CHAPTER 1

THE PROBLEM AND ITS BACKGROUND

1.1 Background of the Study

Accounting literacy is an important factor of business Carnass & Hedin (1999,

cited in Elson et al., 2011). This literacy extends from knowing the basic principles to

their integrations and applications to businesses.

In Australia, Halabi, Barrett and Dyt (2008) studied 10 small firms using semi-

structured interviews and found only a very basic understanding of accounting

information. Accounting reports were not prioritized in assessing business performance;

most of them used informal assessment such as how much cash was in the bank.

Meanwhile in Ghana, Jonah et al. (2016) determined that 57.3% of 222 small and

medium enterprise owners have nothing to do with accounting literacy. The research

suggested the Ghanian government to increase education among the SMEs, particularly

in the “business entity principle” or the transactions associated with a business must be

separately recorded from those of its owners or other businesses (Bragg, 2017).

In the Philippines, Naoya Sakamoto (n.d.) recognized that there are four

classification of business entities: large, medium, small and micro. Micro entrepreneurs

have a total asset less than P3 million, have less than 10 employees and constitute to

89.78% of all business operators in 2012 (Mizunoura, 2017).

While accounting literacy has been widely explored in other countries, the extent

and relevance to sari-sari store owners is still lacking.

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1.1.1 Evolution of Accounting

Accounting has been around the business industry for centuries and has always

been a crucial part of it. Interestingly, Hagerman (2018) concluded that accounting

concepts that are being practiced today can be traced back to Biblical times. However,

accounting is believed to be developed way back to ancient Mesopotamia wherein people

used it to keep a record of their crop and herd growth. Historians hypothesize that the

primary reason for the development of writing systems came out of a need to record trade

and business transactions (Bellis, 2018). According to Investopedia (n.d.), ledger from

these times narrates the dates and descriptions of trades made or conditions for a specific

rendered service.

From then on, Accounting continued to evolved and was used during the reign of

the Roman Empire wherein historians found “The Deeds of Divine Augustus” that shows

the account of Emperor Augustus’ financial dealings. This discovery indicates the level

of accounting information that is accessible to the emperor, which he perhaps used for

deciding and planning. (Freemont College, 2018).

According to Ashton College (2015) Pacioli stated that proper accounting

practices were vital in maintaining a successful business. Luca Pacioli was recognized as

“The Father of Accounting” for publishing his book named Summa de Arithmetica,

Geometria, Proportioni et Proportionalita which is the first known published book that

shows topic of double-entry bookkeeping.

From Accounting being just a practice used for record-keeping of business,

Accounting eventually turns as a profession with the establishment of professional

organizations for accountants which originated in Scotland in the nineteenth century.

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These organizations were granted a royal charter where members of such organization

could call themselves “chartered accountants”. As different businesses multiplied, the

demand for reliable accountancy also increased and the profession promptly became a

vital part of the business and financial system (Bellis, 2018).

1.1.2 21st Century Roles of Accounting

In modern times, many different definitions of accounting have surfaced.

According to American Institute of Certified Public Accountants, accounting is the art of

recording, classifying and summarizing in a significant manner and in terms of money,

transactions and events which are, in the part at least, of financial character and

interpreting the results thereof. In the modern word, the role of accounting is not only to

record financial transaction but also to provide a basic framework for various decision

making. It is also worth mentioning that the accountancy is a vast field which relies on

bookkeeping, auditing, and accounting principles (Borad, 2018).

With the economic, social and technological changes, different branches of

Accounting have emerged. This includes three main branches which are financial

accounting, cost accounting and management accounting.

Accounting in the modern business environment has changed drastically in a short

time with the existence of technology that has advanced business functions and

operations to levels not previously imagined to be possible. Technological innovation has

led the way in how accounting is done nowadays. Productivity and organization improves

with the presence of digital resources and online tool. Electronic accounting took over

and manual accounting slowly vanished through times (Tsouni, 2017). Moreover,

according to Aysel Guney, growth and development growing rapidly in information

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technologies day by day have brought digital revolution in economic, social and cultural

fields. While a few basic procedures or methods have changed, the purpose of accounting

remains the same – to measure company’s financial performance and make business

decisions. (Vitez, 2018)

Tax imposition system is also one of the factors that brought change in the

accounting practices. Tax imposition system started right after the imposition of

government control system over business concerns. Accounting system was improved to

a great extent with the application of income tax rules and regulations. Tax assessment

system influenced keeping accounts, charging depreciation on fixed assets and inventory

valuation. (iEduNote, 2017)

The Saral Study mentioned four roles of accounting in the modern world, two of

which are Assisting Management and Comparative Study. Assisting Management states

that management uses accounting information for short term and long term planning of

business activities, to predict the future conditions, prepare budgets and various control

measures and Comparative Study states that in the modern world, accounting information

helps to know the performance of the business by comparing current year’s profit with

that of the previous years and also with other firms in the same industry.

Generally Accepted Accounting Principles (GAAP) was formed and introduced

by national and international professional organization in order to make the accounting

principles equally meaningful to processors and user of accounting information to bring

uniformity in the meaning of accounts. Business organizations are required to prepare

their financial statements in accordance with the accounting principles included in the

GAAP.

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 As time and environment progressed, in terms of commercial activities,

accounting became a necessity to provide information about trading and other early

business ventures. However, with the industrial evolution, the increase in amount

business and the advent of income taxation, more systematic and formal financial

information was called for. Accounting concepts and practices were adapted to meet the

expectation of times. It is an evolution process that is still on until the end of the world.

(Science Publishing Group, 2012)

1.1.3 Accounting on Small Retail Outlets

A retail outlet is a store where smaller quantity of products or services are being

sold to the public. In a retail outlet, the owner usually purchases directly from the

manufacturers in a large quantity at a wholesale price and sell it to customers in small

quantities at a mark-up price. In this way, the owner's profit will be the added amount on

the product. Examples of a retail outlet are department stores, supermarkets, malls,

warehouse stores, bookstores, sari-sari stores and even pharmacies.

According to Dennis Hartman, every business, no matter its size or industry, is

responsible for its own accounting to supply the required financial information and

monitor its own performance or growth. This means that accounting is needed in running

a retailing business, regardless if it is large or small. Hartman added the accounting

practices used in a small retail outlet which includes the accounting software, record

keeping, inventory method, and accounting expertise.

The effective accounting system was found to be contributing to the performance

of small and medium scale enterprises in a study by Olatunji (2013). The same was

observed by Ezejiofor, Emmanuel, and Olise (2014) wherein they discovered the impact

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of record keeping on the performance of small scale businesses. They also learned that

some of the small scale businesses kept no record of their financial operations while

others hired professional accountant for their business' proper record keeping. Similar

findings were ascertained in a study conducted by Abdulraheem, Yahaya, Muhtar,

Abogun (2012) and Madurapperuma, Thilakerathne, Manawadu (2016). But the latter

also determined that the retail shop business are keeping complete set of accounts for the

controlling of their inventory. Nevertheless, these studies focused more on the effect of

accounting and how record keeping are being used in small and medium scale

enterprises, whereas the objective of this research paper is to find out the applications of

the accounting principles on small scale business specifically sari-sari stores.

1.1.4 Problems Encountered by Sari-sari Store Owners

Sari-sari store businesses has been part of the Filipino life that can be found in

almost every street corners of Philippine barangays or barrios in both rural and urban

areas. Sari-sari store businesses are believed to be the backbone of the consumer

economy, making up 30-40% of retail sales in the Philippines. (Lorenciana, 2014) It sells

commodities that Filipinos get on a daily basis. Sari-sari store is usually family-owned

and situated in a small place within the store owner's house. It can be a good source of

income which can be used to sustain the daily needs of the family, if managed properly.

The problems encountered by sari-sari store owners are: (1) lack of management skill of

the business owner, (2) lack of family cooperation, (3) lack of money handling skills, and

(4) having relaxed attitude towards credit. (Top 4 Reasons Why Sari-sari Store Business

Failed, 2018)

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 Setting up a sari-sari store is not that complicated just like other business. An

aspiring individual can run a business having the advantage of starting at low capital; it

is a cash business, low risk approach to retail, and accepted retail concept. But, that does

not stop the business from having problems which can lead to failure. (Manarang, n.d.)

According to Pinoy Negosyo, there are top four reasons why sari-sari store

businesses failed. Many store managers lack basic education to manage a business,

putting the entity into jeopardy in the future. The management skill of the owner plays a

vital role in running a business. It includes the daily inventory of goods; tabulation of

cash flow— gross earnings profits; identification of most profitable goods; identification

of most popular goods; and checklist of items to procure to replenish inventory.

The lack of cooperation of the family could also be the reason why a sari-sari

store business failed. It is common for family members who get items for household

consumption without being liable for it or taking money from the store for personal

purposes other than allocating it for business activities. The lack of concern or awareness

can direct the business to the wrong way.

Third reason could be because of lack money handling skills. The manager should

also understand where to allocate the money that came from the business. The difference

of gross sales and profits will also help on having a better view of the business. Not all

earnings for the day are considered profits that can be used to pay utility bills or on other

financing activities.

And lastly, having a relaxed attitude towards credit is not healthy in business.

Having many unpaid debts from relationships, may it be personal or business can also

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lead to business towards failure. In business, once the owner give credit, it is understood

as a handout that should be paid immediately.

In conclusion, sari-sari store business despite of being a low capital business, it is

still subject to same principles just like other business to ensure its success. The problems

faced by the businesses, specifically the reasons why a business like sari-sari store shows

how the practices of the owner affect the business, whether towards the success or failure.

1.1.5 Positive and Normative Accounting Theory

The accounting practices performed by a business entity are meticulously

formulated using positive and normative accounting theory.

The positive accounting theory emerged from empirical studies of Ross Watts

(1978) and Jerold Zimmerman (1986). It uses facts, figures and a more objective

approach in choosing the accounting practices. The business transactions history of the

business entity serves as the supporting details for making the policies and generating the

principles to be used by the business entity. It focuses on the self-interest of the owner

rather than the fiscal security of the firm which is disadvantageous. Another downfall of

using positive accounting theory is that values of the assets are inaccurately projected.

The normative accounting theory came from collected studies of different authors

like MacNeal (1939), Paton and Littleton (1940), Littleton (1953), Chambers (1966), and

Ijiri (1975). The accounting practices used by an entity came from a subjective approach.

Subjective theories are deduced to make policies in order to predict the financial

sustainability of an entity. It provides a lot of possible options which makes it difficult to

choose.

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 The positive accounting theory is a practical approach since it uses the present

transactions of an entity. It is based on the current happenings. On the other hand, the

normative accounting theory is theoretical in its approach which allows day-to-day

activities evolve without straying too far from economic related theories. In relation to

the study, these theories are used to determine if the sari-sari store owner uses an

objective approach, a subjective approach or a combination of both in managing their

business.

1.1.6 Overview

Accounting principles have evolved due to the need of the market society in terms

of the techniques in recording and monitoring monetary transactions and businesses

profits (Walther, 2010). These principles help govern the world of accounting according

to general rules and concepts. Accounting principles differ from country to country

(Silver, 2018). Thus, it is important to study its uses in every part of a country’s

marketing world (Adams-Mott, 2017).

Due to its convenience, sari-sari stores became widespread in the Philippines for

the ease and convenience that it brings to every Filipinos. Compared from the most

affluent communities, sari-sari store is a constant feature of residential neighborhoods in

the Philippines. Sari-sari stores became a phenomenon common business for its very

impressive and ability to provide household goods and affordably priced items and

sometimes, even on credit, you still need to know whom, how many times and up to how

much amount.

This study aims to find the different practices the business owners apply in

recording their money transactions and profit in running their businesses. This study also

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aims to know if the accounting principles are present in the techniques and the strategies

that the owners used in their businesses, focusing on the sari-sari stores. Through this

research paper, readers will gain awareness and knowledge about the marketing strategies

most of the Filipino owners used in their business in a certain area. With the help of this

research study, readers will get to know the different processes that run around the small

retail outlets. This research paper will include the goal of the researchers, the benefits that

the study can give, and the reason for conducting the research study. It will also present

the methods that the researchers will use and how will be the research study be

conducted. Researchers ought to give credible data and honest results and will let the

research paper and study be useful to the readers and to the society.

1.2 Research Questions

A sari-sari store is a small retail outlet that gives a regular income to the owners.

Being a convenience store, it is well-promoted in the Philippines. Its success depends on

the strategy that the owner is implementing. As this case was found out to be interesting,

the researchers conducted a study that will determine the practices used by the sari-sari

store owners in monitoring their profit and transactions. As such, it will seek answers to

the following questions:

1. What are the practices that the sari-sari owners used in recording their store’s profit

and transactions?

2. How do accounting principles help in monitoring store owner’s profit and

transactions?

3. What are the advantages and disadvantages of using the “just counting” technique in

recording the profit and transactions?

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1.3 Significance of the Study

This study aims to describe the application of accounting principle in sari-sari

stores. The findings of this study will be beneficial to certain groups and the benefits they

may get are as follows:

Researchers

Aside from fulfilling one of their requirements on their chosen track which is

ABM, this study will also help them to vast knowledge about business and accounting

which is important in their chosen track.

Young Entrepreneurs

The young entrepreneurs will gain more information about the techniques and

practices used by the business owners and apply this knowledge in starting and

establishing their own business.

Sari-sari Store Owners

The sari-sari store owners will know about the techniques and practices that the

other sari-sari store owners used in their business and may incorporate some of these

techniques for the success of their own business.

Government

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 The government will be aware about the sari-sari store owners' practices and they

could create programs and conduct seminars to educate the other sari-sari store owners on

how to run and manage their business properly and successfully.

Other Researchers

The other researchers who also investigate about the accounting principles used

by sari-sari store owners in running their business will have better understanding about

such topics. They can use ideas and data presented as a reference in conducting their

future researches.

1.4 Scope and Delimitation

The general intent of the study is to describe the accounting principles used by the

sari-sari store owners in Hagonoy, Taguig city in their business.

This study is a qualitative type of research and will use convenience sampling

method. The researchers will select 10 sari-sari store owners in Hagonoy, Taguig City as

respondents of the study.

The collection of data will be gain through interview and the interpretation,

analysis, and presentation of data will be executed from December 2018 to March 2018.

1.5 Definition of Terms

The following terms and variables are provided to assist with the understanding of

the terms used throughout the study.

Accounting

Conceptually, it is defined as the systematic and comprehensive recording of

financial transactions pertaining to a business. (Pavtar, n.d.) Operationally, it is defined as

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the practice in which the day-to-day financial activities of a sari-sari store are gathered or

recorded.

Accounting practices

Conceptually, it refers to the normal, practical application of accounting or

auditing policies that occurs within a business (Investopedia, n.d.). Operationally, it refers

to how sari-sari stores kept track to their daily transactions.

Accounting principles

Conceptually, these are the rules and guidelines that companies must follow when

reporting financial data (Investopedia, n.d.). Operationally, thee are the set of rules and

guidelines followed by sari-sari store owner in recording their transactions. In this study,

the researchers use the following principles:

Accrual principle

Conceptually, this is the concept that accounting transactions should be

recorded in the accounting periods when they actually occur, rather than in the

periods when there are cash flows associated with them. (Basic accounting

principles, 2017) Operationally, it is the recognition of sari-sari store owners of

the transactions, specificall the revenues and expenses only when it occurs, rather

than when it is received or paid.

Conservatism principle

Conceptually, the basic accounting principle of conservatism leads

accountants to anticipate or disclose losses, but it does not allow a similar action

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for gains. (Accounting Principles, n.d.) Operationally, it is the principle used by

sari-sari store owners in stating the loss

Cost principle

Conceptually, this is the concept that a business should only record its

assets, liabilities, and equity investments at their original purchase costs. (Basic

accounting principles, 2017) Operationally, it is defined as the recognition of the

assets, liabilities and equity of the sari-sari store must be recorded at their original

purchase cost.

Economic entity principle

Conceptually, this is the concept that the transactions of a business should be

kept separate from those of its owners and other businesses. (Basic accounting

principles, 2017) Operationally, it is defined as the principle which refers to the

separation of transactions of the sari-sari store owner from the owner and the

other businesses' activities.

Full disclosure principle

Conceptually, this is the concept that where the accountant should include

in or alongside the financial statements of a business all of the information that

may impact a reader's understanding of those financial statements. (Basic

accounting principles, 2017) Operationally, it refers to the disclosure of all

important information regarding the sari-sari store's transactions.

Going concern principle

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Conceptually, this accounting principle assumes that a company will continue to

exist long enough to carry out its objectives and commitments and will not

liquidate in the foreseeable future. (Accounting Principles, n.d.) Operationally, it

is defined to the assumption of the owner that the sari-sari store will continue to

exist regardless of the foreseeable future of the business.

Matching principle

Conceptually, this accounting principle requires companies to use the

accrual basis of accounting. The matching principle requires that expenses be

matched with revenues. (Accounting Principles, n.d.) Operationally, it is defined

as the principle where the sari-sari store owners match the expenses made by the

business to the revenues received.

Materiality principle

Conceptually, it states that an accounting standard can be ignored if the net impact

of doing so has such a small impact on the financial statements that a reader of the

financial statements would not be misled. (The materiality principle, 2018)

Operationally, this principle refers to the decision of the owner to ignore some of

the transactions done so that the sari-sari store owner will not be misled with such

transactions that have small impact to the business.

Monetary unit principle

Conceptually, this is the concept that a business should only record transactions

that can be stated in terms of a unit of currency. (Basic accounting principles,

2017) Operationally, it refers to the principle where sari-sari store owners record

their transactions in terms of a unit pf currency which is in peso.

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 Objectivity principle

Conceptually, the objectivity principle states that accounting information

and financial reporting should be independent and supported with unbiased

evidence. (Objectivity Principle, n.d.) Operationally, it refers to the principle that

the sari-sari store owners should have supporting documents to support such

transactions in their business.

Revenue Recognition Principle

Conceptually, under the accrual basis of accounting (as opposed to the cash basis

of accounting), revenues are recognized as soon as a product has been sold or a

service has been performed, regardless of when the money is actually received.

(Accounting Principles, n.d.) Operationally, it is the recognition of the sari-sari

store owner of the revenue of the business as soon as the product has been sold or

a servuce has been performed.

Time period principle

Conceptually, this is the concept that a business should report the results of its

operations over a standard period of time. (Basic accounting principles, 2017)

Operationally, it is defined as the principle where sari-sari store owners record

their transactions over a standard period of time.

Accrual basis

Conceptually, this refers to the concept of recording revenues when earned and

expenses as incurred (Bragg, 2017). Operationally, It is defined as the recognition of sari-

sari store owners on revenues as soon as it is earned, and expenses are reported when

expense occurs.

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Business

Conceptually, It is defined as the activity of where entrepreneurs make one's living or

making money by producing or buying and selling products such as goods and services.

(Wikipedia, n.d) Operationally, it is where sari-sari stores as classified since sari-

saristores owner have the primary goal of gaining profit through selling goods or

rendering services to the customers.

Cash basis

This refers to a method of recording accounting transactions for revenue and

expenses only when the corresponding cash is received or payments are made (Bragg,

2017). Operationally, it is defined as the recognition of sales of sari-sari store owners

only when the cash is received from the customers and recognition of sales when the

payments are made.

Customers

Conceptually, it is defined as the individual who purchases the goods or services

produced by a business. (Investopedia, n.d.) Operationally, these are the individuals who

purchases goods from the sari-sari stores.

Financing Activities

Conceptually, it is refers to the activities that shows how a company funds its

operations and expansions externally (“What are Financing Activities?,” n.d.).

Operationally, it refers to the practices used by sari-sari store owners to fund the business.

Generally Accepted Accounting Principles (GAAP)

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 Conceptually, these are the widely accepted rules, concepts,and principles that

governs the application of accounting procedures. (Idk pa kung ano reference ni Sir Nani

sa handout ehehe pero dun ko ‘to kinuha) Operationally, GAAP refers to the set of

accepted rules, concepts, and principles used by accountants or owners in the application

of accounting in the business.

Just Counting

Conceptually, it is defined as where both currency and accounting began through

concrete counting which means counting being object-specific (Andre, 2017).

Operationally, it is defined as a practice of sari-sari store owners' in which they are just

counting the money in knowing profit without records or any form of basis.

Objective Approach

Concepually, it is the approach used when an individual has a due regard for the known

valid evidence pertaining to that issue. (Wikipedia, n.d.) Operationally, it is approach

used in solving problem where it is based on facts.

Operating activities

Conceptually, "it refers to the activities functions of a business directly related to

providing its goods and/or services to the market." (Investopedia, n.d.) Operationally, it

refers to the activities of a sari-sari store owner in purchasing goods for the business'

inventory.

Profit

Conceptually, it is the positive gain remaining for a business after all costs and

expenses have been deducted from total sales. (Merriam-webster dictionary, n.d.)

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Operationally, it is the money earned from selling goods from the sari-sari store minus

the expenses made by the business.

Revenue

Conceptually,it is defined as the income that a business earned from its normal

business activities, usually from the sale of goods and services to customers. (Revenue,

n.d.) Operationally, it refers to the money earned by the owner from the goods sold from

the by the sari-sari store owner.

Revenue-generating Activities

Conceptually, it is defined as the activities where all operations that produce

income or recover costs by providing goods or services. (Rector and Visitors of the

University of Virginia, 2000) Operationally, it refers to the activities done by the owner

by which is the selling of goods of the sari-sari store.

Sari-sari store

Concepually, it is a small retail business that can be found in almost all every

street corners of Philippine barangays or barrios in both rural and urban areas.

(Lorenciana, 2014) Operationally, it is a small retail business that sells basic goods. In

this study, they were the respondents.

Subjective Approach

Conceptually, it is the approach used when an individual has a due regard to personal

perspectives, feelings, or opinions pertaining to that issue. (Glen, n.d.) Operationally, it is

the approach used when it is based on assumptions, rather than facts.

1.6 Theoretical Framework

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1.6.1. Accounting Theory (GAAP)

Accounting frameworks follow the conditions of existing Accounting Theories.

Wolk, Dodd and Rozycki (2008, cited in Unegbu, 2014) define accounting theory as a

composition of different assumptions, definitions, principles, and concepts including their

derivations (p. 1). Hendrickson (1992 cited in Unegbu, 2014) also defined accounting

theory similarly but further assert that it also aims to generate development of sound

accounting practices (p. 2). On the other hand, Perara and Matthew (1996, cited in

Unegbu, 2014) describe accounting theory as a form of comprehensive principles that

offers references to every accountant (p. 2). The first publication of these principles was

in December 1942 by the ICAEW or Institute of Chartered Accountants in England and

Wales (“Knowledge guide to UK accounting,” 2018). But even before that, American

Institute of Certified Public Accountants (AICPA) already established Committee on

Accounting Procedure (CAP) in 1938 (Unegbu, 2014, p. 5). Nowadays, accountants use

Generally Accepted Accounting Principles (GAAP) which has been developed by

accounting professionals and SEC or Securities and Exchange of Commission

(“Generally Accepted Accounting Principles,” 2016).

Bierman and Drebin (1972, cited in Unegbu, 2014, p.) became realistic in

grouping accounting principles into three. First is the "assumptions about the world",

second, the "operating conventions" and third is the "quality considerations" in order to

determine income in the financial statements. According to them, these groupings would

combine the interests of the various bodies without losing any details. The conceptual

views of Bierman and Drebin (1972) were clearly designed under the Generally Accepted

Accounting Principles (GAAP) in a block diagram as shown on Figure 1.1.

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Figure 1.1 GAAP in Block Diagram. Adapted from ‘Theories of Accounting: Evolution

& Developments, Income Determination and Diversities in Use,’ by Unegbu, A.O., 2014,

Research Journal of Finance and Accounting, 5(19), p.6.

As shown on the Figure 1,1 the “assumptions about the world” consists of

business entity, going concern, stable monetary unit and accounting period assumption.

On the other hand, the “operating conventions” involves historical cost, realization,

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duality, money measurement and matching principle. Lastly, the “quality considerations”

comprises of objectivity, prudence, consistency and materiality.

Accounting Cash Basis

Accounting Recording Method

Realization Principle
Accounting Principles Accrual Basis
Matching Principle

Figure 1.2 Accounting Recording Method used in relation with Accounting Principles

As shown on Figure 1.2, matching and realization principle requires the use of

accrual method of accounting in recording transactions. Accrual method of accounting is

“the theory of recording revenues when received and expenses when gained” (Katre,

2016). In contrast, cash method of accounting only recognizes revenues when payment is

received and expenses when payment is done (Katre, 2016).

1.6.2. Positive and Normative Accounting Theory

As mentioned before, one of the aims of this study is to also to identify whether

the sari-sari store owners utilize an objective approach, subjective approach or a

combination of both in managing their store. Positive accounting theory takes an

objective approach or to be exact, “it predicts facts and does not use assumptions such as

outcomes as the goals” (Santoso & Sebayang, 2017, p. 74). Since future is uncertain, it

uses existing facts as a basis to predict the future (Gaffikin, 2006, cited in Santoso &

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Sebayang, 2017, p. 74). On the other hand, normative accounting theory applies

subjective approach and uses assumption in order to obtain certain outcomes (Santoso &

Sebayang, 2017, p. 74). The summary of the idea of normative and positive accounting

theory when it comes to solving problem is shown below.

PROBLEM

WHAT SHOULD I
DO?

POSITIVE NORMATIVE ACCOUNTING

ACCOUNTING THEORY THEORY

FACTS ASSUMPTIONS

PROBLEM SOLVED

Figure 1.2 Solving Problems using Normative and Positive Accounting Theory

As shown on the Figure 1.2, a problem encountered in a business could be solve

either by positive or normative accounting theory. Positive accounting theory seizes to

predict how businesses account transactions based on actual real world transactions and

events (Motley Fool, 2015). While the normative accounting theory uses value judgment

or starts with existing assumptions, theory or principles to know what should be done in

order to support the goals instead of looking at what’s really happening (Motley Fool,

2015; Santoso & Sebayang, 2017, p. 74).

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1.7 Conceptual Framework

As shown on the Figure 1.3, the data collection method that will be use by the

researchers is in-depth interview. It aims to know business practices that sari-sari store

owners incorporate including purchasing activities, financing activities and revenue-

generating activities, and how these activities affects their business.

The researchers will identify whether sari-sari store owners used objective

approach, subjective approach or combination of both in facing their problems in relation

to their business. Then, the practices will be further break down into accounting

principles and categorize them base on the accounting assumptions, quality

considerations and operating conventions. The researchers will not only consider

principles that are applied by the sari-sari stores, instead, they will also identify the

principles that were violated.

Lastly, the researchers will go back again to the effect of those classified practices

on the sari-sari store and identify what type of approach is used by sari-sari store owners

in facing problems which is also based on the classified practices. With this, the

relationship of application of accounting principles in sari-sari stores is expected to be

described.

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 CHAPTER 2

REVIEW OF RELATED LITERATURE AND STUDIES

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