Chapter 1

Overview of Government Accounting

Learning Objectives
1. Differentiate government accounting from the accounting for business entities.
2. State the government entities charged with accounting responsibility.
3. Describe briefly the GAM for NGAs.
4. State the basic principles used in government accounting.
5. State the recognition criteria for assets.

Introduction
"Government accounting analyzing, accounting, recording, classifying, summarizing and communicating
all transactions involving the receipt and disposition of government funds and property, and interpreting
the results thereof." (State Audit Code of the Philippines, P. D. No. 1445, Sec. 109)
The objectives of government accounting are:
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.
(P. D. No. 1445, Sec. 110)

Like the 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
1. Government resources shall be utilized efficiently and effectively in accordance with the law. The head
of a government agency is directly responsible in implementing this policy and is primarily responsible
for government resources entrusted to his agency. Those who are entrusted with the possession of
government resources are directly responsible to the head of the agency.
2. All those who are exercising authority over a government agency shall share fiscal responsibility.
(State Audit Code of the Philippines, P.D. No. 1445)

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 shall be properly bonded. (P.D.
No. 1445 and E.O. No. 292)

2. The transfer of government funds from one officer to another shall, except as allowed by law, be made
only after the authorization of the COA. The transfer shall be properly documented in an invoice and
receipt. (P.D. No. 1445)

Liability over Government Funds and Property:

1. The unlawful use of government resources shall be the personal liability of the employee found to be
directly responsible therefor.
2. Every accountable officer shall be liable for all losses resulting from the unlawful use or negligence in
the safekeeping of government resources.
3. No accountable officer shall be relieved from liability merely because he has acted under the direction
of a superior officer in unlawfully utilizing the government resources entrusted to him, unless before that
act, he has notified the superior officer, in writing, that the utilization is illegal. The superior officer shall
be primarily liable while the accountable officer who fails to serve the required notice shall be secondarily
liable.
4. An accountable officer shall immediately notify the COA for any loss of government funds from
unforeseen events (force majeure) within 30 days. Failure to do so will not relieve the officer of liability.
(P.D. No. 1445)

Main concept:
Government resources must be utilized efficiently and effectively in accordance with the law.
Government officials are responsible in implementing this policy, are accountable for the
government resources in their custody, and are liable for any loss.

The Unsung Heroes

The number of Filipinos going abroad to seek employment is increasing every year. In 2012, it was
estimated that about 10.4 million Filipinos worked abroad. 1 Almost all Filipinos know at least one
other Filipino- a family member, a relative, or a friend, who is working abroad. We refer to our
overseas workers as unsung heroes. How so?

This is mainly because overseas workers remittances greatly increase the spending in our country,
and the more money is spent. the more taxes the government collects. A portion of the money we
spend on almost everything (food, clothing, bills, entertainment, medicine, rentals, etc.) represents
payment for tax. Taxes are the main source of government funds used in developing our country.
 Working abroad entails great sacrifices, not only for the overseas worker but also for family
members left at home. We need efficient and effective utilization of our government resources so that
someday our countrymen can have better options of finding a livelihood in our country.

Accounting, as a tool for planning and control, contributes to the achievement of this goal by
providing information that is useful in planning the sources and uses of government funds and
comparing actual results with expected results to promote the efficient and effective utilization of
government funds.
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Accounting responsibility
The following offices are charged with government accounting responsibility:
 a. Commission on Audit (COA)
 b. Department of Budget and Management (DBM)
 c. Bureau of Treasury (BTT)
 d. Government agencies

Commission on Audit (COA)

The Commission on Audit (COA):
a. Has the exclusive authority to promulgate accounting and auditing rules and regulations.
b. Keeps the general accounts of the government, supporting vouchers, and other documents.
c. Submits financial reports to the President and Congress.

Department of Budget and Management (DBM)

The Department of Budget and Management (DBM) is responsible for the formulation and
implementation of the national budget with the goal of attaining the nation's socio-economic objectives.

Bureau of Treasury (BTr)

The Bureau of Treasury (BTr) functions under the Department of Finance and is the cash custodian of the
government. The BTr is authorized to:
a. Receive and keep national funds and manage and control the disbursements thereof; and
b. Maintain accounts of financial transactions of all national government offices, agencies and
instrumentalities.

Government Agencies
Government agency refers to any department, bureau, or office of the national government, or any of its
branches and instrumentalities, or any political subdivision, as well as any government owned or
controlled corporation (GOCC), including its subsidiaries, or other self-governing board or commission
of the government. (P.D. No. 1445)
 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 of the BTr and the budget records of the COA and DBM.
Government agencies are required by law to have accounting units/divisions/departments.
* Even a barangay (the smallest administrative division in the Philippines) is required to have an accounting unit, e.g., the
barangay's "bookkeeper."

Financial Reporting System of National Government

 Entity- refers to a government agency, department, or operating/field unit.

 Financial Reporting - is the process of preparation, presentation and submission of general-
purpose financial statements and other reports. The objective of financial reporting is to provide
information about the entity that is useful to users for accountability purposes and decision-
making.

The GAM for NGAS

An "old" government accounting system had been used for about five decades before it was replaced by
the New Government Accounting System (NGAS) in 2002. However, on January 1, 2016, the NGAS was
replaced by the Government Accounting Manual for National Government Agencies (GAM for NGAs).
The GAM for NGAs was promulgated primarily to harmonize the government accounting
standards with international accounting standards, particularly the International Public Sector
Accounting Standards (IPSAS). The IPSASs are based on the International Financial Reporting
Standards (IFRS).
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.

Legal basis
The GAM for NGAs is promulgated by the Commission on Audit (COA) based on the authority conferred
to it by the Philippine Constitution:

Relevant provision of law:

 "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, or
unconscionable expenditures, or uses of government funds and properties." (Art. IX-D. Sec. 2(2).
Philippine Constitution)

Coverage
The GAM for NGAS provides the basic concepts to be used in:
a. Preparing general purpose financial statements in accordance with the Philippine Public Sector
Accounting Standards (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
The GAM for NGAs 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.
(GAM for NGAS; Chapter 1, Sec. 3)

Basic Accounting and Budget reporting Principles

The financial records and reports of government entities shall comply with the following:
1. Philippine Public Sector Accounting Standards (PPSAS) and relevant laws, rules and regulations;
2. Accrual basis of accounting:
 Under the accrual basis of accounting, transactions are recognized when they occur (and not only
when cash is received or paid). Therefore, transactions are recognized in the periods to which they relate.
3. Budget basis for presentation of budget information in the financial statements;
4. Revised Chart of Accounts prescribed by COA;
5. Double entry bookkeeping;
6. Financial statements based on accounting and budgetary records; and
7. 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 Grants Fund
04 Special Account-Foreign Assisted/Foreign Grants Fund
05 Internally Generated Funds
06 Business Related Funds
07 Trust Receipts

For example, separate accounting books (Journals and Ledgers) and budget registries shall be
maintained for Regular Agency Fund. Another separate accounting books and budget registries shall be
maintained for Foreign Assisted Projects Funds, and so on.

Qualitative Characteristics of Financial Reporting

Information reported shall meet the qualitative characteristics. Qualitative characteristics are the
attributes that make information useful to users.
a. Understandability- information is understandable when users can reasonably be expected to
comprehend its meaning.
Accordingly, users are assumed to have.
i. reasonable knowledge of the entity's activities; and
ii. willingness to study the information.
Information about complex matters is not excluded simply because it may be too difficult for
certain users to understand.
b. Relevance- Information is relevant if it can assist users in evaluating past, present or future events
or in confirming or correcting past evaluations. In order to be relevant, information must also be
timely.
c. Materiality- Materiality affects the relevance of information. Information is material if its
omission or misstatement could influence the decisions of users. Materiality depends on the
nature or size of the item or error, judged in the particular circumstances of its omission or
misstatement.
d. Timeliness- Information loses its relevance if there is undue delay in its reporting. The
complexity of an entity's operations is not a sufficient reason for failing to report on a timely
basis.
 e. Reliability- reliable information is free from material error and bias, and can be depended on by
users to represent faithfully that which it purports to represent or could reasonably be expected to
represent.
Trade-offs between Relevance and Reliability
To provide timely information, it may be necessary to report before all aspects of a transaction are
known, thus impairing reliability. Conversely, if reporting is delayed until all aspects are known,
the information may be highly reliable but of little use to users who need to make decision in the
interim. To achieve a balance between relevance and reliability, the overriding consideration is
how users' needs are best satisfied.
f. Faithful Representation- For information to represent faithfully transactions and other events, it
should be presented in accordance with the substance of the transactions and other events, and not
merely their legal form.
g. Substance Over Form - The substance of transactions or other events is not always consistent
with their legal form. If information is to represent faithfully the transactions and other events
that it purports to represent, it is necessary that they be accounted for and presented in accordance
with their substance and economic reality, and not merely their legal form.
h. Neutrality- Information is neutral if it is free from bias. Information shall not be selected or
presented in a manner that is designed to influence the user's decision in order to achieve a
predetermined outcome.
i. Prudence- is the exercise of a degree of caution when making estimates under conditions of
uncertainty, such that assets or revenue are not overstated and liabilities or expenses are not
understated. However, prudence does not allow the creation of hidden reserves or excessive
provisions, the deliberate understatement of assets or revenue, or the deliberate overstatement of
liabilities or expenses, because the financial statements would not be neutral and, therefore, not
reliable.
j. Completeness- Information should be complete within the bounds of materiality and cost.
k. Comparability- Information is comparable when users are able to identify similarities and
differences between that information and information in other reports. Comparability applies to
the comparison of financial statements of different entities and comparison of the financial
statements of the same entity over different periods. Comparability requires that users must be
informed of the entity's policies, changes to those policies, and the effects of those changes and
that financial statements show corresponding information for preceding periods.
(PPSAS 1/GAM for NGAs, Chapter 19, Sec. 6)

Components of 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)
The complete set of general-purpose financial statements consists of:
a. Statement of Financial Position;
b. Statement of Financial Performance;
c. Statement of Changes in Net Assets/Equity;
d. Statement of Cash Flows;
e. Statement of Comparison of Budget and Actual Amounts; and
 f. Notes to the Financial Statements, comprising a summary of significant accounting policies and
other explanatory notes.
Notice that the financial statements listed above are similar to those of a business entity. However, the
financial statement unique to a government entity is the "Statement of Comparison of Budget and Actual
Amounts" (letter 'e'). We will elaborate on this later.

Elements of the financial statements

ASSETS
Assets - are resources controlled by an entity as a result of past events, and from which future economic
benefits or service potential are expected to flow to the entity.
The key features of an asset are:
a. The benefits must be controlled by the entity;
b. The benefits must have arisen from a past event; and
c. Future economic benefits or service potential must be expected to flow to the entity.

 Control means the ability to benefit from an asset or prevent others from benefitting from that asset.
Possession or ownership normally evidences control. However, this is not always true. For example,
under a finance lease, the lessor retains legal ownership over the leased asset but control is transferred to
the lessee.
 Benefit means the ability to use, exchange, lease, sell, or use the asset to settle liabilities, or distribute
it to owners.

Indicators of future economic benefits:

a. distinguishable from the source of the benefit i.e. the particular physical resource or legal right;
b. does not imply that assets necessarily generate cash flows, the benefits can also be in the form of
'service potential';
c. in determining whether a resource or right needs to be accounted for as an asset, the potential to
contribute to the objectives of the entity should be the prime consideration;
d. capacity to contribute to activities/objectives/programs; and
e. the fact that an asset cannot be sold does not preclude it from providing future economic benefits.

 Past event - A transaction or event giving rise to control of future economic benefits must have
occurred. A mere intention to acquire assets in the future does not result to the recognition of assets in
the present.
Recognition of an Asset
An asset is recognized when:
a. it is probable that the future economic benefits will flow to the entity; and
b. the asset has a cost or value (e.g., fair value) that can be measured reliably.
Probable inflow of future economic benefits:
a. The chance of benefits arising is more likely rather than less likely (e.g. greater than 50%).
b. Benefits can be expected on the basis of available evidence or logic.
Reliable measurement:
a. Valuation method is free from material error or bias.
b. Faithful representation of the asset's benefits.
c. Reliable information will, without bias or undue error, faithfully represent those transactions and
events.

LIABILITIES
Liabilities- are present obligations of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits or service
potential.

EQUITY
Net assets/equity- is the residual interest in the assets of the entity after deducting all its liabilities.

REVENUE
Revenue- is the gross inflow of economic benefits or service potential during the reporting period when
those inflows result in an increase in net assets/equity, other than increases relating to contributions from
owners.
 Contributions from owners- are future economic benefits that have been contributed to the entity by
external parties which do not result to liabilities of the entity and for which the contributor obtains
interest in the net assets of the entity (ie., right to dividends and right to net assets in cases of
liquidation).
Revenue funds - comprise all funds derived from the income of any agency of the government and
available for appropriation or expenditure in accordance with law. (Section 3, P.D. No. 1445)

EXPENSES
Expenses- are decreases in economic benefits or service potential during the reporting period in the form
of outflows or consumption of assets or incurrence of liabilities that result in decreases in net
assets/equity, other than those relating to distributions to owners.
 Distributions to owners- are future economic benefits distributed by the entity to its owners, either as
a return on investment or as a return of investment.

Chapter 1 Summary:

 Aside from providing information that is useful in making economic decisions, government
accounting also aims to demonstrate the accountability of the entity for the resources entrusted to
it.
 The following are charged with government accounting responsibility: COA, DBM, BTr and other
government agencies.
 The GAM for NGAs provides the principles and procedures to be applied in the financial reporting
of government entities. It was promulgated by the COA primarily to harmonize the government
accounting standards with international standards.
 Basic principles: Compliance with PPSAS and other relevant laws, Accrual basis, Budget basis,
Revised chart of accounts, Double entry, Financial statements based on accounting and budgetary
records, and Fund cluster accounting.
 Qualitative characteristics: Understandability, Relevance, Materiality, Timeliness, Reliability,
Faithful representation, Substance over form, Neutrality, Prudence, Completeness, and
Comparability.
 An item is recognized as asset if all of the following criteria are met:
1. the item meets the definition of an asset;
2. probable inflow of future economic benefits; and
3. reliable measurement of cost or other value (e.g., fair value).