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THE ROLE OF
ACCOUNTING CONCEPTS AND CONVENTION IN FINANCIAL REPORTING
CHAPTER ONE
1.0
INTRODUCTION
1.1BACKGROUND OF THE
STUDY
Every business organization whether in
the public or private sector is established to achieve certain objectives. This
could be profit maximization as in the case of the private sector or efficient
and timely provision of essential services at a reduced price, as in the case
of the public sector.
The performance of such business
organization has to be reported in monetary terms to the owners of the
business. (For example, shareholders in the case of private organization or the
government as in the case of public)
Accountancy plays a vital role in the
stewardship of an organization. Accounting has been defined as the process of
recording, classifying, reporting and interpreting the financial data of an
organization. While it is important for the accountant to have a sound
knowledge of this phase of accounting process, it is often a relatively minor
part of his total attention to the management reporting and interpretation of
the meaningful implication of the data. (Welgenbad and Dittrich 1973:4)
Accounting is therefore basically
regarded as a language of communication in an organization like every system of
communication; its main purpose is to give different types of information to
interested persons. Because of this main purpose, accounting forms a major part
of the total information system in any entity, be it business or
non-business. (Inanga 1983)
However, the following problems are
encountered in the process of communicating this information.
·
As the information needs of these various groups do not tally, there are
conflicts of interest among the various users of financial statements.
·
The problem of subjectivity in preparing the financial statements. Thus, it
becomes necessary that in preparing the financial statement, the accountant be
guided by some basic assumptions, principles, concepts and conventions in other
to ensure a high degree of standardization in financial reporting.
·
Financial accounting involves the accumulation of historical records which is
technically referred to as stewardship accounting. These historical records for
the embodiment of financial statement. Financial statements are the means of
communicating to understand parties’ information on the resources, obligations
and performance of the reporting entity. (SAS2).
In preparation of these financial
statements, certain assumptions, concepts, conventions and principles which
provide the essential framework for expressing accounting information are used.
This include:-
o
The money measurement concept
o
The going concern concept
o
The business entity concept
o
The realization concept
o
The dual aspect concept
o
The accruals concept
o
Prudence concept
o
Consistency concept (Frame word 1998:82-85)
These accounting concepts and
conventions are seldom disclosed on the financial statement because they are
generally accepted as being the undertaking of periodic preparation and
presentation of financial statement; but, if in preparation and presentation of
this financial statement, the fundamental concepts and conventions are not
followed, problems will arise in analysis, interpreting and reporting financial
statements. It is therefore essential for the understanding that the
interpretation and meaningful analysis of financial statement that these basic
concepts, assumptions, principles and conventions used in the preparation must
be constantly borne in mind.
1.2
STATEMENT OF THE PROBLEMS
The following problems are encountered
in the process of communicating information.
ü
They will be problem of having more meaningful and reliable financial report.
ü
It will lead to misunderstanding of how transactions are accounted for.
ü
There will be problem of having useful information for making economic
decision.
ü
It can lead to conflict of interest among the various users of financial
statements, if their information needs do not tally.
To this end, the problem of the study
is that most accountants do not use accounting concepts and conventions
properly in the preparation of financial statement.
1.3 THE OBJECTIVE OF
THE STUDY
The importance of accounting concepts
and conventions in the preparation of financial statement could be seen in the
assessment of financial viability of an organization. The accountant prepares
the financial statement of most organization. Accounting concepts and
conventions help the accountant in giving relevant financial report to the
management of any organization as regards financial report to the management of
any organization. In order to demonstrate the role of accounting concepts and
convention producing a viable financial report of any going concern, the
following objectives are set out in this study:-
·
To determine whether accounting concepts and conventions serve as a guide in the
preparation of financial statement.
·
To ascertain if accounting concepts and conventions assist the provision of
useful information for making economic decision.
·
To determine whether accounting concepts and convention help in the
understanding of how transactions are accounted for.
·
To determine whether accounting concepts and conventions make financial reports
more meaningful and reliable.
1.4
SCOPE OF THE STUDY
These examines how accounting concepts
and convention help in the preparation of financial statement which are used in
decision making and for evaluation of financial strength, profitability, and
future protection of the organization.
However, it was not possible to cover
all organization that use accounting concepts and convention in Nigeria. This
is because much energy is required, it is expensive as well as time consuming.
The Nigeria Breweries PLC having been
selected, the researchers’ attention was focused on the accounting department
of the company. The purpose being to see how the accountant, prepares financial
statement and to determine the effectiveness of the use of accounting concepts
and convention in the preparation of financial statement, in other to attain
corporate goals.
1.5
SIGNIFICANCE OF THE STUDY
As stated earlier, an understanding of
the basic principle, concept, assumptions and conventions and their role,
relevance to the preparation of financial statement is essential to the
understanding, interpretation and meaningful analysis of financial statement.
This study highlights the relevance and importance of these concepts and
convention in financial reporting, thus enticing a better understanding of the
usefulness of the financial statement to the various users of accounting
information. These are the benefits the various users of financial statements
gets;
Ø
It provides the framework for constructing financial report.
Ø
It provides useful information for making economic decision.
Ø
Is useful for analysis of the Organizational financial statements.
Ø
Is useful in making financial reporting and useful tool for decision making.
Furthermore, this study provides
a better understanding of the desire for objectivity which is often at the
desire for objectivity of the financial accounting method in use at the present
time
1.6
RESEARCH QUESTIONS
The research questions are as follows:-
·
Does accounting concepts and conventions provide framework for constructing
financial report?
·
Does accounting concepts and conventions allow for consistency in the
preparation of financial report?
·
Does accounting concept and convention make financial report useful for
decision making?
1.7
DEFINTION OF TERM
The following words are defined as to
be used in the study:-
·
ACCOUNTING CONCEPTS: Accounting Concepts are concepts that are associated with
measurement of the elements of financial statements. These are various concepts
and convention in accounting all of which are useful in solving practical
accounting problems.
·
ACCOUNTING CONVENTIONS: They are the generally accepted approaches in applying
the accounting concept.
·
CAPITAL EMPLOYED: This is the amount available for production. It represents
the total less current liabilities employed in the business.
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