The Impact Of Poor Accounting System In Small Scale Industries

Project and Seminar Material for Accountancy / Accounting

Project and Seminar Material for Accountancy / Accounting


Abstract


This work is designed to asses the impact of poor accounting system in small scale industries, its significance, its contributory function in general and narrowly in Nigeria contact. The problem associated with the development of accounting system in small scale industries using Nigeria as an example will also be looked at.


Chapter One


Introduction

1.1 Background of the Study

Man has from time immemorial been struggling indefatigably to find absolute solution to his problems. Among this problems are economic, social, political and cultural economic problem is the most significant.

The major problem of all societies at all times was succinctly attempted it by fashioning crude tools out of the locally available wood and other materials to increase his productivity to satisfy his basic psychological needs in a large measure. Universally, economic development of any society is primary based on a solid industrialization programme. This conception has been seriously laid credence by the numerous powers and influence which industrialized nation like U.S.A, West Germany, Japan, USSR weld in the space of international policies and in all other world affairs. It is disheartening to note that in most developing countries of the world, small scale industries have been very often treated in economic policies, as an inevitable background and lagging sector of the economic to be assisted merely for social reason but not as a valid opportunity for economic development. Consequently, upon this other perception of little attention has been rapid to the tremendous benefits to be derived by elevating existing small firms to attain their maximum capacity to stimulate the establishment of new ones. The argument is not that small scale industries are the ultimate panacea to national development but rather that development policies and economic planning should be based on a neutral combination of large medium and small firms. The principal economic importance of small scale industries is in their responsiveness to changes and since changes is a prerequisite factor for economic growth, it is highly desirable that more fund rather than few should be channeled to small scale industries.

Martin O. Ijere, while enumerating the problem of small scale industries made mention of limited finance. This finance being the main resources small scale industries utilize in order to exist, needs to be preserves. In doing this, proper accounting system should be installed so as to make sure that every item or transaction that takes place in the business activities of small scale industries will be accounted for. Small and Medium Enterprises (SSIs) play very vital role in the economy of any country particularly for developing countries and economically emerging nations. It is generally believed that above 80% of the total business enterprises is represented by the SSI sector. There is no unique definition of SSI. Tudor & Mutiu (2008) argue that SSIs” world is not a homogeneous and unified one. In IFRS for SSIs (2009), the International Accounting Standard Board (IASB) s defines SSI as business entities that do not have public accountability and publish general purpose financial statements. The ownership structure of SSIs is based on individual or family members. That’s why there is lack of effective and systematic accounting practice. Even in recent times, many SSIs are found to recruit a bunch of smart sales personnel rather appointing accounting or finance practitioner. The main reasons behind having such poor accounting environment are the lack of public accountability, lack of regulations, lack of mandatory audit requirement, lack of resources, . There is a significant negative impact of poor accounting practices on the growth and sustainability of SSIs. Quality accounting information is very necessary in order to take efficient business and strategic decision. According to the European Federation of Accountants, business decisions need to be supported by good quality financial information which need to be relevant, user friendly and in timely manner. But many owners or managers operate their business activities without any accounting or financial judgment, take many important investment and credit decision without any accounting and financial analysis which. Due to the lack of proper accounting system, different stakeholders involved with the SSIs face a lot of difficulties. Sometimes owners or managers of the SSIs fail to understand about the actual financial status of their own business. According to Ntim, A, L.(2014), accounting system provide a source of information to owners and managers of SSIs operating in any industry for use in the measurement of financial performance. They often have very poor liquidity management, credit management, internal recording system, asset management as they do not prepare financial statements and do not have any analysis.

In many cases they are found to rely on single entry, manual and unsystematic accounting practices. All these things make the many SSIs unable to sustain in the competitive and sophisticated business arena and face a threat to ensure growth and sustainability.


1.2 Statement of the Problem

Due to the immense impact of SSIs over the economy, this sector demands more literature. Studies indicate that in both advanced economies and developing countries SSIs contribute on average 60% of the total formal employment in the manufacturing sector, Ayygari, et al.(2007).Mkasiwa, T. A (2014) SSIs” financial reporting has been scantily reviewed. As the many business entities under this sector is either based on individual owners or family members, they often have lack of knowledge and awareness about the accounting and financial issues. Holmes, S. and Nicholls, D. (1989), concludes that the development of sound Accounting information

System (AIS) in SSIs depends on the owner’s level of accounting knowledge. Kinney (2001) posits that accounting is one of the important types of information for decision making both within and outside the organizations. The businesses that are small in size today are expected to grow day by day and turn into medium even one day large corporate house. Padachi, K.(2012) in developing countries, SSIs serve as a useful bridge between the informal economy of family enterprises and the formalized corporate sector. Kofi, M.E, et al (2014) mentioned that two-thirds of new businesses survive for at least two years and only 44% survive for at least four years because of poor management in the areas such as finance, to be precise lack of proper financial accounting practice. Mia and Chenhall (2003) argued that failure to adopt and implement AISs is the reason why most companies fail to make sound decisions as their information keeping tend to be haphazard as the firm grows. According to European Federation of Accountants, poor accounting and reporting and decisions based upon inaccurate or incorrect financial information can actually cause problems which may threaten the solvency of the business. Managing the capital is considered one of the obstacles on the way of growth and expansion of SSIs. Germain (2010) poor or lack of record keeping in business specially the small business enterprises lead to their collapsing. One of the major sources of finance in SSIs is the banks and other financial institutions.

But these banks and other financial institutions are often found to face difficulties to assess the loan proposal of those SSIs that do not have proper accounting and financial records. Kwok (2002) previous research shows that financial information is one of the primary measures used to assess the capacity of a business to effect payment of credit. William (2008) studies show that it is hard for the SSIs to access finances from the financial institutions since they lack proper financial records as requirements. It is very much necessary to have a practice of proper accounting in SSIs to create a smooth and easily accessible financial sector for them. Olufunso, F.O.(2010) it is recommended that SSIs keep detailed accounting records and audit their financial statements on an annual basis. This will enable the banks to make a proper evaluation of SSIs which should improve their accessibility to credit. Tagoe, et al. (2008) quality of SSI records keeping attracts investors to invest and for financial institutions to provide finance. Zhao, Z. et.al (2015) suppliers and franchisers (buyers) involved in the long term transactions with a firm will also consider its accounting performances when evaluating the possibility that the firm might experience financial distress and no longer perform their implicit contracts. In many cases, owners or managers of SSIs are found to take their business and strategic decisions based on their own perception or guess as they usually do not have quality accounting information. .Hall and Young (2005) established that lack of AISs use was the major reason why most small businesses make unsound decision.


1.3 Objectives of the Study

The study is guided by the following aims:

  1. To determine the impact of poor accounting on the profitability of the Small Scale Industries (SSIs).
  2. To determine the impact of poor accounting on the service delivery of SSIs.
  3. To recommend effective ways of addressing poor accounting system in SSIs

1.4 Research Questions

The study seeks to provide answers to the following questions:

  1. What is the effect of poor accounting system on the Profitability of SSIs?
  2. What is the effect of poor accounting system on the service delivery of SSIs?
  3. What are the most effective methods of improving poor accounting in SSIs?

1.5 Research Hypotheses

The study developed for testing the following hypotheses:

  1. H0: There is no significant relationship between SSIs poor accounting system and its profitability.
    H1: There is a significant relationship between SSIs poor accounting system and its profitability
  2. H02: There is no significant relationship between SSIs poor accounting system and its service delivery.
    H12: There is a significant relationship between SSIs poor accounting system and its service delivery.

1.6 Scope of the Study

The study was conducted on SSIs in (Insert your Location) to SSI at (Insert State). The researcher chose (Insert your Location) because it’s her area of residence and thus, it was easy to collect data. The study was limited by; Absence of SSI owners; SSIs traders are known to be very busy, it was difficult for a researcher to get their attention regarding all questions that the study needed answers to.


1.7 Significance of the Study

To the Enterprises

Improve management of the business. SSIs owners will know the importance of keeping records as they will be able to maintain the transactions, daily stock taking made and find out whether there is profit or loss. Know how to manage their finances, profits and losses, obtain knowledge on business management.

To the University

The study will show the University the importance of holding some seminars for entrepreneurs educating the need to keep accounting records for their business transactions so they can have proper management of all finances. Also the University may put a special course on entrepreneurship concerning record keeping as compulsory subject so the students may become competent entrepreneurs in the future.


1.8 Organization of the study

The study is divided into five chapters. Chapter one deals with the study’s introduction and gives a background to the study. Chapter two reviews related and relevant literature. The chapter three gives the research methodology while the chapter four gives the study’s analysis and interpretation of data. The study concludes with chapter five which deals on the summary, conclusion and recommendation.


Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to ascertain the impact of marketing on agricultural development in a developing country.

In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits examining the impact of poor accounting system in small scale Industries.


5.2 Summary

This study was undertaken to assess examine the impact of poor accounting system in small scale Industries. The study opened with chapter one where the statement of the problem was clearly defined. The study objectives and research hypotheses were defined and formulated respectively. The study reviewed related and relevant literatures.

The chapter two gave the conceptual framework, empirical and theoretical studies. The third chapter described the methodology employed by the researcher in collecting both the primary and the secondary data. The research method employed here is the descriptive survey method. The study analyzed and presented the data collected in tables and tested the hypotheses using the chi-square statistical tool. While the fifth chapter gives the study summary and conclusion.


5.3 Conclusion

Based on the findings of the study, the following conclusions were made:

  1. As a result of the simplicity of single entry accounting system, small scale enterprises are more inclined to adopt single entry accounting system.
  2. Due to inadequate record keeping, the small scale operators could not assess their performances effectively.
  3. There is a correlation between proper record keeping and profitability of small scale enterprises. iv. To enhance the profitability of small scale enterprises and their continuity, there is need for adequate record keeping which will help the proprietors to keep track of the performance of these enterprises.

5.4 Recommendations

Based on the findings made and conclusions drawn from the study, the following recommendations were made:

  1. Since there were many accounting systems available to small scale enterprises, the ministry of commerce and industries should help the small business owners to avail themselves the opportunity to use the accounting systems that are relevant for the day today reporting of their business transactions.
  2. The use of single entry system has many limitations that outweighs its advantages of simplicity, thus, the small scale enterprises should be encouraged by the ministry of commerce and industries to make use of other accounting systems available in their business.

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