Common Accounting Errors and How to Avoid Them Under the Philippine Accounting Standards

In every organization, the accuracy of financial records is essential not only for sound decision making but also to ensure compliance with the Philippine Financial Reporting Standards (PFRS) and Philippine Accounting Standards (PAS). Despite the presence of robust frameworks, many businesses in the Philippines especially small and medium enterprises, continue to encounter recurring accounting errors that can lead to financial misstatements, tax penalties, or reputational risks.

This article outlines some of the most common accounting errors encountered under Philippine accounting practice, their implications, and how to proactively avoid them.

1. Failure to Record Accruals and Adjusting Entries

The Issue: Some companies fail to recognize accrued expenses or revenues at period-end, violating PAS 1 (Presentation of Financial Statements) and PAS 18 (Revenue Recognition).

Example: Unrecorded utilities consumed in December but paid in January result in understated expenses and overstated net income for the year.

How to Avoid:

• Establish a month-end closing checklist to ensure all accruals and adjusting entries are reviewed and recorded.

• Use cut-off procedures to match income and expenses in the proper period, consistent with the accrual basis of accounting.

  
  

2. Misclassification of Accounts

The Issue: Incorrect categorization of items such as recording a capital expenditure as an expense, leads to distorted financial ratios and non-compliance with PAS 16 (Property, Plant and Equipment).

Example: Recording a purchased generator set as “Repairs and Maintenance” instead of capitalizing it as PPE.

How to Avoid:

• Train accounting staff on the distinction between capital expenditures and operating expenses.

• Create internal guidelines or approval processes to review high-value purchases.

3. Improper Recognition of Revenue

The Issue: Inconsistent or premature revenue recognition is a violation of PFRS 15 (Revenue from Contracts with Customers), especially in construction, trading, or service-oriented companies.

Example: Recording revenue upon contract signing instead of upon performance obligation fulfillment.

How to Avoid:

• Map your revenue streams and align them with the five-step model of PFRS 15, including identifying performance obligations and determining transaction prices.

• Periodically review contracts to ensure correct revenue cut-off and measurement.

4. Unreconciled Accounts and Bank Balances

The Issue: Failure to perform timely bank reconciliations results in undetected discrepancies, affecting cash balances and operating decisions.

Example: Outstanding checks or deposits in transit not recorded correctly, leading to a mismatch between book and bank balances.

How to Avoid:

• Conduct monthly bank reconciliations without delay.

• Implement an internal review process or assign a separate team for validation.

5. Non-Recognition of Impairment Losses

The Issue: Assets are kept on the books at inflated values without considering impairment, breaching PAS 36 (Impairment of Assets).

Example: Failing to recognize impairment on idle machinery or outdated inventory.

How to Avoid:

• Conduct annual impairment testing, especially for goodwill, PPE, and inventory.

• Review business operations for any indicators of impairment such as obsolescence, decline in usage, or adverse market conditions.

6. Errors in Withholding and Recording Taxes

The Issue: Incorrect computation or recording of expanded withholding tax (EWT), VAT, and final taxes causes compliance risks and may trigger penalties from the Bureau of Internal Revenue (BIR).

Example: Failure to withhold 2% EWT on professional fees paid to a supplier.

How to Avoid:

• Update your team on the latest BIR regulations and tax rates.

• Use checklists and software that prompt withholding rules based on transaction type and supplier classification.

7. Failure to Disclose Required Information

The Issue: Insufficient disclosures in financial statements violate PAS 1 and other disclosure requirements under PFRS.

Example: Not providing details about contingent liabilities, related party transactions, or subsequent events.

How to Avoid:

• Review compliance with the checklist of Disclosure Requirements under PFRS.

• Engage qualified accountants or auditors to ensure proper financial statement presentation and footnote disclosures.

Accounting errors, while sometimes inevitable, can be minimized through a combination of internal controls, staff training, automated systems, and a firm grasp of the relevant Philippine standards. For accounting leaders and business owners, being proactive in addressing these common issues strengthens not only financial accuracy but also organizational credibility.

As the business landscape evolves, keeping your accounting practices aligned with PFRS and PAS is not just about compliance, it's about making informed, responsible financial decisions that support long-term growth.