1. When do we recognize revenue?

2. Exchange Vs Non Exchange Transactions

3. Recognition of Sales Tax
4. Recognition of Income Tax
5. Recognition of Grants Revenue
6. Sale of Capital Assets
7. Investment Gains/Losses
8. License, Permits and Others
When to recognize a revenue or an expenditure stem from the
measurements focus and basis of accounting.

Measurement focus –what is being reported upon, which assets

and liabilities are being measured.

Basis of Accounting – When are transactions recognized and

brought into the books of accounts.

Cash Basis- An entity opts to focus on cash, recognizes revenue

when cash is received and expenditure when cash is paid.

Accrual Basis- An entity opts to focus on economic resources ,

recognizes revenue and expenditure when a transaction occurs
irrespective of when cash is paid or received.
Government accounting uses Modified Accrual Basis of accounting
which is a combination of both (GASB St No. 34).
 Exchange - Businesses derive revenue from exchange transactions. One party
gives and the other party receives.

 Non – Exchange – Sometimes government revenue such as taxes,

interdepartmental grants are difficult to recognize when no exchange is involved.
Examples of non exchange revenue:
i) Imposed non exchange revenue – Assessments imposed on individuals and
businesses i.e., fines, penalties, etc e.t.c,

ii) Derived tax revenue – Derived taxes such as sales tax ( GST),

iii) Government – mandated non exchange transactions - Upper government

funding a lower level government grants ( LLGs receiving funds from
Provincial Government)

iv) Voluntary non exchange transaction – Results from legislative or contract

agreement between two parties, e.g.; NCDC to fund nature park gardens etc.
 Sales and income taxes are categorized as derived tax revenues (non exchanged)
 Goods and Service Tax (GST) are charged to customers of that purchase goods and
service.
 The tax payer collects the tax and remits to the government tax office along with the
GST return on a monthly basis.
 Important features of the GST return;
1. The date of the sales transaction and amount of GST (10%) collected.
2. The date the GST return is required to be lodged. (Monthly)
3. The date the merchant files its tax return

In PNG, GST Act 1997 states that, companies tally their monthly GST (10%)
collected from total sales for the month (Output debits). They
deduct/offset (10%) of all taxable payments (invoices paid) excluding
Salary etc. The difference (net) balance is then reported in the GST return
and paid to the tax office – Internal Revenue Commission (IRC)
 Journal Example:

Assuming in December 2003, merchants collected 20 million in sales tax. Of

these amount, 12 million is collected before 15 December 2003 and must be
remitted before 15 February 2014. ( 60 days period)
Dr Cr
Sales Tax Receivable 12
Sales Tax Revenue 12
Deferred sales Tax Revenue 8
To record sales tax due in 2003 as at 31 December 2003.
 There are basically two types of Income Taxes administered in PNG by the
IRC.
1. Corporate Income Tax (30% - PNG owned entities to 47% - Foreign
Owned entities)
2. Personal Income Tax ( Ranges from 24% to 47%) depending on income
level.
1. Corporate Income Tax:
This is paid by corporate entities on the basis of their operational results for a
financial year. Each corporate entity is required by the Income Tax Act (1959)
that they declare their profits/(loss) at the end of each year, complete a tax
return and submit to the tax office the taxable amount by 31 August of the
following year. Tax office also allows companies to pay tax in advance on a
quarterly interval (provisional tax).

For Example:
If an entity declares K200, 000 net profit for a financial year. Their tax calculated at
30% ( nationally owned) is K60,000.00. This is payable to the tax office.
2. Personal Income Tax:
Personal Income tax is imposed on every person that is employed in the formal sector
in PNG. The tax rates range from 24% (minimal bracket – K8,000p.a to 47% -
K120,000p.a) differ as the level of income increases. The personal income tax from
employees are collected by the organizations/entities and are remitted to the tax
office on a monthly basis.
 What are grants?
Refers to donations or financial assistance provided by one party to
another or by an upper government to a lower government. E.g..
National Government funding to Local Level Government.

 Types of Government Grants

1. Reimbursement Grants – Common form of grants to reimburse
specific types of expenditure designed for specific projects.

2. Unrestricted Grants - Payments that are unrestricted as to

purpose, projects or activities.

3. Contingent Grants – These are grants contingent upon a specific

action on the part of the recipient. (E.g. the ability of the
recipient to raise matching resources, i.e.. Counter fund
financing of projects)

4. Entitlements – Funds paid by higher level Government out of

budgetary allocations. E.g.. Development funds for each
province.

5. Shared Revenue – Revenue raised by Government buy shared

with lover government. E.g. GST revenue raised in each province
which 50 % is retained by province.
Example:
In Oct 2003 a school district is notified that it have been awarded
untied (unrestricted) grant assistance of PGK15 million to refurbish the
school’s classrooms and acquire new computer equipment. The funds
were transmitted in December 2003 and are to be utilized in 2004.
Journal entries.

1. In December 2013, they would post the following journal.

DR CR
Cash at Bank 15
Deferred Grant Revenue 15
To record grants received.

In December 2004, when the funds were used. The following Journal
would be posted.
DR CR
2. Deferred Grant Revenue 15
Grant Revenue 15
To record grants used for school refurbishment work.
 What are Capital assets?
Capital assets refer to the fixed assets such as motor vehicles,
property or buildings, plant and machinery . Assets that are fixed or
physical objects.
Example:
On 31 December, 2003 the city police department purchased a new
vehicle. On 02 January 2004, the vehicle was involved in an accident
and was nearly demolished/written off. It was later sold as a wreck for
$5,000.

Journal: DR CR
Cash 5,000
Other financing sources 5,000
To record sale of general capital sale of wrecked car.
 What are Investments Instruments?
Are monetary or promissory notes/contracts normally (binding) much
like Interest Bearing Term Deposits (IBD) which the Bank of PNG sells
to generate government revenue by way of interest.
Important Features:
i) Fair value of financial instruments are more relevant than historical
costs
ii) Financial instruments are held as cash substitutes. They can be
liquidated (realized) easily.
iii) Fair values are also called spot rates, are objective and real price

iv) Performance of investment managers are measured by returns on

dividends, interests and changes in fair value.
v) Increase and decrease in prices affect the portfoli balance and net
proceeds available to the investor.
Journals:
 Increase in value net value. DR CR
Investment xxx
Interest Income xxx
Journals:
 Decrease in value net value. DR CR

Loss on Investment Securities xxx

Investment in Securities xxx
This will result in the reduction in the investment portfolio.
 What are license and permits?
Licenses and permits are issued to allow businesses and individuals
to conduct businesses or perform its specific project within a
specifically defined period of time and on terms defined by the
permit or license.

 Important features:
 License fees are intended to cover cost to state by the particular
service, e.g: Restaurant license ( Cost for state in cleaning,
inspections etc.)
 Permits are called as such that state authority has approved the
conduct of a particular activity, i.e, Logging permit, building permit
e.t.c,
 License and permits are non-refundable.

Journal:
 When issuing a license: DR CR
Cash xxx
Miscellaneous Revenue xxx