We are having a debate at work about how small businesses in the Philippines should account for salaries for owners. In your article (http://business.inquirer.net/117805/advice-to-small-business-owners-pay-yourselves-salary), you say if you are the owner to pay yourself a salary so you have that information for costing purposes. I agree with you. The question is where do you record that in your books and your financial statements?
If you are an owner of a small farming business in the Philippines, do you put the money you withdraw monthly as your “salary” under the “Salary and Wages” expense on the Income Statement, or is it considered an “owners draw” on the Balance Sheet? If it is an owner’s draw, what is the logic of that? And doesn’t that cause your net profits to be higher than it should be, for tax purposes? What happens if, as a sole proprietor, you decide to put your salary as a salary expense on the income statement instead of on the balance sheet?
Does Filipino accounting practices differ from US or international practice in this regard?
Thank you very much for the courtesy of a prompt reply.
Hi Ms. Karen.
Below is the reply given by Ms. Editha Reyes, SERDEF treasurer and a financial management specialist, to your inquiry on how small businesses in the Philippines should account for owners’ salaries:
“It is best to include the salary of the small business owner in computing for the cost of sales. It is necessary for product pricing purposes. If this is being practiced, and there is an actual payment of regular salary to the owner, this salary has to be included in the owner’s Individual Tax Return, plus the net earnings of the business, against which the Total Tax Payable will be based.
“In the case of a small farming business, it can be also treated as Salary Expense of the business, which will be treated the same way as that of a small business. The owner’s slaries and the net farming income will be subject to income tax at the end of the year.
“If the owner wants to treat the salary as capital withdrawal, it will not appear in the Income Statement. The withdrawal will be treated as a deduction from the owner’s investment in the Balance Sheet. There will be no entry in the Income Statement of the business.”
I hope this is useful
Serenidad F. Lavador, Technical Adviser, SERDEF
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