What are books of accounts? Why are they so important for a company? What type of books must you have? Who is going to check? In short, every business in the Philippines (and the world!) should have and maintain up-to-date books of accounts. They are an essential element of a successful business for many reasons. We have outlined below the types of accounting books that companies in the Philippines must maintain. We have also provided guidance on which books are likely to be the best fit for your business.
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No matter how big or small your business is or what kind of industry you operate in, you need to prepare and maintain books of accounts. Books of accounts are the place in which all of the financial transactions and operations of a company are recorded. The books enable business owners and managers to understand what money is coming in and out of the business. They are also important for preparing cashflow forecasts and financial reports. It would be almost impossible to run a company successfully without books of accounts.
Compliance is another important reason for a company to have books of accounts. The Bureau of Internal Revenue (BIR) requires that all corporations, companies, partnerships and individuals who pay taxes in the Philippines must maintain books of accounts. The BIR can then monitor companies and ensure the correct amount of tax is being paid. So between financials, governance and compliance, make sure your books of accounts are in order!
Types of accounts
There are three main types of books of accounts approved by the BIR for use – manual, loose-leaf and computerized books. The company itself can decide which one of the three they wish to use. In each case, the books will generally have to include at a minimum, the following information: the general ledger, sales, purchases, accounts receivables and payable, inventory and payroll ledgers. Companies must register their books of accounts with the BIR upon incorporation and also on an annual basis. With this in mind, it is important to identify which books of accounts are the best fit for your business!
Manual Books of Accounts
This is where a business maintains physical books, journals and ledgers. There are no computer or automated processes used for these books. Daily transactions are recorded entirely by hand. This is the most popular system for accounting books across the Philippines. It is most commonly used by freelancers, sole traders and smaller companies as they will usually have a lower volume of transactions and less complex processes.
It is cost efficient as it only requires the purchase of hard copy journals and ledgers but it can be time consuming, more prone to manual errors and fairly inefficient. While companies don’t have to apply for a BIR permit to use the manual books system (as required for other types of accounting books – see below), manual books of accounts do have to be registered with the BIR.
Loose Leaf Books of Accounts
Loose-leaf books of accounts are a somewhat hybrid system between manual books and computerised books. Transactions are recorded into a computer or cloud-based system. When it is time to register or submit the loose-leaf books to the BIR, the company must printout the computer files, bind them together and then submit them to the BIR in hard-copy. If a company wants to use loose-leaf books of account, it must first apply to the BIR for a permit enabling the company to do so.
Cloud based accounting is commonly used in conjunction with the loose-leaf books as they achieve more efficient processes and generates real value-added information for the company without the effort and expenditure required for the registration of the computerized books of account. QuickBooks and Xero are just some of the accounting software that CloudCfo uses.
Computerized Books of Accounts
These books of accounts are “systems generated”. This means recording transactions and generating reports and documents through a computerized accounting system. Computerised books are generally used by bigger organisations that deal with a large volume of transactions and have more complex accounting processes. Capital investment is required as companies must invest in computer hardware, accounting software programmes and data storage.
The company must submit the books of account to the BIR in soft copy (i.e. CD-ROM). The BIR must first approve the company’s use of the computerized books of accounts, including the particular computerised system that the company is operating. Sometimes, the BIR will notify larger companies in the Philippines that they must use computerized books.
Each year, many companies in the Philippines are required to have their books of accounts audited and submit an Audited Financial Statement (AFS) to the BIR. For many companies in the Philippines, the deadline for submitting the AFS is 15 April– just around the corner! Check out our recent article which outlines what you need to know this audit season.
CloudCfo is an outsourced accounting and finance service provider for companies in the Philippines. We put efficient processes in place so that our clients’ books of accounts are always in order and ensure that our clients can extract real time value-added information about the financial status of their business. We provide all our bookkeeping services online via cloud accounting and we are fully enabled by smart technology. Let us show you the most efficient system for managing your books of accounts – tailored services to fit your specific business model! Visit us at www.cloudcfo.ph or contact us at firstname.lastname@example.org.