CHAPTER ONE
1.0 INTRODUCTION
1.1BACKGROUND OF THE STUDY
Every business organization whether in the public or private sector
is established to achieve certain objectives. This could be profit
maximization as in the case of the private sector or efficient and
timely provision of essential services at a reduced price, as in the
case of the public sector.
The performance of such business organization has to be reported in
monetary terms to the owners of the business. (For example, shareholders
in the case of private organization or the government as in the case of
public)
Accountancy plays a vital role in the stewardship of an organization.
Accounting has been defined as the process of recording, classifying,
reporting and interpreting the financial data of an organization. While
it is important for the accountant to have a sound knowledge of this
phase of accounting process, it is often a relatively minor part of his
total attention to the management reporting and interpretation of the
meaningful implication of the data. (Welgenbad and Dittrich 1973:4)
Accounting is therefore basically regarded as a language of
communication in an organization like every system of communication; its
main purpose is to give different types of information to interested
persons. Because of this main purpose, accounting forms a major part of
the total information system in any entity, be it business or
non-business. (Inanga 1983)
However, the following problems are encountered in the process of communicating this information.
- As the information needs of these various groups do not tally, there
are conflicts of interest among the various users of financial
statements.
- The problem of subjectivity in preparing the financial statements.
Thus, it becomes necessary that in preparing the financial statement,
the accountant be guided by some basic assumptions, principles, concepts
and conventions in other to ensure a high degree of standardization in
financial reporting.
- Financial accounting involves the accumulation of historical records
which is technically referred to as stewardship accounting. These
historical records for the embodiment of financial statement. Financial
statements are the means of communicating to understand parties’
information on the resources, obligations and performance of the
reporting entity. (SAS2).
In preparation of these financial statements, certain assumptions,
concepts, conventions and principles which provide the essential
framework for expressing accounting information are used. This include:-
- The money measurement concept
- The going concern concept
- The business entity concept
- The realization concept
- The dual aspect concept
- The accruals concept
- Prudence concept
- Consistency concept (Frame word 1998:82-85)
These accounting concepts and conventions are seldom disclosed on the
financial statement because they are generally accepted as being the
undertaking of periodic preparation and presentation of financial
statement; but, if in preparation and presentation of this financial
statement, the fundamental concepts and conventions are not followed,
problems will arise in analysis, interpreting and reporting financial
statements. It is therefore essential for the understanding that the
interpretation and meaningful analysis of financial statement that these
basic concepts, assumptions, principles and conventions used in the
preparation must be constantly borne in mind.
1.2 STATEMENT OF THE PROBLEMS
The following problems are encountered in the process of communicating information.
ü They will be problem of having more meaningful and reliable financial report.
ü It will lead to misunderstanding of how transactions are accounted for.
ü There will be problem of having useful information for making economic decision.
ü It can lead to conflict of interest among the various users of
financial statements, if their information needs do not tally.
To this end, the problem of the study is that most accountants do not
use accounting concepts and conventions properly in the preparation of
financial statement.
1.3 THE OBJECTIVE OF THE STUDY
The importance of accounting concepts and conventions in the
preparation of financial statement could be seen in the assessment of
financial viability of an organization. The accountant prepares the
financial statement of most organization. Accounting concepts and
conventions help the accountant in giving relevant financial report to
the management of any organization as regards financial report to the
management of any organization. In order to demonstrate the role of
accounting concepts and convention producing a viable financial report
of any going concern, the following objectives are set out in this
study:-
- To determine whether accounting concepts and conventions serve as a guide in the preparation of financial statement.
- To ascertain if accounting concepts and conventions assist the provision of useful information for making economic decision.
- To determine whether accounting concepts and convention help in the understanding of how transactions are accounted for.
- To determine whether accounting concepts and conventions make financial reports more meaningful and reliable.
1.4 SCOPE OF THE STUDY
These examines how accounting concepts and convention help in the
preparation of financial statement which are used in decision making and
for evaluation of financial strength, profitability, and future
protection of the organization.
However, it was not possible to cover all organization that use
accounting concepts and convention in Nigeria. This is because much
energy is required, it is expensive as well as time consuming.
The Nigeria Breweries PLC having been selected, the researchers’
attention was focused on the accounting department of the company. The
purpose being to see how the accountant, prepares financial statement
and to determine the effectiveness of the use of accounting concepts and
convention in the preparation of financial statement, in other to
attain corporate goals.
1.5 SIGNIFICANCE OF THE STUDY
As stated earlier, an understanding of the basic principle, concept,
assumptions and conventions and their role, relevance to the preparation
of financial statement is essential to the understanding,
interpretation and meaningful analysis of financial statement. This
study highlights the relevance and importance of these concepts and
convention in financial reporting, thus enticing a better understanding
of the usefulness of the financial statement to the various users of
accounting information. These are the benefits the various users of
financial statements gets;
- It provides the framework for constructing financial report.
- It provides useful information for making economic decision.
- Is useful for analysis of the Organizational financial statements.
- Is useful in making financial reporting and useful tool for decision making.
Furthermore, this study provides a better understanding of the
desire for objectivity which is often at the desire for objectivity of
the financial accounting method in use at the present time
1.6 RESEARCH QUESTIONS
The research questions are as follows:-
- Does accounting concepts and conventions provide framework for constructing financial report?
- Does accounting concepts and conventions allow for consistency in the preparation of financial report?
- Does accounting concept and convention make financial report useful for decision making?
1.7 DEFINTION OF TERM
The following words are defined as to be used in the study:-
- ACCOUNTING CONCEPTS: Accounting Concepts are concepts that are
associated with measurement of the elements of financial statements.
These are various concepts and convention in accounting all of which are
useful in solving practical accounting problems.
- ACCOUNTING CONVENTIONS: They are the generally accepted approaches in applying the accounting concept.
- CAPITAL EMPLOYED: This is the amount available for production. It
represents the total less current liabilities employed in the business.