Government Auditing and Accounting For NPO

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
auditor’s 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 entity’s 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
entity’s 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 auditor’s judgments and conclusions regarding the organization, program,
activity or function under audit. A record of the auditor’s 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
auditor’s findings, conclusion and recommendations. Except where the possibility or
fraud or other compelling reason may require different treatment, the auditor’s
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 auditor’s 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 Auditor’s
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 Company’s 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 auditor’s 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 auditor’s 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 entity’s 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 auditor’s 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 COA Chairman
property no longer needed with
book value/ acquisition cost not
exceeding P1,000,000 in each
case
2. Unserviceable property or Directors/Officers in charge of COA
property no longer needed with Central and Regional offices
exceeding P150,000 in each case
3. Unserviceable property or Supervising Auditors/ Heads of Audit
property no longer needed with Groups
4. Unserviceable property or Audit Team Leaders
property no longer needed with
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 agency’s 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 Auditor’s
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 organization’s 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 organization’s assets and liabilities in order to let the external users of such be
able to assess the organization’s 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
Cash and cash equivalents P 29,750 P 365

Receivables 1,000 500
Inventories and prepaid expenses 610 110
Assets restricted to investment in building and equipment 66,000 66,000
Land, building and equipment 210,000 213,000
TOTAL ASSETS P 307,360 P 279,975
LIABILITIES AND NET ASSETS
Voucher payable P 4,255 P 3,255

Refundable advances 500 1500
Long-term debt 10,000 10000
TOTAL LIABILITIES P 14,755 P 14,755
Net Assets:
Unrestricted P 172,605 P 153,500

Temporarily restricted 20,000 11,900
Permanently restarted 100,000 99,820
TOTAL NET ASSETS P 292,605 P 265,220
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 organization’s
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 organization’s performance during a period, (2) assess an organization’s
service efforts and its ability to continue to provide services, and (3) assess how an organization’s
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
Temporarily Permanently
Unrestricted Restricted Restricted Total
Revenues, gains and other support:
Contributions P 20,700 P 8,100 P 180 P 28,980
Fees 12,000 12,000
Total P 32,700 P 40,980
Expenses and losses
Program A P 6,000 6,000
Program B 2,895 2,895
Management and General 3,700 3,700
Fund Raising 1,000 1,000
Total P 13,595 P 13,595
Change in net assets P 19,105 P 8,100 P 180 27,835
Net assets at beginning of year 153,500 11,900 99,820 265,220
Net assets at end of year P 172,605 P 20,000 P 100,000 P 292,605
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:
Cash received from members and contributors
P 28,989
Cash received from service recipients 12,000
Cash paid for:
Program A P 5,000
Program B 1,895
Fund Raising 1,000 (7,895)
Cash paid to employees and suppliers (3,700)
Net cash from operating activities P 29,835
Cash and cash equivalents at beginning of year 365
Cash and cash equivalents at end of year P 29,750
Reconciliation of change in net assets to net cash received from operating activities:
Change in net assets P 27,685
Adjustments to reconcile change in net assets to
net cash from Operating activities:
Depreciation 3,000
Decrease in refundable advance (1,000)
Increase in vouchers payable 1,000
Increase in receivables (500)
Increase in inventories and prepaid expenses (500)
Net cash flow from operating activities P 29,835
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
Cash and cash equivalents P 1,800,000
Receivables P 100,000
Less: Allowance for doubtful accounts 20,000 80,000
Rent receivable 100,000
Supplies on hand 50,000
Asset restricted for continuing professional
education projects 600,000
Equipment P 1,500,000
Less: Accumulated Depreciation 650,000 850,000
Building 5,000,000
Less: Accumulated Depreciation P 1,250,000 3,750,000
TOTAL ASSETS P 7,230,000
Vouchers Payable P 1,300,000
Accrued salaries and wages 20,000
TOTAL LIABILITIES P 1,320,000
Net Assets:
Unrestricted P 5,310,000
Restricted to continuing professional educ.
Projects 600,000
TOTAL NET ASSETS P 5,910,000
TOTAL LIABILITIES AND NET ASSETS P 7,230,000
Income: Total Unrestricted Restricted
Membership fees P 2,000,000 P 2,000,000
Income from other sources (rent) 100,000 P 100,000
Subtotal P 2,100,000 P 2,000,000 P 100,000

Expenditures:
Salaries and Wages P 1,320,000
Loss on doubtful accounts 20,000
Subtotal 1,890,000 1,890,000
Excess of income over expenditures P 210,000 P 110,000 P 100,000
Statement of Cash Flows
Cash received from members as annual dues P 2,000,000
Cash paid to employees and suppliers 300,000
Cash paid to increase CPE funds (1,400,000)
Net cash flow from operating activities (100,000)
Net increase in cash and cash equivalents P 800,000
Cash and cash equivalents, beginning 800,000
Cash and cash equivalents, end 1,000,000
P 1,800,000
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
Increase in prepaid expenses (50,000)
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
Accounts receivable 175,000
Inventories (materials & supplies) 50,000
Prepaid expenses 2,500
Total Unrestricted 262,500
Restricted:
Cash 15,000
Temporary Investments 30,000
Total 45,000
TOTAL ASSETS 307,000
Unrestricted:
Voucher payable 235,000
Accrued expenses 5,000
Total 242,500
Restricted:
Due to endowment Fund D 10,000
Total 32,500
TOTAL LIABILITIES 275,000
Net Assets:
Unrestricted 20,000
Restricted 12,500
TOTAL NET ASSETS 37,500
TOTAL LIABILITIES AND NET ASSETS 307,500
NPO University
Current Funds
For the year ended June 30, 20B
Current Total Unrestricted Restricted

Income:
Education and General
Student fees P 1,620,000 P 1,620,000
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
Total P 3,082,500 P 3,000,000 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
Total Current Income P 3,830,000 P 3,662,500 P 167500
Less: Current Expenses:
Education and General
General administration P 200,000 P 190,000 P 10000
General expense 165,000 165,000
Instruction &dept research 1,265,000 1,230,000 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
Total P 2,937,500 P 2,855,000 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
Total current expenses P 3,672,500 P 3,522,500 P 150000
Excess of current income over current expenses P 152,500 P 140,000 P 12500
NPO University
Current Funds
Statement of Changes in Equity
Total Unrestricted Restricted
Net Assets, July 1, 20A -0- -0- -0-
Add: Increase for year ended June 30, 20B per
summary of current income and expenses P 152,500 P 140,000 P 12500
Total 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
Cash 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
Cash P 13,550
Investments 25,000
Notes Receivable 12,200
TOTAL ASSETS P 50,750
TOTAL ET ASSETS P 50,750
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:
Receipts of gifts P 50,000
Excess of receipts over expenses 750
Net cash from operating activities or net assets P 50,750
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.
Cash 1,000,000
Endowment Fund A balance 1,000,000
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.
Pooled Cash 1,000,000
Pooled investments- ordinary shares 750,000
Pooled investments- preference shares 250,000
Cash 1,000,000
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 ¼ %, 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
Cash 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
Cash P 50,000
Due from restricted current funds 10,000
Pooled cash 317,500
Pooled investments:
Ordinary shares P 750,000
Bonds 900,000
Unamortized bond premium 2,500 1,692,500
Land 125,000
Buildings
Less: Accumulated depreciation P 175,000 165,000
Fund held by trustee 10,000 400,000
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
Total 2,750,000
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 funds P2,710 P1,000 P715 P245 P300 P50 P400
Restatement of investment of
Endowment Funds A, B and C,
upon pooling of resources 40 35 5
Net assets, end P2,750 P1,000 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
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 annuity P 125,000

Increase form income for year 7,050 132,500
Total P 132,500
Less: Amount payable to annuitant for year P 5,000
Amount payable to unrestricted current fund 2,500 7,500
Net assets, end P 125,000
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
Unexpended plant funds balance-plant addition 85,000
Cash 85,000
3. Issue of bonds to raise funds for construction of buildings, P1,500,000
Cash 1,500,000
Unexpended plant funds balance-plant additions 1,500,000
4. Completion of buildings at contract price of P1,500,000
Unexpended plant funds balance-plant additions 1,500,000
Contract payable 1,500,000
5. Payment of contract, P1,500,000
Contract payable 1,500,000
Cash 1,500,000
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
Unexpended plant funds balance-plant 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
Buildings to be acquired 1,500,000
Bonds payable 1,500,000
4. Completion of buildings financed by bond issue
Buildings 1,500,000
Buildings to be acquired 1,500,000
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
Buildings P 4,260,000
Less: Accum depreciation 10,000 4,250,000
Equipment 510,000
Total P 5,885,000
Less: Items carried in Endowment
Funds 290,000 5,595,000
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:
Mortgage payable P 975,000
Bonds payable 1,500,000 P 2,475,000
Investment in plant-
From gifts P 3,080,000
From current funds 40,000 3,120,000 5,595,000
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 institution’s 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.
Cash 475,000
Accounts receivable 45,000
Free service and adjustments- contractual patients 40,000
Free service and adjustments- general patients 16,500
Courtesy and miscellaneous allowances 3,500
Earnings from routine service- inpatients 320,000
Earnings from routine services- outpatients 50,000
Earnings from special services 210,000
2. Other hospital revenues, P420,000 of which P10,000 is still due from temporary fund in
reimbursement of research expenses
Cash 410,000
Due from temporary fund 10,000
General contributions, donations, legacies and bequests 180,000
Grants from community chests, foundations 122,500
Donated services and commodities 10,000
Income transfers from temporary funds 57,500
Miscellaneous revenues 50,000
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
Inventory of supplies 200,000
Cash 175,000
5. Hospital supplies charged put, P170,000
Administrative and general 5,000
Household and property 10,000
Professional care of patients 15,000
Dietary 120,000
Outpatient and emergency 5,000
Other expenses 15,000
6. Payment of hospital salaries and wages P490,000
Dietary 60,000
Cash 490,000
7. Payment of hospital expenses other than salaries and wages
Dietary 7,500
Cash 75,000
8. Payments of interest on mortgage, P60,000 and of installment due on mortgage carried as liability in
the plant funds, P50,000
Interest expense 60,000
General fund balance 50,000
Cash 110,000
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.
Bad debts 2,500
Allowance for uncollectible accounts 2,500
administrative and general 1,000

Household and property 250
Dietary 750
Outpatient and emergency 250
Cash 5,000
Depreciation 85,000
General/current fund balance 85,000

Due to plant funds 85,000
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
Earn from routine service-inpatients 320,000
Earnings from routine services- outpatients 50,000
Earnings from special services 210,000
Free services and adjustments-contractual patients 40,000

Bad debts 2,500
Dietary 188,250
11. To close other revenue and expense accounts at the end of the period
General contributions, donations, legacies and bequests 180,000
Grants from community chests, foundations 122,500
Miscellaneous revenues 50,000
Interest expense 60,000
Depreciation 85,000
NPO Hospital
General Funds
December 31, 20B
Assets
Cash P 120,000
Accounts receivable P 45,000
Due from temporary funds 10,000
Vouchers payable P 25,000
Due to Endowment Fund #1 5,000
Due to plant funds 85,000
Accrued salaries and wages 5,000
TOTAL LIABILITIES P 120,000
General 82,500
TOTAL LIABILITIES AND NET ASSTES P 202,500
NPO Hospital
General Funds
For the year ended December 31,20B
Gross revenues from services to patients:
Routine services-inpatients P 320,000
Routine services-outpatients 50,000
Special services (see schedule) 210,000 P 580,000
Deductions from gross revenues:
Free service and adjustments- contractual patients P 40,000
Bad debts 2,500 62,500
Net revenues from services to patients P 517,500
Salaries
&
Wages Others Total
Operating expenses: P 86,000 P 25,000 P 111,000
Administrative and general 45,250 20,000 65,250
Household and property 221,250 40,000 261,250
Professional care of patients (see schedule) 60,750 127,500 188,250
Dietary 30,250 7,500 37,750
Outpatient and emergency 51,500 25,000 76,500
Total P 495,000 P 245,000 P 740,000
Deficit from operations 222,500
Other revenue
General contributions, donations, legacies and bequests P 180,000
Grants from community chest, foundations 122,500
Miscellaneous revenues 50,000 500,000
Total 277,500
Other expenses:
Interest expense P 60,000
Depreciation 85,000 145,000
Net income P 132,500
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
Net income per statement of activities P 132,500
Add: Depreciation charge on properties reported in plant fund 85,000
Total P 217,500
Transfer to plant fund (85,000)
Payment of mortgage reported in plant fund (50,000)
Net cash flow from operating activities P 82,500
Net assets, beg -0-
Net assets, end P 82,500
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

Cash 100,000
Temporary Fund A balance 100,000
2. Purchase of securities, P85,000
Temporary Investment- Fund A 85,000
Cash 85,000
3. Receipt of cash gift to be used for books and journals for hospital patients, P10,000
Cash 10,000
Temporary Fund B balance 10,000
4. Sale of securities, book value, P25,000, for P23,500
Cash 23,500
Temporary Investment Fund A 25,000
5. Collection of interest and dividends
Cash 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.
Cash 40,000
Due to general fund 10,000
7. Payment of general fund for books and journals chargeable to Temporary Fund B balance, P7,500
Cash 7,500
8. Adjustments required on December 31, 20B; accrued interest on securities, P250
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
Due to general fund P 210,000
Fund balances: A P 53,750
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:
Gifts Establishing funds P 110,000 P 100,000 P 10,000
Income from dividends and interest 5,250 5,250 -
Total P 1,150,250 105,250 10,000
Decrease for year:
Loss on sale of securities at less than book
value P 1,500 P 1,500
Charges in fulfillment of fund objectives 57,500 50,000 P 7,500
Total P 59,000 P 51,500 P 7,500
Balances, December 31, 20B P 56,250 P 53,750 P 2,500
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
Investments in bonds at face value (Endowment Fund #1) 1,000,000
Investments-unamortized bond premium (Endowment Fund #1) 50,000
Investments-unamortized bond discount (Endowment Fund #1) 30,000
Endowment Fund #1 balance 1,020,000
2. Receipt of cash in establishment of Endowment Fund #2, P250,000. Endowment income is to be
used for specified research projects.
Cash 250,000
Endowment Fund #1 balance 250,000
3. Purchase of 1,000 shares of Co. T preference shares, P240,000
Investments in preference shares (Endowment Fund #2) 240,000
Cash 240,000
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
Cash 250,000
Investments-unamortized bond discount(Endowment Fund #1) 15,000
Investments-at bonds at face value (Endowment Fund #1) 250,000
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
Cash P 260,000
Due from general fund 5,000
Investments:
Preference shares (Endowment Fund #2) P 240,000
Bonds at face value (Endowment Fund #1) 750,000
Unamortized bond premium 45,000
Unamortized bond discount (15,000) 1,020,000
Fund balances:
Endowment Fund #1- for general
purposes P 1,035,000
Endowment Fund #2- for restricted
purposes 250,000
NPO Hospital
Endowment Funds
Total Fund #1 Fund #2
Balances, January 1, 20B - - -
Increases for year:
Gifts establishing funds P 1,270,000 P 1,020,000 P 250,000
Gain on sale of securities at more than book value 15,000 15,000 -
Balances, December 31, 20B P 1,285,000 P 1,035,000 P 250,000
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:
Land P 250,000
Buildings P 1,750,000
Less: Accumulated
depreciation 35,000 1,715,000
Equipment P 530,000
Less: Accumulated
depreciation 50,000 480,000
Total P 2,445,000
For plant improvements and

replacements:
Cash P 20,000
Due from general fund 85,000
Investments 100,000
Accrued interest on
investments 1,500 206,500
Invested in plant:
Mortgage payable P 950,000
Investment in plant 1,495,000
Total P 2,445,000
Reserve for plant improvement 206,500
and replacements
TOTAL LIABILITIES AND NET
ASSETS P 2,651,500
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)
Cur
rent 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. Cle
arly laid out procedures for keeping accounting records accurate and up to date.
3. Skill
ed personnel, whose primary responsibility is to track, update and report financial information.
4. A
sound system for monitoring loan disbursements, collections and
5. dep
osit transactions.
6. App
ropriate 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. Sep
arate 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. “Go
ing 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. Mo
netary 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. Con
sistency 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 cooperative’s 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 cooperative’s 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
cooperative’s 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 cooperative’s
yearly net surplus.
CETF- due to Apex Organization is credited for ½ 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 cooperative’s yearly net surplus;
Cooperative Education and Training Fund is credited for ½ 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

GOVERNMENT AUDITING STANDARDS

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

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 Company as of

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

PRE-AUDIT ON GOVERNMENT TRANSACTIONS

DEFINITION AND GENERAL SCOPE OF PRE-AUDIT AND POST AUDIT

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

ACCOUNTING FOR NON-PROFIT

STATEMENT OF FINANCIAL POSITION

Cash and cash equivalents P 29,750 P 365

Voucher payable P 4,255 P 3,255

Unrestricted P 172,605 P 153,500

STATEMENT OF CASH FLOWS

Membership fees P 2,000,000 P 2,000,000

Income from other sources (rent) 100,000 P 100,000

Subtotal P 2,100,000 P 2,000,000 P 100,000

Prepaid expenses 2,500

Current Total Unrestricted Restricted

Net cash from operating activities or net assets P 50,750

ENDOWMENT AND OTHER NONEXPENDABLE FUNDS

Endowment Fund B balance 35,000

Account Titles Debit Credit

Add: Increase from gift subject to annuity P 125,000

1. Receipt of cash gift to be used for plant acquisitions, P100,000

Funds for the hospital

There are four major fund groupings:

(1) General or current fund

administrative and general 1,000

General/current fund balance 85,000

Free services and adjustments-contractual patients 40,000

Nursing services P 25,000

1. Receipt of cash gift to be used for medical research, P10,000

Total Fund A Fund B

For plant improvements and

As a general, rule, a good accounting system includes the following:

CONCEPTS AND GENERAL PRINCIPLES

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