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ACCOUNTING FOR LOCAL GOVERNMENT UNIT

I. BASIC FATURES AND POLICIES

a.Accrual Accounting. Under this method, all expenses shall be recognized when incurred, while income
shall be recognized when earned except for transactions where accrual basis is impractical or when other
methods may be 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. As required under Sections 308, 309 and 310
of the Local Government Code, separate books shall be maintained for the General Fund, Special
Education Fund and Trust Fund.
c. Special Accounts in the General Fund. Special accounts in the General Fund complete with subsidiary
ledgers, shall be maintained for the following:
1. Public utilities and other economic enterprises;
2. Loans, interests, bonds issued, and other contributions for specific purposes;
3. Development projects funded from the Share in the Internal Revenue Collections; and
4. Such other special accounts which may be created by law or ordinance.
d. Chart of Accounts and Account Codes. A new coding structure and a new chart of accounts with a three-
digit account numbering system shall be adopted.
e. Books of Accounts. Accounting units of the LGUs shall maintain journals and ledgers while treasurers and
disbursing officers shall also maintain their respective cash records such as Cashbook for Cash in Treasury,
Cash in Bank and Cash Advances. The Treasurers/Collectors shall prepare the Report of Collections and
Deposits (RCD) daily and the Report of Accountability for Accountable Forms (RAAF) monthly.
f. Financial Statements. Balance Sheet, Statement of Income and Expenses, and Statement of Cash Flows.
Notes to Financial Statements shall accompany the above statements.
g. Trial Balance. The two money-column trial balance shall be used.
h. Appropriations, Allotments and Obligations. Journal entry shall no longer be prepared to record the
appropriations, receipt of allotments and incurrence of obligations. In lieu of this, separate registries shall
be maintained by the Accounting Unit to control the appropriations, allotments and obligations for each
of the four classes of expenditures, namely:
1. Registry of Appropriations, Allotments and Obligations – Capital Outlay (RAAOCO)
2. 2. Registry of Appropriations, Allotments and Obligations – Maintenance and Other Operating
Expenses (RAAOMO)
3. Registry of Appropriations, Allotments and Obligations – Personal Services (RAAOPS)
4. Registry of Appropriations, Allotments and Obligations – Financial Expenses (RAAOFE).
i. Financial Expenses. Financial expenses such as bank charges, interest expenses, commitment fees 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 they take place except those purchased out
of petty cash fund which shall be for immediate use, shall be charged immediately to the appropriate
expense accounts.
k. Valuation of Inventory. Cost of ending inventory of supplies and materials shall be computed using the
moving average method.
l. Maintenance of Supplies and Property, Plant and Equipment Ledger Cards. The Accounting Unit shall
maintain Supplies Ledger Cards by stock number and Property, Plant and Equipment Ledger Cards by
category of assets.
m. Construction of Assets. For assets under construction, the Construction Period Theory shall be applied for
costing purposes. Any related expenses incurred during the construction of the project, such as license
fees, permit fees, clearance fees, etc. shall be capitalized.
n. Public Infrastructures. Public infrastructures are assets for use of the general public, such as roads,
bridges, waterways, railways, plazas, monuments, etc. A Registry of Public Infrastructures (RPI) shall be
maintained according to classification to record all infrastructures for use of the general public. The
following are the Registries to be maintained, classified by category of property, plant and equipment:
1. Registry of Public Infrastructure – Bridges (RPIB)
2. Registry of Public Infrastructure – Roads (RPIR)
3. Registry of Public Infrastructure – Plazas, Monuments, etc. (RPIP)
o. Depreciation. The straight-line method of depreciation shall be used. A residual value equivalent to ten
percent (10%) of the cost shall be set-up and depreciation shall start on the second month after
purchase/completion of the property, plant and equipment. Public infrastructures shall not be charged
any depreciation.
p. Reclassification of Obsolete and Unserviceable Assets, as well as Assets No Longer Used by the Agency to
“Other Assets” Account. Assets declared by proper authorities as obsolete and unserviceable, including
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assets of the agency no longer used, shall be reclassified to “Other Assets” account from the
corresponding inventory and property, plant and equipment accounts.
q. Allowance for Doubtful Accounts. An Allowance for Doubtful Accounts for trade receivables shall be set
up for estimated uncollectible receivables.
r. Recognition of Liability. Liability shall be recognized at the time goods and services are accepted or
rendered and supplier/creditor bills are received.
s. Interest Accrual. Whenever applicable and appropriate, interest income and/or expense shall be accrued
and recognized in the books of accounts.

II. BUDGETARY ACCOUNTS

Budget Process:
1. Preparation. Local treasurer submits a certified statement covering income and expenditure for the
preceding and current year, and estimated income for the ensuing year, while the heads of offices submits
statement of proposed expenditure to the local chief executive. Based on these submissions, the LCE
prepares the budget and submits to the local council/sangggunian.
2. Authorization. On or before the end of the current year, the local council approves through enactment of
an appropriation ordinance, the annual budget. The approval requires affirmative votes of majority of the
all members. The approved annual budget is effective as of the beginning of the budget year.
3. Review. Budgets of Provinces and specialized/independent cities are subject to review by the DBM while
Budgets of cities and municipalities are subject to review by the Provincial Council within 90 calendar
days.
4. Execution and Accountability. Local treasurer shall provide technical assistance and staff services in the
execution and accountability phases.

Important Dates:
1. Submission of detailed Statement of Income and Expenditure by Local Treasurer is on or before
15th day of July each year
2. Submission of budget proposal by head of departments/offices is on or before 15 th day of July
each year
3. The submission of the executive budget by the Local Chief Executive is not later than 16 th day of
October of the current year.
4. The enactment of an ordinance to approve the annual budget by the Local Council is on or before
the end of the current year.

Supplemental Budget. Changes in the annual budget may be made within the fiscal year by way of
supplemental budget. Supplemental budget is effective upon its approval or the date fixed in the
appropriation ordinance.

Reenacted Budget. This occurs when legislative body fails to pass the annual budget before the beginning
of the year or when enacted budget is declared inoperative/unenforceable by reviewing officer.

Appropriations. – Appropriation refers to an authorization made by ordinance, directing the payment of goods
and services from local government funds under specified conditions or for specific purposes.

Allotments. – Allotment is the authorization issued by the Local Chief Executive (LCE) to a department/office
of the LGU, which allows it to incur obligations, for specified amounts, within the appropriation ordinance.
Allotments are released quarterly based on the Work and Financial Plan and Request for Release of Allotment.
The Accountant, upon receipt of the Advice of Allotment, shall enter the allotment in the RAAOs.

Obligations. – Obligations refer to the amounts committed to be paid by the LGU for any lawful act made by an
accountable officer for and in behalf of the local government unit concerned.

III. INCOME/COLLECTIONS AND DEPOSITS

Separation of Books and Depository Accounts. – Local accountants and treasurers shall maintain separate
books and depository accounts, respectively, for each fund in their custody or administration.

Depository Accounts. – Local treasurer shall maintain depository accounts in the name of their respective local
government units with banks, preferably government-owned, located in or nearest to their respective areas of
jurisdiction. Earnings of its depository accounts shall accrue exclusively thereto. Remittance of Government
Monies to the Local Treasury. – Officers of the local government authorized to receive and collect monies
arising from taxes, revenue, or receipts of any kind shall remit the full amount received and collected to the
treasury of such local government unit which shall be credited to the particular account or accounts to which
the monies in question properly belong.
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Sources of Income of LGUs. – Income covers all receipts and revenues collected or received. Revenues are
income derived from regular system of taxation while Receipts are income realized from operations and
activities of LGUs. The main sources of income of LGUs are: a) Tax revenues, fees and charges; b) Share from
Internal Revenue Collections; and c) Share from National Wealth. The sources of income are further classified
into general income accounts and specific income accounts.

1. General Income Accounts:

a. Subsidy from Other LGUs
b. Subsidy from Other Funds
c. Subsidy from Special Accounts
d. Sales Revenue
e. Dividend Income
f. Interest Income
g. Gain on Sale of Securities
h. Gain on Sale of Assets
i. Sale of Confiscated Goods and Properties
j. Foreign Exchange (FOREX) Gains
k. Miscellaneous Operating and Service Income
l. Fines and Penalties – Government Services and Business Operations
m. m. Income from Grants and Donations
2. Specific Income Accounts
a. Property Taxes
b. Taxes on Goods and Services
c. Other Taxes
d. Other Specific Income

Sources of Income
a. Tax revenues, fees and charges
1. Proceeds from basic Real Property Tax shall be distributed as follows:
a. In case of provinces:
1. Province-35% shall accrue to the GF of the province
2. Municipality-40% to the GF of municipality where the property is located
3. Barangay-25% shall accrue to the GF of barangay where the property is located
b. In case of cities:
1. City-70% shall accrue to the GF of the city
2. Barangay-30% shall be distributed to the barangay of the city where the property is
located:
a. 50% to the barangay where the property is located
b. 50% to other component barangays
2. Proceeds from additional 1% RPT accruing to SET shall be automatically released to the local
school boards, but in case of provinces, proceeds of SET shall be divided equally to the provincial
and municipal school boards
b. Share from Internal Revenue Collections
LGUs shall have a share in the national internal revenue taxes based on collection of the third fiscal year
preceding the current fiscal year. Share in IRA shall be allocated in the following:
1. Provinces-23%
2. Cities-23%
3. Municipalities-34%
4. Barangays-20%
c. Share from National Wealth
LGUs have a share of 40% of gross collections from the preceding fiscal year.

Method of Accounting for Income

1. Modified Accrual Method-used for Real Property Tax (RPT) and Special Education Tax (SET)

Illustration:
Municipality of Lasam estimated its RPT in the amount of 100,000. This amount shall be distributed as follows:
Municipal-40%; Province-35% and Barangay-25%. Upon collection, the entire amount was deposited and
distributed based on the sharing ratio.
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J.E.
To record RPT Receivable:
Real Property Tax Receivable 100,000
Deferred Real Property Tax Income 100,000

To record collection:
Cash in vault 100,000
Real Property Tax Receivable 100,000

To record deposit:
Cash in Bank-Local Currency, Current Account 100,000
Cash in Vault 100,000

To record distribution of collection:

Deferred Real Property Tax Income 100,000
Real Property Tax 40,000
Due to LGUs 60,000

To record remittance of share:

Due to LGUs 60,000
Cash in Bank-Local Currency, Current Account 60,000

2. Accrual Method-used for Internal Revenue Allotment (IRA)

Illustration:
a. Received Notice of Funding Check Issued (NFCI) from DBM, together with Credit Memorandum (CM) from
the bank for share of IRA in the amount of 100,000

J.E.
Cash in bank-Local Currency, Current Account 100,000
Internal Revenue Allotment 100,000

b. Received NFCI from DBM, for share of IRA in the amount of 100,000

J.E.
Due from National Government Agency 100,000
Internal Revenue Allotment 100,000

3. Cash Basis-used for all taxes, fees, charges and other receipts
Other Receipts Illustration:
a. Borrowings
Municipality of Enrile borrowed funds from a bank: Principal-P500,000; Bank charges-P50,000;
Interest-P6,000.

J.E.
Cash in Bank-Local Currency, Current Account 489,000
Bank Charges 50,000
Interest Expense 6,000
Loan Payable-Domestic 500,000
b. Sale of PPE
Municipality of Roxas sold its 2-year motor vehicle with a book value of P750,000 (Cost of P1,000,000
less accumulated depreciation of P250,000) at an amount of P800,000.

J.E.
Cash in vault 800,000
Accumulated Depreciation-Motor Vehicles 250,000
Motor Vehicles 1,000,000
Gain on Sale 50,000
c. Refund of Cash Advances
Mr. Juan Dela Cruz, who was granted a cash advance of P5,000, liquidated his accountability after
attending a training/workshop in Manila. His actual training is only P4,000 and he refunded the excess
cash.
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J.E.
Training Expenses 4,000
Cash in Vault 1,000
Advances to Officers and Employees 5,000
d. Receipt of Performance/Bidders’ Bonds
City of Ilagan received a performance bond from i-Build Construction Firm amounting to P100,000 as
part of a contract entered into for the construction of the City’s new building.

J.E.
Cash in vault 100,000
Guaranty/Security Deposits Payable 100,000

IV. DISBURSEMENTS
Disbursements. – Disbursements refer to the settlement of government payables/obligations by cash or by
check which shall be covered by Disbursement Vouchers or payrolls. Typical transactions for which
disbursements are made are Personal Services, Maintenance and Other Operating Expenses, Capital Outlay,
and Financial Expenses.

Payments by Check. – Checks shall be drawn only on duly approved disbursement vouchers. It shall be drawn
by the local Treasurer and countersigned by the local Administrator or their immediate assistants, as devolved.

Payments in Cash. – Disbursements by cash shall be made from a cash advance drawn and maintained in
accordance with COA rules and regulations. Cash payments shall be made only on duly approved
payrolls/disbursement vouchers. Cash advances, by regular and special disbursing officers shall be recorded
through a debit to Cash – Disbursing Officers and a credit to Cash in Bank – Local Currency, Current Account
(LCCA).

Cash Advances for Travel. – Cash advances for travel shall be recorded as debit to the account Due from
Officers and Employees and a credit to Cash in Bank – Local Currency, Current Account.

Payments out of the Petty Cash Fund. – Petty cash fund shall be maintained under the imprest system. The
fund shall be sufficient for the non-recurring, emergency and petty expenses of the LGU for one month.
Disbursements from the fund shall be through the Petty Cash Voucher (PCV). Each PCV shall not exceed
P1,000.00.

Purchase or Construction of Property, Plant and Equipment. – Property, plant and equipment include land
and land improvements, buildings, equipment, motor vehicles, books, machineries, ordnance, etc. and public
infrastructure. These are charged against appropriations/allotments for capital outlay when obligated.
1. PPE acquired through purchase shall include all costs incurred to bring it to the location necessary for its
intended use, like transportation, freight, installation costs, etc.
2. PPE to be constructed may be classified as agency assets and public infrastructures. Agency assets are
those to be used by the LGU concerned, like buildings, while public infrastructures are those to be used by
the general public. The construction period theory shall be used in recording both types of assets.

Purchase of Supplies. – Purchase of supplies and materials for stock regardless of whether or not they are
consumed within the accounting period shall be recorded as assets using the Inventory account following the
Perpetual Inventory Method. However, supplies and materials purchased out of the Petty Cash Fund for
immediate use or for emergency shall be taken up as expenses.

ADJUSTING AND CLOSING ENTRIES

Adjusting Entries. – Adjusting entries are accounting journal entries made in order to ensure that revenues and
expenses are recorded in the period when they are earned or incurred following the revenue recognition and
the matching principles.

Types of Adjusting Entries:

1. Prepayments. – Prepayments are expenses paid or revenues received before they are incurred or earned.
Adjusting entries for prepayments are required at the statement date to record the portion of the
prepayment that represents the expense incurred or the revenue earned in the current accounting period.
2. Accruals. – Accruals are revenues earned and expenses incurred in the current accounting period that
have not yet been recorded. Adjusting entries for accruals are required to record revenues earned
and expenses incurred in the accounting period. Adjusting entry for accrued revenues is a debit to a
receivable account and a credit to an income account. Adjusting entry for accrued expenses is a debit
to the appropriate expense account and a credit to a payable account.
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Closing Journal Entries. – Closing journal entries are the accounting entries prepared to reduce all balances of
the nominal accounts to zero at the end of the accounting period in order to prepare the accounts for the next
accounting period. The procedure followed in the reduction of the balances is called the closing process. The
closing process is as follows:
1. Debit all revenue accounts balances and credit the total to the Income and Expense Summary account.
2. Credit all expense accounts balances and cost of goods sold and debit the total to the Income and Expense
Summary account.
3. Debit the credit balance of the Income and Expense Summary account and credit the amount in the
Retained Operating Surplus account, in case of a net income.
4. Credit the debit balance of the Income and Expense Summary account and debit the amount in the
Retained Operating Surplus account, in case of a net loss.
5. Debit all credit balances of the intermediate accounts and debit the total to the Government Equity
account.
6. Credit all debit balances of the intermediate accounts and credit the total to the Government Equity
account.
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LGU Fund:
General Fund-consists of monies and resources not accruing to any other fund and shall be available for
payment of expenditures.

Special Education Fund-consists of respective shares of provinces, cities and municipalities in the proceeds of
the additional 1% tax on assessed value of real property for education purposes under Real Property Tax Code.

Trust Fund-consists of private and public monies received by local government or official as trustee, agent or
administrator as a guaranty for the fulfillment of some obligations.

SPECIAL EDUCATION FUND

Illustration:
At the beginning of 2014, based on Real Property Tax Account Register, the Municipality of ABC set-up its
special education tax receivable in the amount of 500,000, of which 60% is the share of other LGUs (i.e.
province and barangays). Of this amount, 200,000 were collected and deposited with authorized depository
bank. Accordingly, the provincial share, amounting to 100,000, was remitted by the Municipality of ABC.

Municipality ABC also received allotments for the period: PS-50,000; MOOE-20,000; CO-30,000. In addition
fund transfer from General Fund for its subsidy was received in the amount of 50,000. Eventually, an amount
of 30,000 for salaries and wages was obligated and its payroll fund was set-up through local disbursing officer
with the following information:

Gov’t share
Cash advance to disbursing officer 25,000
Deductions
Withholding tax 1,050
GSIS 2,850 2,850
Pag-IBIG 600 600
Philhealth 500 500
Total 30,000 3,950

The corresponding government share was also obligated and remitted together with the above-mentioned
deductions.

For MOOE and CO, the following amounts and purpose were obligated:

MOOE:
Traveling expenses 500
Electricity 800
Office Supplies 500
CO:
Office equipment 30,000

The cash advance for the above travelling expenses was granted and accordingly liquidated after the officer
travel period. The electric bill, office supplies and office equipment delivered are paid immediately. The office
equipment has a useful life of 5 years and 10% residual value based on its cost.

Journal Entries:
1. Special Education Tax Receivable 500,000
Deferred Special Education Tax Income 500,000
2. Cash in vault 200,000
Special Education Tax Receivable 200,000
3. Deferred Special Education Tax Income 200,000
Special Education Tax Income 100,000
Due to LGUs 100,000
4. Cash in bank-Local currency, current account 200,000
Cash in vault 200,000
5. Due to LGUs 100,000
Cash in bank-Local currency, Current account 100,000
6. Payroll fund 25,000
Cash in bank-Local currency, Current account 25,000
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7. Salaries and wages-Regular pay 30,000

Due to BIR 1,050
Due to GSIS 2,850
Due to Pag-IBIG 600
Due Philhealth 500
Payroll fund 25,000
8. Due to BIR 1,050
Due to GSIS 2,850
Due to Pag-IBIG 600
Due Philhealth 500
Cash in bank-Local currency, Current account 5,000
9. Life retirement insurance contributions 2,850
Pag-IBIG contributions 500
Philhealth contributions 600
Cash in bank-Local currency, Current account 3,950
10. Advances to officers and employees 500
Cash in bank-Local currency, Current account 500
11. Travelling expenses 480
Advances to officers and employees 480
12. Cash in vault 20
Advances to officers and employees 20
13. Cash in bank-Local currency, current account 20
Cash in vault 20
14. Electricity expenses 800
Cash in bank-Local currency, Current account 800
15. Office supplies inventory 500
Due to BIR 20
Cash in bank-Local currency, Current account 480
16. Office equipment 30,000
Due to BIR 3,000
Cash in bank-Local currency, Current account 27,000

Adjusting Entry
1. Depreciation-office equipment 5,400
Accumulated depreciation-office equipment 5,400

ACCOUNTING FOR TRUST FUND

Illustration 1: Receipt of Grant from NGA

The Municipality of Cabagan received from DOH directly from the bank for road construction (2,000,000) and
construction equipment (500,000). Cabagan purchased a construction equipment in the amount of 500,000,
which was paid, net of 10% tax. Accordingly the contract was issued and when 60% completed, Cabagan
received and paid the first billings amounting to 1,000,000, net of 10% tax. When the project was 100%
completed, the balance was paid in full, net of 10% tax; tax withheld was remitted, and the corresponding
construction in progress account was transferred to Public Infrastructure account.

Journal Entries:
1. Cash in bank-Local currency, Current account 2,500,000
Government equity 2,500,000
2. Construction and heavy equipment 500,000
Due to BIR 50,000
Cash in bank-Local currency, Current account 450,000
3. Construction in progress-Roads 1,200,000
Due to BIR 120,000
Cash in bank-Local currency, Current account 1,080,000
4. Construction in progress-Roads 800,000
Due to BIR 80,000
Cash in bank-Local currency, Current account 720,000
5. Roads, Highways and Bridges 100,000
Cash in bank-Local currency, Current account 100,000
6. Due to BIR 250,000
Cash in bank-Local currency, Current account 250,000
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7. Government Equity 2,500,000
Roads, Highways and Bridges 2,000,000
Construction and heavy equipment 500,000

Illustration 2: Receipt of Grant with Counterpart from LGU

In 2015, Municipality of Solana entered into agreement with a foreign funding institution, as follows:

Grantor
Building 1,200,000
IT equipment and software 300,000

LGU Counterpart:
Office supplies 100,000
Salaries of project personnel 400,000

1. Upon receipt of the above funds from the foreign funding institution, the corresponding amount for LGU
was recorded in its General Fund books. Eventually, the contractor started the construction of the building
and when almost 50% completed, first billing was paid in the amount of P500,000. Cash advance was also
granted to disbursing officer for the salaries of project personnel in the amount of P170,000 (net of
P30,000 withholding tax), which was accordingly liquidated. Checks in the amount of P100,000 and
P250,000 were issued for payments of supplies and materials and IT equipment, respectively. Installation
costs of P50,000 were also incurred for the IT equipment purchased.

All withholding taxes were remitted to the BIR. Total office supplies issued during 2015 amounted to P60,000,
and expenses were closed to the Project Equity account.

In 2016, the building was completed and the balance of P700,000 was paid in check and the remaining salaries
of project personnel were paid in full, net of withholding tax. The remaining office supplies were issued and all
withholding taxes were remitted to BIR.

Trust Fund Books

2015
Journal Entries:
1. Cash in Bank-LC, CA 2,000,000
Government Equity 2,000,000
2. CIP-Agency Assets 500,000
Due to BIR 50,000
Cash in Bank-LC, CA 450,000
3. Payroll Fund 170,000
Cash in Bank-LC, CA 170,000
4. Salaries and Wages-Casual 200,000
Due to BIR 30,000
Payroll Fund 170,000
5. Office Supplies Inventory 100,000
Cash in Bank-LC, CA 100,000
6. IT Equipment and Software 250,000
Due to BIR 25,000
Cash in Bank-LC, CA 225,000
7. IT Equipment and Software 50,000
Cash in Bank-LC, CA 50,000
8. Office Supplies Expenses 60,000
Office Supplies Inventory 60,000
9. Due to BIR 105,000
Cash in Bank-LC, CA 105,000

Closing Entries
1. Government Equity 260,000
Salaries and Wages-Casual 200,000
Office Supplies Expenses 60,000
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2016
Journal Entries
1. CIP-Agency Assets 700,000
Due to BIR 70,000
Cash in Bank-LC, CA 630,000
2. Office Building 1,200,000
CIP-Agency Assets 1,200,000
3. Payroll Fund 170,000
Cash in Bank-LC, CA 170,000
4. Salaries and Wages-Casual 200,000
Due to BIR 30,000
Payroll Fund 170,000
5. Office Supplies Expenses 40,000
Office Supplies Inventory 40,000
6. Due to BIR 100,000
Cash in Bank-LC, CA 100,000

Closing Entries
1. Government Equity 240,000
Salaries and Wages-Casual 200,000
Office Supplies Expenses 40,000
2. Government Equity 1,500,000
Office Building 1,200,000
It Equipment and Software 300,000