AC 518 HAND-OUTS

GOVERNMENT ACCOUNTING AND AUDITING TNCR

The National Government of the Philippines

The government is the largest financial organization in terms of assets, liabilities, capital, sources
of income and items of expenditures. It is also the largest entity in terms of number and quality of
personnel, facilities and instrumentalities, which are used to serve the social, political and
economic needs of the nation. The government has as many departments, commissions or
offices as necessary to be able to carry out its functions, like promotion of social welfare,
development of national wealth, defense of the state from internal and external aggression,
promotion of justice, promotion of trade and industry, general government and protection of
private rights of the people.

Government Accounting Defined(Section 109 of PD 1445)

Government Accounting encompasses the processes of analyzing, recording, classifying,

summarizing and communicating all transactions involving the receipt and disposition of
government funds and property and interpreting the results thereof.

The general purposes of government accounting are the following:

1. to establish accountability over receipts, property and expenditures, and
2. to generate information that permits a continuous review of government implemented programs
In an efficient manner.

As a process, it consolidates all activities pertaining to the gathering of date to be used as the basis
for fiscal management decisions. It includes:
1. bookkeeping, referred to as analyzing and recording;
2. posting, grouping or classifying of similar items (e.g. arrangement of items according to
account classification, liquidity or nature).
3. analysis of financial reports to determine their accuracy and adequacy as well as the
efficiency and effectiveness of agency operation.

Users of Government Accounting Information:

1. The General public or citizenry
2. The Governing and oversight bodies: The President, Cabinet, COA, Legislative Body.
3. The managers/administrators who are in-charge of carrying out the policy and daily
conduct of government affairs.
4. The students of public finance
5. The resource providers of the government such as:
 Donors or grantors
 Lenders, suppliers and employees whose main concern is to know whether the
government can pay its obligations to them.

Government accounting is a service activity.

Three (3) types of governmental organizational units:

 National Government Unit(NGAs) – are agencies that includes all departments, bureaus,
offices, boards, commissions, councils state colleges and universities.
 Local Government Unit(LGUs)- political subdivisions of the Philippines having substantial
control over local affairs, consisting of provinces, cities, municipalities and barangays.
 Government Owned or Controlled Corp(GOCC)- are agencies organized by law or pursuant
to law, vested with functions relating to public needs whether government or propriety in
nature, owned by the government directly or through its instrumentalities either wholly or,
where applicable as in case of stock corporation, to the extent of at least fifty one % of its
capital stock.

FUNCTIONS OF GOVERNMENT ACCOUNTING

To provide quantitative information primarily financial in nature about the operations of the
government, both national and local, to be used by the administration in making decisions for a
more effective and efficient public service.

OBJECTIVES (PD 1445)

1.To produce information concerning past operations and present conditions.
2.To provide a basis for guidance in future operations.
3.To provide for control of the acts of public bodies and officers in the receipt, disposition
and utilization funds and properties, and
4.To report on the financial position and the result of operation of the government
agencies for the information of all persons concerned.

DISTINCTIONS BETWEEN GOVERNMENT AND COMMERCIAL ENTERPRISES

1. Ownership - Private enterprises are owned by a relatively few stockholders, partners, or

owners. The government represent the entire people in a given community.

2. Purpose - Private enterprises are organized primarily to make profits. The government is
set up mainly to render service at lowest possible cost to its constituents.

3. Organization - The organization of a private enterprise is a succession of authority and

responsibility starting from its stockholders who delegate them to a duly elected board of directors
which in turn organize its own staff of officers in whom the responsibility of managing the affair
of business is reposed. The responsibility and authority of a government entity in our system lies
in Congress.

4. Financing - Private enterprise is supported for its finance primarily by the voluntary
contribution from its members or stockholders which constitute as their share of capital or
investment in the business. The government is vested the exclusive right to demand involuntary
contributions from its constituent in the form of taxes.
 5. Income - In private enterprise, the capital investment of stockholders are made to
generate return in the form of profits for services rendered or good sold. The government which
is organized primarily to render service, cannot make profits on the services it renders. To support
the estimated annual cost of government, taxes are levied.

DISTINCTION BETWEEN GOVERNMENT AND COMMERCIAL ACCOUNTING

1. Objective –
CA – is geared towards income measurements aside from control of company resources,
GA - is control of government funds to see to it that they are properly utilized and provide
data to management for decision.

2. Basis of Accounting -
CA – either cash or accrual method is used but not a combination of both.
GA - the modified accruals basis of accounting is used.

3. Preparation of periodic reports –

CA – Statement of Financial position and condition, Statement of Cash Flows, Notes to
Financial Statements
GA - Financial Statements pursuant to PPSAS 1 (Philippine Public Sector Accounting
Statandards) such as:
- Statement of Changes to Net Assets/Equity
- Statement of Cash Flows
- Statement of Comparison of Budget and Actual Amount
- Statement of Management Responsibility
- Statement of Regional Consolidation of Revenue
- Statement of Regional Consolidation of Expenditure
- Statement of Financial Position
- Statement of Financial Performance
- Statement of Cash Flows, and
- Notes to Financial Statements comprising a summary of significant
accounting policies and other explanatory notes..
Purposes:
1. Enables the Government Accountancy Office (GAO), GAS, COA to conduct extensive
analysis/review of the submitted FSs/reports.
2. Enables the auditor to tag as 'Audited' the FSs/reports in the central database.
3. Facilitates the monitoring by COA of agencies' compliance with the required
submission of FSs/reports .
4. Facilitates consolidation of financial information needed in the preparation of the AFR.
5. Provides real-time consolidation of financial information at the national level.
6. Provides e-learning modules/online video tutorials to capacitate the users on how to
use the system without undergoing a classroom-type of training

The Budget and Financial Accountability Reports ( BFRS ) prescribed under COA-DBM
Joint Circular # 2014-1 dated July 2, 2014 shall also be submitted to the Government Accounting
Sector: (GAS), COA and Agency’s COA Auditor, in addition to the financial statements and reports
stated above.
BFRS:
-. 1 -Statement of Appropriations, Allotments, Obligations, Disbursements and Balances
(SAAODB)
- 1-A - Statement of Appropriations, Allotments, Obligations, Disbursements and Balances
by Object of expenditures (SAAODBOE)
-. 1-B - List of Allotments and Sub-Allotments (LASA)
-. 2 - Statement of Approved Budget, Utilizations, Disbursements and Balances
(SABUDB)
- 2-A - Statement of Approved Budget, Utilizations, Disbursements and Balances by
Object of Expenditures (SABUDBOE)
- 3 - Aging of Due and Demandable Obligations (ADDO)
- 4 - Monthly Report of Disbursements
- 5 - Quarterly Report of Revenue and other Receipts

Purpose:
- Easier and more efficient submission .by NGAs of the following financial accountability
reports (FARs) required by COA pursuant to COA-DBM Joint Circular No. 2013-1
dated August 6, 2013:
- Enables the GAS to conduct extensive analysis/review of the submitted FARs.
- Facilitates the monitoring by COA of agencies' compliance with the required
submission of the FARs.
- Provides a central database for monitoring each agency's appropriations, allotments,
obligations and disbursements on a quarterly basis, at the national level.
- Facilitates the consolidation of financial/budget information needed in the preparation of
the required Annual Report on Appropriations, Allotment, Obligations and
Disbursements (ARAAOD)
- Provides e-learning modules/online video tutorials to capacitate the users on how to
use the system without undergoing a classroom-type of training

4. Control Mechanism –
CA – none
GA – Fund accounting, obligation accounting and CDC accounting

5. Books of Accounts –
CA - only one set is kept
GA - one set of books is kept , Regular Agency (RA) Book, and maintain
Registries for budget accounts.

6. As to accounts and transactions –

CA - Nominal and Real Accounts are used.
GA - includes budgetary accounts such as Appropriation, Allotments and
Obligations which are recorded in a Registry, respectively.

7. Source of Accounting practice and procedures –

CA - dictated by nature of business and policies of management
GA - laws, rules and regulations
Salient Features of Government Accounting

The financial resources of the Government are very limited. It relies heavily on collected taxes.
This means that it has to operate through a system of fiscal and accounting controls. The
following control mechanisms adopted as sub-systems of government accounting are not
adopted in commercial accounting:

 Fund Accounting
 Obligation Accounting
 Cash Disbursement Ceiling (CDC) Accounting

Fund Accounting. A fund is a sum of money or other resources set aside for the purpose
of carrying out specific activities or attaining certain objectives in accordance with specific
regulations, restriction, and limitations.

The two major classification of funds as to purpose for which they may be used:
1. General Fund – one which is generally available for all functions of the government .
2. Special Fund - one which, by legislative action, segregates specified revenues for specific purposes.
for which recipient agencies/departments have not yet identified during budget preparation. Ex.
Calamity fund, contingent fund, pension and gratuity fund.

Obligation Accounting. As a control mechanism of government accounting system,

obligation accounting provides the ceiling of the maximum extent by which an agency can incur
obligations or commit the resources of the government in the performance of its functions. With
obligation accounting, an agency can operates only within the amount actually released to it by
the DBM, which is within or covered by the amount approved appropriation.

Obligation accounting refers to the accounting practice, procedures and techniques for recording
obligations in the government.

Cash Disbursement Ceiling Accounting. The cash disbursement ceiling accounting is

another control mechanism of government accounting system. The cash operations of the
government under the cash disbursement ceiling accounting are limited within the boundaries of
the appropriations release to government agencies in the form of allotments, and any additional
amount granted by the DBM to liquidate or pay existing valid obligation.

Decision-making Process in Government

The decision-making process in government is an important aspect of the environment of state

accounting because accounting information is intended to be useful in making economic
decisions and in making reasoned choices among alternative courses of action.

The ultimate authority for decision-making in the Philippine government rests with the people.
This authority is exercised through duly elected representatives, acting as agents of the people.
It is the sovereign right of the people to change them if the authority is misused or abused.
The President, as chief executive, formulates national policies, which specify the goals of
government and determine the courses of action that the government should take in different
aspects of public affairs.

On the basis of national policy, the President submits a budget to the legislative body for
consideration and processed until approved and passed into a law.

At all levels of government, decision-making should comply with existing laws and regulations.
Questions and issues involving the settlement of money claims, determination of dispute or
settlement of a controversy on the issue as to legality and/or propriety of such claims are
submitted for resolution to the COA in connection with the discharge of its audit function.
Questions involving legal interpretation and/or application of law are submitted for decision to the
courts.

Accounting Responsibility - Under PD 1445, accounting responsibility for all government

funds and property is entrusted, immediately and primarily, to the head of the government agency
or office. It is the duty of the head of the agency to take reasonable steps to minimize, if not to
avoid the risk of losses, defalcations and other types of irregularities in the utilization of all
government resources (to safeguard the resources of the government under his custody) and
periodic reporting to concern authorities. His responsibility, however, is supervised by higher
authorities and government bodies.

The officer in possession or custody of government funds or property by reason of his duties are
accountable for the safekeeping thereof. As such, he shall be properly bonded.

The Head of the agency is made immediately and primarily responsible for all government
funds and property pertaining to his agency. Secondary responsibility is made to rest on the
persons entrusted with the actual possession or custody of the funds or property. They are the
accountable officers and are immediately responsible to the agency head.

The imposition of primary responsibility on the agency head for government funds and property is
in keeping with the concept of fiscal responsibility now lodge with agency head.

The head of the agency shall exercise the diligence of a good father or a family in supervising
accountable officers to prevent the occurrence of loss/wastage of government funds and property,
otherwise, he shall be jointly and solidarily liable with the person primarily accountable thereof.

Although supervisory work of government accounting is vested upon to the Commission on Audit,
accounting responsibilities in the government, by virtue of the provision of the Constitution of the
Philippines, laws, Presidential Decrees and other issuances, are shared primarily by the
Commission on Audit(COA), Department of Budget and Management, (DBM), Department of
Finance (Bureau of Treasury) and government agencies.

The Commission on Audit serves as the external auditor of the government agencies. It is a
constitutional office and its mandates are provided in Section 2, Art. IX-D of the 1986 Constitution
of the Philippines. The COA keeps the general accounts of the national government , prescribes
the standard chart of accounts, promulgates accounting rules and regulations and exercise

technical supervision over the accounting functions of each agency. The office is mandated by the
Constitution to submit to the President and the legislative body within the time frame fixed by law,
an annual audit report of the government, its subdivision, agencies and instrumentalities including
government owned or controlled corporations and recommend measures necessary to improve
efficiency and effectiveness.

The DBM determines the accounting and other item of information needed to monitor budget
performance and assess effectiveness of the agency operation. It prescribes the forms, schedules
of submission and other component of reporting system needed to accomplish and submit the
required information. It approves the Agency Budget Matrix and issues the allotments to agencies
in accordance with the approved budget and issues Notice of Cash Allocation.

The Bureau of Treasury (BTr) performs banking function for the national government. It
receives and keeps government funds, controls the disbursements thereof and maintain accounts of
the financial transactions of national government agencies. It is required to prepare and submit to
the COA and other fiscal activities, a daily statements of cash receipts, disbursements and fund
balances in the National Treasury.

The National Government Agencies (NGAs) consist of various organizational units such as
departments, bureaus, commissions, boards, offices, tribunals, councils, institutions, state colleges
or universities and establishments. These agencies are required to establish and maintain a system
of accounting for their financial resources and operation in accordance with pertinent rules and
regulations. Accounts should be kept in such details as is necessary to meet the need of agency
management and furnish information to fiscal and control agencies such as COA, DBM and BTr.

Relationship between Accountability, Responsibility and Authority

Accountability is the obligation of a public officer/employee to answer for the responsibility

conferred on him/her. It is her Responsibility to respond to the concerns
of individuals or groups, the public he/she is to serve, within the overall context of his/her
obligations for which he/she has the appropriate Authority.

In government, authority is often used interchangeably with the term "power". However, their
meanings differ: while "power" is defined as 'the ability to influence somebody to do something
that (s)he could not have done' , "authority" refers to a claim of legitimacy, the justification and
right to exercise that power.

Accountability Requirements From Public Officer/Employees

Section 1 of PD 1445 provides: ”It is the declared policy of the State that all government resources
shall be managed, expended and utilized in accordance with law and regulations and safeguard
against loss or wastage through illegal or improper disposition, with a view to ensuring efficiency,
economy and effectiveness in the operations of government. The responsibility to see to it that
such policy is faithfully adhered to rests directly with the chief or head of the government agency
concerned.”
This declaration articulates the concern of the state for the safekeeping of the public’s resources.
It focuses on how the resources shall be handled by those given the public trust to manage, spend
or use such resources.

Pursuant to this policy the State requires from public officers and employees the following:
1. Compliance with laws and regulations, Laws and rules, Agency policies, Agency manuals of
operations; and Provisions of contracts, MOA
2. Safeguarding of government resources from loss and waste
3. Achieving goals and objectives

Generally Accepted (State) Accounting Principles

Accounting principles are propositions, a general law or rule adopted, which on the basis
of reasons, demonstrated usefulness and general acceptance as the best way of carrying out the
function and achieving the objectives of financial accounting.

Objectives:
1. Guide the accountants in identifying, measuring and communicating financial accounting
information;
2. Assure proper reporting and reasonable degree of uniformity and comparability among the
financial statements of different government entities; and
3. Provide auditors with the framework for making judgements about the fairness of financial
statements on the basis of some uniform standards.

Significant differences in principles between state accounting and commercial accounting:

1. Government activities are non-profit oriented;
2. State accounting places greater emphasis on accountability, stewardship and control; and
3. State accounting is based on laws, rules and regulations.

A principle is generally accepted if it has substantial authoritative support. There are two
sources of support: primary and secondary sources

Primary sources:
1. Pronouncement of the Commission on Audit - COA is mandated by the Philippine
Constitution to promulgate accounting rules and regulations to facilitate the keeping
and enhance the informational value of the accounts of the government.

2. Provision of law - Sec. 112 of the PD 1445 provides that generally accepted
accounting principles should be observed in government accounting entities a provided
they do not contravene existing laws and regulations.

Secondary source:
From the pronouncements and issuances by other government agencies.
The Government Auditing Code of the Philippines requires that each government agency shall
record its financial transactions and operations in conformance with the generally accepted
accounting principles and accordance with pertinent laws and regulations. The principles to be
followed by government entities includes the following:

1. The accounts of the agency shall be kept in such detail and at the same time be adequate to
furnish the information needed by fiscal or control agencies of the government.
2. The highest standard of honesty, objectivity and consistency shall be observed in the
keeping of accounts to safeguard against inaccurate or misleading information.
3. The government accounting system shall be on double-entry basis with the general ledger
in which all financial transactions are recorded, Subsidiary record shall be kept where
necessary.
4. The Chart of Accounts has eight mandatory digits representing different account groups
and classification.
5. The Chart of Accounts categorizes Personal Services, Maintenance and Other Operating
Expenses and Financial Expenses as Expenses, while obligations charged to capital outlay
are recorded to appropriate asset accounts when the liability and the payment are taken-up.
6. Matching Principles, The principle that requires the matching of revenues and expenses is
adopted.
- Modified accrual method is used
- Depreciation accounting for property, plant and equipment using the straight line
method is followed.
- Allowance for impairment accounts is taken up. Dormant accounts are transferred
to a separate registry,
- Asset method is followed for prepaid expenses.
7. On financial statement:
1. Fairness of presentation – this refer to the overall propriety of disclosing financial
information. Full disclosures in financial aspects requires observance of the
standards of reporting.
2. Compliance – the report shall be in accordance with prescribed government
requirements and international accounting standard of reporting.
3. Timeliness – all needed reports shall produced promptly to be of maximum
usefulness.
4. Usefulness – financial reports shall be carefully designed to present information
that is needed and useful to reports users.
8. Obligation accounting is modified, allotments and obligations are no longer journalized.
Separate registries are maintained to control these accounts and the appropriation.
9. All lawful expenditures and obligation incurred during the year shall be taken up as
accounts of that year.
What is Assertions?

Assertion is the expressed or implied representation by management that is reflected in

their transactions, accounts, financial statements, records, reports and that they are claiming that
they have complied with the accountability requirements of the state policy.

Assertions on Compliance with Laws and Rules

When expenditures, disbursements, receipts and collections are reported to the appropriate
authorities, management is making claim that so much amount has been disbursed or so much
amount have been collected in payment of goods and services received or rendered in accordance
with laws, rules, applicable policies and practices.

Assertion on Resources Duly Safeguarded

When the agencies issue their financial reports and statements they are asserting the following:

1. Existence or Occurrence - This deals with whether assets or liabilities of the audited
agency actually exist at a given date, and whether recorded transactions have occurred
during the given period.

2. Completeness – This deals with whether all transactions and accounts that should be
presented in the financial statements are included.

3. Rights and Obligations - This deals with whether assets are actually owned by the agency
and liabilities are the obligation of the agency at a given date.

4. Valuation or Allocation - This deals with whether or not the asset, liability, revenue and
expenses components have been included in the financial statements at appropriate
amounts.
5. Presentation and Disclosure – This deal on whether particular components of the financial
statements are properly classified, described and disclosed.

Assertions on Achievement of Goals and Objectives (Performance or Value for Money

Accountability)

When the agencies prepare and submit to proper authorities their reports on the performance of an
activity or a project, the agency is asserting that they used and managed the resources for that
activity or project in an economical, efficient and effective manner.
Performance of government entities is measured from the point of view of economy, efficiency
and effectiveness.

Economy refers to the reasonableness of cost incurred. Measuring economy will determine
whether the agency has been performing at the least possible cost or under the terms most
advantageous to the government.

Efficiency refers to the relationship between goods or services produced and resources used to
produce them. The measurement of efficiency involves the determination of whether an agency is
managing or utilizing its resources in an efficient manner as well as establishing the causes of any
inefficiencies, including inadequacy in management information systems, administrative
procedures or organizational structure.

Effectiveness is concerned with the relationship between the outputs and the goals of the agency.
Measuring effectiveness will determine whether the desired results are achieved, whether the
objectives set by the agency are met, and whether the agency has considered alternatives that yield
desired results at a lower cost.

MANUAL ON THE NEW GOVERNMENT ACCOUNTING SYSTEM

For National Government Agencies

ACCOUNTING POLICIES

Sec. 1. OBJECTIVES OF THE MANUAL. The New Government Accounting System

(NGAS) Manual presents the basic policies and procedures; the new coding system; the
accounting systems, books, registries, records, forms, reports, and financial statements; and
illustrative accounting entries to be adopted by all national government agencies effective January
1, 2002. The objectives of the Manual are to prescribe the following:

a. Uniform guidelines and procedures in accounting for government funds and

property;
b. New coding structure and chart of accounts;
c. Accounting books, registries, records, forms, reports and financial statements; and
d. Accounting entries.

Sec. 2. COVERAGE. This Manual shall be used by all national government agencies.

Sec. 3. LEGAL BASIS. This Manual is prescribed by the Commission on Audit pursuant to
Article IX-D, Section 2 par. (2) of the 1987 Constitution of the Republic of the
Philippines which provides that:
"The Commission on Audit shall have exclusive authority, subject to the limitations in this
Article, to define the scope of its audit and examination, establish the techniques and
methods required therefore, and promulgate accounting and auditing rules and regulations,
 including those for the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or uses of government funds and properties".
(underscoring supplied)

The New Government Accounting System (NGAs) simplify the recording of government
transactions and generate financial statements that are reflective of the government’s true state of
affairs.

The old system was done manually and was prone to material errors in recording and journalizing.
In addition, the manual system was ineffective in providing financial information in a timely
manner, and therefore, more difficult to use for decision making.

With computerization and the adoption of NGAs, recording of transactions became easier, and
updates to financial reports --- faster. What comes out are relevant financial statements that are
easy to understand and more reflective of the agency’s operation.

BASIC FEATURES AND POLICIES

Sec. 4. BASIC FEATURES AND POLICIES. The NGAS has the following basic features and
policies, to wit:
a. Accrual Accounting. A modified accrual basis of accounting shall be used. Under this
method, all expenses shall be recognized when incurred and reported in the financial
statements in the period to which they relate. Income shall be on accrual basis except
for transactions where accrual basis is impractical or when other methods required by
law.
b. One Fund Concept. This system adopts the one fund concept. Separate fund
accounting shall be done only when specifically required by law or by a donor agency
or when otherwise necessitated by circumstances subject to prior approval of the
Commission.
c. Chart of Accounts and Accounts Codes. A new chart of accounts and coding structure
with eight mandatory digits shall be adopted. (See Revised Chart of Accounts, COA
C2013-002, Annex A, p 1-115.)
d. Books of Accounts. All national agencies shall maintain one set of books:

Regular Agency (RA) Books. These shall be used to record the receipt and utilized
of Notice of Cash Allocation (NCA) and other income/receipts which the agencies
are authorized to use and to deposit with Authorized Government Depository Bank
(AGDB) and the National Treasury. These shall consist of journals and ledgers, as
follows:
Journals
* Cash Receipts Journal (CRJ)
* Cash Disbursement Journal (CDJ)
* Check Disbursement Journal (CkDJ)
* General Journal (GJ)Ledgers
* General Ledgers (GL)
* Subsidiary Ledgers (SL) for:
* Cash
* Receivables
* Inventories
* Investments
* Property, Plant and Equipment
* Construction in Progress
* Liabilities
* Income
* Expenses

With the implementation of the computerized agency accounting system, only the
General Journal shall be used together with the ledgers by both books.

The use of National Government (NG) books shall be discontinued and a separate set
of books shall be maintained by fund

e. Financial Statements. The following statements are prepared under:

a) AFRS b) BFRS

The COA prescribed the adoption of 25 Philippine Public Sector Accounting

Standards (PPSASs) based on the International Public Sector Accounting
Standards (IPSASs.

f. Two-Money Column Trial Balance. The two - money column trial balance
showing the account balances shall be used.

g. Allotment and Obligation. Obligation accounting is modified to simplify procedures in

the incurrence and liquidation of obligations and the recording of the budgetary accounts
(allotments and obligations incurred and liquidated). Separate registries shall be
mantained to control the allotments and obligations for each of the four classes of
allotments, namely:
* Registry of Allotments,Obligations and Disbursements – for PS, MOOE, CO and FE.
* Registry of Appropriation and Allotment (RAPAL)
 This Registries shall be maintained by the Budget Unit of each entity.
The RAOD shall be maintained by fund cluster, by Major Final Output (MFO) or
Program/Activity/Project (PAP), and by allotment class.
Separate Registry shall be maintained for Overdraft/Obligations Incurred in
Excess of Allotment and for continuing appropriations (unreleased and
unobligated allotments).
( Circular # 2015-002, March 19, 2015 )

h. Notice of Cash Allocation (NCA). The receipts of NCA by the agency shall be
recorded in the books as debit to account "Cash- Modified Disbursement System
(MDS)egular" and credit to account "Subsidy from National Government". (Refer to
the latest issuance by DBM as regards to releases of NCA) (COA-Circular#2013-
002)

i. Financial Expenses. Financial expenses such as bank charges, interest expenses,

commitment charges and other related expenses shall be separately classified from
Maintenance and Other Operating Expenses (MOOE).

j. Perpetual Inventory of Supplies and Materials. Supplies and materials purchased for
inventory purpose shall be recorded using the perpetual inventory system. Regular
purchases shall be coursed thru the inventory account and issuances thereof shall be
recorded as the take place except those purchased out of Petty Cash Fund which shall
be charged directly to the appropriate expense accounts. (PPSAS 12)

k. Valuation of Inventory. Cost of ending inventory of supplies and materials shall be

computed the moving average method.

l. Maintenance of Supplies and Property, Plant and Equipment Ledger Cards. For
appropriate check and balance, the Accounting Units of agencies, as well as the
Property Offices, shall maintain Supplies Ledger Cards/Stock Cards by stock number
and Property, Plant and Equipment Ledger Cards/Property Cards by category of
property, plant and equipment, respectively.

m. Construction of Assets. For assets under construction, the Construction Period

Theory shall be applied for costing purposes. Bonus paid to the contractor for
completing the work ahead of time shall be added to the total cost of the project.
Liquidated damages charged and paid for by the contractor shall be deducted from
the total cost of the project. Any related expenses incurred during the construction of
the project, such as taxes, interest, license fees, permit fees, clearance fee, etc. shall
be capitalized, and those incurred after the construction shall form part of operating
costs.

n. Public Infrastructures/Registry of Reforestation Projects. For agencies that construct

public infrastructures, such as roads, bridges, waterways, railways, plaza,
 monuments, etc., and invest on reforestation projects, shall recognize the cost and
the related accumulated depreciation and impairment losses of existing public
infrastructure assets based on the Registry of Public Infrastructures (RPIs)previously
maintained and the estimated useful life as may be determined by competent
authority. Registry of Public Infrastructures (RPI). Registry of Reforestation
Projects (RRP) shall no longer maintained. (PPSAS 17)

Included in the standard are provisions to be followed regarding PPE controlled but
not owned by the entity, the effect on the recognition of depreciation as a result of
the change in the estimated residual value to 5% of the cost which will be applied
prospectively, and (PPSAS 31) the accounting policy on tangible assets with
serviceable life of more than one year but small enough to be considered as PPE, that
revoked the threshold of P10,000 for semi-expendable items, shall continue to be
applied until amended.

o. Depreciation. The straight-line method of depreciation shall be used. Depreciation

shall start on the second month after purchase of the property, plant and equipment,
and a residual value equivalent to 5% percent of the purchase cost shall be set-up.

Public infrastructures/reforestation projects shall be charged of depreciation while

serviceable assets that are no longer being used shall not be charged of any
depreciation.

p. Reclassification of Assets. Serviceable assets no longer being used shall be

reclassified to "Other Assets" account and shall not be subject to depreciation.

q. Allowance for Doubtful Accounts. An Allowance for Doubtful Accounts shall be set
up for estimated uncollectible trade receivables to allow for their fair valuation.

r. Elimination of Contingent Accounts. Contingent accounts shall no longer be used.

All financial transactions shall be recorded using the appropriate accounts. Cash
shortages and disallowed payments, which become final and executory, shall be
recorded under receivable accounts "Due From Officer and Employees" or
"Receivables-Disallowances/Charges", as the case may be. Additional provisions
regarding contingent assets and liabilities are discussed in PPSAS 19.

s. Recognition of Liability. Liability shall be recognized at the time goods and services
are accepted or rendered and supplier/creditor bills are received.

t. Interest Accrual. Whenever practical and appropriate, interest income and/or expense
shall be accrued and recognized in the books of accounts.

u. Accounting for Borrowings and Loans. All borrowings and loans incurred shall be
recorded to the appropriate liability accounts.
v. Elimination of corollary and negative journal entries. The use of corollary and
negative journal entries shall be stopped. Acquisition/Disposition of assets shall be
debited/credited to the appropriate assets accounts. If an error is committed,
correcting entry to adjust the original entry shall be prepared.

w. Petty Cash Fund. The Petty Cash Fund shall be maintained under the imprest system.
As such, all replenishment shall be directly charged to the expense account and at all
times, the Petty Cash Fund shall be equal to the total cash on hand and unreplenished
expenses. The Petty Cash Funds shall not be used to purchase regular
inventory/items for stock.

x. Foreign Currency Adjustment. Cash deposits in foreign currency and outstanding

foreign loans shall be computed at the exchange rate prescribed by the Bangko
Sentral ng Pilipinas at balance sheet date. The total cash deposits and foreign loans
payable shall be adjusted at the end of each month and any gain or loss on foreign
exchange shall be recognized. The subsidiary ledger for foreign currency obligations
shall reflect appropriate foreign currency in which the loan is payable. The liability
shall be expressed both in the foreign and local currency.