Academic journal article Accounting & Taxation

Accounting Knowledge, Practices, and Controls of Micro, Small and Medium Enterprises: Evidence from the Philippines

Academic journal article Accounting & Taxation

Accounting Knowledge, Practices, and Controls of Micro, Small and Medium Enterprises: Evidence from the Philippines

Article excerpt

ABSTRACT

Of the business enterprises operating in the Philippines, 99.6% are micro, small, and medium enterprises (MSMEs). The Magna Carta of Small Enterprises (Republic Act 6977) governs these MSMEs. However, they are still subject to laws on the declaration of income and other regulations as imposed by the Bureau of Internal Revenue (BIR), including proper accounting in accordance with accounting standards.This paper looks at the accounting knowledge, practices and controls of MSMEs located in Metro Manila cities and in several Quezon Province towns. The study primary investigates whether or not MSMEs understand accounting principles, have acceptable accounting practices and controls. Majority of the MSMEs are either very knowledgeable or knowledgeable on accounting principles and concepts. MSMEs common accounting methods used are cash, accrual and installment. Common accounting practices used by MSMEs are manifested in their bad debt estimation, depreciation method used, net receivable estimation, business documents used and payment methods. MSMEs practice basic accounting controls; however, computers are not commonly used. ANOVA reveals that there are significant differences between MSMEs in Metro Manila and in Quezon Province on their knowledge of accounting principles, accounting practices and controls.

JEL: M40, M41, M48

KEYWORDS: Accounting, Practices, Controls, MSMEs

INTRODUCTION

Micro, small and medium sized enterprises (MSMEs) play a vital role not only in wealth creation but also in dispersing new industries to the countryside that contribute to a more equitable distribution of income, encouraging entrepreneurial development, and stimulating gainful employment, supporting export growth and a potent force in efforts against poverty. Given their economic and social importance, Philippine MSMEs are considered vital in the recovery of the national economy (Ibarra, 2012).

In the Philippines, MSMEs are categorized by the number of their employees and the size of their assets excluding land. Table 1 shows the category of MSMEs in the Philippines in accordance with 2012 statistics of the Department of Trade and Industry (DTI). According to DTI, there were 944,897 business enterprises operating in the Philippines in 2012; 99.6% (940,886) were MSMEs and the remaining 0.40% (4,011) were large enterprises. MSMEs generated 4,930,851 jobs in 2012 versus 2,658,740 for the large enterprises.

The Philippine government has embarked upon a comprehensive and integrated strategy for the sustainable growth and development of SMEs in the country. The strategy encompasses all critical factors - technology, product development, finance, training marketing, and so on (Leano, 2006). To encourage the development of SMEs, the Government of the Philippines enacted into law the Magna Carta of Small Enterprises (Republic Act 6977) which outlines the general policies for the development of SMEs.

In that regard, it is worth considering to what extent these MSMEs follow established accounting principles. Accounting forms a vital element of any business. It plays a critical role in the success or failure of contemporary business institutions (Smirat, 2013). Accounting systems are responsible for recording, analyzing, monitoring and evaluating the financial condition of companies, preparation of documents necessary for tax purposes, and providing information support to many other organizational functions. In the context of small and medium enterprises (SMEs), accounting information is important as it can help the firms manage their short-term problems in critical areas like costing, expenditure and cash flow (Mitchell et al., 2000).

The European Commission (2008) recommended accounting systems, which maybe considered appropriate for small enterprises according to their particular needs. However, not all of these practices will assist all businesses, e.g. firms that operate on a simpler business model may find only some of them useful. …

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