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Government Accounting Chapter 7 - Trial Balance, Financial Reports and Statements
Transcript of Government Accounting Chapter 7 - Trial Balance, Financial Reports and Statements
Leader: CRUZ, Julio Miguel L.
Members: BAELLO, Hazelyn D.
BANIQUED, Bhladimir S.
BORBE, Cleofe P.
PANCHO, Renavie Chapter 7: Trial Balance, Financial
Reports and Statements Financial Reporting System New Government Accounting System Two Subsystems:
1.) Preparation and submission of trial balances
and other reports.
2.) Preparation and submission of financial
statements. TRIAL BALANCE - It is a listing of general ledger accounts with their
corresponding debit and credit balances.
- It is used to determine equality of debit and credit
balances after the recording process.
- It may be prepared anytime; usually before financial
statements are prepared.
- A two-money column trial balance is required under
the new system. ADJUSTING JOURNAL
ENTRIES Revenue and expenses are adjusted to reflect economic activities that have taken place, but are
not yet considered when the financial statements were prepared.
To ensure that revenue and expenses are recorded in the period when they are earned or incurred. TWO MAIN TYPES OF
ADJUSTMENTS = Accrued items
= Deferred items ACCRUED ITEMS -These are adjusting entries for economic activities
already undertaken but not yet recorded as asset
and revenue accounts or a liability and
a.) ASSET / REVENUE ADJUSTMENTS
b.) LIABILITY / EXPENSE ADJUSTMENTS ASSET/REVENUE ADJUSTMENTS LIABILITY/ EXPENSE ADJUSTMENTS DEFERRED ITEMS - These are adjusting entries transferring data
previously recorded in asset account to expense
account or data previously recorded in liability account
to revenue account.
a.) ASSET / EXPENSE ACCOUNT
b.) LIABILITY / REVENUE ACCOUNT ASSET / EXPENSE
ACCOUNT LIABILITY / REVENUE
ACCOUNT Eight Steps in the Accounting Cycle: 1.) Analyzing the transactions
2.) Journalizing the transactions
3.) Posting the journal entries
4.) Preparation of Trial Balance
5.) Adjusting the accounts
6.) Closing the accounts
7.) Preparation of Financial Statements
8.) Reversing the accounts PURPOSES 1.) To prove the mathematical equality the
debits and credits after posting.
2.) To uncover errors in journalizing
3.) To serve as basis for the preparation
of the financial statements. WORKSHEET - It is "a columnar sheet of paper on which
accountants have summarized information needed to
make the adjusting and closing entries and to prepare
the financial statements."
- It is also a useful tool for the auditor in the
analysis and examination of the accounts. 1.) Account Title and Code
Columns (Title and Code)
2.) Unadjusted Trial Balance
Columns (Debit and Credit)
3.) Adjustments Columns (Debit and Credit)
4.) Adjusted/Pre-Closing Trial Balance Columns (Debit and Credit)
5.) Closing Entries Columns (Debit and Credit) 6.) Statement of Income and
Expense Columns (Debit and
7.) Post-Closing Trial Balance
Columns (Debit and Credit)
8.) Balance Sheet Columns (Debit
and Credit) Steps in Preparing the
WORKSHEET: 1.) Enter the titles and balances of the ledger accounts in the Pre-Closing Trial Balance Column.
2.) Enter the adjusting entries and the closing entries in the Adjustments Column.
3.) Extend the adjusted account balances in the Post-Closing
Trial Balance column.
4.) Extend the adjusted balances of the expense and income accounts to the Statement of Income and Expenses column.
5.) Extend the adjusted balances of the assets, liabilities and
equity accounts to the Balance Sheet Statement column. Statement of Cash Flows - It is a statement summarizing all the
cash activities of an agency. This
includes the operating, investing and
financing activities of the entity and
provides information on the cash
receipts and cash payments during
the period. Preparation of Statement of Cash Flows -To facilitate the preparation of the Statement of Cash Flows, the use of a Working Paper is encouraged. It shall show the increase or decrease in the cash accounts between two periods. The net increase in cash provided by 1) operating 2) investing and 3) financing activities in addition to the cash balance at the beginning shall equal to the cash balance at the end of the period.
1.) Operating Activities
2.) Investing Activities
3.) Financing Activities Cash flows from Operating Activities Cash Inflows: •Receipt of Notice of Cash allocation (NCA) from the DBM
•Receipt of Notice of Transfer of Allocation to Agency RO/OU from CO
•Cash receipts from all sources of revenues
•Receipt of Inter–agency cash transfers (Due to)
•Cash receipts from the sale of goods or rendition of services
•Cash receipt of interest income, rental income, dividend income, etc.
•Receipt of payment for liquidated damages
•Receipt of refund of deposits
•Receipt of refunds of cash advance or excess payments
•Collection of receivables
•Cash receipt of grants and donations
•Receipt of cash dividends from enterprises (e.g. PLDT) Cash Outflows:
•Payments of accounts payable
•Cash purchase of merchandise for sale
•Cash advances granted for travel
•Inter-agency transfers (Due from)
•Notice of Transfer of Allocation to Agency RO/OU issued by the NGA Main Office to RO/OU and/or attached agencies through Government Servicing Banks
•Return of unused NCA
•Cash payment for operating expenses
•Remittance of taxes withheld not covered by TRA and other deductions (if any)
•Cash purchase of supplies and equipment
•Cash payment of retirement benefits
• Cash payment of claims for damages
• Cash payment for liabilities incurred in operations
• Cash payments for interest Cash flows from Investing Activities: Cash Inflows: •Proceeds from sale of marketable stocks and bonds
•Cash proceeds from the sale/disposal of equipment and other property, plant and equipment
•Redemption of long-term investments or repayment by GOCC/GFI of long-term loans Cash Outflows: •Purchase of property, plant and equipment
•Purchase of land
•Investment in stocks/bonds
•Investment in GOCC/GFI•Exposure as other long-term investments Cash flows from Financing Activities: Cash Inflows: •Cash received from domestic and foreign loans
•Issuance of treasury bills Cash Outflows: •Payment of domestic and foreign loans
•Redemption of treasury bills outstanding
•Payment of cash dividend Notes to Financial Statements - Integral parts of financial statements, which
pertain to additional information necessary for fair presentation in conformity with generally accepted accounting principles.
- It explains the headings captions or amounts in the statements of present information that cannot be expressed in money terms, and description of accounting policies. The Four Types of Disclosure 1. Customary or routine disclosure 2. Disclosure of changes in accounting principles - Changes in accounting principles, practices, or the methods of
applying them, together with the financial effect, and the
justification for the change shall be disclosed in the financial
statements or a note thereto. - Information about measurement bases of important assets, restrictions on assets and government equity, important long-term commitments not recognized in the body of the statements, information on terms of owner’s equity and long-term debt, and certain other disclosures required by pronouncements of the Philippine Institute of Certified Public Accountants, Accounting Standards Council, and regulatory bodies that have jurisdiction are necessary for full disclosure. 3. Disclosure of subsequent events - Disclosure of events that affect the agency directly and that occur between the date of, or end of the period covered by, the financial statements and the date of completion of the statements is necessary if knowledge of the events might affect the interpretation of the statements, even though the events do not affect the propriety of the statements. 4. Disclosure of accounting policies - Description of the accounting policies adopted by the reporting entity is required as an integral part of the financial statements. It is usually captioned "Summary of Significant Accounting Policies", and placed as first item in the Notes. It shall be limited to description of the policies and no quantitative data shall be included. Interim Reports = Interim reports are the financial statements required to be prepared at any given period or at a financial
reporting period without closing the books of accounts. The following interim financial statements shall be prepared and submitted quarterly with the Notes to Financial Statements:
a.) Statement of Income and Expenses;
b.) Balance Sheet; and
c.) Statement of Cash Flows. Worksheet - A worksheet is a tool for accumulating
and sorting information needed for the preparation of the financial statements. It is a columnar sheet used to adjust and close account balances in preparation for the preparation of the financial statements. The format of the worksheet shall be as follows: a.) Account Title and Code columns show the accounts of the General Ledger.
b.) The Unadjusted Trial Balance columns reflect the amount balances of the General Ledger accounts.
c.) Adjustments columns show adjusting journal entries effected for the accounts.
d.) Adjusted/Pre-Closing Trial Balance columns show the balances of all the accounts after adjustments are added/deducted from the balances of accounts in the unadjusted trial balance.
e.) Closing Entries debit and credit columns show the amounts debited and credited to close the nominal accounts.
f.) Statement of Income and Expenses columns show all the debit and credit amount balances of the nominal accounts (subsidies, income and expenses) and intermediate accounts.
g.) Post-Closing Trial Balance columns show the debit and credit amount balances of all accounts after posting the closing entries.
h.) Balance Sheet columns show all the debit and credit amount balances of all real accounts in the post-closing trial balance (assets, liabilities and government equity). Illustration: (Interest Income)
The interest receivable account of Agency ABC for the interest already earned but not yet collected nor billed as of the end of the year amounts to P2,000. The journal entry will be as follows: Illustration: (Accrued Salaries)
As of year-end, Agency ABC has not yet paid salaries and wages of P25,000, which covers the period December 16-31, 2004. Illustration: (Prepaid Expenses)
Agency ABC has prepaid expenses in the amount of P20,000, portion of which were utilized or consumed in the amount of P5,000. Since the original entry was debited to Prepaid account, the adjusting entry would be: Illustration:
The agency collected an amount of P15,000 for the rent of its facility and originally recorded it as deferred credit to income. At the end of the fiscal year, only P3,000 was earned. The adjusting journal entry to recognize the earned portion would be: This responsibility shall be discharged: - By applying generally accepted state accounting principles
- By maintaining effective system of internal control
- By strict adherence to the chart of accounts prescribed by the Commission on Audit RESPONSIBILITY For FINANCIAL STATEMENTS - The responsibility for the fair presentation and reliability of financial Statement of income and expenses statements rests with the reporting agency’s Management. To achieve fair presentation and reliable information of the financial statements, the following standards shall be observed: = Fairness of presentation
= Usefulness Statement of management responsibility for financial statement - Serves as the cover letter in transmitting the agency’s financial statements to the Commission on Audit, Department of Budget and Management, other oversight agencies and other parties.
- It acknowledges the agency’s responsibility for the preparation and presentation of the financial statements.
- signed by the Director of Finance and Management Office or Comptrollership Office, of the Chief of Office, who has direct supervision and control over agency’s accounting and financial transactions, and the Head of Agency or his authorized representative = Commission on audit- mandated under- Article IX-D of the 1987 Philippine Constitution to submit to the Office of the President and the Congress, and annual report on the financial condition and on the results of operations of all agencies of the government not later than September 30 each year. Types of financial statements Chief Accountants/Head of Accounting Unit
Government Accountancy and Financial Management Information System (GAFMIS) Sector The following yearend financial statements and reports/schedules in PRINTED and DIGITAL copies on or before February 14 of each year pursuant to GAFMIS Circular Letter No. 2003-007 dated December 19, 2003. 1. Pre-closing trial balance
2. Post-closing trial balance
3. Detailed and condensed statement of income and expenses
4. Detailed and condensed balance sheet
5. Statement of changes in government equity
6. Statement of cash flows (DIRECT METHOD)
7. Notes to financial statements
8. Statement of management responsibility 9. Detailed breakdown of obligations
10. Detailed breakdown of disbursements
11. Report of income national government books
12. Report of income regular agency books
13. Regional breakdown of income
14. Regional breakdown of expenses
15. Schedule/aging of accounts payable
16. Schedule/aging of accounts receivable
17. Schedules of public infrastructures/ reforestation projects The new accounting system shall require the following financial statements: Balance sheet
= Taken directly from year-end Post closing trial balance and presented in detailed and condensed form. The balance sheet shall be supported with the following schedules/statements: - Schedules of accounts receivable (SAR)
- Schedules of accounts payable (SAP)
- Schedules of public infrastructures (SPI)
- Other schedules as may be required
= Statement of Allotments, Obligations and Balances (SAOB) shall be submitted to the Commission on Audit by the Budget Officer/Agency Officer concerned. Statement of income and expenses - shows the results of operation/performance of the agency at the end of a particular period. Statement of government equity - shows the financial transactions, which resulted to the change in government equity account at the end of the year. Closing Entries = Revenue, expense, and capital withdrawal (dividend) accounts are temporary accounts that are reset at the end of the accounting period so that they will have zero balances at the start of the next period. Closing entries are the journal entries used to transfer the balances of these temporary accounts to permanent accounts.
= After the closing entries have been made, the temporary account balances will be reflected in the Retained Earnings (a capital account). However, an intermediate account called Income Summary usually is created. Revenues and expenses are transferred to the Income Summary account, the balance of which clearly shows the firm's income for the period. Then, Income Summary is closed to Retained Earnings. The sequence of the closing process is as follows:
1. Close the revenue accounts to Income Summary.
2. Close the expense accounts to Income Summary.
3. Close Income Summary to Retained Earnings.
4. Close Dividends to Retained Earnings. 1. Close Revenue to Income Summary
= The balance of the revenue account is the total revenue for the accounting period. Since revenue is one of the components of the income calculation (the other component being expenses), in the last day of the accounting period it is closed to the Income Summary account as follows:
Closing Entry : Revenue to Income Summary
Income Summary XXX
= Once this closing entry is made, the revenue account balance will be zero and the account will be ready to accumulate revenue at the beginning of the next accounting period. 2. Close Expenses to Income Summary
= Expenses are the other component of the income calculation and like revenue, are closed to the Income Summary account:
Closing Entry : Expenses to Income Summary
Income Summary XXX
=After closing, the balance of Expenses will be zero and the account will be ready for the expenses of the next accounting period. At this point, the credit column of the Income Summary represents the firm's revenue, the debit column represents the expenses, and balance represents the firm's income for the period. 3. Close Income Summary to Retained Earnings
= The income or loss for the period ultimately adds to or subtracts from the firm's capital. The Retained Earnings account is a capital account that accumulates the income from each accounting period. The Income Summary account is closed to Retained Earnings as follows:
Closing Entry : Income Summary to Retained Earnings
Income Summary XXX
Retained Earnings XXX 4. Close Dividends to Retained Earnings
= Any capital withdrawals (e.g. dividends paid) during the period will reduce the capital account balance, so the withdrawal is closed to Retained Earnings:
Closing Entry : Dividends to Retained Earnings
Retained Earnings XXX
= After closing, the dividend account will have a zero balance and be ready for the next period's dividend payments. Posting of the Closing Entries
= As with other journal entries, the closing entries are posted to the appropriate general ledger accounts. After the closing entries have been posted, only the permanent accounts in the ledger will have non-zero balances.
Post-Closing Trial Balance
= Once the closing entries have been posted, the trial balance calculation is performed to help detect any errors that may have occurred in the closing process. GENERATION OF FINANCIAL STATEMENTS AND SUPPORTING SCHEDULE
= Once the adjusting entries have been made or entered into a worksheet, the financial statements can be prepared using information from the ledger accounts. Because some of the financial statements use data from the other statements, the following is a logical order for their preparation:
* Income statement
* Statement of retained earnings
* Balance sheet
* Cash flow statement Cash Flow Statement
= The cash flow statement explains the reasons for changes in the cash balance, showing sources and uses of cash in the operating, financing, and investing activities of the firm. Because the cash flow statement is a cash-basis report, it cannot be derived directly from the ledger account balances of an accrual accounting system. Rather, it is derived by converting the accrual information to a cash-basis using one of the following two methods:
* Direct method: cash flow information is derived by directly subtracting cash disbursements from cash receipts.
* Indirect method: cash flow information is derived by adding or subtracting non-cash items from net income. Income Statement
= The income statement reports revenues, expenses, and the resulting net income. It is prepared by transferring the following ledger account balances, taking into account any adjusting entries that have been or will be made:
* Capital gains or losses Statement of Retained Earnings
= The retained earnings statement shows the retained earnings at the beginning and end of the accounting period. It is prepared using the following information:
* Beginning retained earnings, obtained from the previous statement of retained earnings.
* Net income, obtained from the income statement
* Dividends paid during the accounting period Balance Sheet
= The balance sheet reports the assets, liabilities, and shareholder equity of the company. It is constructed using the following information:
* Balances of all asset accounts such cash, accounts receivable, etc.
* Balances of all liability accounts such as accounts payable, notes, etc.
* Capital stock balance
* Retained earnings, obtained from the statement of retained earnings Thank You for Listening!!!
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