(The author, an Assistant Commissioner of the Philippine Commission on Audit, is in Charge of the Commission's professional development program. A certified public accountant, she is a member of the committee that conceptualized, designed and developed the NGAS and is also a member of the steering committee that is overseeing the computerization of the System. She is a holder of a master's degree in public administration from the University of the Philippines.)
It is said that accounting is “the language of business.” It is a means of reporting the financial facts of a business life, whether in government or in the private sector. It is for this reason that the users of the information must understand the financial reports, which the accounting system produces. The INTOSAI Accounting Standards Framework identifies these users. And to address their needs, the Framework also identifies the following objectives:
To the extent practicable, government financial reports should provide users with the information they need;
Government financial reports should help users understand the size of the government, the nature and scope of its activities and its financial position;
Government financial reports should help users understand and forecast how the Government finances its activities;
Government financial reports should help users understand and forecast the effects of the government activities; and
Government financial reports should help users determine whether the government did what it said it would do and the costs of its activities.
When these objectives are met, we can rightfully say that government accounting is the “language of governance.”
During the commonwealth period, administrative officials accountable for government funds and/or property in the government were guided by the Revised Manual of Instructions of Treasurers (RMIT) 1939 edition for the local government sector and by the National Accounting and Auditing Manual (NAAM) for the national government sector. The former was revised in 1955 when the then General Auditing Office (GAO) issued the Revised Manual of Instructions to Treasurers of Provinces, Cities and Municipalities which took effect on the 1st day of July of that year. On the other hand, the NAAM was revised in 1963. The government employed at least three major accounting systems. The national government used the government system prescribed by the NAAM. Accounting in the local government was governed by the RMIT. Some government-owned or controlled corporations adopted the system prescribed by the NAAM while others adopted the systems used by similar entities in the private sector. The accounting systems were also governed by the rules and regulations issued by the then General Auditing Office, the Budget Commission, the Department of Finance and the applicable rules issued by the Central bank of the Philippines where appropriate. (GOPEZ, 1977).
Since 1900 the supervision over accounting was changed at least ten times from the Insular Treasurer to the Auditing Office to the Budget Commission then to the various departments, bureaus and instrumentalities. (Please refer to Annex 1.) These changes in supervision may have caused the problems in coordination, consistency and orientation that plagued the system. (Gopez 1977) When Francisco S. Tantuico, Jr. was appointed Chairman of the Commission on Audit (COA formerly the GAO) in 1975, he initiated reforms to address these problems starting with the issuance of Presidential Decree 898. This Decree provided for the restructuring of the COA and lodged supervision over accounting with the Commission. (Please refer to Annex 2.) It may be of interest to note that Section 2(2), Article IX-D of the 1987 Philippine constitution affirmed this authority where it provides that:
“The Commission shall have exclusive authority, subject to the limitations of this Article, to define the scope of its audit and examination, establish the techniques and methods required therefore, 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.”
The development of a standard government chart of accounts (SGCA) was undertaken. It was prescribed for use on November 14, 1978 by the national government sector (NGS), the local government sector (LGS) and the government-owned or controlled corporations (GOCCs) except for government corporations with unique accounting systems and the use of the Chart may not be feasible. The SGCA was designed to ensure (1) uniformity in accounting and reporting; (2) facility in consolidating financial reports; and (3) adaptability to computerization (Tantuico, Pobre and Magno.) Although a number of account titles were introduce, some practices which “defy normal accounting logic” (Carague, 2001) have remained.
The accounting system with the SGCA served the needs of the times. But the functions and responsibilities of public managers had become increasingly more complex They needed a more management-focused and understandable information to help them in managing the resources which have become scarcer and scarcer while the needs for them have grown by leaps and bounds. The public managers need information from the accounting system for a more effective financial management. Their needs have to be addressed taking into consideration that many of them lack technical knowledge in accountancy, hence the need for simplicity and understandability. And to ensure commonality in the interpretation of the information, there is a need for the System to follow the policies and procedures set by standard-setting organizations.
In a speech he delivered in a convention of the Philippine Institute of Certified Public Accountants (PICPA), the new Chairman of COA, Mr. Guillermo N. Carague, said:
“I believe that to a certain extent, government inefficiency is due to the inability of the present accounting system to provide the information needs of government managers and supervisors. To them, therefore, accounting is not a tool of management and a partner in effective governance, but is simply a necessary adjunct, tolerated by them because it is required by law, even if it sometimes makes life miserable for them because of the red-tape it entails.”
Because of these concerns, when he assumed office on February 21, 2001 Chairman Carague immediately embarked on two main projects: the government Accounting Simplification & Computerization Project for the design and development of the New Government Accounting System (NGAS) and the COA Organizational Restructuring. The manual version of the NGAS was prescribed under COA Circular No. 2001-004 dated October 30, 2001 to take effect January 1, 2002 for use by the NGS and the LGS after an intensive and nationwide training in November and December. The organizational restructuring took effect on July 1, 2002.
The objectives of the NGAS are: (1) simplify government accounting; (2) conform to international accounting standards; and (3) generate periodic and relevant financial reports for better monitoring of performance. We will discuss the policies to achieve these objectives. These policies are embodied in separate manuals of the NGAS for the NGS and for the LGS and for the LGS. Because of the difference in some of the requirements, it was decided that two manuals should be prepared embodying the policies for each sector. However, there is only one new chart of accounts and there are policies that are common to both.
The development of the NGAS started with the revision of the SGCA. The coding structure was simplified by changing from six-digit codes to three-digit codes with a capacity for responsibility centers, which may be an organizational unit, location/place or a project. There are more account titles because categorizations were made to make them more descriptive of the nature of the account. This will facilitate analysis and determination of accountability and ensure accuracy and appropriateness of information. For example under the old system, petty cash fund, cash for the payroll fund, cash to an employee for travel expenses and cash transferred to an implementing agency were all recorded as Cash – Disbursing Officer. The account was not properly classified and categorized resulting to inappropriate information.
Under the fund accounting concept followed in the past, each fund is an independent accounting entity with self-balancing group of accounts. The NGAS adopts 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. Although it may not be practical for the manual system, the concept will need only one set of books of accounts with the appropriate ledger accounts for specific projects using the project or the responsibility center code.
The National Treasury is the bank of all government agencies. It maintains its own account with a depository bank. The NGS remit their collections to this account. It also maintains accounts when transferring cash for the use of the different agencies through the Notice of Cash Allocation (NCA). The NCA is an advice that cash is credited to the account of the agency in an authorized depository bank. Both the National Treasury and the NGS maintained reciprocal accounts. Records of the commission show that the national clearing account have remained not reconciled. Under the NGAS, collections which cannot be used and which have to be remitted to the National Treasury are recorded separately. They are taken up as a liability of the agency to the treasury. The NCA is taken up as Cash-National Treasury, Modified Disbursement System (please see also next topic).
Under the old system, the COA in pursuant to its mandate to “keep the general accounts” journalized appropriations. Upon receipt of the advice, allotments were journalized by the NGS. Obligations were recorded in the books as soon as the obligations were incurred whether or not the goods were delivered or the services were rendered. Accountants tended to issue “blind” certifications to record obligations, which have not actually been incurred to avoid the reversion of the unused allotments to the national treasury which was required at year-end. This resulted in the overstatement of the liability account shown in the balance sheet. This practice will be stopped although the NGAS still follows obligation accounting. Appropriations, allotments and obligations incurred are no longer journalized but are recorded in separate registries. The commission, the Department of Budget and Management and the national Treasury maintain these registries where appropriate to monitor the appropriations, allotments and the NCA released and utilized. Also, the liability will only be recorded when the goods are accepted and/or the services are rendered.
Under the old system, the receipt by the NGS of the NCA was not journalized but disbursements were entered in the journals. Hence, the ledger showed a cash account with no debits but with credits for the disbursements. Now, upon receipt of the NCA, the account Cash-National Treasury, Modified Disbursement System is debited while the account Subsidy Income from National Government is credited. This in effect records the share of the agency in the income of the national government.
Under the new accounting system, the matching principle will be applied. Recording of disbursements when expenditures apply to more than just the accounting period will use the asset method. The expense shall be recorded upon utilization/consumption. Purchases of supplies and materials for stock, regardless of whether or not they are consumed within the accounting period, shall also be recorded as Inventory following the Perpetual Inventory Method. Under this method, the moving-average unit cost is used; this provides a new unit cost after each purchase and/or when items are issued/used. As in prepaid expenses, the expense shall be taken up upon utilization/consumption. These methods of recording are not only in pursuant of a generally accepted accounting principal, they will also strengthen controls over the assets.
Since the purchase/construction of plant, property and equipment such as, computes, motor vehicles, buildings, etc., were recorded in the past as expense there was a need for a “corollary” entry taking up the fixed asset account while crediting invested surplus. Under the new system, these fixed assets are immediately recorded as such, whether the asset is paid for in cash or received on account. And because of the need for showing the true financial condition of the agency, depreciation accounting is followed. Matching principle is applied through the gradual allocation of the cost of the use of the property, plant and equipment for the accounting period.
The matching principle is also followed for accounts receivables. In the past, the books of accounts showed receivables, which have remained unadjusted for years. Now, regular adjustments to bad debts expense will be made although the actual condonation of the accounts will follow the existing law, Section 36, presidential Decree 1445, authorizing the COA to settle claims or liability to any government agency.
The construction period theory is applied. All expenses such as interests license fees, etc., during the construction period are capitalized. This ensures the accounting for the true cost of the construction. And so that the financial statements will be reflective of the operations of the agency, the balance sheet statement will show only the property, plant and equipment of an agency that are used for its operations. Thus infrastructures that are for public use such as roads, bridges, waterworks, etc. shall be transferred upon completion of the construction from the books of the agency which constructed these assets to separate registries. A summary of these public infrastructures is prepared annually to be included in the notes to the financial statements. Likewise, obsolete and unserviceable assets as well as assets no longer used are reclassified to “other asset” account. These will not be subjected to depreciation.
It was the practice to immediately take up the in-progress accounts when obligations were incurred upon the agency’s entering into contract although there was no actual construction being undertaken. This will be stopped and the in-progress account will be recorded only when bills are received and accomplishments have been determined.
Recording of income uses the accrual and/or modified accrual method. In the LGS, accrual method is used in recording its share of the internal revenue collections since the amount is already determined at the start of the year. Although the cash method is used for taxes, fees, charges and other revenues due to the impracticality of the accrual method, the modified accrual method is used in recording real property taxes. This will facilitate the evaluation of the performance of property tax collection by the LGS.
In the old system, the proceeds from borrowings and loans were taken up as income. The rationale was the fundamental principle which requires that “No money shall be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory authority.” (Section 4, PD such proceeds can only be used when the amount is included in the appropriation law passed by Congress or by the local government legislative body. Thus the fundamental principle is adhered to despite the change in the policy.
Surplus accounting was adopted under the old system. The difference between the current assets and the current liabilities was categorized as the current surplus. This represented the equity of the government available for appropriation. When the appropriation bill was approved, the account is charged and a credit to appropriation surplus was made in the commission’s books of general accounts. The difference between the fixed assets and fixed or long-term liabilities was categorized as invested surplus. This government’s equity was not available for appropriation. Under the NGAS, these two surplus accounts are classified as Government Equity, a generally accepted account title.
A two-column pre/post closing trial balance, or the trial balance of balances, is adopted in lieu of the four-column trial balance, or the trial balance of totals, that was prepared in the past. The change also made unnecessary the practice in journalizing adjusting and/or correcting entry by enclosing in parenthesis the same debit or credit as the original entry to indicate deductions. The entry called negative or “red” entry was originally used to ensure that the ledger footings for the allotments and obligations as shown on the four-money column trial balance did not go beyond the authorized amount. It was, however, applied indiscriminately for all corrections/adjustments. (Gopez, 1977).
Generation of Periodic and Relevant financial Reports for Better Monitoring of Performance.
The best feature of the NGAS, which addresses this objective, is the capacity of the System for responsibility accounting. The new chart of accounts was so structured that codes for responsibility centers have been identified. This will enable the collecting, summarizing and reporting of accounting data relating to the responsibilities of segments/individual units of the agency identified as the responsibility centers. Responsibility accounting is a management accounting concept that enables the System to provide information needed to evaluate the performance of a segment or a unit of the agency as to income and expense over which the manager of that segment or unit has full control and responsibility. It will also provide the facilitative accessibility to cost information and will enable cost monitoring any time. For practical reasons however, responsibility accounting will be implemented by an agency when its accounting system is fully computerized.
In the past, the accounting system produced the balance sheet statement and the statement of operations. The NGAS produces the balance sheet statement the statement of income and expenses and the statement of cash flow. Since the matching principle is followed and depreciation accounting is in place, the balance sheet statement and the statement of income and expense will fairly present the financial condition of an agency at any given time and the results of its financial operations for a period.
The statement of cash flow (SCF) is a new requirement. It summarizes all the cash activities of an agency that include operating, investing and financial activities. It provides information on the cash receipts and payments during the period. It’s primary objective is to give relevant information on the agency’s overall cash position, liquidity and solvency. Using the SCF, managers and other concerned parties could easily assess if the agency could meet its obligations.
Although, these statements and other reports needed by public managers and other concerned parties can be produced by the manual system it will be when the system is computerized that they can be available at the click of the “mouse”.
Eduardo C. Gopez, GOVERNMENT ACCO
presidential Decree No. 898, March 3, 1976
The 1987 Philippine Constitution, Article IX-D
Francisco S. Tantuico, Jr., Hermogenes P. Pobre and Araceli B. Magno, Government Accounting: A SELF-INSTRUCTIONAL APPROACH, ABA Publication, Quezon city, 1980.
INTOSAI Accounting Standards Framework, September 1995.
Guillermo N. Carague, A NEW AND COMPUTERIZED GOVERNMENT ACCOUNTING SYSTEM, a speech delivered during the convention of the Philippine Institute of Certified Public Accountants, July 16, 2001.
Presidential Decree 1445, June 11, 1978.
Manuals on the New Government Accounting System (For the National Government Agencies and for the Local Government Units), September 2002.
Accounting Office under the administration and supervision of the Insular Treasurer.
The second Philippine Commission placed accounting service under the jurisdiction of the Auditing Office.
Accounting service farmed out to different departments, bureaus and agencies of the government.
Commonwealth President Quezon by Executive Order No. 25 created the Budget Commission and gave it administrative jurisdictions on “all functions of the different departments of the government dealing with accounting work”. Subsequently confirmed by law and acted by the National Assembly in September.
Commonwealth Act. No. 320 fused the government auditing and accounting service under the General Auditing Office.
Under the Philippine Executive Commission the auditing and accounting services of the government were placed under the Budget and Auditing Office.
President Osmena, under Executive Order No. 42, returned the accounting services to the jurisdiction of the General Auditing.
The Reorganization Committee transferred back the administrative control and supervision of accounting services to the heads of departments, bureaus, and offices with the Commission of Budget having technical
Republic Act 433 transferred again the Accounting Service to the jurisdiction of the Budget Commission.
Reorganization Plan No. 57-A approved by Congress implemented by Executive Order No. 279 returned the accounting function to the administrative supervision and control of various departments, bureaus and other instrumentalities of the government.
Source: Gopez 1977
The authority and powers of the commission on audit shall extend to and comprehend all matters relating to auditing and accounting procedures, systems, and controls, including inquiry into the utilization of resources and operating performance, the keeping of the general accounts of the government, the preservation of vouchers pertaining thereto, the examination and inspection of the books, records, and papers relating to those accounts; and the audit and settlement of the accounts of all persons respecting funds or property received or held by them in an accountable capacity, as well as the examination, audit, and settlement of all debts and claims of any sort due from or owing to the government or any of its subdivisions, agencies, and instrumentalities. The said jurisdiction extends to all government-owned or controlled corporations and other self-government boards, commissions, or agencies of the government, and as herein prescribed, including non-governmental entities subsidized by the Government, those funded by donations through the government, those required to pay levies or government share, and those partly funded by the government.