CHAPTER 1 – OVERVIEW OF GOVERNMENT ACCOUNTING
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.
Objectives of Government Accounting:
a. To produce information concerning past operations and present conditions;
b. To provide a basis for guidance for future operations;
c. To provide for control of the acts of public bodies and officers in the receipt, disposition and
utilization of funds and property; and
d. To report on the financial position and the results of operations of government agencies for the
information of all persons concerned.
Like accounting for business entities, government accounting is also a process of producing information
that is useful in making economic decisions. Government accounting, however, places greater emphasis
on the following:
a. Sources and utilization of government funds; and
b. Responsibility, accountability and liability of entities entrusted with government funds and
properties.
 The sources of government funds include receipts from taxes and other fees, borrowings and grants
from other governments and international bodies.
 The utilization of government funds includes expenditures on programs, projects, unanticipated
losses from calamities and the like.
Responsibility, Accountability and Liability over Government Funds and Property
Responsibility over Government Funds and Property
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The head of a government agency is directly responsible in implementing this policy and is
primarily responsible for government resources entrusted to his agency.
All those who are exercising authority over a government agency shall share fiscal
responsibility.
Accountability over Government Funds and Property
1.
A government officer entrusted with the possession of government resources is responsible for the
safekeeping therefor in accordance with the law. Every accountable officer another shall be
properly bonded.
PROBLEM 1-2: MULTIPLE CHOICE 1
1. Which of the following is a unique requirement of government, accounting that is not required in
the accounting for business entities?
a. The use of double-entry recording system.
b. The use of single-entry recording system.
c. The use of accrual basis of accounting.
d. The presentation of budget information in the financial statements.
2. What is the legal basis of the COA in promulgating the GAM for NGAS?
a. P.D. No. 1445, State Audit Code of the Philippines
b. The Philippine Constitution
c. R.A. 9298, The Philippine Accountancy Act of 2004
d. Philippine Public Sector Accounting Standards (PPSAS)
3. Which of the following is tasked in keeping the general accounts of the government, supporting
vouchers, and other documents?
a. COA
b. DBM
c. NGAS
d. Congress
4. The Bureau of Treasury (BTR) is responsible for
a. promulgating accounting and auditing regulation rules and regulations
b. the formulation and implementation of the national budget with the goal of attaining the nation's
socio-economic objectives.
c. receiving and keeping national funds and managing and controlling the disbursements thereof.
d. directly implementing the projects of the government.
5. According to the GAM for NGAS, the basis of accounting to be applied by government entities is
the
a. Cash basis
b. Accrual basis
c. Modified accrual basis
d. Any of these as a policy choice
6. Government resources must be utilized efficiently and effectively in accordance with the law.
According to P.D. No. 1445, who is directly responsible in implementing this policy?
a. All employees who are entrusted with the possession of government resources.
b. The head of the government agency.
c. The COA.
d. All elected officials.
7. The transfer of government funds from one officer to another requires the prior authorization of the
a. Commission on Audit
b. Head of the Agency
c. The President of the Republic of the Philippines
d. Bureau of Treasury
8. Mr. A, a government employee entrusted with the custody of government funds, was instructed by
Mr. B (a politician) to release funds for the acquisition of a car as a birthday gift for Mr. B's daughter
who will be having her 18th birthday next week. To relieve Mr. A from any liability, what should
Mr. A do?
a. Mr. A shall not release the fund but rather notify Mr. B, in writing, that his instruction is illegal.
b. Mr. A shall release the fund and then notify Mr. B, in writing, that his instruction is illegal.
c. Mr. A shall release the fund but retains 20% commission.
d. Mr. A shall release the fund but requires Mr. B to promise, in writing, that the car shall be
returned to the government after his daughter's birthday.
9. Mr. C, a government employee entrusted with the custody of government funds, has lost the
government funds entrusted to him in a force majeure. What should Mr. C do to relieve him from
liability?
a. Mr. C should immediately notify the Head of Agency after 30 days.
b. Mr. C should immediately notify the COA within 30 days.
c. Mr. C should immediately notify the Bureau of Treasury within 30 days.
d. Mr. C should keep the event a secret and wait for next funds to arrive
10. These refer to the attributes that make information useful to users.
a. Usefulness characteristics
b. Quantitative characteristics
c. Qualitative characteristics
d. Fundamental principles
11. Information loses this qualitative characteristic if it is not reported on a timely basis.
a. Relevance
b. Reliability
c. Neutrality
d. Materiality
12. Which of the following qualitative characteristics does an entity most likely would need to make
some trade-offs?
a. Faithful representation and Substance over form
b. Materiality and Relevance
c. Relevance and Reliability
d. Understandability and Comparability
13. An entity recognizes an estimated loss from the decline in value of a property. Which of the
following is most likely the qualitative characteristic being applied by the entity?
a. Reliability
b. Substance over form
c. Faithful representation
d. Prudence
14. Which of the following is not one of the fund clusters of a government entity?
a. Regular Agency Fund
b. Foreign Assisted Projects Fund
c. Special Account-Locally Funded/Domestic Grants Fund
d. Business Related Funds
e. Petty Cash Fund
15. To achieve a proper balance between relevance and reliability, the overriding consideration is
a. how users' needs are best satisfied.
b. relevance is always more important than reliability.
c. reliability is always more important than relevance.
d. greater weight shall be given to relevance compared to reliability.
PROBLEM 1-3: FOR CLASSROOM DISCUSSION
1. How does government accounting differ from the accounting for business entities?
a. Government accounting places more emphasis on profit- making
b. Government accounting is very complex that only highly intellectual individuals can
understand it
c. Government accounting places greater emphasis on sources and utilization of funds in
accordance with the law and management’s stewardship over government resources entrusted
to the entity.
d. Government accounting is specialized in nature that the principles applicable to business
entities are never applicable to government entities.
CHAPTER 6 – FINANCIAL ASSETS (Page 162-180)
CASH AND CASH EQUIVALENTS.
Petty Cash Fund
Accounting for Cash Shortage/Overage of Disbursing Officer
Dishonored Checks
Bank Reconciliation
RECEIVABLES
INVESTMENTS
Categories of Financial Assets
Impairment of Financial Assets.
Derecognition of Financial Assets
DERIVATIVES.
CHAPTER 6 SUMMARY
Learning Objectives:
1.
2.
3.
4.
Define a financial asset and give examples.
Account for cash and cash equivalents.
Account for receivables.
Account for investments
Financial instrument – is any contract that gives rise to both a financial asset of one entity and a financial
liability or equity instrument of another entity. (PPSAS 28.9)
Financial asset – is any asset that is:
a.
b.
c.
d.
Cash;
An equity instrument of another entity;
A contractual right to receive cash or another financial asset from another entity;
A contractual right to exchange financial instruments with another entity under conditions
that are potentially favorable; or
e. A contract that will or may be settled in the entity’s own equity instruments
Examples of Financial Assets




Cash and Cash equivalents
Receivables
Investments in equity and debt securities
Derivative assets
Financial liability – is any liability that is:
a. A contractual obligation to deliver cash or another financial asset to another entity;
b. A contractual obligation to exchange financial assets or financial liabilities with another
entity under conditions that are potentially unfavorable to the entity; or
c. A contract that will or may be settled in the entity’s own equity instruments.
Equity instruments – is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
The issuer of a financial instrument shall classify the instrument, or its component parts, on initial
recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance
of the contractual arrangement and the definition of a financial asset, a financial liability and an equity
instrument. (GAM for NGAs, Chapter 7, Sec.23)
Example: Bank deposit is a financial instrument. It is a contract that gives rise to both a financial asset
on the part of the depositor and a financial liability on the part of the bank. The depositor has a
contractual right to withdraw his cash while the bank has a contractual obligation to deliver cash when the
depositor withdraws.
Cash is the most basic financial instrument because it is the medium of exchange and the basis of
measurement of all financial statements elements.
Initial Recognition – A financial asset is recognized when an entity becomes a party to the contractual
provisions of the instrument. (PPSAS 29.16)
Initial Measurement - Financial assets are initially measured at fair value plus transaction costs, except
for financial assets at fair value through surplus or deficit whose transaction costs are expensed.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue, or
disposal of a financial instrument.
An incremental cost is one that would not have been incurred if the entity had not acquired, issued
or disposed the financial instrument.
Transaction costs include:
a. Fees and commissions paid to agents, advisers, brokers and dealers;
b. Levies by regulatory agencies and securities exchanges; and
c. Transfer taxes and duties
Financial assets are subdivided into the ff:
Cash and cash equivalents – Comprises cash on hand, cash in bank and cash treasury accounts.
Unreleased checks - are checks drawn but not yet given to the payees as of the end of the period.
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are not physically cancelled.
Accounting for Cancelled Checks – checks are cancelled when they become stale, voided or spoiled.
A check is considered stale if it has been outstanding for over 6months from its date.
Cancelled checks are reverted back to cash as follows:
Petty Cash Fund – refers to the amount granted to duly designated Petty Cash Fund Custodian for payment
of authorized petty or miscellaneous expenses which cannot be conveniently paid through checks or ADA.
Guidelines:
a. The Head of Agency shall approve the amount of PCF to be established, which shall be
sufficient to defray recurring petty expenses for 1 month.
b. The PCF Custodian shall be properly bonded" whenever the established amount of PCF
exceeds $5,000.
(a)-Bonded" means an insurance shall be taken on the custodian. In the event that the
custodian misuses the funds, the entity can claim from the insurance company, and the
insurance company in turn will go after the custodian.
c. The PCF shall be maintained using the Imprest System. At all times, total cash on hand and
unreplenished expenses shall be equal to the PCF ledger balance.
d. The PCF shall be kept separately from other advances or collections and shall not be used to
pay for regular expenses, such as rentals, electricity, water, and the like.
e. PCF payments shall not exceed 15,000 for each transaction, except when otherwise authorized
by law or by the COA Splitting of transactions to avoid exceeding the ceiling is prohibited.
f.
A canvass from at least 3 suppliers is required for purchases amounting to $1,000 and above,
except for purchases made while on official travel.
g. PCF disbursements shall be supported by properly accomplished and approved Petty Cash
Vouchers, invoices, ORS, or other evidence of disbursements.
h. Replenishment shall be made as soon as disbursements reach at least 75% or as needed.
i.
At the end of the year, the PCF Custodian shall submit all unreplenished Petty Cash Vouchers
to the Accounting Unit for recording in the books of accounts.
j.
The unused balance of the PCF shall not be closed at year-end. It shall be closed only upon the
termination, separation retirement or dismissal of the PCF Custodian, who in turn shall refund
any balance to close his/her cash accountability.
ILLUSTRATION: ………………………………… Page 167
Accounting for Cash Shortage/Overage of Disbursing Officer
The disbursing officer is liable for any cash shortage while any cash overage that he cannot satisfactorily
explain to the auditor is forfeited in favor of the government.
Relevvant provision of law:
“ The failure of a public officer to have duly forthcoming any public funds or property with which
he is chargeable, upon demand by any duly authorized officer, shall be prima facie evidence that he
has put such missing funds or property to personal use.” (Revised Penal Code, Art217)
Dishonored Checks – is a check that is not accepted when presented for payment, e.g., a check returned
by the bank because of lack of sufficient funds – ‘bounced’ check.
Guidelines:
a. When a check is dishonored, the Collecting Officer shall:
i.
issue a Notice of Dishonored Checks to the drawer and any endorser; and
ii.
cancel the related OR
b. If the Collecting Officer fails to issue the notice, the dishonored check becomes his personal
liability. The drawer and any endorser not given the notice will be relieved from any liability.
c. A check refused by the drawee bank when presented within 90 days from its date is a prima
facie evidence that the drawer has knowledge about the insufficiency of his funds, unless the
drawer pays the check in full or makes arrangement with the drawee bank for the full payment
of the check within 5 banking days after receiving the notice of the dishonor.
d. A dishonored check shall be settled by payment in cash or certified check. The dishonored
check shall not be returned to the payor unless he returns first the previous OR therefor.
Bank Reconciliation - is a report that is prepared for the purpose of bringing the balances of cash (a) per
records and (b) per bank statement into agreement.
A bank statement is a report issued by a bank which shows the credits and debits to the depositor's account
during a period, as well as the account's cumulative balance.
Guidelines:
a. Bank reconciliations shall be prepared as internal control to ensure the correctness of cash
records and as deterrent to fraud.
b. The Chief Accountant or designated staff shall prepare separate bank reconciliations for each
bank account maintained by the entity within 10 days from receipt of the monthly bank
statement.
c. The Adjusted Balance Method shall be used. Under this method, the unadjusted book and
bank balances are brought to an adjusted balance that is reported on the Statement of
Financial Position.
d. Bank reconciliations shall be prepared in 4 copies to be submitted within 20 days from receipt
of bank statement to the following: COA Auditor, Head of Agency, Accounting Division, and
Bank, if necessary.
e. A Journal Entry Voucher (JEV) shall be prepared to record any reconciling items.
Cash Equivalents - are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value. (PPSAS28)
Only debt instruments acquired within 3 months before their scheduled maturity date can qualify as cash
equivalents.
Receivables - represent claims for cash or other assets from other entities.
Examples:
a. Accounts receivable- refers to amounts due from customers arising from regular trade and
business transactions.
b. Notes receivable - represents claims, usually with interest, for which a formal instrument of credit
is issued as evidence of debt, such as promissory notes.
c. Loans Receivable –
d. Other receivables such as interest receivable, due from employees/officers/other NGAs, lease
receivables, dividends receivable and the like.
Receivables are initially measured at fair value plus transactions costs and subsequently measured at
amortized cost.
Investments
Categories of FS
For purposes of subsequent measurement, financial assets are classified as follows:
a. Financial asset at fair value through surplus or deficit – is one that is either:
- Held-for-trading, or
- Designated as at fair value through surplus or deficit on initial recognition.
Any financial asset can be classified in this category if its fair value can be
reliably measured.
b. Held-to-maturity investments – are non-derivative financial assets with fixed or determinable
payments and fixed maturity that an entity has the positive intention and ability to hold until
maturity.
c.
Loans and receivables – are non-derivative financial assets with fixed or determinable payments
and are not quoted in an active market.
d. Available-for-sale financial assets – are non-derivative financial assets that are designated as
available for sale or are not classifiable under the other categories.
Investments
in
instruments whose fair value cannot be reliably measured are measured at cost.
unquoted
equity
Derecognition of Financial Assets – is the process or removing a previously recognized asset, liability or
equity from the statement of financial position.
A financial asset is derecognized when:
a. The contractual rights to the cash flow from the financial asset expire or are waived; or
b. The financial asset is transferred and the transfer qualifies for derecognition, such as when the risks
and rewards of ownership and control of the financial assets are relinquished.
Derivatives - is a financial instrument or other contract that derives its value from the changes in value of
some other underlying asset or other instrument.
Characteristics of a derivative
a. Its value changes in response to the change in an underlying;
b. It requires no initial net investment (or only a very minimal initial net investment); and
c. It is settled at a future date.
An "underlying" is a specified price, rate, or other variable (eg, interest rate, security or commodity price,
foreign exchange rate, index of prices or rates, etc.), including a scheduled event (e.g., a payment under
contract) that may or may not occur.
Purpose of a derivative - The very purpose of derivatives is risk management. Risk management is the
process of identifying the desired level of risk, identifying the actual level of risk and altering the latter to
equal the former. (GAM for NGAS, Chapter 7, Sec. 19)
Hedging - is a method of offsetting a potential financial loss or the structuring of a transaction to reduce
risk involving financial instruments.
Hedge accounting - recognizes the offsetting effects on surplus or deficit of changes in the fair values of
the hedging instrument and the hedged item.
Hedging Relationships
a. Fair value hedge - a hedge of the exposure to changes in fair value of a recognized asset or liability
or an unrecognized firm commitment, or an identified portion of such an asset, liability or firm
commitment, that is attributable to a particular risk and could affect surplus or deficit.
b. Cash flow hedge - a hedge of the exposure to variability in cash flows that (i) is attributable to a
particular risk associated with a recognized asset or liability (such as all or some future interest
payments on variable rate debt) or a highly probable forecast transaction and (ii) could affect
surplus or deficit.
c. Hedge of a net investment in a foreign operation.
Components of a Hedging Relationship
a. Hedging Instrument - a designated derivative or a designated non-derivative financial asset or
non-derivative financial liability whose fair value or cash flows are expected to offset changes in
the fair value or cash flows of designated hedged item.
b. Hedged Item - an asset, liability, firm commitment, highly probable forecast transaction or net
investment in a foreign operation that (a) exposes that entity to risk of changes in fair valueor cash
flows and (b) is designated as being hedged.
CHAPTER 7
INVENTORIES
MEASUREMENT
COST FORMULAS
RECEIPT AND DISPOSITION OF INVENTORIES
CHAPTER 7 SUMMARY