COLLEGE OF BUSINESS AND ENTREPRENEURIAL TECHNOLOGY
ACCOUNTANCY DEPARTMENT
“IMPACT OF ACCOUNTING RECORDS ON THE FINANCIAL
PERFORMANCE OF SELECTED MICRO ENTERPRISES”
An Undergraduate Thesis
Presented to the Faculty of the
College of Business and Entrepreneurial Technology
RIZAL TECHNOLOGICAL UNIVERSITY
Mandaluyong City
COLLEGE OF BUSINESS AND ENTREPRENEURIAL TECHNOLOGY
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In Partial Fulfillment of the Requirements for the Degree
Bachelor of Science in Accountancy
By
John Lorenz E. Bacolod
John Martin N. Mengote
Mary Bae Oliveros
Carel P. Roman
Maria Trishka Villapana
June 2021
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CHAPTER 1
THE PROBLEM AND ITS BACKGROUND
This chapter presents the introduction, background of the study,
theoretical framework, conceptual framework, statement of the problem,
hypothesis, scope and delimitation, significance of the study, and
definition of terms.
Introduction
Record
keeping
is
the
systematic
tracking
of
business
transactions so that an organization's financial situation may be
determined at any time. It has evolved into the bedrock upon which
modern businesses are built. Micro enterprises have been highlighted as
a key strategic area for boosting Philippine economic and social
development. MSMEs have received widespread recognition as a major
source of employment, revenue, poverty reduction, and regional
development over the years. Agriculture, mining, manufacturing,
construction, and service industries are just a few of the industries
covered by MSMEs.
Accounting plays a critical role in the success or failure of today's
businesses. It hinders asset exploitation, boosts output and productivity,
keeps costs under control, and aids in overall management efficiency.
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The importance of management in the development of a corporate
organization cannot be overstated. Accounting systems are in charge of
recording, analyzing, monitoring, and evaluating a company's financial
state, as well as creating tax records and giving information assistance
to a variety of other organizational responsibilities. Accounting systems
give owners and managers of MSMEs in every industry with a supply of
information for measuring its performance.
Record keeping is critical to corporate management. For the
creation of financial statements, record keeping entails the identification,
categorization, storage, and preservation of records, as well as their
reception and transfer, retention, and disposal. Maintaining records is
essential for a business's success. Entrepreneurs may create accurate
and timely financial reports that demonstrate the progress and present
state of their organization using a comprehensive record-keeping
system. Performance during one period of time can be compared to
performance during another period using the financial report issued by a
solid recordkeeping system. An accurate record of a company's
performance can be used to track progress in key areas.
Today's accounting focuses on providing decision makers with
relevant, trustworthy, and timely financial data so that they may make
informed financial decisions about their businesses. Accounting is
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described as a systematic technique that identifies, records, measures,
classifies, verifies, summarizes, interprets, and communicates financial
data, according to the business dictionary. It shows profit or loss for a
specific time period, as well as the value and nature of a company's
assets and liabilities, as well as its owner's equity. It entails gathering,
documenting, summarizing, and reporting financial data for the purpose
of reviewing and monitoring a company's economic activities. As a
result, an accounting system is a well-organized combination of manual
and computerized accounting methodologies, processes, and wheels for
acquiring, recording, classifying, analyzing, summarizing, interpreting,
and presenting accurate and timely financial data for decision-making in
an organization.
Background of the Study
The mere thought of bookkeeping and accounting intimidates
many prospective business owners. But, in reality, both are rather
straightforward. Keep in mind that bookkeeping and accounting have the
same two primary goals: keeping track of income and expenses to
increase the possibilities of making a profit, and collecting financial data
for completing various tax returns. There is no necessity for records to
be retained in a specific format. However, some firms must adopt a
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specific way of crediting their accounts, either the cash method or the
accrual approach, as long as the records accurately reflect the
business's income and expenses. Depending on the size of the
company and the number of sales, you can either generate your own
ledgers and reports or hire an accountant.
Financial information linked to financial transaction flows and
financial status is recorded, retained, and reproduced by an accounting
system. Inflows on account of income and outflows on account of
expenses make up the majority of financial transaction flows. Assets,
liabilities, and equity are the three major areas in which financial position
elements, such as property, money received, and money spent, are
classified. Each different asset, liability, income, and expense is
represented by its own "account" within these basic groups. A record of
financial inflows and outflows in relation to a certain asset, liability,
income, or expense is called an account because they only represent
the inflows and outflows absorbed in the financial-position elements at
the end of the time period, income and expense accounts are
considered temporary accounts.
The purpose of determining the impact of financial accounting
reporting
on
the
corporate
financial
performance
of
business
organizations is to determine how financial accounting reporting has
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aided in the advancement of corporate objectives. In the process, it
looked into the impact that financial accounting has on a company's
success. It also tried to determine if corporate organizations were
complying with relevant statutes, as well as the general satisfaction of
stakeholders in corporate organizations.
It is impossible to overstate the importance of performance
measurement to any corporate entity, large or small. Profit, in any case,
can be considered as the lifeblood of a company, and as a result, the
accounting bases, concepts, and principles used should gather and
report all important accounting data to assure accuracy in its
measurement. Profits reported indicate changes in owners' wealth,
which may explain why significant corporate choices are based on
financial
performance
as
measured
by
profitability. Appropriate
accounting data has long been recognized as critical to the successful
operation of any corporate entity, large or small.
Accounting tools such as the cost accounting system, financial
accounting practices, and even management accounting practices
provide various users with information on the entity's performance and
other important information. Financial statements have the goal of
providing information about an enterprise's financial status, financial
performance, and changes in financial position that may be used by a
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variety of users to make economic decisions. Accounting practice, on the
other hand, is the set of procedures and controls that an accounting
department employs to create and record business transactions.
Because there are so many corporate activities that must be handled in
exactly the same way in order to produce consistently credible financial
statements,
accounting
practice
should
ideally
be
exceedingly
consistent.
As a result, it is critical that micro enterprises record-keeping
methods provide complete and relevant financial information to help
entrepreneurs make better economic decisions. As a result, the focus of
this study is on micro enterprises record-keeping procedures, their
completeness, the availability of accounting skills and knowledge for
capturing and processing accounting data that may be utilized to gauge
business success, and the impact of accounting records on the financial
performance of selected micro enterprises.
Theoretical Framework
The theoretical framework on this study is grounded on the
relevant theories of accounting and performance as well as their
application to micro enterprises.
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The primary goal of every enterprise is to make money, which is
indicated by the theory of resources-based view, one of the purposes of
every business is to maximize shareholder wealth by properly utilizing
relevant resources. The effectiveness of a company's managers and the
efficiency of its resources have a direct impact on the state in which it
works. Decision usefulness theory states that positive financial success
emerges from decisions taken in the course of business. It's a common
strategy for meeting the information needs of financial report's major
users. The decision usefulness accounting theory stresses the recording
of company transactions in order to make better business decisions. The
concept of decision usefulness recognizes that usefulness is determined
by the user. Because it decreases "uncertainty regarding the real
condition of things of interest to the user," the type of information and
designated relevance is the primary standard to employ in deciding
among accounting options. In order to make an informed judgment,
revenue authorities in charge of tax collection in a country and lenders of
MSMEs require to review the books of accounts and financial
statements.
Accounting theory dictates that transaction data be measured
precisely and classified consistently. Accounting systems are also
required to ensure that an entity's transactions are recorded. Agency
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costs are a huge issue for firms, and with the number of fraud cases
increasing all over the world, there needed to be a significant
advancement in accounting theory. Stephen Ross and Barry Mitnick
created agency theory which is characterized by a conflict of interest
between principals (owners) and agents (managers), termed as an
"agency dilemma." One approach to advancing the idea is to reduce
agency costs by communication, sharing risks and gains, and attempting
to balance the scorecards. The theory has evolved as a result of the
establishment of performance standards, the use of cost-effective
processes, cost management tools, and incentives, all of which have
aided in the difficulty of managing agency problems.
Watts and Zimmerman (1978) contributed to the development of
positive accounting literature that explains accounting practice. The
relative magnitudes of the contracting costs determine how much
accounting choice affects the contracting parties' wealth. PAT (Positive
Accounting Theory) has been referred to as a crucial part of accounting
practice. Self-interest drives the selection of accounting systems and
practices, as well as policy decisions, in PAT. PAT describes a firm
(organization, corporation, etc.) as a collection of contracts — a nexus of
contracts between management, capital providers, and employees who
must work together to maximize the wealth of the business owner.
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Conceptual Framework
INPUT
1.Demographic profile
of the respondents:






Sex
Age
Forms of
Business
Organizations
Types of
Business
Years of
Business
Operation
Accounting
Records
Maintained
PROCESS
 Questionnaire
 Survey
 Descriptive/
Comparative
Analysis of
Data
OUTPUT
 Determined
impact of
accounting
records on the
financial
performance of
selected micro
enterprises
 Recommendatio
ns/Suggestions
2.
Impacts
of
accounting records on
the
financial
performance of micro
enterprises in terms of:



Profitability
Liquidity
Efficiency
FIGURE 1. Paradigm of the Study
The research paradigm that has been established was distributed
into three parts, namely: Input, Process, and Output (See Figure 1). The
Input consists the profile of the respondents, specifically the age, sex,
forms of business organizations, types of business, years of business
COLLEGE OF BUSINESS AND ENTREPRENEURIAL TECHNOLOGY
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operation and accounting records maintained, together with the factors,
mainly profitability, liquidity and efficiency, which are connected in
determining the financial performance of selected micro enterprises.
The Process states the different methods that involves the use of
surveys, observations, data gathering procedures, and descriptive/
comparative data analysis. Moreover, the Output represents the action
taken after interpreting the results of the study which will determined the
impact of accounting records on the financial performance of selected
micro enterprises, as well as the recommendations and suggestions.
Statement of the Problem
This study aims to identify the impact of accounting records on
performance of selected micro enterprises in Rodriguez, Rizal.
1. What is the profile of the respondents in terms of:
1.1. Sex
1.2. Age
1.3. Forms of Business Organizations
1.4. Types of Business
1.5. Years of Business Operation
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1.6. Accounting Records Maintained
2. What are the respondents assessment as to the impacts of
accounting records on determining the financial performance
of micro enterprises in terms of:
2.1. Profitability
2.2. Liquidity
2.3. Efficiency
3. Is there a significant difference between accounting records
and the financial performance of selected micro enterprises
when grouped by profile?
Hypothesis
Hο: There is no significant difference between accounting records and
the financial performance of selected micro enterprises when grouped
by profile.
Scope and Delimitation of the Study
The study examines the impact of accounting records on the
financial performance of micro enterprises. It explains the nature of
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accounting records and the accounting regulatory framework that
governs them, as well as an analysis of their impact on the performance
of chosen micro enterprises in Rodriguez, Rizal.
Two hundred fifteen (215) randomly selected business owners or
administrators of selected micro enterprises in Rodriguez, Rizal made up
the study's respondents. Furthermore, given the current situation,
contacting respondents is difficult. That is why the researchers were only
able to get that numbers of people to participate in the study.
Significance of the Study
Accounting Students – This will give them an overview regarding the
concept of accounting records and how does it help the micro
enterprises in having a good financial performance.
Aspiring Entrepreneurs – For the preparation of their chosen career, this
will serve as guide for them to minimize the risk and attain success.
Business
Owners/Administrators
–
This
study
will
help
the
owners/administrators to have a better understanding regarding the
impact of accounting records to the performance of their businesses or
organizations.
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Future Researchers - This will help them expand their knowledge and
understanding about the topic. Besides, it will help them in giving more
meaningful interpretations to their future studies. They can use it as their
reference for their future study as well.
Universities - The study will demonstrate to the university the value of
organizing seminars for prospective entrepreneurs, emphasizing the
significance of maintaining accounting records for all business
transactions in order to ensure effective financial management.
Additionally, the University may make a special course on record
keeping as a compulsory subject to prepare students to be competent
entrepreneurs in the future.
Definition of Terms
Accounting Records - All of the documentation and books used in the
preparation of financial statements or records pertinent to audits and
financial reviews are referred to as accounting records. Asset and
liability records, monetary transactions, ledgers, journals, and any
supporting documents such as checks and invoices are all included in
accounting records.
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Efficiency - In accounting, efficiency refers to the use of specific ratios
and measurements to assess the effectiveness of a specific company or
firm. Efficiency ratios are used to assess a company's financial condition
based on how its assets are managed.
Liquidity - Liquidity refers to a business's capacity to repay short-term
debts such as accounts payable that mature in less than a year.
Micro Enterprises - A microenterprise, also known as a microbusiness, is
a small business with few employees. A microenterprise is typically run
by fewer than ten people and is funded by a small amount of capital
advanced by a bank or other organization.
Profitability - Profitability is a metric that compares an organization's
profit to its expenses. More efficient organizations will make more profit
as a percentage of their expenses than less efficient organizations,
which will have to spend more to make the same profit.
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CHAPTER II
Review of Related Literature
This chapter shows a retrospective presentation of previously
written material: research literature and conceptual that has relevance
and significance to the research under consideration.
1 Micro Enterprises
Micro businesses in the Philippines are classified based on the
size of their assets, the size of their equity capital, and the number of
employees. A typical microbusiness employs nine or fewer people and
has assets of 3 million or less.
The Magna Carta for Micro, Small, and Medium Enterprises
(RA9501) and the National Statistics Office (NSO) established the official
classification of MSMEs in the Philippines in 1993, based on asset size
and employee size. According to the classification, a 'micro enterprise' is
defined as any business with fewer than three million Philippine pesos
(PHP) in assets (excluding titled land) or fewer than ten employees. A
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'small enterprise' employs 10 to 99 people and has assets worth
between PHP three and 15 million. 'Large enterprises' have assets worth
more than PHP 100 million (excluding land) and more than 200
employees. According to this definition, the majority of the country's
businesses fall into the first two categories: micro and small. Indeed, the
Philippine private sector, like that of many other countries, is dominated
by micro, small, and medium-sized enterprises in terms of the number of
business establishments. Large enterprises, all of which are in
manufacturing, are the exception, accounting for only 0.4% of the total
number of businesses in the country (Paderanga 2021).
The
Philippine
Statistics Authority's
(PSA)
2020
List
of
Establishments recorded a total of 957,620 business enterprises
operating in the country. There are 952,969 MSMEs (99.51 percent) and
4,651 large enterprises (0.49 percent) among them. Micro enterprises
account for 88.77 percent (850,127) of total MSME establishments, with
small enterprises accounting for 10.25 percent (98,126) and medium
enterprises accounting for 0.49 percent (4,716).
According to the number of MSMEs in 2020, the top five (5)
industry sectors were as follows: (1) Wholesale and Retail Trade; Repair
of Motor Vehicles and Motorcycles (445,386); (2) Accommodation and
Food Service Activities (134,046); (3) Manufacturing (110,916); (4) Other
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Service Activities (62,376); and (5) Financial and Insurance Activities
(45,558). These industries accounted for approximately 83.77 percent of
all MSME establishments.
The National Capital Region (NCR) has the most MSMEs, with
201,123 (21.10 percent) business establishments, followed by region 4A (CALABARZON) with 139,363 (14.62 percent), Region 3 (Central
Luzon) with 111,262 (11.68 percent), Region 7 (Central Visayas) with
65,682 (6.89 percent), and Region 6 (Western Visayas) with 57,469
(6.03 percent). These top five (5) locations accounted for approximately
60.33 percent of all MSME establishments in the country. MSMEs are
concentrated in regions based on economic activity and population size.
These MSMEs created a total of 5,380,815 jobs, accounting for
62.66 percent of total employment in the country. Micro enterprises
produced the greatest share (29.38 percent), followed by small
enterprises (25.78 percent), and medium enterprises (7.50 percent).
Meanwhile, large businesses created 3,206,011 jobs, accounting for
37.34 percent of total employment in the country.
Extensive evidence shows that the expansion of micro and smallscale enterprises (MSSEs) is a critical component in the long-term
development of developing economies (Mbugua et al. 2018).
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The importance of this sector in Ethiopia is recognized in various
documents such as the industrial policy, MSSE development strategy,
and the growth and transformation plan I and II to accelerate growth and
reduce poverty (Esubalew and Raghurama 2017).
2 Nature of Accounting Records
2.1 Definitions
Accounting can be defined as the process of identifying,
measuring, and converting economic data in order for users of the
information to make informed judgments and decisions (Wood, 2017).
Accounting is the art of reporting financial information to
interested parties in order to make decisions about the deployment and
use of resources in business and non-business activities and the
economy (Weygandt, 2017).
2.2 Accounting Records Procedures
The following items should be included in the accounting
recording procedure:
(I) Identifying/Analyzing; determining the financial significance of a
transaction so that it can be properly recorded.
(II) Recording; recording financial data in books of accounts.
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(III) Summarizing and computing; summarizes all transactions and
computes total balance in each recorded account.
(IV) Reporting and communicating results
The first three activities are classified as bookkeeping, while the
last two are classified as reporting. (Wood, 2017)
2.3 Importance of Accounting Records
Good records provide financial data that allows the business to operate
more efficiently and profitably. Accurate and complete records allow the
business manager and accountant to identify all assets, liabilities,
income, and expenses for the company. When compared to appropriate
industry averages, this information assists in identifying both the strong
and weak phases of the business operations.
Good records are required to prepare current financial statements
such as the income statement (profit and loss) and cash-flow projection.
These statements, in turn, are essential for maintaining positive
relationships with the banker. They also provide a comprehensive picture
of the overall business operation.
When it comes to taxes, keeping good records is essential.
Inaccurate records may cause you to underpay or overpay taxes. With
proper records, total income can be easily calculated, allowing the tax
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payer to pay the correct amount of tax without overcharging the
businessman (Senior Magazine, 2018).
2.4 How to keep Accounting Records
A journal is a book in which you record each business transaction
shown on your supporting documents, whereas a ledger is a book in
which you total the totals from all of your journals. It is divided into
various accounts (Department of the Treasury, Internal Revenue Service
Publication 583, 2017).
2.5 Types of Accounts SMEs should Record
As Sarapaivanich and Kotey (2016) explain, SMEs should keep
only a few accounts because their businesses are small and have few
transactions.
(I) Sales account: The Sales Book keeps track of all transactions
involving the sale of goods or services. Date, invoice number, amount,
customer name, and type of transaction – cash or credit – are all
recorded.
(II) Purchases account: The Purchases Book keeps track of all
transactions involving the purchase of raw materials or inventory. Date of
purchase, purchase order number, stock number of item purchased,
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purchase price, and whether purchased on credit or cash are all
recorded.
SME that has been in business for a longer period of time must
keep more accounts to cover all larger transactions that occur in the
business. Some of them include, but are not limited to, the following:
(I) Account of Debtors: The Accounts Receivable ledger is useful for
tracking the amount of money owed to each customer. You will not need
an accounts receivable tracking system if products or services are paid
for at the time of delivery. Accounts receivable records, on the other
hand, keep track of what is owed to you if you provide services or
products for which people pay you later. Accounts receivable can be
monitored by keeping a copy of all invoices sent out or by keeping an
accounts receivable record. In either case, you must record the following
information: invoice date, invoice number, invoice amount, terms, date
paid, amount paid, and the name of the entity being billed.
(II) Creditor’s account/Accounts payable: The Accounts Payable ledger
records the amounts owed to suppliers/creditors. Knowing the status of
your accounts payable and when they are due allows for better cash
management and helps you establish a good credit standing with your
suppliers and creditors. Regardless of the system used, the company
should keep the following accounts payable information on file: invoice
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date, invoice number, invoice amount, terms, date paid, amount paid,
balance (if applicable), and clients' names and addresses.
(III) Cash account: This account records all business receipts and
payments.
(IV) Stock account: Keeping track of inventory records, among other
things, will prevent pilferage, keep inventory holdings to a minimum, and
track buying trends. You must record the following inventory information:
date purchased, stock number of item purchased, purchase price, date
sold, and sale price.
(V) Financial Statements: A financial statement is the result of an entity's
activities and is prepared to assist interested parties in making decisions
such as whether to lend it money or invest in its shares. Financial
statement analysis can be viewed as a component of the link between
financial statements and decision making. Trading, profit and loss
account, balance sheet, and statements of source and application of
fund statements are frequently included in financial statements. (ACCA,
2018.) Financial statements are information provided to meet the needs
of accounting information.
2.3 Measure of Financial Performance
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According to the Encyclopedia of Business (2017), performance
measures are classified into two types: those that focus on results
(outputs or outcomes such as competitiveness or financial performance)
and those that focus on the factors that influence results (inputs such as
quality, flexibility, resource utilization, and innovation). This implies that
performance measurement frameworks can be built around the concepts
of outcomes and determinants. According to Zuriekat, Salameh, and
Alrawashdeh
(2017),
performance
measurement
systems
are
considered information systems that are used to evaluate both individual
and organizational performance.
Different
measures
are
used
to
assess
the
company's
performance. According to Fiori, Di'Donato, and Izzo (2019), literature
review, financial performance can be measured based on the firm's
solvency, repayment capacity, profitability, efficiency, and liquidity.
Financial ratios, according to Lin and Liu (2015), are typically one of the
indicators used to evaluate a firm's performance. In general, the financial
information of a company's business operations is reported in its yearly
financial statements, and a financial ratio is simply one item in the
financial statement divided by another. Financial ratios can be viewed as
a first point of reference for analyzing business performance.
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Traditionally, the financial ratio method has been used to measure
a firm's performance because it provides a simple description of the
firm's financial performance in comparison to previous periods and helps
to improve management performance. Glautier and Underdoon (2019),
on the other hand, maintained that there are two aspects of a company's
financial performance that are of interest to investors. First, its financial
performance can be evaluated in terms of its ability to generate profit.
This is consistent with Pandey (2018), who claims that profit
maximization leads to the efficient allocation of resources under
competitive market conditions, and profit is regarded as the most
appropriate measure of a firm's performance. Thus, financial efficiency
ratios in this context focus on the relationship between profit and sales
as well as profit and assets employed. Second, the financial
performance of the company can be measured in terms of the value of
its shares to investors. In this way, financial performance ratios
concentrate on earnings per share, dividend yield, and price/earnings
ratios. Financial ratios are the ratios used to assess a company's overall
profit performance.
2.4 Profitability
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To calculate profit or loss, you must maintain accounting records.
A firm's success will be determined by the quality of its accounting
records and the consistency of its cash flow. It is simply impossible to
establish your company's financial state of profitability without correct
and up-to-date accounting documents. You must be aware of the legal
requirements and give the relevant information. The collection of
financial information is also required for filing various tax returns, as it
allows you to keep track of your revenue and spending, which increases
your chances of generating a profit. Profitability measures efficiency and
eventually success. It is also defined as a company's capacity to
generate a reasonable rate of return on its resources against an
alternative investment to (Horton, 2021). A company's profitability
determines its viability. Unpaid costs directly tied to revenue-generating,
such as manufacturing a product, and other expenses related to
business operations are profitable (Grimsley, 2021).
For micro, small and medium-sized enterprises, profitability is a
measure of performance. When MSMEs have easy access to funds and
a favorable economic environment, they may be able to address other
issues such as a lack of innovation, high costs concerning technological
implementations, a lack of expertise, and inefficiency in operations,
which hinder their ability to realize their full potential in terms of profit
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maximization and maintaining a stronger position in the economy. The
profitability of MSMEs tends to increase while the economy is expanding
(Ombongi & Long, 2018). In the study about the Examining business
performance of micro, small and medium scale enterprise through
accounting records keeping; case study in Ghana (Senzu & Ndebugri,
2018), it was observed that the vast majority of respondents did not
retain company records, and as a result, they had no way of knowing
whether or not their firms were growing. That is why we are determining
the impact of accounting records on the financial performance of
selected micro enterprises in Rodriguez, Rizal.
As we observe in most micro, small and medium-sized
enterprises (MSMEs), specifically in our country, they do not maintain
financial records due to a lack of accounting knowledge and the high
expense of hiring qualified bookkeepers. Micro, small and medium-sized
enterprises (MSMEs) are challenged for making inefficient use of
accounting data to improve their performance estimates. It made it
impossible for the business visionaries to determine the value of their
company's benefit on time. The failure to maintain accurate records
resulted in the proprietors' or administrators' inability to realize their full
talents and potentials in their prospective company area. Thus,
accounting records were thought to be the foundation upon which a
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compliance program should be formed, and they were considered to be
just as vital as the creation of an organization. If the accounting record is
done correctly, it may result in improved profits and the development of
micro, small and medium-sized enterprise (Grefalde, 2020).
The ultimate mission of all businesses is to grow shareholder
wealth through increasing the value of its stockholders’ investment in the
firm (Alarussi & Alhaderi, 2018). In this kind of environment, it is
necessary to understand net profits. It aims to learn more about what
operational profit and net profit genuinely are and how it connects to all
of the measurements that have been gathered.
It's clear that the ultimate purpose of any company is to increase
shareholder wealth through raising the value of its stockholders (Alarussi
& Alhaderi, 2018). As a result, it is critical to have an understanding of
profitability metrics. With all the metrics, it is hoped to discover what
operational profit and net profit actually are and how they relate to one
another.
It is common knowledge that net income, also referred to as total
comprehensive income, net profits, bottom line, or credit sales, is the
amount of money earned by an organization less the amount it spends
on goods and services sold, expenses, depreciation, and amortization,
interest payments, and taxes paid during an accounting period
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(Wikimedia Foundation, 2020). When all costs and revenues are taken
into account, net income also known as net profit is the revenue that is
left over (Kagan, Investopedia, 2020). The bottom line of the income
statement is net income (Kagan, Investopedia, 2020). The "bottom line"
number is commonly used when discussing a firm. Ecommerce and
retail organizations need to keep an eye on net profitability because
sales growth does not necessarily convert into higher profitability (Glew,
n.d.). In the end, net profit informs how much money it has left over after
all expenses have been taken into account (Glew, n.d.).
2.5 Liquidity
The importance of Micro, Small, and Medium-Sized Enterprises
(MSMEs) in many economies cannot be overstated, as they play critical
roles in both established and developing economies, including job
creation and poverty alleviation. However, the majority of MSMEs have
overlooked the critical nature of a well-structured accounting system that
would enable them to maintain accurate financial statements. The
purpose of this study was to determine the extent to which accounting
data is used to assess the financial performance of MSMEs.
Questionnaires were distributed to 200 owners of MSMEs, of which 197
were valid and assessed using the Likert scale. While respondents
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agreed that one of the primary benefits of maintaining proper records is
to understand the business's performance and that record keeping is
critical to the business's success, the majority of MSMEs' owners lack
basic accounting knowledge and decry the cost associated with
preparing financial statements, and thus maintain records manually. The
report suggests that MSMEs operators maintain correct records and, if
necessary, employ the services of MSME professionals to do so at a
little cost, since the cost of business failure due to a lack of proper
record keeping considerably outweighs the cost of maintaining proper
records for a business concern.
The Advantages of Bookkeeping According to Eric and Gabriel
(2017), accounting is a financial control instrument that enables
managers to understand their organizations' financial circumstances and
implement control measures to improve corporate performance. It
contains a plethora of data that managers, investors, leaders,
customers, suppliers, and regulators all rely on. An examination of its
financial accounts can reveal a company's strengths and weaknesses,
and managers can use this information to boost performance. To
optimize a firm's value, management must capitalize on the firm's
strengths and address its deficiencies. This is accomplished through the
examination of financial statements. Financial statement analysis, which
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can be achieved through bookkeeping, entails comparing the firm's
performance to that of other firms in the same industry and analyzing the
financial situation of the firm over time. These studies assist managers in
identifying shortcomings and taking corrective action to improve the
situation.
Financial statement analysis is beneficial to the management in
two ways: it assists in anticipating future situations and, more
importantly, it serves as a starting point for taking activities that will
improve the firm's future performance. Bookkeeping provides critical
information regarding an enterprise's financial status and present
performance. Although financial statements are created primarily for
customers outside the firm, such as banks and non-bank financial
organizations, managers find them valuable in making choices. When
managers design operating plans, they consider the impact those plans
will have on the organization's performance as measured by the financial
statements. Financial statements such as the balance sheet, income
statement, retained earnings statement, and statement of cash flows are
derived from the bookkeeping.
The balance sheet is a statement that summarizes an
organization's assets, liabilities, and equity at a certain point in time.
Thus, an organization's balance sheet depicts the firm's financial status
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at a certain point in time. The income statement summarizes revenue
and expenses for the time period between two balance sheet dates. The
retained earnings statement summarizes how the period's income and
dividends affected the organization's retained earnings. The statement of
cash flows details how cash was obtained and spent throughout the
period. All of these assertions contribute to the firm's or organization's
decision-making process. When it comes to obtaining long-term capital
or a loan from a bank or the government, the accountant's involvement
is critical. Okwena et al. corroborate this assertion (2016). Apart from
reviewing the character and experience of the management team, a
bank or government would give a loan to a small-scale business after
analyzing the total financial statement, detailing how the business has
performed over the last several years, and projecting future financial
performance. These include the following:

Historical and projected cash flow statement

Historical and projected balance sheet

Historical and projected income statement
Cash flow estimates are critical. They reflect the firm's ability to
generate sufficient funds to cover interest and outstanding principal. The
lender's accountant handles the above, whilst the borrower's (firm's)
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accountant creates the financial statements that have been assessed
and frequently advises on a less expensive source of funding.
2.6 Efficiency
Measuring firm performance is a critical issue in strategic
management. Firm performance measurement is critical for researchers
and managers because it allows them to assess the effectiveness of the
strategies they have implemented. Firms must be able to efficiently use
their exclusive resources/capabilities in order to reduce costs, capitalize
on market opportunities, and/or neutralize competitive threats in order to
improve performance (Newbert, 2018). As a result, as previously stated,
we consider profit efficiency to be a performance measure because it
outperforms the traditional performance measures used in empirical
research on the RBV. Profit efficiency refers to a company's ability to
reduce costs while increasing economic value from its output.
The economic literature considers cost efficiency and profit
efficiency to be the two most important concepts of efficiency, because
they are based more on economic optimization in response to market
prices and competition and less on the use of a specific technology
(Berger and Mester, 2017). In other words, these two efficiency concepts
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respond to two important economic goals: cost minimization and profit
maximization. Cost efficiency is defined as the ratio of the lowest
possible cost for a given volume of production to the current production
cost. This concept tells us how much higher a firm's costs are in
comparison to the costs of the most efficient firm that produces the same
combination of outputs given the same input prices, assuming that the
difference cannot be explained by a random error. According to
Leibenstein (2016), the majority of these inefficiencies are the result of
management and/or organizational errors. As a result, we can confirm
that cost inefficiencies are caused by, first, a poor choice of production
plan (allocative inefficiency) and, second, poor production plan
implementation (technical inefficiency). Thus, cost efficiency refers to a
company's ability to minimize its costs for a given amount of output.
Chen et al. (2015) describes in detail the few studies in the
strategy literature that use efficiency as a performance measure. The
authors examine the estimation methods used, sample size, input and
output variables chosen, industry type, and average cost efficiency
obtained in each of these studies. All of these studies represent
significant advances in the strategy literature because (1) the ability of
firms to minimize costs is part of the RBV and (2) the efficient use of
resources is critical to achieving competitive advantage (Majumdar,
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2018). Despite the importance of cost efficiency as a potential source of
cost savings, this concept has two significant flaws (Berger & Mester,
2017):
1. Cost efficiency evaluates efficiency for a given level of output, which
does not always have to correspond to the optimal level of output As a
result, even if a firm is cost-efficient at its current scale of output, it is
very likely not at its optimum level of output.
2. Cost efficiency does not account for potential differences in output
quality. If these quality differences are not taken into account, and higher
quality implies a higher cost, we may misinterpret this higher cost as
inefficiency when it is actually due to unmeasured differences in output
quality.
These flaws, combined with the fact that a firm's goal is not only
to minimize costs but also to select a combination of outputs that
maximizes revenue, have given rise to the concept of profit efficiency.
Profit efficiency is defined as a firm's proportion of maximum profit4
(Berger & Mester, 2017), and it includes both cost efficiency and revenue
efficiency. Revenue inefficiencies stem from an incorrect market and/or
competitive strategy selection and reflect a failure to produce a higher
output value. Alternatively, a firm can have revenue inefficiencies if its
response to the relative prices of its outputs is poor and it produces few
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high margin outputs while producing many low margin outputs. In this
sense, revenue inefficiencies are analogous to cost inefficiencies in that
they both result in a net loss of real value, whether the loss is expressed
as a lower value of the output produced or a higher value of the
consumed inputs. As a result, in order for a company to create value, it
must increase its efficiency, and the efficiency concept that best
measures this value creation is profit efficiency.
2.7 Relationships between Accounting Records and Performance
The ability of a business to meet required standards, increase
market share, improve facilities, ensure returns on profitability, and total
cost reduction is considered effective performance, and once this is
achieved, a business is considered to be performing effectively
(Fitzgerald et al 2016). Performance is a continuous process that entails
the management of the criteria against which an institution, agency, or
project can be held accountable (Duranti and Thibodeau, 2019).
Typically, these criteria are expressed as component parts of an internal
system and address the institution's capacity to manage financial
expenses, satisfy staff, deliver timely interventions, and respond to target
group reactions to interventions. Furthermore, Fitzgerald et al. (2016)
argue that businesses must improve production in order to compete
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effectively in this era of rapid economic and technological change.
Increased productivity requires both capital investment and a workforce
that is adaptable to new jobs created as a result of structural changes in
the economy. According to Bititei et al. (2019), performance is a result of
workers because they provide the strongest linkage to the business
enterprise's strategic goals, customer satisfaction, and economic
contribution to the business; thus, it addresses the manner in which an
activity is accomplished in particular and the level of standards to which
a task is performed within the work environment. According to Ikechukwu
(2018), maintaining records is critical for a business's success. A
comprehensive record keeping system enables entrepreneurs to create
accurate and timely financial reports that detail the business's progress
and current state. With the financial report generated by a sound
recordkeeping system, it is possible to compare performance over time
(month, quarter, or year). A complete accounting of the business's
performance provides a means of monitoring performance in specific
areas. Accounting records serve as a foundation for complete and
accurate income tax computations, for sound future planning, and for
discussions with partners, potential investors, and lenders; all of these
are critical aspects that contribute to the business's performance.
Additionally, businesses rely on accurate accounting records to make
sound business decisions. Expansion, discontinuation, or maintenance
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of product lines, manufacture or acquisition of debtors are all examples
of decisions. As a result, maintaining proper records enables efficient,
timely decision making and improves performance in small scale
industry.
2.8 Synthesis of Related Literature and Studies
The researchers believes that each and every literature and
studies stated in this research are related to the present study. The
researchers relate and differentiates the research based on the flow of
their network analysis from the proposed study.
Different articles that include Magna Carta and the National
Statistics Office (NSO) established the official classification of MSMEs in
the Philippines in 1993, based on asset size and employee size.
According to the classification, a 'micro enterprise' is defined as any
business with fewer than three million Philippine pesos (PHP) in assets
(excluding titled land) or fewer than ten employees. Moreover, as
Sarapaivanich and Kotey (2016) explain, SMEs should keep only a few
accounts because their businesses are small and have few transactions.
Furthermore, numerous authors, which include Zuriekat, Salameh, and
Alrawashdeh (2017), as cited by Fiori, Di'Donato, and Izzo (2019), Lin
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and Liu (2015), Glautier and Underdoon (2019) have shared similar
understanding with regards to the financial performance, traditionally the
financial ratio method has been used to measure a firm's performance
because it provides a simple description of the firm's financial
performance in comparison to previous periods and helps to improve
management performance. In addition, (Grimsley, 2021), (Ombongi &
Long, 2018), (Senzu & Ndebugri, 2018), (Grefalde, 2020) claimed that if
accounting record is done correctly, it may result in improved profits and
the development of micro, small and medium-sized enterprise. However,
according to (Alarussi & Alhaderi, 2018)contradicted as stated that The
ultimate mission of all businesses is to grow shareholder wealth through
increasing the value of its stockholders’ investment in the firm.
Authors
(Newbert,
2018),
(Berger
and
Mester,
2017),
(Leibenstein,2016), (Chen et al. 2015), (Majumdar, 2018) shared same
understanding on how to improve the business performance. According
to them firms must be able to efficiently use their exclusive
resources/capabilities in order to reduce costs, capitalize on market
opportunities, and/or neutralize competitive threats as well as to
minimize its cost. Moreover, according to (Fitzgerald et al 2016), Bititei et
al. (2019), (Ikechukwu 2018), have claimed that maintaining records is
critical for a business's success. A comprehensive record keeping
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system enables entrepreneurs to create accurate and timely financial
reports that detail the business's progress and current state.
The research gap that has not been answered from the previous
studies is the setting of the study. The researchers aimed to identify
significant difference between accounting records and the financial
performance of selected micro enterprises when grouped by profile.
Therefore, the researchers filled the gap by choosing a particular setting
for the study which is the Rodriguez Rizal.
The different studies that the researchers have cited give great
relevance to this study because these past studies used he same
variables as the researchers. Therefore, these guided the researchers
and widened their knowledge and understanding about the variables
used in this study such as, profitability, liquidity, and efficiency which is a
financial ratios to measure the financial performance.
They also provided comprehensive knowledge and arguments
about the subject that can back up the researcher’s study and support
their claims. In addition, being knowledgeable about various related
literature to this study, the researchers will be able to identify their
difference and fill the gap between this study and the past studies.
Researchers can consider conducting the same study in other location
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and a more higher capital or the medium scale enterprises aside from
micro enterprise. After all, they can compare and contrast the previous
study’s findings to the current results to have a viable reference.
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CHAPTER III
Method of Research
This chapter discusses the methodology of the research
regarding the Impact of Accounting Records on the Financial
Performance of Selected Micro Enterprises in Rodriguez, Rizal.
Sampling Technique
The researchers used simple random sampling in selection of the
respondents. A sampling technique which each respondent is chosen
randomly.
Respondents
The respondents were selected based on specific characteristics
that are appropriate in the topic of the research. The respondents are the
business owners or administrators of selected micro enterprises in
Rodriguez, Rizal. Using GPower with 5% margin of error at 95%
confidence level, the computed minimum sample size is 215.
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Research Instruments
The research methodology or data gathering instrument that the
researchers
used
questionnaires.
The
in
gathering
survey
information
questionnaires
is
through
were
made
survey
by
the
researchers which are aligned in the topic. The researchers used this
type of data gathering instrument for it is proven to be much more
effective on the type of research that the researchers are conducting.
Moreover, survey questionnaires are known to be less bias and least
expensive way of gathering information.
Data Gathering Procedure
The data for this research were gathered with the use of
distributing survey questionnaires. The survey was created with suitable
questions in relation to the topic of our study based on related
researches and individual questions constructed by the researchers. The
survey questionnaires raised fifteen (15) sets of questions which
correspond to the impact of accounting records on the financial
performance of selected micro enterprises in Rodriguez, Rizal.
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In the questionnaire, the researchers used the Likert-type of
scale. After the ratification of the questionnaire by the researchers, these
were distributed to the business owners or administrators of selected
micro enterprises in Rodriguez, Rizal. The researchers guaranteed
confidentiality by letting them to choose whether to write down their
names or not in the survey sheets since their identities are not
significant. The researchers also understood the consciousness of the
respondents that may affect their honesty, effectiveness, and willingness
in answering the questionnaire; thus, giving them the option to be
anonymous. Respondents were given enough time to scrutinize the
questionnaire and on the same day. Any form of incentives was not
offered for participating on the research.
Statistical Treatment of Data
The following instruments below were utilized by the researchers
in analyzing and interpreting the data gathered.
Percentage Distribution – this tool is use in averring the impact of
accounting records on the financial performance of selected micro
enterprises in Rodriguez, Rizal.
f
Formula: P= x 100
n
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Where:
P = Percentage
f = Frequency
n = Total number of respondents
Weighted Mean - The weighted mean is used to get the data's
average value. When data is presented in a different manner than the
arithmetic mean or sample mean, we must compute the weighted mean.
∑ wx
∑x
Formula:
Weighted Mean =
Where:
x = is the repeating value
Σ = summation
w = is the individual weights
Mean – The mean is the most commonly used measure of central
tendency since it averages all of the values in the data set.
Formula:
x̄ = (Σ xi) / n
Where:
x̄ = sample Mean
Σ = summation
xi = all of the x values
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n = number of items in the sample
Research Design
The researchers used the descriptive research design, wherein
the data are collected without changing the environment. The
researchers used this research design to describe the characteristics of
a population or phenomenon being studied. It does not answer
questions about how/when/why the characteristics occurred. Rather, it
addresses the “what” question. This type of research describes what
exist and may help to uncover new facts and meaning. Instruments that
can
be
utilized to
obtain
data
in
descriptive
studies include
questionnaires and observations (checklist, etc).
Research Locale
The research was administered at Rodriguez, Rizal. The province
was composed of different micro enterprises. The respondents needed
in this research are the business owners or administrators of selected
micro enterprises.
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