Government Accounting

Government accounting problems appear in nearly every CPA examination. Except in rare cases,
they are relatively easier than the other accounting problems. This is due, perhaps, in recognition
by those preparing the CPA examination that most candidates tend to avoid the government
accounting problems. At any rate, a candidate can earn more points by solving government
accounting problems using his general knowledge of accounting. Thus, to be proficient in
government accounting, candidates should have a fair knowledge of the following aspects of
government accounting:

1. Budgetary procedures.
2. General accounting procedures – General Fund (Agency Books)
a. Journal entries.
b. Preparation of trial balance.
c. Adjusting and closing entries.
d. Preparation of financial statements.

BUDGETARY PROCEDURES

An agency of the government is given authority to expend funds through the use of a control
device called budget. A budget is a legal authorization for expenditure based on a plan which has
been received and approved by Congress through an Appropriation Law.

The budgetary procedures are divided into four phases, as follows:

1. Preparation and Presentation. This phase covers the estimation, determination and
translation of government revenues, priorities and activities. Under this phase,
government agencies prepare their budgets to be submitted to the Department of Budget
and Management (DBM) for review. The DBM then consolidates all budgets to form a
government-wine budget estimate. This shall be submitted to the President for final
approval.
2. Budget Authorization. This phase involves the submission of the national government
budget to the Congress for review, and the formulation of an Appropriation Bill to be
forwarded to the President for approval.
3. Budget Execution and Operation. This phase covers the implementation of the various
operational aspects of the budget, such as the release of allotment to the various
agencies, the continuing review of government fiscal position, and other related activities.
4. Budget Accountability. This phase involves the evaluation of expenditures and
performance against the predetermined budget. Obligations incurred, personnel use and
work accomplished are compared with the plans and goals of various agencies submitted
at the time their respective budget was prepared. This is accomplished by the
 heads of the various agencies who review the performance of their respective agency
and the Commission on Audit (COA) who examine accounts and operations of agencies.

GENERAL ACCOUNTING PROCEDURES – GENERAL FUND (Agency Books)

In government accounting the principal accounting unit is referred to as a fund. A fund is a sum
of money or other resources set aside for the purpose of carrying out specific activities in
accordance with special regulations, restrictions, or limitations. The government has various
types of fund. For CPA examination, the general fund which is available for general purposes.

JOURNAL ENTRIES

Presented below are the typical transactions and the related journal entries in the books of
government agencies under the New Government Accounting System (NGAS). Take note that the
NGAS adopts commercial accounting and double-entry bookkeeping.

1. Appropriations, Allotments and Notice of Cash Allocation (NCA).

An Appropriation is a formal authorization under the law or legislative act for an agency
to pay goods and services out of government funds under specified conditions or for
special purposes.

Allotment, on the other hand is the authorization issued by the DBM to the agency, which
allows it to incur obligations, for specified amounts, within the legislative appropriations.

The agency does not journalize the appropriations and allotments. The agency records
the allotment receives in the Registry of Allotments and Obligations classified into four
classes of expenditures as follows:

1. Registry of Allotments and Obligations – Capital Outlay (RAOCO)

2. Registry of Allotments and Obligations – Maintenance and Other Operating
Expenses (RAOMO)
3. Registry of Allotments and Obligations – Personal Services (RAOPS)
4. Registry of Allotments and Obligations – Financial Expenses (RAOFE)

Notice of Cash Allocation (NCA) is an authorization granted to an agency to disburse by

checks an amount within a specified period. This is a control device designed to ensure
that all withdrawals are within the cash allocation. Upon receipt of the NCA, the
accountant of the agency shall journalize it by the following entry:

Cash-National Treasury – Modified Disbursement System (MDS) xx

Subsidiary Income from National Government (SING) xx
2. Obligations

These are amounts to be paid by a government agency arising from act of a duly
authorized administrative officer binding the government to the immediate or eventual
payment of a sum of money. The incurrence of obligations is not journalize by the agency,
instead the agency record the obligations incurred in the Registry of Allotments and
Obligations classified according to the type of obligation.

3. Disbursements

These are payments of obligations incurred by the agency. The NCA is used for the
payment of the following types of obligations:

a. Personal services
b. Maintenance and other operating expense
c. Financial expense
d. Purchase and/or construction of fixed assets
e. Miscellaneous transactions, such as cash transfer to another agency to implement a
project of the agency.

The agency records the disbursement by debiting the asset, liability or expense account
and crediting “Cash – National Treasury - MDS” account.

To illustrate the recording of the different types of disbursements, consider the

following:

a. Salaries, wages and other remuneration of personnel of the

agency. Assume the following payroll fund is established:

Salaries and wages P500

Less: Withholding tax P40
GSIS contribution 30
PAG-IBIG contribution 20
PHILHEALTH contribution 10 100
Net payroll P400

The agency enters the obligation for the gross payroll of P500 in the RAOPS. The net
payroll is advance to a Disbursing Officer and is recorded by the following entry:

Cash- Disbursing Officer 400

Cash-National Treasury – MDS 400

The entry to record the payment of salaries and wages is as follows:

 Salaries and wages – Regular pay 500
Due to BIR 40
Due to GSIS 30
Due to PAG-IBIG 20
Due to PHILHEALTH 10
Cash – Disbursing Officer 400

b. Supplies and Materials. Assume the following transactions:

1. Issued purchase order (PO) for office supplies, P50.

2. Paid the PO less withholding tax of P5
3. Remittance of withholding tax thru Tax Remittance Advice (TRA).

The above transactions are recorded by the agency as follows:

1. The agency enters the obligation for office supplies in the RAOMO, P50.
2. The entry to record the payment of the PO is:

Office supplies inventory 50

Due to BIR 5
Cash – National Treasury – MDS 45
3. The entry to record the remittance of withholding tax is:

Due to BIR 5
Subsidy Income from National Government 5

c. Purchase of Office Equipment. Assume the following transactions:

1. Issued purchase order (PO) for the office equipment, P800.

2. Received the office equipment with the charge invoice.
3. Paid the office equipment less withholding tax of P80.

The above transactions are recorded as follows:

1. The obligation for the office equipment is entered in RAOCO, P800.

2. The agency records the receipt of office equipment as follows:

Office equipment 800

Accounts payable 800

3. The entry to record the payment is:

Accounts payable 800

Due to BIR 80
 Cash – National Treasury – MDS 720

d. Construction of Building by Contract. Assume the following transactions:

1. Signed the construction contract for the construction of the building, P2,000.
2. Paid 30% of the contract price, P600.
3. Received the first building, 50% of the contract price, P1,000.
4. Paid the first billing, less withholding tax of P40.
5. Received the final billing for the balance of the contract price, 100% completed.
6. Paid the final billing, less withholding tax of P100.
7. Recognize the Building account and close the Construction in Progress account.
8. Remitted the withholding tax to BIR per TRA.

The above transactions are recorded by the agency as follows:

1. The obligation for the contract price is entered in the RAOCO, P2,000.
2. Advances to Contractor 600
Cash – National Treasury – MDS 600
3. Construction in Progress – Agency Assets 1,000
Advances to Contractor 600
Accounts payable 400
4. Accounts payable 400
Due to BIR 40
Cash – National Treasury – MDS 360
5. Construction in Progress – Agency Assets 1,000
Accounts payable 1,000
6. Accounts payable 1,000
Due to BIR 100
7. Building 2,000
Construction in Progress 2,000
8. Due to BIR 140
Subsidy income from National Government 140

4. Income, Collections and Related Transactions. The sources of income and collections
made by the agency are:

a. Taxes
b. Operating and service income
c. Grants and donations
d. Borrowings
e. Miscellaneous receipts and collections.

The accounting procedures to record the collection of income will depend on the
agency’s authority to use the income collected.
 Without authority to use
All revenues collected by the agency, regardless of the amount are to be deposited to the
National Treasury. Such collections shall be recorded by the collecting agency in a
separate book it shall maintain, the National Government Books. The collection shall be
credited to the Income account which shall be debited upon remittance to the National
Treasury. To illustrate assume the following:

Income Taxes:

1. Collection of income taxes by the Bureau of Internal Revenue (BIR), P1,000.

2. Remits the above collection to Bureau of Treasury (BTR).
The following are the journal entries to record the above transactions:
1. Cash – Collecting officer 1,000
Income taxes – Individuals 1,000
2. Income taxes – Individuals 1,000
Cash – Collecting officer 1,000

With authority to use

Incomes collected by the agency in which they are authorized to use in their operations
are usually deposited in a government depository bank. The collections are recorded in
the Regular Agency Books. To illustrate assume the following collection:

Rent:

1. Collection of rent income, P50

2. Deposit of collection to a government depository bank.
3. Use of the collection for the repair of the office space.

The above transactions are recorded by the agency as follows:

1. Cash – Collecting officer 50

Rent income 50
2. Cash in bank – Local Currency – Current Account (LCCA) 50
Cash – Collecting officer 50
3. Repairs and maintenance – Office Building 50
Cash in bank – LCCA 50

Note: the accounts used in the above illustrations are taken from the government Chart of
Accounts.

TRIAL BALANCE
A trial balance is a list of ledger accounts and their debit and credit balances. It is usually prepared
before adjusting and closing entries are prepared. The column headings of the trial balance are:
Account Title Account Code Debit Credit

ADJUSTING ENTRIES

Before the preparation of financial statements, adjusting entries are prepared. As in commercial
accounting, there are basic two types of adjustments; accrued items and deferred items.
Depreciation of fixed assets is computed and adjusted using the straight line method.

CLOSING ENTRIES

The following shall be closed at the end of the year:

1. Unused Notice of Cash Allocation.

2. Nominal or temporary accounts.

Unused NCA

This is computed by deducting from the total NCA received during the year the total MDS checks
issued by the agency. At the end of the year the unused NCA is to be reverted to Bureau if
Treasury, because of the policy of the DBM that the NCA will only be used for the year it was
issued. The closing entry to close the unused NCA is:

Subsidy Income from National Government xx

Cash – National Treasury – MDS xx

Nominal or Temporary Accounts

As in commercial accounting, all income and expense accounts are closed to Income and
Expense Summary account.

Income and Expense Summary account is then closed to Retained Operating Surplus account.

Finally the balance of the Retained Operating Surplus account is closed to Government Equity
account.

FINANCIAL STATEMENTS

After the preparation of the trial balance, adjusting and closing entries, financial statements
can now be prepared as follows:

1. Statement of Income and Expenses. This statement shows the changes in the
agency’s equity resulting from operations during the period.
 2. Balance Sheet. This statement provides information on the agency’s resources, its
obligations, and the government equity in the agency.
3. Cash flow Statement. The statement provides relevant information about the
agency’s inflows and outflows of cash during the year. It shows the changes in cash
and cash equivalents for the year.

The format of the above statements follows that of the commercial accounting.