Government Accounting And Auditing Handouts PDF

AA 4102 HAND-OUTS GOVERNMENT ACCOUNTING AND AUDITING TNCR 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 qual...

AA 4102 HAND-OUTS GOVERNMENT ACCOUNTING AND AUDITING TNCR 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. The COA keeps the general accounts of the national government , prescribes the standard chart of accounts, promulgates accounting rules and regulations and exercise technical supervision over the accounting functions of each agency. 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, PD. 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, PD. No. 1445; Sec 50, Chap 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, 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. PART II Government Accounting Manual (GAM) Recent developments brought about by the Philippine Public Financial Management Reforms and significant changes in the field of accounting prompted the harmonization of the existing accounting standards with the international accounting standards, particularly the International Public Sector Accounting Standards (IPSAS). The4 IPSAS are based on the International Financial Reporting Standards (IFRS). This Commission revised the New Government Accounting System (NGAS) Manual prescribed under Commission on Audit (COA) Circular No. 2002-002 dated June 18, 2002 to make it responsive to dynamic changes and modern technology. The Philippine Government has adopted the IPSAS through the Philippine Public Sector Accounting Standards (PPSAS). The provisions of the PPSAS are incorporated in the GAM for NGAs. Sec. 1. Legal Basis. The Government Accounting Manual (GAM) is prescribed by COA pursuant to Article IX-D, Section 2 par. (2) of the 1987 Constitution of the Republic of the Philippines which provides that: “The Commission on Audit shall have exclusive authority, subject to the limitations in this Article, to define the scope of its audit and examination, establish the techniques and methods required therefor, and promulgate accounting and auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary, excessive, extravagant, unconscionable expenditures, or uses of government funds and properties". (Underscoring supplied) Coverage: This Manual presents the basic accounting policies and principles in accordance with the Philippine Public Sector Accounting Standards (PPSAS) adopted thru COA Resolution No. 2014-003 dated January 24, 2014 and other pertinent laws, rules and regulations. It includes the Revised Chart of Accounts (RCA) prescribed under COA Circular No. 2013-002 dated January 30, 2013, as amended; the accounting procedures, books, registries, records, forms, reports, financial statements; and illustrative accounting entries. It shall be used by all National Government Agencies (NGAs) in the: a. preparation of the general purpose financial statements in accordance with the PPSAS and other financial reports as may be required by laws, rules and regulations; and b. reporting of budget, revenue and expenditure in accordance with laws, rules and regulations. Objective of the Manual. The Manual aims to update the following: a. standards, policies, guidelines and procedures in accounting for government funds and property; b. coding structure and accounts; and c. accounting books, registries, records, forms, reports and financial statements. BASIC FEATURES AND POLICIES. The GAM has the following basic features and policies, to wit: a. Accrual Accounting. A modified accrual basis of accounting shall be used. Under this  method, all expenses shall be recognized when incurred and reported in the financial statements in the period to which they relate. Income shall be on accrual basis except for transactions where accrual basis is impractical or when other methods 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. c. Chart of Accounts and Accounts Codes. A new chart of accounts and coding structure with eight mandatory digits shall be adopted. (See Revised Chart of Accounts, COA C2020-001,) d. Books of Accounts and Registries. The books of accounts and registries of the NG entities consist of: a. Journals 1. General Journal (GAM Appendix 1) 2. Cash Receipts Journal (GAM Appendix 2) 3. Cash Disbursements Journal (GAM Appendix 3) 4. Check Disbursements Journal (GAM Appendix 4) b. Ledgers 1. General Ledgers (GAM Appendix 5) 2. Subsidiary Ledgers (GAM Appendix 6) c. Registries 1. Registries of Revenue and Other Receipts (GAM Appendices 7, 7A, 7B, 7C and 7D) 2. Registry of Appropriations and Allotments (GAM Appendix 8) 3. Registries of Allotments, Obligations and Disbursements – for PS, MOOE, CO and FE (GAM Appendices 9A, 9B, 9C and 9D) 4. Registries of Budget, Utilization and Disbursements (GAM Appendices 10A, 10B, 10C and 10D) e. Financial Statements. The following statements are prepared under: a) AFRS b) BFRS The COA prescribed the adoption of 25 Philippine Public Sector Accounting Standards (PPSASs) based on the International Public Sector Accounting Standards (IPSASs.) f. Two-Money Column Trial Balance. The two - money column trial balance showing the account balances shall be used. g. Allotment and Obligation. Obligation accounting is modified to simplify procedures in the incurrence and liquidation of obligations and the recording of the budgetary accounts (allotments and obligations incurred and liquidated). Separate registries shall be maintained to control the allotments and obligations for each of the four classes of allotments, namely: * Registry of Allotments, Obligations and Disbursements – for PS, MOOE, CO and FE. * Registry of Appropriation and Allotment (RAPAL) These Registries shall be maintained by the Budget Unit of each entity. The RAOD shall be maintained by fund cluster, by Major Final Output (MFO) or Program/Activity/Project (PAP), and by allotment class. Separate Registry shall be maintained for Overdraft/Obligations Incurred in Excess of Allotment and for continuing appropriations (unreleased and unobligated allotments). h. Notice of Cash Allocation (NCA). The receipts of NCA by the agency shall be recorded in the books as debit to account "Cash- Modified Disbursement System (MDS) Regular" and credit to account "Subsidy from National Government". (Refer to the latest issuance by DBM as regards to releases of NCA) (DBM-Circular#_____) i. Financial Expenses. Financial expenses such as bank charges, interest expenses, commitment charges 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 it takes place except those purchased out of Petty Cash Fund which shall be charged directly to the appropriate expense accounts. (PPSAS 12) k. Valuation of Inventory. Cost of ending inventory of supplies and materials shall be computed the moving average method. l. Maintenance of Supplies and Property, Plant and Equipment Ledger Cards. For appropriate check and balance, the Accounting Units of agencies, as well as the Property Offices, shall maintain Supplies Ledger Cards/Stock Cards by stock number and Property, Plant and Equipment Ledger Cards/Property Cards by category of property, plant and equipment, respectively. m. Construction of Assets. For assets under construction, the Construction Period Theory shall be applied for costing purposes. Bonus paid to the contractor for completing the work ahead of time shall be added to the total cost of the project. Liquidated damages charged and paid for by the contractor shall be deducted from the total cost of the project. Any related expenses incurred during the construction of the project, such as taxes, interest, license fees, permit fees, clearance fee, etc. shall be capitalized, and those incurred after the construction shall form part of operating costs. n. Public Infrastructures/Registry of Reforestation Projects. For agencies that construct public infrastructures, such as roads, bridges, waterways, railways, plaza, monuments, etc., and invest on reforestation projects, shall recognize the cost and the related accumulated depreciation and impairment losses of existing public infrastructure assets based on the Registry of Public Infrastructures (RPIs)previously maintained and the estimated useful life as may be determined by competent authority. Registry of Public Infrastructures (RPI). Registry of Reforestation Projects (RRP) shall no longer maintained. (PPSAS 17) Included in the standard are provisions to be followed regarding PPE controlled but not owned by the entity, the effect on the recognition of depreciation as a result of the change in the estimated residual value to 5% of the cost which will be applied prospectively, and (PPSAS 31) the accounting policy on tangible assets with serviceable life of more than one year but small enough to be considered as PPE, that revoked the threshold of P15,000 for semi-expendable items, shall continue to be applied until amended. o. Depreciation. The straight-line method of depreciation shall be used. Depreciation shall start on the second month after purchase of the property, plant and equipment, and a residual value equivalent to 5% percent of the purchase cost shall be set-up. Public infrastructures/reforestation projects shall be charged of depreciation while serviceable assets that are no longer being used shall not be charged of any depreciation. p. Reclassification of Assets. Serviceable assets no longer being used shall be reclassified to "Other Assets" account and shall not be subject to depreciation. q. Allowance for Doubtful Accounts. An Allowance for Doubtful Accounts shall be set up for estimated uncollectible trade receivables to allow for their fair valuation. r. Elimination of Contingent Accounts. Contingent accounts shall no longer be used. All financial transactions shall be recorded using the appropriate accounts. Cash shortages and disallowed payments, which become final and executory, shall be recorded under receivable accounts "Due From Officer and Employees" or "Receivables- Disallowances/Charges", as the case may be. Additional provisions regarding contingent assets and liabilities are discussed in PPSAS 19. s. Recognition of Liability. Liability shall be recognized at the time goods and services are accepted or rendered and supplier/creditor bills are received. t. Interest Accrual. Whenever practical and appropriate, interest income and/or expense shall be accrued and recognized in the books of accounts. u. Accounting for Borrowings and Loans. All borrowings and loans incurred shall be recorded to the appropriate liability accounts. v. Elimination of corollary and negative journal entries. The use of corollary and negative journal entries shall be stopped. Acquisition/Disposition of assets shall be debited/credited to the appropriate assets accounts. If an error is committed, correcting entry to adjust the original entry shall be prepared. w. Petty Cash Fund. The Petty Cash Fund shall be maintained under the imprest system. As such, all replenishment shall be directly charged to the expense account and at all times, the Petty Cash Fund shall be equal to the total cash on hand and un-replenished expenses. The Petty Cash Funds shall not be used to purchase regular inventory/items for stock. x. Foreign Currency Adjustment. Cash deposits in foreign currency and outstanding foreign loans shall be computed at the exchange rate prescribed by the Bangko Sentral ng Pilipinas at balance sheet date. The total cash deposits and foreign loans payable shall be adjusted at the end of each month and any gain or loss on foreign exchange shall be recognized. The subsidiary ledger for foreign currency obligations shall reflect appropriate foreign currency in which the loan is payable. The liability shall be expressed both in the foreign and local currency.