The importance of accounting concepts and conventions in the preparation of financial statement

CHAPTER ONE

• 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.

• STATEMENT OF THE PROBLEMS

The following problems are encountered in the process of communicating information.

• They will be problem of having more meaningful and reliable financial report.
• It will lead to misunderstanding of how transactions are accounted for.
• There will be problem of having useful information for making economic decision.
• 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

• 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?
  • 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.