TRIAL BALANCE,

FINANCIAL REPORTS &

STATEMENTS
CHAPTER 7

Prepared by: Robert Jade D. Dabandan, CPA, MMBM

FINANCIAL REPORTING SYSTEM
Eight General Step in the Accounting Cycle
Analyzing the transactions
Journalizing the transactions
Posting the journal entries
Preparation of trial balance (TB)
Adjusting the accounts
Closing the accounts
Preparation of the financial statements (FS)
Reversing the accounts

PPSAS 1, Presentation of Financial Statements and the

applicable PAG shall be applied in the presentation of General
Purpose FS covering: Presentation of FS, Statements of Cash
Flows, Events After the Reporting Date, Related Party
Disclosures, Accounting Policies, Changes in Accounting
Estimates and Errors and Accounting Process.
Objective of General Purpose FS

To provide information about the Financial Position, Financial

Performance and Cash Flows of an entity that is useful to wide
range of users in making and evaluating decisions about the
allocation of resources.
TRIAL BALANCE

Trial Balance is a listing of general ledger accounts with their

corresponding debit and credit balances. It is used to determine
equality of debit and credit balances after the recording process.
A two-money column trial balance is required under the new
system.

The preparation of a trial balance shall serve the following

purposes:
1. To prove the mathematical equality of the debits and credits
after posting.
2. To uncover errors in journalizing and posting; and
3. To serve as basis for the preparation of the FS.
ADJUSTING JOURNAL ENTRIES

The Pre-Closing TB, otherwise known as the Adjusted TB, is

prepared after adjusting journal entries are recorded in the
General Journal and posted to the General Ledger. It shows the
adjusted balances if all accounts as of given period.

Adjustments are of two main types, namely:

1. Accrued Items these are adjusting entries for economic
activities already undertaken but not yet recorded as asset
and revenue accounts or liabilities and expense accounts.
These require two types of adjusting entries such as:

1. Asset/Revenue Adjustment These involves assets and

income which exist at the end of the accounting period
but are not yet recorded.
Illustration: (Interest Income)
The interest income account of Agency ABC for the interest earned but not yet
collected no billed as of the end of the year amounts to P2,000. The journal entry
will be as follows:

Account Title Account Code Debit Credit

Interest Receivable 1-03-01050 2,000
Interest Income 4-02-02-210 2,000

2. Liability/Expense Adjustments these involve liabilities and

expenses, which already exist at the end of the accounting
period but not yet recorded.
Illustration: (Accrued Salaries)
As of year-end, Agency ABC has not yet paid salaries and wages of P25,000,
which covers the period December 16-31, 2013:
Account Title Account Debit Credit
Code
Salaries and Wages Regular 5-01-01-010
25,000
Due to Officers & Employees 2-01-01-020
25,000
2. Deferred Items these are adjusting entries transferring
data previously recorded in asset account to expense account
or data previously recorded in liability account to revenue
account. These also require two types of adjustments:

1. Asset/Expense Adjustments these involve prepaid

expenses, portion of which shall be recorded as expense
of the agency at the end of the accounting period. These
also include bad debts and depreciation.

Illustration: (Prepaid Expense)

Agency ABC has prepaid expenses in the amount of P20,000, portion of which
were utilized or consumed in the amount of P5,000. Since the original entry was
debit to prepaid account, the adjusting entry would be:

Account Title Account Code Debit Credit

Rent /Lease Expense 5-02-99-050 5,000
Prepaid Rent 1-99-02-020 5,000
Illustration 2: (Bad Debts)
Per aging of the accounts, the required allowance id P20,000; while the beginning
balance of the allowance for bad debts is P15,000. No other transactions
transpired. The adjusting entry to take-up bad debts expense is as follows:
Account Title Account Debit Credit
Code
Impairment Loss -Loans & Rec. 5-05-03-020 5,000
Allowance for Impairment - AR 1-03-01-011 5,000
Illustration 3: (Depreciation)
Records of Agency ABC show the following depreciable assets, with 10% salvage
value as provided by the COA
Asset Cost Life Deprn.
Buildings 50,000,000 20 2,250,000
Machinery 150,000 5 27,000
Office Equipment 100,000 5 18,000
Furniture & Fixtures 75,000 10 6,750
Motor Vehicles 10,000,000 10 900,000
Books 10,000 5 1,800
Illustration 3: (Depreciation)
The compound adjusting entry to record the depreciation for the depreciable
assets would be:
Account Title Account Debit Credit
Code
Deprn. Exp. Bldg & Other Structures 5-05-01-040 2,250,000
Deprn. Exp Machinery & Equipment 5-05-01-050 45,000
Deprn. Exp - Furniture, Fixtures & 5-05-01-070 8,550
Books
Deprn. Exp - Trans. Equip. 5-05-01-060 900,000
Accum. Deprn. Bldg & Other 1-06-04-011 2,250,000
Structures
Accum. Deprn. Machinery & 1-06-05-011 45,000
Equipment
Accum. Deprn. - Furn.,Fixtures & 1-06-07-011 8,550
Books
Accum. Deprn. - Motor Vehicle 1-06-06-011 900,000
NOTE: Under PPSAS No. 17, method of depreciation maybe
straight line, diminishing balance, and the units of production
method to be applied consistently from one period to period.

2. Liability/Revenue Adjustments these involve

unearned revenue where the agency receives the assets,
usually cash, even before the income is actually earned.
Illustration:
The agency collected an amount of P15,000 for the rent of its facility and
originally recorded it as deferred credit to income. At the end of the fiscal year,
only P3,000 was earned. The adjusting journal entry to recognize the earned
portion would be::

Account Title Account Debit Credit

Code
Other Deferred Credits 2-05-01-990 3,000
Rent/Lease Income 4-02-02-050 3,000
CLOSING JOURNAL ENTRIES
Closing journal entries are general journal entries, which
zeroes out the balances of all nominal/temporary and
intermediate accounts at the end of the accounting period.

Nominal accounts includes subsidies, income and expense

accounts and are closed to Revenue and Expense Summary.

Balance of Revenue and Expense Summary closed to

Accumulated Surplus/(Deficit) account.

Post Closing TB shall be prepared after recording the

closing journal entries in the General Journal and posting
these entries to the General Ledger. It contains a listing of
all real accounts in the general ledger.
Illustration:
1. Reversion of unused NCA

Account Title Account Debit Credit

Code
Subsidy from NG 4-03-01-010 500,000
Cash MDS - Regular 1-01-04-040 500,000
Note : The remaining balance of Subsidy from NG is closed to Revenue and Exp.
Summary.
2. Close the balance of all income accounts to Revenue and Expense Summary
account:

Account Title Account Debit Credit

Code
Income Accounts 35,822,500

Revenue and Exp. 3-03-01-010 35,822,500

Summary
Illustration:
3. Close the balance of all expense accounts to Income and Expense Summary
account:

Account Title Account Debit Credit

Code
Revenue and Exp. Summary 3-03-01-010 5,480,835

Expense Accounts 5,480,835

4. Close the balance of the Income and Expense Summary account to

Government Equity:

Account Title Account Debit Credit

Code
Revenue and Exp. Summary 3-03-01-010 30,341,665

Accumulated 3-01-01-010 30,341,665

Surplus/(Deficit)
Illustration:
5. Close the Public Infrastructure account to Government Equity and transfer the
corresponding amounts to the respective registries:

Account Title Account Debit Credit

Code
Accumulated 3-01-01-010 1,000,000
Surplus/Deficit
Road Network 1-06-03-010 1,000,000
GENERATION OF FS & SCHEDULES

The financial statements generally prepared in the National

Government are:
Statement of Financial Position
Statement of Financial Performance
Statement of Changes in Net Asset/Equity
Statement of Cash Flows
Operating activities
Inventing activities
Financing activities

Cashflow Statement Preparation Method

1. Balance Sheet Method this method shows the agencys net cashflow
from all of its activities calculated by adding the individual cash inflows
and then deducting the individual cash outflows. This is the preferred
approach.
2. Income Statement Approach this methods starts with the net income
and adds back expenses and charges that do not entail cash payments.
GENERATION OF FS & SCHEDULES

Notes to Financial Statements

Statement of Comparison of Budget and Actual Amount

(PPSAS No. 24, Presentation of Budget Information in
Financial Statements
QUALITATIVE CHARACTERISTICS
OF FINANCIAL REPORTING
A. UNDERSTANDABILITY
B. RELEVANCE
C. MATERIALITY
D. TIMELINESS
E. RELIABILITY
F. FAITHFUL REPRESENTATION
G. SUSBTANCE OVER FORM
H. NEUTRALITY
I. PRUDENCE
J. COMPLETENESS
K. COMPARABILITY
STATEMENT OF MANAGEMENT
RESPONSIBILITY FOR FS
The Statement of Management Responsibility for
Financial Statements serve as the covering letter in
transmitting the agencys financial statements to the
COA, DBM, other oversight agencies and other
responsibility. It acknowledges the agencys
responsibility for the preparation and presentation of
the financial statements. This statement shall be signed
by the Director of Finance and Management Office or
Comptrollership Office of the Chief of Office, who has
direct supervision and control over the agencys
accounting and financial transaction, and the Head of
Agency or his authorized representative.
NOTES TO FINANCIAL
STATEMENTS
Notes to FS are integral part of the FS. It provides additional
information necessary for the fair presentation of the financial
statements in conformity with GAAP. It provides an
explanation about the headings, captions or amounts of
present information that cannot be expressed in monetary
terms. It shall also include a brief description of accounting
policies being followed by the entity.

Where notes to fs appear on a separate page, the phrase See

accompanying Notes to Financial Statement shall be
indicated at the bottom of the statement.
NOTES TO FINANCIAL
STATEMENTS cont.
Types of disclosure considered necessary are as follows:
1. Events after the Reporting Date
1. Adjusting and Non Adjusting Events After Reporting Date
2. Changes in Accounting Policies
3. Changes in Accounting Estimates
4. Errors