THE ROLE OF ACCOUNTING IN THE DEVELOPMENT OF THE ECONOMY (A CASE STUDY OF NIGERIA AS A DEVELOPING ECONOMY)


Content

 

 

ABSTRACT

 

The aim of this study is to examine The Role of Accounting in the Development of the Economy. A Case Study of Nigeria as a Developing Economy: that is the impact accounting played in the overall development of the economy, with a view to making useful suggestions and recommendations as a way of enhancing the development the economy. The population for this study includes workers in the Ikeja axis and the sampling method adopted for this study is the random sampling in order to ensure adequate representation of the population. In order to achieve the objective of making useful suggestions that would improve the economy, a hypothesis was made and tested. Samples of thirty-five responses were collected and analyzed using the chi-square (x2) testing method. It was discovered that most public concerns in Nigeria are faced with many negative factors such as mismanagement of public funds, wastage of resources, misinterpretation of financial statements and lack of proper accounting and financial control. Finally, it was recommended that accountants should be involved in auditing of companies’ accounts, qualified staff should be employed by public enterprises and accountants should be employed to help potential investors in knowing the best industry for them to invest their capital.

 


 

TABLE OF CONTENT

 

TITLE PAGE                                                                                                                         i

DECLARATION                                                                                                                   ii

APPROVAL                                                                                                                          iii

DEDICATION                                                                                                                       iv

ACKNOWLEDGEMENT                                                                                                     v

ABSTRACT                                                                                                                           vi

TABLE OF CONTENT                                                                                                         vii

CHAPTER ONE: INTRODUCTION

1.1              Background of the study                                                                                            1

1.2              Statement of the problem                                                                                           2

1.3              Research questions                                                                                                      3

1.4              Objectives of the Study                                                                                              3

1.5              Statement of hypothesis                                                                                             3

1.6              Significance of the study                                                                                            4

1.7              Justification of the study                                                                                            4

1.8              Scope of the study                                                                                                      4

1.9              Definition of terms                                                                                                     4

 

CHAPTER TWO: LITERATURE REVIEW

2.1       Conceptual clarification                                                                                              10

            2.1.1    The role of accounting in government and control of public enterprises        10

            2.1.2    Analysis and interpretation of financial statements                                        13

            2.1.3    Budget and budgetary control                                                                                    17

            2.1.4    Management and control of public concern                                                   20

            2.1.5    Public enterprises and inefficiency                                                                 20

            2.1.6    Public enterprises and subsidies                                                                      22

            2.1.7    Waste of public resources                                                                               22

2.1.8        Accountability and social objectives responsibility                                        27

2.2       Theoretical framework                                                                                                27

2.3       Review of empirical studies                                                                                        27

CHAPTER THREE: RESEARCH METHODS

3.1       Research design                                                                                                          31

3.2       Sources of data                                                                                                           31

3.3        Sample and sampling technique                                                                                  31

3.4       Method of data collection                                                                                          31

3.5       Operationalization of variables                                                                                   31

3.6       Method of data analysis                                                                                             32

3.7       Limitations of the study                                                                                             32

CHAPTER FOUR: DATA PRESENTATION AND RESULTS

4.1       Data presentation                                                                                                        33

4.2       Results                                                                                                                        34

4.3       Discussion of findings                                                                                                40

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1        Summary of findings                                                                                                  41

5.2       Conclusion                                                                                                                  41

5.3       Recommendations                                                                                                      42

5.4       Suggestions for further research                                                                                 42

References                                                                                                                              44

Appendices                                                                                                                             50

                       


 

CHAPTER ONE

INTRODUCTION

 

1.1             BACKGROUND OF THE STUDY

The basic economic problem that confronts an under developed or a developing country and especially the new independent ones is how to attain sustainable development within a relatively short period, a notable increase in the rate of economic growth which is envisaged will bring it to the level of perpetual real income comparable to those of more admired economics of the world. In order to attain this oval, the country would have to;

·            Provide those basic government services especially in education, public health and transport. These services will serve as fertile soil to advancing the nation’s economy.

·            Stimulate a higher rate of capital formation in production facilities either in government or private sectors. The first accomplishment requires transportation on needed factors or resources to the governmental sector of the economy for the production of those services or facilities required by the entire populace. The second accomplishment requires transfer of resources to capital formation either strictly in the private sector or through the governmental sector.

These reso1urces may come from:

o    Outside the control.

o    Present use for consumption.

o    Present use in production of capital or types regarded as not contributing to economic growth.

o    Idle or partially idle resources primarily manpower. The above four sources off varying opportunity growth and it actually does it only by transfer existing resources to the appropriate quarter and profitable application of these to production attains within that relatively short period a level of standard of living comparable to those of  other more advanced countries of the world.

Accounting come in as the tool that measures the profitability/viability of a project with an economic system.

Glanlier (1976) defines accounting as the systematic collection, summarization, and analysis and reporting of data in a form suitable and under stable to prospective users.

Generally, it involves some other related discipline as budgetary control taxation, cost and management accounting, financial management, auditing and quantitative techniques.

Since development project entails projection into the future, it is essential that public officers and employees in the private sector appreciate the need a transaction and necessary statistics as to enable the proper evaluation of past records with what obtains presently in order to reasonably project into the future.  Some of the practical ways in which accounting can be and is known to have been used not only for a decision making but also importantly to achieve desired results include;

·         Economic planning

·         Capital formation

·         Accountability

·         Taxation

·         Accounting for social purposes.

Accounting records provide information that may be used within the business and which may be relied on by businessmen while making investment decisions. 

 

1.2             STATEMENT OF PROBLEM

The basic economic problem that confronts an under developed or a developing country and especially the new independent ones, as contained in the introduction, is how to attain sustainable development within a relatively short period, a notable increase in the rate of economic growth which is envisaged will bring it to the level of perpetual real income comparable to those of more admired economics of the world.

The government is required to provide those basic services especially in education, public health and transport. These services will serve as fertile soil to advancing the nation’s economy. Also the government is required to stimulate a higher rate of capital formation in production facilities either in government or private sectors.

Another problem is that most potential investors in the development nations is they are mostly illiterates and therefore required the services of accountants and financial analysts to help access possible areas of investment.

Budget implementation is another vital area where accounting knowledge is essential. Most budgets are stated in accounting formula and their implementation will require that knowledge that will enable officials read the budget as it affects their sector and even reflect on how other sectorial outlay may affect them.  It is due to the perennial lags in our civil service that the researcher decided to carry out an investigation into what are likely lags in the wheel program or growth of the civil service and thereby the nation.  The private sector employees are also caught in this lapses but however, there seems to be more commitment on their part due to obvious reasons of ownership and direct supervision by entrepreneurs.  The proper functioning of financial system of a company determines to a good extent the viability of her economic structure.  That is why he researcher decided to show set of accounts viz (profit and loss account and value added statement) from Unipetrol Nigeria PLC Annual Report and Account 1999.  This financial statements help users of such statements ascertain the viability of the company and it is prepared by chartered Accountant.

 

1.3             RESEARCH QUESTIONS

To achieve the earlier stated objectives, the following research questions become pertinent:

·            Do accountants play a major role in national development?

·            What is the role of accounting in government and control of public enterprises?

·            What effect does proper analysis and interpretation of financial statements have on the economy?

·            How efficiency in public enterprises can contribute to economic development?

·            Are there any relationships between budgetary control and economic development?

·            Are accountants adequately involved in budget preparation and development planning in Nigeria?

·            How does proper management and control of public concern can improve economic development?

·            Are foreign investors encouraged to invest in Nigeria?

·            Is wastage of public resources is harmful to economic development?

 

1.4             OBJECTIVES OF THE STUDY

The objective of this project is to identify;

·         The role of accounting in economic planning

·         The role of accountants in government accounting.

·         The role of accounting in controlling public expenditure.

·         The duties of accounting management and control of public concerns.

 

1.5       STATEMENT OF HYPOTHESIS

For the purpose of direction and clarity of issues raised in this study, the hypothesis formulated are:

Ho:      Accountants have a major role to play in national development

H1:       Accountants have no major role to play in national development.

 

1.6       SIGNIFICANCE OF THE STUDY

The study which is an attempt to diagnose the accounting system in a developing economy is of immense importance to future researchers. This will serve as a secondary data to future researchers who intends to carry on research on accounting role in nation development.  It will also help students in the school of financial studies in having an in-depth knowledge of control accounting.

It will enable the researchers know more about the role of an accountant in government accounting and where there are lapsed or breakdown in management and control of public concerns, appropriate suggestions are made to the management.

 

1.7       JUSTICATION OF THE STUDY

Nigeria has been facing a difficult problem trying to achieve sustained economic growth through formulation and implementation of development plans. Such development plans are dependent, among other things, upon availability of relevant and reliable economic information. However, the availability of accounting information to help implement economic decisions have been widely criticized as deficient, irrelevant and often lacking credibility. This has been due to the absence of well-defined reporting practices and procedures whereby such requirements, whether statutory or legal are strictly followed and enforced. The sooner the importance of maintaining accounting records by instituting a competent accountant in an organization is realized, the better for such organization. This will help in enhancing accurate decision making for planning, profit forecasting and even national development.

 

1.8       SCOPE OF THE STUDY

This project will cover some vital aspect of an accountant’s role in government accounting and control of public expenditure analysis and interpretations of financial statements, budgetary control, management and control of public concerns in developing economy.  It will also show a company’s financial statement prepared by an accountant. 

 

1.9       DEFINITION OF TERMS

·         Accounting: American accounting association committee define accounting as ‘‘the process of identifying, measuring and communicating economic information to permit informed judgment and decision by users of the information.

·         Bad Debts: An amount owed to a company that will not be paid. An account becomes a bad debt when the company recognizes that the debt won’t be paid. Sometimes bad debts are written off when recognized. Other times a reserve is set up to provide for possible bad debts. This is usually called reserve or allowance for bad debts, or reserve or allowance for doubtful accounts. The write-off of a bad debt is an expense. Any addition to the reserve or allowance is also an expense. When there is a reserve or allowance, recognition of an actual bad debt will not result in an expense, because it has already been allowed for in expenses. Unrecognized bad debts for which no allowance or reserve has been set up are an important factor to consider in evaluating a company’s value.

 

·         Book Value: Total assets minus total liabilities. Book value also means the value of an asset as recorded in the company’s books or financial reports. Book value is often different from the true value. True value may be more or less than book value. The book value of a share of stock is the company’s total book value divided by the total number of shares of stock outstanding.

 

·         Budget: A budget according to chartered institute of accountants is a plan quantified in monetary term, prepared and approved prior to a defined period of time, usually showing planned inform to be generated and or expenditure to be incurred during that period and the capital to be employed to attain a given objective.

 

·         Budgetary Control:  According to Haper (1974), budgetary control can defined as the establishment of budget relating the responsibilities of executives to the requirements of a policy, and continuous comparison of actual with budgeted.

 

·         Cash flow: The amount of actual cash generated by business operations within a period of time. Cash flow differs from profits shown because the accrual method of accounting is used and because noncash expenses are deducted from profits.

 

·         Current Assets: Converted into cash over the next 12 months; typically include cash, pledges, prepaid expenses, due from affiliates.

 

 

·         Current Liabilities: Commitments that are due over the next 12 months; typically include accounts payable, accrued expenses, current portion of mortgage and notes payable, due to affiliates, deferred revenue.

 

·         Depreciation:  A method of converting an expenditure into an expense. It is an expense that is supposed to reflect the loss in value of a fixed asset. For example, if a machine will completely wear out after ten years of use, the cost of the machine is charged as an expense over the ten-year life rather than all at once when the machine is purchased. Straight-line depreciation would charge an equal amount each year. A machine costing $1,000 depreciated over ten years by the straightline method would have $100 charged to expense each year for ten years. Accelerated depreciation charges more to expense in the early years and less in later years. Under one accelerated depreciation formula the first-year charge for the $1,000 machine might be $181.82, the fifth-year charge $109.09, and the tenth-year charge $18.18. The choice of depreciation periods and methods is regulated by accounting standards and the IRS.

 

·         Financial Statements - records that outline the financial activities of a business, an individual or any other entity.

 

·         Fixed cost: A cost or expense that does not change as sales volume changes (in the short run). Fixed costs normally include such items as rent, depreciation, interest, and any salaries unaffected by ups and downs in sales. Of course, fixed costs are fixed only for the short run. (Leases can be canceled and executives fired.) Extreme shifts in sales volume cause many fixed costs to become unfixed. Fixed costs are a factor in determining breakeven.

 

·         Independent Auditor’s Report: By law, an independent audit can be conducted only by an outside certified public accountant (CPA). In a letter to the board of directors, the auditor describes his or her analysis of the fairness of the financial statements and states whether they conform to generally accepted accounting principles.

 

·         Inflation: An increase in prices or reduction in the value of money that has a major effect on companies and their financial reports. Because assets are shown at original cost, they do not reflect inflated value or the inflated cost of replacing them. Inflation of selling prices can result in increased dollar sales with reduced unit sales, and possibly reduced market share. Sales must go up faster than inflation if a company is to move ahead. Inflation distorts all financial reports. It also results in extra taxes being paid on the inflated income, which drains cash needed to pay for the higher costs. Inflation corrodes all business. Its effects can be insidious.

 

·         Internal Control: According to Horngren (1982) ‘’Internal control is the set of accounting and administrative controls and practices that helps ensure that         approved and appropriate decisions are made in an organization.

 

·         Limited Liabilities: Liabilities of shareholders are limited to just their shares in the company (paid up and unpaid) if the business goes bankrupt.

 

·         Long Term Assets: Assets expected to be usable for more than I year. Typically include assets that are depreciated (i.e. building improvements, equipment), restricted cash and reserves, property under development, notes receivable and any financing fees, net of amortization.

 

·         Long Term Liabilities: Liabilities with a future benefit over one year or more. Typically include mortgage and notes payable (long-term portion), tenant security deposits, accrued interest, deferred developer fees).

 

·         Present value: A concept that compares the value of money available in the future with the value of money in hand today. The present value of money is compared to the future value. For example, $100 in hand today is worth more than $100 to be available in five years. This is because the $100 in hand today can be invested and earn money. If it is invested at 5 percent, the $100 will grow to $127.63 in five years. To put it another way, $78.35 invested at 5 percent for five years will grow to $100. Thus, the present value of $100 received five years in the future is $78.35. The concept of present value is used to analyze investment opportunities that have a future payoff. All the investment and all the return can be computed at present value to see if the percentage rate of return on the investment is acceptable.

 

·         Private Company: J. C. Odike in Managerial Economics for Nigerian Polytechnics II (2200) defined private company as a limited liability company owned by the minimum of 2 shareholders and previously a maximum of 50 persons but now in Nigeria, a maximum of 100.

 

·         Public Company: J. C. Odike in Managerial Economics for Nigerian   Polytechnics II (200) is a limited liability corporate body with previous minimum of shareholders but now in Nigeria a minimum of 2 since the 1990 Companies and Allied Matters Decree (CAMD) there is no minimum of        shareholders.

 

·         Ratios - Financial ratio analysis is one tool used to improve financial decision making and alert management about “issues.” Ratios use financial data to summarize organizational performance and see how one organization’s financial indicators stack up against its peers.

 

·         Statement of Cash Flows – reports information about the cash receipts and cash payments of an organization during the reporting period. The statement of cash flows categorizes revenue and expenditures based on three types of activity: operating, investing and financing.

 

·         Subsidiary: A company owned or controlled by another company. A subsidiary is a separate legal entity. A division is not.

 

·         Tax: An amount paid to a government body.

Income tax is a portion or percentage of the net profit before taxes.

Franchise tax is a tax paid on the right to do business. It may be a flat sum or be related to something like the amount of original capital. It is not related to profits. Property tax is a tax levied on the value of a company’s property or assets.

Sales tax is a tax collected by business as a percentage of the sales price and then sent to the taxing government. The business acts as the tax collector. The kinds of taxes are many and are limited only by the ingenuity of government bodies. Taxes have a major impact on business results. As a general principle, don’t make any decision for tax reasons that would not be a good decision without tax considerations.

 

·        Working Capital: Current assets minus current liabilities. In most businesses the major components of working capital are cash, accounts receivable, and inventory minus accounts payable. As a business grows, it has more accounts receivable and needs more inventory. Thus, its need for working capital increases. Increases in working capital can come from retained earnings, borrowing, or selling more stock.

 

 


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