TRIAL BALANCES, FINANCIAL REPORTS AND STATEMENTS

Financial Reporting System.

This financial Reporting System (FRS) includes the preparation and submission of trial
balances, financial statements and other reports needed by fiscal and regulatory agencies.

The sub-systems are as follows:

(1) Preparation and Submission of Trial Balances and Other Reports
(2) Preparation and Submission of Financial Statements

Trial Balance.

The trial balance shows the equality of debit and credit balances of all general ledger
accounts as of a given period. It is prepared and submitted monthly, quarterly and annually.
At the end of the fiscal year, the pre-closing and the post-closing trial balances shall be
prepared.

PURPOSES. The trial balance is prepared:

(1) to prove the mathematical equality of the debits ad credits after posting;
(2) to uncover errors in journalizing and posting; and
(3) to serve as basis for the preparation of the financial statements.

The pre-closing trial balance shall be prepared after recording the adjusting journal entries in
the General Journal and posting the same to the General Ledger. It shows the adjusted
balances of all accounts as of a given period. This is also described as the adjusted trial
balance.

SECTION 50. Adjusting or Correcting Journal Entries. Under the matching principle, adjustments
shall be made for economic activities that have taken place but are not yet recorded at the time
when the financial statements are prepared. Such adjusting journal entries are made to ensure that
revenues and expenses are recorded in the period when they are earned or incurred. Adjustments
are two main types: accrued items and deferred items.

Adjustment for Accrued Item. It is an adjusting entry for an economic activity already undertaken but
not yet recorded into an asset and revenue accounts or a liability and expense accounts. It requires
asset/revenue adjustments and liability/expense adjustments.
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Asset/Revenue Adjustment. It involves earned revenues not yet recorded as assets and income at the
end of the accounting period. Examples are receivables for revenues already earned but not yet
collected nor billed as of the year end.

Interest Receivables 10301050 500

Interest Income 40202210 500

Liability/Expense Adjustment. It involves expenses, which exist already but remain unpaid at the end
of the accounting period. Examples are salaries, wages and other expenses already incurred but not
yet paid.

Salaries and Wages – Regular 50101010 1 000

Due to Officers and Employees 20101020 1 000

Adjustment for Deferred Items. These are adjusting entries transferring data previously recorded in an
asset account to an expense account, or data previously recorded in a liability account to a revenue
account. It also requires asset/expense adjustments and liability/revenue adjustments.

Asset/Expense Adjustments. These pertains to assets, portion of which shall be recorded as expense
of the agency at the end of the accounting period. Examples are prepaid expenses, bad debts and
depreciation.

(Original entry)

Prepaid rent 19902020 1 000

Cash – MDS, Regular 10104040 1 000

(Adjusting entry)

Rent/Lease expenses 50299050 900

Prepaid rent 19902020 900

Reversion of the unused or utilized Subsidy Income from National Government at year–end due to
the DBM policy that NCA will only be valid within the year of issue except NCA for accounts payable,
which is valid one month after its issuance. There is no need to issue an MDS Check when reverting
the account.

Subsidy from National Government 40301010 100

Cash – MDS, Regular 10104040 100

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SECTION 51. Other Adjustments. The following adjustments shall also be made (if applicable) for
fair presentation of the results of operation of the entity in the financial statements:
(a) Unused NCA (National)
(b) Petty Cash Fund
(c) Unreleased Commercial Checks
(d) Allowance for/Accumulated Impairment Losses of asset accounts
(e) Write-down of Inventories
(f) Correction/Reclassification Entries
(g) Adjustment for reversal of Impairment Losses
(h) Depreciation Expense
(i) Exchange differences on foreign currency
(j) Other adjustments

Closing Journal Entries. Closing journal entries are general entries which close out the balances of
all nominal/temporary and intermediate accounts at the end of the accounting period. The nominal
and intermediate accounts that shall be closed at the end of the accounting period are as follows:

(1) Close the balance of the Subsidy Income from National Government account to Revenue and
Expense Summary account.

Subsidy from National Government 40301010 1,000

Revenue and Expense Summary 30301010 1,000

(2) Close the balance of all income accounts to Revenue and Expense Summary account.

Other business Income 40202990 500

Other gains 40501990 400
Revenue and Expense Summary 30301010 900

(3) Close the balance of all expense accounts to Revenue and Expense Summary account.

Revenue and Expense Summary 30301010 800

Salaries and Wages-Regular 50101010 800

(4) Close the balance of the Revenue and Expense Summary account to the Accumulated Surplus
account.

Revenue and Expense Summary 30301010 1 100

Accumulated Surplus/Deficit 30101010 1 100

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(5) Close Public Infrastructures or Reforestation Projects accounts to Accumulated Surplus account
and transfer the corresponding amount to the respective registries.

Accumulated surplus/Deficit 30101010 10 000

Other Infrastructure Assets 10603990 4 000
Land Improvement, Reforestation Projects 10602020 6 000

For the purpose of preparing the financial statements for the first, second and third quarters, the
closing entries (numbers 1 to 4) shall be prepared using the worksheet.

The Post-Closing Trial Balance.

The Post-Closing Trial Balance shall be prepared after recording the closing journal entries in
the General Journal and Posting to the General Ledger. It contains a listing of all general
ledger accounts that remains open after the closing process is completed.

GENERATION OF FINANCIAL STATEMENTS

Generation of Financial Statements and Supporting Schedules. Financial statements and their
supporting schedules are the products of the government accounting processes. These are the
principal comprehensive means by which the information accumulated and processed in the state
accounting system is periodically communicated to the end-users. The financial statements generally
prepared in the National Government are: the Balance Sheet, Statement of Income and Expenses,
Statement of Government Equity, and Statement of Cash Flows.

Responsibility for Financial Statements. Responsibility for the fair presentation and reliability of
financial statements rests with the management of the reporting agency. This responsibility is
discharged by applying generally accepted state accounting principles that are appropriate to the
entity's circumstances, by maintaining effective system of internal control and by adhering to the chart
of accounts prescribed by the Commission on Audit.

To achieve fair presentation and reliable information of the financial statements, the following
standards shall be observed:

(a) Fairness of Presentation. This refers to the overall propriety in disclosing financial
information. Full disclosure in financial aspects requires observance of the following
standards of reporting:

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 (1) All essential facts relating to the scope and purpose of each report and the period
involved shall be included and clearly displayed.
(2) All financial data presented shall be accurate, reliable, and truthful. The
requirement for accuracy does not rule out the inclusion of reasonable estimates
when the making precise measurements are impracticable, uneconomical,
unnecessary, or conducive to delay. All appropriate steps shall be taken to avoid
bias, unclear facts, and presentation of misleading information.

(3) Financial reports shall be based on official records maintained under an adequate
accounting system that produces information objectively and discloses the financial
aspects of all events or transactions taking place. Where financial data or reports
based on sources other than the accounting systems are presented, their basis
shall be clearly explained.

(4) The financial data reported shall be derived from accounts that are maintained in
all material respects on a consistent basis from period to period; material changes
in accounting policies or methods and their effect shall be clearly explained.

(5) Consistent and non-technical terminology shall be used in financial reports to

promote clarity and usefulness.

(b) Compliance. The report shall be in accordance with prescribed government requirements
and international accounting standards of reporting.

(c) Timeliness. All needed reports shall be produced promptly to be of maximum usefulness.

(d) Usefulness. Financial reports shall be carefully designed to present information that is
needed and useful to reports users.

STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS.

The Statement of Management Responsibility for Financial Statements shall serve as the covering
letter in transmitting the agencies financial statements to the Commission on Audit, Department of
Budget and Management, other oversight agencies and other parties. It shows the agency's
responsibility for the preparation and presentation of the financial statements. The statement shall be
signed by the Director of Finance and Management Office or Comptrollership Office, or the Chief of
Office who has direct supervision and control over the agency's accounting and financial
transactions, and the Head of Agency or his authorized representative.

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BALANCE SHEET. The Balance is a formal statement which shows the financial condition of the
agency as of a certain date. It includes information on the three elements of financial position -
assets, liabilities, and government equity. It shall be prepared from information taken directly from
the year-end Post-Closing Trial Balance.

The Balance Sheet shall be supported with the following schedules/statements:

 Schedules of Accounts Receivables (SAR) with Aging of A/R;
 Schedules of Accounts Payables (SAP);
 Schedules of Public Infrastructures (SPI); and
 Other schedules as may be required.

Although the allotments and obligations of the agency are not recorded in the books of accounts,
the Statement of Allotments, Obligations and Balances (SAOB) shall be submitted to the Commission
on Audit by the Budget Officer/Agency Officer concerned. This statement shall be included among
the aforementioned schedules for information of government officials and oversight agencies.

STATEMENT OF INCOME AND EXPENSES. The Statement of Income and Expenses shows the
results of operation/performance of the agency at the end of a particular period. It shall be
prepared by the Accounting Unit from information taken directly from the Pre-Closing Trial Balance.

STATEMENT OF GOVERNMENT EQUITY. The Statement of Government Equity shows the financial
transactions, which resulted to the change in Government Equity account at the end of the year.

STATEMENT OF CASH FLOWS. The Statement of Cash Flows 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. The
primary purpose of the Statement of Cash Flows is to give relevant information on the agency's
overall cash position, liquidity and solvency. Using the Statement of Cash Flows, managers,
investors, and creditors could easily assess if the agency could meet its obligations in operating,
investing and financing activities.

PREPARATION OF THE STATEMENT OF CASH FLOWS. To facilitate the preparation of the

Statement of Cash Flows, the use of a Working Paper is encouraged. It shows the increase or
decrease of the cash account 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. Operating activities involves the principal resources producing activities of
the enterprise and other activities that are not investing or financing (SFAS 22). Generally, these
include the cash effect on transactions that enter in the Income and Expense Summary account.

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(2) Investing Activities. Investing activities involves the acquisition and disposal of long-term assets
and other investments not included in cash equivalent (SFAS 22). These activities include cash
transactions covering non-operating assets, such as the purchase of property, equipment, short
and long-term investments and other non-current assets. Non-cash investing activities are not
included in the statement of cash flows.

(3) Financing Activities. Financing activities are derived from the equity capital and borrowings of
the agency (SFAS 22). These include cash transactions involving the government equity and
non-operational liabilities. Non-cash financing activities are not included in the statement of
cash flows.

The increase or decrease in the cash accounts is analyzed. the following computations are made:

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 receipts 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 of liabilities incurred in operations
 Cash payments for interest

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 CASH FLOWS FROM INVESTING ACTIVITIES

CASH INFLOWS:
 Proceeds from sale of marketable stocks and bonds
 Cash proceeds from 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 INVESTING 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

The net increase in cash provided by operating activities, investing activities and financial
activities for the year, and the cash balance at the start of the year, shall equal the cash
balance at the end of the year. Such amount shall tally with the total cash account shown in
the balance sheet.

NOTES TO FINANCIAL STATEMENTS. Notes to Financial Statements are integral parts of financial
statements, which pertain to additional information necessary for fair presentation in conformity with
generally accepted accounting principles. These may explain the headings captions or amounts in
the statements of present information that cannot be expressed in money terms, and description of
accounting policies.

Information shall be presented in a way that will facilitate understanding and avoid erroneous
implications. The headings, captions and amounts shall be supplemented by enough additional data
so that the meaning would be clear and not overshadowed by so much information that important
matters are buried in mass trivia.

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Where Notes to Financial Statements appear on a separate page, indicate the phrase "See
accompanying Notes to Financial Statements" placed at the bottom of said statements.

Material changes in classification of accounts shall be indicated and explained as notes to financial
statements.

The four types of disclosure considered necessary are as follows:

(a) CUSTOMARY OR ROUTINE DISCLOSURE. 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.

(b) 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.

In particular, it shall include any of the following:

─ Selection from existing acceptable alternatives
─ Principles and methods peculiar to the agency
─ Unusual application of generally accepted accounting principles

(c) 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 themselves.

(d) 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.

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 Examples of accounting policy disclosures commonly required:
─ Consolidation principles
─ Accounting for long-term investments
─ Adoption of policy on increasing benefit entitlements of the program members.
(The effect of the increase shall be disclosed.)
─ Basis of revenue recognition

In general, disclosures shall include important judgment as to appropriateness of principles

relating to recognition of revenues and allocation of asset costs to current and future
periods.

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.

The interim financial statements shall be prepared employing the same accounting principles used
for annual reports. Adjusting and closing journal entries shall be prepared. However, only the
adjusting journal entries are recorded in the books of accounts. To facilitate the preparation of the
interim financial statements, the use of the worksheet is recommended.

SECTION 82. 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 for the preparation of the financial statements. The format of the worksheet shall
be as follows:

Agency Name
Worksheet
As of ______________, 20__

Adjusted
Unad- Statement Post
or Pre- Closing Balance
justed Adjustments of Income Closing
Adjusted Entries Sheet
TB & Expenses TB
TB
Title Code Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

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(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).

. . . nothing follows . . .

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