Abstract

This project is entitled “The Impact of Accounting Principles on the Financial Sustainability of Small and Medium-size Enterprises” was aimed at creating awareness of the role accounting principles played in the growth and performance of SMEs the reasoning here is that accounting principles is the fuel that helps SMEs to grow.

The central problem that surrounds this study amidst others is that despite the numerous small and medium-sized enterprise that exist most of them still run out of business due to either lagging of accounting policies which leads to it collapse. The main objective of this study is to examine the impact of financial sustainability of SMEs in Molyko –Buea.

To effectively carry out this work, the main sources of data are primary and questionnaires were used to collect data. In the study it was realized that business cannot succeed without an efficient accounting system put in places.

CHAPTER ONE

INTRODUCTION

1.1 Background to the study

SMEs are spread all over the world as such its definition varies from country to country. This definition is based on the number of employees, and turnover of the organization. In Canada, SMEs are defined as businesses with employees ranges from 50 to100persons, in the European union business with less than 50 employees are small size while 250 are medium sizes enterprises. Summarily SMEs are businesses with 0 to 499 employees and contribute less than a 180million dollars in gross revenue.

In Cameroon, SMEs account for over 90% of the country economy and contribute 34% of the country GDP (according to the national institute of statistic), Given the fact that SMEs contribute greatly to the country economic development, the government of Cameroon has implemented policies to improve the growth of SMEs by creating a special bank for the Cameroon SMES called Banque Camerounaise des Petites en Moyenne Enterprise (RCPME) which will go operation as from 2014 (PM January 2014  speech). The objective of this major implementation is to reinforce the SMEs and make them competitive in the world standard.

Given the importance of SMEs as explain above the economic crisis of 2008/2009 which was the most severe in the decade deeply affected the business and financing environment of SMEs in many countries. GDP contracted by 3.6% in the scoreboard countries areas as a whole in 2009 and by 4.3% in the Euro area.

The 2010 recovery was uneven and in many instances came to a halt in the second quarter of 2011 as indicated in the table  below of scoreboard  countries over 2010 to 2011.GDP growth slowed in the US from 2.4% in 2010 to 1.9% in 2011.Similarly , in the Europe area where the 2010 recovery had been pronounced, the growth rate decreased from 1.9% to 1.5%.

In Europe however, growth performance varied significantly across countries while some countries such as Sweden 3.9%, Finland 2.7%, and the Slovak Republic 3.2% experience sustained growth rates, Southern European countries like Italy 0.6% and Spain  0.4% grew at a much slower pace or even experienced negative GDP growth as in Portugal -1.7%. On the other hand, stronger growth continued to be observed in other countries including Turkey 8.5%, Chile 5.9%, and Russia 4.3% as seen in appendix one.

The financial sustainability of these SMEs greatly depends on the proper bookkeeping and the accounting principles concepts and convention. Accounting which evolves from bookkeeping is the desire to keep information about and individual effort and accomplishment was dated as far back as the third century BC. The zenopapyi discovered in 1915, contained information about the construction project, agricultural activities and the business operation of the private estate of Apollonius for a period of about thirty years. This gave evidence of an accounting system used in Greece since the fifth century BC which in the wake of the Greek gradually spread throughout the eastern Mediterranean and the Middle East.

Accurate record-keeping arose during the Renaissance 1300-1500 as Italian were vigorously pursuing trade and commerce. Italian merchants borrowed the Arabic numeral system and the basis of arithmetic to develop the double-entry booking system used today.

Bookkeeping is therefore the recording of transactions in a prescribed manner. Much of the work of a bookkeeper is clerical in nature. Recording here means writing the transaction in the books of account. It is essentially concerned with the recording of transactions that are financial in nature and in an orderly manner. The recording is done in the journal or books. The types and number of the journal maintained in a business depend on the nature and size of the business.

Accounting began when people expressed the need to record business transaction, know if they were financially successful, and know how much they owned and how much they owed. Accounting is defined as the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.

However, Accounting consists of principles, conventions, and concepts that help to bine the proper functioning of the accounting system in every organization. These principles refer to the standardized guidelines that governs the various financial accounting activities including the way transactions are record, the format of drafting the accounting statements. These accounting principles usually refer to as GAAP are mostly founded along the line of the concepts and convention of accounting also known as the basic accounting concepts and principles that are more or less followed all over the world . These principles are the globally standardized guideline for performing financial accounting activities that conform to the double-entry system of accounting.

Given below is an elaboration of some of these principles as they are followed as a standard of regulatory procedures.

Firstly, the principle of consistency, According to this principle a firm should stick to a single, consistent method of preparing, recording, and presenting its accounts.

Secondly, the principle of prudence seeks to explain the Importance of presenting a true and fair financial statement these include the recording of income and revenue only when they actually realized and provision should be made for expected expenses.

Again, the historical cost principle. GAAP required that most assets and liabilities should be accounted for and reported on the basis of the acquisition price. Acquisition cost is the objective and verifiable basis upon which to account for the assets and liabilities of a business enterprise. Noncurrent assets must remain in the books at their historical cost to the enterprise.

Furthermore, the full disclosure principles, in the preparation of financial statements, the accountant should include sufficient information to permit the knowledgeable reader to make an informed judgment about the financial condition of the enterprise in question.

On the other hand, concepts include all assumptions upon which the sciences of accounting is based .it is a practice based on a general agreement between parties some these concepts include the economic entity concept, the going concern concept, the monetary unit and the periodicity concept.

Concepts +convections = Accounting principles

1.2 Problem Statement

SMEs which are widely spread all over the world and has contributed to the economic development of many nation, also to the growth of real GDP and GNP and has also helped to reduce the rate of unemployment, from past experience shows that most of these SMEs have failed to obtain their main objective of growth, profitability, and solvency.

This is as the result of the fact that most of the owners have limited funds necessary to operate the business. This problem of limited funds has made SMEs unable to employ a qualified expert who will help manage the business efficiently such as Accountants who keep financial records of the business transaction and managers who plan, organized, and control the resources of the business.

As such the financial sustainability of most of these SMEs is wanting due to the fact that accounting principles, conventions, and concepts are not implemented in recording, classifying, and analyzing financial transactions and also most of these SMEs do not follow the General Accepted Accounting Practices.

However, my area of interest is on the fact that accounting practices of small and medium size enterprises are inadequate. This is visible from the fact that many SMEs that emerge often shut down in the long run or remain unchanged. A typical example is the collapse of Confines which emerged not long ago and shut down a few years later due to their inadequate accounting system.

1.3 Research Questions

To solve the problem faced by the SMEs. This study will be carried out to answer the following questions.

1. Are records of financial transactions kept by SMEs?
2. Is the accounting principle of accrual basis practiced?
3. Are our internal control measures put in place to safeguard the firm assets?
4. Are final accounts that are a statement of financial position and income statement prepared?
5. Does the enterprise fight tax return?
6. Do SMEs make use of the double-entry system of recording transactions?
7. Our financial experts hired to check their final accounts?

1.4 Research Objectives

1.4.1 Main Objective

The main objective of this study is to examine the Impact of accounting principles on the financial sustainability of SMEs in Molyko Buea.

1.4.2 Specific Objectives

1. To identify the problems relating to accounting principles and financial sustainability of SMEs.
2. To examine the extent to which accounting principles affect SMEs.
3. To make recommendations.

1.4 Hypothesis

Ho: the growth of SMEs does not significantly depend on the accounting principles.

H1: The growth of SMEs significantly depends on accounting principles.