISBURSEMENTS AND RELATED TRANSACTIONS
Most of the transactions in the government involves the receipt and disbursement of cash. The cash transactions affect every classification within the financial statements – assets, liabilities, residual equity, income and expenses.by check. Thus it is essential that cash transactions are recorded correctly for reliability in the financial statements. .
Disbursements constitute all cash paid out during a given period either in currency (cash) or by check. It may also mean the settlement of government payables/obligation by cash or by check. It shall be covered by Disbursement Voucher (DV), Petty Cash Voucher, or Payroll.
How to Distinguish Disbursement from Expenditures?
Expenditures are the obligations incurred by the Agency. It includes both the amount actually paid and those incurred and recorded as liabilities to be paid in the future.
While Disbursements are payments made for such government obligations by cash or check.
Typical transactions for disbursements include the following major classes of payments:
Current Operating Expenses
Personal Services
Salaries and wages
Other Compensation
Personnel benefits
Other personnel benefits
Maintenance and Other Operating Expenses
travelling expenses
training and scholarship program
supplies and material expenses
repairs, etc….
Financial Expenses
bank charges
commitment fees
documentary stamps
interest and other financial charges
Capital Expenditures – these expenditures need allotment for CO. As
opposed to the current operating expenses, this involves
investments and procurement of assets that is expected to be used
for a longer period of time.
Inter-agency fund transfers - this covers the transfer of funds to other
agencies for the implementation of specific projects. This is taken
up in the books under "Due to –" by the receiving agency and "Due
from – " by the releasing agency.
Basic Requirements for Disbursement:
Existence of a lawful and sufficient allotment certified as available by the
budget officer.
Existence of a valid obligation certified by the Chief Accountant/Head of
Acctg. Unit;
Legality of transactions and conformity with laws, rules and regulation.
Approval of the expense by the Chief of Officer or by his duly authorize representative; and
Submission of proper evidence to establish the claim.
Disbursement System – involves the preparation and processing of disbursement voucher; preparation and issuance of check, payment of cash, granting, utilization, and liquidation/replenishment of cash advances.
All disbursement of the government require the certification as: 1) to validity, propriety, legality of the claim by the head of office who has control of the funds , and 2) certification that funds are available for the purpose.
Modes of disbursement in the government:
by check – thru MDS checks or commercial checks
by cash – cash advances granted to disbursing officer and petty cash fund.
Advices to Debit account
Disbursement by Checks – Checks shall be drawn only on duly approved DV or PCV. These shall be reported and recorded in the books of accounts only when actually released to the respective payees.
Two types of checks are being issued by government agencies:
Modified Disbursement System (MDS) checks – issued by government agencies chargeable against the account of the Treasurer of the Phil which are maintained with different MDS Governemnt Servicing Banks. These are covered by Notice of Cash Allocation, an authorization issued by the DBM to all government agencies to withdraw cash from the National Treasury through the issuance of MDS checks or other authorized mode of disbursements.
Commercial checks – issued by government agencies chargeable against the agency checking account with GSBs. These are covered by income/receipts authorized for deposits with AGDBs and funding checks received by RO/OUs from CO/ROs respectively.
All checks issued including cancelled checks shall be recorded chronologically in the Check Disbursement Record (CKDR) and indicate the date checks were actually released.
All checks actually released to the claimants including the cancelled ones shall be included in the Report of Checks Issued, which shall be prepared daily by the Cashier. All unreleased and cancelled as of the report date shall be enumerated in the "List of Unreleased Checks" to be attached to the RCI.
The agency received Notice of Cash Allocation for payment of its obligations. It maybe either for payment of prior year's or current year, the same is recorded as:
Cash – National Treasury, MDS XXXX
Subsidy Income from NG XXXX
This entry will show that the NCA received, is the share of the Agency in the income of the National Government, and is proof that there was an allocation of cash for the Agency by the National Treasury.
The NCA received by the agency may be net of the amount of the taxes to be withheld by the agency.
Disbursement by Cash - shall be made from cash advance drawn and maintained in accordance with COA rules and regulations. Cash payments are to be based on duly approved payrolls/disbursement vouchers. May either for:
personal services or salaries and wages
travels
miscellaneous expenses, which shall be recorded in separate cashbooks.
For Personal Services/payroll fund, the cash advance shall only be equal to the net amount due the officials and employees. The cash advance for the payroll shall be fully liquidated within five (5) days after the pay period. Any unclaimed wages shall be remitted and receipted to close the cash advance account.
Cash advances granted for travel shall be accounted for as Due from Officers and Employees and these are subject to liquidation upon completion. For liquidation of travel where the amount of cash advance is equal to or more than the travel expenses incurred, the Liquidation Report form shall be prepared by the officers/employees concerned and submitted to the accounting unit as basis for JEV preparation. This shall close the receivable account.
The excess cash advance shall be refunded and an OR shall be issued to acknowledge receipt thereof and shall be noted in the Liquidation Report. In the case the amount of cash advance is less than the travel expenses incurred, a Liquidation Report shall be submitted to liquidate the cash advance previously granted and a DV shall be prepared to claim reimbursement of the deficiency in amount.
The Report of Disbursement shall serve as the liquidation report of the cash advance granted to the Disbursing Officer.
Petty Cash Fund(PCF) - another mode of disbursement and the fund shall be sufficient for emergency and petty expenses of the agency. As such, all replenishment shall be directly charged to the appropriate expense accounts and at all times, the PCF shall be equal to the total cash on hand and the unreplenished expenses.
The PCF shall not be used to purchase regular inventory items for stock nor for the liquidation of outstanding cash advances. It shall be used only for disbursements which cannot be conveniently paid by check.
Disbursement through Petty Cash Fund - shall be through the PC Voucher which shall be approved by authorized officials and signed by the payee to acknowledge receipt of the amount from the PCCustodian. A DV shall be prepared to replenish the fund.
At the end of the year, the PCC shall submit to the Accounting unit all outstanding PCVs. In case the fund could not be replenished for lack of funds, a JEV shall be prepared
to recognize all unreplenished expenses in the books and the PCF account shall be credited. At the start of the year, as soon as cash becomes available, the fund shall be replenished by a debit to account "Petty Cash Fund" and credit to the appropriate "Cash in Bank" account to restore the fund to its original amount.
In case the PCC resigns or ceases as the custodian of the fund, full accounting/liquidation shall be made. Any excess cash shall be refunded and all the PCVs together with the original supporting documents shall be surrendered to the Accounting Unit which shall prepare a JEV to take up the expenses in the books and credit account "Petty Cash Fund". In no case shall the remaining cash of the former custodian be transferred to the incoming PCC.
The Petty Cash Fund record shall be used to record all the PCs received by the PCC as well as reimbursements received for expenses paid. All PCV shall be supported with valid documents to prove the propriety of disbursements, such as ORs, invoices, etc.
Advice to Debit Account (ADA) – This is a system by which no check is issued to the payee in payment of government obligations, but instead, the current account number of the payee in the bank where the government maintains a deposit, shall be obtained by the accounting unit. If payment is to be made, the ADA shall be issued by the Accounting Unit of the agency to the bank where it maintains an account. All payments shall be made to the credit of the payee's account and a debit to the account maintained by the government agency in the same bank. A JEV shall be prepared to record the transaction in the GJ.
Recording the different types of Disbursements:
a. Personal Services
Under the new accounting system payment of salaries and wages and other
remuneration to the personnel of the GENCY may be made through the following:
1. Payroll Fund in the hands of a Disbursing Officer(DO) as cash advance.
Payments are made by the DO in cash to the employees.
2. Payroll Fund deposited in an authorized depository bank, withdrawal by the
employees is through the automated teller machine (ATM).
3. Direct payment to employees by individual check.
Example, Assume the following payroll fund is established:
Salaries and wages P 36,000
Additional Compensation 10,000
Personnel Economic Relief Allowance (PERA) 6,000
Gross P 52,000
Less: Withholding tax P 2,000
GSIS contribution 3,000
PAG-IBIG contribution 3,000
PHILHEALTH contribution 2,000 10,000
Net Payroll P 42,000
=======
Enters the obligation – RAOPS
Cash Advance to be granted to the DO
Recognize the expenses and liabilities
Obligation and recording of the government share of the mandatory contributions
Remittance of the deductions to the respective offices.
Maintenance and Other Operating Expenses
Under NGAS, the Asset Method will be used in recording disbursements when expenditures apply to more than the accounting period.
Example, Assume the following types of expenditures:
Rent: The government signed a contract for the rental of office space with 3 months advance payment of P1,200 starting November.
The Agency enters the obligation of P1,200 in the RAOMO, and records the payment as:
Prepaid Rent P1,200
Cash – National Treasury, MDS P1,200
Supplies and Materials: Assume the following transactions about office supplies:
Issued Purchase Order (PO) for office supplies, P60,000.
Obligation
Payment (thru Procurement Service). Compare with purchases made to outside supplier.
Record the asset received/delivered
Record the used supplies.
Remittance of withholding tax thru TRA
Like the prepaid expenses, the expense shall be taken up upon utilization/consumption.
Cash Advances: Petty Cash Fund, Travelling Expenses
Obligation
Record the granting of cash advances
Record liquidations. Determine if there are refunds, reimbursements or additional claims.
d. remittance of refunds to the Bureau of Treasury and adjust obligations.
Property and Inventory accounting System - consists of the system of monitoring, controlling and recording of acquisition and disposal of property and inventory.
The system starts with the receipt of the purchases inventory items and equipment. The requesting office need of the inventory items and equipment after determining that the items are not available in stock shall prepare and cause the approval of the Purchase Request (PR). Based on the approved PR and after accomplishing all the required procedures adopting a particular mode of procurement, the agency shall issue a duly approved Purchase Order. Procedures relative to the obligation of the purchase order and payment of the deliveries follow the procedures in the obligation accounting system and disbursement system.
The sub-system are as follows:
Receipt, Inspection, Acceptance and Recording Deliveries of Inventory Items and Equipment,
Requisition and Issuance of Inventory Items
Requisition and Issuance of Equipment
Perpetual Inventory Method – purchase of supplies and materials for stock regardless of whether or not they are consumed within the accounting period, shall be recorded as Inventory account. Under the perpetual inventory method, an inventory control account is maintained in the General Ledger on a current basis.
Regular purchases shall be recorded under the Inventory account and issuance thereof shall be recorded based on the Report of Supplies and Materials Issued. Purchases out of Petty Cash Fund shall be charged immediately to the appropriate expense accounts.
The accounting Unit shall maintain perpetual inventory records, such as the Supplies Ledger Cards for each inventory stock, Property, Plant and Equipment Ledger Cards for each category of plant, property and equipment including work and other animals, livestock, etc. The subsidiary ledger cards shall contain the details of the General Ledger accounts.
For check and balance, the Property and Supply Officer/Unit shall maintain Property Cards (PC) for property, plant and equipment, and Stock Cards (SC) and for inventories. The balance in quantity per PC and SC should always reconcile with the ledger cards of the Accounting Unit.
The Moving Average Method of costing shall be used for costing inventories. This is a method of calculating cost of inventory on the basis of weighted average on the date of issue. The Accounting Unit shall be responsible in computing the cost of inventory on a regular basis.
Financial Expenses
These are expenses which are not used in the actual operation of the agency such as interest expenses, cank charges, etc.
Purchase and/or Construction of Fixed Assets
Property, Plant and Equipment and Inventory Accounts acquired through purchase shall include all costs incurred to bring them to the location necessary for their intended use, like transportation cost, freight charges, installation costs, etc. These are recorded in the books of accounts as Asset after inspection and acceptance of delivery.
Construction Period Theory
Fixed assets are charged against capital outlay. Since corollary entry is no longer made, the asset account is taken up upon purchase. Under the depreciation accounting adopted, depreciation will be taken up starting on the month succeeding the month of purchase or completion of construction. Straight-line method will be followed. The rate of depreciation shall depend on the nature of the assets, guidelines for this shall be issued by the COA.
In recording of fixed assets, the Construction Period Theory shall be followed. All expenses such as interests, license fees, etc., during the construction period shall be capitalized.
During the construction period , property, plant and equipment shall be classified and recorded as "Construction in Progress" with the appropriate asset classification. As soon as these are completed, the "Construction in Progress" account shall be transferred to the appropriate asset accounts.
Accounts "Public Infrastructures" and "Reforestation Projects" are closed to "Government Equity" account and the asset is recorded in the Registry of Public Infrastructures/Reforestation Projects at the end of the year.
Purchase/Construction of Fixed Assets
Example: Purchase of office equipment either thru the Procurement Service / outside suppliers.
Issue PO for the office equipment
Record the obligation, RAOCO
Record payment (Procurement Service/outside supplier) or recognize
the liability and taxes withheld
Record the asset receive/delivered
Remit taxes withheld upon receipt of TRA
Construction of Building by Contract
Signed the construction contract. Record the obligation – RAOCO
Record performance bond posted by the contract(cash-5%, bank guarantee-10%,
And surety bond-30% of the contract cost)
Grant 15% advances to the contractor if requested
Payment based on the percentage of completion billed
Imposed retention fees and observed if needed up to the last claims
Required withholding taxes to be deducted for every billing
Record completion and turn-over
Return the performance bond, retention fees and remittance of withholding taxes
Miscellaneous Transactions
These are the transactions that are unique and not recurring in the ordinary course of government operations. These seldom take place or should not happen at all.
Accounting for loss of cash and property. This may be due to malversation, theft, robbery, fortuitous event or other causes. Cash shortage discovered during cash examination conducted by auditors is reported through the Report of Cash Examination. The Auditor issues and audit report in case of shortage in property accountability. As soon as a shortage is definitely established, the auditor shall issue a memorandum pertaining thereto and the accountant shall draw a JEV to record the shortage as a receivable from the accountable officer concerned.
In case of loss of property due to other causes like theft, force majeure , etc., a report thereon shall be prepared by the accountable Officer concerned for purposes of requesting relief from accountability. No accounting entry shall be made but the loss shall be disclosed in the notes to financial statements pending result or request for relief from accountability.
Grant of Relief from Accountability. When a request for relief from accountability for shortage or loss of funds is granted, a copy of the decision shall be forwarded to the Chief Accountant who shall draw a JEV to record the transaction. The loss shall be debited to the Loss of Assets account and credited to the appropriate receivable account. In case the request for relief is denied, immediate payment of the shortage shall be demanded from the AO. Retitution shall be acknowledged by the issuance of an official receipt.
In case the request for relief from accountability for loss of property caused by fire, theft, etc, is granted a copy of the decision shall likewise be forwarded to the Chief Accountant for the preparation of the JEV. The loss shall be debited to the Loss of Assets account and credited to the appropriate asset account. If request for relief is denied, the loss shall be taken as receivable from the accountable officer and shall be credited to the appropriate asset account.
Accounting for Cash Overage. In case the cash examination of the auditor disclosed an overage, the amount shall be forfeited in favor of the government and an official receipt shall be issued by the cashier. The cash overage shall be taken up as Miscellaneous Income.
Accounting for stale checks. Checks may be cancelled when it become stale. The depository bank considers a check stale, if it has been outstanding for over six months from date of issue or as prescribed.
A stale check shall be marked cancelled on its face and reported as follows:
1. Unclaimed stale checks which are still with Cashier shall be cancelled and reported
in the List of Unreleased Checks as cancelled. The List of Unreleased Checks is
attached to the RCI.
2. For stale checks which are in the hands of the payees or holders in due course
and requested for replacements, new checks maybe issued upon submission of
stale checks to the accounting unit. A certified copy of the previously paid DVs shall
be attached to the request for replacement. A JEV shall be prepared to take up the
cancellation. The replacement check shall be reported in the RCI.
Accounting for Disallowance. Disallowances shall be taken up in the books of accounts only when they become final and executory. The accountant shall prepare the JEV to take up the Receivable-Disallowance/Charges and credit the appropriate expense account for the current year or Prior Year's Adjustment account if pertaining to expenses of previous years.
Cash settlement for disallowances shall be acknowledged through the issuance of an official receipt and reported by the cashier in the RCD.
Accounting for overpayments. Sometimes overpayments or even double payments of expenditures do happen in agencies. These could be avoided with the institution of peroper controls but some could not be avoided because of built-in procedures. One example is the payment of payrolls. Payrolls are prepared in advance and some agencies pay their employees through the banking system. All these are done before reports of attendance are submitted, making it impossible to know the exact amount to be paid in case there are absences without pay during the pay periods. In case of overpayments, refunds shall be demanded of the employees concerned.
TRIAL BALANCES, FINANCIAL REPORTS AND STATEMENTS
Financial Reporting System. This financial Reporting System (FRS) includes the preparation and submission of trial balances, financial statements and other reports needed by fiscal and regulatory agencies. The sub-systems are as follows:
1. Preparation and Submission of Trial Balances and Other Reports
2. Preparation and Submission of Financial Statements
The Trial Balance shows the equality of debit and credit balances of all general ledger accounts as of a given period. It is prepared and submitted monthly, quarterly and annually. At the end of the fiscal year, the pre-closing and the post-closing trial balances shall be prepared.
Purposes of the Trial Balance. The trial balance is prepared to:
1. prove the mathematical equality of the debits ad credits after
posting;
2. uncover errors in journalizing and posting; and
3. serve as basis for the preparation of the financial statements
The Pre-closing trial balance shall be prepared after recording the adjusting journal entries in the General Journal and posting the same to the General Ledger. It shows the adjusted balances of all accounts as of a given period. This is also described as the adjusted trial balance.
Adjusting or Correcting Journal Entries. Under the matching principle, adjustments shall be made for economic activities that have taken place but are not yet recorded at the time when the financial statements are prepared. Such adjusting journal entries are made to ensure that revenues and expenses are recorded in the period when they are earned or incurred. Adjustments are two main types: accrued items and deferred items.
Adjustment for Accrued Item. It is an adjusting entry for an economic activity already undertaken but not yet recorded into an asset and revenue accounts or a liability and expense accounts. It requires asset/revenue adjustments and liability/expense adjustments.
Asset/Revenue Adjustment. It involves earned revenues not yet recorded as assets and income at the end of the accounting period. Examples are receivables for revenues already earned but not yet collected nor billed as of the year end.
Account Title Account Code Debit Credit
------------- ------------ ----- -----
Interest Receivables 117 500
Interest Income 612 500
Liability/Expense Adjustment. It involves expenses, which exist already but remain unpaid at the end of the accounting period. Examples are salaries, wages and other expenses already incurred but not yet paid.
Account Title Account Code Debit Credit
------------- ------------ ----- ------
Salaries and Wages-Regular 701 1,000
Due to Officers and
Employees 423 1,000
Adjustment for Deferred Items. These are adjusting entries transferring data previously recorded in an asset account to an expense account, or data previously recorded in a liability account to a revenue account. It also requires asset/expense adjustments and liability/revenue adjustments.
Asset/Expense Adjustments. These pertains to assets, portion of which shall be recorded as expense of the agency at the end of the accounting period. Examples are prepaid expenses, bad debts and depreciation.
Account Title Account Code Debit Credit
------------- ------------ ----- ------
Original Entry:
Prepaid Rent 171 1,000
Cash-National Treasury,
MDS 107 1,000
Adjusting Entry:
Rent Expenses 786 900
Prepaid Rent 171 900
Bad Debts. Trade receivables shall be valued at their face amounts minus, whenever appropriate, allowance for doubtful accounts. Bad debts expense and/or any anticipated adjustments, which in the normal course of events will reduce the amount of receivables from the debtors to estimated realizable values, shall be set up at the end of the accounting period.
The Allowance for Doubtful Accounts shall be provided in an amount based on collectibility of receivables balances and evaluation of such factors as aging of the accounts, collection experiences of the agency, expected loss experiences and identified doubtful accounts
The determination of bad debts expense shall be derived from computations based on percentages and aging of accounts receivables as follows:
Age of Accounts Percentage
--------------- ----------
1-60 days 1%
61-180 days 2%
181-1 year 3%
More than 1 year 5%
An adjusting journal entry to take up bad debts expense is as follows:
Account Title Account Code Debit Credit
------------- ------------ ----- ------
Bad Debts 901 1,000
Allowance for Doubtful
Accounts 301 1,000
Depreciation for Property, Plant and Equipment. The cost of property, plant and equipment are allocated to the periods benefited through the provision of accumulated depreciation. Depreciation is the systematic and gradual allocation of the depreciable amount of assets over its useful life.
Method of Depreciation. Depreciation shall be computed using the Straight Line Method. Depreciation shall start on the second month from purchase. A residual value equivalent to ten percent of the cost shall be set. Annual depreciation is computed as follows:
Annual Depreciation = Assets Cost less Estimated
Residual/Salvage Value
--------------------------
Estimated Useful Life
Asset Cost - Purchase or Acquired Value of the Asset
Estimated Salvage Value - 10% of the asset cost
Estimated Useful Life - Estimated number of years the asset
shall be used as determined by the Commission on Audit
A sample adjusting journal entry for depreciation expense is as follows:
Account Title Account Code Debit Credit
------------- ------------ ----- ------
Depreciation-Office Equipment 907 1,000
Accumulated Depreciation-
Office Equipment 307 1,000
Reversion of the unused or utilized Subsidy Income from National Government at the end of the year due to the DBM policy that NCA will only be valid within the year of issue except NCA for accounts payable, which is valid one month after its issuance. There is no need to issue an MDS Check when reverting the account.
Account Title Account Code Debit Credit
------------- ------------ ----- ------
Subsidy Income from National
Government 631 100
Cash-National Treasury, MDS 107 100
Closing Journal Entries. Closing journal entries are general entries which close out the balances of all nominal/temporary and intermediate accounts at the end of the accounting period. The nominal and intermediate accounts that shall be closed at the end of the accounting period are as follows:
1. Close the balance of the Subsidy Income from National Government account to Income and Expense Summary account.
Account Title Account Code Debit Credit
------------- ------------ ----- ------
Subsidy Income from National
Government 631 1,000
Income and Expense Summary 999 1,000
2. Close the balance of all income accounts to Income and Expense Summary account.
Account Title Account Code Debit Credit
------------- ------------ ----- ------
Other business Income 618 500
Other Income 659 400
Income and Expense Summary 999 900
3. Close the balance of all expense accounts to Income and Expense Summary account.
Income and Expense Summary 999 800
Salaries and Wages-Regular Pay 701 800
4. Close the balance of the Income and Expense Summary account to the Retained Operating Surplus account.
Income and Expense Summary 999 1,100
Retained Operating Surplus 1,100
5. Close the balance of the Prior Year's Adjustments accounts to Retained Earnings Surplus account.
Prior Year's Adjustment 684 200
Retained Operating Surplus 200
6. Close the balance of the Retained Operating Surplus to Government Equity account.
Retained Operating Surplus 1,300
Government Equity 471 1,300
7. Close Public Infrastructures or Reforestation Projects accounts to Government Equity account and transfer the corresponding amount to the respective registries.
Government Equity 471 1,300
Public Infrastructures/ 251-260
Reforestation Projects 261-262 1,300
For the purpose of preparing the financial statements for the first, second and third quarters, the closing entries nos. 1 to 6 shall be prepared using the worksheet.
The Post-Closing Trial Balance. The Post-closing Trial Balance shall be prepared after recording the closing journal entries in the General Journal and Posting to the General Ledger. It contains a listing of all general ledger accounts that remain open after the closing process is completed.
GENERATION OF FINANCIAL STATEMENTS
Generation of Financial Statements and Supporting Schedules. Financial statements and their supporting schedules are the products of the government accounting processes. These are the principal comprehensive means by which the information accumulated and processed in the state accounting system is periodically communicated to those who use them. The financial statements generally prepared in the National Government are: the Balance Sheet, Statement of Income and Expenses, Statement of Government Equity, and Statement of Cash Flows.
Responsibility for Financial Statements. Responsibility for the fair presentation and reliability of financial statements rests with the management of the reporting agency. This responsibility is discharged by applying generally accepted state accounting principles that are appropriate to the entity's circumstances, by maintaining effective system of internal control and by adhering to the chart of accounts prescribed by the Commission on Audit.
To achieve fair presentation and reliable information of the financial statements, the following standards shall be observed.
a. FAIRNESS OF PRESENTATION. This refers to the overall propriety in disclosing financial information. Full disclosure in financial aspects requires observance of the following standards of reporting:
All essential facts relating to the scope and purpose of each report and the period involved shall be included and clearly displayed.
- All financial data presented shall be accurate, reliable, and truthful. The requirement for accuracy does not rule out the inclusion of reasonable estimates when the making precise measurements is impracticable, uneconomical, unnecessary, or conducive to delay. All appropriate steps shall be taken to avoid bias, unclear facts, and presentation of misleading information.
- Financial reports shall be based on official records maintained under an adequate accounting system that produces information objectively and discloses the financial aspects of all events or transactions taking place. Where financial data or reports based on sources other than the accounting systems are presented, their basis shall be clearly explained.
- The financial data reported shall be derived from accounts that are maintained in all material respects on a consistent basis from period to period; material changes in accounting policies or methods and their effect shall be clearly explained.
- Consistent and non-technical terminology shall be used in financial reports to promote clarity and usefulness.
b. COMPLIANCE. The report shall be in accordance with prescribed government requirements and international accounting standards of reporting.
c. TIMELINESS. All needed reports shall be produced promptly to be of maximum usefulness.
d. USEFULNESS. Financial reports shall be carefully designed to present information that is needed and useful to reports users.
STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS.
The Statement of Management Responsibility for Financial Statements shall serve as the covering letter in transmitting the agencies financial statements to the Commission on Audit, Department of Budget and Management, other oversight agencies and other parties. It shows the agency's responsibility for the preparation and presentation of the financial statements. The statement shall be signed by the Director of Finance and Management Office or Comptrollership Office, or the Chief of Office who has direct supervision and control over the agency's accounting and financial transactions, and the Head of Agency or his authorized representative.
BALANCE SHEET. The Balance is a formal statement which shows the financial condition of the agency as of a certain date. It includes information on the three elements of financial position - assets, liabilities, and government equity. It shall be prepared from information taken directly from the year-end Post-Closing Trial Balance. The Balance Sheet shall be supported with the following schedules/statements;
- Schedules of Accounts Receivables (SAR)
- Schedules of Accounts Payables (SAP)
- Schedules of Public Infrastructures (SPI)
- Other schedules as may be required.
Although the allotments and obligations of the agency are not recorded in the books of accounts, the Statement of Allotments, Obligations and Balances (SAOB) shall be submitted to the Commission on Audit by the Budget Officer/Agency Officer concerned. This statement shall to be included among the aforementioned schedules for information of government officials and oversight agencies.
STATEMENT OF INCOME AND EXPENSES. The Statement of Income and Expenses shows the results of operation/performance of the agency at the end of a particular period. This statement shall be prepared by the Accounting Unit from information taken directly from the Pre-Closing Trial Balance.
STATEMENT OF GOVERNMENT EQUITY. The Statement of Government Equity shows the financial transactions, which resulted to the change in Government Equity account at the end of the year.
STATEMENT OF CASH FLOWS. The Statement of Cash Flows is a statement summarizing all the cash activities of an agency. This includes the operating, investing and financing activities of the entity and provides information on the cash receipts and cash payments during the period. The primary purpose of the Statement of Cash Flows is to give relevant information on the agency's overall cash position, liquidity and solvency. Using the Statement of Cash Flows, managers, investors, and creditors could easily assess if the agency could meet its obligations in operating, investing and financing activities.
PREPARATION OF THE STATEMENT OF CASH FLOWS. To facilitate the preparation of the Statement of Cash Flows, the use of a Working Paper is encouraged. It shall show the increase or decrease in the cash account between two periods.
The net increase in cash provided by 1) operating 2) investing and 3) financing activities in addition to the cash balance at the beginning shall equal to the cash balance at the end of the period.
1) OPERATING ACTIVITIES. Operating activities involves the principal resources producing activities of the enterprise and other activities that are not investing or financing (SFAS 22). Generally, these include the cash effect on transactions that enter in the Income and Expense Summary account.
2) INVESTING ACTIVITIES. Investing activities involves the acquisition and disposal of long-term assets and other investments not included in cash equivalent (SFAS 22). These activities include cash transactions covering non-operating assets, such as the purchase of property, equipment, short and long-term investments and other non-current assets.
Non-cash investing activities are not included in the statement of cash flows.
3) FINANCING ACTIVITIES. Financing activities are derived from the equity capital and borrowings of the agency (SFAS 22). These include cash transactions involving the government equity and non-operational liabilities.
Non-cash financing activities are not included in the statement of cash flows.
The increase or decrease in the cash accounts are analyzed and the following computations are made:
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Inflows
- Receipt of Notice of Cash Allocation (NCA) from the DBM
- Receipt of Notice of Transfer of Allocation to Agency RO/OU from CO
- Cash receipts from all sources of revenues
- Receipt of Inter-Agency cash transfers (Due to)
- Cash receipts from the sale of goods or rendition of services
- Cash receipts of interest income, rental income, dividend income, etc.
- Receipt of payment for liquidated damages
- Receipt of refund of deposits
- Receipt of refunds of cash advance or excess payments
- Collection of receivables
- Cash receipt of grants and donations
- Receipt of cash dividends from enterprises (e.g. PLDT)
Cash Outflows:
- Payments of accounts payable
- Cash purchase of merchandise for sale
- Cash advances granted for travel
- Inter-agency transfers (Due from)
- Notice of Transfer of Allocation to Agency RO/OU issued by the NGA Main Office to RO/OU and/or attached agencies through Government Servicing Banks.
- Return of unused NCA
- Cash payment for operating expenses
- Remittance of taxes withheld not covered by TRA and other deductions (if any)
- Cash purchase of supplies and equipment
- Cash payment of retirement benefits
- Cash payment of claims for damages
- Cash payment of liabilities incurred in operations
- Cash payments for interest
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Inflows:
- Proceeds from sale of marketable stocks and bonds
- Cash proceeds from the sale/disposal of equipment and other property, plant and equipment.
- Redemption of long-term investments or repayment by GOCC/GFI of long-term loans
Cash Outflows:
- Purchase of property, plant and equipment
- Purchase of land
- Investment in stocks/bonds
- Investment in GOCC/GFI
- Exposure as other long-term investments
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Inflows:
- Cash received from domestic and foreign loans
- Issuance of treasury bills
Cash Outflows:
- Payment of domestic and foreign loans
- Redemption of treasury bills outstanding
- Payment of cash dividend
The net increase in cash provided by operating activities, investing activities and financial activities for the year, and the cash balance at the start of the year, shall equal the cash balance at the end of the year. Such amount shall tally with the total cash account shown in the balance sheet.
NOTES TO FINANCIAL STATEMENTS. Notes to Financial Statements are integral parts of financial statements, which pertain to additional information necessary for fair presentation in conformity with generally accepted accounting principles. These may explain the headings captions or amounts in the statements of present information that cannot be expressed in money terms, and description of accounting policies.
Information shall be presented in a way that will facilitate understanding and avoid erroneous implications. The headings, captions and amounts shall be supplemented by enough additional data so that the meaning would be clear and not overshadowed by so much information that important matters are buried in mass trivia.
Where Notes to Financial Statements appear on a separate page, indicate the phrase "See accompanying Notes to Financial Statements" placed at the bottom of said statements.
Material changes in classification of accounts shall be indicated and explained as notes to financial statements.
The four types of disclosure considered necessary are as follows:
a. CUSTOMARY OR ROUTINE DISCLOSURE. Information about measurement bases of important assets, restrictions on assets and government equity, important long-term commitments not recognized in the body of the statements, information on terms of owner's equity and long-term debt, and certain other disclosures required by pronouncements of the Philippine Institute of Certified Public Accountants, Accounting Standards Council, and regulatory bodies that have jurisdiction are necessary for full disclosure.
b. DISCLOSURE OF CHANGES IN ACCOUNTING PRINCIPLES. Changes in accounting principles, practices, or the methods of applying them, together with the financial effect, and the justification for the change shall be disclosed in the financial statements or a note thereto.
In particular, it shall include any of the following:
- Selection from existing acceptable alternatives
- Principles and methods peculiar to the agency
- Unusual application of generally accepted accounting principles.
c. DISCLOSURE OF SUBSEQUENT EVENTS. Disclosure of events that affect the agency directly and that occur between the date of, or end of the period covered by, the financial statements and the date of completion of the statements is necessary if knowledge of the events might affect the interpretation of the statements, even though the events do not affect the propriety of the statements themselves.
d. DISCLOSURE OF ACCOUNTING POLICIES. Description of the accounting policies adopted by the reporting entity is required as an integral part of the financial statements. It is usually captioned "Summary of Significant Accounting Policies", and placed as first item in the Notes. It shall be limited to description of the policies and no quantitative data shall be included.
Examples of accounting policy disclosures commonly required:
- Consolidation principles
- Accounting for long-term investments
- Adoption of policy on increasing benefit entitlements of the program members.
The effect of the increase shall be disclosed.
- Basis of revenue recognition
In general, disclosures shall include important judgment as to appropriateness of principles relating to recognition of revenues and allocation of asset costs to current and future periods.
INTERIM REPORTS. Interim reports are the financial statements required to be prepared at any given period or at a financial reporting period without closing the books of accounts. The following interim financial statements shall be prepared and submitted quarterly with the Notes to Financial Statements:
a. Statement of Income and Expenses;
b. Balance Sheet; and
c. Statement of Cash Flows.
The interim financial statements shall be prepared employing the same accounting principles used for annual reports. Adjusting and closing journal entries shall be prepared. However, only the adjusting journal entries are recorded in the books of accounts. To facilitate the preparation of the interim financial statements, the use of the worksheet is recommended.
Sec. 82. WORKSHEET. A worksheet is a tool for accumulating and sorting information needed for the preparation of the financial statements. It is a columnar sheet used to adjust and close account balances for the preparation of the financial statements. The format of the worksheet shall be as follows:
Agency Name
Worksheet
As of ______________, 20__
Unad
justed
Trial
Bal.
Adjustments
Adjusted
Or Pre-
Adjusted
Trial Bal.
Closing
Entries
Statement
Of Income
& Exp
Post
Closing
Trial Bal.
Balance
Sheet
Title
Code
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
Dr
Cr
a. Account Title and Code columns show the accounts of the General Ledger.
b. The Unadjusted Trial Balance columns reflect the amount balances of the General Ledger accounts.
c. Adjustments columns show adjusting journal entries effected for the accounts.
d. Adjusted/Pre-Closing Trial Balance columns show the balances of all the accounts after adjustments are added/deducted from the balances of accounts in the unadjusted trial balance.
e. Closing Entries debit and credit columns show the amounts debited and credited to close the nominal accounts.
f. Statement of Income and Expenses columns show all the debit and credit amount balances of the nominal accounts (subsidies, income and expenses) and intermediate accounts.
g. Post-Closing Trial Balance columns show the debit and credit amount balances of all accounts after posting the closing entries.
h. Balance Sheet columns show all the debit and credit amount balances of all real accounts in the post-closing trial balance (assets, liabilities, and government equity).
