EFFECT OF GOOD ACCOUNTING SYSTEM ON THE PERFORMANCE OF SMALL SCALE ENTERPRISES IN NIGERIA, A CASE STUDY OF BUTTERFIELD BAKERY

CHAPTER ONE

INTRODUCTION

According to (Hussy, 2014), accounting system is defined as “the system designed to record the accounting transactions and events of a business and account for them in a way that complies with its policies and procedures. The basic elements of the accounting system are concerned with collecting, recording, evaluation, and reporting transactions and events”. Accounting system has also been considered as an integral aspect of the internal control system of an entity which entails the recording, keeping, analyzing, summarizing, interpretation and communication of various financial transactions for the purpose of planning, control and decision making. All forms of business organization, regardless of their sizes and nature of operation, require functional and reliable accounting system (Gabriel, 2012)

An accounting system is an orderly, efficient scheme for providing accurate financial information and controls. Regulatory requirements and internal administration policies are key considerations in the design of an effective accounting system. Thus accounting systems show the books, records, voucher, and files and related supporting data resulting from the application of the accounting process. It involves the design of documents and transactions flow through an organization. The uniqueness of small and medium scale businesses call for careful consideration in the design of accounting systems (Atijosan, 2013).

Small and medium scale enterprises are a vast majority of businesses found in variety of primary and intermediate production of the economy (Ayozie, 2013). These establishments have tremendous impact on the state and well-being of the nation in employment generation, as sources of national outputs and revenues, providing feedstock for large corporations They may lack the sophistication to apply the detailed accounting processes, yet the value of accounting systems to these businesses is quite profound.

• BACKGROUND TO THE STUDY

Many new business owners are daunted by the mere idea of book keeping and accounting. But in reality, both are pretty simple. Keep in mind those book keeping and accounting share two basic goals: to keep track of income and expenses, which improves chances of making a profit, and to collect the financial information necessary for planning, decision making and for filing various tax returns (Barbara, 2016). There is no clear requirement that records should be kept in any particular way. As long as records accurately reflect the business’s income and expenses, there is a requirement, however, that some businesses use a certain method of crediting their accounts: the cash method or accrual method. Depending on the size of the business and amount of sales, one can create own ledgers and reports, or rely on accounting (Williams et al 2013).

An accounting system records is meant for retaining and reproducing financial information relating to financial transactions and financial position during the financial period. Financial transactions encompass inflows of incomes and outflows of expenses. (Ademola,  Samuel &Ifedolapo, 2012) argued that small business should be able to prepare and maintain proper statement of profit or loss and statement of financial position for any given financial period from which various financial transactions that occurred during the period can be tracked and appraised. Elements of statement of profit or loss comprises of incomes and expense. Elements of financial position include non-current assets, current assets, current liabilities, non-current liabilities and owner’s equity.

An account is simply a record of financial inflows and outflows in relation to the respective asset, liability, income or expense. Income and expense accounts are considered temporary accounts, since they represent only the inflows and outflows absorbed in the financial-position elements on completion of the time period (Williams et al, 2013). The impact of accounting is a function of the benefit that are derived by the members of the society who had bind themselves into the social organization of their survival and want satisfaction quest (Anyigbo, 2014). Small businesses have the chance of benefiting from availability of accounting information for evaluating the concluded events of the organization and to predict for the future success of the business. Book keeping and accounting information facilitate the solution or resolution of business planning, organization and control function of the enterprises as a social organization (Udoh and Jaja, 2012). Most small scale firm owners prefer to recruit unskilled personnel especially clerical and accounting staff. The product of these unskilled accounting (clerical staff) has only succeeded in helping the small scale firms to stagnate base on this fact, some firms have even wound up. This was because unskilled accounting staff could not keep reliable accounting records that would stand the test of time statutory. Such staff could not correctly determine the profit or loss and net worth of the firm from the preparation of profit or loss account and statement of financial position.

For any form of business enterprises to stay long in the industry, such must take into consideration of a good and reliable book keeping and accounting system. The records kept in monetary term would act as a common measure for estimating the value of purchases, sales, and contract for service, taxes and rate.     However, if the owner of a small-scale business has no time for elaborate system of bookkeeping and accounting, then it is necessary for him or her to keep clear and accurate account of the business so as not to lose the dream of the business. (Udoh, 2014) pointed out that many small scale businesses do not take the cognizance of good accounting system and therefore they do not know whether the business is operating at a profit or loss. A good accounting system is necessary and it often play a vital role, no matter how good a business is running, failure to keep adequate record is likely to spell a company down. The recording of all transactions in term of the monetary value is the first purpose of all information to compare the cost of caring a business operation with its total earnings.

However, the efficient and effective performance of any business entity either small or large will require a sound accounting system (Alabede, 2015). The importance of accounting records and information to the survival of these businesses cannot be overstressed. (Nwachukwu, 2015) In this regard wrote that for an entrepreneur, the most important aspect of his information comes from financial accounting. This in brief is the score card that consists of statement of financial position, statement of profit or loss and other supporting documents. They are indicators of growth potentials, earning ability, liquidity and stability. A high degree of uncertainty surrounds small business operation in Nigeria, largely due to the problem of keeping and maintaining proper books of accounts and standard accounting system, the problem of recruiting unqualified accountant to head accounting departments and how to face the problem of meeting the goal of profitability.

• STATEMENT OF THE PROBLEM

A number of Small Scale Enterprises have not given much attention to book keeping and accounting system in relation to their business transactions, despite its importance in the success of businesses. This could be lack of sound knowledge in book keeping and accounting practices by owners or respective managers. Also, there was difficulty in ascertaining whether comprehensive accounting records that satisfied the laws under which it was incorporation had been kept. It is often easy to determine at what extent no adherence to laid down accounting procedure could affect the present and future existence of small scale businesses. Difficulty of small scale enterprises could be traced lack of good and liable accounting system, low educational background of owners and the employment of unskilled accounting staff which has contributed to the production of unreliable accounting or financial statement (Barbara, 2016).  Except for statutory demands, small and medium scale enterprises hardly give serious thoughts to the process of sound accounting, yet the inadequacy and ineffectiveness of accounting processes have been responsible for untimely collapse of a host of them (Mukaila and Adeyemi, 2013) be done without taking in to cognizance of record of all transaction during the period. Another problem that manifest during the interpretation of financial data or evaluation of performance was non-existence of accurate or good accounting system. Many business owners has failed due to their inability to understand certain rudiment of book keeping and accounting system

The essence of this research work is to examine the unresolved problems of good and reliable accounting system among small scale business in Nigeria one of the factors responsible for sudden collapse of such business.  This study was aimed at contributing to resolving the contending level of inadequacies associated with the maintenance of good book keeping and accounting system, engagement of inexperience accounting staffs and provision of financial information for planning and decision making due to inaccurate data.

• OBJECTIVES OF THE STUDY

The main objective of this study is to assess the need and effect of good accounting system on the performance of small scale enterprises in Nigeria, a case study of Butterfield Bakery.

SPECIFIC OBJECTIVES

1. To assess the extent at which good accounting system is implemented by Butterfield Bakery.
2. To analyze the relationship between accounting records keeping and the performance of small scale firms in Nigeria.

• To examine the limitations of small enterprises to implementing full accounting systems;

1. To evaluate the extent of compliance of small enterprises with standard accounting practices.
   • RESEARCH QUESTIONS
2. What is the necessity of good accounting system in small scale business?
3. What is the relationship between good accounting system and the performance of small scale businesses?

• To what extent does a good accounting system determine the survival and growth of small scale businesses?

1. What are the difficulties facing small scale businesses in Nigeria in implementing good accounting system.
   • STATEMENT OF HYPOTHESIS

For the purpose this research work, research question number 1 and question number 2 will be used for formulating the research question

H0₁:     A good accounting system is not a key to the performance of small scale business

H1₁:     A good accounting system is a key to the performance of small scale businesses

H0₂:     A good accounting system does not determine the survival and growth of small scale businesses

H1₂:     A good accounting system does determine the survival and growth of small scale businesses

• SIGNIFICANCE OF THE STUDY

A good accounting system is necessary and it often play a vital role, no matter how good a business is running, failure to keep adequate record is likely to spell a company down. The recording of all transactions in term of the monetary value is the first purpose of all information to compare the cost of caring a business operation with its total earnings.  One of the significance of this research study is to establish at what extent a good accounting system will contribute to the survival and growth of small scale firms in Nigeria. This study will be of important to the owners of small scale businesses on how to maintain a reliable and effective accounting system which will help in determining and evaluation of profitability, liquidity and financial risk level of the business.

The research findings would be of importance to policy makers on how to formulate and implement programmes that will educate and orientate both existing and potential owners of small scale businesses. . This will provide an insight on how to ensure that small scale businesses continue to survive in the economy which will ensure economic growth. .

This study will also be of great important to students at various level of learning especially those that intend to carry out further research on this subject. It will help students to understand why small scale businesses could not withstand the test of time due to faulty and insufficient accounting records.

Also this study will be of great importance to further researchers, scholars and academicians who will find the literature arising from the research work to be of great value as it will be added to the existing literature.

1.7       SCOPE OF THE STUDY

SMEs studied in this research are those that meet the features of SMEs as definedby Small and Medium Industries Equity Investment Scheme (SMIEIS) in Nigeria.

The area of business operations of most SMEs surveyed include; trading, service delivery, manufacturing, construction and agriculture. The scope of financialchallenges covered include: finance availability, finance accessibility and financemanagement.

1.8       DEFINITION OF TERMS

1. Accounting:- Accounting the act of recording, classifying and summarizing in a significant manner and in terms of monetary transaction which are of financial characters and interpreting the result there of .
2. Transaction:-Transaction is the act of exchanging goods and services from one person to another or businesses, of which it may express in monetary terms.
3. Journal:-Journal is the day to day book of a business where in both aspect of all business transaction is recorded in a logical order.
4. Ledgers:-Ledger is one of the essential books of account that is necessary to record fully all the business transaction in accordance with the essential principle of the double system of the book keeping. It consists of a number of a separate account kept in classified term.
5. Double entry system: this is a method of book keeping in which all item of transaction are recorded twice in relation to receiving and giving aspects.
6. Source Documents: these are documents that provide detailed information and support entries in the journals and ledgers. They are documents that serve as the origin of all financial information.
7. Small Scale Businesses: these are business enterprises that can be established with relatively small capital that operate and provide goods and services on small scale
8. Profit or Loss Account: it is an account prepared for the financial operation of the business which helps to reveal the profitability level of the business during a given financial period.
9. Statement of Financial Position: it is a statement prepared which shows the net worth of the business and its financial position as at the end of the financial period.
10. Assets: these are regarded as the resources controlled by an entity from which future economic benefits are expected to flow into the organization.
11. Liabilities: these are obligations (debts) in which their settlement will involve outflow of economic benefit as at when due

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