CHAPTER ONE

                                                             INTRODUCTION

BACKGROUND OF STUDY

In this world, everything is important nothing is useless. But for knowing the importance of anything you have to change the level of your thinking. Like other things of accounting, accounting concepts and conventions are also important. These concepts and conventions have been made by accounting experts. They carried out experiments practically with these concepts and conventions and found out that,  if any accountant or user  uses these concepts and conventions in his/her professional work, he/she can save money, energy, time and provide effective services to the organization ( Kumar, 2010).

Every business enterprise and government parastatal has an accounting system which is a means of collecting, summarizing, analyzing and reporting in monetary terms information about the organization (Kabir, 2005). Accounting system is 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 and decision making in any entity (Pamela, 2010).

However, these business organizations whether in public or private sectors are established to achieve certain objectives. This could be profit maximization or efficient and timely provision of essential services at a reduced price (Pamela, 2010). The decisions on such objectives of the business organization has to be reported in monetary terms to the owners or those who have interest in the business, in so doing, it’s important to consider accounting concepts and conventions as being part of financial accounting system.

Accounting is a term derived from the word ‘account’, and which is simply defined as an expression of transactions. Accounting is therefore, about giving account of various transactions that is explaining the transactions to the satisfaction of the interested parties. Accounting has been defined by different experts and different institutions in different ways. The definition that might probably encompass all other attempt at defining accounting is the one given by the American accounting association (AAA).

The association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by the users of the information”. Accounting can also be defined as the process of collecting, classifying, recording, interpreting and presenting financial information for the users of financial statements (Dandago and Bashir, 2005).

Financial accounting is not an end in itself. It provides information to the various users of the financial statements. Many of these users have conflicting information needs. Over the centuries during which the financial accounting profession has developed, a body of principles has evolved to regulate the practice of the profession so that the preparation of financial statements is guided by consistent and acceptable principles.

These principles, known as the concepts and conventions are so fundamental that their application has come to be taken for granted. They have been accepted, and issued in the form of accounting standards, by such bodies as the international accounting standard board (Igben, 2009).

Hence, it does not follow that you will necessarily agree with or apply the concepts and conventions. They are often criticized by accountants and others, and are constantly undergoing changes as better methods of accounting are found (Omuya, 1999).

Faced with problems and choices, decision making becomes relatively important to every individuals and businesses. The decisions reached on circumstances, however differs as the circumstance themselves (Barnabas, 2007).

People at all levels in an organization must constantly make decisions and solve problems. For managers, the decision making and problems solving tasks are particularly very important parts of their job. How would they source money to finance the business?  How would more profit be generated? Which employee should be assignzed to a particular task? Whether problems are small or large, it is the manager who must confront it and decide what action to take (Bagobiri and Kassah, 2009).

Thus, decision making can be defined as the selection of an alternative course of action from available alternatives that will best achieve the desired objectives. Decision making is the process of identifying and selecting a course of action to deal with a specific problem or take advantage of an opportunity (stoner, 1995). The decisions are not best in themselves except they meet the goals set in the firm or by the individual.

Decision making can be carried out quantitatively or qualitatively. Most small organizations may not bother about using certain techniques or approaches to make their decisions. They could just decide based on experience, common sense, routine and discretion of the decision maker. A large organization on the other hand, because of the various departments, decision needs and complexity of the government may need to employ various techniques quantitatively to arrive at a valid decision (Barnabas, 2007).

The application and use of accounting concepts and conventions may however be part of quantitative and qualitative business decision making. The use of various quantitative analysis techniques to arrive at a decision is what the quantitative decision making is about, quantitative factors that can be measured in numerical terms such as cost, time etc. are used in decision making. Example of quantitative techniques that are used in business decision making and financial reporting are; linear programming, network analysis, queuing theory, modeling and probability theory etc. (Barnabas, 2007).

While qualitative decision making involve decisions based on experience, experimentation, research and analysis, common sense, and judgmental abilities to make decisions that the decision maker feels is the most suitable and applicable to the decision area which does not include numerical terms. Example financial reporting using increase in demand, changes in technology and methods of preparation of financial statements.

There may be no need to employ quantitative techniques as managers can just lie down and decide. Qualitative factors that relates to decision making are those factors that are difficult to measure numerically such as the quality of labour relations, the risk of technological changes or the local/international political climate (Barnabas, 2007).

In preparation of these financial statements, certain concepts and conventions which provide the essential framework for expressing accounting information are used. The accounting concepts are sets of broad principles that have been devised to provide a basic framework for financial reporting,  While accounting Convention implies that those customs, methods and practices to be followed as a guideline for preparation of accounting statements.

As financial reporting involves significant professional judgments by accountants, these concepts and conventions ensure that the users of financial information are not mislead by the adoption of accounting policies and practice that go against the spirit of the accountancy profession.

Accountants must therefore actively consider whether the accounting treatments adopted are consistent with the accounting concepts and conventions. In order to ensure the application of the accounting concepts and conventions, major accounting standard setting bodies have incorporated them into their reporting frameworks such as the IASB (international accounting standard board) framework.

Following is a list of the major accounting concepts and conventions

Entity Concept; Dual Aspect Concept; Going Concern Concept; Historical Cost Concept; Money Measurement Concept; Matching Concept; Realization Concept; Accrual Concept; Periodicity concept; Convention of Conservatism/prudence; Convention of Consistency; Convention of Materiality Convention of objectivity/fairness; (Kabir, 2014)

These accounting concepts and conventions are hardly 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.

Hence, these basic concepts and conventions must be born in mind when preparing and presenting financial statement, as it facilitates a clear understanding and meaningful analysis of the financial statements

1.2       Statement of the Research Problem

The financial reporting process is concerned with providing information that is useful in the business and economic decision making process. Therefore a conceptual framework will form the theoretical basis for determining which events should be accounted for, how they should be measured and how they should be communicated to the users. However, some 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 statement.  Some researches were conducted on the same area addressing other problems or otherwise emphasizing on the meaning and role of these concepts and convention, among which are:

Owojori and Asaolu (2010) in their work: critical evaluation of accounting system in multinational organizations in Nigeria. Their major objective was to evaluate the effectiveness and the efficiency of accounting system in multinational organizations. Data were collected from both Primary and Secondary sources using Chi-square (χ2) statistics to analyzed the data. The results showed that Accounting Standards have impact on the preparation of the financial statements of multinational organizations and the accounting standards were complied with in the preparation of financial statements of multinational organizations.

Ugwu (2010) in the study: the relevance of accounting concepts and conventions in preparation of financial statements, the objective was to determine whether accounting concepts and conventions serve as a guide in the preparation of financial statement. The data collected through responses given in the questionnaire, were analyzed and interpreted using table and percentage methods. However, the result showed that, accounting concepts and conventions served as a guide in the preparation of financial statements.

Bariyama and loveday (2014) in their work: some basic concepts of accounting: a critical appraisal, their major objective was to appraise various accounting concepts and the conflict between them. Concluded that accounting concepts are likely to be of relatively different importance to different users of the financial statements.

Mahmud (2014) in the study: an analysis of conventional concepts of accounting from an Islamic perspective, the major objective was to explore the nature of accounting concepts within the context of Islamic jurisprudence, to investigate their acceptability or otherwise with the practice of Islamic accounting. It was found that the entity, accrual realization, dual aspect and money measurement concepts are accepted from the Islamic perspective. While the historic cost concept is out rightly rejected, the going concern concept is accepted but with modification on the issue of conservatism and its support of the historical cost concept.

Therefore, this study tries to examine the impact of accounting concepts and conventions on business decision; since decision making is the selection of alternative course of action from available alternative that will best achieve the desire objectives. How managers are face with the problem of choosing and application of certain accounting system; how should they choose consistently not randomly from the various available accounting concepts and conventions that will be fovourable to business at a given period in order to ensure fairness and effective comparability, because these financial statements are used for decision making.

However, the problem of subjectivity becomes necessary in preparation of financial statements; the accountants are guided by some basic principles in order to ensure a high degree of standardization in financial reporting.  The problem of having more meaningful and reliable financial reports, which might leads to misunderstanding of how transactions are account for. The  problem of having useful information for making economic decision, which might lead to conflict of interest among the various users of financial statements, if their information needs do not tally.

Finally, this study will also try to fill the gap of emphases on the effective and consistence application of these accounting concepts and conventions on business activities, because most accountants do not use these concepts and conventions properly in the preparation of financial statement.

1.3       Objectives of the Study           

The main aim of this research work is to appraise the impact of accounting concepts and conventions in providing useful information for economic decision making.

In order to demonstrate the impact of accounting concepts and convention to business decisions of any organization, the following are its specific objectives set out in this study:-

        i.            To determine whether accounting concepts and conventions are apply consistently in the preparation of financial statements.

      ii.            To determine whether accounting concepts and convention serve as a basis of decision making.

    iii.            To determine whether accounting concepts and conventions help in the understanding how transactions are accounted for.

.1.4       Research questions

        i.            What accounting concepts and conventions are apply consistently in the preparation of financial statements?.

      ii.            What  accounting concepts and convention serve as a basis of decision making?.

    iii.            What accounting concepts and conventions help in the understanding how transactions are accounted for?.

1.5       Research Hypotheses

In the context of this research work, the following hypotheses are formulated.

Ho1      Accounting concepts and conventions are not applied consistently in the preparation of financial statements.

Ho2      Accounting concepts and conventions do not serve as basis for decision making.

Ho3      Accounting concepts and conventions do not help in accounting for transactions

1.5    Scope of the Study      

These examine how application of  accounting concepts and convention help in decision making and for the evaluation of financial strength, profitability, and future protection of the any organization.

However, it was not possible to cover all the government education parastatals  in Nigeria but an education parastatal was selected in Akwa Ibom state. This is because much energy is required, it is expensive as well as time consuming.

The Akwa Ibom state secondary school board was used for this research. Akwa Ibom State Secondary School Board is a government education parastatal set up for the management of students and teachers in the state and also for effective management of schools facilities in both government and private secondary schools in the state.

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1.6       Significance of the Study

Accounting happens to be one field of study without which the organization would not be able to carry on for a long time without crumbling, and that is why it is popularly referred to as the “language of business” (Kabir, 2015)

This study highlights the impact of accounting concepts and convention application on performance strategy of government education parastatals in Nigeria with particular reference to Akwa ibom state, thus will be enticing a better understanding of the usefulness of the financial statement to the various users of accounting information. It will provide the framework for constructing financial report. It will provide useful information for making economic decision. And it will provide information on how transactions can be account for.

Furthermore, this study will provide a better understanding and is expected to contribute to the already established knowledge on the impact of accounting concepts and conventions on business decisions. The findings of this research work will be of great relevance to the following categories of people.

The academics, this includes lecturers, teachers, researchers and students. The relevance of this work will be seen much when any of them wants to use it as a source of material.

The management of organizations and government agencies who formulate economic decisions will also find the work relevant from the following:

a)      Supports Management Planning and Decisions: Accounting concepts and conventions provides adequate information on the flow of essential financial data within the organization on the one hand, and between the organization and its wider environment (i.e. owners, government, suppliers, leaders, etc.). E.g. Realization Concept; This concept states that revenue is recognized when transaction is completed, whether payment is received or not, it is considered complete at the point when the property in goods passes to the buyer and he/she becomes legally liable to pay.

b)      Promotes Efficiency: Accounting’s main strength lies in its ability to promote efficiency through providing periodic information which improves decisions and judgments thereby ensuring the usage of fewer resources in the attainment of desired objectives. E.g. Periodicity Concept; According to this concept, the life of the business is divided into appropriate periods for the purpose of determining its results of operations. In accounting, such a segment or time interval is called “accounting period”, and it is usually a year. Though, a business organization may produce quarterly or half yearly abridge financial statement, before the end of its financial year, for the purposes of planning, performance evaluation and control.

c)      Enhances budget and budgetary control: Accounting concepts and conventions provides futuristic accounting information (through estimates and projection i.e. budgets) which assist management in budget and budgetary control. E.g. prudence concept;

d)     Determination of results of operations: Accounting helps in the preparation of financial statements which allow a business to accurately determine the profit or loss for a given period of time. E.g. Matching Concept; This concept states that all the revenue earned and all the expenses incurred in generating the revenue should be matched together and reported for the period, with a view to determining the net financial position of the business. Thus, all expenses incurred (whether they are actually paid for or not) should be match against the revenue earned (whether they are actually received or not).

e)      Reduce wastages and Fraud: Accounting also assists management with the aid o

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