AA 4102 Hand-outs ----- TNCR

PART 1

GOVERNMENT ACCOUNTING AND AUDITING

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 budgetary 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 reasonable 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. (1) The COA keeps the general accounts of the national
government , (2) prescribes the standard chart of accounts, (3) promulgates accounting rules and
regulations and (4)exercise technical supervision over the accounting functions of each agency.
(5) 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.

The government agencies are responsible in directly implementing the projects of, and
performing the functions delegated by, the government.

Each agency(entity) shall maintain accounting books and budget registries which are
reconciled with the cash records or the BTr and the budget records of the COA and DBM.

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.
GAM Sec. 3. Responsibility, Accountability and Liability over Government Funds and
Property
a. Responsibility over Government Funds and Property

1. It is the declared policy of the State that all resources of the government shall be
managed, expended or utilized in accordance with laws and regulations, and
safeguarded 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 take care that such policy is faithfully adhered
to rests directly with the chief or head of the government agency concerned.
(Sec. 2, P.D. No. 1445)

2. 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. (Sec. 4(4), P.D. No. 1445)

3. The head of any agency of the government is immediately and primarily responsible
for all government funds and property pertaining to his agency. Persons entrusted
with the possession or custody of the funds or property under the agency head shall
be immediately responsible to him, without prejudice to the liability of either party
to the government. (Sec. 102, P.D. No. 1445)

b. Accountability over Government Funds and Property

1. Every officer of any government agency whose duties permit or require the
possession or custody of government funds or property shall be accountable therefor
and for the safekeeping thereof in conformity with law. Every AO shall be properly
bonded in accordance with law. (Sec. 101, P.D. No. 1445; Section 50, Chapter 9,
Subtitle B, Book V, Executive Order (E.O.) No. 292)

2. Transfer of government funds from one officer to another shall, except as allowed by
law or regulation, be made only upon prior direction or authorization of the
Commission or its representative. (Sec. 75, P.D. No. 1445)

3. When government funds or property are transferred from one AO to another, or from
an outgoing officer to his successor, it shall be done upon properly itemized invoice
and receipt which shall invariably support the clearance to be issued to the relieved
or outgoing officer, subject to regulations of the Commission. (Sec. 77, P.D. No.
1445)

c. Liability over Government Funds and Property

1. Expenditures of government funds or uses of government property in violation

 of law or regulations shall be a personal liability of the official or employee
found to be directly responsible therefor. (Sec. 103, P.D. No. 1445)

2. Every officer accountable for government funds shall be liable for all losses
resulting from the unlawful deposit, use, or application thereof and for all losses
attributable to negligence in the keeping of the funds. (Sec. 105(2),P.D. No.
1445)

3. No AO shall be relieved from liability by reason of his having acted under the
direction of a superior officer in paying out, applying, or disposing of the funds
or property with which he is chargeable, unless prior to that act, he notified the
superior officer in writing of the illegality of the payment, application, or
disposition. The officer directing any illegal payment or disposition of the funds
or property shall be primarily liable for the loss, while the AO who fails to serve
the required notice shall be secondarily liable. (Sec. 106, P.D. No. 1445)

4. When a loss of government funds or property occurs while they are in transit or
the loss is caused by fire, theft, or other casualty or force majeure, the officer
accountable therefor or having custody thereof shall immediately notify the
Commission or the auditor concerned and, within 30 days or such longer period
as the Commission or auditor may in the particular case allow, shall present his
application for relief, with the available supporting evidence. Whenever
warranted by the evidence, credit for the loss shall be allowed. An officer who
fails to comply with this requirement shall not be relieved of liability or allowed
credit for any loss in the settlement of his accounts.

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.

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.

Basic Government Accounting and Budget Reporting Principles.

Each entity shall recognize and present its financial transactions and operations conformably
to the following:
a. generally accepted government accounting principles in accordance with the PPSAS and
pertinent laws, rules and regulations;
b. accrual basis of accounting in accordance with the PPSAS;
c. budget basis for presentation of budget information in the financial statements (FSs)
in accordance with PPSAS 24;
d. RCA prescribed by COA;
e. double entry bookkeeping;
f. financial statements based on accounting and budgetary records; and
g. fund cluster accounting.
The books of accounts are maintained by fund cluster (i.e., according to the types of
funds being accounted for) as follows:
Code Fund Clusters
01 Regular Agency Fund
02 Foreign Assisted Projects Fund
03 Special Account-Locally Funded/Domestic Grans Fund
04 Special Account-Foreign Assisted/Foreign Grants Fund
05 Internally Generated Funds
06 Business Related Funds
07 Trust Receipts

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.