Accounting in the Philippines for Small Businesses

Oct 13, 2014 | Sharon Cheong

According to the latest available Philippine data, 99.6% of all registered businesses in the country are small to medium scale enterprises (SMEs), which employ 70% of the local workforce.

SMEs are crucial in the economic development of the Philippines because of their significant contribution to rural and entrepreneurial development, utilization of local resources, and job creation. SMEs can essentially be the source of business innovation and skills; however, no matter how plausible a start-up idea is, without the proper accounting skills, the company is bound to fail.

Basic Accounting for SMEs

Before one starts a business, they need to know basic accounting skills and how to use various financial tools. The financial health of a business is determined by its balance sheet, cash flow statement, and profit and loss statement.

The balance sheets show the business's worth. The cash flow statement indicates the probable cash balances of the business in the coming months, whereas the profit and loss statement presents the business's profitability or lack of it.

There are two basic methods of accounting: the cash basis method and the accrual method.  The cash basis method calculates income when cash is received and expenses when bills are paid. This type of accounting is used by more SME entrepreneurs as it is simple to understand.

The accrual method requires matching the income with expenses regardless whether the cash has been collected or not. A retailer who sold a product or service to a customer on credit would record the sale in the books as account receivable. Once the credit has been paid, the “account receivable” becomes “cash received”.  It is the same with expenses. An expense is recorded in the month in which it was incurred even if the payment is due the following month.

It is important for an SME entrepreneur to set up a business account even if he is a sole proprietor. Business records must be separate from personal records, which include credit cards, savings accounts, and checking accounts.

Types of Business Tax in the Philippines

Most SME owners employ the services of or consult a certified public accountant (CPA) to balance sheets, do the payroll, establish a working relationship with banks, and facilitate the computation and payment of numerous tax requirements in the Philippines.

There are several tax laws in the Philippines that every business owner should know, based on the National Internal Revenue Code.  In the Philippines, taxpayers pay more taxes to the national government than to the local government through the Bureau of Internal Revenue. Local government taxes are paid to the municipal or city government.  Imported product duties are paid through the Bureau of Customs.

The following are the major taxes encountered by entrepreneurs doing business in the Philippines:

Value Added Tax (VAT) is a 12% sales tax collected from the sale of products, services, and leases. The VAT, reflected in receipts and sales invoices of a business, is paid to the Bureau of Internal Revenue on a monthly or quarterly basis.  A product or service with a large profit margin will have a greater value added tax regardless if there is net profit or not. Some transactions are VAT-exempt.

Percentage taxes are paid by small business enterprises with annual gross sales under P 1,910,000.00. These businesses are non-VAT establishments and are subjected to 3% sales tax on their monthly gross sales. Percentage tax is paid at any BIR-authorized bank or at any BIR office in the locality of the business.

Income tax is the tax paid on the net earnings of an individual or establishment. This tax is paid quarterly using BIR Form 1702 and 1702Q. For corporations, a minimum 2% tax on gross income is paid after the fourth taxable year from when the company started operating. To date, Filipino taxpayers pay the highest income tax rate in Southeast Asia at 32%.

Withholding tax is deducted from an employer's payments to employees and vendors. This serves as an advanced collection of income taxes by the employer to be remitted to the government.

Capital gains tax is the tax remitted to the government as payment for a sold real property that is classified as a capital asset. The term used is somewhat confusing as it has another legal meaning. This type of tax is a form of transaction tax, which has to be paid even if there is no value gained. More people prefer to pay capital gains tax, since properties or assets that are not classified as capital assets will fall in a higher tax bracket.

Accounting Tips for SMEs

Running a small to medium enterprise is not as straightforward as it seems because part of its success depends on the way the owner balances the business's accounting sheets. For a business to thrive, an entrepreneur must have a prepared budget plan. He should know how to handle all accounts receivable and effectively manage and schedule payments for all accounts payable. He should be able to compute his employees' payroll, know how to prepare a financial statement, and be able to analyze the business's cash flow.

Not all entrepreneurs are equipped to handle the accounting side of a business, more so if things get technical or when taxes are due. In such cases, it is recommended to avail the services of a certified public accountant.

If you are thinking of setting up an SME in the Philippines, it is best to seek help from a seasoned professional. Call Servcorp now.