Manual Accounting System.

It is the paper-based accounting system that make

used of traditional accounting methods and equipment, such as journals and

ledgers, in recording business transactions.

Computerized Accounting System. It is the accounting system that uses the

computer system, and software in recording business transactions.

Grocery Store. It is a small retail business that sustains the daily-needs of the consumers.

It can be found in urban places.

Store owners. They are persons who oversee the daily operation of a business.
 CHAPTER II

THEORETICAL FRAMEWORK

This section presents review of literature and studies in order to determine existing trends

and issues with connection to the main problem of the research. This will establish a firm

foundation of rich ideas to the research who may be interested in conducting a study similar to

this study, for his own or other purposes.

To be discussed under the main components of theoretical framework are the following:

(1) Review of literature and studies, and (2) Theoretical basis of the research.

REVIEW OF LITERATURE AND STUDIES

This section presents a discussion on the following topics: 1) Accounting; 2) Accounting

Practices; and 3) Types of Accounting Practices; 4) Purpose of Keeping Accounting Records; 5)

Accounting System and Practices on MSMEs; 6) Micro, Small, and Medium Enterprises; and 7)

Grocery Stores.

Accounting

According to Kagan (2018), accounting is the systematic and comprehensive recording of

financial transactions pertaining to a business. Furthermore, it refers to the process of

summarizing, analyzing and reporting these transactions to oversight agencies, regulators and tax

collection entities. The financial statements that summarize a large company's operations,

financial position and cash flows over a particular period are a concise summary of hundreds of

thousands of financial transactions it may have entered into over this period.
 In addition, as cited by Abrugar (2011), accounting is a service activity. Its function is to

provide quantitative information, primarily financial in nature about the economic entities that is

intended to be useful in making economic decisions.

According to Gale (2008), accounting has been defined as "the language of business"

because it is the basic tool keeping score of a business's activity. It is with accounting that an

organization records, reports, and evaluates economic events and transactions that affect the

enterprise. Furthermore, it processes document all aspects of a business's financial performance,

from payroll costs, capital expenditures, and other obligations to sales revenue and owners'

equity.

Accounting is one of the key functions for almost any business. It may be handled by a

bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of

employees at larger companies. The reports generated by various streams of accounting, such as

cost accounting and management accounting, are invaluable in helping management make

informed business decisions. (Kagan, 2018)

A business's accounting system contains information relevant to a wide range of people.

In addition to business owners, who rely on accounting data to gauge the financial progress of

their enterprise, accounting data can communicate relevant information to investors, creditors,

managers, and others who interact with the business in question. (Gale, 2008)

In conclusion, accounting plays a critical role in the success or failure of contemporary

business institutions. It serves as the bible and the backbone of every business. It is what makes a

business a business. Everything that happens inside the business depends on a proper and

accurate operation of accounting.

Accounting System and Practices

 According to Bragg (2018), accounting practice is the system of procedures and controls

that an accounting department uses to create and record business transactions. Accounting

practice should ideally be extremely consistent, since there are a large number of business

transactions that must be dealt with in exactly the same manner in order to produce consistently

reliable financial statements. Auditors rely upon consistent accounting practice when examining

a company's financial statements.

Additionally, Kenton (2018) stated that accounting practice is a routine manner in which

the day-to-day financial activities of a business entity are gathered and recorded. A firm's

accounting practice refers to the method by which its accounting policies are implemented and

adhered to on a routine basis, typically by an accountant, auditor, or a team of accounting

professionals.

Kenton (2018) further explained that it is intended to enforce a firm's accounting

guidelines and policies. It exists as the daily recording of financial data that is important to the

evaluation and monitoring of the firm's economic activities. These systems help gather, store and

process financial and accounting data that is used by decision makers throughout an

organization.

Ittner & Larcker (2002) defined management accounting practices as a variety of

methods specially considered for manufacturing businesses so as to support the organization’s

infrastructure and management accounting processes. Management accounting practices can

include budgeting, performance evaluation, information for decision-making; and strategic

analyses are some of the methods used among many others. Ittner & Larcker (2001) has also

argued that due to the development of these new methods, it has changed the basic principles of

management accounting to a more superior one that adds value to various practices. The
literature has also indicated that some practices such as absorption costing and marginal costing

have not been highly favored by most manufacturing businesses. For example, Dugdale and

Jones (2002) stressed that there is a limitation within these costing systems, since they do not

provide an accurate method of recording costs to be exact in order to make sound management

decisions.

A study conducted by Alusen and Javier (2018) cited that a proper accounting system

provides financial accounting information for any purpose. In addition, it is one of the most

effective decision making tools of management. It provides an orderly method of gathering and

organizing information about various business transactions, so that it may be applied as an aid to

management in operating the business. Zhou (2010) proposes that accounting software can

improve accounting practices. Lalin and Sabir (2010) explain that the main motivation for SMEs

to prepare financial statements is the pressure from regulatory authorities.

In conclusion, accounting system and practices are required to be implemented in a

particular business, for it monitors the performance of a business. It keeps track of the daily

changes that occur internally or externally. It is needed for it indicates whether the business is

already failing of is successful.

Types of Accounting Systems

According to Surbhi (2018), in accounting, the financial transactions are recorded,

processed, and presented to generate financial statements that are useful to the readers, in making

decisions. Traditionally, accounting is done manually, by trained accountant, with the use of

registers, account books, vouchers and many more. But with the emerging technology,

nowadays, computerized accounting is in vogue, due to its accuracy, convenience and speed.
 Manual Accounting. It is the paper-based accounting system, in which journal and

ledger registers, vouchers, account books are used to store, classify and analyze financial

transactions of an organization. It refers to the accounting method in which physical registers for

journal and ledger, vouchers and account books are used to keep a record of the financial

transactions. (Surbhi, 2018)

Manual accounting systems are most commonly used by small businessmen, as these

systems have lower upfront cost less than complex accounting software and are relatively easy to

use. New or small businesses may not have many financial entries to make and, therefore, their

accounting needs are simple. (Surbhi, 2018)

One of the advantages of the manual accounting system is its easy accessibility, that the

book can always be opened up and gain instant access to it. There is no delay due to power or

internet outages, and there are no risks of sensitive information being hacked online. It is also

characterized by confidentiality, which makes the sensitive information hacking free. (Surbhi,

2018)

There can be many disadvantages of using a manual accounting system. Accounting, for

any business, can be a complex undertaking. A manual accounting system requires a person to

understand the accounting process in a way that may be unnecessary with a computerized

accounting system. (Surbhi, 2018)

As cited from a study conducted by Baluyot (2016), human error also plays a role in

inaccurate financial records; manual accounting can be tiresome and tedious, causing

bookkeepers to make mistakes. Additionally, records may only be available in paper format,

which can cause issues if they are lost, stolen, or damaged.

 According to Gaffney (2018), computerized accounting has become commonplace in

many firms, from Fortune 100 companies all the way down to one-person solopreneur

businesses. Due to the internet and the availability of both online and desktop-based systems, the

cost of accounting software has come way down, and some vendors even offer scaled-down

online bookkeeping systems at no cost.

Computerized Accounting. The accounting system that uses the computer system and

pre-packaged, customized or tailored accounting software, to keep a record of financial

transactions and generate financial statements, for analysis (Surbhi, 2018)

Further, it requires front-end interface, back-end database, database processing and

reporting system to store data in a database-oriented application. The merits of computerized

accounting rely on its speed, accuracy, reliability, legibility, up-to-date information and reports

etc. (Surbhi, 2018)

One of the merits of computerized accounting which manual accounting lacks is that in

manual accounting there is no way to back up all the entries and financial statements, but in

computerized accounting, the accounting records can be saved and backed up. In computerized

accounting, instant trial balance is provided on a daily basis. The financial statement is provided

at the click of a button, in the computerized accounting system. (Surbhi, 2018)

In conclusion, both manually and computerized system is based on the same principles,

conventions and concept of accounting. However, they differ only in their mechanism, in the

sense that manual accounting makes use of pen and paper to record transactions, whereas

computerized accounting makes use of computers and internet to enter transactions

electronically.

Purpose of Keeping Accounting Records

 According to Bragg (2018), accounting records are the original source documents,

journal entries, and ledgers that describe the accounting transactions of a business. Accounting

records support the production of financial statements. They are to be retained for a number of

years, so that outside entities can inspect them and verify that the financial statements derived

from them are correct. Auditors and taxing authorities are the entities most likely to inspect

accounting records.

Kenton (2018) stated that accounting records are all of the documentation and books

involved in the preparation of financial statements or records relevant to audits and financial

reviews. Accounting records include records of assets and liabilities, monetary transactions,

ledgers, journals and any supporting documents such as checks and invoices.

A study conducted by Maseko and Manyani (2011) purposes that regulatory bodies

should develop specific guidelines for SME accounting and organizes accounting training

programs for entrepreneurs in small businesses. Record keeping which will help the proprietors

to keep track of the performance of these enterprises in order to enhance the profitability of small

scale enterprises and their continuity should be maintained.

Howard, (2013) emphasized that many small businesses failed to keep adequate records.

This leads to major problems and quite possibly the closing of the business. Evidence shows that

keeping good records helps to increase the chances of business survival. In essence, the SME’s

owners or manager should be personally involved in record keeping (Sian, 2016). Proper record

keeping ensures long-term sustainability of the business and anticipates long term prospects.

According to Adeniji (2017), it is very important that business owners make a habit of

recording their business transactions every day. It will assist in making informed, efficient and

precise decisions at any time.

 He further stated that proper bookkeeping involves maintaining up to date accounting

system, which includes recording business transactions as they occur, as well as keeping

important receipts or bills for substantiating all expenses incurred on behalf of the business.

There are many purposes on why a business must keep accounting records, and some are

the following:

Firstly, well-kept records means tax saving. Well-kept accounting records act as a

reminder of a person’s deductible credits and expenses. It’s only by keeping correct records of

business expenses that owners are able to proof various expenses that were incurred while

carrying out business operations. By doing this, they are not forced to rely on memory. This

means they only pay what is due, no more or less, as their records remind them of all the

expenses they are entitled to claim against their income.

Secondly, keeping good accounting records act as backup for all income and business

expenses incurred in time of audit. Without good records, tax auditors may be forced to make

decisions based on their "best judgment" of what value the income and expenses may be,

according to the size, location or type of a business. Additionally, without the right records,

industry standards might be used as a guide in the audit of a business.

Thirdly, keeping good records shorten the length of time that an audit takes to be

completed. If a business is chosen for audit, the business owner will be asked to produce the

necessary backups to the info filed on the income tax return. Once the business operator has

produced the right records, then the tax auditor will be able to examine the records provided and

make a timely decision on the accuracy of those records. The auditor will therefore spend less

time at the business.

 Fourthly, good record keeping complies with the law. One of the main advantages of

keeping good accounting records is to comply with the law. By simply being organized,

businesses not only enjoy the above benefits, but also stay within the law.

Fifthly, recordkeeping keeps owners informed about their businesses financial position.

With the right records, a business owner can identify areas for expansion or improvements.

Proper records also help the business owner to secure financing for the business. Additionally,

proper analysis of records can help in making strategic decision of changing business focus.

Lastly, proper keeping of accounting records help business owners to avoid interest and

penalties as they make it easier for them to pay the right amount of tax and at the right time.

Penalties are here forever (if any), but proper records can help business owners avoid them. By

the time the deadline comes, everything should be in good order ready for filing.

In conclusion, keeping proper business records can be seen as a daunting task at first.

However, it gives several benefits not only to the owners, but the business as a whole.

Additionally, keeping proper records assists the owners in making informed, efficient and precise

decisions for the betterment of the business.

Accounting System and Practices on MSMEs

In a study conducted by Khor, Jacildo, and Tacneng (2015), 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. 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 is 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.

The studies of Dyt and Halabi (2007) and Zhour (2010) concluded that business owner

and managers of micro enterprises is mostly encounters problems in their inability to keep

sufficient records to aid them in their decision-making. Another problem is their difficulty in

preparing proper financial statements because of poor or insufficient records. Results of their

studies show that majority of micro businesses rely more heavily on manual methods, while

small businesses are more likely to use computerized systems.

Another study in Ghana was made by Amidu, Effah, and Abor (2011). They explored the

e-accounting practices among SMEs in Ghana. They also looked at the expectations, realities and

barriers in adopting e-accounting. The study showed that most of the respondents used

accounting software. Even if the firms dealt with lack of electricity supply and frequent system

breakdown, they were still satisfied with the computer systems they used.

Another study conducted by Arceg, Datinguinoo, Guerra, et. al. (2015) showed that in

terms of type of system utilized in MSEs, majority of them use computerized accounting system

rather than manual accounting system with the frequency of 65 and 33 respectively.

In conclusion, it is very important for MSMEs to observe proper accounting system and

practices. Additionally, it shows that majority of MSMEs use computerized accounting system

rather than manual accounting system. However, it is given that most MSMEs lack accounting

practices that made these enterprises face some struggles with their business.
Micro-, Small-, and Medium-sized Enterprises

According to Liberto (2019), small and mid-size enterprises (SMEs) are businesses that

maintain revenues, assets or a number of employees below a certain threshold.

Each country has its own definition of what constitutes a small and medium-sized

enterprise (SME). Certain size criteria must be met and occasionally the industry in which the

company operates in is taken into account as well. (Liberto, 2019)

Though small in size, small and mid-size enterprises (SMEs) play an important role in the

economy. They outnumber large firms considerably, employ vast numbers of people and are

generally entrepreneurial in nature, helping to shape innovation (Liberto, 2019).

According to an article made by the MSME Sector – Senate of The Philippines (2012),

micro, small, and medium-sized enterprises have a very important role in developing the

Philippine economy. They help reduce poverty by creating jobs for the country’s growing labor

force. They stimulate economic development in rural and far-flung areas. They serve as valuable

partners to large enterprises as suppliers and providers of support services. They serve as

breeding ground for new entrepreneurs and large corporations. A vibrant MSME sector is thus an

indication of a thriving and growing economy. Despite policies that aim to provide an enabling

environment for MSME development, the sector still faces various constraints that prevent it

from realizing its full growth and potential.

In conclusion, micro, small, medium enterprises play a very crucial role in improving the

Philippine economy. With their existence, they help not only in wealth creation but also in

disseminating new industries to the countryside that contribute to a fair distribution of income

and helps reduce the number of poverty. They serve as valuable partners to large enterprises as
suppliers and providers of support services. They serve as breeding ground for new entrepreneurs

and large corporations.

Grocery Stores

According to Petersen and Seidel (2019), grocery stores specialize in the selling of food,

both fresh and prepackaged, as well as nonfood household goods, such as paper towels, toilet

paper, cleaning products and over-the-counter medicines. A typical grocery store sells fresh

produce, meats, dairy products and, often, bakery goods alongside canned, frozen and prepared

foods. In addition, a grocery store will also sell a full range of household, healthcare and

personal care items.

Grocery stores are a destination for consumers who need to purchase food and household

products for both everyday use and special occasions. The wide selection of products and brands,

as well as high inventory levels, allow consumers to shop the goods that their household may

need for a significant period of time. Large, wheeled carts are available at the store entrance,

with the anticipation that shoppers will fill them with enough food to last a household a week or

more. (Petersen & Seidel, 2019)

Typically, grocery stores have multiple checkout lanes and registers, along with large

staffs that include store and department managers, workers in specialty departments, such as the

deli or meat counter, cashiers and stockroom workers. (Petersen & Seidel, 2019)

In addition, grocery stores often have much larger parking lots and may be part of a large

cluster of retail stores. The large parking lots may require patrons to spend several minutes

walking out and into the store. (Petersen & Seidel, 2019)

In an article made by Ferrolino (2018), it is stated that grocery retailers saw opportunities

in providing more convenience and accessibility to local consumers, and pursued smaller store
formats, as well as grocery delivery services. Players which operated several grocery retail

channels put a stronger focus on smaller store formats such as convenience stores and minimarts

(smaller neighbourhood supermarkets), which enabled them to locate in residential areas and

business districts closer to consumers.

Moreover, Ferrolino (2018) stated that grocery stores, especially modern grocery

retailers, are expected to continue to enjoy growth in both outlet numbers and value sales over

the forecast period, due to both consumer need and purchasing power. As grocery retailers

remain the major source of food and household consumables, players will strive to adapt to

consumers’ needs by opening stores in more accessible locations and increasing their presence in

underserved markets.