THE EFFECT OF ACCOUNTING TECHNIQUES ON SMALL BUSINESS PERFORMANCESCHAPTER ONE
INTRODUCTION
1.1.
BACKGROUND TO THE STUDY
The
Small
and medium scale enterprises sector has been recognized worldwide for
its role in economic advancement through ways various like; wealth generation,
employment creation, and poverty reduction (Kithae, Gakure, & Munyao,
2012). Small and medium scale enterprises are a fundamental part of the economic
fabric in most developing countries, and they play a very important role in
furthering growth, innovation and prosperity. Although smaller in size, they
are the most important enterprises in the economy due to the fact that when all
theindividual effects are aggregated, they surpass that of the larger
companies. The social and economic advantages of
small
and medium scale enterprises cannot be overstated.
SMEs are defined as non- subsidiary, independent firms which employ
less than a given number of employees, this number varies across national
systems, other parameters other than the number of employees are used in
categorizing businesses as SMEs.
As per the time of the new millennium SMES accounted for 95% of firms and
60-70% of employment creation in majority countries in the world (OECD, 2000).
Small
and Medium Scale Enterprises are mostly found in the service sector of
various economies which in most countries account for two-thirds of employment
levels.Being highly innovative, they lead to the utilization of our natural
resources which in turn translates to increasing the country’s wealth through
higher productivity. Small and medium scale enterprises have undoubtedly
improved the standard of living of so many people especially those in the rural
areas (Ariyo, 2005).
Accountingtechniques
serves as a critical tool for recording, analyzing, monitoring and evaluating
the financial condition of organizations,preparation of documents necessary for
tax purposes, providing information support to many otherorganizational
functions, (Amidu et al., 2011). In the context of SMEs, accounting techniques
is important as itcan help the firms manage their short-term problems in
critical areas like costing, expenditure and cashflow, byproviding information
to support monitoring and control.
Many small business owners are daunted by the mere idea of
accounting
techniques and bookkeeping. But in reality, both are pretty simple. Keep in
mind that bookkeeping and accounting techniques shares 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 filing various tax returns.
There is no requirement that records 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 techniques 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 1999). Elements of financial
position, including property, money received, or money spent, are assigned to
one of the primary groups, that is, assets, liabilities, and equity. Within
these primary groups each distinctive asset, liability, income and expense is
represented by respective “account”. 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.
Furthermore, nurturing of the small to medium size enterprises (SMEs) is
being hailed for their pivotal role in promoting grassroots economic growth and
equitable sustainable development, this nurturing has resulted in increased
entrepreneur activities in the SMEs sector in developing countries (OECD, 2000)
.
SMEs play a key role in transition and developing countries These
firms, constitute a major source of employment and generate significant
domestic and export earnings, thus SME development emerges as a key instrument
in poverty reduction efforts and their advancement is key to sustained economic
growth, for they are an integral part of a country’s economic fabric and their
success affects the well being of the society as engines of job creation,
economic growth and innovation.
However, the mortality rate of these small firms is very high. According to
the
Small
and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN)
Nigeria, 80% of SMEs die before their 5th anniversary, another smaller
percentage goes into extinction between the sixth and tenth year thus only
about five to ten percent of young SMEs survive, thrive and grow to maturity.
This implies that, the survival rate of SMEs in Nigeria is less than 5% in the
first five years of existence. This also suggests that, SMEs in Nigeria have
not been able to contribute to development. Among the factors responsible for
these untimely close-ups are poor accountingtechniques,lack of concrete record
keeping, inadequate accounting information and procedures,lack of finance, weak
institutional capacity, lack of managerial skills and training of small-scale
enterprises,and tax related issues.
Against the backdrop, maintenance of proper accounting records and
techniques is a pre-requisite for the success of every business or enterprise,
this involves documenting all transactions of business entities includes
assets, liabilities and capital (liquidity). In other to solve limitations such
as lack of finance, weak institutional capacity, lack of managerial skills and
training of small-scale enterprises, there is need for relevant business and
management expertise to manage properly the finance, purchasing, selling,
production, and human resources aspect of the business. According to Jones
(2012), accounting is important in that, it allow businesses or organizations
to understand their financial perspective, and moreso,in order to develop the
small business enterprises properly; there is the need for them to adopt proper
accounting
techniques.
SMEs are also require adequate and also sophisticated accounting techniques
and systems to better manage scarce resources and enhance customer and
owner/manager values, assist them in controlling costs, measuring and improving
productivity and thus ensure the achievement of the business goals.
