Knowing Basic Business Accounting for Non-Accountants Philippines

By: Tax and Accounting Center Philippines

In the present day business, basic business accounting for non-accountants in the Philippines is a must learn topic as a root for compliance. Non-accountants in the Philippines maintain the belief that learning basic business accounting would take much time and effort, if not resources, and would just leave it all to their retainer paid accountants or bookkeepers in the Philippines.  Unfortunately, while this may have worked in the past decade, the current circumstances of accounting and tax compliance would disfavor such mindset of small and medium entrepreneurs in the Philippines. In most worst instances, the entrepreneur would end up headaches on missed compliance blaming none other than themselves for entrusting everything to their retainer paid accountants or bookkeepers in the Philippines.

By this present, let us give a simple overview of what basic business accounting is all about. Going through this before attending any seminar on basic accounting for non-accountants in the Philippines or a similar program like basic business accounting and BIR compliance seminar workshop.

Let us start with the question: What is accounting?  As the American Institute of Certified Public Accountants (AICPA) puts it:

“Accounting is an art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial character, and interpreting the results thereof.”

Accounting as a “language of business” is best described in the said definition. It is an art as accounting has developed its very own technical process through the “double-entry” bookkeeping system. Accounting records deals only with transactions and events which are financial in nature. Such financial transactions and events will undergo a process of recording through the journals, classifying through the ledgers, and summarizing through the trial balance and financial statements.  Finally, the final output of accounting, the financial statements would be analyzed in order for the users to get the message about the business, the risks and opportunities, the weakness and the strength of the financial figures it ought to communicate.

The entire accounting cycle described in the above definition covers nine (9) steps and let us describe each in plain language for better appreciation.

Step I – Journalizing

In journalizing, financial transactions and events are being analized for effects on the accounting elements – assets, liabilities, capital, revenue, and expenses, as to whether increase or decrease. Recording of such transactions are effected using a “general journal” or “book of original entry” with prescribed columns. Other forms could also be used for convenience depending on the peculiarity of the business such as special journals and or subsidiary journals. For non-accountants in the Philippines, this is the tricky part as they would need to understand the elements of accounting and its relationship, the rules of debit and credit, and proper use of account titles contained in a chart of accounts.

Step 2 – Posting

Posting is just a mechanical process of classifying entries in every account title in the journal. This is written in another accounting form, general ledger, where each account title is provided its own general ledger. The general ledger would include details on the increases and decreases of each account title, and the difference called “account balance” would be determined periodically, say, monthly or quarterly, or annually. Variations of ledger would be “special ledgers” and subsidiary ledgers depending on the peculiarity of the business.

Step 3 – Trial balance

In this step, the “account balances” in the ledgers of each account title in accounting elements (assets, liabilities, capital, revenue, and expenses) in Step 2 – Posting will be summarized in a formal statement called a “trial balance”.  It could be a “trial balance of totals” with the total amount for debit and credit entries, or “trial balance of balances” with either a debit or a credit balance in every account title.  For tax compliance purposes filing monthly, quarterly, and annual returns and reports, a trial balance could play a very important role as reference. Without it, the business may not be able to effectively comply with the tax laws, rules, and regulations in the Philippines.

Step 4 – Adjusting entries

Please do not get this wrong and there is no such thing as adjustment to lower tax liabilities. Adjusting entries referred here are those which are normally required to be adjusted so as to update the accounting elements. Example of this is the recognition of depreciation, recognition of expenses that are yet to be paid, revenues earned but not yet collected, correction of some errors, and more. This is somewhat similar to Step 1 on journalizing utilizing same journal forms.

Step 5 – Worksheet

A worksheet is a special accounting form being adopted to further sort out the accounts in the trial balance, layout the adjusting entries, the adjusted trial balance, and provide columns for statement of comprehensive income (income statement) Philippines, and statement of financial condition (balance sheet).  In this manner, the preparation of the financial statements Philippines in the next step would be easier.

Step 6 – Financial statements

Financial statements in the Philippines is the final output of the financial accounting and is composed of five items as follows:

• Statement of comprehensive income (income statement)
• Statement of financial condition (balance sheet)
• Statement of cash flows;
• Statement of changes in equity; and,
• Notes to Financial Statements

This is what the users would need for making economic decisions. Users could be internal such as the management, the internal auditors, the employees, and others from within the organization. External users could be the general public, suppliers, lenders, government and regulators, external auditors, and others outside the organization. Annual financial statements are the ones the certified public accountant in the Philippines would conduct an audit to determine whether the the same was prepared in accordance with Philippine Financial Reporting Standards (PFRS).

Step 7 – Closing entries

Upon completion of the financial statements in the Philippines, the books of accounts for the particular period (normally annually) would have to be closed. To do this, nominal accounts or account titles in the statement of comprehensive income or income statement Philippines will be closed to a temporary account “income and expense summary”. Entries will be prepared in the journals in Step 1.

Step 8 – Post-closing trial balance

The closing entries in Step 7 will then be posted to the ledgers similar to that in Step 2. Upon posting, the account titles under statement of financial condition or balance sheet would show debit or credit balances. Such balances will be summarized as a “post-closing trial balance”.

Step 9 – Reversing entries

Reversing entries is the last step of the cycle but is not done at the end of the period. Instead, this is made at the beginning of the next accounting period. The target of this step are the adjusting entries made on accruals specially those expenses accounted under expense method and those revenues accounted under revenue method. By doing so, the expense method or revenue method adopted on such items would be consistently be applied in the next accounting period.

Summary

Accounting for non-accountants in the Philippines is a must learn for SMEs so their compliance will not be at the mercy of the retainer paid accountants or bookkeepers. Yes, it is technical, but it is something anybody else could learn. To further develop your understanding of the basic business accounting in the Philippines, we conceptualized a very basic seminar program for non-accountants. We have a one-day program for Basic Business Accounting and we also have a two-day program for Basic Business Accounting and BIR Compliance for VAT or non-VAT registered taxpayers in the Philippines.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at info(@)taxacctgcenter.org)

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