ACCOUNTING PRACTICES AND CHALLENGES FACED BY SELECTED

ONLINE MICRO BUSINESS IN DAVAO CITY.

 Chapter 1

INTRODUCTION

Background of the Study

Accounting has come to occupy an ever more significant position in

the functioning of modern industrial societies. As the business grows, it

acquires new customers, enters new markets and keeps pace with constant

changes in information technology. Their performance is underpinned by

the versatility of the Internet as an information medium. Through the digital

marketplace, micro enterprises have effectively reached out to their

customers in a variety of ways, achieving greater efficiencies and in some

cases offering added value and in return, increasing the need of accounting

practices.

There is a growing recognition of the important roles Micro, Small and

Medium Scale Enterprises (MSMEs) play in the economic growth and

sustainable development of every nation (Palich & Longernecker, 2018).

Representing about 90% of businesses and more than 50% of employment,

SMEs account for the majority of enterprises worldwide and are important

contributors to job creation and global economic development. In the

context of micro online business, accounting information is important as it

can help the firms manage their short-term problems in critical areas like

costing, expenditure and cash flow (Mitchell et al., 2014).

 In the global arena, a study made by Uddin (2019) examined the

accounting practices of micro online businesses and their challenges in

Scotland and found out that most of the micro businesses used single entry

bookkeeping and cash basis accounting. Also, Amoako (2013) reported that

the majority of SMEs in Ghana fail to maintain complete accounting records

as they think there is no need to keep accounting records and that it

exposes their financial position. In the same way, a study in Zimbabwe’s

micro online businesses revealed that the majority of the firms do not keep

complete accounting records because of lack of accounting knowledge and

as a result there is inefficient use of accounting information in financial

performance measurement (Manseko & Maynani, 2011).

In the Philippines, the online business industry is gaining ground as

digital marketplaces end 2018 with record highs to reflect the growing

number of Filipinos doing their shopping online and accessing their

necessities digitally (Zialcita,2019). As of 2018, Philippine Statistics

Authority (PSA) recorded a total of 1,003,111 business enterprises operating

in the country where micro enterprises constitute 88.45% (887,272) of total

MSME (99.6%) establishments.

A study conducted by Rufino (2018) showed that accounting practices were

utilized mostly in sales and marketing related business decisions and time

requirement to adopt and implement the practices appeared to be the

primary problem encountered by the MSMEs. Moreover, the Philippine

government has embarked upon a comprehensive and integrated strategy

for the sustainable growth and development of MSMEs.To encourage the

development of MSMEs, the Republic Act 6977 also known as Magna Carta

of Small Enterprises outlines the general policies for the development of

MSMEs.

In the local arena, people are mostly engaging in the online-based

transaction in doing their businesses. Davao City Business Bureau (2020)

highlighted that online selling of goods in the city has been the new normal

and preferred by more consumers than going out to shops during the

pandemic. As a matter of fact, the city tightened its regulation regarding

online business and framed this measure in accordance to the Article I,

Section 94 of the Revenue Code that calls for a need of securing business

permit and paying of necessary fees.

In June 2013, the International Accounting Standards Board (the

Board) issued guidance to help micro-sized entities apply the 2009 IFRS for

SMEs without modifying any of the principles for recognizing and measuring

assets, liabilities, income and expenses. However, effective last January

2010, the Philippine Financial Reporting Standards issued by the Financial

Reporting Standards Council stated that micro entities were excluded from

the SEC definition of an SME and, as such, are not required to apply the

PFRS for SMEs. Under the SEC implementation guidance for the PFRS for

SMEs, micro entities may apply another acceptable basis of accounting

(e.g., income tax basis, cash basis).

With the current trends and progress in the accounting for micro entities,

this study aims to assess the level of accounting practices of micro online

business in Davao City and the challenges faced by the online micro

business. Researchers aim to unlock the answers whether there is a

significant relationship between accounting practices and the challenges

faced by online micro business.

Statement of the Problem

This study aims to determine the level of accounting practices used by

micro online business in Davao City. Specifically, it sought to answer the

following questions:

1. What is the demographic profile of online micro business in terms of:

a. Nature of Business

b. Years of operation

c. Average Monthly Income

2. What is the accounting practices used by online micro business

with reference to the following factors:

d. Recording

e. Budgeting

f. Reporting
 3. What is the challenges in the accounting practices faced by online

micro business in terms of their:

g. Sales Promotion

h. Competitors

i. Government Agencies

4. Is there a significant relationship between the accounting practices

and challenges faced by micro online businesses in Davao City?

Objectives of the Study

This study primarily seeks to determine the accounting practices of

selected micro online businesses established in Davao City. Specifically, this

investigation aims to do the following:

1. To present the demographic profile of selected micro online

businesses in Davao City in terms of its type of business, years of

operation and legal ownership.

2. To assess the challenges faced by micro online business in dealing

its competitors, sales promotion and government agencies

3. To determine if there is a significant relationship between

accounting practices and the challenges faced by online micro

business.
Significance of the Study

Establishing knowledge on the accounting practices among selected

micro online businesses in Davao City is essential since the relationship of

the two variables can be one of the indicators of success of the online-based

business. Hence, this study will be conducted to establish findings that are

helpful to c the following:

Bureau of Internal Revenue. The findings of the study will

assist them in assessing and collecting taxes. The result may be used to

create ways on how to locate and collect taxes form online businesses.

Department of Trade and Industry. The result of this study

will provide them the practices of online businesses and will make it easier

for them to regulate and monitor the transactions that online businesses

are entering into.

Online Business Owners. This study will help existing online

businesses who are respondents and not of this study as it aims to develop

accounting practices which will address the difficulties of its procedure and

application. The development of such knowledge will provide more

information to the owners as to what and how accounting practices will be

implemented properly and successfully. The information may serve as a key

factor of success and possible growth of the business.

 Certified Public Accountants. The outcome of this study will

give CPAs that will provide an overview of what are the most effective and

efficient accounting practices that online businesses are utilizing. As a

result, it will make the process more efficient.

Future Online Businesses. The result of this study will give

the future potential online businesses knowledge on the importance of

accounting application in the success of their business. The outcome will

give recommendation of what is the most beneficial and application

accounting practices to online businesses.

The Researchers. It would be of great help to the researchers

in the future who might enter the world of online business. By that time, the

researchers already have knowledge on what accounting practices will be

used and applied in their chosen business.

Future Researcher. This study may be used as reference for

future researchers who will conduct a similar study.

Scope and Limitations of the Study

Generally, the study sought to determine the accounting practices

used by selected micro online businesses in Davao City. The respondents

will be the micro online business entrepreneurs who are legally operating

within the said area. The demographic profile of the subject of this study
was limited only to type of business, years of operations and legal

ownership.

Also, this study was designed to know whether there is a significant

relationship between the accounting practices used and the success of

micro online business. The determinant of accounting practices was limited

to accounting method, business documents and payment method. The

challenges faced by online micro businesses operating in the area is limited

only in dealing with its competitors, sales promotion and government

agencies.

However, due to various constraints, the lack of exact and timely

record of the total registered micro online business in Davao City played a

significant limitation in this research paper.

Another limitation of this study is the availability of time and

resources of the researches and the dispersed population of the micro

businesses that would make it hard and impractical to do the face-to face

hand over of printed questionnaires. As a course of action, the data will be

gathered through utilization of online surveys.

Definition of Terms

For a better understanding of this study, the following terms are

operationally defined:
 Accounting refers to the art of recording, summarizing, and

classifying financial transactions and events. It is the process of measuring,

identifying, and communicating economic information to make a decision.

Accounting Practice refers to the procedures and policies of day-to-

day financial operations of a business entity necessary to produce the

legally required financial statements. In this research, it includes the

recording, budgeting and reporting.

Budgeting refers to the process of creating a plan to spend the online

micro business’ capital and fund. It is the extent to balance an entity's

expenses and income.

Competitors refer to the challenges faced by the online micro

business in terms of the companies, practices, and barriers that can cause

some problems to the entity.

Demographic Profile refers to the moderating variables of this study

particularly the characteristics describing the status of the respondents.

This includes the type of business, years of operation and legal ownership.

Digital Marketplace refers to the use of the internet, social media,

search engines, and other channels to reach consumers. This is considered

to be the new endeavor which requires a new way of approaching

customers.
 Government Agencies refers to the challenges experienced by the

owners of online micro business in dealing with the government agencies

that regulate the operations of the business.

Micro Enterprise is defined as a business that is composed of 1 to 9

employees and has an asset size of not more than 3 million pesos, exclusive

of the land where the business entity’s plant, office and equipment are

located.

Nature of Business refers to the various forms of a business such as

service, merchandising or manufacturing.

Recording refers to the process where all financial transactions are

recorded in a systematic and chronological manner in the appropriate books

or databases.

Reporting refers to the disclosure and submission of reportorial

requirements required by the government agencies like income tax returns

and financial statements like income statement, cash flow, and balance

sheet, etc.

Sales Promotion refers to the challenges faced by online micro

businesses in terms of persuading a potential customer to buy the product

and boosting the entity's sales.

Years of Operation refers to the years the business will or must

operate.
 Average Monthly Income refers to remuneration received before

deduction of the employee contributions, expenses and personal income tax.

 Chapter 2

REVIEW OF RELATED LITERATURE

This chapter presents related literature and studies, the theory base, the

conceptual framework, and the hypothesis of the study.

Related Literature and Studies

The literatures encompass topics regarding the context and

perspectives on the accounting practices, challenges faced by online micro

business and other related studies to provide appropriate background,

insights and direction needed for this research paper.

ACCOUNTING PRACTICES

Shiegel and Shim (2020) defines accounting practices as normal

practical applications of accounting and or auditing practices that occur

within a business. A firm's accounting practice refers to the method by

which its accounting policies are implemented and adhered to on a routine

basis. It is the day to day implementation of the accounting policies of an

organization, the system of procedures and controls that an accounting

department uses to create and record business transactions (Bragg, 2020).

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 (Baidu, 2019).

 Lastly, Kushnir (2019) emphasized that accounting practices exist as

the daily recording of financial data that is important to the evaluation and

monitoring of the firm's economic activities. The age of business, size of the

business, and the nature of the industry influenced the extent of accounting

practices in MSMEs (Muteti, Namusonge, and Nzomo, 2018).

The Importance of Accounting Practices

One of the most important entrepreneurial skills that can help

microenterprise business operations to become successful is accounting

practices.

According to SMEinfo (2019), accounting practices are vital to the

MSMEs in making a better financial and management decision. They also

help to prepare on annual taxes payment and furthermore, help to plan for

the next step in the businesses. It is also highlighted by Uddin et al. (2017)

that accounting practices are used to manage, monitor and control the

income, expenses, and other financial activities of a business, including to

prepare for the taxation purpose as well as supporting the organizational

functions. Furthermore, it is also useful to measure the financial

performance of the company (Maseko and Manyani, 2011).

In other cases, Mbroh and Attom (2011) observed that businesses

that are keen in determining their profitability ought to include appropriate

accounting principles, concepts, and standards to ensure the consistency of

measurement. Additionally, accounting records can help to improve

business performance and as confirmed by Abdul-Rahamon and Adejare

(2014), there is a strong positive relationship between accounting practices

and growth of MSMEs. In short, the enterprises will not be able to realize

their businesses’ condition if they fail to maintain accounting practices.

Zotorvie (2017) also supported this notion that an inefficient use of

inaccurate accounting information and practices to support MSME owners'

financial decisions can affect the financial status and long-term

sustainability of businesses.

Muteti et al. (2018) posited that it is important for business’s

operations and owner managers to adopt use of accounting practices and

systems because it promotes effectiveness to prepare recording business

transactions systematically and more properly which helps business

prepare more accurate financial reports.

Maseko and Manyani (2011) stated that record keeping, budgeting

and generation of financial reports is at the heart of business activities and

decision making. It was asserted by Sanga and Kasubi (2014) that keeping

business records is an important driver for the success of a business and

they observed that a comprehensive record or bookkeeping system enables

business owners to develop accurate and timely financial reports that detail

the progress and prospects of the business and having correct budgeting of
the enterprise’s expenses and possible revenue decreases the possibility of

business failure.

Abdul-Rahamon & Adejare (2014) argued that the general objectives

of recording include improving efficiency and productivity, to control

creation and growth, to reduce operating costs, to ensure regulatory

requirements. Mutua (2015) argued that proper bookkeeping helps MSMEs

to control the activities and to help manage cost and expenses, whereas,

according to Eric and Gabriel (2012) proper recording enables managers of

micro enterprises to know the financial positions of their businesses and to

take certain control measures to improve corporate performance.

As mentioned and supported by various literatures, some of the most

important accounting practices needed by a microenterprise consists of

keeping accurate records about how the business is doing financially over

time, applying budgeting over the financial matters and having the correct

reporting practice of the financial data. These will be the focus of the study.

Recording

The norm of a business entity is to record transactions for the benefit

of future economic decisions. Bwana and Mwakujonga (2013) stated that

recording becomes an accounting practice to develop or create financial

statements that are relevant to business undertaking. Also, it is a basic

phase of accounting that includes all business transactions in a systematic

and chronological manner in the appropriate books (Newton, 2019). This

supports the idea of Maseko and Manyani (2011) that micro and small

business record keeping is the backbone of one’s business.

Peacock (2018) pointed out that recording is a fundamental skill a

micro-business owner must have as the accounting information is vital for

decision making even though preparing financial reports is not mandatory

for micro businesses and they have no obligation to keep proper books of

accounts. However, Amaoko (2013) maintained that proper accounting is

paramount in any business and crucial in tracking all aspects of the

business from the information contained in the books.

Having a good book of accounts can allow several businesses,

especially micro businesses to maintain precise accounting information

which also help them in making decisions. As contended by Owusu, Assabil,

and Asare-Kyire (2015), recording practices is a mechanical and systematic

process of capturing economic consequences of business transactions in

compliance with accepted Accounting Standards. Recording practices serve

as the basis for proper planning and management of business activities

(Uddin, et.al, 2017) and allows managers and owners to determine whether

they are making profits or loss (Mutua, 2015).

Moreover, some micro enterprise owners consider recording business

transactions for the preparation of financial statements that could be

helpful in a way of assessing profit or loss on the company but due to the
minimization of expense owners cannot afford to hire employees possessed

with the ability of recording (Krisdatiwi, 2018).

Internationally, recording as an accounting practice had been also

taken into consideration. Amoako (2013) in his study entitled “Accounting

Practices of MSMEs: A case study of Kumasi Metropolis in Ghana'' found that

MSMEs do not maintain proper books of accounts. The study recommended

that accounting records in micro and small enterprise should be made

mandatory. As a support to this, findings of the field survey performed by

Jeyaseeli & Justus (2014) indicated that the majority (75%) of MSEs fail to

keep complete accounting records.

In a study done by Madurapperuma, Thilakerathne, and Manawadu

(2016), it concluded that proper record keeping ensures long term

sustainability of the business and anticipates long term prospects whilst

Okoli (2011) added that adequate record keeping will help the micro and

small proprietors to keep track of the performance of their enterprises.

However, some micro-business owners believe that recording

accounts are not efficient, not important and a waste of time (Laeli, 2013).

Micro-business owners are too focused on the production process and

operations, it is because the micro business does not have enough human

resource that has the ability to do the recording (Putra and Kurniawati,

2012). In addition, "Managers often find the difficulties to make a record of

what happens in business operations in implementing the activities of

MSMEs" (Hidayat, 2018).

Despite the vital importance accounting practices played,

microenterprises owners failed to apply the accounting practices in their

businesses due to several issues. According to Dawuda and Azeko (2015),

high costs in the involvement of qualified personnel make it very difficult for

SMEs owners to maintain proper book accounts. In fact, they also failed to

uphold proper account books to avoid tax payments. In the same study, it

was noted that the overall impact of poor financial record keeping is that the

owners who provide strong financial statements could prevent them from

conducting financial analysis to establish trends to find out whether their

business is working properly or not. They are also unable to understand

and foresee the business environment, and this is one of the indicators of

business failure.

Lastly, SMEinfo (2019) further elaborated that it is crucial for the

business owners to have an adequate record of business transactions; to

keep track whether their businesses are gaining profit or deficit. Not only

that, but the basic accounting information also certifies the dependability of

their business financial reporting. From the above argument, it is clear that

recording, as an accounting practice is important and also a challenge to

every micro enterprise business (Fatoki, 2012)

Budgeting
 Warue and Wanjira (2013) avowed that budgets are the foundation

and manifestation of a business plan and action. A budget is a complete

quantitative plan for receiving and using money and other resources over a

specified future time period. Budgeting is the act of preparing a budget (Nso,

2018). There are various and many types of budgets that businesses draft in

practice but they are not basically specific to MSMEs. The main challenge

for all businesses in preparing a budget is in predicting out the future. Not

all businesses do rightly with precision, only spirit filled businesses dare to

predict well the future. In conjunction with the spirit awareness, SMEs need

to maintain some basic budget if they are going to be competitive,

sustainable and emerge as reference businesses in their communities. In

alliance with Warue and Wanjira (2013), the size and type of the SMEs

would greatly influence a better budgeting process. There basic budgets

SME firms should practice include; sales budget, purchase budget, cash

budget, capital expenditure budget and income and expenditure budget.

Zor, Linder and Endenich, (2018) articulated that MSMEs play an

important role in the gross national product and employment in most

emerging markets and they agreed that little is known about their budgeting

practices. On the other side of the toss coin, Maduekwe and Kamala, (2016)

stated that failure to budget has been identified as one of the main causes

of MSMEs failure. Their study seeks to determine the extent to which

MSMEs in the Cape Metropolis use budgets. Their findings revealed that

most MSMEs use budgets and pointed that the three most frequently used
budgets are sales budgets, purchases budgets and cash budgets. This tally

with (Nso, 2018) though he went further to include Income and expenditure

budget as the fourth basic budget class for MSMEs to prepare. On the

method of budgeting, Maduekwe and Kamala, (2016) found out that the

most frequently used method of budgeting by MSMEs is fixed budgeting.

Their study further revealed that SMEs used budgets for monitoring,

measuring business performance, future planning and control purposes and

that budgets were perceived to be effective but lack of top management

support and qualified personnels are among the major factors that hinder

MSMEs from using budgets.

Kimunguyi et al. (2015) further argued that good budget management

practices positively influenced budgetary execution and suggested

improvement and usage of supportable strategies and guidelines for

spending the board. As indicated by Warue and Wanjira (2013), the absence

of planning and money related control lead to lackluster showing of the

micro enterprise.

Akande and Oluwaseun, (2014) affirmed that budgets highlight areas

where actual performance deviates from the budgeted performance, for an

appropriate corrective measure to be taken. To them budgets facilitate

management decision making and are able to isolate problem areas that

need urgent attention, an approach that results in effective problem

resolution cited (Dima, 2013). To add, Hill, (2015) conceded that budgets
facilitate coordination and alignment of different departments within a

business towards common objectives by providing a bigger picture of the

desired objective pursued by MSMEs. Through the quantification of desired

objectives, budgets minimize confusion and create a common

understanding of business objectives, thus enabling easy communication

(Hill, 2015). Kelly, (2015) admitted that budgets provide a useful standard

and benchmark for evaluating employee performance and for rewarding

good results to motivate employees while Dima (2013) held that budgets

facilitate delegation of tasks to subordinates by senior managers. Further,

Dima, (2013) concluded that top management are freer to perform strategic

roles when tasks are budgetary delegated to subordinates.

Reporting

In accounting terms, reporting is the disclosure of financial results

and related information to management and external stakeholders about

how a company is performing over a specific period of time. It may be

subject to the requirements of the applicable accounting framework, such

as Generally Accepted Accounting Principles or IFRS (Bragg, 2020). For

example, US companies must report their results under US GAAP, whereas

companies in most international markets report under International

Financial Reporting Standards (IFRS) and in the Philippines, Philippine

Financial Reporting Standards became the basis. These accounting

guidelines provide principles and rules that must be followed to ensure

accuracy, consistency, and comparability in financial results (Hossain,

2016).

Bragg (2020) added that for publicly held entities, these financial

reports can be very detailed and complex. They typically include extensive

footnotes, as well as a management discussion and analysis. The notes

provide details about each item on the balance sheet, income statement,

and cash flow statement, including insights into the accounting method

used (Stice 2015).

In addition, Ahmed and Khan (2016) emphasized that financial

statements give useful information and detailed information is given

by corporate financial reports although the information relates directly

or indirectly to the information provided by a business enterprise’s

accounting system. In addition to basic financial statements, it provides

narrative and descriptive statements and often-illustrative materials.

Financial reporting is a means of providing information to users of all

kinds, which most completely describes an organization’s economic

activity regardless of what size or type it is (Hossain, 2016).

It is revealed in the findings that in South Africa, few of the MSMEs

were fully utilizing the accounting information systems in reporting the

financial results and that contributed to their failure (Peacock, 2018).

Nevertheless, studies conducted in developed nations disapproved with the

results showing that mostly utilizing the accounting information systems in

reporting were most of the MSMEs (Shamsul & Nor Izah, 2010; Ahmed,

2015; Hamza & Neeg, 2017).

A study published in the Philippines by Anoos, Ferrater-Gimena,

Etcuban, Dinauanao, Macugay, & Velita (2020) suggested that reporting as

an accounting practice, micro enterprise should include reports of all

revenues or sales to the government, owner prepare all the recording and

reportorial requirements, hire an external bookkeeper/accountant to

prepare the reports and returns to be submitted to government, and submit

and comply on time all reportorial requirements. In the same study,

researchers concluded that micro enterprise’s sales revenues were reported

properly both at the Local Government Unit (LGU) of the Danao City, Cebu

and Bureau of Internal Revenue (BIR). Also, reducing their tax liabilities to

the national and local governments were practiced by some business owners

or which is known as tax avoidance. Some businesses used fraud to lessen

as much as possible their tax liabilities which is considered as an act of

offense, and will be charged by tax evasion whoever may be caught.

It is important to have a modern budgetary announcing framework to

guarantee that the assets of the MSMEs are being utilized successfully and

proficiently. By and by, there must be an exactness and unwavering quality

in the data to give a stage to convenient and steady choice (McMahon,

2019).
MICRO BUSINESS

Authors and other researchers claim that there is no absolute

description as to micro business enterprise. Jappie (2018) said that all

micro enterprises are considered to be small businesses. The only

distinction present is that micro businesses are subsets of small businesses

considering the number of employees. It simply means that micro

businesses are even smaller than that of the small businesses.

In the Philippines, as cited in the blog of Full Suite (2015), micro business is

defined by RA. 9178 Act of 2002 as “any business enterprise engaged in

production, processing, or manufacturing of products, including agro-

processing, as well as trading and services, with total assets of not more

than P3 million. Such assets shall include those arising from loans but not

the land on which the plant and equipment are located.”

Gherhes, Williams, Vorley and Vasconcelos (2016) provides that

having an owner-manager entrepreneur (OME) is the key distinction of

micro business from that of the MSMEs. Micro businesses are even more

challenging because of its tendency to be a growth-averse, underdeveloped

capabilities in some of the business areas, insufficient OME capabilities,

and inadequate business support provision (Gherhes et al., 2016). In the

bigger picture, if these factors are redirected, it is expected for micro

businesses to grow to larger scale business.

On the other hand, in a wider perspective, the economic status does

not rely merely on the large businesses operating on a certain city, or

country as a whole. Houston and Reuchke (2017) argued that micro and

home-based businesses have been an active contributor to a country’s

economic performance. Houston et al. further stated that micro businesses

became an integral component of the evolution and dynamics of urban

economies which subsequently affects the nation’s economic rate. However,

the negative implication of the growing number of micro enterprises is the

jobless growth. Since micro enterprises need only ten or less employees, this

means that the number of manpower being employed is small as compared

to the labor force available. Nevertheless, the need for the application of

accounting practices increases.

In the Philippines, micro business had a very favorable policy

environment for enterprises to increase productivity and upgrade. Perhaps

the most crucial legislation in support of MSMEs is RA 9501, otherwise

known as the ‘Magna Carta for Micro Small and Medium Enterprises

(MSMEs)’. Presented to parliament in 1991 and approved in 2008, RA 9501

acknowledges SMEs’ role in creating employment and economic growth and

providing a self-sufficient industrial framework for the country. The Magna

Carta for MSMEs announced the State’s support for developing MSMEs with

all available means (Milagrosa, 2015).

According to the classification, any enterprise with an asset size of

less than three million Philippine pesos (not including titled land) or fewer

than 10 employees is considered a ‘micro enterprise’ (MSMED Council,

2011).

By this definition, most of the enterprises in the country fall into the

first two categories: micro and small. Indeed, like many other countries, in

terms of the number of business establishments, the Philippine private

sector is largely dominated by micro, small and medium-sized enterprises.

Large enterprises – all in manufacturing – are the exception, comprising just

0.4 percent of the total number of businesses in the country (Paderanga

2011).

Online Micro Business

The emergence of new technology intensifies the widespread adoption

of online businesses. The global business world is undertaking an

ambiguous transformation due to the rapid penetration of the internet

worldwide (Goyal, Sergi, and Esposito, 2019.) It directly affected the

behavior of traditional market participants. Turban (2010), as cited by

Rahayu and Day (2015), defined online business as “the process of buying,

selling, transferring, or exchanging products, services, and/or information

via computer networks with the aid of the internet”. Based on the study

conducted by Rahayu et al. (2015), it was found out that a great number of

MSMEs have decided to enter the world of online business. The study

further suggests that the higher the adoption level of MSMEs of e-commerce

the higher the possibility of receiving the potential benefits of such.

In contrast, Elizabeth (2016) argued that although micro enterprises

acknowledge the benefits of transitioning into online business, many

businesses owners opt to stay to the traditional way of conducting business.

Accordingly, Syahrin and Susilawati (2020) said that lack of

community skills for using internet access is the main factor that restrain

micro businesses from transitioning into online business.

With the limited related studies and literature about online micro

business, it is of great curiosity of the researchers to make this area the

focus of this research paper.

Challenges Faced by Micro Online Enterprise

Micro online businesses have been relevant in the economic

performance of the local sectors in many countries (Nishanth, 2019).

Generally, its main contributions to local economic development are: income

generation, strengthening local competitiveness, and poverty alleviation

(Yahaya, Geidam, & Usman, 2016). However, it is in the nature business of

any size that many challenges will occur along the business operations.
These challenges may arise from internal and external factors. Formulation

of internal control as well as analysis of market conditions, customer

behavior and adaptation to changes in laws and regulations plays a vital

role in the business life.

According to Anwar, Yuangga and Sholeh (2019), most of the micro

businesses owners are having difficulties in marketing and financing.

Furthermore, the study conducted by Quingco and Leonoras (2019)

concluded that technology is the main indicator that micro business owners

are highly challenged. While infrastructure development is the least,

corresponding to moderate degree. It was suggested that the local

government must put more emphasis on giving support to amplify the

booming industry of micro enterprises (Quinco and Leonoras, 2019). By

providing assistance to micro businesses, the unemployment rate will

decrease (Edoho, 2016) and it can help alleviate poverty (Issa, 2020).

In addition, based on the study made by Chimucheka and

Mandipaka (2015), the obstacles that MSMEs face, particularly micro

enterprises, are the lack of networking opportunities (sales promotion), lack

of access to finance, and insufficient government support accompanied by

the taxation and market competition (Guevara and Thiagarajan, 2019). The

identified challenges hinder the micro enterprises from its long term survival

and growth possibilities.

 In this study, the challenges faced in dealing with competitors, sales

promotion and government agencies is taken into focus.

Competitors

In business, competitors are a company in the same industry which

offers a similar product or service. The presence of one or more competitors

can reduce the prices of goods and services as the companies attempt to

gain a larger market share (Bragg, 2020).

The ability of learning and sharing knowledge of MSMEs depends on

their levels of innovation and competitiveness, enabling them to respond to

external pressures. Also they are creating new forms of organizational

development that emerge as consequences of changes in the global

economy, but given from a local perspective (Longhi, 2015).

The effectiveness of market rivalry as a system for designating

merchandise and ventures is the most acknowledged statute (Baack &

Harris, 2013; Ross & Szymanski, 2010). The unrestricted market rivalry

additionally serves the enthusiasm of buyers by enabling them to practice

their privilege of decision over products and enterprises offered in the

market (Ayyagari, 2017).

The danger of entry forces exists in companies to present modern

items and forms. In this point of view, micro firms are not established to be
littler clones of huge firms but they serve as specialists of alter through

inventive exercises and competitive ideas (Audretsch and Mata, 2015).

A study conducted by Blees, Mosselman, and Zoetermeer (2018)

concluded that competitors are either anticipated to cause a drop in market

price or at the exceptionally slightest have no impact in SME’s. However, it

is noted in the said study that competitors and competition are hindering

the financial welfare of micro online enterprises given the rapid innovations

and creative minds of other businesses.

Karen (2017) recommends that assurance and ceaseless development

and advancement would improve survival in an immersed advertisement of

products and services of micro businesses. She further uncovered that

taking full control of a specific specialty by a microenterprise would help in

handling competition and remaining within the market. The remaining

within the market amid ferocious competition requires having a conclusion

objective settled within the intellect.

On the other side, the non-appearance of strict execution of laws to

maintain a strategic distance from as well as competition could be a

migraine to the commerce administration considered as challenging in

numerous occasions, based on the study of Velita (2020). This result

denotes that there was an issue within the context of the strict usage of

Anti-Competition Law and Anti-Trust Law within the Philippines. The

arrangements of these two administrative authorizations approximately the

protection of neighborhood businesses are total in substance, but the

escape clause was on the usage. That's the reason why there are parts of

showcase twists where the micro enterprise endure to a few degree of

difficulties in terms of competitors.

Grills (2020) sees that setting up micro online businesses and startup

undertakings will reply in an unexpected way to whether vicious

competition in trade is the key to commerce victory or not. He includes that

micro enterprise owners must do something genuinely transformative, one

ought to go strongly where no man has gone before in order to win and stay

competitive in this modern times of industry. Through this, competition gets

to be a transformative challenge and not just a means to thrust others out

of trade dangerously.

Increased market competition and competitors leads to improved

efficiency, productivity and growth (Porter, 2018). The constant entry and

exit of enterprises into and out of markets underlies a dynamic screening

process for a more productive and innovative use of resources in which

businesses initiate change and innovation through their new products

(Pisani, 2014). Competition can also have an adverse effect on micro

enterprise upgrading. In markets in developing countries, large profits are

needed to maintain high rates of investment in product development and

technological catching-up. Competition can negatively impact on demands

for investment and lead to price wars and subsequent slumps in profits
(Singh 2012). Aghion et al. (2015) showed that there is a U-shape

relationship between competition and innovation: both very high and very

low levels of competition are bad for growth and enterprise upgrading.

Sales Promotion

Išoraitė, M. (2020) stated that sales promotion provides information on

product availability, features, benefits, and price. Even the best product is

worthless if the consumer is unaware of its existence, point of sale, price,

features, and so on. According to Grubor, Djokic, and Milicevic (2015) sales

promotion is a significant part of a firm's activities, especially in modern

economies where prices are rising fast, consumers are becoming more

sensitive to price changes and the market goes online.

Marketers use sales promotions to boost sales. Sales promotion tools

vary in their effectiveness to elicit different sales responses (Mittal & Sethi,

2011). Sales promotion techniques are instruments that seek to increase

sales of products and brands, usually in a short time (Wierenga &

Soethoudt, 2010), because they act in the consumer’s mind as a benefit

to him, creating thus consumer behavior (Yusuf, 2010). The

effectiveness and the importance of sales promotion in the market can

be viewed when presenting the segment numbers. In a report quoted by

Wierenga and Soethoudt (2010) , over 75% of spending on

communication in the nondurable consumer goods segment between 1997

and 2004 in the United States were driven by sales promotion activities,
while 25% were applied in other communication activities. Because of its

importance, the quality of promoting one’s product became a challenge in

every company of its type and size (Haan, 2013).

Išoraitė (2020) found out that in order to encourage shoppers to visit

online business more often, sales promotions should be more frequent.

When applying sales promotion measures, it is necessary to take into

consideration the interests of the buyers, the interest of the customers, and

the feedback with the customers. However, because of the wide range of new

marketing and promotional strategies in the modern times, most of the

online micro business had a hard time looking for ways of boosting one’s

sales grounded in a unique and appealing theme (Bakanauskas, 2019).

Back then, MSMEs have been using few media to disseminate

information, because of the high cost of advertising and promotion and poor

support of media to convey the message about product or services of

MSMEs (Rahadi, 2016). Fortunately, most of the micro enterprises today are

in tune with disseminating information and taking the advantage of creating

websites and using social networking as primary tools in sales promotion

(Vaikunthavasan, Velnampy & Rajumesh, 2019).

Government Agencies

Government agencies regulate the operations of the business (Neeg,

2018). Being so, this factor is also one of the challenges that online micro

businesses are facing nowadays.

 The Doing Business report (World Bank 2011) suggested that micro

enterprises face an array of regulatory and institutional constraints to their

business activities. Regulatory policies in most developing countries were

described as burdensome, complex and, in some cases, opportunities to

exact bribes. Informal small firms with little capital and few savings cannot

afford to formalize and therefore continue to be excluded from public

services and formal credit markets (Klein and Hadjimichael, 2013).

Regulation is mostly seen as a costly deterrent for firms that aim to

formalize or scale up productive activities (De Soto, 2018). Therefore,

governments should concentrate on ensuring a stable and simple regulatory

regime, introduce a fast, low-cost procedure to register businesses, create

more flexible regulations regarding employment and reduce corporate taxes

(Klapper, Lewin & Delgado 2016; World Bank 2011).

Most of the results in the study of Rahadi (2016) indicates that there are

issues for the government involving red tapes and bureaucracy which are

hindering the access to capital and progress of the business in the American

micro enterprise community. However, the previous research conducted by

Musaroh and Wijaya (2015) in exploring the profiles of micro, small and

medium enterprises in the area of Yogya-karta, Indonesia showed there are

a lot of issues that are complex and diverse about dealings with government

agencies. Many business practitioners of MSMEs stated that they have

never received assistance or guidance in a various program implemented by

the government, the assistance provided was not in accordance with the

problem faced.

In the Philippines, a study made by Velita, et.al (2020) highlighted that

one of the challenges MSMEs experienced is the problem in securing

business or mayor's permits from the city, where their businesses are

operating. This result shows that in many cases (challenging), the MSMEs

in Danao City, Cebu experienced the problems that relate to the compliance

of the different regulatory requirements needed to obtain the business or

mayor's permit such as the sanitary permit, building permit, fire safety

clearance, etc.

This result relates to the result of the study conducted by the World

Bank Group in 2018 that stipulates that the rank of the Philippines

declined from 99th to 113th among 190 countries in terms of ease of doing

business. In the ASEAN Region, the Philippines lags behind Singapore,

Malaysia, Thailand, Indonesia, Brunei, Vietnam, and the regional average

for East Asia and the Pacific while the Philippines advances from Cambodia,

Lao PDR, and Myanmar (Mendoza, 2015).

Relationship between Accounting Practices and Challenges faced by

Online Micro Business

Ahammed, Becluocif, and Tarbetsssss (2019) examined the

accounting practices and challenges of online microbusiness. The study

showed that there is rapid emergence of microbusinesses in Scotland which

accounts for more than 94% that goes online. Cost, knowledge of owners,

time constraints was found to be the key hindrance of proper application of

accounting practices. At some point, the calculated profit and loss does not

reflect what is actual. This information has a great impact on the economic

decision that the owner will make. In other words, it strengthens the

important role of proper accounting application which will give accurate

calculations of the business’ performance.

According to Parwati, Nurdin, Indriasari and Zahra (2016), most of

the micro businesses lack definite accounting practices making it hard to

access additional capitalization from any source especially those that are

initiated by the government. Parwati et al. (2016) suggests, and was further

supported by Ahammed (2019), micro business owners can seek advice

from accounting practitioners to enhance the accounting practices in the

business. This implicates that better and accurate application of accounting

practices makes it easier for the micro businesses to manage financial

matters and attract additional capitalization.

Businesses of every size and nature have the need for proper

application of accounting practices. It plays a vital role in any aspect of the

business. This study focuses on the micro business enterprise alone since

only several studies have been conducted addressing such.

The Application of Accounting Practices among Microenterprises

 Various studies and literature cited the relationship of applying

accounting practices in every micro enterprise business.

Olatunji (2013) in his study entitled “The impact of the accounting

system on the performance of macro, small and medium scale enterprises in

Nigeria – A survey of MSMEs in Oyo State Nigeria” found that adoption of

accounting system and practices would significantly enhance the

performance of MSMEs in Nigeria.

In addition, Abor et.al (2011) in their study entitled, “E-Accounting

practices among MSMEs in Ghana” found that the MSMEs put in place

accounting software to generate their financial performance. The study

recommended the adoption of e-accounting ensures proper accounting

practices as well as reversing good implications for entrepreneurs and

MSME managers.

Mitchell, F., G. Reid, and J. Smith (2015) argued that MSMEs short-

term problems in areas such as costing, expenditure and cash flow could be

helped by providing and applying accounting practices to support

monitoring and control.

Muteti et al. (2018) observed in their study that most micro

enterprises kept several important accounting records in their business

including purchases records, sales records and expenses records.

Furthermore, remembering the nature of financial transactions, keeping

track of enterprises profits, for profit analysis purposes, to enable observing

of the performance or improvement of their company and as a reference

point in the growth of the enterprise were reasons cited for keeping records

by the enterprises. The study also found that four important factors in the

MSMEs accounting systems were maintaining records for costing of goods

and services, recording expenses and payments, recording sales and

recording purchases. In the same study also, it found out that

entrepreneurs were noted to keep records in order to remember, observe

progress and track profit. The micro enterprises subject to the study were

also in line with engaging in the e-commerce industry.

The study of Roslan et al. (2018) found that micro businesses daily

transactions were recorded manually, some owners do not know the

differences between revenue and net profit and majority of them did not

maintain any financial reports for the business.

In the same way, Umeji and Obi (2014) stated that recording and

reporting daily business transactions by using accounting practices and

techniques helps owners to identify cash flow, cost of production, assets

and liabilities. Whereas, there are also other MSMEs that do not comply

with the double entry system of record keeping (Onaolapo and Adegbite,
2014). It was posited by Abdul-Rahamon, Adejare, and Sciences (2014) that

the double entry system is important in creating a convenient relationship

which permits an interim check of accuracy of recording work at any time

during the process.

Tanwongsval and Pinvanichkul (2018) found in their study that

MSMEs have two major reasons in preparing financial statements which is

(1) for the purpose of tax return, and (2) to measure their business’s

profitability. In addition, Lalin and Sabir (2010) added that the most

powerful pressure that forces MSMEs to provide a complete financial

statement is pressure coming from regulatory authorities. There is positive

link between values of accounting data used inside MSME with their

business’s outcome and continued existence (Lybaert, 2016), thus, resulted

that most businesses having to close down due to failure to provide good

accounting records and practices.

The above discussion shows that a range of accounting practices are

exercised by micro businesses in any part of the world. And challenges

embodies with these practices that calls for a solution. This is supported by

the empirical findings presented in the next section.

Theoretical Framework
 The study was anchored in the Accounting Theory by William Patón

(1922). The theory is uses speculations, methodologies and frameworks in

the study of financial reporting as well as how financial reporting principles

are applied in the accounting industry. Basically, accounting theory serve

as a basis for the understanding of financial reporting and how companies

channel their financial statements using the appropriate strategies. An in

depth study of accounting theory entails a look into existing accounting

practices, how they evolved and the modifications or additions done to them

overtime and the challenges they are facing. These accounting principles

serve as framework for accurate financial reporting and statements

(Unegbu, 2018.

In the words of Hendrickson (2014), accounting theory was defined as

logical reasoning in the form of a set of broad principles that (1) Provide a

general frame of reference by which accounting practice can be evaluated,

and (2) guide the development of new practices and procedures. Accounting

theory is used to explain existing practices and procedures to obtain a

better understanding and to provide a coherent set of logical principles that

form the general frame of reference for the evaluation and development of

sound accounting practices.

In addition, the Financial Management Theory is also used in this

study. It states that the way a manager makes decisions results in either

the success or failure of any organization (Brigham & Ehrhardt, 2013).

According to Stern (2015), it is a popular tool that is used for building

reliable and effective financial decisions regarding the business. It deals

with the usage of money in a company, including all acquisitions, sales, and

expenditure. This assists the businessman and provides tools when putting

into practice and will help one achieve.

Conceptual Framework

INDEPENDENT VARIABLE DEPENDENT VARIABLE

Challenges Faced by

Online Micro

Accounting Practices Business

 Recording  Competitors

 Budgeting  Recording

 Reporting  Government

Agencies

Figure 1. Conceptual Framework

In this study, the independent variable is accounting practices of

online micro business that is measured in terms of recording, budgeting

and reporting. On the other hand, the dependent variable is the challenges

faced by online micro business upon dealing with competitors, sales

promotion and government agencies.

Research Hypothesis

Alternative Hypothesis

1. There is a significant relationship between accounting practices

and challenges faced by selected online micro businesses in

Davao City.

2. Recording, budgeting and reporting is highly practiced in

selected online micro enterprises.

3. There is a high level of challenges faced by online micro

business in dealing with competitors, sales promotion and

government agencies.

Null Hypothesis

1. There is no significant relationship between accounting

practices and challenges faced by selected online micro

businesses in Davao City.

2. Recording, budgeting and reporting is not highly practiced in

selected online micro enterprises.

3. There is low level of challenges faced by online micro business

in dealing with competitors, sales promotion and government

agencies.