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:-
o
The money measurement concept
o
The going concern concept
o
The business entity concept
o
The realization concept
o
The dual aspect concept
o
The accruals concept
o
Prudence concept
o
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.
