Accounting systems in small and medium enterprises

Ecole des hautes études des Finances et des Banques

MBURABUTURO

Tel/Fax: [phone] P.O.BOX 1514 Kigali-Rwanda Email: [e-mail] website:www.sfb.ac.rw

BBA PROGRAM

DEPARTMENT OF ACCOUNTING

A STUDY OF ACCOUNTING SYSTEM IN SMALL AND MEDIUM
ENTERPRISES IN RWANDA

THE CASE OF INYANGE INDUSTRIES

PROJECT WORK ON:

A project work submitted in partial fulfillment of requirement for
the Award of Bachelor `s Degree in Business Administration «BBA»
in Management faculty, Accounting option.

Prepared by: Supervised by:

HAGENIMANA J. DAMASCENE Mr. KAMASA EMMANUEL

Reg No: GS 20050030

October,2008

DECLARATION

I, HAGENIMANA Jean Damascene, hereby do declare that this project is my original work and it has never been presented by any other student in any university or other institution of higher learning as far as I know. It is my own research; whereby other individuals work was used, references have been provided in the foot notes. I thus declare that this work is mine under supervision of, Mr. KAMASA Emmanuel.

Signature: HAGENIMANA Jean Damascene

Date: ./ ../

CERTIFICATE

This to certify that the dissertation entitled «a study of accounting system used in small and medium enterprises in Rwanda» a case study of INYANGE INDUSTRIES is an original work of Mr. HAGENIMANA Jean Damascene, a student under my supervision.

Mr KAMASA Emmanuel

Signature:

Date: / /

DEDICATION

I dedicate this work to:

Almighty God

My fiancée and my family in law

My mother and father

My lovely sisters and my brother

My close friends, classmates and colleagues.

AKNOWLEDGEMENT

First and foremost I thank the Almighty God to have guided me on this world until now. With pleasure I am happy with the blessings I get from him. I recognise all the hardships I have passed through up to this date may his tolerance continue ever since and forever to all his people.

My special appreciation also goes to Mr. KAMASA EMMANUEL who devoted his precious time to direct this tedious and painful research work, especially reading through the draft copies all the times and correcting errors till the final copy. I greatly appreciate his diligent assistance.

My thanks go the Rwandan government, which has managed to rebuild and extend education to guide a good number of us.

I thank SFB and its staff for the knowledge and skills I acquired from them.

My thanks go to my fiancée IYAKAREMYE Christine, my relatives, my sisters for their help and patience when I was studying.

I cannot forget friends and classmates for their comprehension and knowledge we shared from the beginning of my studies in the university level, within the institute I recognise all friends being full time students for the knowledge blessings we shared.

Last but not least, my thanks are addressed to the Director of INYANGE INDUSTRIES and its staff from all departments for allowing me to conduct this research in their company, and provide me the necessary information that are significant to this work.

LIST OF ABREVIATIONS

ACCA: Association of Chartered and Certified Accountants

AICPA: American Institute of Certified Accountants

APB: Accounting Principles Board

DAF: Director of Administration and Finance FIFO: First In First Out

LIFO: Last In First Out

GRN: Goods Received Note

GAAP: General Accepted Accounting Principles

SMEs: Small and Medium Enterprises SFB: School of Finance and Banking Dr: Debit

Cr: Credit

IAS: International Accounting Standards

IFRS: International Financial Reporting Standards

KIST: Kigali Institute of Science and Technology

NGOs: Non Government Organizations US: United States of America

PA: Professional accountants

ERP: External Reporting Program SMB: Small and Medium Businesses

LIST OF TABLES

TABLE1. EXISTENCE OF THE ACCOUNTING SYSTEM 42

TABLE2. MAIN CONSIDERATIONS WHILE CHOOSING ACCOUNTING SOFTWARE 43

TABLE3. BASIC POINT WHILE DESIGNING ACCOUNTING SYSTEM 44

TABLE4. METHOD USED TO RECORD THE FINANCIAL TRANSACTIONS 44

TABLE5. THE EDUCATION LEVEL OF THE INYANGE'S CHIEF ACCOUNTANT 45

TABLE6. THE DESIGNER OF ACCOUNTING SYSTEM IN INYANGE INDUSTRIES 45

TABLE7. BASIS OF ACCOUNTING USED IN INYANGE INDUSTRIES 46

TABLE8. THE USE OF SOURCE DOCUMENTS 47

TABLE9. COMPLIANCE WITH THE GENERAL ACCEPTED ACCOUNTING PRINCIPLES 48

TABLE10. LEVEL OF COMPLIANCE WITH GENERAL ACCEPTED ACCOUNTING PRINCIPLES

49

TABLE11. EFFECTIVENESS OF INYANGE'S ACCOUNTING SYSTEM 49

TABLE12. TRAINING OF ACCOUNTING STAFF 50

TABLE13. TRAINING SUBJECTS FOR ACCOUNTING STAFF 50

TABLE14. THE BEST DOING OF THE COMPANY TO IMPROVE ITS ACCOUNTING SYSTEM 51

TABLE15. THE PREPARATION OF BUDGET FOR WELL DESIGNING OF ACCOUNTING SYSTEM 52

TABLE16. HAVING AN INTERNAL CONTROL SYSTEM 52

TABLE17. PREPARATION OF FINANCIAL STATEMENTS 53

TABLE18. PREPARATION OF BOOKS OF ACCOUNTS 53

TABLE19. ACCOUNTING STANDARD FOLLOWED WHEN PREPARING FINANCIAL STATEMENTS AND BOOKS OF ACCOUNTS 54

TABLE OF CONTENTS

DECLARATION I

CERTIFICATE II

DEDICATION III

AKNOWLEDGEMENT IV

LIST OF ABREVIATIONS V

LIST OF TABLES AND FIGURES. VI

TABLE OF CONTENTS VII

ABSTRACT X

CHAPTER ONE: GENERAL INTRODUCTION 1

1.0. BACKGROUND OF THE STUDY 1

1.1. STATEMENT OF THE PROBLEM 2

1.2. OBJECTIVES OF THE STUDY 3

1.2.1. GENERAL OBJECTIVES 3

1.2.2. SPECIFIC OBJECTIVES 3

1.3. SIGNIFICANCE OF THE STUDY 4

1.4. SCOPE OF THE STUDY 4

1.5. COMPANY PROFILE 5

1.5.1. Historical background 5

1.5.2. Location of the company 5

1.5.3. Mission 6

1.5.4. Objectives 6

1.5.5. Shareholders and capital 6

1.5.6. Management 6

CHAPTER TWO: LITERATURE REVIEW 7

2.1. GENERAL INTRODUCTION 7

2.1.1. Historical background of accounting 7

2.1.2. Definition of accounting 8

2.1.3. Braches (Fields or Careers) of accounting 9

2.2. BUSINESSES' OBJECTIVES 10

2.4. TYPES OF BUSINESS TRANSACTIONS AND BASES OF ACCOUNTING 12

2.5. BASES OF ACCOUNTING 13

2.6. USERS OF ACCOUNTING INFORMATION 13

2.7. ACCOUNTING PRINCIPLES 15

2.8. ACCOUNTING SYSTEM 17

2.8.1. Objectives of accounting system 17

2.8.2. Characteristics of an effective accounting system 17

2.9. ACCOUNTING CYCLE 18

2.10. IMPORTANCE OF GENERAL ACCEPTED ACCOUNTING PRINCIPLES 19

2.11. THE SYSTEM OF BOOKKEEPING 20

2.11.1. Double entry bookkeeping 20

2.11.2. Single entry system 21

2.12. ACCOUNTING BOOKS 22

2.12.1. Journals or books of prime entry 22

2.12.2. Subsidiary journals or daybooks 23

2.12.3. The ledger 24

2.13. SOURCE DOCUMENTS 25

2.14. OTHER SOURCE DOCUMENT 26

2.15. USE OF SOURCE DOCUMENTS 27

2.16. DEVELOPING AN ACCOUNTING SYSTEM 28

2.17. FINANCIAL STATEMENTS 28

2.17.1. Balance sheet (statement of financial position) 29

2.17.2. Statement of cash flows (statement of resources and application) 30

2.17.3. Trading, Profit and Loss account (income statement) 30

2.18. OBJECTIVES OF FINANCIAL STATEMENTS 31

2.19. THE QUALITIES OF ACCOUNTING INFORMATION 31

2.20. THE NEEDS OF AN ACCOUNTING SYSTEM 32

2.21. THE ACCOUNTING OBJECTIVES TO BE CONSIDERED WHILE DESIGNING 33

AN ACCOUNTING SYSTEM 33

2.22. THE LIMITATIONS OF ACCOUNTING 33

2.23. DEFINITION OF SMES 35

2.24. ACCOUNTING SYSTEM FOR SMES 37

CHAPTER THREE: RESEARCH METHODOLOGY 39

3.1. INTRODUCTION 39

3.2. POPULATION 39

3.3. SAMPLING SIZE: 39

3.5. DATA PROCESSING 40

3.6. LIMITATIONS FOR THE STUDY 41

CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION 42

INTRODUCTION 42

CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS 57

AND CONLUSION 57

5.1. SUMMARY OF FINDINGS 57

5.2. CONCLUSION 59

5.3. RECOMMENDATIONS 60

5.4. SUGGESTIONS FOR FUTURE RESEARCHER 62

BIBLIOGRAPHY 63

APPENDICES 64

ABSTRACT

The research on «A study of accounting system used in small and medium enterprises in Rwanda» a case study of INYANGE INDUSTRIES, has been carried out in order to know the contribution of effective accounting system towards efficient performance of SMEs. The general objective of this research was to examine to what extent effective or weak accounting system affect positively or negatively the operations of SMEs in Rwanda.

In this study, purposive sampling method was adopted and the researcher has collected both primary and secondary data to achieve the research objectives.

Data collection was carried out using questionnaires and interview. Data were analysed and interpreted using simple judgement method based on editing and tabulation while processing those data.

Findings have shown that INYANGE INDUSTRIES hasn't an effective accounting system in place to play a great role in enhancing effective use of its resources. This is evidenced by the fact that INYANGE INDUSTRIES does not have qualified employees to work with its accounting system and its internal control system is not strong enough to prevent errors and frauds and the fact that the responsibilities of designing its accounting system are in the hands of one person who is the director general.

In addition, the respondents have confirmed that the accounting system in INYANGE INDUSTRIES has played an important role in recent performance and they rated this role ranging between 75% and 100%.

Finally, a conclusion was made that a sound accounting system plays a key role in the achievement of the set objectives in SMEs, but an effective implementation of

Accounting system is not a task of one person or one department and effective accounting system can only be implemented when there is a cooperation and full commitment of all employees.

CHAPTER ONE: GENERAL INTRODUCTION

1.0. BACKGROUND OF THE STUDY

In order to generate and present accounting information effectively, every organization needs an accounting system. The systems depend on the nature and the size of the organization concerned.

In this study, we will make emphasis on the accounting system applicable in small and medium enterprises and how its effective use and misuse affect differently the performance of those enterprises.

SMEs present the same features in the developing countries. They are those like; sole proprietors, partnerships, cooperatives, small and medium public enterprises that due to their low capital investments, their activities are limited and their accounting systems are weak. They comprise a high rate of enterprises operating in Rwanda. Reported by Rwanda development bank.

The definition of SMEs generally varies from country to another depending on the economic and socio-political context of the country. it may also depend on the objectives to be achieved in the sector. They cover non farm economic activities mainly manufacturing, mining, commerce, services and agro-businesses. The commonly measure used to define them is based on the number of employees, total investment, and total sales turnover in the year. In Rwanda the definition given by Rwanda development bank is as follows:

The small enterprises are those whose net capital investment falls between 0.5 and 15 million, annual sales turnover between 0.3 and 12 million and from 3 to 30 employees.

The medium enterprises are those whose net capital investment falls between 15 and 75 million, annual sales turnover between 12 and 50 million and from 30 to 100 employees.

The accounting system refers to the set of procedures, and principals that are responsible for the collection and processing of data to produce information useful to decision makers in planning and controlling of business activities. The system deals primary with financial information.

According to JILL HUSSEY and ROGER HUSSEY (1999) Cost and Management accounting, all efficiently managed organizations need to keep some form of accounting system. For big organizations like limited companies, there are legal requirements that must be adhered. For small and medium businesses, it is important to keep some form of accounting records for taxation and decision making purposes.

The role of accounting is concerned with classifying and recording transactions in a monetary term. Accounting is thus mainly concerned with classifying, recording, interpreting and reporting to external and internal users of accounting data that used to evaluate the performance of any business.

The business organizations to have better development, an effective accounting system is very critical, hence the topic of the researcher. Effective accounting system should have appropriate measure of control, standard implementation methods, qualified accounting personnel, updated information technology control and should comply with General Accepted Accounting Principles.

This assists in one way or another to achieve the over all objectives of the organization. The management and control of SMEs is done by the people around the environment.

The business organization to be more successful and accountable for their day-to-day activities, the application of effective accounting system should be considered in a highly position.

1.1. STATEMENT OF THE PROBLEM

World wide, an effective accounting system affects business performance positively, while weak accounting system affects negatively business performance.

SMEs are enterprises favorable for small entrepreneurs and they suffer from the following problems:

> Their management conceives them as the family holdings;

> There are limited financial resources to adopt effective accounting system and its relevant applications in business.

> Lack of updated accounting system and even when it is updated, its installation and use are not perfect.

> Poor technologies used to the system

> Lack of software necessary to the system,

> Lack of personnel and technicians qualified to use and operate the system.

All these have lead to the researcher to conduct a study on accounting system used in small and medium enterprises in Rwanda. After the assessment of those problems facing the small and medium enterprises in relation to the uses of accounting system in their day to day operations, the recommendations will be available for better decisions to be adopted.

1.2. OBJECTIVES OF THE STUDY

The objectives of the study are divided into two parties: general and specific objectives;

1.2.1. GENERAL OBJECTIVES

The proposed study is designed to provide information on how effective and weak accounting system affects positively or negatively the operations of small and medium enterprises in Rwanda.

1.2.2. SPECIFIC OBJECTIVES

· To establish the effective and efficient use of source documents in bookkeeping.

· To assess if accounting system used in small and medium businesses in Rwanda specifically in INYANGE INDUSTRY follows the general accepted accounting principles.

· To study the functioning and major problems of accounting system in small and medium businesses.

· To examine the quality and qualification of workers working with the accounting information in inyange industries

· To examine the flow of accounting information in different levels of management of inyange industries

· To give advices on the better use of accounting system to enhance performance of SMEs

1.3. SIGNIFICANCE OF THE STUDY

This research is of paramount importance to the researcher, to accountants in business enterprises, to the SFB community and to SMEs.

To the researcher:

It will enable him to acquire and increase knowledge and skills on how accounting system can be applied effectively to improve development and enable him to be awarded a Bachelor's Degree in Business Administration. Accounting option.

To the different accountants:

This research will provide to them the recommendations on how they can increase effectiveness on accounting system where necessary. And it will make their work easier and valuable.

To SFB community:

This research will act as reference to other academicians who would wish to do their research in the same field and they will get much from my findings which will be helpful for them both academically and later in the applications of their studies.

It will be an asset in the SFB library and its students may use it in their work assignment during their classroom applications.

To SMEs:

It will provide recommendations on how to improve performance based on the use of effective accounting system and they will guess different ways to improve their accounting system.

1.4. SCOPE OF THE STUDY

The study will be conducted in Rwanda specifically in Kigali city, in the case study of INYANGE INDUSTRY chosen among different SMEs operating in Rwanda as a convenient area for the study.

1.5. Company profile

1.5.1. Historical background

Inyange is a hundred percent Rwandan company and a private limited company (s.a.r.l). The project of setting up this company began in 1997 recently after the 1994 Rwandan genocide. It was not until 1999 that Inyange started its operations, which initially involved milk processing and rendering the milk products to its customers. As the company was growing it went on introducing new products like juice processing and by the year 2001 it introduced another new product which was mineral water. Presently Inyange has grown as one of the top milk, juice, yogurt, and mineral water processing and selling companies in Rwanda. It has just recently introduced mongo juice as another new product.

The following are the products of Inyange:

Fresh milk

Yogurt: these are of five different types (natural, strawberry, banana, vanilla and a apricot). Juice: these are of four types: (passion fruit, pineapple, apple juice and mango)

Fresh cream

Skimmed milk, and

Mineral water

Being a new and small company, Inyange employs 58 employees and 25 casual workers.

The company is expected to increase number of employees since it is growing as said by the general manager. Till now Inyange produces for the local domestic market through plans for exportation are underway.

1.5.2. Location of the company

Inyange is located in Kigali in the district of kicukiro , it is on Mburabuturo road direct opposite the industrial area.

1.5.3. Mission

Inyange being a company involved in processing of agricultural products it has the mission of producing high quality products agro based to meet its customers needs and wants.

1.5.4. Objectives

To process local materials into finished products

To aim at making profits thus increasing wealth for the company

To avail market to domestic agriculture producers in Rwanda

To improve the revenue of government through taxation

To promote import substitution in order to protect their products against foreign competition and avail citizens with commodities at affordable price

To create employment opportunities to Rwandan citizens

To encourage private investments in Rwanda by being a good example

1.5.5. Shareholders and capital

Inyange is private limited company and is owned by the following shareholders: TRISTAR investment

Mr. KAYIRANGA Calvin

It is made up of 124000000Rwfs share capital.

1.5.6. Management

The director general Mr. KAYIRANGA Calvin who is one of the shareholders is involved in the entire management of the firm; he closely monitors the daily operations within the firm with the help of the department heads. The direct general also works as a human resource manager and carries out recruitment, promotion:

demotions, terminating inefficient employees to mention but a few. The director general still has a responsibility of reporting to the board of directors.

The company is made up of three departments and these departments are divided into sections. These departments include: maintenance/technical, production, and accounting departments.

CHAPTER TWO: LITERATURE REVIEW

2.1. General introduction

2.1.1. Historical background of accounting

Accounting is as old as the exchange processes that gradually developed with civilization. It is neither a discovery of science nor the inspiration of a happy moment, but the outcome of the continued efforts to meet the changing necessities of trade.

The origin of keeping accounting has been traced as far back as 8500 B.C, the date archeologists have established for certain clay tokens-cones, disks spheres, and pellets-found in Mesopotamia(modern Iraq). These tokens represented such commodities as sheep, jugs of oil, bread, or clothing and were used in the Middle East to keep records. Later, symbols impressed on wet clay tablets replaced tokens. Some experts consider this stage of record keeping as the beginning of the art of writing, which spread rapidly along the trade routes and took hold throughout the known civilized world.

Development of more formal accounts keeping methods is attributed to the merchants and bankers of Florence, Venice and Genoa (ITALY) during 13^th -15^th centuries. The earliest of these methods consisted of accounts kept by a Florence banker in 1211 A.D.

The first known treatment of the subject was written in 1494 by an Italian monk and mathematician, Fr. Luca Paciolo, described an approach earlier developed by merchants to account for their activities as owner managers of business venture.

Paciolo laid the foundation of the basic accounting model that is used today. As economic activities progressed from the feudal system to the industrial revolution, accounting continued to adapt to the needs of society. As business units became complex and broader in scope, accounting evolved in response to the increased planning control responsibilities of management.

As governments grew in size and became more centralized, accounting was developed to meet accountabilities in the 17^th and 18^th centuries.¹

¹ Jill Hussey and roger hussey, business accounting, seventh edition, 1996

2.1.2. Definition of accounting

Accounting is the process of whereby the effects of the economic activities of an enterprise are accumulated, analyzed, quantified in money terms, classified in related groups, recorded in books pf accounts, summarized in financial statements and reported as information which can be used in making better decisions for the enterprise.

Accounting is the process by which financial information about a business is recorded classified, summarized, interpreted, and communicated to owners, managers, and other interested parties. The effects of economic changes or activities or events are known as transactions. These are in form of exchange of goods or services using money as the medium of exchange.

Both the above definitions identify the various aspects that make up the accounting processes involving the following key procedures that are repeated in the same sequence every year:

Accumulating, analyzing, and recording day by day money worth of every transaction in the books of accounts which are traditionally referred to as books of original entries or journals or day books. This operation is termed as journalizing.

Classifying the journal entries by sorting them into related categories (accounts) in the ledger book. This exercise is technically known as posting.

Testing the accuracy of the records of the financial data by the preparation of a trial balance. Summarizing data from the trial balance in financial report or statements wh5ch are traditionally:

The income statement or trading, profit and loss account, which is the statement in which income (revenue) earned by the business venture is matched with the costs (expenses) associated with that revenue to ascertain the net increase (profit) or decrease (loss) in the owner's wealth during a particular accounting period.

The balance sheet which shows a photo image of the financial position of the business as at a given point in time listing the property of the business known as assets, and the claims of the creditors (debts) known as liabilities and the business owner's claim to thatproperty known as capital or equity of the owner.

The statement of sources and application of funds.

Interpreting of financial statements to various interested parties through an exercise Commonly referred to as financial statement analysis.

2.1.3. Branches (Fields or Careers) of accounting

Book keeping

Accounting in general Cost accounting

Management accounting

Book keeping

This is the record making part of accounting. It is mainly concerned with the accumulation, analysis, and classification of financial data in the accounting system on a day to day basis. The one who does it is called a book keeper or accounts clerk.

Accounting in general

This is the policy making part of accounting which involves taking decisions as to what financial data are to be fed in the accounting system; how such financial data should be processed and finally how the financial statement are to be designed, prepared, and presented to interested parties and interpreted to them.

Accountants usually supervise the work of bookkeepers. Accountants usually choose to practice in one of the three areas; public accounting, managerial accounting, of government accounting.

Cost accounting

This is a specialized accounting concerned with the day today process of collecting, analyzing, recording, classifying and summarizing all costs incurred in manufacturing each product or rendering service so as to ascertain the cost per unit of each product or service provided.

Managerial accounting

This is the application of accounting techniques for providing information designed to help all levels of management in planning and controlling the activities of a business enterprise and in decision making.²

² American accounting association, a statement of basic accounting theory, 1966, P.1.

About Accounting and ERP for SMB Systems

Accounting systems manage procedures for accurately entering, tracking, and maintaining information related to an organization's financial operations. These accounting applications typically support general ledger (GL), accounts payable (A/P) and accounts receivable (A/R), payroll, job and project costing, and multinational accounting. Many small to medium businesses (SMBs) require that other functions (such as inventory control, manufacturing management, and financial reporting) also integrate with their accounting system.

Accounting (ERP for SMB) Key Systems Benefits:

-Automate accounting processes.

-Allow multiple users to work with financial data.

-Implement well-defined procedures to decrease accounting errors. -Refine forecasting methodologies for improved production efficiency. -Determine costs based on output levels to improve pricing.

-Improve order, inventory, and asset management.

2.2. Businesses' objectives

A business firm or enterprise or commercial undertaking is floated by its owners with the following goals in mind:

a. Maximizing profits and ultimately

b. Maximizing shareholders' wealth.

2.3. Forms of business organizations

Business organizations can be classified according to: the ownership and the nature of business.

a) Ownership: Using this basis , the following are the types of business:

Single or sole proprietorship: This type of business is owned only by one person. Usually the owner is also the manager of the business.

Partnership: This business organization with two or more owner. The owners are called partners; agree on the capital contributions, management of the firm, sharing of profits or loss, and other matters pertaining to the operation of the business.

Limited company: This is a legal entity established by operation of law.

Ownership is divided into shares and the owners are called shareholders.

Cooperatives: This is a business formed, owned by a group of people who agree to follow special rules in running it. It has open and voluntary membership and democratic control with every member entitled only to one vote.

b) Nature of business: According to this basis, the following are the types of business.

Service entity (business): This deals with the rendering of services to the customers such as tailoring shops, garages, auditing and accounting firms, doctors, advocates, etc.

Trading or merchandising firms: This type of business deals with the buying and selling of tangible goods for a profit. Examples are groceries, supermarkets.

Manufacturing firm: This business involves purchase of raw materials and converting these materials into finished products for sale. Examples are textiles, manufacturing, breweries and plastic company, etc.

2.4. Types of business transactions and bases of accounting

a) types of business transactions

Investment transaction

These are transactions by which the firm receives amounts of economic resources or benefits from the owner (owner's capital) and the loan holders(loan capital) so as to fund its activities and realize its goals.

Trading or revenue transactions

These are business transaction by which the firm earns its revenues and incurs expenditures associated with those revenues, day to day and continuously throughout the accounting period. It is from these transactions that summaries are extracted and reports made so that total revenues are matched with total expenditure incurred in securing that revenue to ascertain profit for the year on trading activities. The proprietary capital owner expects to share in the firm's profits in successful years whereas the loan capital investor gets a return on his investments in the form of interest whether the firm is making profits or losses.

Examples:

Buying (purchases) and selling (sales) of the firm's goods and services plus purchases and sales returns.

Meeting the operating expenses of the business such as administration expenses, selling and distribution expenses.

Capital transactions:

These are non routine financial activities in the firm that create major permanent resources used to produce or finance the firm's main revenues. Capital expenditure for instance, is expenditure of a long term nature whose object is the acquisition of a long term benefit for the business.

Cash and credit transactions

A cash transaction is one in which there is an immediate exchange of money for value such as a cash sale or cash purchase whereby cash is received or paid for value exchanged respectively.

A credit transaction is an economic event in which there is no simultaneous exchange of cash for value received or given. It involved the immediate or postponed transfer of the subject matter of the transaction and a promise to pay at a future date after the transaction has taken place, example of a credit sale, credit purchase, etc.

2.5. Bases of accounting

Cash basis of accounting

This means that the transactions are recorded only when the related cash is received or paid.

Accrual basis of accounting

Under this basis al transactions are recorded when they occur, regardless of when any related cash receipts or payments occur.

Cash basis of accounting is not in conformity with GAAP (General Accepted Accounting Principles). Accrual basis of accounting specifies that revenue are earned (recognized) in the period when the revenue transaction occurs, rather than when cash is collected. Also expenditures are incurred (recognized) in the period when the goods or services are used or consumed rather than when they are paid for.

2.6. Users of accounting information

Accounting is often described as the language of business because it is the medium of communication between a business firm and the various parties interested in its financial activities. These parties include:

Owners and shareholders

They rely on accounting information in fact that it is their money invested in the firm. They would like to ensure that they are getting a good return on their investments. This is assessed by how much profit the firm is making and whether their investment is increasing in value. For shareholders in companies this means they will get good dividends and the market value of their shares will increase and they can make profit if these were sold.

Management

Board of Directors and Managers use accounting information for making decisions and in planning of the business operations.

Banks and loan companies

They are interested not only in the firm's profitability but also in its ability to repay its loans. They rely on the financial reports as the basis of assessing the firm's liquidity or long term solvency.

Employees

They rely on accounting information in claiming bonuses and salary increases.

Suppliers

They rely on accounting information to be sure that the firm has sufficient funds to pay its maturing obligations.

Customers

They are interested to know if the firm is able to continue in its operations on a long term basis and is capable of meeting its customers demand for goods.

Prospective investors

They are interested in a firm's profitability and potential for growth. They rely on accounting information in making their investment decisions.

Government

Various ministries and departments are interested in a firm's accounting reports as the basis for taxation, enactment of laws for the industry, provision of social services to the people. It also wants to ensure that firms comply with laws on wage payments and employee benefits.³

³ RL Gupta and M. Radhas wamy, advanced accountancy, 1999

2.7. Accounting principles

Certain fundamental concepts provide a frame work for recording and reporting business activities,. The reason for these rules is connected with the fact that different groups may make use of accounts and these groups all need to be convinced that financial statements presented by a firm are an accurate reflections of that business. Furthermore it allows users of these financial statements to make comparisons between different firms relying that all accounts have been drawn following General Accepted Accounting Principles. Some of these concepts and principles are as follows;

Accounting entity

This concept states that the business firm is separate and distinct from its owners. Its books of accounts and records should reflect only those transactions that pertain to the firm and should not include personal transactions of the owners.

Going concern

The business firm is assumed to continue its operations indefinitely unless there is evidence that indicate otherwise. In this aspect the business should continue to value all its resources at the original costs.

Unit of measure

All financial records, reports and statements are prepared using money as the unit of measurement. The specific money currency used must be clearly indicated.

Accrual basis

In determining the net income (revenue-expenses) revenue is recognized when earned rather than when cash is collected and expenses are recognized when goods and services are used rather than when are paid for.

Consistency

When there are alternative methods or policies that a business firm may use, it is important that whichever method or policy is adopted, it should be used consistently from one accounting period to another as well as within one accounting period.

If for unavoidable reasons the method has to be changed, this should be clearly stated so that those users are aware of the reason for the change.

Prudence

The business firm is encouraged to take approach in treatment of profits and losses. If the accountant is faced with a choice of figures which are both acceptable to use in the financial statements he should use a figure that will produce a smaller profit. This is also known as the conservatism principle.

Materiality

Only significant items should be considered when preparing financial statements. These are items whose omission or non disclosure will result in a distorted view of the financial statements and will mislead the users of the same. Items may be considered significant in amount or importance depending on the nature and size of the firm.

Duality

Every transaction has two aspects and both aspects should be recognized by the business firm. This is the basis of the double entry system of bookkeeping or accounting.

Accounting period

The life of a business can be broken into periods of time usually twelve months during which results can be measured The significance of this concept is that users do not have to wait until cessation of the business to determine profits or losses.

Matching principle

In determining the profit or loss from operations at all times, revenues should be matched against expenses incurred in the process of generating that revenue in the same income statement. This is related to the accrual principle.

Cost principle

Assets of a business must be recorded at their original cost. Cost is determined through an arms-length transaction and in most cases this is the most objective figure to use as long as the going concern assumption holds.

Realization concept:

According to this concept, revenue is recognized when a sale is made. Sale was considered to be made at the point when the property in goods passes to the buyer and he becomes legally liable to pay this.⁴

2.8. Accounting system

An accounting system may be defined as an orderly arrangement and devices used for the systematic or organized collection, processing, and reporting of financial and other information essential to the effective conduct of the activities or transactions of a business firm. It is basically composed of:

> A set of inter-related activities involving the originating, processing and reporting financial and other data.

> Written records and reports necessary to collect process store and transmit information.

> Equipment and devices used in the system to expedite the work and provide better control. Personnel directly involved in the accounting activities.⁵

2.8.1. Objectives of accounting system

· To provide means by which interested parties may be given information on the financial position and results of operations of an enterprise.

· To facilitate management in planning, control and decision n making

· To comply with various laws and government requirements

· To protect the business and safeguard its assets

· To accomplish different routine administrative activities like billing, paying receiving, purchasing, etc.⁶

⁴ Rajeshwar kumar sharma and R.S popli, principle and practice of financial accounting, seventh edition, 1994

⁵ American accounting association, a statement of basic accounting theory, 1966, P.1.

⁶ Anthony, R.N. and J.S , Management accounting principles, Taraporewala,1975,p.11

2.8.2. Characteristics of an effective accounting system

· Comprehensive enough to supply the users with all the information they require

· Consistent in its various components which must be integrated so that there is no conflict in the data produced

· Flexible so that it could easily adapt to changes occurring in the business firm and the economic environment

· Practical in providing useful information that is balanced against the cost of providing it.

2.9. Accounting cycle

In a well designed accounting system, all accounting processes are undertaken in a form of a cycle, known as the accounting cycle.

An accounting cycle is a complete sequence of accounting procedures within an accounting system of an enterprise that are repeated in the same order during each accounting period from the start to the end of such period.

It outlines the various accounting processes that are undertaken by the accountant so as to process transactions data through the books of accounts such as journals,

cash books, and ledgers, to summarize and draw up financial statements and reports on the enterprise's performance continuously and at year ends. An accounting cycle for a typical business organization consists of the following key procedures;

· Record daily transaction data in source documents. This is a piece of paper or

· document that initiates a transaction and reports its occurrence, e.g. an invoice,

· cash receipt, debit and credit notes, etc.

· Analyze and record day by day and in chronological order the daily source document transactions in the journal.

· Classify and post the journal transactions data to the ledger.

· Balance, foot and rule the ledger accounts to ascertain the balances in such accounts.

· Prepare a trial balance to summarize and list balances in the ledger accounts to test their arithmetical accuracy, the accuracy of postings and to prepare financial data from which to prepare financial statements.

· Prepare a worksheet as a tool used to sort out, update and organize trial balance information needed at the end of the period to summarize and report on the performance of the entry in the form of financial statements, namely the profit and loss accounts and the balance sheet.

· Correct, adjust and update the trial balance information in the worksheet to ensure that all the transactions data and other accounting information that ought to be recorded in the accounts in the ledger have in fact been recorded and that errors committed in processing accounting information in the source documents, the journal, the cashbook, the ledger and the trial balance are corrected.

· Prepare financial statements in the form of:

· The profit and loss accounts or income statements to show the net profit earned or the net loss sustained for the year, and the balance sheet to present the financial state of the business as at the close of the accounting period.

· Close books of accounts and reverse the entries to complete the records of the accounting period before the transactions of the next accounting period are entered in the books of accounts.⁷

2.10. Importance of general accepted accounting principles

· They attempt to produce standardization in collecting, recording, classifying, summarizing and reporting of accounting information.

· They attempt to issue general consensus among authoritative groups concerned with accounting information as to the treatment of various items such as assets, liabilities, capital, revenue (income) and expenditure.

⁷ S.N Maheshwari, an introduction to accountancy, fourth edition, 1996

· They define objectively and after careful research the items used in the language of business such as double entry, depreciation, book keeping, accrual, etc.

· They establish a fairly common accounting framework for processing and reporting financial data and describe the whole range of business transactions in a meaningful manner

· They clarify and improve financial reporting to outsiders especially on the issues of diverse opinion within the accounting profession such as valuation of stock, depreciation of fixed assets, etc.

· They offer a well defined and researched body of accounting principles to guide managers in preparing financial statements.

· They generally creates confidence in the reliability of financial statements⁸

2.11. The system of bookkeeping
2.11.1. Double entry bookkeeping

Double entry bookkeeping is the most efficient and effective method for recording financial transactions in a way which allows the easy preparation of financial statements. In double entry bookkeeping system, every transaction is recorded twice.

This reflects the dual nature of transactions and provides an arithmetical check. In order to understand the principle of double entry bookkeeping, you need to remember that the business is a separate entity from its owner when carries out its activities. Therefore it can enter into transactions with the owner.

All businesses need resources and these are known as assets. Example include, cash, stock, office furniture and equipment, vehicles, plant and machinery and premises. But before the business can acquire any assets, it must have funds. In a new business the most likely source of funding is the owner. The amount invested by the owner is known as capital. Capital is the liability of the business because the business owes money to the owner. If no one else has funded the business the assets of the business are equal to the capital and this can be shown in form of equation; Assets = Capital.

⁸ Accounting principles board(APB) statements No.4, basic concepts and accounting principles underlying financial statements of business enterprises, American institute of certified public accountants, 1870, p.40 5 Ibid, p. 76-84

However the business may have also received funding from the bank or other lenders in the form of a loan in which case the equation becomes; Assets = Capital + other liabilities. This is known as the accounting equation and it is important to note that the equation must always balance.

Advantages of double entry bookkeeping

· It presents a complete picture of the initiation and occurrence of each and every transaction.

· It gives operational support for the accounting equation framework that is the total economic resources of the business (its assets) must always be equal to the sources of funds (liabilities and capital) which were used to acquire the resources.

· It makes it easy to logically follow the movement of funds in the course of trading

· It gives a double check on each transaction recorded in the accounts as equal debit and credit entries are made for every transaction.

· It facilitates the mathematical check of the accuracy of bookkeeping, as at anytime, debits should equal credits.

· It provides a reliable way for the basic requirements expected from accounting records, which can be verified by outsiders.

· It permits the orderly classification and summarization of transactions and the preparation of financial statements from them.

2.11.2. Single entry system

An incomplete double entry system can be termed as a single entry system. According top Kotler, it is a system of bookkeeping in which as a rule only records of cash and personal accounts are maintained. This system has been developed by some business houses who for their convenience keep only some essential records. Since all records are not kept, the system is not reliable and can be used only by small business firms.⁹

⁹ Anthony, R.N. and J.S , Management accounting principles, Taraporewala,1975,p.11

2.12. Accounting books

2.12.1. Journals or books of prime entry

The primary function of the journals is to serve as formal connecting link between the source document of a transaction and the appropriate ledger accounts. The journals provide a chronological history of the transactions engaged in by a business firm. They provide more information regarding a transaction more than the ledger accounts and they show clearly the dual effect of each transaction. Journals are some times referred as daybooks.

The journal is used to describe the process of recording the various aspects of a transaction in one or more books of primary entry. A journal entry or the recorded transaction in a journal should include the following information:

Date of the transaction

Name of the account to debited and credited Amount to be debited and credited

A brief narration or explanation of the transaction

The journal will also contain a column for posting references or folio. This column will show which account numbers in the ledger the various entries have been posted. A general journal or journal proper is illustrated below. It is the simplest form of journal which uses two column formats. In a small business organization, a general journal serves the purpose of recording all accounting transactions.

General journal

Date

Description

Folio

Debit

Credit

As shown above, the general journal contains the following columns:

Date column: The date of the transaction is entered in this column, the year, month and date. It is not necessary to repeat the year and the month on the same journal page.

Description column: This column contains the debit and credit accounts and the brief explanation of the transaction. The account debited is written first and the account credited is written on the following line intended a little bit so as to distinguish it from the debit account. On the next line a concise explanation of the journal entry is written.

Folio column: This is posting reference column. It contains the ledger page or code number of the account into which the journal entry has been transferred or posted. This column is left blank at the time of journalizing and is filled in only when the posting is done from the journal to the ledger accounts.

Debit column: This column is for the amount debited.

Credit column: This column is for the amount credited.

2.12.2. Subsidiary journals or daybooks

These are journal which contain daily records or voluminous transactions of highly routine and respective nature such as credit sales, credit purchases, returns of goods, cash receipts, and cash disbursements. E.g. each special journal is reserved for a particular type of document transactions data as it is shown below:

Special or subsidiary journal	Source document transaction data
1. cash payment journal	Payment of cash			2. cash receipt journal
Receipt of cash	3. Petty cash book
Petty or minor cash disbursement
4.Three column cash book	Receipts and payments of cash, cheques including a record of each discount allowed and received.
5. Analysis cash book	Multi columnar record of receipts and payments of cash and cheques.				6. Sales journal
Sale of merchandise or goods on credit.	7. Sales return journal
Return of goods previously sold on credit.	8. Purchase journal
Purchase of merchandise or goods on credit.	9. Purchase return journal
Return of goods to supplies previously bought on credit.

10

2.12.3. The ledger

A ledger is the book of accounts where in the entries transactions recorded in the journal are summarized. The process of transferring the entries in a journal to the appropriate accounts in the ledger is called posting. The two kinds of ledger are; general ledger and subsidiary ledger as it the case of the journal.

Classification of accounts in the ledger

All accounts are calcified either as personal accounts or as impersonal accounts. Personal accounts are those of debtors and creditors. Impersonal accounts are divided into real accounts and nominal accounts.

Real accounts: Refer to accounts in which properties are recorded and they remain open. They include assets like building and machinery, liabilities and owner's equity.

¹⁰ S.N Maheshwari, an introduction to accountancy, fourth edition, 1996

Nominal accounts: Are concerned with revenues and expenses and they are closed at the end of each accounting period, for example salaries expenses and sales.

Mixed accounts: These are accounts containing both real and nominal components, which are separated in adjusted entries at the end of the accounting period, for example, office supplies, inventory and stationeries.

After the ledger, the trial balance is prepared. A trial balance is listing, in ledger accounts order, of the individual ledger accounts and their respective balances and adding together the debit balance at the same time adding all the credit balances.

A trial balance has two purposes in the accounting information processing cycle. It provides a check on the equality of the debits and credits as shown in the ledger accounts at the end of the period. It provides financial data in a convenient form to help in preparing financial statements.¹¹

2.13. Source documents

The major source documents used in accounting are as follows;

Invoice: Confirms details of goods ordered or purchased by a customer. Invoices are generally used to provide a document for a credit transaction. It is usually to include details of the credit terms that is the credit period offered and discount offered.

There are two types of discounts:

Trade discount: Given to firms that are trading in the same merchandise and are likely to return for future orders. This discount is calculated when the invoice is prepared and may be deducted from the sales total shown on the invoice.

Cash discount: This is given to customers for prompt payment. It is an inducement for customers to pay the amount owing within the credit term. The discount is calculated only when the customer pays and is not shown in the invoice but in the official receipt.

¹¹ Anthony, R.N. and J.S , Management accounting principles, Taraporewala,1975,p.11

Official receipt: These are documents which evidence cash transactions. They are issued or received when cash is paid or received.

Credit notes: These are used to describe any items sold on credit. Which are being returned to the firm by its customers. Goods returned may be defective, damage or of inferior quality than what was ordered and invoiced.

Debit notes: These are the opposite of credit notes and are used to describe details of goods bought on credit, which are returned by the firm to the suppliers. The amount corresponding to the goods returned will be deducted from the amount owing.

2.14. Other source document

Authority to incur expenses: This is statutory authority vested in a person known as an accounting officer to make payments out of public funds for services for which parliament has decided upon by statute. Once this power is exercised the authority to incur expenditure provides financial information as to the occurrence of the transaction.

Minutes: It is a record of the business transacted at a meeting. Minutes are source documents for authority to transact major non trading financial activities in the business such as the purchase of new assets not for resale but for use in the business.

Resolution: This is the acceptance of the proposal, for example to incur expenditure, put forward for discussions and decision at a meeting , after it has been put to vote and agreed to by the necessary majority at the meeting. It is a source of transactions data relating to expenditure of material nature outside the normal activities of the firm.

Cheque: This is a written order from a bank current account holder addressed to his bank to pay a stated sum of money to or to the order of the person named on the order or to its bearer. A cheque has a detachable tally or counterfoil containing a summarized record of the contents of the cheque and it shows transactions data on payments made by cheque.

Voucher: This is a document in which every obligation that the business organization incurs is recorded. It serves as a written authorization to pay cash or to issue cheques and is usually signed by the appropriate authorized officer of the firm.

Bank statement: This is a document issued periodically for example monthly or quarterly by the bank to its customer informing him of the state of his financial affairs at the bank. As the customer maintains a record of his bank account in his own books the bank statement is issued to sort out any difference between the two in a process called bank reconciliation.

Current account deposit slip: This is a sheet used to record the deposit of money into an account in the bank. It is written evidence that money has been deposited into the bank account.¹²

2.15. Use of source documents

· Initiate transactions and report their occurrence.

· Authenticate raw data that are input into the accounting system.

· Provide verifiable legal evidence of completed financial transactions.

· They are properly written sources of accounting information covering various transactions undertaken in the business during a given accounting period.

· They are occasionally used as media of contract between the firm and outsiders who deal with it from time to time.

· An underlying document, they are a basis or springboard for introducing transactions data into the accounting system.¹³

¹² I.M. pandey, financial management, seventh edition

¹³ S.N. Maheshwari, advanced accountancy(volume 1), fifth edition, 1995

2.16. Developing an accounting system

According to WEYGANDT, KIESSO, and KELL good accounting systems do not just happen. They are carefully planned, designed, installed, managed and refined. Generally, developing an accounting system involves the following four phases:

Analysis: This involves determining the internal and external information needs. It is identifying sources of information and the needs for controls, studying alternatives. If an existing system is being analyzed, its strengths and weaknesses must be identified.

Design: For a new system, forms and documents must be selected from alternatives, job descriptions must be prepared and equipments must be selected. Successful system design depends to a large upon the creativity, experience and capabilities of the designer. Redesigning an existing system may involve only minor changes, a complete overhaul or replacement of a manual system by a computerized system.

Implementation: Whether a new system is created or an existing is revised, the plan and design have to be implemented. New or revised documents, procedures, reports and processing equipment must be hired, trained and closely supervised through a start up or transition period.

Follow up: After the new or revised system is operational, it must be evaluated and monitored for weaknesses and break downs. Furthermore the effectiveness and efficiency of the system must be evaluated in relation to design and operational objectives. Corrections in design or changes in implementation may be necessary. Both internal and external audit procedures provide feedback and follow up assurances in regard to the soundness of the system.¹⁴

2.17. Financial statements

A firm communicates financial information to the users through financial statements and
reports. The financial statements contain summarized information of the firm's financial
affairs, organized systematically. They are means to present the firm's financial position to

¹⁴ Kieso, D.E and Weygandt, J.J, Intermediate accounting, John Wiley,1980, p.3-8

users. The preparation of financial statements is the responsibility of top management. As these statements are used by investors and financial analysts to examine the firm's performance in order to make investment decisions, they should be carefully prepared and contain as much information as possible.

There are four types of financial statements to be prepared by the firm for the users of accounting information. These statements are:

Balance sheet (statement of financial position) Trading, profit and loss account (income statement) Fund flow statement

Cash flow statement

These statements are contained in the company's annual report. A typical annual report also includes the chairman's speech, the director's report, the auditor's report and accounting policy changes. For internal management purposes, i.e. planning and controlling, much more information than contained in the published financial statements is needed. Therefore, the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management and external decision making.

2.17.1. Balance sheet (statement of financial position)

The purpose of balance sheet is to report the financial position of a business at a particular point of time , that is :

Assets = liabilities + owners equity

Assets: These represent the resources owned by the entity. Assets are divided into current assets and fixed assets.

Current assets: These are cash and other assets, which are reasonably expected to be realized in cash or consumed during the normal operating cycle, or within one year whichever is longer, for example cash, account receivable, inventory, etc.

Fixed assets: these are long live assets that were acquired for use during operations and have a life span of more than one accounting period.

Liabilities: Liabilities are the debts of the entity. Owners' equity represents the interests of the owners. The heading specially identifies the name of the entity, the title of the report, and specific data of the statements.

2.17.2. Statement of cash flows (statement of resources and application)

Business requires substantial cash for operations expansion. Cash comes primary from four sources, that is,

Owner's investments,

Loan or borrowing,

Earnings,

And selling of non cash assets.E.g.sale of cars.

The objective of the statement of cash flow is to communicate to decision makers' information about the inflow and outflows of cash.

Cash resources inflows)...cash use s(outflows)= Net change in cash.

Notice that the heading is dated the same as the income statement because it covers a period of time.

2.17.3. Trading, Profit and Loss account (income statement)

The profit and loss account starts with the credit from the trading accounts in respects of gross profit(or debit if there is gross loss).

There after, all those expenses or losses, which have not been debited to the trading accounts, are debited to the profit and loss accounts. If there is any income besides the gross profit, it will also be transferred to the credit of profit and loss account.

A fundamental principle for preparing the trading, profit and loss account, is the expenses and incomes for the full trading period, but only for the trading period, are taken to the profit and loss account (trading accounts). This means that, if any exspenses has been incurred but not yet paid for, a liability for unpaid amount must be credited before the accounts can be said to show the true picture. All the expenses accounts should be properly adjusted. This flows from the accrual concept. It is common practice, e.g. to pay salaries on the first day of the next

month. Salaries on March are generally paid in April if accounts are being made up to 31^st March. Salaries outstanding account is liability and will appear in the balance sheet.

The above is true for all expenses, whichever expense relating to the trading period has not yet been paid. Must be adjusted to show its correct position by means of an entity debiting the expense accounts and crediting expense outstanding accounts. ¹⁵

2.18. Objectives of financial statements

Financial statements are prepared from accounting the records maintained by the firm. The general accepted accounting principles and procedures are followed to prepare these statements. The basic objective of financial statements is to assist in decision making process. The other objectives are:

To provide reliable financial data about economic resources and obligations of a business enterprises;

To provide reliable data about changes in net resources (resources minus obligations) of an enterprise that result from the profit directed activities;

To provide financial data that assists in estimating the earnings potential of an enterprise;

To disclose to the extent possible other information related to the financial statement that is relevant to statement users.¹⁶

2.19. The qualities of accounting information

The accounting information must have some qualities in order to its users. These qualities will help to avoid the misleading. These qualities are:

¹⁵ ACCA paper 2.6, preparation of financial statements, 2006

¹⁶ ACCA paper 1.1, preparation of financial statements ,2003

Relevance: the information should be relevant enough to the needs of the users, so that it helps them to evaluate the financial performance of the business and to draw conclusions from it.

Reliability: the information should be of a standard that can be relied upon by external users, so that it is free from errors and can be depended upon by the users in their decisions. Comparability: accounts should be comparable with those of other similar organizations and from one period to the next.

Understandability: the information should be in a form that is understandable to the user groups.

Completeness: accounting systems should show all aspects of the organization.

Lack of bias: accounting statements should not be biased towards the needs of one user; they should be objective oriented.

Timeliness: accounting information should be published as soon as possible on a periodic basis.¹⁷

2.20. The needs of an accounting system

An accounting system is an important tool whose existence is undoubtedly important. Accounting is termed as the language of business. The basic function of the language is to serve as a mean of communication. Accounting also communicates the results of organization's operations to various parties who have some stake in the business, i.e. the proprietor, creditors, investors, government and other agencies. Though accounting is generally associated with business, it is not only the business that makes use of accounting.

The need of an accounting system is all the more great for the person who is running a business or any other organization. He must know what he owns, what he owes, whether he has earned a profit or suffered a loss on account of running a business, what his financial position is i.e. whether he will be in a position to meet all his commitments in the future or whether he is in the process of becoming bankrupt.

Thus, an accounting system is designed to accumulate data about an organization's financial affairs, classify the data in a meaningful way and summarize it in periodic reports called financial statements.¹⁸

¹⁷ Rajeshwar kumar sharma and R.S popli, principle and practice of financial accounting, seventh edition, 1994

2.21. The accounting objectives to be considered while designing an accounting system

i) Control over property and assets of the firm: The accounting system should be designed in a way that up to date information about various assets that the firm possesses is ready available. Similarly, it should also provide up to date information relating to the liabilities of the firm so that neither the assets of the organization get misappropriated nor any rightful payment is withheld.

ii) Preparation of the financial statements of accounts: The term final statement includes the income statement and the balance sheet of the organization. These days, most of the business is being carried on by the joint stock companies.

iii) Information to management for rational decision making: We have seen that accounting is a service activity. Its function is to provide information, primarily financial in nature, about economic entities that are intended to be useful in making economic decisions in making reasoned choices among alternatives courses of action.¹⁹

2.22. The limitations of accounting

Accounting information is not free from bias

Some examples show this limitation; The inventory cost may be ascertained by FIFO or LIFO methods or the stock can be valued at cost price or market price. An other example is the depreciation of assets which can be charged differently and give different results. Thus the lack of objectivity may cause the income to not be true in some cases.

Provide only limited information

There are now no set patterns of business on account of radical changes in business
activities. Expenditure may not bring an immediate advantage to the business but it may

¹⁸ Accounting principles board(APB) statements No.4, basic concepts and accounting principles underlying financial statements of business enterprises, American institute of certified public accountants, 1870, p.40 5 Ibid, p. 76-84

¹⁹ S.N. Maheshwari, cost and management accounting, eighth edition,1999, P.A.4-A.5

have to be incurred because it may bring advantage to the business in the long run or may be necessary simply to sell the name of the business. The management needs a lot of varied information to decide whether on the whole it will be justifiable to incur a particular expenditure or not. Financial accounting fails to provide such information.

Treats figures as single, simple and silent items

Financial accounting fails to make people realize that accounting figures are not mere isolated phenomena but they present a chain of purposeful and pertinent events. The role an accountant these days is not only of bookkeeper and auditor but also that of financial adviser. Recording of transactions is now the secondary function of the accountant. His primary function now is to analyze and interpret the results.

Provides only a post mortem record of business transactions

It records transactions only on historical basis. These days' business decisions are made on the basis of estimates and projections rather than historical facts. Of course, past records are helpful in making future projections but they alone are not sufficient. Thus needs of modern management demand a break up from the principles and practice of traditional accounting.

Considers only quantifiable information

Financial accounting considers only those facts that are capable of being quantitatively expressed. In modern times, the concept of welfare state has resulted in increased government interference in all sectors of the national economy. The management has therefore to take into account government decisions over and above purely commercial considerations. Some of these factors are not capable of being quantitatively expressed and hence their impact is not reflected in financial statements.

Fails to provide informational needs of different levels of management

Company form of business organization has divorced ownership from management. The shareholders are only the providers of capital. The business is run in reality by different executives; search an expert in his area. These executives have powers based on the level of management to which they belong. There are usually three levels of management; Top, middle and lower managements. The type of information required by each level of

management is different. Financial accounting does not have a built in system to provide all such information.²⁰

2.23. Definition of SMEs

The definition of and small medium enterprises generally vary from country to country depending on the economic and socio political context of the country. In some countries different institutions adopted different definitions depending on the objectives to be achieved that is assigned to the sector.

The SMEs categorization is used to mean micro, small and medium enterprises. It is some times referred to as micro, small and medium enterprises (MSMEs). The SMEs cover non farm economic activities mainly manufacturing, mining, commerce, cervices and agro business.

There is no universally accepted definition of SMEs. Different countries use various measures of size depending on their level of development. The commonly used yardsticks are total number of employees, total investment, and total sales turnover.

In the case of Rwanda, there is no commonly accepted definition by all the intervening institutions. The most commonly used definition is that of Rwanda development bank. It is based on the criteria as net investment, turnover and employment as follows:

Size of the enterprises	Net capital investments in million FRW	Annual turnover in million FRW	Employment number
Micro enterprises	Less than 0.5	Less than 0.3	Less than 3
Small enterprises	0.5 to 15	0.3 to 12	3 to 30
Medium enterprises	15 to 75	12 to 50	30 to 100
Large enterprises	More than 75	More than 50	More than 100

(Source : Etude sur le secteur des petites et moyenne industries et de l artisanat au Rwanda MINIMART/ SERDI, Mai 1990)²¹

²⁰ Anthony, R.N. and J.S , Management accounting principles, Taraporewala,1975,p.11

²¹ Etudes sur le secteur des petites et moyennes entreprises et de l'artisanst au rwanda MINIMART/SERDI, 1990

General orientation of SMEs

The SMEs policy lies within the scope of the key development orientations of our country, practically;

Vision 2020: The vision's targets attributes emphasis to the development of SMEs in the following ways:

The modernization of agriculture and diary farming whereby, by 2020 50% of the population will be employed by the agriculture sector instead of 90% and the private sector will be employing the remaining 50%. In regard to the development of the private sector, the SMEs will help to guide the medium income earner's efforts in investment and development.

Importance of SMEs

Given that the situation and the fact that Rwanda is characterized by low rate of capital formation, SMEs are the best option to address this problem. SMEs tend to be more effective in the utilization of local resources using simple and affordable technology. They play a fundamental role in utilizing and adding value to local resources. They have been tested and trusted to be labor intensive, to create employment at relatively low levels of investment per job created.

Their development can be of an immense importance to Rwanda because they facilitate the distribution of economic activities within the economy and thus foster equitable income distribution. Furthermore SMEs technologies are easier to acquire, transfer, and adopt. Also, SMEs are better positioned to satisfy limited demands brought about by small and localized markets due to their lower overheads and fixed costs.

Moreover, SMES owners tend to show grater resilience in the face of recessions by holding on to their businesses, as they are prepared to temporally accept lower compensation. They have great potential to complement large industries through business linkages, partnerships, and subcontracting relationships. A strong and productive industrial structure can only be achieved where SMEs and large enterprises not only coexist but also function in a symbiotic relationship.

However due to the above and the fact that the government of Rwanda support for SMEs is limited and scattered, SMEs policy therefore creates the potential for enhancing linkages within the economy. As said by Michael porter (strategy guru in Kigali, June 2007) you can never be competitive just by copying best practices, instead you must learn from them; this requires innovative brains. SMEs act as a training ground for entrepreneurship and managerial development and enable motivated individuals to find new avenues for investment and expanding their operations.

Since, SMEs development does contribute significantly to poverty alleviation, resources earmarked for poverty alleviation should also be availed to the SMEs sector. Various initiatives towards improving infrastructures and especially roads do provide an added opportunity for SMEs development.

Constraints faced by SMEs in Rwanda

In general SMEs in Rwanda are faced with distinctive problems including:

Underdeveloped business development services

SMEs operators lack information as appreciation for such services and can hardly afford to pay for the services. As a result, operators of the sector have rather low skills.

Limited of access to finance and lack of permanent premises

Further more, there is no uniting body, association or an umbrella for SMEs in Rwanda at the moment and apparently, there is no clear coordinated guidance framework and policy for the development of the sector.

2.24. Accounting system for SMEs

Many accounting guidelines and standards govern the recording and reporting of transactions. Transactions and accounting ledgers are part of a larger, complex system for controlling firms and reporting on their sources and uses. In this system accountants are responsible for showing the movement of funds throughout the institutions. They record how funds are received and used and what resources are used to produce or deliver goods and services.

To do this, they need a chart (or list) of accounts. Similar to a database structure, the chart of
accounts provides accountants with a structure for posting transactions to different accounts

and ledger. It also determines what appears in the financial statement. The chart of account typically designates each account by:

An account number

A description; for example national bank checking account, or accrued salaries, HQ staff.

The type of account, such as asset, liability, equity, income, or expenses. A bank account is categorized as an asset, for example and salaries are categorized as expenses.

For SMEs the accounting system can be a simple manual one based on the general journal (where transactions are recorded chronologically as debits and credits), general ledger ( where activities from general journal is summarized by account number) , and other journal required to manage the business, such as purchase, payment, sales receipts, and payroll journals.

Because the expenses of maintaining multiple manual journals, enterprises typically do not prepare all of these other journals.

A manual accounting system typically includes at least the following: Chart of accounts

General journal

General ledger

Subsidiary ledgers ( accounts receivable, inventory, fixed assets) Transaction reports

Financial statements²²

22 Rwanda revenue authority Tax department's reports

CHAPTER THREE: RESEARCH METHODOLOGY

3.1. Introduction

In reference to the book of social research methods; by Richard M.Hesseler, research methodology is the science of how to make a research decisions and it includes the practice of evaluating the goodness and the badness of decisions made in the course of doing the research.

In this party of the study, I presented the methodology that was used to investigate the accounting system used in SMEs in Rwanda of which the Inyange industries was selected as the case study for the research.

The research methodology explains in details the sampling methods, sample size, data collection methods, and data processing and analysis methods.

3.2. POPULATION:

This is the totality of the persons or objects to which the research is concerned. A properly designed population must be well defined in terms of elements, sampling units, and extent of time. This research considered all employees and staff of INYANGE INDUSTRY in different departments.

3.3. SAMPLING SIZE:

As the population of the study was the different staff and employees of INYANGE INDUSTRY in different departments, it was not possible and scientific for the researcher to collect all information from the whole population, for this reason, a number of 20 staffs and employees was be selected as the sample size for the study.

3.4. DATA COLLECTION METHODS

The researcher proposes to use primary and secondary data for this study in order to get clear and concrete information.

Primary data:

Are those that were collected at source for the first time by the research trough the interview, questionnaires and direct observation?

Interview method:

This is the presentation of oral stimuli and reply in terms of verbal responses. This can be personal or collective. This method was conducted through telephone lines and face to face conversations.

Observation method:

The research collects the relevant data about the study through unstructured observation where he or she records information as it occurs. This is referred to what he or she saw by his or her own eyes and how he or she conceives it.

Questionnaire method:

This is a written form of questions prepared by the researcher to be answered by the respondent about the study to achieve its set goals and objectives. A draft of questions was provided different interested respondents for answers.

Secondary data:

Those were collected from previous researcher's records or documents like newspapers, magazines, journals, and other documents from the library for example.

3.5. DATA PROCESSING

This is the link between the data collection and the data analysis. It is requires that information gathered from the field be processed into a more clear and meaningful format for interpretation and analysis. It comprises with editing and tabulation.

Editing:

The activity to be performed after data collection. It is a recess of revaluation and collection of errors either in fact or judgment it involves correction of spellings, punctuation and capitalization. This was used to examine relationship between the responses from respondents and the questions asked to them.

Tabulation:

This deals with putting data into some kind of statistical tables or format showing the number of occurrence of responses to particular questions .After editing and tabulation the researcher interpreted the data to show the relationship between variables.

3.6. ORGANIZATION OF THE STUDY

The first chapter: Includes the introduction of the project in order to have a clear understanding of what was researched about. It gives also the objectives, significance of the study, scope and limitations of the study.

The second chapter: Concerned the existing literature about the research topic to make the research more objective oriented. The researcher visited the libraries, read relevant text books, and made research on internet.

The third chapter: Gives and explains the methodology used to collect data and sampling techniques. The researcher used questionnaires and observation method to collect primary data and literature review for the secondary data.

The fourth chapter: This referred on the analysis and interpretation of the collected data to put them into meaning full information about the research topic in a view of getting to interpret it basing on real facts.

3.7. LIMITATIONS FOR THE STUDY

( The time provided for the study was not enough for the researcher to collect all the information necessary.

( The financial means for the study was insufficient to provide all requirements as the prices for every thing in the market was increasing day to day.

( The respondents had heavy work and do not provide the information on time. Some also
did not understand the objective and the importance of the study and think otherwise.

( Some might not give true information for their own reasons. Accounting records are kept secretly in many organizations and therefore the problem of not having access to important data for effective research.

CHAPTER FOUR: DATA ANALYSIS AND INTERPRETATION Introduction

This chapter deals with the presentation, analysis and interpretation of data. it gives details on various responses provided by different respondents and the personal observation of the investigator. The findings are in line with the research objectives mentioned earliest in the first chapter. Data was analyzed using qualitative and quantitative techniques. The researcher used quantitative techniques to calculate numerical and emotional aspects of the respondents.

Table1. Existence of the accounting system

Answers	Number of respondents	Percentages
Yes	20	100%
No	-	-
Total	20	100%

Source: Primary data

The above table indicates that 100% of the respondents said that the accounting system exists in their organization (Inyange industries). This number of respondents also said that the accounting system is computerized and the study revealed that the sage 100 accounting software is used to record transactions into the system.

The fact that the accounting system of Inyange is computerized indicates some how the effectiveness of the system. The computerized accounting system avoids errors and misstatement while recording and processing accounting transactions and information. But the researcher revealed that the system is not updated and there are no technicians and skilled persons to install and use the system effectively.

Table2. Main considerations while choosing accounting software

Answers	Number of respondents	Percentages
Effectiveness	5	25%
Efficiency	4	20%
Easy manipulation	4	20%
Cheapness	2	10%
Quick report preparation	5	25%
Others	-	-
Total	20	100%

Source: primary data

The above table shows that the company has main considerations while choosing the accounting software to adopt within its accounting system. As shown in the above table, out of 20 respondents 5 said that the main consideration is effectiveness; 4 said that the main consideration is efficiency; 5 said that the main consideration is quick report preparation; 4 said that the main consideration is easy manipulation; and the 2 remaining said that it is cheapness.

The study revealed that accounting software is only used when the company's accounting system is computerized. This is important because it improves the effectiveness of the accounting system in the company in that it helps the company to achieve its set objectives. Another fact is that it allows the users of accounting system to execute many transactions in the short period of time at a minimum cost. It also allows users of accounting information to get information on time and make necessary decisions.

Table3. Basic point while designing accounting system

Answers	Number of respondents	Percentages
Number of transactions	3
Nature of the business	8
Size of the business	9
Others	-	-
Total	20	100%

Source: Primary data

The table above shows the responses from respondents on the basic point the company considers during the designing of an accounting system. Out of 20 respondents, 3 said that the basic point to consider is the number of transactions; 8 said that the designing of an accounting system is based on the nature of the business and 9 said it is based on the size of the business. As shown in the chapter 2 of this study every accounting system of any organization must depend on two main things said nature and size of the business.

Table4. Method used to record the financial transactions

Answers	Number of respondents	Percentages
Double entry	20	100%
Single entry	-	-
Total	20	100%

Source: Primary data

According to the study the company (inyange) uses a double entry accounting method to record its financial transactions. 100% of the respondents who had been given questionnaires said that the double entry method of accounting is used by the company while recording its financial transactions. This method of accounting gives operational support for the accounting equation framework that is the total economic resources of the business (its assets) must always be equal to the sources of funds (liabilities and equity) which were used to acquire those resources.

Table5. The education level of the Inyange's chief accountant

Answers	Number of respondents	Percentages
Professional level (ACCA, IACPA, etc	-	-
PHD	-	-
Post graduate	-	-
Undergraduate	20	100%
Diploma	-	-
Secondary education	-	-
Others	-	-
Total	20	100%

Source: Primary data

The table above shows the education level of the chief accountant of Inyange industries. A 100% of the respondents said that the chief accountant of Inyange is an undergraduate level in education. As the requirements of IAS (international accounting standards), a chief accountant should be a professional accountant from professional certified accountants like; ACCA, IACPA, etc or at least with a postgraduate level from a recognized institution or university.

Table6. The designer of accounting system in Inyange industries

Answers	Number of respondents	Percentages
Director of administration and finance	4	20%
chief accountant	-	-
General director	16	80%
Accounting experts	-	-
Others	-	-
Total	20	100%

Source: Primary data

The table above shows the person responsible of designing an accounting system of Inyange industries. Out of 20 respondents, 16 said that the general director of the company is the one responsible for the designing of its accounting system; 4 said that the director of administration and finance has the responsibility of designing the company's accounting system. This indicates that 80% of respondents agreed that the designer of the accounting system is the general director.

The study revealed that the general director of Inyange industries is the owner of the same and he is responsible of the management, the designing of the accounting system. this means that there is separation of duties in the organization and the principle of separate entity which state that the business should be separate to its owner has been violated. The researcher revealed that Inyange industries are managed like a family holding property and this affected negatively its growth and development.

Following the rules governing companies the responsibility of designing accounting system should be in the hands of the DAF or chief accountant who has enough skills in accounting matters and who work with accounting information the most of time and due the these reasons who is familial with accounting problems.

Another fact of ineffective accounting system is that because the responsibility of designing the accounting system is in the hands of one person, there is no variety of ideas from different skilled people about the designing of the system. An effective accounting system might be designed by more than one person to be able to take into consideration all aspects of the accounting transactions and an external expert consultant had to be contacted and gives his contribution if necessary.

Table7. Basis of accounting used in Inyange industries

Answers	Number of respondents	Percentages
Cash basis	5	25%
Accrual basis	15	75%
Total	20	100%

Source: Primary data

The table above shows the basis of accounting used by inyange industries in its day to day opera ratios. 75% of the respondents said that inyange uses accrual basis of accounting in its day to day operations and 25% of the respondents said that inyange uses cash basis of accounting in its day to day operations. This means that the company uses both the two basis of accounting.

The study revealed that the cash basis of accounting is not recognized by the general accepted accounting principles. Only the accrual basis of accounting is recognized and recommended by the general accepted accounting principles to be used by any business organization.

This accrual basis recommended states that only revenue s are recognized when the sales are made rather than when cash is collected and the expenditures are recognized only when things are used or serves are consumed rather than when cash is paid for. This basis is very important that it enables to present a meaningful picture of profit earned and loss suffered and the financial position of the business.

Table8. The use of source documents

Answers	Number of respondents	Percentages
0-25%	-	-
25-50%	4	20%
50-75%	10	50%
More than 75%	6	30%
Total	20	100%

Source: Primary data

The table above shows the use of source documents in Inyange to verify the accuracy for each recorded transaction. out of 20 respondents, 4 said that the source documents is used at the rate of 25 to 50% and 10 said that it is used at the rate of 50 to 75% and 6 said that it is used at the rate which is more than 75%.

The study revealed Inyange uses source documents to verify the occurrence of each financial
transaction recorded in the system. This helps the person responsible for recording
transactions in the system to minimize the number of errors and correct them easily when

occurred. The fact that each transaction is supported by a source document controlled by the auditor provides hope that the accounting information obtained is accurate and reliable.

Such information one of the indicators of effective accounting system and it is used by many different people in decision making process.

Table9. Compliance with the general accepted accounting principles

Answers	Number of respondents	Percentages
Yes	20	100%
No	-	-
Total	20	100%

Source: Primary data

The table above indicates the compliance of accounting system used in Inyange with the General accepted accounting principles. The 100% of the respondents agreed that the accounting system of inyange complies with the general accepted accounting principles. The researcher revealed that even if the respondents said that the compliance with GAAP is 100%, there are some principles which were found violated like separate entity concept, materiality concept, accrual concept, etc.

The requirements state that the business organization should consider all accounting principles without any exception because of their importance in the development and growth of the company and well running of operations. GAAP being rules and regulations of action or conduct adopted by accountants universally while recording accounting transactions, they should be considerably needed and followed by any company during the time of recording its financial transactions into the accounting system.

Table10. Level of compliance with general accepted accounting principles

Answers	Number of respondents	Percentages
0 to 25%	2	10%
25 to 50%	15	75%
50 to 75%	3	15%
More than 75%	-	-
Total	20	100%

Source: Primary data

This table shows the level of compliance of accounting system with the General accepted accounting principles. Out of 20 respondents, 2 respondents said that the level of compliance is at the rate of 0 to 25%; 15 said that it is at the rate of 25 to 50% and 3 said that it is at the level of 50 to 75%.

The study revealed that the level of compliance with general accepted accounting principles is not sufficient as the required level is at 100%. The fact that the accounting system of inyange does not comply with general accounting principles 100%, the company does not operate properly and then its growth is very slow. And its set objectives are not achieved as intended.

Table11. Effectiveness of Inyange's accounting system

Answers	Number of respondents	percentages
0 to 25%	-	-
25 to 50%	15	80%
50 to 75%	5	20%
More than 75%	-	-
Total	20	100%

Source: Primary data

The table above shows the level of effectiveness of the accounting system of Inyange. Out of 20 respondents, 15 said that the effectiveness level of inyange's accounting system is at the rate of 25 to 50% and 5 respondents said that it is at the rate of 50 to 75%.

The study revealed that as 80% of the respondents agreed that the level of effectiveness is at the rate of 25 to 50%, this level is not sufficient to allow the to perform its operations effectively and efficiently. Inyange should improve the level of effectiveness for its accounting system.

Table12. Training of accounting staff

Answers	Number of respondents	Percentages
Yes	20	100%
No
Total	20	100%

Source: Primary data

The table above provides responses concerning the training of accounting staff of the Inyange from the different respondents. 100% of all the respondents said that the accounting staffs of Inyange get training to develop their accounting skills and enhance their performance in business operations. This indicates that they do not get enough training to develop their and acquire new accounting knowledge and skills so that they can be able to perform their tasks as intended and achieve the set company's objectives.

Table13. Training subjects for accounting staff

Answers	Number of respondents	Percentages
Compliance with the GAAP	-	-
Adaptability to changes in accounting system	-	-
Maximization of profit with accounting system	5	20%
General accounting knowledge	15	80%
Others	-	-
Total	20	100%

Source: Primary data

The table above represents the subjects on which inyange's accounting staffs are trained. 20% of the respondents said that the inyange's accounting staffs are trained on the maximization of profit with the accounting system and 80% of the respondents said that they are trained on the general accounting knowledge. During the period of training the management of the company should ensure that the training covers all the subjects necessary to improve knowledge and skills of its accounting staffs, so that they can be able to adapt to changes in accounting matters following in technologies and in business applications.

Table14. The best doing of the company to improve its accounting system

Answers	Number of respondents	Percentages
Yes	8	40%
No	12	60%
Total	20	100%

Source: Primary data

The table above shows responses from different respondents about the best doing of the company (inyange) to improve its accounting system. Out of 20 respondents, 8 said that the company does the best to improve its accounting system and 12 said that the company does nothing to improve its accounting system. From the data, the researcher revealed that Inyange does not take care of its accounting system and due to that it can not improve its growth and development.

The study revealed that for any company to succeed in achieving its set objectives, it should make more emphasis on its accounting system and do all possible to improve that accounting system. This helps the company to improve its success as the accounting system of any organization deals all aspects in the business organization. If the company's accounting system is not improved, it is easy for that company to run out of business operations.

Table15. The preparation of budget for well designing of accounting system

Answers	Number of respondents	Percentages
Yes	4	20%
No	16	80%
Total	20	100%

Source: Primary data

The table above shows if the company prepares budget for the well or effective designing of its accounting system. Out of 20 respondents; 4 respondents said that their company prepares budget for the well designing of its accounting system and 16 respondents said that the company does not prepare budget for effective designing of its accounting system. With other methods used by the researcher, the study revealed that no budget prepared for that. For a company to be able to design effective accounting system, it should have a budget of expenses reserved for the well designing of that accounting system. Otherwise, a company can not design its accounting system perfectly.

Table16. Having an internal control system

Answers	Number of respondent5s	Percentages
Yes	20	100%
No	-	-
Total	20	100%

Source: Primary data

The table above indicates whether the company (Inyange) has an internal control system to prevent the occurrence of material errors and frauds. A 100% of the respondents said that there an internal control system in the company to guarantee the effectiveness of the management and prevent errors and frauds. The researcher with other methods used in his research like interview and personal observation, he discovered that the internal control system of Inyange industries is weak and can not prevent errors and frauds as intended.

The fact that the internal control system of the company is not strong enough to be able to prevent errors and frauds and safeguard the company's assets may cause an ineffective accounting system and the mismanagement of the funds of the firm and lead to running out of business for the firm. A strong internal control system prevents errors and frauds during the firm's business operations and protects its assets and resources from being misused.

Table17. Preparation of financial statements

Answers	Number of respondents	Percentages
Yes	20	100%
No	-	-
Total	20-	100%

Source: primary data

The table above shows preparation of financial statements. A 100% of the respondents agreed that Inyange industries prepare the financial statements to report financial information to the users and assess the company's financial position.

The study revealed that the company prepares its reports annually in the form of; trading, profit and loss account, trial balance, balance sheet, cash flow statement and fund flow statement to be used by the users of accounting information in the process of making different accurate decisions.

The fact that accounting information is used or relied on by many different people, the ineffective accounting system will affect not only the operations of the company using it, but also the operations of users of accounting information who had relied on the information provided by that ineffective accounting system while making their decisions.

Table18. Preparation of books of accounts

Answers	Number of respondents	Percentages
Yes	20	100%
No	-	-
Total	20	100%

Source: Primary data

The table above shows whether the company (inyange) the books of accounts. 100% of the respondents said that the company (inyange) prepares books of accounts where all its financial transactions are recorded and summarized in order to enable the preparation of different report at the end of the accounting period.

The study revealed that the company prepares the books of accounts like journals including purchase journal, sales journal, cash journal, general journal, purchase returns journal and sales returns journal; ledger where summarized all the transactions recorded in the different journals; cash book including petty cash book and three column cash book; the trial balance and the bank reconciliation statement.

The study also revealed that the bank reconciliation statement is prepared annually and this is a long period because the errors may be with a big number and become difficulty at the time of correcting them. The advised period for the preparation of the bank reconciliation is at least using a weekly basis in order to be able to correct occurred errors earlier.

Table19. Accounting standard followed when preparing financial statements and books of accounts

Answers	Number of respondents	Percentages
International standard	20	100%
Regional standard	-	-
None	-	-
Total	20	100%

Source: Primary data

The table above shows the accounting standard followed by the firm while preparing the books of accounts and financial statements. A 100% of the respondents said that their company follows the international accounting standard in the preparation of books of accounts and financial statements.

The fact that the firm uses the international accounting standard while preparing its books of accounts and financial statements indicates that its accounting system can be improved and become effective to provide meaningful information to the users. Accounting information is relied on by many different users of financial data like employees, managers, owners, stakeholders and other interested parties.

General analysis of the organization's strengths, weaknesses, opportunities and threats (SWOT analysis)

Strengths

· High quality standards of its products

· Availability of the distribution process of its products to the customers

· Technical know how

· Good working conditions to the employees, which motivating

· Production of new quality products like vanilla yogurt, strawberry yogurt, and others

· A variety of quality services to its customers

Weaknesses

Inyange is a small and new company, this alone leads to various weaknesses, which are witnessed mainly within the management of the company;

· To start with; Inyange sarl has created of recent marketing department, meaning that the absence of this department for a period of time delayed the products awareness to some people

· Inyange's accounting department is headed by the chief accountant who does all the accounting work, serves as a financial manager and carries internal controls. This leads to failure to fulfill some important responsibilities because of their abundance.

· Lack of skilled personnel especi9ally in accounting field which leads to accounting errors in the preparation of books of accounts

· Underdeveloped human resource this is because human resource management is a responsibility of the director general who has a variety of other tasks to perform and therefore efficient human resource is more likely impossible

· Limited marketing and publicity strategies this is indicated by lack of systematic publicity measures and budget.

Opportunities

· Since inyange is an agro based business, it enjoys less competition because this business is still virgin with very low investments

· It produces with most of its raw materials purchased locally in Rwanda therefore it acquires its raw materials at favorable prices

· Since it produces mainly for the domestic market it easily understands its market

Threats

· Growing competition pressure form other similar product producing companies like Huye for mineral water, Rubirizi and Nyabisindu for milk, to mention but a few.

· Likely entry of new competitors

· Competition from foreign products that could be imported from COMESA and East
African community member countries by the time of free trade and customs union.

General challenges in the organization

Inyange is a new and small company that started its operations in 1999 like any other manufacturing firm; it faces a number of problems or challenges that are more specific due to its nature. These include:

· Seasonal raw materials, these lead to unstable supply from its suppliers and this is most evident during dry season.

· Price fluctuations in times of low production that is to say during dry season for example when there is low milk production

· Lack of skilled personnel

· The competition from other similar product processing campaigns like milk and juice products and which are deeply sold.

· Small market because of local processing of the same products like milk and juice products which are cheaply sold

· Like order businesses Inyange operates in a poor investment environment

· Payment of high government taxes

· Low purchasing power

CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONLUSION

5.1. Summary of findings

The summary of findings is done according to the objectives of the study by taking one objective after another.

The first objective of the study was to assess the effective and efficient use of source document by Inyange in its bookkeeping system. As it has been seen, the company uses source documents in its transactions recording process to insure the accuracy of its accounting information. We have noticed that the level at which inyange uses the source documents is not sufficient to justify each and every transaction recorded in the system while processing its financial information.

The second objective of the study was to assess whether the accounting system used in small and medium size enterprises specifically in inyange follows the general accepted accounting principles. A 100% of the respondents agreed that the inyange's accounting system complies with the GAAP but 80% said that the level of compliance is between 25 to 50%. This indicates that compliance with GAAP is not enough as the GAAP requires at least more than 75% level of compliance. The study revealed that there is some principles which are not followed in inyange's accounting system while processing the data like the principle of separate entity, principle of full disclosure, principle of conservatism, principle of legal aspects, principle of consistency and the principle of periodic costs matching and revenues.

The third objective of the study was to study the functioning and major problems of accounting system of inyange industries. The study revealed that accounting system of inyange is computerized and sage 100 accounting software is used to record orb process transactions in the system. This computerized accounting system is of paramount important of a business organization like inyange to help the company plan, organize, coordinate, manage and control its operations or activities efficiently and effectively.

The study also revealed that the accounting system of inyange faces the major problems like lack of qualified personnel to operate with the system, lack of enough financial resources to funds well being of the accounting system, lack of budget for the effective design of accounting system, lack best doing of the company itself to improve its accounting system, a weak internal control system to prevent errors and fraud in the system operations.

The fourth objective of the study was to examine the quality and qualification of workers working with accounting information in inyange industries. The study revealed that the quality and qualification of inyange's chief accountant are not sufficient as he is undergraduate level and the requirements are professional level for a person to be a chief accountant in a business organization. This worker has many different responsibilities meaning that there is no separation of duties in the company and this is more dangerous for the company' s business operations as it is difficult to determine the person to be liable for the wrong actions done.

The fifth objective of the study was to examine the flow of accounting information in different levels of management of inyange industries. This study revealed that the accounting information is needed and used in all levels of management of inyange industries during their decision making process. This shows that if the accounting system provides wrong information, it will affect the whole operations of the company as it its basis of making decisions at all management levels.

The last objective of the study was to give suggestions and recommendation for the better design of effective accounting system, better use of accounting information in order to improve the company's business operations and achieve its set objective.

5.2. Conclusion

The accounting is the language of business. For that reason it is an important area to be exploited by a business organization. It is the process by which financial information about the business is recorded, classified, summarized, interpreted and communicated to owners, managers and other interested parties. For a business organization ton achieve its set objectives, an effective accounting system is necessary. An effective accounting system is a cornerstone for the proper management and success of small and medium enterprises as it provides accurate information to be used in the decision making process.

Given that every business entity needs to maintain books of accounts in an orderly and timely basis, prepares financial statements and presents them to stakeholders, the academic enquiry was conducted on the accounting system used in small and medium enterprises to assess the effectiveness and efficiency of their accounting system, whether it complies with GAAP and identify the weaknesses.

The research shows that the accounting system of Inyange industries is neither effective nor efficient enough to guarantee the proper management of the company's business operations as regards to the weaknesses presented by it. The accounting system of Inyange industries do not comply 100% with the General accepted accounting principles. There are some principles that are violated as indicated in the summary of findings.

The researcher found out that there is no proper accounting system as there is lack of skilled labor, budget for a well design, and other materials necessary for the smooth running of accounting system in small and medium enterprises. Owing to benefits received from effective accounting system, this should be designed and ran by a qualified professional accountant as required by international accounting standards.

5.3. Recommendations

Owing to the benefits of an effective accounting system in business success, prior to conducting an academic enquiry on the accounting system used in small and medium enterprises in Rwanda, after analyzing and interpreting the data from Inyange industries, based on summary of findings and conclusion stated above and the SWOT analysis done by the researcher on the company, the following recommendations come in to address the stated problems:

To maintain all books of accounts and prepare financial statements in accordance with the international accounting standards and international financial reporting

SMEs in Rwanda should adopt the accounting plan that shows the complete accounting cycle. They should follow the following accounting plan;

Draw the chart of accounts

Record the daily transactions in official source documents

Prepare all different types of journals

Analyze and record the daily official documents transactions data in the journals Prepare all necessary types of ledgers

Post journal transactions data to the relative ledger accounts

Balance the accounts to ascertain the balances brought forward

Draw up the multicolumn trial balance from the accounts balances to test the accuracy of the ledgers

Update and adjust trial balance information with the amount relevant to the accounting period under review

Prepare all types of financial statements (trading, profit and loss account; balance sheet; cash flow and fund flow statements) from adjusted trial balance

Prepare the economic and statistical reports for decision making and future planning.

To comply with the General Accepted Accounting Principles GAAP

The accountants of Inyange industries should take care of GAAP while recording the business transactions and at the time of preparing the financial statements. All accounting conversions and concepts should be duly complied with so as to ensure that the accounting system operates in the normal way of recording business transactions.

Regular training for employees

When accounting is done wrongly it may loose its quality of providing the real facts of the business transactions and hence preventing errors and frauds. Thus the accounting profession requires a solid knowledge and experience in the accounting field. The SMEs especially Inyange industries should includes in its budget the training expenses to train both technical and administrative staff.

5.4. Suggestions for future researcher

The major shortcoming of this research is that it concentrated on one of the small and medium enterprises operating in Rwanda which is Inyange industries. However, the aim was to assess the effectiveness of accounting system used in all small and medium enterprises in Rwanda and suggest the way for improvement. Therefore other research studies can cover the totality of the whole small and medium enterprises operating in Rwanda for the purpose of exhaustive information in this regard.

BIBLIOGRAPHY

Books

· ACCA paper 2.5, preparing financial statements, June 2006, Foulklysh

· Accounting principles board(APB) statements No.4, basic concepts and accounting principles underlying financial statements of business enterprises, American institute of certified public accountants, 1870

· American accounting association, a statement of basic accounting theory, 1966,U.K

· Anthony, R.N.and J.S , Management accounting principles, Taraporewala,1975,

· I.M pandey, Financial management, seventh edition, venice

· Jill Hussey and Roger Hussey, Business accounting, second edition, 1996, florence

· M.C Shukla, T.S Grenal and S.C Gupta, Advanced accounting, ninth edition, New dheli

· Rajeshwar Kumar Sharma and R.S popli, principles and practices of financial accounting, seventh edition,1994, New dheli

· R.L Gupta and M. Radaswamy, Advanced accountancy, ninth edition, 1999, Harcourt brace Jovanovich publisher

· S.N maheshwari, advanced accountancy, (volume 1), fifth edition, 1995, New york

· S.N Maheshwari , An introduction to accountancy, fourth edition, 1996, New york

· S.N Maheshwari, Cost and management accounting, eighth edition, New york

· N.A Salemi, Financial accounting simplified, 1988, N.A Salemi publisher

Reports

· Etude sur le secteur des petites et moyenne industries et de l artisanat au Rwanda MINIMART/ SERDI, Mai 1990

· Rwanda revenue authority Tax department's reports, Kigali

· Rwanda development bank's reports, Kigali

APPENDICES