THE IMPORTANCE OF ACCOUNTING CONCEPTS AND CONVENTIONS IN FINANCIAL STATEMENT PREPARATION

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY: Every single commercial organisation, regardless of whether it operates in the public or private sphere, was founded with the intention of accomplishing a certain set of goals. This may involve the maximising of profits, as is the situation in the private sector; alternatively, it may involve the timely and effective supply of critical services at a lower cost, as is the case in the public sector (Alexander & Britton 2021). The owners of the company are entitled to receive a report detailing, in monetary terms, the performance of the business organisation in question. (For instance, stockholders in a private business, or the government in the case of a public institution) (Dyckman, Dukes, & Davis, 2021). The management of a company or organisation is greatly aided by the profession of accountancy. The process of recording, categorising, reporting, and understanding the financial data of an organisation is what is referred to as accounting (Kiabel, 2022). Although it is essential for the accountant to have a solid understanding of this phase of the accounting process, the accountant will often only devote a relatively small portion of his full focus to the management reporting and interpretation of the significant consequence of the data. (Welgenbad and Dittrich 1973:4)

As a result, accounting is often considered to be a language of communication in an organisation; the primary goal of accounting, similar to that of any other kind of communication, is to provide various kinds of information to those who are interested in receiving it. Because of this overarching goal, accounting is a significant portion of the overall information system in every organisation, regardless of whether it is commercial or not (Kiabel, 2022).

However, in order to communicate this knowledge effectively, the following challenges must be overcome.

Conflicts of interest might arise among the many consumers of financial statements due to the fact that the information requirements of the various user groups do not align with one another.

The issue of subjectivity that arises while compiling the financial accounts is a challenge. Therefore, in order to achieve a high level of standardisation in financial reporting, it is required for the accountant to be led by some fundamental assumptions, ideas, concepts, and conventions while compiling the financial statement. This is necessary since it has become necessary.

The process of compiling a history of financial transactions is known in the industry as "stewardship accounting," and it is one of the components of financial accounting. These historical records will be used to construct the financial statement. The financial statements of a reporting entity are the mechanism by which information may be communicated to parties so that they can be understood regarding the resources, liabilities, and performance of the reporting company. (SAS2).

According to Alexander and Britton (2021), the creation of these financial statements involves the utilisation of specific assumptions, ideas, conventions, and principles that serve as the fundamental structure for the communication of accounting information. Included in this are:

The idea of money as a unit of measurement

"The notion of a running concern."

The idea of a company as a legal entity

"The notion of coming to terms"

The idea of the dual aspect

The principle of accumulating losses

Prudence notion

The idea of consistency (Frame word 1998:82-85)

These accounting concepts and conventions are generally accepted as being the undertaking of periodic preparation and presentation of financial statement; however, if in the preparation and presentation of this financial statement, the fundamental concepts and conventions are not followed, problems will arise in analysing, interpreting, and reporting financial statements. These accounting concepts and conventions are rarely disclosed on the financial statement because they are generally accepted as being the undertaking of periodic preparation and presentation of financial statement (Dyckman, Dukes, & Davis, 2021). It is therefore essential for the understanding that the interpretation and meaningful analysis of financial statement that these fundamental concepts, assumptions, principles, and conventions used in the preparation must always be borne in mind. This is essential for the understanding that the interpretation and meaningful analysis of financial statement (Dyckman, Dukes, & Davis, 2021).

1.2 STATEMENT OF THE PROBLEMS

The following problems are encountered in the process of communicating information.

• They will be problem of having more meaningful and reliable financial report.
• It will lead to misunderstanding of how transactions are accounted for.
• There will be problem of having useful information for making economic decision.
• 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 financial statement preparation 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;

• It provides the framework for constructing financial report.
• It provides useful information for making economic decision.
• Is useful for analysis of the Organizational financial statements.
• 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.