University of San Carlos

School of Business and Economics

Department of Accountancy
AC 518 Advanced Financial Accounting and Reporting, Part 3
2nd Sem, A.Y. 2015-2016 (1st Hand-Out)
The National Government of the Philippines
The government is the largest financial organization in terms of assets, liabilities, capital,
sources of income and items of expenditures. It is also the largest entity in terms of number and
quality of personnel, facilities and instrumentalities, which are used to serve the social, political
and economic needs of the nation. The government has as many departments, commissions or
offices as necessary to be able to carry out its functions, like promotion of social welfare,
development of national wealth, defense of the state from internal and external aggression,
promotion of justice, promotion of trade and industry, general government and protection of
private rights of the people.
Government Accounting Defined (Section 109 of PD 1445)
Government Accounting encompasses the processes of analyzing, recording, classifying,
summarizing and communicating all transactions involving the receipt and disposition of
government funds and property and interpreting the results thereof. Government accounting is
a service activity.
Three (3) types of governmental organizational units:

National Government Agency (NGA) are agencies that includes all departments,
bureaus, offices, boards, commissions, councils state colleges and universities.

Local Government Unit (LGU)- political subdivisions of the Philippines having

substantial control over local affairs, consisting of provinces, cities, municipalities
and barangays.

Government Owned or Controlled Corp (GOCC)- are agencies organized by law or

pursuant to law, vested with functions relating to public needs whether government
or propriety in nature, owned by the government directly or through its
instrumentalities either wholly or, where applicable as in case of stock corporation,
to the extent of at least fifty one % of its capital stock.

FUNCTIONS OF GOVERNMENT ACCOUNTING

To provide quantitative information primarily financial in nature about the operations of the
government, both national and local, to be used by the administration in making decisions for a
more effective and efficient public service.
OBJECTIVES
1.To provide quantitative information concerning past operations and present conditions.
2.To provide a basis for guidance for future operations.
3.To provide for control of the account of public entities and officers in the receipt, disposition
and utilization funds and properties, and
4.To report on the financial position and the result of the operations of the government agencies
for the information of all persons concerned.
Users of Government Accounting Information:
1. The General public or citizenry
2. The Governing and oversight bodies: The President, Cabinet, COA, Legislative Body.
AC 518 2nd Sem, A.Y. 2015-2016

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.
DISTINCTIONS BETWEEN GOVERNMENT AND COMMERCIAL ENTERPRISES
1. Ownership - Private enterprises are owned by a relatively few stockholders, partners, or
owners. The government represents 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, Statement of Comprehensive Income, Statement
of Cash Flows, Statement of Shareholders Equity and Notes to the FS
GA - Statement of Financial Position, Statement of Financial Performance, Statement of
Changes in Net Assets/ Equity, Statement of Cash Flows and Notes to the FS
4. Control Mechanism
CA none
GA Fund accounting, obligation accounting and CDC accounting
5. Books of Accounts
CA - only one set is kept
GA - National Government (NG) Books.
6. As to accounts and transactions
CA - Nominal and Real Accounts are used.
GA - includes budgetary accounts such as Appropriation, Allotments and
Obligations are maintained.
7. Source of Accounting practice and procedures
CA - dictated by nature of business and policies of management
GA - laws, rules and regulations
AC 518 2nd Sem, A.Y. 2015-2016

Decision-making Process in Government

The decision-making process in government is an important aspect of the environment of state
accounting because accounting information is intended to be useful in making economic
decisions and in making reasoned choices among alternative courses of action.
The ultimate authority for decision-making in the Philippine government rests with the people.
This authority is exercised through duly elected representatives, acting as agents of the people.
It is the sovereign right of the people to change them if the authority is misused or abused.
The President, as chief executive, formulates national policies, which specify the goals of
government and determine the courses of action that the government should take in different
aspects of public affairs.
On the basis of national policy, the President submits a budget to the legislative body for
consideration and processed until approved and passed into a law.
At all levels of government, decision-making should comply with existing laws and regulations.
Questions and issues involving the settlement of money claims, determination of dispute or
settlement of a controversy on the issue as to legality and/or propriety of such claims are
submitted for resolution to the COA in connection with the discharge of its audit function.
Questions involving legal interpretation and/or application of law are submitted for decision to
the courts.
Salient Features of Government Accounting
The financial resources of the Government are very limited. It relies heavily on collected
taxes. This means that it has to operate through a system of fiscal and accounting controls. The
following control mechanisms adopted as sub-systems of government accounting are not
adopted in commercial accounting:

Fund Accounting
Obligation Accounting
Cash Disbursement Ceiling (CDC) Accounting

Fund Accounting. A fund is a sum of money or other resources set aside for the
purpose of carrying out specific activities or attaining certain objectives in accordance with
specific regulations, restriction, and limitations.
The two major classification of funds as to purpose for which they may be used:
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 limited purposes.
Obligation Accounting. As a control mechanism of government accounting system,
obligation accounting provides the ceiling of the maximum extent by which an agency can incur
obligations or commit the resources of the government in the performance of its functions.
Obligation accounting refers to the accounting practice, procedures and techniques for
recording obligations in the government.
Cash Disbursement Ceiling Accounting. The cash disbursement ceiling accounting is
another control mechanism of government accounting system. The cash operations of the
government under the cash disbursement ceiling accounting are limited within the boundaries of
the appropriations release to government agencies in the form of allotments, and any additional
amount granted by the DBM to liquidate or pay existing valid obligation.
Accounting Responsibility - Under PD 1445, accounting responsibility for all
government funds and property is entrusted, immediately and primarily, to the head of the
government agency or office. It is the duty of the head of the agency to take reasonable steps
to minimize, if not to avoid the risk of losses, defalcations and other types of irregularities in the
utilization of all government resources (to safeguard the resources of the government under his
custody) and periodic reporting to concern authorities. His responsibility, however, is supervised
by higher authorities and government bodies.
AC 518 2nd Sem, A.Y. 2015-2016

The officer in possession or custody of government funds or property by reason of his

duties are accountable for the safekeeping thereof. As such, he shall be properly bonded.
The Head of the agency is made immediately and primarily responsible for all
government funds and property pertaining to his agency. Secondary responsibility is made to
rest on the persons entrusted with the actual possession or custody of the funds or property.
They are the accountable officers and are immediately responsible to the agency head.
The imposition of primary responsibility on the agency head for government funds and
property is in keeping with the concept of fiscal responsibility which now lodge with agency
head.
The head of the agency shall exercise the diligence of a good father or a family in
supervising accountable officers to prevent the incurrence of loss of government funds and
property, otherwise, he shall be jointly and solidarily liable with the person primarily
accountable thereof.
Although supervisory work of government accounting is vested upon to the Commission
on Audit, accounting responsibilities in the government, by virtue of the provision of the
Constitution of the Philippines, laws, Presidential Decrees and other issuances, are shared
primarily by the Commission on Audit(COA), Department of Budget and Management, (DBM),
Department of Finance (Bureau of Treasury) and government agencies.
The Commission on Audit serves as the external auditor of the government agencies.
It is a constitutional office and its mandates are provided in Section 2, Art. IX-D of the 1987
Constitution of the Philippines. The COA examine, audit and settle all accounts pertaining to
revenues or receipts and expenditures or uses of government funds and property, keeps the
general accounts of the national government , prescribes the standard chart of accounts,
promulgates accounting rules and regulations and exercise technical supervision over the
accounting functions of each agency. The office is mandated by the Constitution to submit to
the President and the legislative body within the time frame fixed by law, an annual audit report
of the government, its subdivision, agencies and instrumentalities including government owned
or controlled corporations and recommend measures necessary to improve efficiency and
effectiveness.
The DBM is responsible for the design, preparation, and approval of the accounting
systems of government agencies, determines the accounting and other item of information
needed to monitor budget performance and assess effectiveness of the agency operation. It
prescribes the forms, schedules of submission and other component of reporting system
needed to accomplish and submit the required information. It acts on agencies
recommendations for the modification or changes to prescribed systems for procedures to effect
simplicity and/or meet the requirements of the peculiarities of the agencies concerned. It
approves the Agency Budget Matrix and issues the allotments to agencies in accordance with
the approved budget and issues Notice of Cash Allocation.
The Bureau of Treasury (BTr) performs banking function for the national government.
It receives and keeps government funds, controls the disbursements thereof and maintain
accounts of the financial transactions of national government agencies. It is required to prepare
and submit to the COA and other fiscal activities, a daily statements of cash receipts,
disbursements and fund balances in the National Treasury.
The National Government Agencies (NGAs) consist of various organizational units
such as departments, bureaus, commissions, boards, offices, tribunals, councils, institutions,
state colleges or universities and establishments.
These agencies are required to establish and maintain a system of accounting for their financial
resources and operation in accordance with pertinent rules and regulations. Accounts should
be kept in such details as is necessary to meet the need of agency management and furnish
information to fiscal and control agencies such as COA, DBM and BTr.

Relationship between Accountability, Responsibility and Authority

Accountability is the obligation of a public officer/employee to answer for the
responsibility conferred on him/her. It is her Responsibility to respond to the concerns of
individuals or groups, the public he/she is to serve, within the overall context of his/her
obligations for which he/she has the appropriate Authority.
AC 518 2nd Sem, A.Y. 2015-2016

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 publics
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
Assertions of Compliance with Accountability Requirements
When public officers and employees submit to the Commission their transactions,
accounts, financial reports and statements and other performance and operation reports, they
are asserting or claiming that they have complied with the foregoing accountability
requirements.
What is Assertions?
Assertion is the expressed or implied representation by management that is reflected in
their transactions, accounts, financial statements, records, reports and that they are claiming
that they have complied with the accountability requirements of the state policy.
Assertions on Compliance with Laws and Rules
When expenditures, disbursements, receipts and collections are reported to the
appropriate authorities, management is making claim that so much amount has been disbursed
or so much amount have been collected in payment of goods and services received or rendered
in accordance with laws, rules, applicable policies and practices.
Assertion on Resources Duly Safeguarded
When the agencies issue their financial reports and statements they are asserting the
following:
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.
AC 518 2nd Sem, A.Y. 2015-2016

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

Accountability)
When the agencies prepare and submit to proper authorities their reports on the
performance of an activity or a project, the agency is asserting that they used and managed the
resources for that activity or project in an economical, efficient and effective manner.
Performance of government entities is measured from the point of view of economy, efficiency
and effectiveness.
Economy refers to the reasonableness of cost incurred. Measuring economy will determine
whether the agency has been performing at the least possible cost or under the terms most
advantageous to the government.
Efficiency refers to the relationship between goods or services produced and resources used
to produce them. The measurement of efficiency involves the determination of whether an
agency is managing or utilizing its resources in an efficient manner as well as establishing the
causes of any inefficiencies, including inadequacy in management information systems,
administrative procedures or organizational structure.
Effectiveness is concerned with the relationship between the outputs and the goals of the
agency. Measuring effectiveness will determine whether the desired results are achieved,
whether the objectives set by the agency are met, and whether the agency has considered
alternatives that yield desired results at a lower cost.
Generally Accepted (State) Accounting Principles
Accounting principles are propositions, a general law or rule adopted, which on the basis
of reasons, demonstrated usefulness and general acceptance as the best way of carrying out
the function and achieving the objectives of financial accounting.
Objectives:
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 judgment 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 as
provided they do not contravene existing laws and regulations.
Secondary source:
From the pronouncements and issuances by other government agencies.
The Government Auditing Code of the Philippines requires that each government agency
shall record its financial transactions and operations in conformance with the generally accepted
AC 518 2nd Sem, A.Y. 2015-2016

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 three-digit coding system and provides for responsibility
accounting.
5. The Chart of Accounts categorizes Personal Services, Maintenance and Other
Operating Expenses and Financial Expenses as Expenses, obligation charged to capital
outlay are recorded to appropriate asset accounts when the liability and the payment are
taken-up.
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 doubtful accounts is taken up. Dormant accounts are transferred o
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.
- End -

AC 518 2nd Sem, A.Y. 2015-2016