Government Accounting

&
Accounting for non-profit organizations
 10-Adjusting/Closing Entries and FS
• Adjusting Journal Entries
Adjusting journal entries are made at the end of
an accounting period to allocate revenue and
expenses to the period in which they actually
occurred.
AJEs are required every time a financial
statement is prepared to make the statement
truly reflective of the financial condition of the
entity at a given period.
 Adjustments are of two main types:

1. Adjustment for Accrued Items –

• It is an adjusting entry for an economic activity

already undertaken but not yet recognized into
asset and revenue accounts or liability and expense
accounts.

• It requires asset/revenue adjustments and

liability/expense adjustments.
 1.1 Asset/Revenue Adjustment.

• It involves earned revenues not yet recognized as

assets and income at the end of the accounting period.

• Examples are receivables for revenues already earned

but not yet collected nor billed as at the year-end.
 1.1 Asset/Revenue Adjustment.
Example: On Dec. 1, the entity receives a PN, P10,000,
10%, 60 days

To recognize receipt of PN on Dec. 1:

N/R 10,000
Appropriate Revenue Acct 10,000

Dec. 31 A/E to recognize interest income already earned

Interest Receivable 83.33
Interest Income 83.33
• 1.2 Liability/Expense Adjustment.

It involves expenses, which have already been incurred but

remained unpaid at the end of the accounting period.

Examples are salaries and wages, water, electricity and other

expenses which are already incurred but not yet paid.

The adjusting journal entry are as follows:

Salaries and Wages-Regular xxx

Due to Officers and Employees xxx
To recognize salaries and wages not yet paid
• 1.2 Liability/Expense Adjustment.

Another example:

On Dec 1, the entity issues PN, P10,000, 10%, 60 days

Interest Expense (10,000 * 10% * 30/360) 83.33

Interest Payable 83.33
2. Adjustment for Deferred Items.

These are adjusting entries transferring data

previously recognized in an asset account to an expense
account, or data previously recognized in a liability
account to a revenue account.

In contrast to the accrued items, it requires

asset/expense adjustments and liability/revenue
adjustments.
 2.1 Asset/Expense Adjustments.

• These pertain to assets, portion of which are

consumed/used/incurred at the end of the accounting
period.

Examples of these adjustments are prepayments (pre-paid).

• Prepayments are expenses paid before they are incurred.

At the end of the accounting period, the expired portion
shall be determined and an adjusting journal entry shall
be prepared to recognize the expense applicable to the
period being reported.
 2.1 Asset/Expense Adjustments.

• Example: Dec. 1 paid rental of office building for 1 year,

P12,000

• Original Entry: Dec. 1

• Prepaid Rent P12,000

• Cash-Modified Disbursement System (MDS), Regular P12,000

• Adjusting Entry: Dec. 31

• Rent/Lease Expenses P 1,000

• Prepaid Rent P 1,000
 2.2 Liability/Revenue Adjustments.

• For accounting purposes, the cash received does not

represent revenue until it has been earned. Thus, the
recognition of revenue must be deferred/delay until it is
earned.

• Advance income collections are recognized by debiting Cash

and by crediting a liability account for unearned revenue.

• As unearned revenue is earned, an adjusting journal entry is

made at the end of each period to transfer the appropriate
amount from the liability account to revenue account.

• This adjustment reflects the fact that all or part of the entity's
obligation to its customers has been fulfilled and that
revenue has been realized.
• Example: Dec. 1 receive rental of office building for 1 year, P12,000

• Dec. 1 Original Entry:

Cash-Collecting Officer P12,000

Other Unearned Revenue P 12,000

Cash-Treas/AD 12,000
Cash-CO 12,000

• Dec. 31: Adjusting Journal Entry:

Other Unearned Revenue P 1,000

Rent Income P1,000
• 3. Other Adjustments.

The following adjustments shall also be made (if applicable)

for fair presentation of the results of operation of the entity
in the financial statements:

3.1 Petty Cash Fund Adjustments.

• At the end of the year, all unreplenished Petty Cash Fund

expenses shall be reported and supporting papers
submitted to the Accounting Division/Unit, to recognize
the expenses incurred to the period to which they relate.
• In case no replenishment could be made for lack of fund,
a JEV shall be prepared to recognize all the expenses paid
under the Petty Cash with a credit to the account “Petty
Cash”.

Appropriate Expense Account xx

Petty Cash xx

• If replenishment is made, the credit shall be the

appropriate cash account.

Appropriate Expense Account xx

Cash-MDS xx
 3.2 Reversion of Unused Notice of Cash Allocation.

For NGAs receiving subsidies from the national government in

the form of NCA, adjusting journal entry shall be made for the
reversion of the unused or unutilized NCA at the end of the
accounting period.

• Upon receipt of NCA:

• Cash-MDS, Regular 30
• Subsidy from NG 30
 3.2 Reversion of Unused Notice of Cash Allocation.
• Upon disbursement:
Appropriate Account 20
Cash-MDS, Regular 20

The entry for lapsed regular NCA and those issued for the
payment of accounts payable/retirement gratuity/terminal
leave, shall be: (Balance of Cash-MDS account to be closed to
Subsidy from NG account)
Subsidy from National Government 10
Cash-MDS, Regular 10
•
 3.2 Reversion of Unused Notice of Cash Allocation.
• For unused NCA issued for the release of
performance/bidders/bail bonds, which were deposited with
the National Treasury, a JEV shall be drawn with debit to
account “Cash-Treasury/Agency Deposit, Trust” and credit to
account “Cash-Modified Disbursement System (MDS), Trust.”

Receipt of Performance Bond:

Cash CO 5,000

Performance/bidders/bail bonds payable 5,000

Cash-Treasury/AD, Trust 5,000

Cash CO 5,000
Receipt of NCA for release/payment of performance bond:

Cash-MDS, Trust 5,000

Subsidy Income from NG 5,000

------------------------------------------------------------------------------------a

Payment/release of performance bond – 4,000:

Performance/bidders/bail bonds payable 4,000

Cash-MDS, Trust 4,000

----------------------------------------------------------------------------------
• Adjusting Entry:

Cash-Treasury/Agency Deposit, Trust 1,000

Cash-MDS, Trust 1,000
 3.3 Adjustments for Unreleased Commercial Checks.

A Schedule of Unreleased Commercial Checks shall be

prepared by the Cashier for submission to the Accounting
Division/Unit.
All unreleased checks at the end of the year shall be
reverted back to the cash accounts.
A JEV shall be prepared to recognize the restoration of
the cash equivalent to the unreleased checks and the
recognition of the appropriate liability/payable account.
 3.3 Adjustments for Unreleased Commercial Checks.

• The accounting entry for the restoration of the unreleased

check to the cash account shall be a debit to “Cash in
Bank, Local Currency Current” account with credit to the
appropriate liability account.

• Original Entry:

• Appropriate Account 5000

• Cash in Bank, LCCA 5000
 3.3 Adjustments for Unreleased Commercial Checks.

• Adjusting Entry:

Cash in Bank, LCCA 3000

A/P 3000

There shall be no physical cancellation of the checks. The JEV

supporting such restoration shall form part of the supporting
document to the financial statements to be submitted to
COA at year end.
 3.3 Adjustments for Unreleased Commercial Checks.
At the start of the ensuing year, another JEV shall be drawn
to reverse the previous entry made and recognize the
availability of the checks for release.

• January next year / Reversing Entry:

A/P xxx
CIB, LCCA xxx

This procedure shall not apply to account “Cash-Modified

Disbursement System (MDS)” since there is no actual cash
with the GSBs.
3.4. Allowance for/Accumulated Impairment Losses of asset
accounts (discussed in accounting for IP/PPE)
• 3.5. Write-down of Inventories

• Assume: Inventories Held for Sale:

Cost P4,000,000

Net Realizable Value* 3,880,000

Impairment Loss P 120,000

*Computation of Net Realizable Value

• Estimated Selling Price P4,080,000

• Less: Estimated cost of disposal 200,000

• Net Realizable Value P3,880,000

•
• 3.5. Write-down of Inventories

• A/E
• Impairment Loss-Inventories P120,000
Merchandise Inventory P120,000
• To recognize impairment loss of inventories
held for sale
4. Correction/Reclassification Entries

Assume: Entity A discovered in current year that the revenue has

been inadvertently omitted in the amount of P6,200
A/R 6,200

Appropriate Revenue Account 6,200

Assume: Entity ABC discovered in 2019 that the revenue recognized

in 2018 has been inadvertently omitted in the amount of P6,200.

A/R (or applicable account) 6,200

Accumulated Surplus/(Deficit) 6,200

5. Depreciation Expense (discussed in
accounting for IP/PPE)
•
6. Other adjustments
• Closing Journal Entries

Closing journal entries are entries which close out the

balances of all nominal/temporary and intermediate
accounts at the end of the year.

The closure will reduce the balance of those accounts to

zero.
• Closing Journal Entries
The nominal and intermediate accounts that shall be closed at
the end of the year are as follows:
a. Balance of all revenue accounts to the “Revenue and Expense
Summary” account;

b. Balance of all expense accounts to the “Revenue and Expense

Summary” account;

c. Balance of the “Revenue and Expense Summary” to the

“Accumulated Surplus/(Deficit)” account;
d. ; and
• Closing Journal Entries

For the purpose of preparing the financial statements

for the first, second and third quarters, the closing
entries shall be prepared, but shall not be recorded in
the books of accounts.
• REQUIREMENTS:
1. Adjusting Entry for Reversion of
Unused Notice of Cash Allocation

2. Prepare Closing Entries

•
3. Prepare Post Closing TB
General Purpose Financial Statements
• General Purpose Financial Statements are those
intended to meet the needs of users who are not in a
position to demand reports tailored to meet their
particular information needs. (PPSAS 1.3)
Objectives of General Purpose Financial
Statements

a. To provide information about the entity’s

financial position, financial performance, and
cash flows that is useful to a wide range of
users in making economic decisions; and

a. To demonstrate the accountability of the

entity for the resources entrusted to it.
Responsibility for Financial Statements

• The responsibility over financial

statements rests with the entity’s
management, particularly the Head of
the Entity jointly with the Head of
Finance/Accounting.
 Components of General Purpose
Financial Statements
1. Statement of Financial Position;
2. Statement of Financial Performance;
3. Statement of Changes in Net Assets/Equity;
4. Statement of Cash Flows;
5. Statement of Comparison of Budget and Actual
Amounts; and
6. Notes to the Financial Statements, comprising a
summary of significant accounting policies and
other explanatory notes.
 General Principles
• Fair Presentation
• Compliance with IPSASs
• Departure from IPSAS
• Going Concern
• Consistency of Presentation
• Materiality and Aggregation
• Offsetting
• Comparative Information

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 Identification of the Financial
Statements
• The following information shall be displayed
prominently and repeatedly:
a. Name of the reporting entity;
b. Whether the financial statements cover the
individual entity or a group of entity;
c. The reporting date or the period covered by the
financial statements, whichever is appropriate to
that component of the financial statements;
d. Name of fund cluster;
e. The reporting currency; and
f. The level of rounding-off of amounts.
(PPSAS 1.61)
 Reporting Period
• Financial statements shall be presented at least
annually.
Statement of Financial Position
• The statement of financial position is presented in
comparative, condensed and detailed formats.

1. Condensed Statement of Financial Position –

presents only line items.

2. Detailed Statement of Financial Position – presents

all the asset, liability and equity accounts in the
Revised Chart of Accounts.
 Statement of Financial Performance
• Generally, revenue and expenses are recognized in
surplus or deficit, except for the following which are
recognized directly in equity:

a. Correction of prior period errors;

b. Effect of changes in accounting policies; and
c. Gains or losses on remeasuring available-for-sale
financial assets.
 Presentation of Expenses
• Expenses may be presented according to their
function or nature, whichever is more relevant.
• If expenses are classified by function, additional
disclosures shall be made on the nature of expenses,
including depreciation, amortization and employee
benefits expenses.
Statement of Changes in Net Assets/Equity
• The statement of changes in net assets/equity shows
the increase or decrease in the entity’s net assets
during the period resulting from the following:
a. Surplus or deficit for the period;
b. Items of revenue and expense that are
recognized directly in equity;
c. Effects of changes in accounting policies and
corrections of errors; and
d. The balance of accumulated surpluses or deficits
at the beginning of the period and at the
reporting date, and the changes during the
period.
 Statement of Cash Flows
• The statement of cash flows shows the sources and
utilizations of cash and cash equivalents during the
period according to the following activities:
1. Operating activities – presented using the Direct
Method only.
2. Investing activities
3. Financing activities
Indirect Method-Cash Flow Statement
Examples of Operating Activities
• Receipt of NCA and reversion of unused NCA
• Receipt or provision of assistance and subsidy to
other entities
• Collection of income and receivables
• Payments of expenses, cash advances and payables
• Inter or intra-entity transfers of funds
Examples of Investing Activities
• Acquisition and disposal of PPE, investment property,
intangible assets and other noncurrent assets
• Acquisition and disposal of investment securities and
derivatives
• Collection and provision of long-term loans
Examples of Financing Activities
• Issuing of notes, loans, and bonds payable, and their
repayments
• Finance lease payments pertaining to the reduction
of the outstanding finance lease liability
Statement of Comparison of Budget
and Actual Amounts
• The statement of comparison of budget and actual
amounts shows the differences (variances) between
budgeted amounts and actual results for a given
reporting period.
 Notes to Financial Statements
• The notes shall be structured in a systematic and
logical manner to show the following:
1. General information on the reporting entity.
2. Statement of compliance with the PPSAS and
Basis of preparation of financial statements.
3. Summary of significant accounting policies.
4. Disaggregation (breakdowns) and other
supporting information for the line items in the
other financial statements.
 Notes to Financial Statements
5. Other disclosures required by PPSAS, such as:
– Explanations for the differences between
budgeted and actual amounts;
– Events after the reporting date, if material;
– Changes in accounting policies and accounting
estimates and prior period errors;
– Contingent liabilities, contingent assets, and
unrecognized contractual commitments;
– Related party disclosure; and
– Non-financial disclosures, e.g., the entity’s
financial risk management objectives and policies.
 Notes to Financial Statements
6. Other disclosures not required by PPSAS but the
management deems relevant to the understanding
of the financial statements.
 Interim Financial Statements
• Government entities prepare interim financial
statements on a quarterly basis using the same
accounting policies used in annual reports.
 Other Reports
• In addition to the financial statements, government
entities are also required to prepare and submit the
following reports:
1. Trial balances (Pre-closing and Post-closing)
2. Other schedules:
a. Regional Breakdown of Income
b. Regional Breakdown of Expenses
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 REACTIONS!!!!!
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