Accounting Principles and Practices Performed by Small Businesses in the Philippines

College of seam Administration Abstract This research aims to gain the noesis and awargonness on the write up gives do by downhearted origines. It aims to certify and learn round teeny-weeny line of productses and their compliance to the timeworn conventions of be in the Filipinos, whether or non these ancestryes ar succeeding(a) the basic story principles and what alternatives of explanation do they perform.And lastly, to provide recommendations to the moving ines proprietors and opposite(a) persons involved, on what invoice answer is much suitable for micro bloodes. Through the put on a variety of informant materials, such as reference books, text books and internet sources, t just about(prenominal)lying tie in to the study has been compiled and put together to form the distract k todayledge take for the study.Through the findings, the researchers classified advertisement two types of write up lend oneselfs performed by sm in all businesses F ormal invoice, this chronicle practice is based on the authentic Philippine accounting model provided by the IFRS, and a Semi-Formal accounting schema, a combination of the IFRS accounting and the undivided entry shew strategy. Keywords story, method of accounting Principles, story Practices, vitiated Business, Small Business bill Introduction there atomic number 18 more than a one thousand million businesses spread throughout the Philippines.From high rising commercial entities in the commodious cities, to the smallest businesses found in the front yard of residential homes in pastoral or urban atomic number 18as. Business back end be defined as a person, partnership, or corporation that seeks to provide goods and go to an some other(prenominal)s at a net income (Dias and Shah, 2009) Businesses argon among one of the factors affecting the frugalal growth in the country. Generally, taxes and investments earned by these businesses, through the purchases of their consumers, be paid to the Government. Small and medium-scale enterprises (SMEs) sportsman a signifi rout outt role in underdeveloped economies.Among their contri scarcelyions argon as follows (a) they address poverty by creating jobs and by increasing incomes (b) they disperse frugal activities in the countryside, and provide broad-based sources of growth (c) they serve as suppliers and providers of support profits for jumbo enterprises (d) they stimulate entrepreneurial skills among the populace and (e) they act as incubators for developing domestic enterprises into vainglorious corporations. SMEs typically comprise the bulk of business enterprises in twain developed and developing countries.They withal employ a large segment of a countrys workforce, and contribute significantly to national output (Habaradas, 2008) However, non all businesses contribute to the economic growth of the country especially for small independent businesses in private homes. Such examples are self-employed proprietors and alley vendors whose businesses are not registered to the Bureau of Internal Revenue (BIR). Legally registered businesses (small businesses) on the other hand, contribute to the economic growth through payments of taxes collected by the Bureau of Internal Revenue.Such businesses magnetic disk legal proceeding or accounting nurture to keep track and allocate assets, liabilities and the owners equity. Through this accounting information, the owners leave behind be able to allocate their assets for the expenses of tax payments. It whitethorn be said that the accounting practice is for formalities and usually performed by large business entities. However it is important for small businesses to curb the accounting practices in order to easily keep track and record important performances especially those which concern large amounts of money.Accounting is important in achieving success in any business, especially a small one. Accounting is tied to the business fiscal well bing, without it, it will be hard to discipline whether on that point is a positive or negative increase to the profit of the business. Accounting records essential accurately reflect the replaces occurring in the firms assets, liabilities, income, expenses and equity. The proceed operation of a business depends on maintaining the proper counterweight among its investments, revenues, expenses and profit.Beca spend profit margins are so critical to the success of a business, any pin should trigger an immediate search for the cause. Thus, the owner must rely on the accounting information to search this cause (Byrd and Megginson, 2009) The sureness of a business is to sword a profit proper business accounting helps determine how well the business runs. Accounting is the universal accomplish of tracking income and expenses and then(prenominal) using that data to examine the pecuniary status of a business. (Strauss, 2005) The accounting practices p erformed by larger businesses are usually formal, specific and detailed and done by certified accountants.Small business accounting whitethorn be performed in unlike styles, with no formality and proper structure, and usually done by the owners themselves. A variety of accounting styles maybe derived from the informal accounting performed by small businesses. Some styles may have the like structure, making it exemplarised to other businesses thus having slight uniformity. Review of Related Literature Small Businesses A small Business is any business that is independently possess and independently owned and operated, is not dominant in its field, and does not muster in in umteen new or innovative practices.It may neer grow large, and the owners may not want it to, as they usually pick a more relaxed and less aggressive approach to racetrack the business. They recognize their business in a normal way, expecting normal sales events, profits, and growth. In other words, they seek a certain degree of freedom and ideally a certain degree of fiscal independence. (Byrd amp Megginson, 2009) Accounting Accounting is a service activity Its function is to provide quantitative information, primarily monetary in nature, about economic entities that is intended to be useful in making economic decision.Accounting includes several branches, for example, fiscal accounting, managerial accounting, and government accounting. This asseveration deals with fiscal accounting for business enterprises, the branch of accounting that focuses on the all-purpose reports on financial position and results of operations known as financial statements. This Statement has two broad purposes (A) to provide a rear end for compound understanding of the broad fundamentals of financial accounting, and (B) to provide a basis for guiding the future development of financial accounting. n. d. , 1998) Financial statements are inclined(p) and presented for external users by many entities a round the military personnel. Although such financial statements may appear similar from country to country, there are differences which have plausibly been caused by a variety of social, economic and legal circumstances and by dissimilar countries having in mind the packs of different users of financial statements when saddle horse national requirements.The accounting conceptual framework, formerly known as the model for the Presentation of financial Statements by the IASC, serves as the foundation for the development of accounting standards by the planetary Accounting archetypes board. Its main objective is to differentiate the differences in financial statements of different entities by harmonizing regulations, accounting standards and procedures relating to the preparation and monstrance of financial statements. (Robles amp Empleo, 2007) Structure of the Philippine AccountingThe Framework for the preparation and presentation of financial statements doned in the Phili ppines is based on the internationalist Accounting steps Committees (IASC) Framework for the Preparation and presentation of Financial Statements. This was approve in the Philippines on January 26, 2000 by the unanimous vote of the members of the Accounting criterions Council (ASC). The ASC was the carrying into action accounting standard setting body in the Philippines, when the Philippines decided to adopt the planetary Accounting Standards.The same Framework was upheld by the International Accounting Standards Board, when the latter succeeded the International Accounting Standards Committee in 2001. In the Philippines, the ASC was succeeded by the currently functioning Financial Reporting Standards Council (FRSC). The FRSC assists the Board of Accountancy in the latters function of adopting and promulgating the International Financial Reporting Standards. Thus, both the IASB and the locally functioning FRSC in the Philippines are pop offd by the same Framework. Robles amp Empleo, 2007) The IFRS for SMEs The Philippine Institute for Public Accountants (PIcertified public accountant) now recognizes the International Accounting Standards Boards (IASB) recently released International Financial Reporting Standard for Small and Medium-Sized Entities (IFRS for SMEs), as an official set of accounting standards to be audited against. (Brozovsky, Christie & Hicks, 2010) The IFRS for SMEs was mete out in the Philippines issueive January 1, 2010, and is known as the Philippine Financial Reporting Standards for Small-Medium Entities (PFRS for SMEs).The Philippine Securities and Exchange Commission (SEC) adopted a definition of small and medium- surface entities that includes a size criterion. As defined by SEC, an entity is an SME if it is not in the process of filing its financial statements for the purpose of issuing any class of instruments in a public market and, it is not a holder of a secondary license issued by a regulatory agency, such as bank (all types of banks), an investment house, a finance order, an insurance company, a securities gene / dealer, a mutual fund and a pre-need company.The Philippines has been acknowledged by semipolitical scientists and economists as a newly industrialize nation. The country is experiencing rapid economic growth usually export-oriented and on-going industrialization. The Accounting Standards Council (ASC) is responsible for establishing and improving generally original accounting standards. Development of such standards are based on true(a) practices in the country, as well as statements and studies issued by other standard setting bodies like the International Accounting Standards Committee (IASC) and the Financial Accounting Standard Board (FASB).The ASC, which was renamed as the Financial Reporting Standards Council (FRSC) decided to fill in its US-based standards with International Accounting Standards (IAS), later referred to as IFRS. The Philippines alike adopted the Internati onal Financial Reporting Standards in 2005. It modified its accounting practices slightly to aline to Philippine policies making the Philippine Financial Reporting Standard (PFRS), and the Philippine Accounting Standards (PAS).Businesses are fully aware of the changes from GAAP to IFRS, which now engage the new IFRS procedures, and modifications that were implemented taking effect in 2009. These companies are now preparing their financial statements in compliance with the PFRS. The Philippines has fully implemented the IFRS. In April 2010, The Philippines adopted IFRS for SMEs referred to as Philippine Financial Reporting Standard for SMEs. These standards can be used by an entity that is not a listed company, a large unlisted company, and a financial institution or public utility. (Ibarra & Suez-Sales, 2011)The International Accounting Standards Board ( IASB ) was established in 2001 as part of the International Accounting Standards Committee ( IASC ) Foundation. One of the ob jectives of the IASC foundation and of the IASB is to develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that are require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the worlds capital markets and other users make economic decisions.The IASB also develops and exsertes a separate standard intended to apply to the general purpose and other financial statements of, and other financial reporting by, entities that in many countries are referred to by a variety of terms, including small and medium-sized entities (SMEs), private entities, and non-publicly accountable entities. That standard is the International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SMEs).SMEs often produce financial statements just now for the use of tax authorities or other political authorities. Financial statements produced solely for those purposes are not necessarily general purpose financial statements. (Alliance of Accounting and Auditing Researchers, n. d. ) Accounting Policies The IFRS for SMEs is indented for the use of small and medium sized entities (SMEs). Small and medium-sized entities are entities that do not have public accountability, and go forth general purpose financial statements for external users.Examples of external users include owners who are not involved in managing the business, existing and potential creditors and credit valuation agencies. Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. If this IFRS specially addresses a transaction, other event or condition, an entity shall apply this IFRS. However, the entity need not to follow a requirement in this IFRS in the effect of doing so would not be material.If this IFRS specifically address a transaction, other event or condition, an entitys management shall use its judgement in developing and applying an accounting policy that results in information that is relevant to the economic decision-making needs of users, and reliable, in that the financial statements represent faithfully the financial position, financial performance and cash flow of the entity reflect the economic substance of transactions, other events and conditions, and not merely the legal form are neutral, i. . free from warp are prudent and are complete in all materials respects. An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless this IFRS specifically requires or permits categorisation of items for which different policies may be appropriate. If this IFRS requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category.An entity shall change an accounting policy only if the chang e is required by changes to this IFRS, or results in the financial statements providing reliable and more relevant information about the effects or transactions, other events or conditions on the entitys financial position, financial performance or cash flows. (Alliance of Accounting and Auditing Researchers, n. d. ) Need of Accounting Information for Small Businesses In order to operate a business effectively, the owner should be informed as to the nature and amount of each asset, each liability, and the amount of owners equity.For purposes of planning and controlling business operations, the owner should also know when, why and how frequently changes occurs in the various assets, liabilities and the owners equity of the business. Without written records, business owners are not able to keep track of the nature and the amount of the assets, liabilities, and owners equity and the changes that occur in their composition. A good record tutelage system is usually essential to provide the necessary information.This system of record keeping should show the effect of each transaction on the assets, liabilities and owners equity of the business. (Taylor, 2003) Proper Business Records There are several reasons (and advantages) for keeping good business records, and many of them are a real a real advantage (1) to show financial standings, (2) to help make important financial decisions, (3) to help control VAT collecting it in and paying it out, (4) to help audit in certain cases, and keep the auditing cost down, (5) to discuss your financial position with other people.Unless the owners decide otherwise, there is no legal need for an one-year audit of the records of a sole dealer or a partnership. There is, however, a legal obligation for an annual audit of the accounts of nearly limited companies. There will be some expenses which are partly for business and partly for private purposes. Recording of business transactions also depends on the size of the business. There can be no hard and fast categories for size of a business. But plain a national chain store will have a more sophisticated accounting system than a local trader with a market stall.The point at which more complicated records needed, will also depend partly on the type of trade. There are three types of entity commonly found running a business. These are restore traders, Partnerships and Limited Companies. Sole traders are persons owning the business which he is running in his own right. Since the person is trading in his own right he is personally responsible for any debts his business incurs. Partnerships are groups of people owning and running the business. It is the individuals in the partnership who are responsible for the partnership debts.Limited Companies are businesses which are owned by at least two people who may or may not also be involved in the day-to-day running of the business. The owners have a limited personal liability for the debts incurred by the company which is a separate legal person or entity. The day-to-day running of a limited company is entrusted to its directors. The directors of a company may also be the shareholders. (Taylor, 2003) Businesses can also be classified into three broad categories public companies, private companies, and small businesses.The distinction between the latter two is the size of the company. Though small, these businesses are important in the aggregate as the major creator of new jobs. Small businesses also constitute a major source of clients for local and regional CPA firms. The need for accounting reports varies among the three classes of businesses. Accounting reports are used to keep up with various government reporting requirements. Primary among these is the need to report a businesss income, personal property, and payroll to the necessary tax authorities.The relative importance of different uses of accounting reports varies with the size of the business. (Brozovsky, Christie amp Hicks, 2010 ) Accounting Principles and Practices Most businesses typically use one of two basic accounting methods in their bookkeeping systems cash basis and accrual basis. While almost businesses use the accrual basis, the most appropriate method for a company depends on the sales volume, whether or not you sell on credit, and your business structure. The cash method is the most simple in that the books are kept based on the actual flow of cash in and out of the business.Income is recorded when it is received, and expenses are inform when they are actually paid. The cash method is used by many sole proprietors and businesses with no inventory. From a tax standpoint, it is sometimes advantageous for a new business to use the cash method of accounting. That way, recording income can be put off until the next tax year, while expenses are counted right away. With the accrual method, income and expenses are recorded as they occur, regardless of whether or not cash has actually changed hands. An excellent example is a sale on credit.The sale is entered into the books when the invoice is generated rather than when the cash is collected. Likewise, an expense occurs when materials are ordered or when a workday has been logged in by an employee, not when the check is actually written. The downside of this method is that payment of income taxes on revenue are made before actually receiving it. The accrual method is required if annual sales exceed $5 million and the venture is structured as a corporation. In addition, businesses with inventory must also use this method.It also is highly recommended for any business that sells on credit, as it more accurately matches income and expenses during a disposed time period. The cash method may be appropriate for a small, cash-based business or a small service company. (Leonsky, 1998) Accounting is the general process of tracking your income and expenses and then using that data to examine the financial status of your business. The basi c accounting tool is the general ledger. It is the place where you keep track of all the business financial transactions.That information is then used to create financial statements such as balance sheets and income statements. (Strauss, 2007) An accounting system structures the flow of financial information to provide a complete picture of a firms financial activities. There are two types of accounting systems performed by small businesses (1) the single-entry system and (2) the double-entry system. The single-entry record-keeping system is occasionally still found in the very small business. It is not, however, a system recommended for firms that are striving to grow and achieve effective financial planning.A single entry-system neither incorporates a balance sheet nor directly generates and income statement. A single-entry system is a check book system of accounting reflecting only receipts and disbursements. A double-entry system is a type of accounting system that provides a se lf-balancing mechanism in the form of two counterbalancing entries for each transaction recorded. It can be done with the record-keeping journals and ledgers found in most office supply retail stores. However, the relatively simple accounting software programs knowing for small firms are preferable. Longenecker, 2006) Conclusion Based on the information self-collected by the researchers, the researchers have come up with a conclusion to the express problem. The researcher has classified two types of accounting practice/principles performed by small businesses namely Formal Accounting and Semi-Formal Accounting. Formal Accounting practice are based on the standards of the International Financial Reporting Standard for Small and Medium-Sized Entities (IFRS for SMEs) The IFRS for SMEs is indented for the use of small and medium sized entities (SMEs).Small and medium-sized entities are entities that are defined as not having public accountability, and do not publish general purpose f inancial statements for external users. The Semi-Formal Accounting practice is a combination of the Formal Accounting Practice (based on the IFRS for SMEs), and the Single-entry record keeping or booking keeping system. In the Single-Entry system, mostly performed by small businesses, business owners record only the most important or essential transactions for the business which usually contain only the following cash, accounts receivable, accounts payable and taxes.However, by performing this system, the owners still apply some of the standards given by the IFRS for SMEs. Most businesses however, perform only the Single-entry system. It is a much easier and at rest accounting practice that is preferable by the owners of small businesses because of its comprehensiveness in storing only the important accounting information needed by such businesses. Recommendation The Single-entry system, for most business owners, is mostly performed for its convenience and completeness. The researc her recommends, however, for the owners to apply the Formal accounting practice.The IFRS for SMEs, established by the IASB, was made specifically for small businesses to use. This accounting standard is best recommended for small businesses to attain uniformity among all other businesses alike. This will not only provide advantage to the owners but also to the users of the accounting information. It is still reminded that smaller businesses such as vendors, sari-sari stores, restaurants or eateries are not recommended to perform such complicated accounting practice but, they are still advised to record accounting information.The recommended accounting practice for such businesses is the Single-entry system. The researchers provide further recommendations toward the persons involved 1. To the Business Owners of small businesses, they must obey and follow the accounting standards of the International Financial Reporting Standard for Small-Medium Entities (IFRS for SMEs), mentioned in this research, to attain uniformity among other small businesses which practice the accounting standard of the IFRS. 2.To the College of Business Administration and its faculty members, in which they can use this research as an instructional material or instrument in teaching their students about topics relating to the research. 3. To the Graduates of the College of Business Administration, who plans to have their own business or put up a small business that this research may serve as a reference and as a guide for their first steps in being entrepreneurs. 4. To the Students of the College of Business Administration, in which they can use this research as a reference material to their faculty member studies.Bibliography 1. Alliance of Accounting and Auditing Researchers. (n. d. ). International / Philippine Financial Reporting Standard for Small and medium-sized entities (IFRS / PFRS for SMEs). n. d. 2. Brozovsky, John, Nancy Christie, amp Sam Hicks. (2010, July). Accounting for sm all businesses the role of IFRS. pedantic OneFile. Retrieved July 17, 2012, http//go. galegroup. com/ps/i. do? id=GALE%7CA234140898ampv=2. 1ampu=lyceumphampit=rampp=AONEampsw=w 3. Byrd, Mary Jane amp Megginson, L. C. (2009).Small Business Management An Entrepreneurs Guidebook. (Seventh Edition). newborn York McGraw-Hill. 4. Dias, Laura amp Shah, A. J. (2009). Introduction to Business. New York McGraw-Hill. 5. Habaradas, Raymund B. (2008, March). SME development and technology upgrading in Malaysia lessons for the Philippines. pedantic OneFile. Retireved July 17, 2012, http//go. galegroup. com/ps/i. do? id=GALE%7CA204419292ampv=2. 1ampu=lyceumphampit=rampp=AONEampsw=w 6. Ibarra, Venus and Suez-Sales, M. G. (2011, December). A comparison of the International