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Accounting for Local Government Units

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Sheena Soriano

on 29 August 2013

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Transcript of Accounting for Local Government Units

Notes
Financial Expenses
Accounting for Local Government Units
Accrual accounting
A modified accrual method shall be used where expenses shall be recognized when incurred and income shall be in accrual basis except for the transactions where accrual basis is impractical or when other methods may be require by law.
ONE FUND CONCEPT
Separate fund accounting shall be done only when specifically required by law or by a donor agency or otherwise necessitated by circumstances subject to prior approval of the Commission.

Special Accounts in General Fund
-Special accounts maintained in the General Fund shall be supported by subsidiary ledgers for the following:

Public utilities and other economic enterprises;
Loans, interest, bond issued and other contribution for specific purpose;
Development projects funded from the share in International Revenue collection; and
Other special accounts, which may be created by law or ordinance

Books Accounts
Ledgers
General Ledgers
Subsidiary Ledgers
-Cash
-Receivables
-Inventories
-Investments
- PPE
-Liabilities
-Income
-Expenses
Depreciation
Depreciable assets shall be depreciated using the straight line method. A residual value equal to 10% of its cost shall be maintained. Depreciation shall start on the second month after the purchase or completion of the property, plant and equipment. Public Infrastructures shall not be charged any depreciation.
Interest Accrual
Whenever applicable and appropriate, interest income and/or expenses shall be accrued and recognized in the books of accounts.

Chart of Accounts and Account Codes
A new coding structure and a new chart of accounts with three-digit account numbering system shall be adopted.

Journals
Cash Receipt Journal (CRL)
Cash Disbursement Journal (CDJ)
Check Disbursement Journal (CkDJ)
General Journal








In addition to the preceding records, the treasurers and disbursing officers, however, shall maintain their respective cash records such as:
Cash Book- Cash in Treasury
Cash Book- Cash in Bank
Cash Book- Cash Advances

The Treasurers/Collectors shall prepare the Report of Collections and Deposits (RCD) daily and the Report of Accountability for Accountable Forms (RAAF) monthly.

Financial Statements
The local Government Units shall prepare the financial statements such as:
Balance Sheet
Statements of Income and Expenses
Statement of Cash Flows

Notes to Financial Statements, being integral part of the financial statements shall accompany the above statements

Appropriations, Allotments and Obligations
Journal entry shall no longer be prepared to record the appropriations, receipt of allotments and incurrence of obligations. In lieu of this, separate registries shall be maintained by the accounting unit to control the appropriations, allotments and obligations for each of the classes of expenditure namely:
Registry of Appropriations, Allotments and Obligations – Capital Outlay (RAAOCO)
Registry of Appropriations, Allotments and Obligations – Maintenance and other Expenses (RAAOMO)
Registry of Appropriations, Allotments and Obligations – Personal Services (RAAOPS)
Registry of Appropriations, Allotments and Obligations – Financial Expenses (RAAFE)

Under new accounting system financial expenses such as bank charges, interest expenses, commitment fees and other related expenses shall no longer be classified as maintenance and other operating expenses.

Perpetual Inventory of Supplies and Materials
It shall be recorded using the perpetual inventory system. Regular purchases shall be coursed through the inventory account and issuance thereof shall be recorded as the transactions take place, except those purchased out of petty cash fund, which shall be for immediate use shall be charged to expense account.

However, there are tangibles account with serviceable life of more than one year but small enough to be considered as PPE. To address this issue, the Commission prescribed the following policies:

Small tangible items with estimated useful life of more than one year shall be recorded as Inventories upon acquisition and expense upon issuance
Other tangible assets not included in the list shall be classified as PPE subject to depreciation

Valuations of Inventory
Inventories shall be valued at cost and computed using the moving average method which is a method of calculating the value of inventory based on weighted average on the date of issue.
Maintenance of Supplies and Property, Plant and equipment Ledger Cards
The accounting unit shall maintain Supplies Ledger Cards by stock number and Plant, Property and Equipment Ledger cards by category of Assets
Construction of Assets
The construction period theory shall be applied for costing purposes. Bonus paid to the contractor for early completion of work shall be added to the cost of project. Liquidated damages charged and paid for the contractor shall be deducted from the cost of the asset and not as an income. Any related expenditures incurred during the construction period shall be capitalized.

Public Infrastructures
Registry of Public Infrastructures (RPI) shall be maintained according to classifications. These are the following:
Registry of Public Infrastructures- Bridges
Registry of Public Infrastructures- Roads
Registry of Public Infrastructures- Plazas etc.

While under the construction, these infrastructures shall be recorded under the “Construction in Progress” account. Upon completion, it shall be recorded as “Public Infrastructures” and shall be transferred to the respective registry at the end of the year. However, completed Public Infrastructures funded out of loan shall be retained in the books of accounts until the loan is fully paid.
Reclassification of Assets
Assets declared by proper authorities as obsolete and unserviceable, including assets no longer used, shall be reclassified as “Other Assets” separate from inventory and plant, property and equipment account
Allowance for Doubtful Accounts
In order to have fair valuation of receivables, allowance for doubtful accounts shall be established and shall be provided only for trade receivables.
Eliminations of Contingent Accounts
Contingent accounts shall no longer used. All financial transactions shall be recorded using the appropriate accounts. Cash shortages and dis allowance shall be recorded under receivable accounts.

Recognition of Liability
Liability shall be recognized at the time goods and services are accepted or rendered and supplier/creditor bills are received.

Accounting for Borrowing and Loans
All borrowings and loans incurred shall be recorded directly to the appropriate liability accounts.
Elimination Corollary and Negative Entries
Corollary entries and negative entries shall no longer be used. Acquisition/Disposition of Assets shall be debited or credited directly to the appropriate asset accounts.

Form and Content of Budget
The local government budget primarily consist of two parts:

The estimates of income certified collectible by the treasurer; and
The total appropriations covering the current operating expenditures and the capital outlays.

The Budget Process
Preparation
The local treasurer shall submit to their local chief executive a certified statement covering the income and expenditure pertaining to the preceding fiscal year; the actual income and expenditures of the first three quarters and the estimated income for the ensuing year. The local treasurer also certifies to the reasonable probability of realizing the estimates of income for the issuing year.
On the hand, each head of office shall submit a statement of the proposed expenditures recommended by him for his office of the local chief executive.
Upon receipt of the statements of income and expenditures and the budget proposals, the local chief executive prepares the budget for the issuing year and submits the same to the local council on or before the deadline set for the submission of the budget.

Legislative Authorization
On or before the end of the fiscal year, the local council approves through the enactment of an appropriate ordinance, the annual budget for each fund of the local government on the basis of the statement of certified estimated income and budget proposals submitted by the local chief executive. The approval by the council of local government unit requires the affirmative votes of the majority of all members thereof.
Execution and Accountability
As the chief financial officer, the treasure of the local government unit shall provide technical in the staff services in execution and accountability phases of the budget process. The projects and activities under each program are performed and pursued in accordance with the functions of the government unit to realize expected results.

Changes in Annual Budget
Changes in the annual budget may be made within the fiscal year by the way of the supplemental budget, which is enacted in the same manner as the annual budget. Whenever any change is made in the budget, the supplemental appropriation ordinance clearly indicates the various items of appropriations effected and the reason for change.

Failure to Enact an Annual Budget
Whenever the local legislative body fails to pass the annual budget before the beginning of the ensuing fiscal year or when the enacted budget is declared unenforceable by the reviewing officer, the annual appropriations for salaries and wages of existing positions, statutory and contractual obligations and essential operating expenses authorized in the annual budget are deemed re-enacted. The disbursements of funds is in accordance with said preceding year budgets until a new budget or revised budget meeting the objections of reviewing officer is approved.

Failure to Enact an Annual Budget
In the implementation of a re-acted budget, the local treasurer excludes from the estimates of income for the preceding year those realized from non-recurring sources should be revised income estimates be less than the aggregate re-enacted appropriations, the treasure shall advise the local council and the legislative body shall make the necessary adjustments within 10 days from the receipt of such advice.

Budgetary Accounting
The fundamental state accounting principles and procedures used in recording the financial transactions and operations of the local government unit is the same to the national government accounting.
Accounting is one of the principal devices through which control of budget execution is exercised. The estimated revenues, receipts and appropriations, in the amount approved by the local legislative body and confirmed by the reviewing officers, are recorded in the books, where these are compared with the actual developments during the period.

Appropriations
- it refers to the authorization made by ordinance, directing the payment of goods and services fro the local government funds under specified conditions or for specific purposes.
Allotments
- is the authorization issued by the local chief executive to the local government unit, which allows it to incur obligations fro specified amounts within the appropriation of the ordinance.
Obligations
- it refers to the amounts committed to be paid by the government unit for any lawful act made by an accountable officer for and in behalf of the local government unit concerned.

SOURCES OF INCOME
Tax revenues, fees and charges.
Share from Internal Revenue Collection.
Share from National Wealth.

Classification
General Income Accounts
Specific Income Accounts

General Income Accounts
Subsidy from other local government units
Subsidy from other funds
Subsidy from special accounts
Sales revenue
Dividend revenue
Interest income
Gain on sale of assets
Sale of confiscated goods and properties
Foreign exchange gains
Miscellaneous operating and service income
Fines and penalties - government service and business operations
Income from grants and donations

Specific Income Accounts
Property taxes
Taxes on goods and services
Other taxes
Other specific income

METHODS OF ACCOUNTING FOR INCOME
Accrual Method
Modified Accrual Method
Cash Basis

Accrual Method
shall be used to record Share from Internal Revenue Collections in the books of accounts.

Modified Accrual Method
shall be used for real property taxes; that is, Real Property Tax Receivable and Special Education Tax Receivable shall be established at the beginning of the year.

Cash Basis
shall be used for all other taxes, fees, charges, and other revenues.

OTHER RECEIPTS
Borrowings
Sale of Property, Plant and Equipment
Refund of Cash Advances
Receipt of Performance/Bidders' Bonds

Borrowings
proceeds of repayable obligations, generally with interest from the bank, national agency, another local government unit, and private sector.

Sale of Property, Plant and Equipment
refers to the proceeds from the sale of fixed assets. Similar to commercial accounting, the applicable asset accounts shall be canceled from the books upon disposal.

Refund of Cash Advances
cash advances for official travel shall be recorded as a receivable from the concerned official or employee as Advances to Officers and Employees. Refunds made shall be credited to the receivable account previously recorded. Cash advances for salaries and wages shall be recorded as debits to the account Payroll Fund, and any refund shall be credited to the same account.

Receipt of Performance/Bidders’ Bonds
performance bond posted by contractor or supplier to guaranty full and faithful performance of their work may be in for of cash, certified check or surety.

ACCOUNTING FOR COLLECTIONS AND DEPOSITS
The local Treasurer/Cashier shall deposit intact all collections with the authorized depository bank daily or not later than the next banking day.
He shall record all deposits made in the cash book.
He shall also prepare an RCD.

DISBURSEMENTS
The settlement of governments payable/obligations by cash or check.
Typical transactions for which disbursements are made:
Personal Services
Maintenance and Other Operating Expenses
Capital Outlay
Financial Expenses

PAYMENTS BY CHECK
Checks shall be drawn only on duly approved disbursements voucher.
It shall be drawn by the local treasurer and countersigned by the local administrator.
In case of the absence or incapacity of the said official this duties shall devolve upon their immediate assistants.

PAYMENTS BY CHECK
In case of municipalities where no administrator has been appointed, checks drawn shall be countersigned by the municipal Mayor.
In case of expenditures appropriated for the operation of the Sanggunian, checks drawn shall be countersigned by the provincial Vice Governor, city Vice Mayor, or Municipal Vice Mayor.

PAYMENTS BY CASH
Disbursements by cash shall be made from a cash advance drawn and maintain in accordance with Commission on Audit rules and regulations.
To account for cash disbursement from regular and special cash advances, the accountable/disbursing officer shall prepare the Report of Disbursement and submit the original and duplicate copy with vouchers/payroll/petty cash voucher to the accountant.
In case of cash advance for travel, the Liquidation Report form shall be prepared by the officers/employees concerned and submitted to the accounting unit as basis for preparation of the JEV to record liquidation.

PAYMENT OUT OF THE PETTY CASH FUND
Petty cash fund shall be maintained under the imprest system.
The fund shall be sufficient for the non-recurring, emergency and petty expenses of the LGU for one month.
Each Petty Cash Voucher shall not exceed P1,000.00

PURCHASE OR CONSTRUCTION OF PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment are charged against appropriation for capital outlay when obligated.
PPE acquired through purchase shall include all costs incurred to bring the asset to location necessary for its intended use.
Classification of PPE:
Agency Assets – those to be used by the LGU concerned.
Public Infrastructures – those to be used by general public.

PURCHASE OR CONSTRUCTION OF PROPERTY, PLANT AND EQUIPMENT
In recording both types of assets, the Construction Period Theory shall be applied.
Construction Period Theory
License fees and bonus paid to contractors for early completion shall be added to the total cost of the project.
Liquidation damages paid by the contractor for the delay shall be deducted from the total cost.

PURCHASE OF SUPPLIES
Purchase of supplies and materials for stock, regardless of whether or not consumed within the accounting period, shall be recorded as assets using the Inventory account following the perpetual inventory method.

MISCELLANEOUS TRANSACTIONS
Transactions that are unique and not recurring in the ordinary course of operations of the government.
The following may be considered miscellaneous transactions:
Loss of cash and property accountability
Cash overage
Dishonored checks
Lost/Destroyed/Stale/Obsolete and Fraudulently Encashed Checks
Settlement of Suspension/Disallowance/Charges
Refund of overpayment

LOSS OF CASH AND PROPERTY ACCOUNTABILITY
This may be due to malversation, theft, robbery, or other causes.
Cash shortage discovered during cash examination conducted by auditors is reported through the Report of Cash Examination within ten working days from the completion of the examination.
In case of shortage in property accountability, the auditor shall issue an audit report.

CASH OVERAGE
In case the cash examination disclosed cash overage, as determined by the auditor, the amount shall be forfeited in favor of the government and an official receipt shall be issued by the collectors/teller.

DISHONORED CHECKS
A check is said to be dishonored when upon presentation for payment, such payment is refused or cannot be obtained.
Upon receipt of the debit memo and the dishonored check from the bank, constructive cancellation of the official receipt covering the dishonored check shall be immediately effected by the treasurer on the copy in his possession.

CANCELLATION OF LOST CHECK ISSUED
A check is considered lost when it is misplaced, waylaid or left behind inadvertently/negligently by the payee or holder in due course or by the custodian/carrier thereof and after diligent search cannot be found or located; or when it is lost due to fortuitous event, theft or robbery
Upon submission of sworn statement from the payee that a check issued by the LGU is lost, the treasurer shall immediately notify the bank concerned for the stoppage of payment.

SPOILED AND STALE CHECK
A check is considered spoil when it is torn, mutilated, defaced or with erasures/errors affecting the genuineness of any material information contained therein.
It is stale if it has been outstanding for over six months from date of issue as prescribed by the depository bank.
A spoiled or slate check shall be marked cancelled on its face.


TRIAL BALANCE AND FINANCIAL STATEMENTS
- is a list of all the general ledger accounts and their balances at a given time. The accounts are listed in the order in which they appear in the ledger, with the debit balances in the left column and credit balance on the right column.

ADJUSTING JOURNAL ENTRIES
- are accounting journal entries made in order to ensure that revenues and expenses are recorded in the period when earned or incurred following the revenue recognition and the matching principles.
There are two types of adjusting journal entries, namely:

Prepayments – These are expenses paid or revenues received before they are incurred or earned, respectively.

Accruals – These are revenues already earned and expenses already incurred in the current period that have not yet been recorded.

PRE-CLOSING TRIAL BALANCE

- is the one prepared from the general ledger accounts after the adjusting journal entries have been journalized and posted. This is also termed as adjusted trial balance.

CLOSING JOURNAL ENTRIES

- is the accounting entries prepared to reduce all balance of nominal accounts to zero at the end of the accounting period in order to prepare the accounts for the next accounting period.

POST-CLOSING TRIAL BALANCE

- is the trial balance prepared at the end of the year after the closing entries are journalized and posted in the general ledgers.


INTERIM REPORTS
- are financial statements required to be prepared at any given period or at a financial reporting period shorter than a full financial year, without closing the books of accounts.

STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS

- this statement, which is an integral part of the financial statements, shows the local government agencies’ responsibility for the preparation and presentation of its financial statements.

YEAR-END FINANCIAL STATEMENTS

1. Balance Sheet – it shows the financial condition of the local government agency at the specific date. It presents information on the assets, liabilities and the government agency.

Statement of Income and Expenses – it shows the income and expenses of the local government agency at the end of the particular period. It presents the detailed information of the income and expenses recognized during the period covered.

Statement of Cash Flows – it shows the local government agency’s cash activities.

Notes to Financial Statements – these are the accountant’s means of explaining the items of explaining the items presented in the main body of the financial statements.

GENERAL FUND

- consists of monies and resources not accruing to any other fund and shall be available for payments of expenditures, obligations and purpose not specifically declared by law as chargeable to or payable from, any other fund, though transfers of monies or resources there from to other funds of local government may be made by proper appropriation.

SPECIAL EDUCATION FUNDS

- consist of the respective shares of provinces, cities and municipalities in the proceeds of the additional one percent (1%) tax on the assessed value of real property for education purposes under the Real Property Tax Code. This amount accruing to special education fun shall be automatically released to the local school.

In case of provinces, the proceeds of the special education fund shall be divided equally between the provincial and municipal school boars, and municipal school boards, and allocated as determined and approved by the local school boards concerned intended only for the following purposes:

Operation and maintenance of public schools.

Construction and repair of school buildings, facilities and equipment

Educational research

Purchase of books and periodicals

Sports development

BASIS OF RECORDING SPECIAL EDUCATION TAX

Based on Real Property Tax Account Register/Taxpayer’s index card, the Special Education Tax Receivable shall be established at the beginning of the year, where the treasurer shall furnish the chief accountant with a duly certified list of the name of taxpayers and the amount due and collectible for the year. Based on the list, the chief accountant shall record the Special Education Tax Receivable using the Journal Entry Voucher.

In case of delinquencies, payment for special education taxes prior to calendar year 2012, shall be recognized as a direct credit to Special Education Tax Income account.

ACCOUNTING FOR SPECIAL EDUCATION FUND

The treasurer and/or the concerned accountable officers shall maintain separate cashbook for the special education fund. The chief accountant, on the other hand, shall maintain separate registries for appropriation, allotment and obligations and books of accounts. In addition, he shall prepare separate financial reports, such as: Trial Balance, Balance Sheet, Statement of Income and Expenses, Statement of Cash Flows and supporting schedules to be submitted on time. For disbursements, separate set of Journal Entry Voucher shall also be prepared, which shall be numbered in accordance with the prescribed codes.

The duly authorized Allotment and Obligation Slips (ALOBS) which shall form an integral part of the disbursement voucher/payroll, shall be forwarded to the Budget Officer, who will verify and certify the existence of appropriation for the proposed expenditure. This shall then be forwarded to the chief accountant, who shall certify as to obligations of allotments and record in the appropriate Registry of Appropriations, Allotments and Obligations (RAAO). As to cash availability, the treasurer shall certify for the fund in the disbursement voucher and purchase request, including infrastructure projects undertaken in the contract.

For the inventory process, the perpetual inventory method and the moving average of accounting and costing the inventory shall be followed. The general procedures for inventory shall be the same, except separate perpetual inventory records shall be maintained and separate weekly Summary for Supplies and Materials for the fund shall be prepared.

TRUST FUND
Consist of private and public cash received by local government official as trustee, agent or administrator, as a guaranty for the fulfillment of some obligation.
Shall only be used for the specific purpose for which it was intended.

Grants and donation coming from foreign funding institutions, other levels of government and private institution/individuals for specific projects/purpose shall accrue to the Trust Fund. The equity of the local government unit on projects under a trust agreement shall also accrue to the Trust Fund. These receipts shall be credited to the Government Equity account.

ACCOUNTING FOR TRUST FUND
Cash collections for the Trust Fund shall be acknowledged by issuance of official receipt. Collection procedures shall be the same as that prescribed for collections in the general fund. In case of receipt through the bank, the accountant shall draw a JEV based on the bank credit memo.

Disbursement from trust fund shall be in accordance with the specific purpose stated in the trust agreement/approved budget between the trustor and trustee (LGU) as certified by the chief accountant as to existence of funds held in trust.

As for the expenditures on infrastructure projects of the trust fund, the construction period theory shall be applied. For other projects, expenditures shall be debited to appropriate expenditures account. Expenditures shall be closed to Government Equity account at the end of the year or upon project completion, whichever comes first.

For the inventory process, the perpetual inventory method and the moving average of accounting and costing the inventory shall be followed. The general procedures for inventory shall be the same, except separate perpetual inventory records shall be maintained and separate weekly Summary for Supplies and Materials for the fund shall be prepared.

THE NEW CODING STRUCTURE
CODING
A systematic assignment of numbers to distinguish items within a given classification for each other.

Designed to achieve uniformity in accounting and reporting facility in consolidating financial data; and adaptability to computerization. A series of numbers is assigned to provinces, cities, and municipalities. The coding structure for Local Government Unit codes shall be:

SPECIAL ACCOUNTS IN GENERAL FUNDS
Local Government Units shall maintain special accounts, through the use of complete subsidiary ledgers for each number of the same economic enterprises, if any, in the General fund for following:

Public utilities and other economic enterprises
Loans, interests, and bond issues and other contributions for specific purposes
Development projects funded from the share of the local government concerned from the Internal Revenue Collections
Other special accounts which may be created by law or ordinance.

ACCOUNTING FOR SPECIAL ACCOUNTS
Special accounts shall be maintained through the use of complete subsidiary ledger. In case the local government unit maintains a number of the same economic enterprise, each shall have its own set of subsidiary ledger. Accounting procedures for the operations of the special accounts are adopted for the following purposes:

1. To determine whether the income generated by the public utilities or economic enterprises are sufficient to meet their respective operating cost.

2. To provide adequate information as to assets, liabilities and equity of each special account.

Revise Rates of Representation and Transportation Allowance (RATA)
Local Budget Circular No. 2009-91 dated March 27, 2009 is issued to implement the revised RATA rates authorized under Section 44, General Provisions of R.A. No. 9524, the General Appropriations Act, for local government officials and employees and to prescribe the funding source thereof. The grant of RATA at the revised rates is subject to the 45%/55% limit on personal services expenditures mandated under Section 325(a), R.A. No. 7160, Local Government Code of 1991. The following officials and employees of provincial, city and municipal governments are equated to national government officials and employees entitled to RATA under General Appropriations Act:



1. Local Chief Executive (i.e., Provincial Governors, City Mayors, and Municipal Mayors)

2. Local Vice Chief Executive (i.e., Provincial Vice Governors, City Vice
Mayors, and Municipal Vice Mayors)

3. Sangunian Members (i.e., Sangunian Panlalawigan Members, Sangunian Panglunsod Members, Sangunian Bayan Members)

4. Department Heads (i.e., Provincial Government Department
Heads, City Government Department Heads, and Municipal
Government Department Heads)

5. Assistant Department Heads (i.e., Provincial Government Asst.
Department Heads, City Government Asst. Department Heads, and Municipal Government Asst. Department Heads)
6. Chiefs on Hospitals

7. Division Chiefs in Special Cities

THANK YOU FOR LISTENING!
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