Government Auditing1

Chapter 8
GOVERNMENT AUDITING
STANDARDS AND PROCEDURES
Government Auditing is the analytical and systematic examination and
verification of financial transactions, operations, accounts and reports of any
government agency for the purpose of determining their accuracy, integrity
and authenticity and satisfying the requirements of law, rules and
regulations, As such, the scope includes not only financial and compliance
audits, but also the examination and evaluation of the operations of
government agencies in order to arrive at a basis for an opinion regarding the
fairness of the presentation agencies in order to arrive at a basis for an
opinion regarding the fairness of the presentation of the financial position and
results of operation including recommendations to improve the efficiency and
effectiveness of the agencies.
The basic function of government auditing is to examine, audit and
settle in accordance with law and regulations, all accounts pertaining to the
revenue and receipts or, and expenditures or uses of funds and property,
owned or held in trust by the Government.
The Commission on Audit, as the Supreme Audit institution of the
Philippines, performs the audit for government including the departments,
bureaus and offices of the national government and branches and
instrumentalities, and the political subdivisions, as well as government-owned
or controlled corporations, including subsidiaries, other self-governing boards
and Commissions of the government and non-governmental entities
subsidized by the government, those required to pay levies or government
share and those for which the government has put up a counterpart fund or
those party funded by the government; public utilities and non-government
entities subject to the visitorial authority.
TYPES OF AUDIT
The types of audit conducted by the COA are the following:
1. Financial Audit includes financial statement and financial related
Audits.
a. Financial statement audits determine whether (1) the financial
statements of an audited entity present fairly the financial position,
results of operation and cash flows or changes in financial position in
accordance with generally accepted accounting principles, and 920
the entity has complied with laws and regulations for those
transactions and events that may have a material effect on the
financial statements.
b. Financial related audits determine whether 910 financial reports and
related items, such as elements, accounts or funds are fairly
presented, 920 financial information is presented in accordance with
established or stated criteria, and 930 the entity has adhered to
specific financial compliance requirements.
2. Performance Audits include economy, efficiency and program audits.
a. Economy and efficiency audits determine (1) whether the entity
acquires, protects and uses its sources (personnel, property and
spaces) at minimum operating costs and systematic manner, (2) the
causes of inefficiencies or uneconomical practices, and (3) whether
the entity has complies with laws and regulations concerning matters
of economy and efficiency.
b. Program or effectiveness audits determine (1)the extent to which the
desired results or benefits of the program or activity established by
the legislative or other authorizing body are achieved, and (2)
whether the entity has complied with laws and regulations applicable
to the program.
GOVERNMENT AUDITING STANDARDS
Auditing standards are measures by which the quantity, quality, and
adequacy of the auditors examination can be judged. They control the nature
and extent of evidence to be obtained by means of auditing procedures. The
hierarchy determining state accounting and auditing practice in the
Philippines, in the order of authorities, is as follows:
a. Constitutional provisions
b. Provisions of law, such as P.D. 1445 and applicable jurisprudence
c. Rules and regulations issued by the Commission on Audit and COA
decisions and resolutions
d. Rules and regulations issued by other government agencies
e. The State Accounting Standards (SAS) and the State Comprehensive
Auditing standards (SCAS)
f. Where the SAS and SCAS are silent on specific areas of concern, the
issuances and practices of other accounting and auditing bodies may
be followed, so long as these do not contravene the hierarchy:
1. Standards and other issuances of the International Organization of
Supreme audit Institutions (INTOSAI)
2. Standards and issuances of United nations specialized committees
and agencies on accounting and auditing
3. Practices, standards and issuances of professional organizations
and authorities concerned with accounting and auditing, such as
a. Philippine Institute of Certified Public Accountants (PICPA)
b. International Federation of Accountants (IFA)
c. International Institute of Internal Auditors (IIIA)
d. Other International Organizations of CPAs
GENERAL STANDARDS
Section 54 of P.D. 1445 stated the following general standards:
1. The audit shall be performed by a person possessed with adequate
technical training and proficiency as auditor.
The Commission should ensure that the audit is conducted by the
staff members who have the audit knowledge and skills. They should
also have a thorough knowledge of the government, its environment
and government auditing. These knowledge and skills apply to the
Commission as a whole and not necessarily to every individual auditor.
Evaluations of contemporary government operations requires the
auditors to be abreast with acceptable knowledge and skills in such
areas as accounting, statistics, law, engineering, audit design and
methodology, automatic data processing, public administration,
economics, political science and actuarial science, etc. Modern auditing
has become a collective effort of various professions and disciplines.
2. In all matters relating to the audit work, the auditor shall maintain
complete independence, impartiality and objectivity shall avoid any
possible compromise of his independence or any act which may create a
presumption of lack of independence or the possibility of undue influence
in the performance of his duties.
Independence refers to the objectivity of the auditor. It is the
personal quality to be honest and impartial in the performance of his
work. This requires the objective consideration of facts and exercise of
an unbiased judgment in the report. On matters of audit work, the
Commission and the individual auditors should be free from personal
and external impairments to independence. As an institution it should
be organizationally independent. This standard places upon the COA
auditor and the Commission the responsibility to be objective and
impartial in auditorial opinions, conclusions, judgments and
recommendations.
Independence of an auditor may be impaired if during the period of
the audit or at the time of expressing an opinion, he or any member of
his immediate family (1) acquires any direct or material indirect
financial interest in the enterprise, or (2) has connection with the
enterprise in any capacity equivalent to that of a member of
management or as an employee.
3. The auditor shall exercise due professional care and be guided by
applicable laws, regulations and the generally accepted principles of
accounting in the performance of the audit work as well as in the
preparation of audit and financial reports.
This standard requires the COA auditor to follow all applicable
standards in conducting government audits. In case of failure to follow
an applicable standard, the COA auditor should report the fact, the
reasons therefore, and the effects of the deviation from the standard
on the results of the audit. This should be documented in the working
papers.
Exercise of due care us not an assurance of infallibility nor an
insurance against pure errors of judgment. It simply requires that the
auditor perform his examination with reasonable care, diligence and
the professional competence necessary to accomplish the audit work
according to applicable auditing standards.
Exercising due professional care means using sound judgment in
establishing the scope, selecting the methodology, and choosing tests
and procedures for the audit. The same sound judgment should be
applied in the actual evaluation, audit and reporting on the audit
results.
Due professional care also includes a mutual understanding o the
audit objectives and scope between the audited entity and those who
authorized or requested the audit. Also necessary is an understanding
of the operations to be audited and the performance measurement
criteria (including laws and regulations). When the criteria are vague or
not available, the COA auditor should consult with the other interested
parties.
STANDARDS OF FIELD WORK
Section 55 of P.D. 1445 states the following standards of field work
1. The audit work shall be adequately planned and assistants shall be
properly supervised.
The auditor should thoroughly plan the audit. This includes defining the
audit objectives, setting up procedures and determining the nature and
extent of tests to realize the audit objectives. The plan should ensure
optimum use of audit resources. The details of the audit plan should be
included in the audit program.
Adequate planning is especially important in performance audits
because the methodology, implementing steps and procedures employed
in such audits are varied and complex.
The first step in planning an audit is to define carefully the audit
objectives. The statement of audit objectives should be clear on what the
audit is to accomplish. It is rare for just one audit to cover all aspects of
performance. This is critical in establishing the audit boundaries.
The objectives of an audit extend to every phase of the audit, the
selection of scope, methodology, and staff, the conduct of the audit and
the timing and nature of reports. Time invested in determining audit
objectives is time well spent because an audit with clear objectives can
avoid waste of resources, delays, and poor quality reports. In analyzing
possible audit objectives, the auditors should consider the significance of
an issue, the contribution auditors can make, and the availability of data
and resources.
2. A review shall be made in compliance with legal and regulatory
requirements.
Auditors are responsible for determining which requirement of law and
regulations are to be considered in the audit. This responsibility requires
that those planning the audit be knowledgeable of the compliance
requirements that apply to the subject under audit. The auditors need to
exercise professional judgment in determining how those laws and
regulations might have a significant impact on the audit objectives.
Compliance with laws and regulations is import in government
auditing. In government, the organizations, the programs, activities and
functions are usually created by law and are subject to specific rules and
regulations.
The need and nature of assessment for compliance with requirements
of laws and regulations, vary with the objectives of the audit. The auditor
should design steps and procedures to provide reasonable assurance that
the audited entity has adhered to the requirements of laws and
regulations.
The nature of the requirements of laws and regulations that the auditor
might assess are illustrated below:
a. Economy and efficiency - compliance with laws and regulations that
could significantly affect the acquisition, protection, and use of the
entitys resources, and the quantity, quality, timeliness, and cost of
the products and services it produces and delivers.
b. Program compliance with laws and regulations pertaining to the
objectives of the entitys program, activities and functions; the
manner in which programs and services are to be delivered; the
population a program or service is to be served; and whether the
programs, activities and functions are being carried out in
conformity with these laws and regulations.
3. An evaluation shall be made of the system of internal control and related
administrative practices to determine the extent they can be relied upon
to ensure compliance with laws and regulations and to provide for
efficient, economical and effective operations.
Management is responsible for establishing an effective system of
internal controls. The lack of administrative continuity in government units
because of continuing changes in elected legislative bodies and in
administrative organizations increases the need for an effective internal
control system.
Internal control includes the plan of organization and methods and
procedures adopted b management to ensure that its goals and objectives
are met; tat resources are used consistent with laws, regulations and
policies that resources are safeguarded against wastage, loss and misuse;
and that reliable data are obtained, maintained and fairly disclosed in
reports.
The focus of the assessment of internal controls caries with the
objective of the audit being conducted. Hence, in:
a. Economy and efficiency audits, the auditors may assess those
policies, procedures, practices, and controls applicable to the
economic and efficient implementation of the programs, functions
and activities, under audit to the extent necessary, as determined
by the audit objectives.
b. Program audits, the auditors may assess those policies, procedures,
practices and controls which specifically bear on the attainment of
the goals and objectives specified by the law or regulations for the
organization , program, activity or function under audit to the
extent necessary, as determined by the audit objectives.
Internal auditing is an import part of internal control, and the auditors
should consider this in conducting audit. Where an assessment of internal
controls is called for, COA auditors should consider the extent to which the
work of the internal auditors can be relied upon to help provide reasonable
assurance that internal control is functioning properly and to prevent
duplication of effort.
4. The auditor shall obtain through inspections, observations, inquiries,
confirmation and other techniques, sufficient, competent evidential matter
to afford himself a reasonable basis for his opinion, judgments,
conclusions and recommendations.
Sufficient, competent and relevant evidence is to be obtained to afford

a reasonable basis for the auditors judgments and conclusions regarding
the organization, program, activity or function under audit. A record of the
auditors work is to be retained in the form of working papers. Working
papers may include tapes, films and discs.
TYPES OF EVIDENCE
(a) Physical evidence this is obtained by direct inspection or observation of

(a) activities or people, (b) property, or (c) events. Such evidence may be
documented in the charts, maps or actual samples.
(b) Documentary evidence this consists of created information such as
letters contracts, accounting records, invoices and management
information of performance.
(c) Testimonial evidence this is obtained from others through statements
received in response to inquiries or through interviews. Statements
important to the audit should be corroborated when possible with
additional evidence. Testimonial evidence also needs to be evaluated from
the standpoint of whether the individual may be biased or has only a
partial knowledge about the subject under inquiry.
(d) Analytical evidence this includes computations, comparisons
reasoning and separation of information into components.
TESTS OF EVIDENCE
The evidence should meet the basic tests of sufficiency, relevance and
competence. The working papers should reflect the details of the evidence
and disclose how it was obtained.
(a) Sufficiency this is the presence of enough factual and convincing

evidence to support the auditors findings. Conclusions and any
recommendations. Determining the sufficiency of evidence requires
judgment. When appropriate, statistical methods may be used to establish
sufficiency.
(b) Relevance this refers to the relationship of evidence to its use. The
information used to prove or disprove an issue is relevant if it has a
logical, sensible relationship to that issue. Information that is irrelevant
should not be included as evidence.
(c) Competence to be competent, evidence should be valid and reliable. In
evaluation the competence of evidence, the auditors should carefully
consider whether reasons exist to doubt its validity or completeness. If so,
the auditors should obtain additional evidence or reflect the situation in
the report.
REPORTING STANDARDS
Section 56 of P.D. 1445 states the reporting standards:
1. Audit reports shall be dated, signed manually and shall be issued and
distributed in the manner provided by regulations of the Commission.
2. Audit reports shall contain basically the transmittal statement, scope and
objectives of the audit and time period examined highlights, financial
information, findings, recommendations and conclusions as well as other
data that may provide the management of the audited agency with the
necessary input for the decision-making process. Tables, charts, graphs
and other data to detail the conditions and facts shall be used in proper
cases.
3. Audit reports shall meet the following reporting criteria:
(a) Factual matter must be accurately, completely and fairly presented.
(b) Findings must be presented objectively and in language as clear and
simple as the subject matter permits.
(c) Findings must be adequately supported by evidence in the audit
working papers.
(d) Reports must be concise yet complete enough to be readily understood
by the users.
(e) Information or underlying causes of problems must be included so as
to assist in implementing or devising corrective actions.
4. Audit reports shall put primary emphasis on improvement; critical
comments shall be presented in balance perspective, recognizing unusual
difficulties or circumstances faced by officials concerned.
(a) Identify and explain issues and questions needing further study and
consideration by the auditor, the agency, or others.
(b) Include recognition of noteworthy accomplishments particularly when
management improvements in one area of activity may be applied
elsewhere.
(c) Include recognition of the views of responsible officials of the agency
audited on the auditors findings, conclusion and recommendations.
Except where the possibility or fraud or other compelling reason may
require different treatment, the auditors tentative findings and
conclusions should be reviewed with officials. When possible, without
undue delay, their view should be obtained in writing and objectively
considered and resented in the final report.
(d) State whether any significant pertinent information has been omitted
because it is deemed confidential. The nature of such information
should be described and the law or other basis under which it is
withheld should be stated.
5. Audited reports accompanying financial reports shall:
(a) State whether the audit was made in accordance with generally
accepted auditing standards, and shall disclose the omission of any
auditing procedure generally recognized as normal of deemed
necessary by him under the circumstances of a particular case, as well
as the reasons for the omission. Nothing in this section, however, shall
be construed to imply authority for the omission of any procedure
which auditors would ordinarily employ in the course of audit.
(b) Express the auditors opinion with respect to.
i) Whether the financial reports have been presented fairly in
accordance with applicable laws and regulations and the generally
accepted accounting principles applied on a consistent basis.
ii) Material change in accounting principle and practices and their
effect on the financial reports.
(c) Identify any matter to which he takes exception and shall specifically
and clearly state his exceptions together with the statement on the
effect thereof, to the extent practicable, on the related financial
reports.
(d) Contain appropriate supplementary explanatory information about the
comments of the financial reports as may be necessary for full and
informative disclosure about the financial operations of the agency
audited.
(e) Explain violations of legal or other regulatory requirements, including
instances of non-compliance.
The report should be addressed to the head of the agency audited. In the
case of a government-owned or controlled corporation or a non-governmental
entity, the report should be addressed to its board of directors.
Independent Auditors
We have audited the accompanying balance sheet of X

Company as of December 31, 20__, and the related statements of
income, retained earnings, and cash flows for the year then ended.
These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance that the financial
statements are free of material misstatement/s. Our audit included
examining, on a test basis, evidence supporting the amount and
disclosures in the financial statements. WE also included assessing
the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement
presentation. We believe that our audit provides reasonable basis
for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of X
Company as of (at) December 31, 19XX, and the results of its
operations and its cash flows for the year then ended in accordance
with applicable laws and regulations and in conformity with
generally accepted state accounting principles.
(Signature)
(Date)
Consistency ranks as a major reporting standard, since it is vital to the

comparability of financial statements. Accounting principles should be applied
on a consistent basis. The report shall identify the circumstances in which
such principles have not been consistently observed in the current period in
relation to the preceding period. A change in accounting principles, its effect
is material change and its effect on the financial reports would be manifestly
deceptive.
A statement should be included in the auditors report that the audit was
made in accordance with generally accepted state auditing standards. This
statement refers to all the applicable standards that the auditors should have
followed during their audit. The statement need not be qualified in situations
where the auditors did not follow an applicable standard. In these situations,
the auditors should modify the statement to disclose in the scope section of
their report the applicable standard that was not followed, the reasons
therefore, and the known effect that the deviation from the standard had in
the results of the audit.
TYPES OF OPINIONS
Depending in the circumstances of each engagement, the auditor shall
express any of the following opinions on the financial statements:
1. Unqualified opinion an unqualified opinion stated that the financial
statements present fairly, in all material respects, the financial position,
results of operations, and cash flows of the agency in conformity with
generally accepted government accounting principles and in accordance
with applicable laws and regulations. This is the opinion expressed in the
standard audit report discussed above.
In the event of any conflict between the application of the law and/or
regulations and of accounting principles, the former shall prevail over the
latter.
An unqualified opinion cannot be issued if any of the generally
accepted government accounting principles and state auditing standards
has been violated.
2. Qualified opinion this opinion communicates a favorable opinion on
the financial statements except for the effects of a particular matter,
such as:
a. The scope of the auditors examination is restricted
b. The financial statements depart from pertinent laws and regulations
and/or generally accepted state accounting principles
c. Applicable laws and regulations and/or generally accepted state
accounting principles have not been applied consistently
Each of these circumstances for issuing an except for opinion
assumes that the effect upon the financial statements is
moderately material rather that highly material.
3. Adverse opinion this opinion communicates an unfavorable signal that
the financial statements do not present fairly the financial position, results
of operations and cash flows in accordance with applicable laws and
regulations and/ or generally accepted state accounting principles. An
adverse opinion is issued when the effect upon the financial statements of
the following is material:
a. Departure from generally accepted state accounting principle
b. Violation of law or regulation
c. Inconsistency in the application of generally accepted state
accounting principle
d. Uncertainty as to estimates of future transactions or events]
4. Disclaimer of opinion this opinion communicates neither a favorable
or unfavorable signal in that the auditor DOES NOT express an opinion on
the financial statements. Generally, a disclaimer of opinion is resorted to
when the scope limitation or uncertainty is SO material that a qualified
opinion is unwarranted.
REPORT DISTRIBUTION
Written audit reports are to be submitted for approval to appropriate
officials of the Commission, after which copies of said reports shall be
furnished to the head of the agency audited and to other officials authorized
to receive such copies.
Audit reports should be distributed to as many interested officials as is
practicable. In some cases, the subject of the audit may involve material that
is classified for security purposes or is not releasable to particular parties or
the public for other valid reasons. Generally, however, the report should be
distributed to officials directly interested in the results. Such officials include
those designated by law or regulation to receive such reports, those
responsible for acting on the findings and recommendations, legislators and
those of other levels of government that have provided funds to the audited
entity. Audit report distribution is regulated by the Commission (COA Res. No.
84-40 dated August 21, 1984)
AUDIT PROCEUDRES
Audit procedures are the acts to be performed in conducting an examination
of accounts. The proper application of these audit procedures will achieve the
objectives of the audit program.
The audit program is an integral part of audit planning and guides the
actual audit. It clearly spells out the scope of the audit, the audit objectives,
the specific audit procedures to follow, the staff assignment, and the
estimated time required to carry out the audit procedure.
Audit of Assets
Assets are the economic resources of a business or government entity
which is expected to be used in the entitys operations. In government
accounting, the total amount of the assets is equal to the sum of the
liabilities and residual equity.
Assets account balances are the end results of cumulative effects of all
transactions, both expenditures and revenues, before the trial balance date.
The verification procedure in relation to asset accounts relies heavily upon
the vouching work having already been properly executed during the audit of
expenditures and revenues. This previously executed vouching work will have
ensured (1) that the original transactions were correctly recorded,
distinguishing between expenditures of a capital and expense nature, and (2)
that the transactions were properly authorized at the appropriate level in
accordance with regulations.
The examination and audit of assets shall be performed with a view to:
1. Ascertaining the existence, ownership, valuation and encumbrances as
well as propriety of items composing the respective asset accounts;
2. Determining their agreement with records;
3. Proving the accuracy of such records;
4. Ascertaining if the assets were utilized economically, efficiently and
effectively, and
5. Evaluating the adequacy of controls over the accounts.
The auditors concern at the final review stage is to complete the
verification process, which includes the following objectives:
1. Valuation that assets are fairly valued, and that depreciation or
obsolescence charges, if any, are reasonable and have been fully taken
into account on an acceptable basis consistent with that adopted in
previous years;
2. Existence- that the assets exist;
3. Ownership that the audited agency is in fact the beneficial owner of
the assets concerned and that the liens or encumbrances have been
recognized and recorded;
4. Completeness- that all assets owned are included and properly
recorded
5. Economy and efficiency that assets are acquired, utilized and
disposed of to full advantage and that internal controls are adequate
and operating effectively.
6. Effectiveness the results from the use of the assets contribute to the
achievement of the agency goals and mission.
Audit of Liabilities
Liabilities are economic obligations of an enterprise that are recognized
and measured in conformity with generally accepted accounting principles.
Liabilities also include certain deferred credits that are not obligations but are
recognized and measured in conformity with generally accepted accounting
principles.
Obligations are amounts which are committed to be paid by
government which arise from an act of duly authorized administrative officer
which binds the government to the immediate or eventual payment of a sum
of money.
Liabilities are classified into current, contingent, and fixed or long-term.
1. Current liability a short-term debt, regardless of its resources, including
any liability accrued and deferred and unearned revenue that us to be
paid out of the current assets or is to be transferred to income with
relatively short period, usually one year or less, or a period greater than a
year but within the business cycle of an enterprise.
2. Contingent liability claims pending litigation or decision of courts or
authorities concerned. An obligation relating to a past transactions or
other event or condition, that may arise in consequence, as a future event
now deemed possible but not probable. If probable, the obligation is not
contingent but real (ordinarily, a current liability), and recognition in the
accounts is required, notwithstanding that its amount must be estimated n
whole or in part. The mere possibility of a future loss, as from a fire, not
linking with a past event, does not give rise to contingent liability.
3. Long-term liability an obligation which will not become due within a
relatively short period, usually a year. Example: mortgages; mortgage
bonds; debentures; secured note issues; funded debt generally.
In the audit of liabilities, the auditor shall seek to establish that all
obligations of the agencies have been accurately recorded; only recorded;
only bonafide obligations of the agency have been included; the obligations
incurred are properly authorized; all provisions of trust indentures or
mortgages are complied with; and mortgages and other encumbrances are
fully disclosed.
Audit of Equity
The terms equity represent the difference between total assets and
total liabilities.
The audit of equity shall seek to determine the nature of the surplus,
whether current or invested surplus; the amount of current surplus available
to cover appropriations for the operational expenses of the government; the
propriety of the ledger accounts and the balance sheet presentation account
and the proper authority and recording of changes in capital structure made
during the period under audit.
Audit of Revenue/Receipts
The examination and audit of revenue accounts shall be performed
with a view to ascertaining that all earned revenues have been duly recorded;
all recorded revenues have been earned; and appropriate classifications of
revenues have been consistently followed.
Audit of Expenditures
Expenditures represent the amount of cash paid or to be paid for a
service rendered or an asset purchased. The audit of expenditures starts with
the evaluation and verification of the budget formulation and execution
process to ensure that funds are properly allocated and utilized solely for the
specific purposes for which they have been appropriated.
Specifically, the system of budgetary control shall:
1. Establish and maintain the accountability of officials
2. Ensure that resources are used only for the purpose intended, and
3. Ensure disclosure of material errors in the accounts, unauthorized
transactions or loss of assets.
The examination of expense accounts ascertains that all expenses
incurred have been duly authorized; adequately funded and documented;
properly recorded; all recorded expenses have been actually incurred; and
the classifications of expenses are appropriate and have been consistently
followed.
PRE-AUDIT ON GOVERNMENT TRANSACTIONS
All resources of the government shall be managed, expanded or utilized in
accordance with law and regulations and safeguard against loss or wastage
resulting from illegal or improper disposition, with a view of ensuring
efficiency, economy, and effectiveness in the operations of the government.
The primary responsibility for faithful adherence to this policy rests with the
chief or head of the government agency concerned. The Commission on
Audit, thru COA Circular No. 95-006 dated May 18, 1995, has lifted all pre-
audit activities that were then performed on financial transactions.
But recent developments, however, necessitate the revising of the present
policy of examining government transactions strictly on a post-audit basis in
view of the rising incidents of irregular, illegal, wasteful and anomalous
disbursements of huge amounts of public funds and disposal of huge
amounts of public funds and disposal of public property. An assessment if the
risk-prone areas (using the risk-based audit approach) in government
operations and the marked inadequacy in internal controls as exemplified by
the frequency of anomalous uncovered or unreported likewise point to the
need to consider restoring pre-audit as a deterrent gains observed by the
auditor to ensure that the agency accepts all responsibility for (1)
establishing and monitoring internal controls; (b) making all management
decisions with respect to the design, implementation and maintenance of the
internal controls, (c) evaluating the adequacy and results of the design,
implementation and maintenance of the internal controls, and (d) the data
used or generated by the financial reporting process.
Through the issuance of COA Circular 2009-02 dated May 18, 2009, COA
has reinstituted selective pre-audit, subject to periodic review and
assessment of the effectiveness and coverage thereof in accordance with the
risk-calibrated agency audit framework.
DEFINITION AND GENERAL SCOPE OF PRE-AUDIT AND POST AUDIT

Pre-audit is the examination of documents supporting a transaction or
series of transactions before these are paid for and recorded. Pre-audit
operates to (a) determine that the proposed expenditure is for a purpose in
compliance with the appropriation law, other specific statutory authority and
regulations, (b) assure that sufficient funds are available to enable payment
of the claim; (c) initially determine that the proposed expenditure is not
illegal, irregular, extravagant, excessive, unconscionable or unnecessary; (d)
determine that the transaction is approved by proper authority and duly
supported by authentic underlying evidences.
Post-audit, on the other hand, covers the same areas and
supplemented by tracing the transaction under audit to the books of
accounts. It also includes a final determination that the transaction is not
illegal, irregular, extravagant, excessive, unconscionable or unnecessary. In
general and wherever practical, the scope of post audit work covers all areas
identifies in the risk assessment and embraces financial, compliance, and
value-for-money audits. Transactions subjected to pre-audit shall be post
audited without performing the audit procedures previously undertaken in
pre-audit, unless there is compelling reason to re-perform the same.
Selective pre-audit shall be reinstituted in the following transactions:
1. Cash advance
All cash advance including those for foreign travels funded out of the
local funds regardless of amount, except for cash advances for payroll,
intelligence fund, petty cash funds, and those granted for local travel
expenses of officers and employees.
An audit of the liquidation of cash advance and the issuance of the
corresponding Credit Notice shall be done before the same is recorded
in the books
2. Payment salaries and terminal leave benefits
Pre-audit of payments of salaries shall apply only to the first payment
after appointment by transfer or reinstatement, and to the last
payment prior to transfer
All payments of terminal leave benefits shall be subject to pre-audit
3. Payments for infrastructure projects
Infrastructure projects include the construction, improvement,
rehabilitation, demolition, repair, restoration or maintenance of roads
and bridges, railways, airports, seaports, communication facilities, civil
work components or information technology projects, irrigation, flood
control and drainage, water supply, sanitation, sewerage and solid
waste management systems, shore protection, energy/power and
electrification facilities, national buildings, school buildings, hospital
buildings and other related construction projects of the government
[Section 5(n) of IRR-A of R.A. No. 9184]
All infrastructure projects with contract amounts falling under the
categories outlined below shall be covered by pre-audit:
o For National Government Agencies: Departments/Bureau/Agency
Main/ Central/Head Offices, general headquarters, Projects
management Offices P25 million and above; Regional
offices/Operating units/Area Commands/Field Offices or their
equivalent P10 million and above;
Provincial/District/Division/Satellite Offices P2 million and
above
o For Local Government Units: Cities within Metro manila, other
highly urbanized cities and first class provinces P5 million and
above; Provinces/Cities below first class P3 million and above;
Municipalities P1 million and above
o For government owned and/or Controlled Corporations: Head
Offices, Project Management Offices P25 million and above;
Regional/ Provincial Branches/Field Offices- P10 million and
above.
Only the advance payments granted to contractors as well as the first
and last progress billings of contracts for infrastructure projects the
contract amount of which fall within the threshold as above indicated
shall be subjected to pre-audit.
Inspection of construction project accomplishments shall mandatory on
the payment for the first and last progress billings. The auditor may,
however, conduct random on-the-spot inspection of on-going
infrastructure projects or request inspection of projects at any time he
may deem necessary.
4. Payments for road right-of-way
5. Payments for procurement of capital assets, goods and services
Capital assets shall not include land and building
Goods and services include acquisition of supplies, materials, general
support services, labor, equipment and motor vehicles by the
government, regardless of services, labor, equipment and motor
vehicles by the government, regardless of fund, construction materials
for projects implemented by administration.
Only the first payments for general support services, those which are
recurring and fixed in nature, shall be subject to pre-audit. First
payments involving extension of contracts shall also be pre-audited.
First and last payments of contracts entered into through any of the
various modes of procurement involving an amount of at least P2
million for national government agencies, government owned and/or
controlled corporations, cities within Metro Manila, other highly
urbanized cities and first class provinces, P1 million for provinces/cities
below first class, and P500,000 for municipalities, shall be subject to
pre-audit.
Procurement of goods and services to address natural calamities or
emergencies shall be subject to pre-audit except procurement
involving lifesaving medicines, food and other similar items which shall
be exempt from pre-audit.
6. Releases of funds to NGOIs/POs
All releases of funds to NGPs/POs shall be subjected to pre-audit. The
audit shall be carried out taking into consideration the requirements
and guidelines provided in COA Circular No. 2007-001 dated October
25, 2007 and subsequent amendments thereto.
No subsequent releases shall be made unless the previous release is
liquidated and the liquidation documents are port-audited and properly
taken up in the books.
7. Transfers of funds between government agencies
All transfer of funds wither thru funding check or bank transfer
between and among bank accounts of the government agency
regardless of amount shall be subject to pre-audit.
Exempted from pre-audit are fund transfers within and between
government banks, transfers of funds to address an emergency or
calamity, releases of NCAs by the DBM, and releases of NTAs from
departments/central offices to operating units
8. Disbursements from trust funds of local government units
The pre-audit of trust funds of local government units shall only cover
disbursements of the trust funds received from the national
government or from government owned and/or controlled corporations
9. Disposal of real property and unserviceable property
Disposal of real property undertaken through negotiated sales
involving an amount of at least P1 million.
Negotiated sale of acquired assets of government financial institutions
amounting to at least P50 million, except those disposed to previous
owners in the exercise of the right of redemption
For unserviceable property and those no longer needed, only
negotiated sales involving an amount of at least P500,000.00 whether
valued individually or by lot
Negotiated sale of property covered by Sec. 380 of R.A. No. 7160
otherwise known as the Local Government Code of 1991 shall be
governed by the following rules:
o Unserviceable property and property no longer needed may be
disposed at a private sale at such price as may be determined
by the committee on awards, subject to the approval of the
Commission on Audit or its duly authorized representatives
when the acquisition or transfer cost exceeds P50,000.00 in the
case of provinces and cities, and P25,000.00 in the case of
municipalities and barangays. In the case of real property, the
disposal shall be subject to the approval of the Commission on
Audit regardless of the value or cost involved.
o Approval of the disposal of unserviceable property and property
no longer needed in private sale shall be as follows:
Category Approving COA Official
1. Unserviceable property or property COA Chairman
no longer needed with book value/
acquisition cost not exceeding
P1,000,000 in each case
2. Unserviceable property or property Directors/Officers in charge of C
no longer needed with book value/ Central and Regional offices
P150,000 in each case
3. Unserviceable property or property Supervising Auditors/ Heads of Au
no longer needed with book value/ Groups
4. Unserviceable property or property Audit Team Leaders
no longer needed with book value/
5. Real Property regardless of the COA Commission Proper
book value/ Acquisition cost
o The value of the property declared to be unserviceable or no

longer needed should be appraised by a qualified COA Technical
Property Inspector or by a committee composed of Technical
Property Inspectors, as determined by the TSO Cluster Director,
for cases within metro manila, or the Regional Director, for cases
in the regions, before approval of the sale.
o Whenever there exists a doubt as to the reasonableness of the
price of the unserviceable property or property no longer
needed, the same must be submitted to the Technical Services
Office for review and appropriate action.
SETTLEMENT OF ACCOUNTS
COA Circular 2009-006 dated September 15, 2009 was issued
prescribing the use of the Rules and Regulations on Settlement of Account
(RRSA). It covers all accounts audited pertaining to the revenues and receipts
of and expenditures or uses of government funds. It does not cover
settlement of property accounts.
The Auditor shall issue a Notice of Disallowance/Notice of Charge for
difference/balances resulting from the audit of the accounts. A notice of
Suspension may be issued pending compliance with various requirements for
transactions which may result in pecuniary loss to the government.
The Statement of Audit Suspensions, Disallowances and Charges
(SASDC) shall be issued by the Auditor in place of the Certificate of
Settlement and Balances to summarize the total suspensions, disallowances,
and charges pertaining to the agency as of the end of each quarter. The first
SASDC issued under RRSA shall reflect a zero balance for uniformity and
simplicity in the application of the rules and for facility in the monitoring of
agency suspensions/ disallowances/ charges of the agency.
A Notice of Settlement of Suspension/Disallowance/Charge (NSSDC)
shall be issued whenever a suspension/disallowance/charge is settled, to
serve as basis for dropping from the books of accounts of the agency of the
recorded disallowance/charge.
A Notice of Finality of Decision (NFD) shall be issued to inform the
agency head that a decision of the Commission or its authorized
representatives has become final and executor, which shall be the basis for
recording the disallowance/charge in the agencys books of accounts.
A COA Order of Execution (COE) shall be issued to enforce the
settlement of audit disallowance/charge, whenever the persons liable refuse
or fail to settle the same after the decision has become final and executor.
There is no motion for reconsideration allowed at all levels of adjudication
except at the Commission Proper. The levels of appeal from the Auditors
decision are to the Cluster/Regional Director, the Adjudication and Settlement
Board and then the Commission Proper. Appeal fees shall be required to be
paid before jurisdiction is acquired by the Commission.
Chapter 9
ACCOUNTING FOR NON-PROFIT

ORGANIZATIONS
It has been discussed in earlier chapter that certain private organizations
formed as not-for-profit organizations possess many of the characteristics of the
government. These organizations include professional organizations, schools,
colleges and universities, hospitals, churches, charities and social service groups.
Services of these units may be offered only to closed membership groups or they
may be offered to the general public. Most hospitals, trade associations and
membership organizations provide a statement of financial position and a statement
of revenues and expenses (activities) that report their financial position and results
of operations for the entity as a whole. Educational institutions religious
organizations, and certain other not-for-profit organizations often provide
information on financial position, changes I financial position and results of
operations by fund groups and not for the entity as a whole. At present, a statement
of cash flow is now a required statement.
Service organizations differ widely as to size, nature and diversity or
operations. They may differ in the means they employ to finance their activities.
Contributions are generally an important part of the financing program, but the
nature of the contributions and the use of such resources also differ. Such
organizations require books and records to summarize receipts and disbursements
as well as assets, liabilities and equities. Systems for achieving accounting and
administrative control are required. Budgets that provide for direction and control of
proposed activities and financial statements that summarize past activities are
indispensable parts of an accounting program.
Although privately organized service organizations are bit subject to the rigid
legal controls that are found in the governmental unit, they are still subject to
special conditions that suggest an accounting similar to that employed by the
government. Service organizations ordinarily engage in a core of general activities
that are accompanied by a number of auxiliary services. Gifts and grants from both
private and public channels in the form of cash and other properties are frequently
accompanied by detailed requirements on exactly how such resources are to be
spent or utilized. Instead of emphasis upon operating at a profit, emphasis centers
upon the resources in meeting the service objectives of each of these organizations.
When fund accounting is used, the resources that are for financing the normal
or general activities in the operations of the service organizations are commonly
called general or current fund. The receipts or resources that are to be used in the
special activities such as publication of a periodic journal or construction of a
building for the unit are designated as special or current fund. Each fund group or
subdivision calls for a separate set of self-balancing accounts and the recognition of
related asset, liability and fund balances or net assets. When a number of different
revenues and expenses affect a fund balance, nominal accounts are established to
summarize them and the nominal accounts are closed at the end of each project;
when relatively few transactions affect a fund balance, they may be recorded
directly in the fund balance. At the end of each period, financial statements are
prepared to summarize the operations and to report on the financial conditions of
each of the funds or fund groups maintained and not for the entity as a whole. In
many cases, locally, combined statement of financial position and statement of
revenues and expenditures now called statement of activities together with
statement summarizing the changes in fund balances, now called the statement of
cash flows are prepared.
The discussion in this chapter will focus upon accounting for four types of not-
for- profit/service organizations, namely: (1) the professional organization, (2) the
privately organized education institutions-school, college, university, (3) the
privately organized hospital and (4) the cooperative. The first type uses the net
asset approach for the statement of financial position while in the second and the
third types, fund accounting finds extensive use. The fourth type is more similar to
trading/manufacturing or loaning entities.
Whether fund accounting is used or not, a complete set of financial
statements of not-for-profit organization shall include a statement of financial
position as of the end of the reporting period, a statement of activities and a
statement. Disclosure and reporting requirements are similar to those of a business
form such as those for financial instrument, loss contingencies, extraordinary,
unusual and infrequently occurring events and accounting changes. The degree of
segregation and order of presentation of items of assets and liabilities in statements
of financial position or of items of revenue and expenses in statements of activities
although not specified in the statement issued generally should be similar to those
of a business enterprise as various requirements of internal and external users
would be met.
The primary purpose of financial statements is to provide relevant
information to meet the common interests of donors, members, creditors and others
who provide resources to not-for-profit organizations. Those external users of
financial statements have common interests in assessing (a) the services an
organization provides and its ability to continue to provide those services and (b)
how managers discharge their stewardship responsibilities and other aspects of
their performance. More specifically, the purpose of financial statements, including
accompanying notes, is to provide information about:
(a) The amount and nature of an organizations assets, liabilities and net
assets
(b) The effects of transactions and other events and circumstances that
change the amount and nature of net assets
(c) The amount and kinds of inflows and outflows of economic resources
during a period and the relation between inflows and outflows
(d) How an organization obtains and spends cash, its borrowing and
repayment of borrowing and other factors that may affect its liquidity
(e) The service efforts of an organization
STATEMENT OF FINANCIAL POSITION
This statement provides relevant information about the liquidity, financial
flexibility and interrelationship of an organizations assets and liabilities in order to
let the external users of such be able to assess the organizations ability to continue
providing the services, to meet obligations, and needs for external financing. This
statement shows the assets, liabilities and net assets of a not-for-profit organization
NFP Organization
Statement of Financial Position
December 31, 20B and 20A
(In thousands)
ASSETS 20B 20A
29 P
Cash and cash equivalents P ,750 365
Receivables 1,000 500
Inventories and prepaid expenses 610 110
Assets restricted to investment in building and
equipment 66,000 66,000
213,0
Land, building and equipment 210,000 00
279,9
TOTAL ASSETS P 307,360 P 75
LIABILITIES AND NET ASSETS
3,25
Voucher payable P 4,255 P 5
5
Refundable advances 00 1500
Long-term debt 10,000 10000
14,7
TOTAL LIABILITIES P 14,755 P 55
Net Assets:
172,6 153
Unrestricted P 05 P ,500
11,9
Temporarily restricted 20,000 00
99,8
Permanently restarted 100,000 20
265,2
TOTAL NET ASSETS P 292,605 P 20
TOTAL LIABILITIES AND NET ASSETS P 307,360 P 279,975
Information about the nature and amounts of different types of permanent

restrictions or temporary restrictions shall be provided either by reporting their
amounts on the face of the statement or by including relevant details in notes to
financial statements. Separate line items may be reported within permanently
restricted net assets or in notes to financial statements o distinguish between
permanent restrictions for holding of (a) assets, such as land or works of art,
donated with stipulations that they be used to a specified purpose, be preserved
and not be sold or (b) assets donated with stipulations that they be invested to
provide permanent source of income such as gifts that create permanent
endowment funds.
Separate line items may be reported within temporarily restricted net assets
or in notes to financial statements to distinguish between temporary restrictions for
(a) support of particular operating activities, (b) investment for a specified term, (c)
use in specified future period, or (d) acquisition of long-lived assets. Donors
temporary restriction may require that resources be used for specified purpose as
purpose restrictions, or both. Gifts called term endowments such as gifts of cash or
other assets with stipulations that they be invested to provide source of income for
a specified term and that the income be used for a specified purpose are both time
and purpose restricted.
STATEMENT OF ACTIVITIES
This statement shows the revenues, gains, expenses and losses. The primary
purpose of this statement is to provide relevant information about (a) the effects of
transaction and other events and circumstances that change the amount and
nature of net assets, (b) the relationships of those transactions and other events
and circumstances to each other, and (c) how the organizations resources are used
in providing carious programs or services. The information in this statement used
with related disclosures and information in other financial statements, helps donors,
creditors and others to (1) evaluate the organizations performance during a period,
(2) assess an organizations service efforts and its ability to continue to provide
services, and (3) assess how an organizations managers have discharged their
stewardship responsibilities and other aspects of their performance. This statement
uses the descriptive term- change in net assets or change in equity of the entity as
a whole. The following format shows revenues and expenses segregated using the
net asset classification/category.
NPF Organization
Statement of Activities
For the year ended December 31, 20B
Temporar
ily Permanen
Unrestricte Restricte tly
d d Restricted Total
Revenues, gains and other
support:
20,70 1 28,98
Contributions P 0 P 8,100 P 80 P 0
12,00
Fees 12,000 0
P 40,98
Total P 32,700 0
Expenses and losses
6,00 6,00
Program A P 0 0
2,89 2,8
Program B 5 95
3,7 3,7
Management and General 00 00
1,0 1,0
Fund Raising 00 00
P 13,59
Total P 13,595 5
P 27,83
Change in net assets P 19,105 P 8,100 180 5
11,90 99,82 265,2
Net assets at beginning of year 153,500 0 0 20
20,00 P 100,00 P 292,6
Net assets at end of year P 172,605 P 0 0 05
STATEMENT OF CASH FLOWS

This statement provides relevant information about the cash receipts and
cash payments of an organization during a period. Although this statement may be
using either of the two methods. Direct and indirect, only the direct method is
illustrated below.
NFP Organization
Statement of Cash flows
Cash flows from operating activities:
P 2
Cash received from members and contributors 8,989
Cash received from service recipients 12,000
Cash paid for:
5,0
Program A P 00
1,8
Program B 95
1,00
Fund Raising 0 (7,895)
Cash paid to employees and suppliers (3,700)
P
Net cash from operating activities 29,835
Cash and cash equivalents at beginning of year 365
P
Cash and cash equivalents at end of year 29,750
Reconciliation of change in net assets to net cash received from

operating activities:
27,6
Change in net assets P 85
Adjustments to reconcile change in net assets
to
net cash from Operating activities:
Depreciation 3,000
(1,00
Decrease in refundable advance 0)
1,0
Increase in vouchers payable 00
(50
Increase in receivables 0)
Increase in inventories and prepaid (50
expenses 0)
29,8
Net cash flow from operating activities P 35
PROFESSIONAL ORGANIZATIONS
There are more than 40 professional organizations accredited by the

Professional Regulation Commission. These associations or institutions have their
head offices in Metro Manila, but their chapters are found all over the country. Their
operations are generally financed by membership dues that are paid annually.
Sharing of these membership fees among the different chapters, regional councils
and head office are provided for in their by-laws. Bigger organizations have
established regional councils which oversee the chapters. Each organization has its
own mission and vision and its activities shall be towards the attainment of these
goals.
Their operations are characterized by having a board of directors establishing

the policies and guidelines based in the by-laws which are implemented by means
of a set of officers elected from among the members of the boars. Every year
elections are conducted nationwide. Various committees are created with a
chairman and members who give their time and effort voluntarily to achieve the
objectives of the organization. Full accrual basis is used whenever practicable,
depreciation is provided but is not considered in determining the excess of receipts
over disbursements. Two kinds of net assets are commonly in determining the
excess of receipts over disbursements. Two kinds of net assets are commonly
accounted for, unrestricted or general and restricted or special net assets. The
spreadsheet is used to summarize daily transactions in these two types of net
assets. An undated list of members is requirement for the sure accounting of annual
dues in arrears to support the receivable accounts. Collections are normally done by
the chapters and monthly reports are prepared to account for the remittances due
to the head office and the regional councils. Restricted net assets are created every
time collections would include receipts for subscriptions to the periodic journal or for
additions or betterment of the building.
To illustrate the journal entries under these two types of net assets, the
transactions affecting a professional organization is given below and in the
succeeding pages. Financial statements are illustrated immediately after the journal
entries. The entries are posted to arrive at the account balances at the end of the
fiscal period. The beginning balances for assets and equities were:
Cash 1,000,000
Receivables 400,000
Assets restricted for investment in building &
equipment 500,000
Asset restricted for continuing professional education 500,000
Equipment 1,000,000
Accumulated Depreciation-equipment 500,000
Buildings 5,000,000
Accumulated Depreciation-buildings 1,000,000
Vouchers payable 1,200,000
Unrestricted net assets 4,700,000
Restricted net assets for professional education 500,000
Restricted net assets for plant assets 500,000
JOURNAL ENTRIES:
1. Annual dues received from regional councils and chapters
Account Titles Debit Credit
Cash 2,300,000
Membership fees 2,000,000
Receivables* 300,000
*Receivables are supported by subsidiary ledgers for each regional council and
chapter
2. General expenditures (salaries and supplies)
Salaries and Wages 1,300,000
Supplies expense 200,000
Cash 1,000,000
Vouchers payable 500,000
3. Acquisition of equipment per approval of the board of directors
Equipment*
500,000
Asset restricted for investment in bldg.&
equipment
500,000
*Equipment was acquired using the assets restricted to investment in building and
equipment.
4. Payment of vouchers
Cash 400,000
5. Adjustments required at year-end:
(a) Rental of office due P100,000; Inventory of supplies P50,000; accrued expenses
P20,000; allow. For dues in arrears P20,000; depreciation 10% p.a. for equipment &
5% p.a. for buildings
Rent receivable 100,000
Supplies on hand 50,000
Salaries and wages 20,000
Loss on doubtful accts 20,000
Depreciation-equipment 150,000
Depreciation-building 250,000
Rent income 100,000
Allow. For doubtful accounts 20,000
Accumulated depreciation-equipment 150,000
Accumulated depreciation-building 250,000
Accrued expenses payable 20,000

6. To close the nominal accounts
Membership fees 2,000,000
Rent income 100,000

Salaries and wages 1,320,000
Loss on doubtful accounts 20,000
Unrestricted net assets 210,000

7. To Record time deposits which can be preterminated anytime
Cash equivalents 1,000,000
Cash 1,000,000
8. To setup P100,000 as additional CPE project fund per board of directors approval
Asset restricted for continuing prof. educ 100,000
Cash 100,000
Professional Organization
December 31, 20B
ASSETS
1,800,00
Cash and cash equivalents P 0
Receivables P 100,000
80,0
Less: Allowance for doubtful accounts 20,000 00
100,0
Rent receivable 00
50,
Supplies on hand 000
Asset restricted for continuing professional
600,00
education projects 0
1,500,0
Equipment P 00
850,00
Less: Accumulated Depreciation 650,000 0
5,000,0
Building 00
Less: Accumulated Depreciation P 1,250,0 3,750,00
00 0
7,230,0
TOTAL ASSETS P 00
1,300,00
Vouchers Payable P 0
Accrued salaries and wages 20,000
1,320,0
TOTAL LIABILITIES P 00
Net Assets:
5,310,00
Unrestricted P 0
Restricted to continuing professional
educ. Projects 600,000
5,910,00
TOTAL NET ASSETS P 0
7,230,00
TOTAL LIABILITIES AND NET ASSETS P 0
Unrestrict Restrict
Income: Total ed ed
2,000,00 P
Membership fees P 0 2,000,000
Income from other sources
(rent) 100,000 P 100,000
2,100,00 P P
Subtotal P 0 2,000,000 100,000
Expenditures:
1,320,00
Salaries and Wages P 0
Loss on doubtful accounts 20,000
1,890,00
Subtotal 0 1,890,000
Excess of income over P
expenditures P 210,000 110,000 P 100,000
Statement of Cash Flows
Cash received from members as annual 2,000,0
dues P 00
Cash paid to employees and suppliers 300,000
(1,400,0
Cash paid to increase CPE funds 00)
(100,00
Net cash flow from operating activities 0)
Net increase in cash and cash equivalents P 800,000
Cash and cash equivalents, beginning 800,000
1,000,0
Cash and cash equivalents, end 00
1,800,0
P 00
Reconciliation of change in net asset to net cash from
operating activities:
Change in net assets P 110,000
Adjustments to reconcile change in net
assets
to net cash from operating activities:
Depreciation and loss on doubtful
accounts 420,000
Decrease in receivables 220,000
(50,000
Increase in prepaid expenses )
Increase in vouchers payable 100,000
Net cash from operating activities P 800,000
Supplemental data for noncash investing
activity:
Purchase of equipment using the asset
restricted
for the purpose P 500,000
EDUCATIONAL INSTITUTIONS
The activities of an educational institution may be classifies as (1)
instructional, (2) administrative and (3) auxiliary. Instructional activities include both
resident and extension instruction, public services, organized research and the
operation of libraries. Administrative activities include staffing and promotion,
registration and enrollment, operation of the business office, and operation and
maintenance of the educational plant. Auxiliary services include the operation of
residence halls, dining rooms, college unions and bookstores, health centers, and
athletic and cultural programs. Revenues in support of these different activities are
provided by such varied sources as contributions, governmental appropriations,
student fees, endowment income, and revenues from the sale of goods and
services.
There are six major fund groupings for educational institutions, namely:
(1) current funds;
(2) loan funds;
(3) endowment and other nonexpendable funds;
(4) annuity funds;
(5) plant funds, divided into unexpended plant funds, retirement of
indebtedness funds and an invested in plant section; and
(6) agency funs
Current Funds
Current funds are composed of current resources that are to be employed in
meeting obligations arising from the general operations of the educational
institution. The educational unit establishes the following funds within this grouping:
(1) a current unrestricted fund that consists of the resources that can
be applied to current purposes without restriction and
(2) restricted current funds consisting of resources that, while available
for current purposes, are subject to certain limitations in their application.
Student fees and resources from gifts or from income of endowment
funds that carry no specific limitations as to use, then, are reported in the
current unrestricted fund. On the other hand, resources from gifts or grants
and from the income of endowment funds that can be spent only for specified
purposes, such as for a library, for scholarships, for an athletic program, or
for research, would be reported in restricted current funds.
Operations of the educational institutions normally include the
establishment of a number of auxiliary enterprises that offer services to
students and staff on a self-supporting basis. Activities of such auxiliary
enterprises are generally reported in the current unrestricted fund. It would
be possible, however, to establish a third subgrouping within the current
funds category for revolving funds or working capital funds and thus provide
a separate accounting for auxiliary units.
Accounting practices that are special in accounting for the educational
unit include the employment of a modified accrual basis. In general, the
accounts of colleges and universities should be kept on the accrual basis. This
means that bills for materials received or for services rendered, whether or
not paid, should be reported to the fullest extent practicable. Income should
be reported when it becomes due or when a bull has been rendered for it,
and appropriate allowance should be made for probable losses. Since the
primary purpose of accounting for educational institutions is to report on the
stewardship of the funds and property entrusted to the institution rather than
to determine net profits and net worth, some items of income need not be
accrued and certain expenditures need not be prorated. For example, few
institutions find it necessary or desirable to report accrued interest
receivable, or to allocate insurance premiums to subsequent periods.
Consequently, it may be said that the accounts of educational institutions
generally are maintained in a modified accrual basis.
The above discussion is especially applied to government supported
educational institutions. Privately owned educational institutions operate just
like business enterprises, except that in most local private educational
institutions, tuition fees are accounted for using the cash basis. Supporting
schedules are prepared to reflect receivables from students for tuition fees.
These schedules, however, are not reflected on the balance sheet and
therefore the corresponding income is not reflected on the statement of
activities.
To illustrate the accounting for transactions affecting thee
Unrestricted Current Funds of NPO University and the entries to record
these transactions are listed below:
1. Educational and general revenue for year ended June 30, 20B P3,000,000 of
which P150,000 has not yet been collected
Cash 2,850,000
Account Receivables 150,000
Student fees 1,620,000
Gifts and grants 920,000
Endowment income 60,000

Sales & service-educational depts. 325,000
Income from org. acts. Rel. to educ. depts 40,000
Income from other sources 35,000

2. Revenue related to auxiliary unit bookstore, P262,500 of which P25,000 has not
yet been collected
Cash 237,500
Accounts Receivable 25,000

Revenue-auxiliary unit 262,500
3. Revenue for student aid, P400,000 collected
Cash 400,000
Revenue for student aid 400,000
4. Educational and general expenses (salaries and supplies), 2,750,000 of which
P180,000 has not yet been paid.
General administration 190,000
General expense 60,000

Instruction & departmental research 1,230,000
Organized activities rel. to educ. Depts. 35,000
Organized research 415,000
Extension and public services 160,000
Libraries 360,000
Operation & maintenance of physical plant 300,000
Cash 2,570,000
5. Expenses related to auxiliary enterprise- bookstore (materials &supplies,
salaries, and other expenses), P300,000 of which P55,000 has not yet been paid.
Expenses-auxiliary enterprise 300,000
Cash 245,000

6. Payments representing student aid, P415,000
Student aid 415,000
Cash 415,000
7. Payments of interest on current and long-term indebtedness, P100,000 and
payment of installment due on mortgage carried as liability in invested in plant
section, P25,000
Current unrestricted net assets 25,000
Cash 125,000
8. Acquisition of equipment to be carried as asset invested in plant section,
P15,000
Cash 15,000
9. Transfer to unexpected plant funds of cash to be used for plant renewals and
replacements, P30,000
Cash 30,000
10.Transfer to endowment fund or cash to be employed as an endowment until
alternative use is authorized by board of directors
Cash 50,000
The expenses established in transactions (7) to (10) should not be considered
in summarizing and evaluation the results of educational and general operations. It
may be noted that some educational institutions would distinguish between
acquisitions of equipment for new buildings and acquisitions of equipment other
than for new buildings. They would charge acquisitions of equipment for new
buildings against the corresponding fund balance but would recognize all other
acquisitions of equipment as current fund expenses and would report these in the
statement of operations within appropriate functional classifications.
11.Adjustments, June 30, 20B: (a) Earnings, P2,500, reported by annuity fund, to
become available next period for education and general purposes; (b)
adjustments related to auxiliary enterprise- bookstore: inventories, materials and
supplies P50,000 prepaid expenses P2,500; accrued expenses- P5,000; (c)
adjustments related to educational and general activities: allowance for doubtful
accounts, P5,000
Due from annuity fund 2,500
Unearned income from annuity fund 2,500
Inventory of materials and supplies 50,000
Prepaid expenses 2,500
Accrued expenses 50,000
Allowance for doubtful accounts 5,000

12.To close educational and general revenue and expense accounts at end of fiscal
year
Student fees 1,620,000

Sales & services-educational departments 325,000
Income from org. activities-educ. depts 40,000
Income from other sources 35,000

Instruction and departmental research 1,230,000
Organized activities re educational depts. 35,000

Organized research 415,000
Operation and maintenance-physical plant 300,000
Libraries 360,000
13.To close auxiliary enterprise revenue and expense accounts at the end of the
fiscal year
Revenue-auxiliary enterprise 262,500

14.To close student aid revenue and expenses at the end of fiscal year
Revenue for student aid 400,000
Student Aid 415,000
To illustrate the accounting for transaction affecting the Restricted Current
Funds of NPO University and the entries to record these transactions are listed
below:
1. Revenues for year ended June 30, 20B P182,500 of which P15,000 applies to
expenses of next year.
Cash 177,500
Unearned income 15,000
Revenues-auxiliary enterprise 80,000

2. Expenses, P140,000 of which P7,500 has not yet been paid
Instruction and departmental research 35,000
Libraries 32,500
Cash 132,500

3. Investments of cash in securities P30,000
Temporary investment 30,000
Cash 30,000
4. Required transfer to endowment fund of P10,000 representing charge for
depreciation on endowment properties (dormitory) employed in producing
auxiliary income
Expenses-auxiliary enterprises 10,000
Cash 10,000
In this example, the net earnings of a dormitory become available for certain
designated current purposes and hence revenues and expenses of this enterprise
are reported in the restricted current funds. It is assumed, however, that terms of
the dormitory grant call for a periodic charge against revenue for depreciation and a
transfer of cash to the endowment fund equal to the depreciation charge. The
depreciation is recognized by a charge to expense and a credit to a liability
account; subsequent payment to the endowment fund will call for a charge to the
liability account and a credit to Cash.
5. To close educational, general revenues & expenses
Instruction and departmental research 35,000
Libraries 32,500
NPO University
Current Funds
June 30, 20B
ASSETS
Unrestricted
Cash 37,500
Due from annuity fund 2,500
175,00
Accounts receivable 0
170,00
Less: Allowance for doubtful accounts 20,000 0
Inventories (materials & supplies) 50,000
Prepaid expenses 2,500
262,50
Total Unrestricted 0
Restricted:
Cash 15,000
Temporary Investments 30,000
Total 45,000
307,00
TOTAL ASSETS 0
Unrestricted:
235,00
Voucher payable 0
Accrued expenses 5,000
242,50
Total 0
Restricted:
Due to endowment Fund D 10,000
Total 32,500
275,00
TOTAL LIABILITIES 0
Net Assets:
Unrestricted 20,000
Restricted 12,500
TOTAL NET ASSETS 37,500
307,50
TOTAL LIABILITIES AND NET ASSETS 0
NPO University
Current Funds
For the year ended June 30, 20B
Restricte
Current Total Unrestricted d
Income:
Education and General
1,620,00 1,620,00
Student fees P 0 P 0
Endowment income 105,000 60,000 P 45000
Gifts and grants 957,500 920,000 37500
Sales & services-educ. depts 325,000 325,000
Income from org. activities 40,000 40,000
Income from other resources 35,000 35,000
3,082,50 3,000,00
Total P 0 P 0 P 82500
Auxiliary enterprises:
Bookstore P 262,500 P 262,500
Dormitory 80,000 P 80000
Total P 342,500 P 262,500 P 80000
Student aid P 400,000 P 400,000
3,830,00 3,662,50 16750
Total Current Income P 0 P 0 P 0
Less: Current Expenses:
Education and General
General administration P 200,000 P 190,000 P 10000
General expense 165,000 165,000
1,265,00 1,230,00
Instruction &dept research 0 0 35000
Organized activities 35,000 35,000
Organized research 415,000 415,000
Extension & public services 165,000 160,000 5000
Libraries 392,500 360,000 32500
Operation & maintenance of
physical plant 300,000 300,000
2,937,50 2,855,00
Total P 0 P 0 P 82500
Auxiliary enterprises:
Bookstore P 252,500 P 252,500
Dormitory 67,500 P 67500
Total P 320,000 P 252,500 P 67500
Student aid P 415,000 P 415,000
3,672,50 3,522,50 15000
Total current expenses P 0 P 0 P 0
Excess of current income over current
expenses P 152,500 P 140,000 P 12500
NPO University
Current Funds
Statement of Changes in Equity
Restricte
Total Unrestricted d
Net Assets, July 1, 20A -0- -0- -0-
Increase for year ended June 30,
Add: 20B per
summary of current income and
expenses P 152,500 P 140,000 P 12500
To
ta
l P 152,500 P 140,000 P 12500
Less
:
Payment on mortgage note
reported as invested P 25,000 P 25,000
in plant section
Acquisition of equipment reported as
invested in plant section 15,000 15,000
Transfer to unexpected plant funds 30,000 30,000
Transfer to endowment fund 50,000 50,000
Total P 120,000 P 120,000
Change in net assets* P 32,500 P 20,000 P 12500
*Change in net assets under the current fund is equal to the cash balance at year-
end since no beginning balance exists.
The statements for the current funds to report financial position, revenues and
expenses, changes in funds balance, and cash flows are prepared periodically.
LOAN FUNDS
Loan funds consist of resources that are available for loans to students. Loan
funds originate from gifts, they may be built up over a period of years from student
fees collected for such purpose or from transfers from endowment fund whose
income is available for such purpose. Loans may be made with or without interest
depending upon the conditions established by those providing the loan fund. Loan
funds are regarded as nonexpendable uncollectible loans, fund administrative
expenses, and losses on the sale of fund investments, and gains on the sale of fund
investments.
Transactions related to the loan fund of NPO University and the entries to record
these are listed below:
1. Receipt of cash gift to be used for loans to students, P50,000
Cas
h 50,000
Loan Fund net assets 50,000
2. Purchase of securities for P25,000 which includes accrued interest of P600
Investments 25,000
Accrued interest 600

Cash 25,600
3. Loans to students, P20,000
Noted receivable 20,000
Cash 20,000
4. Collections of interest on investments, P1,500
Cash 1,500
Accrued interest 600
Loan fund net assets 900

5. Collections of loans with interest of P150, P7,650
Cash 7,650
Notes receivable 7,500
Loan fund net assets 150

6. Uncollectible loans written off, P300
Loam fund net assets 300
Notes receivable 300
Loan fund resources are balanced by the account Loan Fund Balance/ Loan Fund
Net Assets. During the period, entries are made to record the operations of the
fund. Nominal accounts may be established to summarize the separate sources of
fund increases and decreases for a period; when fund changes are few in number,
changes are recorded directly in the loan fund balance/ loan fund net asset balance.
This was done in the example.
NPO University
Loan Fund
June 30, 20B
ASSETS
13,5
Cash P 50
25,0
Investments 00
12,2
Notes Receivable 00
50,7
TOTAL ASSETS P 50
50,7
TOTAL ET ASSETS P 50
NPO University
Loan Fund
Revenues:
Interest on investments P 900
Interest on loans 150 P 1,050

Less: Expenses/losses:
Uncollectible loans written off 300
Excess of revenue over expenses P 750
NPO University
Loan Fund
Statement of Cash Flows
Cash from operating activities:
50,00
Receipts of gifts P 0
75
Excess of receipts over expenses 0
Net cash from operating activities or net 50,75

assets P 0
ENDOWMENT AND OTHER NONEXPENDABLE FUNDS

An endowment fund is formed when cash or other properties are transferred to
the institution under conditions that provide that only the income produced by such
resources can be used for the benefit of the institution. Fund, principal, then, is
unexpendable; although fund principal may change as a result of the sale of
restrictions are placed on the use of fund income by the institution, the endowment
is referred to as an Unrestricted Endowment . When the use of the fund income is
limited to certain objectives, the endowment is called a Restricted Endowment.
Income from an unrestricted endowment becomes available to the unrestricted
current fun; income from a restricted endowment is transferred to the appropriate
restricted current fund or to the plant fund.
Endowments are generally created by transfers of assets directly to the
institution. The governing body of the institution then takes steps to carry out the
terms of the endowment. In some instances, assets are transferred to a trustee who
assumes the responsibility for administering the endowment. Here, the trustee
transfers endowment income to the institution for use in accordance with the terms
of the endowment. In other instances, resources not currently required by
unrestricted current fund may be transferred out of this fund to be administered as
an endowment until the resources are required for alternative use. These resources
are referred to as Fund Temporarily Functioning as an Endowment. Authority
for the establishment of the latter funds, the use of income from such funds rests
with the governing body of the institution.
The proper management of endowment fund calls for measuring income
accurately so that income distributions do not impair fund principal. Terms of the
endowment may define certain practices for calculating distributable income. When
specific provisions for distinguishing between principal and income are not included
in the endowment instrument, reference is made to law. Principal and income
distinctions are the same as those that were recognized in the discussion of trust.
In maintaining a single set of books for the endowment fund group, investments
and other property items should be identifies with specific endowments, and
separate endowment fund balances should be reported for each endowment.
Earnings of the different endowments do not need to be reflected on the books for
the endowment funds that may be entered directly in the books of the funds
receiving the earnings.
An institution may arrange for pooling the resources of some or all of its
endowments when such action is not prohibited by terms of the individual
endowments. Pooling frequently makes possible more attractive investment
opportunities. It also reduces the amount of detailed record keeping. Furthermore,
arrangements may be made for assuring regularly periodic income distributions by
adopting conservative distribution rates that permit an accumulated of income for
distribution in periods of below-normal investment return. Under the latter
circumstances, both investment income and distributions of income would be
reported in the endowment fund books and any undistributed earnings balance
would be carried forward.
Entries to record transactions related to endowment funds for NPO University are
as follows:
1. Receipt of cash from donor in establishment of endowment Fund A, P1,000,000.
No restrictions are made as to use of endowment income.
Cas 1,000,00
h 0
1,000,00
Endowment Fund A balance 0
2. Receipt of securities from 2 donors in establishment of Endowment Funds B and
C. Endowment Fund B- 10,000 shares of X Co. ordinary shares, value on date of
transfer is P715,000. Endowment Fund C- 2,500 shares of Y Co. preference
shares, value on fate of transfer P245,000. No restrictions are made as to use of
endowment income
Investments-ordinary shares 715,000
Investments-preference shares 245,000

Endowment Fund B balance 715,000
Endowment Fund C balance 245,000

3. Pooling of Endowment Funds A, B, and C. Endowment fund balances were
restated in terms of market values of securities as of date of pooling as follows:
Ordinary shares market value, P750,000 and Preference shares market value
P250,000.
1,000,00
Pooled Cash 0
Pooled investments- ordinary shares 750,000
Pooled investments- preference shares 250,000
1,000,00
Cash 0
Investments- ordinary shares 715,000
Investments- preference shares 245,000
Endowment Fund B balance 35,000
Endowment Fund C balance 5,000

The receipt of endowment fund resources is recorded by charges to appropriate
asset accounts and credits to properly identified endowment fund balances. In the
example, resources from Endowment Funds A, B, and C are pooled. Securities and
endowment fund balances are restated in terms of the values of the respective
contributions on the date of pooling.
Pooled investments- bonds 900,000
Pooled investments - unamortized bond
premium 45,000
Pooled cash 945,000
4. Purchase of P900,000 of Z Co. bonds at a price of 105
Pooled Cash 107,500
Undistributed pooled income 107,500

5. Collection of interest and dividends on pooled investments, P107,500
Pooled investments-unamortized bond
premium 2,500
6. Premium amortization on pooled investments, P2,500
Revenues of P107,500 are related to pooled investments, but these revenues are
reduced by bond premium amortization of P2,500 to assure that endowment
principal balances remain unimpaired.
Pooled cash 105,000

7. Distribution of income on pools endowments to unrestricted and restricted
current funds: Endowment Fund A: 1,000,000 / 2,000,000 x 105,000 or P52,500.
Endowment Fund B: 750,000/ 2,000,000 x 105,000 or P30,375. Endowment Fund
C: 250,000/ 2,000,000 x 105,000 or P13,125
Pooled cash 105,000

It is assumed in the example that the total revenue from pooled investments is
distributed, and consequently distribution is made in proportion to respective fund
contributions. With endowment fund principal balances of P2,000,000 and income
available for distribution of P105,000, the return on principal balances is 5 %,
would have resulted in a distribution limited to P90,000 and would have left a
balance of P15,000 to be carried forward as undistributed pooled income
8. Sale of Y Co. preference shares for P260,000
Pooled cash 260,000

Pooled investments- preference
shares 250,000
Gains and losses on pooled
investments 10,000
The gain from sales of pooled securities made during the year is reported
separately in an account titled Gains and losses on Pooled Investments, Gains and
losses in subsequent periods can also be carried to this account. Ultimately, and
balance in this account will be transferred to the individual endowment fund
balances in proportion to the respective fund interest in the pooling
9. Receipt of gift of properties to be used as a dormitory. Net income after
recognizing an annual charge for depreciation of P10,000 is to be used for
certain restricted purposes. Appraised values of properties in date of gift: Land
P125,000, Buildings P175,000
Land 125,000
Buildings 175,000
Endowment Fund D balance 300,000

Endowment Fund D, E, and F are examples of funds carried separately. Fund D
arises from gift of land and buildings whose net income is to be used for certain
restricted purposes. Properties forming the endowment are recorded in the
endowment fund.
10.Receipt of cash from unrestricted current fund to be used as an endowment fund
until alternative use is authorized, P50,000
Cas
h 50,000
Principal temporarily functioning as
Endowment 50,000
Fund E balance
Fund E arises from a transfer of unrestricted current fund cash for use as an
endowment until some alternative employment of funds is authorized.
11.To recognize resources of P400,000 held by trustee as an endowment. No
restrictions are made as to use of endowment income.
Fund held by trustee 400,000
Endowment Fund F balance 400,000

Fund D is established to recognized resources that are held for the benefit of the
institution by a trustee. Upon notification from the trustee of a change in fund
principal, an appropriate adjustment would be made in the endowment fund
balance. Income distributions by the trustee are recognized by the fund receiving
such income.
12.Amount receivable from restricted current fund representing recovery of
depreciation on endowment properties (dormitory), P10,000
Due from restricted current fund 10,000
Accumulated depreciation-buildings 10,000

Revenues and expenses relating to operations of the properties are reported in
the restricted current funds. The recognition of a claim against a restricted current
fund for the recovery of cash equal to the depreciation on endowment properties, as
required by the terms of the endowment, is recorded by a charge to a receivable
account and a credit to an allowance for depreciation.
NPO University
Endowment and Other Nonexpendable Funds
June 30, 20B
ASSETS
Cas
h P 50,000
Due from restricted current funds 10,000
Pooled cash 317,500

Pooled investments:
Ordinary shares P 750,000
Bonds 900,000
1,692,50
Unamortized bond premium 2,500 0
Lan
d 125,000
Buildings
Less: Accumulated depreciation P 175,000 165,000
Fund held by trustee 10,000 400,000
2,760,00
TOTAL ASSETS P 0
Gains and losses on pooled investments
Net Assets:
Unrestricted
Endowment Fund A P 1,000,000
Endowment Fund B 750,000
Endowment Fund C 250,000
Endowment Fund F 400,000
Total P 2,400,000
Restricted:
Endowment Fund D 300,000

Principal temporarily functioning
as Endowment Fund E 50,000
2,750,00
Total 0
2,760,00
NPO University
Endowment and Other Nonexpendable Funds
Fund Fund Fund Fund Fund Fund

Total A B C D E F
Net Assets, beg -0- -0- -0- -0- -0- -0- -0-
Increase for the year:
Gifts or transfers establishing P2,7 P1,0
funds 10 00 P715 P245 P300 P50 P400
Restatement of investment of
Endowment Funds A, B and
C,
upon pooling of resources 40 35 5
P2,7 P1,0
Net assets, end 50 00 P750 P250 P300 P50 P400
ANNUITY FUNDS
An annuity fund is formed when cash or other properties are transferred to the
institution subject to the requirement that specified payments be made to a
designated beneficiary during his lifetime. The payments to an annuitant may be
variable amount or they may be fixed; they may be equal to the income produced
by the fund assets or they more or less than such amounts. Upon the death of an
annuitant, undistributed fund resources become available for use in accordance
with the terms of the annuity agreement.
Annuity funds are sometimes included with the endowment funds for accounting
and reporting purposes. In the absence of limitations in the annuity agreements,
assets may be pooled just as in the case of endowment funds. Annuity fund
balances are increased by gifts subject to annuity agreements, gains on the sale of
annuity fund assets, and annuity fund income; annuity fund balances are decreased
by losses on the sale of assets, payments to annuitants, and asset transfers.
Transactions related to annuity fund of NPO University and the entries to record
these transactions appear below.
1. Receipt of cash of P125,000 subject to condition that P5,000 per year be paid to
the donor during his lifetime, any balance available for educational and general
purpose
Cash
125,000
Annuity net assets 125,000

2. Purchase of securities for P120,000 that includes accrued interest of P2,000
Investments 118,000
Accrued interest 2,000
Cash 120,000
3. Collections of income for the year ended June 30, 20B, P9,500
Cash 9,500
Accrued interest 2,000

4. Recognition of amount payable to annuitant, P5,000
Due to annuitant 5,000
5. Amount becoming available for educational and general purposes according to

annuity agreement, P2,500
Due to Unrestricted Current Fund 2,500

The receipt of annuity fund resources is recorded by charges to appropriate
asset accounts and credits to properly identified annuity fund balances. Investments
in securities are recorded in the usual manner. Earnings from investments as well as
losses and gains in the sale of investments are usually entered directly in the fund
balance. Payment to an annuitant is recorded by a charge to the annuity fund net
assets and a credit to Cash. In this example, recognition of the amount payable to
the annuitant is recorded by a credit to a liability account; the liability account
would be closed when payment is made.
NPO University
Annuity Fund
June 30, 20B
ASSETS
Cash 14,500
Investments 118,000
TOTAL ASSETS P 132,500
LIABILITIES AND
NET ASSETS
Due to annuitant 5,000
Due to
unrestricted
current fund 2,500
TOTAL LIABILITIES
AND NET ASSETS P 50,750
NPO University
Annuity Fund
Net assets, beg P -0-
Add Increase from gift subject to 125,0

: annuity P 00
132,5
Increase form income for year 7,050 00
Tot 132,5
al P 00
Les Amount payable to annuitant
s: for year P 5,000
Amount payable to unrestricted
current fund 2,500 7,500
125,0
Net assets, end P 00
Plant Funds
Resources related to the educational plant may be divided into three groups: (1)
resources that are held for plant expansion and replacement, (2) resources that are
held for retirement of long-term debt incurred in the acquisition of the plant, and (3)
the specific physical resources comprising the plant. This division has suggested the
use of three self-balancing groups of accounts from plant resources as (1)
Unexpended plant funds, (2) Retirement of indebtedness funds, and (3) Invested in
plant.
Unexpended Plant Funds. This grouping consist of cash, securities,
receivables and other assets that are to be used for the acquisition of new plant or
the replacement of existing plant. Present obligations against these resources for
construction in progress of for current plant acquisitions are recognized on the
unexpended plant fun books as liabilities. The difference between the assets and
liabilities is reported as the unexpended plant funds balance or net assets. This
balance is commonly divided into (1) the portion to be applied to plant additions
and (2) the portion to be applied to renewals and replacements.
Retirement of Indebtedness. This grouping consist of cash, securities, and
other assets that are to be used for the retirement of plant indebtedness. Fund
accounts are balanced by a single fund balance reporting total resources available
for retirement of indebtedness.
Invested in Plant. This grouping consist of the individual property items that
compose the educational plant. This grouping also carries any long-term
indebtedness relating to plant acquisitions. The difference between plant assets and
related liabilities is reported as an investment in plant balance. This balance is
commonly divided to show the different sources of plant financing gifts, current
funds, and endowment funds.
Transactions related to that Unrestricted Plant of NPO University and the entries
to record these transactions are as follows:
1. Receipt of cash gift to be used for plant acquisitions, P100,000

Cash 100,000
Unexpended plant funds balance-plant
addition 100,000
2. Payment of additions to buildings, P85,000
addition 85,000
Cash 85,000
3. Issue of bonds to raise funds for construction of buildings, P1,500,000
1,500,0
Cash 00
Unexpended plant funds balance-plant 1,500,0
additions 00
4. Completion of buildings at contract price of P1,500,000
Unexpended plant funds balance-plant 1,500,00
additions 0
1,500,00
Contract payable 0
5. Payment of contract, P1,500,000
1,500,00
Contract payable 0
1,500,00
Cash 0
6. Receipt of cash from unrestricted current fund for plant renewals and
replacements in subsequent periods, P30,000.
Cash 30,000
Unexpended plant funds balance-renewals
and replacements 30,000
7. Purchase of securities, P30,000
Investments 30,000
Cash 30,000
8. Collection of interest on investments, P750
Cash 750
additions 750
Cash and other assets for plant additions or for renewals and
replacements received from gifts and grants, from transfers from current
funds, or from the issue of long-term indebtedness are recorded by debits to
appropriate asset account balances and credits to unexpended plant fund
balances that designate the purpose to be served by the resources (see
entries 1, 3, and 6). Expenditures for plant expansion or for renewals and
replacement are recorded by debits to unexpended plant funds balances and
credits to Cash or to payable balances (see entries 2 and 4). Investments in
securities are recorded in the usual manner. Earnings are recorded by debits
to asset accounts and credits to appropriate unexpended funds balances (see
entry 8).
Transactions related to that Retirement on Indebtedness Plant Funds of NPO
University and the entries to record these transactions are reflected below.
1. Receipt of cash from unrestricted current for payment of mortgage instrument
due, P25,000
Cash 25,000
Retirement of indebtedness funds balance 25,000
2. Payment of mortgage installment due, P25,000
Cash 25,000
3. Receipt of cash gift to be used for payment of installments due on mortgage in
20C- 20E, P75,000
Cash 75,000
Resources that are specially provided for the retirement of long-term debt are
recorded by debits to appropriate asset accounts and credits to Retirement of
indebtedness funds balance. Payments of long-term debt are recorded by debits to
the funds balances and credits to Cash.
Transactions related to that Invested in Plant Funds of NPO University and the
entries to record these transactions are reflected below.
1. Receipt of gift of land, buildings, and equipment for educational and general
purpose valued at P4,000,000; properties are subject to mortgage for
P1,000,000.
Land 850,000
Improvements other than buildings 150,000
Buildings 2,500,000
Equipment 500,000
Mortgage payable 1,000,000
Investment in plant- from gifts 3,000,000
2. Addition to buildings financed by gifts reported in unexpended plant funds,
P85,000
Buildings 85,000
Investment in plant-from gifts 85,000
3. Issue of bonds to be used for construction of buildings, P1,500,000
1,500,00
Buildings to be acquired 0
1,500,00
Bonds payable 0
4. Completion of buildings financed by bond issue
1,500,00
Buildings 0
1,500,00
Buildings to be acquired 0
5. Payment by retirement of indebtedness funds of current installment due on
mortgage, P25,000
Mortgage payable 25,000
Investment in plant- from current funds 25,000
6. Acquisition by general current fund of equipment, P15,000
Equipment 15,000
Investment in plant-from current funds 15,000
7. Acquisition by endowment fund of a dormitory valued at P300,000
Land 125,000
Buildings 175,000
Investment in plant- from endowments 300,000
8. To record depreciation in buildings represented by endowment, P10,000
Investment in plant-endowments 10,000
Accumulated depreciation 10,000
In order that the invested in plant group may report all of the properties owned by
the institution, land and buildings reported in an endowment fund are also reported
here; asset accounts are debited and Investment in plant from endowments is
credited. Depreciation on endowment fund properties that was recognized in the
endowment fund is also reported in the invested in plant group; the investment in
plant balance is debited and accumulated depreciation account is credit.
9. Retirement of equipment carried at P5,000
Investment in plant - from gifts 5,000
Equipment 5,000
Acquisitions of educational plant items are recorded by debits to appropriate

asset accounts and credits to investment in plant balances that designate the plant
financing sources. The issue of bonds to finance constructions is recorded by a debit
to Buildings to be acquired and a credit to liability; the proceeds from the bond
issue are recorded in the unexpended plant funds books. Completion of the
construction is recorded by a debit to buildings and a credit to Buildings to be
acquired. Retirement of a plant item is recorded by a debit to the appropriate
investment in plant balance and a credit to the asset account.
NPO University
Plant Funds
June 30, 20B
ASSETS
Unexpended Plant Funds:
Cash P 15,750
Investments 30,000 P 45,750
Retirement of indebtedness
funds:
Cash 75,000
Invested in Plant:
Land p 975,000
Improvements other than
Buildings 150,000
4,260,0
Buildings P 00
4,250,0
Less: Accum depreciation 10,000 00
Equipment 510,000
5,885,0
Total P 00
Less: Items carried in
Endowment
5,595,0
Funds 290,000 00
5,715,75
TOTAL ASSETS P 0
Unexpended plant funds:
Balance-plant additions P 15,000
Balance-renewals and
replacements 30,750 P 45,750
Retirement of indebtedness
funds:
Balance 75,000
Invested in Plant:
975,00
Mortgage payable P 0
1,500,0 2,475,0
Bonds payable 00 P 00
Investment in plant-
3,080,0
From gifts P 00
3,120,0 5,595,00
From current funds 40,000 00 0
TOTAL LIABILITIES AND NET 5,715,75
ASSETS P 0
Observe that the credit balance summarizing the investment in plant from
endowments is subtracted from total assets rather than being reported as a fund
balance item. This is done to cancel the effects of reporting endowment fund
properties both in endowment fund books and in plant fund books.
AGENCY FUNDS
The educational institution frequently acts as an agent or trustee,

holding certain assets on behalf of others. When agency operations are
simple and of limited duration both asset accounts and accounts expressing
the institutions accountability to others may be carried in the general or
current fund. On the other hand, when operations are involved and
continuing, an agency fund may be recognized and special agency books
established for the properties subject to agency control. Agency funds may
be established for pension and retirement resources, special organization
resources, student deposits, and tax withholding amounts. Accounting for the
agency is the same as it would be for a private business. Agency operations
are discussed in a higher accounting subject.
HOSPITALS
Hospitals provide for depreciation, care and medical and surgical treatment of
the sick or injured. Rooms are provided and meals are supplied. Although major
activities center about inpatients, hospitals frequently render outpatient care and
emergency services. Hospitals may also carry on special activities such as research
and nurses training. They also operate a number of auxiliary enterprises such as
pharmacies for outpatients and cafeterias for staff members and visitors. Hospital
operations call for important administrative activities. The latter include: hospital
staffing; registration of patients; operation of the physical plant; food, laundry and
housekeeping management; and budgeting, accounting, billing and collecting.
The major source of hospital support is normally charges that are made to
patients for services. However, such charges frequently fail to cover the full cost of
hospital operations, and significant sums must be sought from contributions and
grants from private, public and charitable sources.
Funds for the hospital
Accounting for hospitals are quite similar to that for educational institutions.
The hospital, like the educational institution, acquires revenues that must be
applied to specific objectives; hence, a fund approach is used in the recognition of
resources. There are certain accounting differences, however, that should be
pointed out.
The hospital generally does not require variety of funds required by the
educational institution. A further different is found with respect to the operating
summaries of the two units. For the educational institution, revenue were compared
with expenditures, a modified accrual basis was employed and depreciation of the
educational plant was generally ignored. In the case of hospitals, an analysis and
summary of operations that comes closer to that of private business is normally
warranted. Hospitals sell specific services. There is the expectation by patients,
group purchasers of insurance protection, and insurance companies selling hospital
protection charges for services will bear a close relationship to the costs of these
services. Furthermore, although contributions may be available suggest that
hospital revenues should be set at levels that will provide for the ultimate
replacements of properties. In summarizing activities for the hospital unit, then,
these factors suggest that revenues, be compared with expenses, that a full
accrual basis be employed, and that depreciation of hospital properties be
recognized in arriving at total operating costs.
There are four major fund groupings:
(1) General or current fund

(2) Temporary funds
(3) Endowment funds
(4) Plant funds
GENERAL/CURRENT FUND
The general/current fund of the hospital summarized the current resources

that are to be used in meeting the obligations arising from general operations.
Resources that can be applied without restriction are reported here; expenditures
for which specific funds have not been provided are financed from these resources.
The general fund of the hospital is the same in nature are function as the general or
current fund of the educational institution.
To illustrate the accounting for the general fund, transactions affecting the
general fund of NPO Hospital and the entries to record these transactions are listed
below.
1. Charges for services to patients for year ended December 31, 20B, P580,000 of
which P45,000 is still due; adjustments and allowances of P60,000 apply to
charges.
475,00
Cash 0
45,00
Accounts receivable 0
40,00
Free service and adjustments- contractual patients 0
16,50
Free service and adjustments- general patients 0
3,50
Courtesy and miscellaneous allowances 0
320,00
Earnings from routine service- inpatients 0
50,00
Earnings from routine services- outpatients 0
210,00
Earnings from special services 0
2. Other hospital revenues, P420,000 of which P10,000 is still due from temporary
fund in reimbursement of research expenses
410,0
Cash 00
10,0
Due from temporary fund 00
General contributions, donations, legacies and 180,0
bequests 00
122,5
Grants from community chests, foundations 00
10,0
Donated services and commodities 00
57,5
Income transfers from temporary funds 00
50,0
Miscellaneous revenues 00
3. Collections of interest and dividends in endowment funds securities, P85,000 of
which P5,000 is due from Endowment Fund #1 representing bond premium
amortization
Cash 85,000
Due from Endowment Fund #1 5,000
Income from investments 80,000
4. Expenditures for hospital supplies. P200,000 of which P25,000 has not been paid
200,00
Inventory of supplies 0
175,00
Cash 0
25,00
Vouchers payable 0
5. Hospital supplies charged put, P170,000
5,00
Administrative and general 0
10,00
Household and property 0
15,00
Professional care of patients 0
120,00
Dietary 0
5,00
Outpatient and emergency 0
15,00
Other expenses 0
170,00
6. Payment of hospital salaries and wages P490,000
85,00
45,00
220,00
60,00
Dietary 0
30,00
50,00
Other expenses 0
490,00
Cash 0
7. Payment of hospital expenses other than salaries and wages
20,00
10,00
25,00
7,50
Dietary 0
2,50
10,00
Other expenses 0
75,00
Cash 0
8. Payments of interest on mortgage, P60,000 and of installment due on mortgage
carried as liability in the plant funds, P50,000
60,00
Interest expense 0
50,00
General fund balance 0
110,00
Cash 0
9. Adjustments required on December 31, 20B: (a) allowance for uncollectible
accounts, P2,500; (b) accrued salaries and wages, P5,000; (c) charges for
depreciation on properties carried as assets by plant funds, P85,000; (d) to
recognize amount to be paid to plant funds equal to depreciation on properties.
2,50
Bad debts 0
2,50
Allowance for uncollectible accounts 0
1,00
administrative and general 0
2
Professional care of patients 1,25
0
7
Dietary 50
2
1,50
Other expenses 0
5,00
Cash 0
85,00
Depreciation 0
85,00
General/current fund balance 0
85,00
85,00
Due to plant funds 0
The transfer of cash to plant funds to finance the ultimate replacement of
properties is recorded by a debit to General Fund balance and a credit to Cash. In
the example, recognition of reimbursement due to plant funds is reported by a
credit to a payable. The payable would be closed when the cash is transferred.
10.To close general operating revenue and expense accounts at the end of the
period
320,0
Earn from routine service-inpatients 00
50,0
Earnings from routine services- outpatients 00
210,0
Earnings from special services 00
222,50
40,00
Free services and adjustments-contractual patients 0
16,50
Free service and adjustments- general patients 0
3,50
Courtesy and miscellaneous allowances 0
2,50
Bad debts 0
111,00
65,25
261,25
188,25
Dietary 0
37,75
76,50
Other expenses 0
11.To close other revenue and expense accounts at the end of the period
bequests 00
122,5
Grants from community chests, foundations 00
10,0
57,5
80,0
Income from investments 00
50,0
Miscellaneous revenues 00
60,0
Interest expense 00
85,0
Depreciation 00
355,0
NPO Hospital
General Funds
December 31, 20B
Assets
120,0
Cash P 00
45,00
Accounts receivable P 0
Less: Allowance for doubtful 42,50
accounts 2,500 0
10,00
Due from temporary funds 0
30,00
202,5
TOTAL ASSETS P 00
25,00
Vouchers payable P 0
Due to Endowment Fund #1 5,000
85,00
Due to plant funds 0
Accrued salaries and wages 5,000
120,0
TOTAL LIABILITIES P 00
82,50
General 0
TOTAL LIABILITIES AND NET 202,5
ASSTES P 00
NPO Hospital
General Funds
For the year ended December 31,20B
Gross revenues from services to patients:
320,00
Routine services-inpatients P 0
Routine services-outpatients 50,000
210,00 580,0
Special services (see schedule) 0 P 00
Deductions from gross revenues:
Free service and adjustments-
contractual patients P 40,000
Free service and adjustments- general 116,50
patients 0
Courtesy and miscellaneous
allowances 3,500
62,50
Bad debts 2,500 0
517,5
Net revenues from services to patients P 00
Salarie
s&
Other
Wages s Total
25,00 111,0
Operating expenses: P 86,000 P 0 P 00
20,00 65,25
Administrative and general 45,250 0 0
221,25 40,00 261,2
Household and property 0 0 50
Professional care of patients (see 127,5 188,2
schedule) 60,750 00 50
Dietar 37,75
y 30,250 7,500 0
25,00 76,50
Outpatient and emergency 51,500 0 0
495,00 245,0 740,0
Total P 0 P 00 P 00
222,5
Deficit from operations 00
Other revenue
bequests P 00
Grants from community chest, 122,5
foundations 00
10,00
57,50
80,00
Income from investments 0
50,00 500,0
Miscellaneous revenues 0 00
277,5
Total 00
Other expenses:
60,00
Interest expense P 0
Depreciati 85,00 145,0
on 0 00
Net 132,5
income P 00
NPO Hospital
General Funds
Schedule of Gross Revenues from Special Services
Operating rooms P 30,000
Delivery rooms 12,500
Anesthesiology 3,000
Radiology 8,000
Laboratory 40,000
Pharmacy 106,000
Medical and surgical supplies 2,500
Emergency 8,000
Total P 210,000
NPO Hospital
General Funds
Schedule of Salaries and Wages for Professional Care of Patients
Nursing services P 25,000
Medical and surgical services 90,000
Pharmacy 17,500
Medical library 15,000
Operating rooms 27,500
Delivery rooms 10,000
Department of anesthesiology 5,000
Department of radiology 12,500
Laboratory 18,750
Total P 221,250
NPO Hospital
General Funds
132,5
Net income per statement of activities P 00
Add: Depreciation charge on properties reported in 85,00
plant fund 0
217,5
Total P 00
(85,00
Transfer to plant fund 0)
(50,00
Payment of mortgage reported in plant fund 0)
82,50
Net cash flow from operating activities P 0
Net assets, beg -0-
82,50
Net assets, end P 0
In considering the presentation of hospital revenues for statement purposes,
the following classifications are used (1) gross revenues from patients, (2)
deductions from revenues, and (3) revenue sources. In considering operating
expenses, it recognizes the following classifications: (1) administration and general;
(2) dietary; (3) household and property; (4) professional care of patients; (5)
outpatient and emergency and (6) other expenses.
TEMPORARY FUNDS
Temporary funds are composed of current resources that, while available for
current purposes, are subject to certain limitations in their use. For example,
resources from gifts or grants and income from endowment funds that can be spent
only for specified purposes, such as research, a medical library, or nurses training,
would be reported as temporary funds. Temporary funds of the hospital, then, are
identical in nature and function to the restricted current funds of the educational
institution.
Temporary funds transactions of NPO Hospital and the entries to summarize

these transactions are listed below.
1. Receipt of cash gift to be used for medical research, P10,000

Credi
Account Titles Debit t
100,0
Cash 00
100,0
Temporary Fund A balance 00
2. Purchase of securities, P85,000
85,00
Temporary Investment- Fund A 0
85,00
Cash 0
3. Receipt of cash gift to be used for books and journals for hospital patients,
P10,000
Credi
10,00
Cash 0
10,00
Temporary Fund B balance 0
4. Sale of securities, book value, P25,000, for P23,500
23,50
Cash 0
Temporary Fund A balance 1,500
25,00
Temporary Investment Fund A 0
5. Collection of interest and dividends
Credi
Cash 5,000
Temporary Fund A balance 5,000
6. Expenditures during year by general fund for research for research chargeable to
Temporary Fund A, P50,000; cash transferred to general fund, P40,000.
Credi
50,00
Temporary Fund A balance 0
40,00
Cash 0
10,00
Due to general fund 0
7. Payment of general fund for books and journals chargeable to Temporary Fund B
balance, P7,500
Temporary Fund B balance 7,500
Cash 7,500
8. Adjustments required on December 31, 20B; accrued interest on securities, P250
Temporary Fund B balance 7,500
Cash 7,500
In the example the temporary funds books summarize two temporary funds, and
a separate fund balances are maintained to report the respective fund equities. It
should be observed that changes in temporary fund balances; when there are many
changes and these are to be reported in special operating statements, nominal
accounts would be established to accumulate profit and loss detail.
NPO Hospital
Temporary Funds
December 31, 20B
ASSETS
Cash P 6,000
Temporary investments 60,000
Accrued interest on temporary
investments 250
TOTAL ASSETS P 66,250
Due to general fund P 210,000
53,75
Fund balances: A P 0
B 2,500 56,250
TOTAL LIABILITIES AND NET
ASSETS P 66,250
NPO Hospital
Temporary Funds
Total Fund A Fund B

Balances, January 1, 20B - - -
Increases for year:
110,00 100,0 10,0
Gifts Establishing funds P 0 P 00 P 00
Income from dividends and interest 5,250 5,250 -
Tota 1,150,2 105,2 10,0
l P 50 50 00
Decrease for year:
Loss on sale of securities at less
than book value P 1,500 P 1,500
Charges in fulfillment of fund 50,00 7,50
objectives 57,500 0 P 0
51,50 7,50
Total P 59,000 P 0 P 0
53,75 2,50
Balances, December 31, 20B P 56,250 P 0 P 0
ENDOWMENT FUNDS
Endowment funds for a hospital, like those for an educational unit, represent
resources that have been transferred under conditions that limit expenditures to
the income that is produced by such resources. Assets may be transferred
directly to the hospital, or they may be transferred to a trustee who administers
them for the benefit of the institution.
An endowment may also be created by the action of the governing board of the
hospital. Terms of endowment may place no restrictions on the use of the
endowment income, or they may specify a particular purpose for which the
income is to be used. In the absence of restrictions, endowment income
becomes available to the general fund; when there are restrictions, income is
reported in a temporary fund. Endowment funds transactions of NPO Hospital
and the entries to summarize these transactions are listed below
1. Receipt of bonds in establishment of Endowment Fund #1 as follows: Co. R

bonds, face value P500,000, market value on date of transfer, P550,000. Co. S
bonds face value, P500,000, market value on date of transfer, P470,000
1,000,0
Investments in bonds at face value (Endowment Fund #1) 00
Investments-unamortized bond premium (Endowment
Fund #1) 50,000
Investments-unamortized bond discount (Endowment
Fund #1) 30,000
1,020,0
Endowment Fund #1 balance 00
2. Receipt of cash in establishment of Endowment Fund #2, P250,000. Endowment
income is to be used for specified research projects.
250,00
Cash 0
250,00
Endowment Fund #1 balance 0
3. Purchase of 1,000 shares of Co. T preference shares, P240,000
240,00
Investments in preference shares (Endowment Fund #2) 0
240,00
Cash 0
4. Collection of interest by general/current fund that includes P5,000 reimbursable
to Endowment Fund #1 for bond premium amortization.
Due from general/current fund 5,000
Investments- unamortized bond premium (Endowment
Fund #1) 5,000
5. Sale of Co. S bonds at face value, P250,000
250,00
Cash 0
Investments-unamortized bond discount(Endowment Fund
#1) 15,000
Investments-at bonds at face value (Endowment Fund 250,00
#1) 0
Endowment Fund #1 balance 15,000
In the example, endowment funds books summarize two endowments,

and separate endowment fund balances summarize their respective fund
equities. It should be observed in the example that endowment fund income
is reported directly in the fund that is entitled to such income. When revenue
and expenses are involved in a determination of net income, revenue and
expenses can be summarized in the endowment funds books; the fund net
income, when determined, is then transferred to the appropriate fund.
NPO Hospital
Endowment Funds
December 31, 20B
ASSETS
Cas 260,00
h P 0
Due from general fund 5,000
Investments:
Preference shares (Endowment 240,0
Fund #2) P 00
Bonds at face value 750,0
(Endowment Fund #1) 00
45,00
Unamortized bond premium 0
(15,0 1,020,0
Unamortized bond discount 00) 00
1,285,0
TOTAL ASSETS P 00
Fund balances:
Endowment Fund #1- for 1,035,0
general purposes P 00
Endowment Fund #2- for 250,00
restricted purposes 0
1,285,5
NPO Hospital
Endowment Funds
Total Fund #1 Fund #2
Balances, January 1, 20B - - -
Increases for year:
1,270,0 1,020,0 250,0
Gifts establishing funds P 00 P 00 P 00
Gain on sale of securities at more than
book value 15,000 15,000 -
1,285,0 1,035,0 250,0
Balances, December 31, 20B P 00 P 00 P 00
PLANT FUNDS
Hospital plant resources may be divided into two groups (1) physical
resources comprising the hospital properties, and (2) cash and other assets that are
available for the improvement and the replacement of the hospital properties.
Although the two asset groups are recognized, hospitals would nevertheless
combined these within a single plant funds category. When there are claims against
plant fund resources in connection with original financing of properties, construction
in progress, or current property acquisitions, such obligations would be recognized
in the plant funds. Funds are balanced by two plant fund balances: (1) Investment
in Plant and (2) Reserve for Plant Improvement and Expansion
Transactions affecting the plant funds of NPO Hospital and the entries to
record these transactions are shown below:
1. Acquisition of land construction of hospital financed by gifts of cash, P1,500,000
and cash raised through a mortgage, P1,000,000
2. Receipt of gifts of cash of P50,000 and securities valued at P100,000 for plant
improvement and replacements
3. Acquisition of equipment, P30,000
4. Payment by general fund of mortgage installment, P50,000
5. Adjustments required on December 31, 20B: (a) accrued interest on
investments, P1,500; (b) depreciation on plant assets for year, P85,000; (c)
amount recoverable from general fund equal to depreciation on plant assets.
Alternative approaches have been suggested for analyzing and recording
plant funds transactions of the hospital. Probably the best approach would
recognize two self-balancing sets of accounts, one summarizing the existing
physical plant and the other summarizing resources that are held for plant
improvement and replacement. With such an approach, the analysis of
transactions affecting hospital plant assets, liabilities, and fund balances or
net assets is the same as the employed for the educational unit. However,
the entries relating to existing plant and to improvement and replacement
resources are made in self-balancing form within a single set of books instead
of in separate sets of books as in the case of the educational unit.
In applying the above, the acquisition of hospital properties is recorded by
debits to asset accounts and credits to an investment in plant balance; t the
recognition of a liability in connection with the acquisition of properties would
reduce the credit to investment in plant balance (see entry 1). The acquisition
of assets that are to be used for plant improvement and replacement is
recorded by debits to asset accounts and credits to Reserve for plant
improvement and replacement. Two entries are required when an addition or
an improvement is made through plant fund expenditures: (1) Reserve for
plant improvements and replacements is debited and Cash is credited; (2) an
asset account is debited and Investment in plant is credited (see entry 3).
When the expenditure represents an asset that is retired and the related
investment in plant balance.
NPO Hospital
Plant Funds
December 31, 20B
ASSETS
Invested in plant assets:
250,00
Land P 0
1,750,0
Buildings P 00
Less: Accumulated 1,715,0
depreciation 35,000 00
530,00
Equipment P 0
Less: Accumulated 50,000 480,00
depreciation 0
2,445,0
Total P 00
For plant improvements

and replacements:
Cash P 20,000
Due from general
fund 85,000
100,00
Investments 0
Accrued interest on 206,50
investments 1,500 0
2,651,5
TOTAL ASSETS P 00
Invested in plant:
950,00
Mortgage payable P 0
1,495,0
Investment in plant 00
2,445,0
Total P 00
Reserve for plant
improvement and 206,50
replacements 0
TOTAL LIABILITIES AND 2,651,5
NET ASSETS P 00
COOPERATIVES
Cooperatives are normally formed to serve the entire membership. Their
basic objectives are viability, growth, and service to members. The need for
cooperatives, whether single-purpose, dual or multi-purpose has been felt especially
in the countryside as early as late 50s. a single purposes cooperative is best
illustrated by one doing mainly loaning activities to its members. Members give
their contributions in the form of fixed deposits and therefore the main income of
the cooperative is interest on loans.
A credit cooperative is financial organization owned and operated by its
members with the following objectives: 10 to encourage savings among its
members; 20 to create pool of such savings from which loans for productive or
provident purposes may be granted to its members; and 3) to provide related
services to its members to maximize the benefits from such loans. (Article 111,R.A.
6938)
Current accounting policies and procedures adopted by credit cooperatives were

used as basis in the development of this manual. Key officers of cooperatives were
interviewed and financial statements and relevant reference materials were
gathered from organizations doing capacity building for cooperatives.
As a general, rule, a good accounting system includes the following:
1. A well-conceived chart of accounts and general ledger system.
2. Clearly laid out procedures for keeping accounting records accurate and up to
date.
3. Skilled personnel, whose primary responsibility is to track, update and report
financial information.
4. A sound system for monitoring loan disbursements, collections and
5. deposit transactions.
6. Appropriate accounting safeguards and controls to provide reasonable
assurances that accounting records are complete and accurate.
CONCEPTS AND GENERAL PRINCIPLES

The basic concepts and general principles fundamental to the detailed accounting
principles and standards for cooperatives are listed and described below:
1. Separate Enterprise
Each cooperative is a separate business enterprise requiring the
maintenance of comprehensive accounting records and financial reporting
practices to provide meaningful information to members, officers, directors
and the audit committee of the cooperative, government agencies (such as
the Cooperative Development Authority), the apex organizations, and other
interested third parties.
2. Going Concern Concept
Each credit cooperative should normally maintain its accounts as a
going concern on the basis that its operations will continue indefinitely.
Therefore, assets and liabilities should present the reasonable value of the
cooperative as a going concern and should not be based on liquidation
values.
Whenever unusual circumstances indicate limited life for a cooperative,
e.g., if the cooperative liquidates, the going concern concept will no
longer apply. As a result, appropriate adjustments should be made to
realistically state assets and liabilities and recognize appropriate revenues
and expenses. These adjustments may include, for example, a re-evaluation
of the loan portfolio to recognize probable losses on loans, an evaluation of
the realizable value of property and equipment in liquidation, possible
adjustments required in carrying value of deferred charges and deferred
credits, and others.
3. Monetary Basis of Accounting
Financial statements in the Philippines are expressed in terms of Philippine
peso (Php), hence, accounts of credit cooperatives should be stated in terms of the
peso amounts involved at the time the transactions occur. The recording of each
transaction in terms of peso units provides the best possible indicator of its relative
impact on the overall operations of the credit cooperatives. It also permits
identification of the amount of assets, liabilities, equity, revenues and expenses
represented by the transaction.
4. Consistency in Accounting Practice from Period to Period
Consistent accounting practices should be followed by each cooperative from
one accounting period to the next. Should a material change in accounting
treatment occur, the facts must be disclosed in the financial statements, including
the peso effect upon the Statement of Financial Condition and the changes in net
surplus for the period. For example, if a credit cooperative converts from accrual or
cash basis to modified cash basis system of a accounting, it should make a
complete reversion at one time and report the conversion in the financial
statements of the current period.
5. Timely recognition in Accounting Records
Accounting transactions should be recorded on a timely basis so that all
material information applicable to each accounting period will be shown in the
records. To properly recognize in accounting records and financial reports the
reasonable value of assets, liabilities, equity,, revenues and expenses, each
credit cooperative should make provision for losses that may be sustained in the
collection or conversion of loans and other assets by charges against current
operations.
6. Materiality
Material facts relating to the credit cooperatives activity must be recognized in
the accounts of the said cooperative and reported in its financial statements. A
statement, fact, or item is material id, giving full consideration to the
surrounding circumstances as they exist at the time, it is of such a nature that its
disclosure, or the method of treating it, would likely influence or make a
difference in the judgment and conduct of a reasonable person. The
accumulation of many small items, each of which in itself would not be
material, would be material if the overall effect would tend to influence the
judgment and conduct of a reasonable person.
7. Principle of Disclosure
This accounting principle requires that the members of the cooperative
and other users of the financial statements should be informed of the
material and relevant information about the economic and financial affairs of
the cooperative. This can be done either in the financial statements or in the
notes that accompany the statements or supplementary schedules and other
representations. Full disclosure requires reporting of all facts that can make a
difference in the decision of the users and that the accounting information
reported must be understandable and not susceptible to misinterpretation.
Such disclosure makes the financial statements more relevant and useful and
less subject to misinterpretation.
Adequate information to be disclosed in the financial statements may
not be presented in detail provided important and relevant facts are revealed
and made clear. For example, if the cooperative is facing a legal suit and is
liable to pay a large sum of money, this information should be disclosed. Or, if
the loan receivable has been pledged as collateral in obtaining a loan, the
financial statements would be inadequate without disclosure if this
information, the full-disclosure principle requires the financial report to give
more emphasis to substance over form. This means that the substance
should not be made less clear or hidden by using mechanics, rules and jargon
of accounting.
There are, however, limits to the amount of disclosure that can be
made in financial statements or in the accompanying notes. As minimum
information, the following should generally be disclosed:
a. Accounting methods used in preparing the financial statements;
b. Changes in the use of accounting methods during the current period;
c. Terms of major borrowing arrangements;
d. Existence of large contingent liabilities;
e. Major proposed asset acquisitions;
f. Contractual provisions relating to leasing arrangements and employee pension
and bonus plan;
g. Significant events affecting financial position, including major contracts for sale
of services and pending legislation which may affect significantly the operations
of the cooperative;
h. Other materials and significant events which will occur after the end of the
accounting period and before the financial statements are released and which
are relevant to the user.
Disclosure through footnotes should not, however, take the place of good
accounting practices in preparing the financial statements, the accounting record is
the primary source of information made available to the readers, hence, accurate
recording is a must. However, there are events that are not disclosed in the
accounting records but should be disclosed in preparing the financial statements.
Hence, there is a need for supplementary information through footnotes or
accompanying notes. The key point to keep in mind is that the supplementary
information should be relevant to the user.
8. Principle of Conservatism
each credit cooperative should maintain its accounting records on a
conservative basis. It should make reasonable provisions in the accounts for
probable losses on assets and for the settlement of liabilities. IT should not
materially overstate nor understate its assets, liabilities, revenues or expenses.
9. Accounting Basis
The prescribed accounting basis to be used in the credit cooperative is the
Modified Cash Basis. This is a combination of the cash basis of accounting and the
accrual basis of accounting. Under the modified cash basis, the accounting is based
on actual receipts and disbursements of the credit cooperative except that
provisions should be made to reflect:
a. Liabilities which are not paid when due;
b. Unpaid interest on share capital and patronage refunds applicable to the
accounting period;
c. Deferred credits and charges that are applicable to future periods;
d. Estimated losses on loans outstanding and other risk assets; and
e. The depreciation of property and equipment.
Other two accounting bases are:
a. Cash Bases- Revenue is recorded and accounted for when actually
collected and expenses are accounted for when actually paid.
b. Accrual basis- The accrual basis of accounting provides the most complete
and informative record of the financial activities of the cooperatives. Under
the accrual basis of accounting, the credit cooperative records revenue
when earned and expenses and liabilities as they are incurred regardless of
the timing of the actual receipt or payment. It is recognized, however, that
a requirement that all cooperatives adopt the full accrual basis of
accounting would pose a high degree of difficulties in its adoption by any
small cooperatives. A danger in adopting the accrual basis of accounting is
the treatment of the declaration of interest on share capital and patronage
refund on the basis of income while some of it is still uncollected.
10.Accounting Safeguards and Control
Each credit cooperative should adopt appropriate accounting safeguards and
controls to provide its members and the general public reasonable assurance that
accounting records are complete and accurate.
11.Accounting Period
The accounting period shall be a 12-month period starting January 1 and ending
December 31, as commonly practiced.
FINANCIAL STATEMENTS
Financial statements are the means by which the information accumulated and
processed in financial accounting is periodically communicated to those who use it.
They are designed to serve the needs of variety of users, particularly owners and
creditors. Through the financial accounting process, the myriad and complex effects
of the economic activities of a cooperative are accumulated, analyzed, quantified,
classified, recorded, summarized and reported as information of two basic types:
a)financial condition, which relates to appoint in time, and b) financial operations,
which relate to a period of time. Notes to the statements, which may explain
headings, captions or amounts in the statements or present information that cannot
be expressed in terms of money and those descriptions of accounting policies are
integral part of the statements.
A. Statement of Financial Condition (balance sheet) presents three major
categories: a) assets, b) liabilities, and c) equity, the difference between the
total assets and total liabilities. The statement of financial condition at any
date presents an indication in conformity with generally accepted accounting
principles of the financial status of the cooperative at a particular point in
time.
B. Statement of Operation (Statement of Net Surplus) for a period presents
the revenues, expenses, gains, losses, and net surplus (net loss) recognized
during the period and thereby presents an indication in conformity with
generally accepted accounting principles of the results of the cooperatives
service-directed activities during the period. The information presented in the
statement of operation is usually considered the most important information
provided by financial accounting because the net surplus is a paramount
concern to those interested in economic activities of the cooperative.
C. Statement of Cash Flows
is a formal statement summarizing all operating, investing and financing
activities of a cooperative. In simple language, the statement of cash flows
provided information about cash receipts and cash payments of a cooperative
during a period.
D. Related schedules such as:
Bank reconciliation
Aging of loans receivables
Property and equipment
Members loans receivables, savings/time deposits, subscribed and paid-
up share capital
Investments
Accounts payable
Loans payable
Uses of:
a) Reserve fund
b) Optional fund
c) Education and training fund
-Apex -Local
ACCOUNTS PECULIAR TO A COOPERATIVE
As shown on the balance sheet of a credit cooperative, Reserve fund such
as Optional Fund and General Reserve Fund are accounts not commonly
found in trading/manufacturing business. Interest on fixed deposits and
patronage refund are amounts due to members for deposits made and share
in the cooperatives yearly net surplus, respectively. The latter is disturbed to
the members as approved by the board of directors. Additional data such as
summary of fixed deposits and loan receivable showing comparative figures
in total amounts and number of members serviced; loans granted and
members availing and the total amounts per month for the entire year;
proposed budget showing comparative figures between approved last year
and actual amount spent; analysis of the General Reserve Fund and Optional
Fund and such other schedules that will satisfy the needs of the members are
submitted with the financial statements.
As may be observed, Revolving Fund as well as Change Fund are not
commonly found in ordinary single-purpose cooperative or in
merchandising/manufacturing companies. Cash advances are either for
operations or to be given as such to officers and employees. These accounts
and other unfamiliar ones used by a multi-purpose cooperative are described
below.
Revolving fund is an amount set up to meet immediate cash operating

requirements while Change fund is set up to take care of loose change in the
store.
Advances to officers and employees account is debited for duly approved
advances to officers and employees other than for operations purposes as
distinguished from cash advance for operations which is given to an officer,
employee, supplier, or contractor in relation to the normal business
operations as indicated in the for Request for Cash Advance. The board of
directors should define a policy to govern the granting and liquidation of such
advances. Due from officers and employees is an account debited for
shortages and other losses sue to the fault/negligence of accountable officers
and employees.
Investment in Cooperative refers to lone-term investment in other
cooperatives in the form of stock and bonds. This investment should be duly
authorized and approved by the general assembly.
Interest on share capital payable is credited for the amount allocated for
interest on share capital payable to members, set aside in accordance with
the by-laws; while Patronage refund payable is credited for the amount
allocated by the board of directors for patronage refund from the
cooperatives yearly net surplus.
CETF- due to Apex Organization is credited for of the amount allocated
for Education and Training set up from net surplus. Revolving capital payable
is credited for the deferment of interest on capital and patronage refunds
payable to members.
General Reserve fund is credited for at least 10% of the cooperatives
yearly net surplus; Cooperative Education and Training Fund is credited for
of the amount allocated Education and Training fund from net surplus;
Optional fund is credited for the amount allocated for land and building,
community development and any other necessary fund the total of which
may not exceed 10% of net surplus as prescribed in the cooperative code.
DISCUSSION QUESTIONS
1. Name the fund groups maintained by the educational institution and describe
the purpose of each group.
2. Name the fund groups maintained by the hospital and describe the purpose of
each group.
3. What funds of the educational unit carry plant assets among their resources?
What funds carry long-term liabilities among their obligations?
4. What accounts are peculiar to a professional organization? To a credit
cooperative?
5. Compare the accounting for not-for-profit service institutions with that for
governmental units.
6. What circumstances would suggest the recognition of depreciation on properties
of a not-for-profit service organization?
7. Describe the differences in accounting for general assets of the educational
institution and those of the hospital.
8. Distinguish between the general purpose endowment and the restricted
purpose endowment.
9. Describe the modified accrual basis: employed by the educational institution.
Would you prefer the use of full accrual basis? Give reasons for your answer.
10.What entries would be made on the plant funds books of an educational
institution for each of the following transactions:
a) The purchase of certain equipment is paid for by the general/current fund
b) Certain equipment financed from gifts is scrapped
c) Bonds are issued for the construction of additional classroom space and the
building is partly completed in the current period
d) A building financed from current funds on which fire insurance is carried is
destroyed by fire
11.In what fund of an educational institution should each of the following properties
be listed:
a) Physical education building acquired by funds from the issue of long-term
bonds.
b) Dormitory acquired from a donor, with income to become available for
general purposes of the institution
c) Student union building acquired from gifts by alumni
d) Apartment building acquired from a donor with the provision that net income
from the building shall become available to donor for life; upon his death, the
building may be sold and proceeds employed for any educational purpose
12.Indicate for each account of an educational institution that follows the difference
fund groups in which it might appear:
a) Unappropriated surplus or net assets
b) Due from annuity fund
c) Inventory of materials and supplies
d) Cash
e) Accrued expenses
f) Investments (or temporary investments)
g) Pooled investments
h) Land and buildings
i) Funds held by trustee

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Chapter 8

Sufficient, competent and relevant evidence is to be obtained to afford

(a) Physical evidence this is obtained by direct inspection or observation of

(a) Sufficiency this is the presence of enough factual and convincing

Section 56 of P.D. 1445 states the reporting standards:

5. Audited reports accompanying financial reports shall:

We have audited the accompanying balance sheet of X

Consistency ranks as a major reporting standard, since it is vital to the

DEFINITION AND GENERAL SCOPE OF PRE-AUDIT AND POST AUDIT

o The value of the property declared to be unserviceable or no

ACCOUNTING FOR NON-PROFIT

Information about the nature and amounts of different types of permanent

STATEMENT OF CASH FLOWS

Reconciliation of change in net assets to net cash received from

There are more than 40 professional organizations accredited by the

Their operations are characterized by having a board of directors establishing

Asset restricted for continuing professional education 500,000

Accumulated Depreciation-equipment 500,000

Accumulated Depreciation-buildings 1,000,000

Vouchers payable 1,200,000

Unrestricted net assets 4,700,000

Restricted net assets for professional education 500,000

Restricted net assets for plant assets 500,000

Vouchers payable 400,000

Rent receivable 100,000

Supplies on hand 50,000

Salaries and wages 20,000

Loss on doubtful accts 20,000

Rent income 100,000

Supplies expense 50,000

Allow. For doubtful accounts 20,000

Accumulated depreciation-equipment 150,000

Accumulated depreciation-building 250,000

Accrued expenses payable 20,000

Membership fees 2,000,000

Rent income 100,000

Supplies expense 150,000

Loss on doubtful accounts 20,000

Unrestricted net assets 210,000

Cash equivalents 1,000,000

Asset restricted for continuing prof. educ 100,000

Supplies expense 150,000

Loss on doubtful accounts 20,000

Endowment income 60,000

Income from org. acts. Rel. to educ. depts 40,000

Income from other sources 35,000

Accounts Receivable 25,000

General expense 60,000

Vouchers payable 55,000

Due from annuity fund 2,500

Unearned income from annuity fund 2,500

Inventory of materials and supplies 50,000

Prepaid expenses 2,500

Accrued expenses 50,000

Expenses-auxiliary enterprise 2,500

General expense 5,000

Allowance for doubtful accounts 5,000

Endowment income 60,000