GOVERNMENT ACCOUNTING The Need to Study Government Accounting Firstly, it is a board subject. Secondly, additional employment opportunity, such as: a b c
Biggest employer of accounting graduates and CPAs Other forms of employment such as computer programmer, financial management analyst there are various job opportunities open
The general public can understand and analyze government financial statements published for their scrutiny and better judgment. Government Accounting Definition and Environment Section 109 of PD 1445 defines government accounting as: Government Accounting encompasses the processes of analyzing, recording, classifying, summarizing and communicating all transactions involving the receipts and disposition of government funds and property and interpreting the results thereof (ARCSCI) Types of government organizational 1. national government - include all departments, bureaus, offices, boards, commissions, councils, authorities, administrations, institutions, state colleges and universities and other organizational units under the national government 2. local government - political subdivisions of the Philippines having substantial control over local affairs, consisting of provinces, cities, municipalities and barangays 3. government corporations - agencies organized by law or pursuant to law, vested with functions relating to public needs whether government or proprietary 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 percent of its capital stock Government - means the National Government, including the Executive, Legislative, the Judicial Branches and the Constitutional Commissions. (PD 1177 otherwise known as the Budget Reform Decree of 1077) Objectives of Government Accounting Section 10 of PD 1445 sets down the objectives or functions of government accounting 1. To provide information concerning past operations and present conditions - enable the evaluation of the performance of an agency from one period to the next 2. To provide basis for guidance for future operations - results of the evaluation may guide the manager on what proper course of action to follow in a future operations 3. To provide for control of the acts of public bodies and offices in the receipt, disposition and utilization of funds and properties 4. To report on the financial position and the results of operations of government agencies for the information and guidance of all persons concerned - show the extent of the agency’s financial and non-financial resources Government accounting is a service activity with the main purpose of providing quantitative information, primarily financial in nature about the government entity that is useful in: 1. assessing the stewardship and the aspects of performance of public officials for which they are accountable 2. planning, program selection and budgeting 3. making decision involving the effective and efficient allocation and control of government resources PROCESS - consolidates all activities pertaining to the gathering of data, which are to be used as the basis for fiscal management decisions 1. bookkeeping, referring to as analysis and recording; 2. posting, grouping or classifying of similar items 3. preparation of periodic financial reports 4. analysis of the financial reports - determine their accuracy and adequacy as well as the efficiency and effectiveness of agency operations Users of Government Accounting Information (MALe GeStuRe) PRIMARY OBJECTIVE OR PURPOSE - to provide information concerning government operation 1. The general public or the citizenry – the group which has interest on the information about government services
2. The legislative body - uses the financial data to see to it that policies are being implemented and that funds are being properly handled 3. The managers/administrators - responsible for the implementation of the policies and daily conduct of government affairs. The data will serve as a guide in the performance of their duties 4. The students of public finance and political and other social scientists who need financial information in the pursuit of their research/studies; and 5. The resource providers of the government such as: a. donors and grantors - assess how well the objective of a donation or grant have been accomplished; b. taxpayers - know how the services provided by the government are likely to affect the amount and fees they will be required to pay; and c. lenders, suppliers and employees - know whether the government can pay its obligation to them Accounting Concepts and Conventions Concepts - provides the rules of accounting that should be followed of all accounts and financial statements. It provides the foundation for accounting processes 1. Entity Concept – a separate identity apart from its owner 2. Money Measurement Concept – all transactions are assumed to be measured and recorded in stable monetary units. Only those transactions which can be measured in terms of money are recorded. 3. Modified Accrual Concept – for each accounting period, expenses are recognized when they are incurred not necessarily when cash is disbursed and income is recognized when earned not necessarily when cash is received except for transactions where accrual basis is impractical or when other basis may be required by law. 4. Going-Concern Concept – an entity is an on-going concern and will continue in operations for the foreseeable future. 5. Dual-Aspect Concept – every transaction affects two or more accounts 6. Cost Concept – the value of an asset is to be determined on the basis of historical cost i.e. acquisition cost. 7. Objectivity Concept – recorded in an objective manner, free from the personal bias of either management or the accountant who prepares the accounts 8. Timeliness Concept – this principle states that the information should be provided to the users at the right time for decision making purposes Conventions - custom or generally accepted practice which is adopted either by general agreement or common consent among accountants 1. Full Disclosure – information relating to the entity’s affairs which are of material interest to the users should be completely disclosed. 2. Consistency – “the accounting methods and practices should be applied on a uniform basis from period to period”. 3. Conservatism Concept – avoidance of overstating estimates. (3) Qualitative characteristics of financial statements namely: prudence, neutrality and faithful representation of alternative values. 4. Materiality – strict adherence to GAAP is not required when the items are not significant enough to affect evaluation, decision and fairness of the financial statements. According to an American Accounting Association, “an item should be regarded as material if there is reason to believe that knowledge of it could influence decision of informed parties”. CONTROL MECHANISM 1. Fund Accounting 2. Obligation Accounting 3. Cash Disbursement Ceiling (CDC) Accounting Fund Accounting FUND - a sum of money or other resources set aside for the purpose of carrying out specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations and constitutes an “independent fiscal and accounting entity”. ENTITY - fund is given a personality of its own, that is, it has its own asset and it can incur obligations or liabilities. TWO MAJOR CLASSIFICATIONS OF FUND AS TO PURPOSE 1. General Fund – generally available for all functions of the government 2. Special Fund – segregates specified revenues for limited purposes Obligation Accounting
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; refers to the accounting practice, procedures and techniques for recording obligations in the government Cash Disbursement Ceiling (CDC) CDC - 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 obligations Important Characteristics of Government Accounting 1. emphasis on legalities - adherence to legalities more in case a conflict between the GAAP and government accounting laws ensues 2. emphasis on budget – an item of expenditure may be legal but without budget or funding makes the transaction impossible 3. multiplicity of responsibility a. LEGISLATIVE BODY – appropriates fund b. BUREAU OF TREASURY – acts as the bank c. SPECIFIC GOVERNMENT AGENCY – spends the money d. COA – keeps the general accounts Distinction Between Government Entity and a Commercial Enterprise GOVERNMENT ENTITY OWNERSHIP Entire people in a given community PURPOSE Render service at the lowest possible cost to its constituents OPERATES TO MAKE PROFITS profits realized are retained for public use and not for use of specific individuals ORGANIZATION CONGRESS - responsibility and authority of a government entity OFFICERS AND ADMINISTRATORS OF GOVERNMENT - governed in almost every act by specific laws, rules and regulations LEGISLATIVE BODIES - place limitations on executives, administrative officers and department heads, through revenue and appropriations acts FINANCING Involuntary contributions from its constituents in the form of taxes INCOME Organized primarily to render service, cannot make profits on the services it renders
COMMERCIAL ENTERPRISE Stockholders, partners, owners Profits
Succession of authority and responsibility Stockholders BOD staff or officers
Voluntary contribution from its members or stockholders Capital investment of stockholders – used to generate return in the form of profits for services rendered or goods sold
Similarities and Distinctions of Commercial and Government Accounting Similarities: 1. Recording of Transactions a. Adopts double-entry bookkeeping system b. Records the transactions in journals c. Summarized in general ledger accounts d. Keeps subsidiary ledgers. 2. Use of Chart of Accounts 3. Preparation of Periodic Reports and Statements 4. Use of Trial Balance of Balances 5. Depreciation Accounting Distinctions OBJECTIVE
COMMERCIAL ACCOUNTING Geared towards income measurement aside
GOVERNMENT ACCOUNTING Control government funds Provide data for management
BASIS OF ACCOUNTING
Cash or accrual method but not both
PREPARATION OF PERIODIC REPORTS
Balance Sheet Income Statement Statement of Cash Flows
CONTROL MECHANISMS
No fund, obligation and CDC accounting ACCOUNTING OF MONEY COLLECTED - not separate and independent from the accounting of the use/disbursement of said money collected One set except when there are branches Nominal accounts Real accounts ESTIMATES – considered as memo entries Dictated by nature of business and policies of management
BOOKS OF ACCOUNTS ACCOUNTS AND TRANSACTIONS SOURCE OF ACCOUNTING PRACTICE AND PROCEDURES
decision Modified accrual basis - expenses shall be recognized when incurred; Income shall be on accrual basis except for transactions where accrual basis is impractical or when other methods are required by law Balance Sheet Statement of Income and Expenses Statement of Government Equity Statement of Cash Flows Fund Accounting Obligation Accounting CDC Accounting
Regular agency books (RA) National government books (NG) Budgetary accounts – appropriations, allotments, obligations Laws, rules, and regulations
Responsibility Center and Accounting Responsibilities Responsibility Accounting 1. a system that relates the financial results to a responsibility center, which provides access to cost and revenue information under the supervision of a manager having a direct responsibility for its performance 2. measures the plans (by budget) and the actions (by actual results) of each responsibility center 3. a part, segment, unit or function of a government agency, headed by a manager, who is accountable for a specific set of activities Cost centers - established to provide each government agency accessibility to cost information and to facilitate cost monitoring at any given period. ACCOUNTING RESPONSIBILITY - entrusted, immediately and primarily, to the head of the government agency or office (PD 1445) 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; supervised by higher authorities and government bodies SUPERVISION 1. 1900 – Insular treasurer 2. General Auditing Office (GAO) 3. Different agencies 4. 1936 – Budget Commission 5. 1938 – GAO 6. 1942 – GAO and Budget Commission 7. PD 898, March 3, 1977 - COA ACCOUNTING RESPONSIBILITY - shared primarily by the COA, DBM, Department of Finance (Bureau of Treasury) and government agencies. Commission on Audit (COA) 1. Audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any or its subdivisions, agencies and instrumentalities 2. Serves as the external auditor of all government agencies 3. A constitutional office and its mandates are provided in Section 2, Article IX-D of the 1986 Constitution of the Philippines 4. Keeps the general accounts of the national government 5. Prescribes the standard chart of accounts
6. Promulgates accounting rules and regulations 7. Exercise technical supervision over the accounting functions of each agency 8. Submit to the President and the legislative body within the time fixed by the law, an annual financial report of the government, its subdivisions, agencies and instrumentalities including government owned or controlled corporations 9. Recommend measures necessary to improve efficiency and effectiveness. (Section 26 of PD 1445). The Department of Budget and Management (DBM) 1. Determines the accounting and other item of information needed to monitor budget performance 2. Assess effectiveness of the agency operations 3. Prescribes the forms, schedules of submission and other component of reporting system needed to accomplish and submit the required information 4. Approves the Agency Budget Matrix (ABM) 5. Issues the allotment to agencies in accordance with the approve budget 6. Issues Notice of Cash Allocation (NCA). (Chapter I, Title XVII of EO 292) 7. Responsible for the design, preparation and approval of accounting systems of government agencies (PD No. 1376) POWERS AND FUNCTIONS OF THE DBM (PD 999) 1. Prepare the budget and other appropriation proposals 2. Exercise functional supervision over financial and management staffs or agencies 3. Provide technical assistance and compensation, and position classification, management evaluation and other related areas; 4. Study departments and agencies 5. Develop a reporting system - allow the monitoring of fund releases including the design of report forms to be accomplished by the agencies through their accounting, budgeting and other units, and to issue rules and regulations applicable to the accomplishment and submission of those forms; and 6. Conduct training programs in budgeting, organization design, management reporting and control compensation and position classification and management evaluation The Department of Finance (DOF) - primarily responsible for the sound and efficient management of the financial resources of the government, its subdivisions, agencies and instrumentalities; responsible for formulating policies on financial management and for the generation and management of the financial resources of government The Bureau of Treasury (BTr) 1. principal custodian of all national government funds 2. performs banking function for the national government 3. receives and keeps government funds 4. controls the disbursements 5. maintains accounts of the financial transactions of national government agencies 6. required to prepare and submit to COA and other fiscal activities, a daily statement of cash receipts, disbursements and fund balances in the National Treasury 7. manages, controls and services public debt from domestic or foreign sources The National Government Agencies (NGAs) - required to establish and maintain a system of accounting for their financial resources and operation; furnish information to fiscal and control agencies such as COA, DBM, and BTr Generally Accepted Government Accounting Principles (Section 112 of P.D. 1445) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) - rules, regulations or guidelines being followed in accounting These are as follows: a. the accounting of an agency shall be kept in such detail as is necessary to meet the needs of the agency and at the same time be adequate to furnish information needed by fiscal or control of the government (Sec. 111 of PD 1445) b. the highest standards of honesty, objectivity and consistency shall be observed in the keeping of accounts to safeguard against inaccurate or misleading information Sec. 111 of PD 1445) c. the government accounting system shall be on double entry with a general ledger in which all financial transactions are recorded; Subsidiary records shall be kept where necessary (Sec. 114 of PD 1445) d. the chart of accounts for government agencies shall be prescribed by the Commission on Audit and shall be so designed as to: i. permit agency heads to review their activities according to selected areas or responsibility ii. allow for a clearer to more precise budgetary control
iii. provide for a wider range of analytical information designed for use in management audit or legislative review iv. furnish information regarding the production of income and the investment in capital items which is of value in fiscal and economic planning v. enable tighter accounting control to be exercised over agencies’ financial relationship with the Treasury vi. permit a more simplified preparation of trial balance and a simple and more orderly process of national consolidation vii. facilitate the application of mechanical accounting procedures for more effective protection against error and irregularity and yielding economics in operation (Sec. 113 of PD 1445) e. permit effective budgetary control and to establish uniformity of accounts and shall be classified in balanced fund groups; The group of each fund shall include all accounts necessary to set forth its operations and conditions; All financial statements shall follow this classification (Sec. 116 of PD 1445) f. a common terminology and classification shall be used consistently throughout the budget, the accounts and the financial reports (Sec. 115 of PD 1445) g. estimated revenues, remain unrealized at the fiscal year, shall not be booked or credited to the appropriate surplus or any other accounts (Sec. 118 of PD 1445) h. all lawful expenditures and obligations incurred during the year shall be taken up in the accounts of that year (Sec. 119 of PD 1445) THE NEW GOVERNMENT ACCOUNTING SYSTEM (NGAS) ACCOUNTING POLICIES 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. OBJECTIVES: 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. 2. COVERAGE. All national government agencies. 3. LEGAL BASIS. 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". *To simplify the government accounting system in order to facilitate the process of recording transactions and the preparation of financial reports, and ultimately expand the numbers/range of users who can see and understand the accounting system and the output it produces. The NGAS is a simplified set of accounting concepts, guidelines and procedures designed to ensure correctness, completeness and timeliness in the recording of government financial transactions and production of financial reports. The rationale behind the major changes in government accounting system was brought about by the following needs:
to make the system more in conformity with international accounting standards to pursue eventual computerization which will include responsibility accounting to make it capable of generating various reports useful to management, lawmakers and the general public to generate relevant and periodic financial statements, operations reports to help government managers and executives in monitoring the performance of their agency more effectively
Basic Features and Policies a. ACCRUAL ACCOUNTING. A modified accrual basis
b. 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 ACCOUNT CODES. 8-digit coding system d. BOOKS OF ACCOUNTS. 2 books of accounts 1. REGULAR AGENCY (RA) BOOKS – record the receipt and utilization of Notice of Cash Allocation (NCA) and other income/receipts which the agencies are authorized to use and to deport with Authorized Government Depository Bank (AGDB) and the National Treasury Journals: Cash Receipt 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 and Expenses. 2. NATIONAL GOVERNMENT (NG) BOOKS – used to record income which the agencies are not authorized to use and are required to be remitted to the National Treasury Journal: Cash Journal (CJ) General Journal (GJ) Ledgers: 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. 1. Balance Sheet 2. Statement of Government Equity 3. Statement of Income and Expenses 4. Statement of Cash Flows 5. Notes to Financial Statements f. TWO-MONEY COLUMN TRIAL BALANCE g. ALLOTMENT AND OBLIGATION. Separate registries shall be maintained to control the allotments and obligations for each of the four classes of allotment class, namely: 1. 2. 3. 4.
Registry of Allotment and Obligations – Capital Outlay (RAOCO) Registry of Allotment and Obligations – MOOE (RAOMO) Registry of Allotment and Obligations – Personal Services (RAOPS) Registry of Allotment and Obligations – Financial Expenses (RAOFE)
h. NOTICE OF CASH ALLOCATION (NCA). The receipt of NCA by the agency shall be recorded debit CashNational Treasury, Modified Disbursement System (MDS) and credit Subsidy Income from National Government i. FINANCIAL EXPENSES. Separately classified from Maintenance and Other Operating Expenses (MOOE). j. PERPETUAL INVENTORY OF SUPPLIES AND MATERIAL. Purchased out of Petty Cash fund charged directly to the appropriate expense account k. VALUATION OF INVENTORY. moving average method l. MAINTENANCE OF SUPPLIES AND PROPERTY, PLANT AND EQUIPMENT LEDGER CARDS. by category m. CONSTRUCTION OF ASSETS. Construction Period Theory. 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 capitalized, and those incurred after the construction form part of operating cost. n. REGISTRY OF PUBLIC INFRASTRUCTURE/REGISTRY OF REFORESTRATION PROJECTS. 1. 2. 3. 4. o.
Registry of Public Infrastructure – Bridges (RPIB) Registry of Public Infrastructure – Roads (RPIR) Registry of Public Infrastructure – Parks (RPIP) Registry of Reforestration Projects – (RRP)
A Summary - prepared and included in the Notes to Financial Statement. DEPRECIATION. Straight-line. Start on the second month after purchase. Residual value ten percent of the purchase cost. Assets that are no longer being used not be charged any depreciation.
p.
RECLASSIFICATION OF ASSETS. Assets no longer being used reclassified to “Other Assets”; not be subject to depreciation. q. ALLOWANCE FOR DOUBTFUL ACCOUNTS. r. ELIMINATION OF CONTINGENT ACCOUNTS. Cash shortages and disallowed payments, final and executory, recorded under the Receivables-Disallowances/Charges s. RECOGNITION OF LIABILITY. Recognized goods and services are accepted or rendered and supplier/creditor bills are received. t. INTEREST ACCRUAL. Interest income and/or expense shall be accrued as deemed appropriate. 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. Acquisition/disposition of assets debited/credited to the appropriate asset accounts. Error is committed correcting entry to adjust the original entry shall be prepared. w. PETTY CASH FUND. Imprest system. Replenishments charged to the expense account. Equal to the total cash on hand and the unreplenished expenses. Not be used to purchase regular inventory/items for stock. x. FOREIGN CURRENCY ADJUSTMENT. Cash deposits in foreign currency and outstanding foreign loans computed at the exchange rate prescribed by the Bangko Sentral ng Pilipinas at balance sheet date. Any gain or loss on foreign exchange shall be recognized. Subsidiary ledger for foreign currency obligations reflect the appropriate foreign currency in which the loan is payable. Liability expressed both in the foreign and local currency. ACCOUNTING SYSTEM GENERAL ACCOUNTING PLAN (GAP) - shows the overall accounting system of a government agency/unit. 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. 1. 2. 3. 4.
Budgetary Accounts System; Receipts/Income and Deposit System; Disbursement System; and Financial Reporting System
BUDGETARY ACCOUNTS SYSTEM – encompasses the processes of preparing the Agency Budget Matrix (ABM), monitoring and recording of allotments received by the agency from DBM, releasing of Sub-Allotment Release Order (Sub-SARO) to Regional Office (RO) by Central Office (CO), issuance of Sub-SARO to operating units (OUs) by the RO and recording and monitoring obligations. BUDGETARY ACCOUNTS 1. APPROPRIATIONS - authorizations made by law or other legislative enactment for payments to be made with funds of the government. Shall be monitored and controlled through registries and control worksheets by the DBM and COA, respectively. 2. ALLOTMENTS 3. OBLIGATIONS AGENCY BUDGET MATRIX (ABM) – a document showing the desegregation of agency expenditures into components GOVERNMENT PLANNING PLANNING - involves selecting missions and objectives and the actions to achieve them; requires decision making that is, choosing from among alternative future courses of action. FUNCTIONS OF PLANNING 1. Defines and directs the efforts or the agencies. 2. Organizes people; describes productive relationships between and among them; coordinates all decisions and actions necessary to service delivery outcomes; determine what kind of organization structure to have and what kind of people needed to do corresponding tasks toward the attainment of organizational goals. 3. Identifies and estimates the resources 4. Establish effective communication 5. A basis for useful supervision, monitoring and evaluation (control) 6. A basis for further capability of agencies
THE NATIONAL BUDGET NATIONAL BUDGET - financial expression of approved programs and projects the government
PROGRAM – a major purpose for which a government entity is established and includes all functions and activities devoted to the accomplishment of this purpose Project – a subdivision of a program covering a homogenous group of activities and describes the work to be done Activity – a definable segment of a project PUBLIC EXPENDITURE MANAGEMENT (PEM) - an approach that ensures resource allocation is results-based, and that government is accountable for its performance OBJECTIVES: 1. Aggregate Fiscal Discipline – spend within its means 2. Allocative Efficiency – Spend On The Right Priorities 3. Operational Efficiency – ensure the best value for the people’s money. THREE PILLARS 1. Medium-Term Expenditure Framework (MTEF) – Link policy, planning and budgeting over the mediumterm. Employs a three-year rolling budget approach 2. Organizational Performance Indicator Framework (OPIF) - Links government expenditure priorities with desired outcomes and agency performance. 3. Zero-Based Budgeting Approach (ZBB) – close review and evaluation of major ongoing programs and projects Budgeting enables the government to manage its scarce resources to support priority programs and projects for promoting economic growth and providing public services BUDGETING - a part of the process of assigning financial resources to organizational units so that they can carry their plans and of scheduling the use of these resources and the results to be achieved outlined in the plan; planning and controlling PURPOSES OF BUDGETING 1. Tool of Accountability – government agencies are responsible for the management of programs for which the funds are appropriated. 2. Tool of Management – it specifies either directly or indirectly, the cost, time and nature of expected results. 3. Instruments of economic policy a. b. c. d. e.
Indicates the direction of the economy since it expresses intentions regarding the utilization of resource; Leads to the determination of national growth and investment goals; Promotes macroeconomic balance in the economy; Reduces inequalities; Permits quick and meaningful measurement of its impact on the national economy as a whole.
ADVANTAGES OF BUDGETING 1. 2. 3. 4. 5. 6. 7. 8. 9.
Action is based on study. Cooperation is secured in the entire organization. Policies are established. Programs of activities are related to expected or available resources and economic conditions. Balanced programs are developed. Coordinated effort is attained. Operations are controlled. Weaknesses in the organization are revealed. Wastes are prevented. INCOME, EXPENDITURES, DEFICIT
NATIONAL BUDGET - government’s estimated income and planned expenditures in a given year. GOVERNMENT’S INCOME - taxes (income tax, value-added tax, etc) and non-tax revenues (fees and charges, privatization proceeds, etc) EXPENDITURES - programs, activities, projects, purchase of goods and services, among others, that the government will spend on to achieve its socio-economic development objectives. FISCAL DEFICIT - income is insufficient to finance expenditures
COVERAGE NATIONAL BUDGET - covers the totality of the budgets of national government agencies – not only those of the Executive branch, but also of Congress, the Judiciary and other Constitutional bodies.; covers the budgetary support given by the national government to local government units (LGUs), in particular, the Internal Revenue Allotment (IRA); as well as to government-owned ot controlled corporations (GOCCs) and government financial institutions (GFIs). COMPONENTS The National Budget for a given year is composed of the following: o
NEW GENERAL APPROPRIATIONS – legislated by Congress and enacted by the President every fiscal year as the General Appropriations Act (GAA). The GAA enacts both programmed and unprogrammed general appropriations. 1. programmed appropriations – supported by corresponding resources 2. unprogrammed appropriations – can only be executed when the government attains a revenue windfall (i.e. above target)
o
AUTOMATIC APPROPRIATIONS – under specific laws, certain types of expenditures (e.g. debt interest payments, LGUs IRA) are automatically set or appropriated.
o
CONTINUING APPROPRIATIONS – appropriations previously enacted by Congress in the previous years’ GAA and which continue to be valid. Currently, appropriations for capital outlays and maintenance and other operating expenditures have a validity of two years.
Section 4 of the Revised Budget Act provides that the budget shall consist of two parts: 1. Current Operating Expenditures; and 2. Capital Outlay. Fundamental Principles of Fiscal Operations 1 2 3 4 5 6 7 8
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 BUDGET - an estimate of the proposed expenditures for specified purposes and embodies the means of financing them during the same period; provides the means for controlling the estimated amounts to be raised as well as the proposed amounts to be spent for specified objects; a program that guides all activities relating to collections and expenditures; the framework of the accounts by which the transactions affecting such collections and expenditures shall be recorded Linkage between Government Budgeting and State Accounting ACCOUNTING SYSTEM - provides the essential information needed to make resource allocation decisions, monitor budgetary performance, and assess the effectiveness of operations 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 Kinds of Budgets
1
AS TO NATURE a Annual Budget – a budget which covers a period of one year b 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 c Special budget – a budget of special nature and generally submitted in special forms
2
AS TO BASIS a 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 b Line-Item Budget – a budget the basis of which are the objects of expenditures such as salaries and wages, travelling expenses, freight, etc.
3
AS TO APPROACH AND TECHNIQUE a Zero-Based Budgeting – a process which requires systematic consideration of all programs, projects and activities with the use of the defined ranking procedures; activities are analyzed and presented in “decision packages” or key budgetary inclusions Zero-based - yearly analysis, evaluation and justification of each activity, project or program, starting from a “zero” performance and budgeting level; does not accept the prior year’s budget as a starting point for analysis b Incremental Approach – a budget where only additional requirements need justification c 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 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 – the cost of performing regular agency functions, excludes the costs of non-recurring programs Government-wide baseline – the budget impact of decisions or policies enunciated by the government that require priority funding Examples are: a Proposed salary adjustment b Miscellaneous personnel benefits, including retirement benefits c Mandatory allocations to local governments d Projected level of support to GOCCs e Estimated provisions for contingencies due to calamity, foreign exchange fluctuations and other adjustments FAPs baseline – 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. a b c
OTHER FORMS OF BUDGET Regional budgeting – a budget prepared consistent with the regional organization of the national government Long-term budget – a budget prepared for a four or five year period or longer Key Budgetary Inclusions – refer to the financial commitments of agencies pertaining to a budget year; 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 - consists of the methods and practices of the government for planning, programming and budgeting; 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; primary concern is the availability and use of money to provide the services required or expected from the government . The two principal objectives of the current budget system are:
To carry out all government activities under a comprehensive fiscal plan To provide for a periodic review and disclosure of the budgetary status
Legal Basis of the Budget System - Budget Reform Decree or PD No. 1177 The Budget Reform Decree requires the following: 1. The formulation of the budget that supports the national development plan and reflects the objectives and strategies of the plan; 2. The preparation of the budget within the context of the total resources of government
3. The preparation of the annual budget as an integral part of a long-term plan and long-term budget program; 4. The specification of multi-year requirements in each state of the budget process; 5. The preparation of the budget at the regional level, consolidation and review at the department and central levels 6. The implementation and timing of major development projects and the determination of expenditure levels 7. Analysis of budget estimates on a zero-base approach 8. Limiting the time allotted for debate on the budget by the legislative body, thereby ensuring that the budget is approved before the start of the fiscal year; and 9. Adoption of a management information system for effective performance monitoring and financial evaluation and the development of standard costs for units of work measurement, in order to effectively evaluate agency programs. What is a national budget? NATIONAL BUDGET - the government’s estimate of its income and expenditures; the financial translation of the program and projects that best promote the development of the country; what the government plans 1) to spend for its programs and projects and 2) where the money will come from On what is our national budget spent? Expenditures by expense class show how much is provided for: 1 2 3 4
Current operating expenditures – appropriations for the purchase of goods and services for the conduct of normal government operations within a budget year 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 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 pump primes 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 in 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 self-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 requires 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 a Tax i ii iii iv
Excise tax License and business tax Income tax Import duties
v Other taxes and duties Non-tax - fees and service incomes of various government agencies, foreign grants Borrowings a Domestic borrowings - sources from the auction of Treasury bills, notes and bonds b Foreign borrowings i Project loans - foreign loans obtained to finance a specific project ii Program loans - multi-purpose foreign loans b
2
Why does the government borrow from foreign sources? Why can’t it make do with what is collected locally. Relying only on domestic or local resources to finance such projects will limit our government’s capacity to provide this 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 ANNUAL PREPARATION, THREE-YEAR PERSPECTIVE The Philippine Constitution requires the President “to submit to Congress, within 30 days from the opening of every regular session as the general appropriations bill, a budget of expenditures and sources of financing, including receipts from existing and proposed revenue measures”. The annual preparation of the National Budget also ensures that all government spending is reviewed and justified anew each year. Even so, the government also adopts a three-year perspective (see succeeding section on Medium-Term Expenditure Framework). This ensures that the National Government remains strategic in managing its resources. PHASES OF BUDGETING
The execution and accountability phases are implemented simultaneously year-round. BUDGET PREPARATION 1. The Budget Call a. a document which reminds the different agencies in the government to prepare their respective budgets in accordance with approved overall budget ceilings and parameters b. contains budget parameters (including macroeconomic and fiscal targets and agency budget ceilings) as set beforehand by the Development Budget Coordination Committee (DBCC) c. policy guidelines and procedures in the preparation and submission of agency budget proposals At the beginning of the budget preparation year, the Department of Budget and Management (DBM) issues the National Budget Call to all agencies (including state universities and colleges) and a separate Corporate Budget Call to all GOCCs and GFIs. The DBCC - determines the overall expenditure levels, the revenue projection, the deficit levels and the financing plan; submits these to the Cabinet and to the President for approval. The DBCC is composed 1 Chairman - Budget Secretary 2 Members - Economic Planning Secretary, Bangko Sentral ng Pilipinas, Finance Secretary 3 Assisted - Executive Technical Board. The DBM - holds consultation with agencies on the allocation of the sectoral and sub-sectoral expenditure ceilings set by the DBCC; PURPOSE – for setting indicative expenditure ceilings of department and component agencies; minimize the possibility of bloated agency budget proposals as well as allow agencies greater flexibility in prioritizing their funding requirements. The agencies issue guidelines to their regional offices which are expected to conduct regional budget hearings in close coordination with the Regional Development Council (RDC)
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. Early Preparation Budget Call - issued in December (versus against April in the past) Submission of the President’s budget a day after the State of the Nation Address (in contrast to the earlier practice of submitting it late in the 30-day window that the Constitution prescribes). 2. Stakeholder Engagement – seeks to increase citizen participation in the budget process “Bottom-Up Budgeting” 3. Technical Budget Hearings – conducted after departments and agencies submit their Agency Budget Proposals to the DBM; agencies defend their proposed budgets before a technical panel of DBM, based on performance indicators on output targets and absorptive capacity. The DBM bureaus then review the agency proposals and prepare recommendations. 4. Executive Review – The recommendations are presented before an Executive Review Board which is composed of the DBM Secretary and senior officials. Deliberations here entail a careful prioritization of programs and corresponding support. Implementation issues are also discussed and resolved. 5. Consolidation, Validation and Confirmation – DBM then consolidates the recommended agency budgets and recommendations into a National Expenditure Program (NEP) and a Budget of Expenditures and Sources of Financing (BESF). As part of the consolidating process, the deliberations by the DBCC will determine the agency and sectoral allocation of the approved total expenditure ceiling, in line with the macroeconomic and fiscal program. Heads of major departments are invited to this meeting. 6. Presentation to President and Cabinet - The proposed budget is presented by DBM together with the DBCC, to the President and Cabinet for further refinements or reprioritization. After the President and Cabinet approve the proposed National Expenditure Program, the DBM prepares and finalizes the budget documents to be submitted to Congress. 7. The President’s Budget – ends with the submission of the proposed national budget – the “President’s Budget” – to Congress. The President’s Budget consists of the following documents: President’s Budget Message – the President explains the policy framework and priorities in the budget. Budget of Expenditures and Sources of Financing (BESF) – contains the macroeconomic assumptions, public sector context (including overviews of LGU and GOCC financial positions), breakdown of the expenditures and funding sources for the fiscal year and the two previous years. National Expenditure Program – contains the details of spending for each department and agency by program, activity or project, and is submitted in the form of a proposed General Appropriations Act. Details of Selected Programs and Projects – contains a more detailed disaggregation of key programs, projects and activities in the NEP Staffing Summary – contains a summary of the staffing complement of each department and agency BUDGET LEGISLATION / BUDGET AUTHORIZATION 1. House Deliberations The House of Representatives, in plenary, assigns the President’s Budget to the House Appropriations Committee. The Committee and its Sub-Committees then schedule and conduct hearings on the budgets of the departments and agencies and scrutinize their respective programs and projects. It then crafts the General Appropriations Bill (GAB). In plenary session, the GAB is sponsored, presented and defended by the Appropriations Committee and Sub-Committee Chairmen. As in all other laws, the GAB is approved on Second and Third Reading before transmission to the Senate. (Note: In the First Reading, the President’s Budget is assigned to the Appropriations Committee.) 2. Senate Deliberations Conducts its own committee hearings and plenary deliberations on the GAB; formally start after the House of Representatives transmits the GAB. For expediency Senate Finance Committee and Sub-Committees usually start hearings on the GAB even as House deliberations are ongoing. The Committee submits its proposed amendments to the GAB to plenary only after it has been formally transmitted by the House. 3. Bicameral Deliberations Once both Houses of Congress have finished their deliberations, they will each constitute a panel to the Bicameral Conference Committee. This committee will then discuss and harmonize the conflicting provisions of the House and Senate Versions of the GAB. A Harmonized Version of the GAB is thus produced. 4. Ratification and Enrollment
The Harmonized or “Bicam” Version is then submitted to both Houses, which will then vote to ratify the final GAB for submission to the President. Once submitted to the President for his approval, the GAB is considered enrolled. 5. The Veto Message The President and DBM then review the GAB and prepare a Veto Message; GAB only legislative measure where the President can impose a line-veto (in all other cases, a law is either approved or vetoed in full). 6. Enactment When the GAA is not enacted before the fiscal year starts, the previous year’s GAA is automatically reenacted. BUDGET EXECUTION “Spending” the Budget; people’s money is actually spent
1. Release Guidelines and Program. The budget execution phase begins with DBM’s issuance of guidelines on the release and utilization of funds 2. Budget Execution Documents (BEDs) - outline agency plans and performance targets; include the physical and financial plan, monthly cash program, estimate of monthly income, and list of obligations that are not yet due and demandable; submitted at the start of the budget execution 3. Allotment and Cash Release Programming DBM prepares an Allotment Release Program (ARP) to set a limit for allotments issued to an agency and on the aggregate; corresponds to the total amount of the agency-specific budget under the GAA, as well as Automatic Appropriations Cash Release Program (CRP) - formulated alongside to set a guide for disbursement levels for the year and for every month and quarter. 4. Allotment Release Allotments - authorize an agency to enter into an obligation, are either released by DBM to all agencies comprehensively through the Agency Budget Matrix (ABM) and individually via Special Allotment Release Orders (SAROs). ABM - disaggregates all programmed appropriations for each agency into two main expenditure categories: “not needing clearance” and “needing clearance.” The ABM is the comprehensive allotment release document for appropriations which do not need clearance, or those which have already been itemized and fleshed out in the GAA. SARO - identified as “needing clearance” are those which require the approval of the DBM or the President; an agency needs to submit a Special Budget Request to the DBM with supporting documents. Once approved, a SARO is issued 5. Incurring Obligations Obligations - liabilities legally incurred, which the government will pay for The GAA as Allotment Release The Aquino Administration plans to design the annual General Appropriations Act as the comprehensive allotment release document itself. This is being pursued in order to significantly speed-up the process of releasing the Budget and implementing the programs and projects that it funds. This entails the disaggregation of all budget items into full detail, as well as the elimination of all lump-sum funds, save for a few exceptions such as the Calamity Fund. In other words, this reform significantly reduces the need for SAROs. 6. Cash Allocation To authorize an agency to pay the obligations it incurs, DBM issues a disbursement authority. Most of the time, it takes the form of a Notice of Cash Allocation (NCA); and in special cases, the Non-Cash Availment Authority (NCAA) and Cash Disbursement Ceiling (CDC). NCA - a cash authority issued periodically by the DBM to the operating units of agencies to cover their cash requirements; specifies the maximum amount of cash that can be withdrawn from a government servicing bank for the period indicated; based on an agency’s submission of its Monthly Cash Program and other required documents. Others Disbursement Authorities. NCAAs - issued to authorize non-cash disbursements. CDCs - issued to departments with overseas operations, allowing them to use income collected by their foreign posts for their operating requirements. 7. Disbursement – the actual spending Modified Disbursement Scheme - where disbursements of national government agencies chargeable against the Treasury are made through government servicing banks BUDGET ACCOUNTABILITY - happens alongside the Budget Execution phase; DBM - monitors the efficiency of fund utilization, assesses agency performance and provides a vital basis for reforms and new policies. 1. Performance and Target Outcomes These performance measures are set alongside the preparation of the National Budget; and these are indicated in the OPIF Book of Outputs 2. Budget Accountability Reports (BARs) - submitted by agencies on a monthly and quarterly basis; shows how agencies used their funds and identify their corresponding physical accomplishments; include quarterly physical and financial reports of operations; quarterly income reports, a monthly statement of allotments, obligations and balances; and monthly report of disbursements.
No Report, No Release – if does not submit BAR 3. Review of Agency Performance The DBM - reviews the financial and physical performance of agencies. Actual utilization of funds and physical accomplishments - evaluated against their targets; Agency Performance Reviews (APRs) - conducted quarterly or every semester; Budget Performance Assessment Review (BPAR) - conducted to determine each agency’s accomplishments and performance by the year-end. The DBM regularly reports results to the President. 4. Audit - COA Ensures agency accountability in the use of public funds; COA’s audit reports in confirming agency performance, determining budgetary levels for agencies and addressing issues in fund usage. 5. Performance-Based Incentive System – recognize and reward good performance among government employees – to improve the efficiency of service delivery across all government institutions 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 are 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 1 2 3 4 5
When the agencies issue their financial reports and statements they are asserting the following: Existence or Occurrence - assets or liabilities of the audited agency actually exist at a given date, and whether recorded transactions have occurred during the given period. Completeness –all transactions and accounts that should be presented in the financial statements are included. Rights and Obligations - assets are actually owned by the agency and liabilities are the obligation of the agency at a given date. Valuation or Allocation - the asset, liability, revenue and expenses components have been included in the financial statements at appropriate amounts. Presentation and Disclosure – 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 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 Accounting for Budgetary Accounts Budgetary accounts consist of the appropriations, allotments and obligations. Appropriations refer 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: a. The amount to be released categorized under “Not Needing Clearance” column, (ABM) b. 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). Annual Cash Program - provide cash to finance the programs reflected in the ABM and the prior year’s accounts payable; with approved total comprehensive release by DBM to 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) - 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. Records of the DBM Approval and issuance of the ABM and the SARO 1. Registry of Appropriations and Allotments (RAPAL) - enter the pertinent data on releases for each government agency 2. Registry of Allotments and NCA (RANCA) – allotments and NCA issued; the control and monitoring record of the DBM and shall furnish the BTr a copy of the NCA. Records of the BTr Receipt of the NCA from DBM - 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 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). 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)
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. Head of the Requesting Unit - 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. Head of the Budget Unit - 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; 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. 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. 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: 1 2 3
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: a Receipt of Allotment
Posting in the allotment column to the respective Registries.
b 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 108 Subsidy Income from National Government 651
XX 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: 1 2 3
Taxes Operating and Service Income Grants and Donations
4. Borrowings 5. Miscellaneous Receipts
Methods of Accounting for Income: 1
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.
2
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.
3
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: 1
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)
2
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 1 2 3 4 5
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. 6 The accounting unit prepares Journal Entry Voucher (JEV) and records in the Cash Receipts Journal. Types of collections as to authority to use: 1 2 3 4 5 6
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: 1. 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. 1
Receipt of cash payment of hospital fees Cash – collecting officers 102 Due to National Treasury 411 Hospital fees 596 xxx
2
Remittance to the treasury Due to National Treasury Hospital fees 596 xxx Cash-collecting officers
2.
xxx xxx
411 102
xxx 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
1
Issuance of bill for the rent of an office space. Accounts Receivables Rent/Lease income
2
xx xx
Record collection of rent payment. Cash – collecting officer Accounts Receivable
3
xx xx
Record deposit in the bank. Cash in Bank – LCCA Cash – collecting officer
4
xx xx
Record disbursement for the repair (use of income). Repairs and Maintenance –Buildings Cash-National Treasury, MDS
xx xx
3. 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 Due to Other NGAs( SA) 6.b Remittance of cash to the BTr
102 416
xx
Due from National Treasury Cash-collecting officers 6.c Receipt of NCA from DBM
131 102
xx
106 131
xx
Cash-National Treasury, MDS Due from National Treasury
xx
xx
xx
6.d Purchase of technical equipment Technical & Scientific Machinery And Equipment 226 Cash-National Treasury, MDS 106 6.e Submission of liquidation report to the SA. Due to Other NGAs Technical and Scientific Machinery & Equipment
416
xx xx
xx
226
xx
If there is still a balance or refund of fund balances of completed projects. Due to Other NGAs Cash-National Treasury, MDS 4.
416 108
xx 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. 1
Record collection of (ex.) seminar fees. Cash – collecting officer Seminar/Training fees
2
Record deposit of collection.
102 622
xx xx
Cash in Bank – Local Currency Cash – collecting officer 3
111 102
xx
Office supplies expense 755 Cash in Bank – Local Currency 111
xx
xx
Record payment of expenses. xx
To close the balance or unused income in RA and transfer to NG Bks. Seminar/training fees Cash in Bank–Local Currency 4
622 111
xx xx
Record transfer in the NG Bks the unused collections. Cash – collecting officer 102 Due to NT 411 ( Seminar/Training fees 622- xx
5
xx xx
Record remittance of excess to the Bu of Treasury through bank. Due to NT (Seminar/training fees 622 xx) Cash – collecting officer
411
xx
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 Accumulated depreciation Sales Price
P500,000 250,000 300,000
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 Accumulated DepreciationLand Transport Equipt Land Transport Equipment Gain on Sale of Asset
102
300,000
314 214 623
250,000 500,000 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 Subsidy Income from NG
107 631
450,000 450,000
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 Accounts Payable 401
214500,000 500,000
To record full payment of obligation: Accounts Payable Due to BIR Cash – NT, MDS
401500,000 412 107
50,000 450,000
To record remittance of withholding tax through TRA. Due to BIR Subsidy Income from National Government
412 50,000 631
50,000
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
The cash transactions affect every classification within the financial statements – assets, liabilities, and residual equity, income and expenses by checks. Disbursements constitute all cash paid out during a given period either in currency (cash) or by check; the settlement of government payables/obligation by cash or by check; covered by Disbursement Voucher (DV), Petty Cash Voucher, or Payroll. How to Distinguish Disbursement from Expenditures? EXPENDITURES - the obligations incurred by the Agency; includes both the amount actually paid and those incurred and recorded as liabilities to be paid in the future DISBURSEMENTS - payments made for such government obligations by cash or check. Typical transactions for disbursements include the following major classes of payments: A Current Operating Expenses 1 Personal Services - Salaries and wages - Other Compensation - Personnel benefits - Other personnel benefits 2
Maintenance and Other Operating Expenses - travelling expenses - training and scholarship program - supplies and material expenses - repairs, etc….
3
Financial Expenses - bank charges - commitment fees - documentary stamps - interest and other financial charges
B
Capital Expenditures – these expenditures need allotment for CO; involves investments and procurement of assets that is expected to be used for a longer period of time.
C
Inter-agency fund transfers - covers the transfer of funds to other agencies for the implementation of specific projects; taken up in the books under “Due to –“ by the receiving agency and “Due from – “ by the releasing agency.
Basic Requirements for Disbursement: 1 Existence of a lawful and sufficient allotment certified as available by the budget officer. 2 Existence of a valid obligation certified by the Chief Accountant/Head of Acctg. Unit; 3 Legality of transactions and conformity with laws, rules and regulation. 4 Approval of the expense by the Chief of Officer or by his duly authorize representative; and 5 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: 1 by check – thru MDS checks or commercial checks 2 by cash – cash advances granted to disbursing officer and petty cash fund 3 Advices to Debit account (ADA) Disbursement by Checks – Checks shall be drawn only on duly approved DV or PCV; reported and recorded in the books of accounts only when actually released to the respective payees. Two types of checks: 1 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 Government Servicing Banks; 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.
2
Commercial checks – issued by government agencies chargeable against the agency checking account with GSBs; 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 included in the Report of Checks Issued the Cashier. All unreleased and cancelled enumerated in the “List of Unreleased Checks” to be attached to the RCI. Receipt of NCA – this entry will that the NCA received is the share of the agency in the income of the National Government; proof that there was an allocation of cash for the Agency by the National Treasury; may be net of the amount of the taxes to be withheld by the agency Cash – National Treasury, MDS XXXX Subsidy Income from NG XXXX Disbursement by Cash - shall be made from cash advance drawn and maintained in accordance with COA rules and regulations; based on duly approved payrolls/disbursement vouchers. May either for: 1 personal services or salaries and wages – equal to the net amount due the officials and employees; fully liquidated within 5 days after the pay period; UNCLAIMED WAGES remitted and receipted to close the cash advance account 2 travels – accounted for as Due from officers and Employees; subject to liquidation upon completion a LIQUIDATION OF TRAVEL WHERE THE AMOUNT OF CASH ADVANCE =/> THE TRAVEL EXPENSES INCURRED LIQUIDATION REPORT FORM shall be prepared by the employee concerned and submitted to the accounting unit as a basis for JEV preparation ; close the receivable account b EXCESS CASH ADVANCE – refunded and an Or shall be issued to acknowledge receipt; noted in the LIQUIDATION REPORT c CASH ADVANCE < TRAVEL EXPENSES INCURRED – LIQUIDATION REPORT shall be submitted to liquidate cash advance previously granted; DV prepared to claim reimbursement of the deficiency in amount 3 miscellaneous expenses - recorded in separate cashbooks REPORT OF DISBURSEMENT - serve as the liquidation report of the cash advance granted to the Disbursing Officer. Petty Cash Fund (PCF) - fund shall be sufficient for emergency and petty expenses of the agency; replenishment directly charged to the appropriate expense accounts; equal to the total cash on hand and the unreplenished expenses; not be used to purchase regular inventory items for stock nor for the liquidation of outstanding cash advances; 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 PC Custodian ; DV 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. PCC resigns or ceases - full accounting/liquidation shall be made. 1 EXCESS CASH - 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. Petty Cash Fund record - used to record all the PCs received by the PCC as well as reimbursements received for expenses paid; PCV supported with valid documents to prove the propriety of disbursements, such as ORs, invoices, etc. Advice to Debit Account (ADA) – 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. 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 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 prepared to record the transaction in the GJ. Recording the different types of Disbursements: a. Personal Services 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 ======= a Enters the obligation – RAOPS b Cash Advance to be granted to the DO c Recognize the expenses and liabilities d Obligation and recording of the government share of the mandatory contributions e Remittance of the deductions to the respective offices. b Maintenance and Other Operating Expenses Asset Method - 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: 1 Issued Purchase Order (PO) for office supplies, P60,000. a Obligation b Payment (thru Procurement Service). Compare with purchases made to outside supplier. c Record the asset received/delivered d Record the used supplies. e Remittance of withholding tax thru TRA The expense shall be taken up upon utilization/consumption. Cash Advances: Petty Cash Fund, Travelling Expenses a Obligation b Record the granting of cash advances c 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. The subsystem are as follows: 1 Receipt, Inspection, Acceptance and Recording Deliveries of Inventory Items and Equipment, 2 Requisition and Issuance of Inventory Items 3 Requisition and Issuance of Equipment PERPETUAL INVENTORY METHOD – purchase of supplies and materials for stock recorded as Inventory account; an inventory control account is maintained in the General Ledger on a current basis. Regular purchases - recorded under the Inventory account; issuance - recorded based on the Report of Supplies and Materials Issued. Purchases out of Petty Cash Fund - charged immediately to the appropriate expense accounts. Perpetual inventory records 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. Subsidiary ledger cards contain the details of the General Ledger accounts.
Property and Supply Officer/Unit - maintain Property Cards (PC) for property, plant and equipment, and Stock Cards (SC) for inventories. The balance in quantity per PC and SC - reconcile with the ledger cards of the Accounting Unit. Moving Average Method - used for costing inventories. Accounting Unit - responsible in computing the cost of inventory on a regular basis. Financial Expenses - expenses not used in the actual operation of the agency such as interest expenses, bank charges, etc. Purchase and/or Construction of Fixed Assets PROPERTY, PLANT AND EQUIPMENT AND INVENTORY ACCOUNTS acquired through purchase - include all costs incurred to bring them to the location necessary for their intended use ; recorded as Asset after inspection and acceptance of delivery. CONSTRUCTION PERIOD THEORY – used in recording fixed assets Depreciation - taken up starting on the month succeeding the month of purchase or completion of construction; Straightline method; rate of depreciation - depend on the nature of the assets, guidelines for this shall be issued by the COA. Recording of fixed assets - the Construction Period Theory shall be followed. All expenses 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. “Public Infrastructures” and “Reforestation Projects” accounts closed to “Government Equity” account; asset 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. 1. Issue PO for the office equipment 2. Record the obligation, RAOCO 3. Record payment (Procurement Service/outside supplier) or recognize the liability and taxes withheld 4. Record the asset received/delivered 5. Remit taxes withheld upon receipt of TRA Construction of Building by Contract 1 Signed the construction contract. Record the obligation – RAOCO 2 Record performance bond posted by the contract(cash-5%, bank guarantee-10%, And surety bond-30% of the contract cost) 3 Grant 15% advances to the contractor if requested 4 Payment based on the percentage of completion billed 5 Imposed retention fees and observed if needed up to the last claims 6 Required withholding taxes to be deducted for every billing 7 Record completion and turn-over 8 Return the performance bond, retention fees and remittance of withholding taxes Miscellaneous Transactions Accounting for loss of cash and property - may be due to malversation, theft, robbery, fortuitous event or other causes; CASH SHORTAGE reported through the Report of Cash Examination. The Auditor issues an 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 – Grant of relief from accountability due to shortage or loss of fund a copy of the decision shall be forwarded to the Chief Accountant who shall draw a JEV to record the transaction; debited to the Loss of Assets account and credited to the appropriate receivable account; Request for relief is denied immediate payment of the shortage shall be demanded from the AO. Restitution - acknowledged by the issuance of an official receipt. Request for relief from accountability for loss of property caused by fire, theft, etc, is granted - a copy of the decision shall be forwarded to the Chief Accountant for the preparation of the JEV; same journal entry; Request for relief is denied - taken as receivable from the accountable officer and shall be credited to the appropriate asset account.
Accounting for Cash Overage - the amount shall be forfeited in favor of the government and an official receipt shall be issued by the cashier; taken up as Miscellaneous Income. Accounting for stale checks - 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 still with Cashier - cancelled and reported in the List of Unreleased Checks as cancelled, which is attached to the RCI. 2. 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 - 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 - acknowledged through the issuance of an official receipt and reported by the cashier in the RCD. Accounting for 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 Cash-National Treasury, MDS 107
1,000
Adjusting Entry: Rent Expenses Prepaid Rent
900
786 171
-----
------
1,000
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 DepreciationOffice 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 -----------------------Subsidy Income from National Government 631 Income and Expense Summary 999
Debit -----
Credit ------
1,000 1,000
2. Close the balance of all income accounts to Income and Expense Summary account. Account Title Account Code -----------------------Other business Income 618 Other Income 659 Income and Expense Summary 999 3.
Credit -----900
Close the balance of all expense accounts to Income and Expense Summary account.
Income and Expense Summary Salaries and Wages-Regular Pay 4.
Debit ----500 400
999 701
800 800
Close the balance of the Income and Expense Summary account to the Retained Operating Surplus account.
Income and Expense Summary Retained Operating Surplus
999
1,100 1,100
5. Close the balance of the Prior Year's Adjustments accounts to Retained Earnings Surplus account. Prior Year's Adjustment Retained Operating Surplus 6.
200 200
Close the balance of the Retained Operating Surplus to Government Equity account.
Retained Operating Surplus Government Equity 7.
684
1,300 471
1,300
Close Public Infrastructures or Reforestation Projects accounts to Government Equity account and transfer the corresponding amount to the respective registries.
Government Equity Public Infrastructures/ Reforestation Projects
471 251-260 261-262
1,300 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. Title a. b. c. d. e. f.
Cod e
Dr
Cr
Adjustments
Dr
Cr
Adjusted Closing Or PreEntries Adjusted Trial Bal. Dr Cr Dr Cr
Statemen Post t Closing Of Trial Income Bal. & Exp Dr Cr Dr Cr
Balance Sheet
Dr
Cr
Account Title and Code columns show the accounts of the General Ledger. The Unadjusted Trial Balance columns reflect the amount balances of the General Ledger accounts. Adjustments columns show adjusting journal entries effected for the accounts. 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. Closing Entries debit and credit columns show the amounts debited and credited to close the nominal accounts. 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. h.
Post-Closing Trial Balance columns show the debit and credit amount balances of all accounts after posting the closing entries. 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).
