AFRICA UNIVERSITY

AN ANALYSIS OF THE EXTENT TO WHICH SMEs HAVE ADOPTED ACCOUNTING PRACTICES BY TAPIWA PREVILEGE CHIRIPANYANGA A RESEARCH PROJECT SUBMITTED TO AFRICA UNIVERSITY IN PARTIAL FULFFILMENT OF THE DEGREE IN ACCOUNTING IN THE FACULTY OF MANAGEMENT AND ADMNISTRATION AFRICA UNIVERSITY MUTARE, ZIMBABWE 2014 i

COPYRIGHT All rights reserved. No part of this dissertation may be reproduced, stored in any retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise from scholarly purpose, without the prior written permission of the author or of Africa University on behalf of the author.

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AFRICA UNIVERSITY

DECLARATION This research project is my original work except where sources have been acknowledged. The work has never been submitted, nor will it ever be, to another University in the awarding of a degree.

…………………………………. STUDENT

DATE

………………………………… SUPERVISOR

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DATE

DEDICATION This research is dedicated to my family, my parents Mr and Mrs Chiripanyanga, my brother Tawanda, and my two sisters Tanyaradzwa and Tariro.

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ABSTRACT This research sought to analyze the extent to which SMEs have adopted accounting practices in Mutare. In this study 30 SMEs were used as the research subjects. The research used primary data and used convenience sampling to select the sample. Questionnaires were used as research instruments. The research found out that there are few SMEs adopting accounting practices and a few of these accounting practices are used by these SMEs. Therefore to a lesser extent the SMEs in Mutare are adopting accounting practices; there are lacking the necessary knowledge of accounting; the high cost to hire expects such as accountants, they do not see the importance of adopting the accounting practices and some do not want to be followed by regulatory authorities such as ZIMRA, Councils and so on. The study recommends that the regulators should come up with some SME specific accounting guidelines and provide template form for capturing accounting information by SMEs. This study also recommends that Ministry of Small- Medium Enterprises should organize workshops and training programs to equip the owners of SMEs. It is necessary to equip the owners of SMEs with knowledge of accounting so that the regulatory bodies make it mandatory for SMEs to adopt accounting practices so that they improve their accounting practices and increase chances of them formalizing their business operations.

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ACKNOWLEDGEMENTS I wish to acknowledge the assistance received from the following people who made it possible for this document to be put together. My supervisor, Dr. S Bigirimana, who tirelessly guided me in conducting and compiling the entire research project, my parents Mr and Mrs Chiripanyanga and my brother Tawanda and his family and my two sisters Tanyaradzwa and Tariro who gave, me the encouragement and patiently put up with the difficulties and frustrations faced in getting the work done. I also want to express my gratitude to the SMEs at the Green Market and at the showground in Mutare for their patience and assistance and filling in the questionnaires. To all I want to say, most sincerely, thank you!

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TABLE OF CONTENTS Contents COPYRIGHT ..................................................................................................................................... ii DECLARATION ............................................................................................................................... iii DEDICATION .................................................................................................................................. iv ABSTRACT ....................................................................................................................................... v ACKNOWLEDGEMENTS ................................................................................................................. vi TABLE OF CONTENTS .................................................................................................................... vii LIST OF TABLES ............................................................................................................................... x LIST OF FIGURES ............................................................................................................................ xi LIST OF APPENDICES..................................................................................................................... xii CHAPTER 1...................................................................................................................................... 1 INTRODUCTION .......................................................................................................................... 1 1.1 Background to the study ...................................................................................................... 1 1.2 Statement of the problem ................................................................................................... 2 1.3 Aim of the study ................................................................................................................... 3 1.4 Objectives of the study ........................................................................................................ 3 1.5 Research questions .............................................................................................................. 3 1.6 Significance of the study ...................................................................................................... 3 1.7 Assumptions of the study .................................................................................................... 4 1.8 Scope of the study................................................................................................................ 4 1.9 Limitations of study .............................................................................................................. 5 1.10 Definition of terms ............................................................................................................. 5 CHAPTER 2...................................................................................................................................... 7 LITERATURE REVIEW .................................................................................................................. 7 2.1 Introduction ......................................................................................................................... 7 2.2 Theoretical Review ............................................................................................................... 7 2.2.1 Definitions of a Small and Medium Sized Entity ........................................................... 7 2.2.2 Accounting practices of SMEs ....................................................................................... 9 2.2.3 Accounting concept of capital maintenance............................................................... 12 vii

2.2.4 Measurement issues ................................................................................................... 14 2.2.5 Accounting bases ........................................................................................................ 19 2.2.8 Tax accounting in SMEs ............................................................................................... 36 2.2.9 International Financial Reporting for SMEs (IFRS for SMEs) ....................................... 37 2.3 Empirical Review ................................................................................................................ 40 2.4 SUMMARY .......................................................................................................................... 42 CHAPTER 3.................................................................................................................................... 43 RESEARCH METHODOLOGY ..................................................................................................... 43 3.1 Introduction ....................................................................................................................... 43 3.2 Research Design ................................................................................................................. 43 3.2.1 Descriptive Research ................................................................................................... 44 3.3 Sampling ............................................................................................................................. 45 3.3.1 Population ................................................................................................................... 45 3.3.2 Probability Sampling ................................................................................................... 45 3.3.3 Convenience Sampling ................................................................................................ 46 3.4 Data Collection Methods ................................................................................................... 47 3.4.1Primary Sources ........................................................................................................... 48 3.5 Research Instruments ........................................................................................................ 48 3.5.1 Questionnaire.............................................................................................................. 49 3.5.2Data Validation............................................................................................................. 51 3.6 Summary ............................................................................................................................ 51 CHAPTER 4.................................................................................................................................... 52 DATA PRESENTATION AND ANALYSIS ...................................................................................... 52 4.0 Introduction ....................................................................................................................... 52 4.1 Questionnaire Response Rate ............................................................................................ 52 4.2 Research Findings............................................................................................................... 54 4.2.1 Background of Accounting .......................................................................................... 54 4.2.2 Measurement Issues ................................................................................................... 55 4.3.3 Accounting Bases ........................................................................................................ 57 4.2.4 Financial Record Keeping ............................................................................................ 59 4.3.5 Financial statements adopted ..................................................................................... 62 4.3.6 Tax Accounting ............................................................................................................ 64 viii

4.4 Conclusion .......................................................................................................................... 65 CHAPTER 5.................................................................................................................................... 66 CONCLUSIONS AND RECOMMENDATIONS .............................................................................. 66 5.0 Introduction ....................................................................................................................... 66 5.1 Summary of Findings .......................................................................................................... 66 5.2 Conclusion .......................................................................................................................... 68 5.3 Recommendation ............................................................................................................... 68 REFERENCES ............................................................................................................................. 70

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LIST OF TABLES Table 4.1…………………………………………………………..53 Table 4.2………………………………………………………......57 Table 4.3…………………………………………………………..58 Table 4.4…………………………………………………………..60 Table 4.5…………………………………………………………..62 Table 4.6…………………………………………………………..64

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LIST OF FIGURES Graph 4.1………………………………………………………………54 Graph 4.2………………………………………………………………55 Graph 4.3……………………………………......................................57 Graph 4.4………………………………………………………………58 Graph 4.5………………………………………………………………61 Graph 4.6………………………………………………………………62 Graph 4.7………………………………………………………………64 Graph 4.8……………………………………………………………....65

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LIST OF APPENDICES Questionnaire (appendix 1)……………………………………………74

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CHAPTER 1 INTRODUCTION

1.1 Background to the study Small and medium-sized entities (SMEs) play important roles in the economic growth and sustainable development of every nation, (Moore et al., 2008). The government of Zimbabwe has identified entrepreneurship development as a major policy thrust to achieve economic development. This is evidenced by a number of institutions established by the government to provide funding and improve operational efficiency in the SMEs sector, (Reserve Bank of Zimbabwe, 2009). The major advantages to any economy of developing SMEs have been identified as sources of innovation and business evolution (Wynarczyk et al., 1993). The development and growth of SMEs in Zimbabwe can provide solutions to the problem of high unemployment facing the country because these entities have low startup costs, low risk and can exploit untapped knowledge bases of creativity in the population for new product development. Zindiye et al. (2008) approximated that there are 40 000 manufacturing entities in Zimbabwe, most of which are SMEs, and further postulated that SMEs account for the employment of at least 57% of the Zimbabwe population. SMEs dominate all service sectors of the economy excluding banking.

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Accounting systems provide a source of information to owners and managers of SMEs operating in any industry. Taxation concepts and principles adopted ought to capture and report all the relevant accounting information to ensure reliability in its measurement. Reported profits reflect changes in wealth of owners and this can explain why major economic decisions in business are centered on financial performance as measured by profitability, (Cooley and Edwards, 1983). It has been recognized that appropriate accounting information is important for a successful management of any business entity, whether large or small (European Commission (EC), 2008).

It is crucial therefore that the financial accounting of SMEs supply complete and relevant financial information needed to improve economic decisions made by entrepreneurs. This research therefore focuses on assessing the adoption of accounting practices by SMEs.

1.2 Statement of the problem It has been recognized that appropriate accounting information is important for a successful management of any business entity, whether large or small and therefore this research aims at assessing the adoption of accounting practices by SMEs in Mutare. There various accounting practices which include the following; measurement issues (historical cost, current cost, realizable value and present value), financial record keeping (day books, cash books, cheque books, journals, ledgers, income statement, statement of financial position, statement of changes in equity and statement of cash flows), tax accounting, accounting basis (cash or accrual basis). 2

1.3 Aim of the study The aim of this study is to assess the adoption of accounting practices by SMEs in Mutare.

1.4 Objectives of the study The study is aimed at achieving the following objectives: 

To identify accounting practices that can be adopted by SMEs in Mutare.

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To assess whether these accounting practices have been adopted or not by a selected number of SMEs in Mutare.

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Research questions

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What are the accounting practices that can be adopted and maintained by SMEs?

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Have those accounting practices adopted by SMEs or not?

1.6 Significance of the study a) To The researcher The research gives the researcher a smooth platform to integrate the theoretical fundamentals mastered during her studies at University with the practical aspects of the business environment. The research can be viewed as the training ground to the researcher for future academic researches. The researcher will have a deep understanding of the importance of adopting the accounting practices by SMEs.

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b) To the University The research will add literature on the relevance of adoption of modern accounting practices by SMEs thereby providing a line of thought to other succeeding students. Other researchers and scholars may borrow ideas from this research project and use it as a research tool on any related study.

c) To the Corporate World The Corporate World will be assisted by the findings of the study to appreciate the importance of adopting the accounting practices by SMEs as it helps to grow the economy at large. This research study will help different SMEs owners of various organizations to adopt the use of modern accounting in doing their business and improve their businesses. Some SMEs they require training about the accounting practices and advocacy for the use of GAAP.

1.7 Assumptions of the study

For the sake of this study the research will assume the following. 

The responses of questionnaires are accurate and reliable.

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The respondents accurately represent the owners of various SMEs.

1.8 Scope of the study 4

The research was confined to a few SMEs that are adopting the modern accounting practices and also a few that are not adopting modern accounting practices. The researcher looked at SMEs at the Green Market and at the Showground in Mutare as the area under study. The researcher did not question all the beneficiaries in the selected area under research. The research will direct questions to the owners of various SMEs.

1.9 Limitations of study Collection of primary data was a challenge given the fact that response time for respondents was not long enough; to counter this researcher had to put extra effort to build good relations with the respondents so that progress is achieved. The researcher faced resistance from the organizations as they were not willing to disclose their information as they feared publicity. To counter this researcher had to sign a non disclosure agreement with them.

1.10 Definition of terms SMEs abbreviation for Small Medium Enterprises - Evidence from literature reveals that there is no universally agreed definition of an SME across all academic disciplines. This is so because no single definition can capture all the dimensions of a small and mediumsized entity, nor can be expected to reflect the differences between entities in different industrial sectors or countries at different levels of development. Most definitions are however based on size and they use fundamental bases such as number of employees, financial position or annual turnover (Beck et al., 2005; Ghafoor and Iqbal, 2007;

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Zindiye et al., 2008). However, none of these bases are pegged at the same level across disciplines and national boundaries (Holt, 2008).

Accounting Practices – is a set of rules that a company must follow when reporting information on its financial statement. The standard accounting practice guidelines allow companies to be compared to each other because they have followed the same rules. The standard methods in the US are referred to as Generally Accepted Accounting Principles (GAAP) and it is widely used by many countries (WebFinance, 2014).

GAAP – Generally Accepted Accounting Principles.

1.11 Summary This chapter was concerned with providing a concise summary and introduction of what the whole research paper involved. It laid a base for the study on adoption of accounting practices by SMEs that the researcher is about to undertake by highlighting the problem areas. This chapter also looked at the research objectives, research questions, and the significance of the research and assumptions of the research. The following chapters review literature related to the topic being understudied.

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CHAPTER 2 LITERATURE REVIEW

2.1 Introduction

The previous chapter considered the research background, objectives, research questions, significance of the study, and limitation of the study, scope of the study and definitions of key words. The research identifies this chapter as the engine of the project to facilitate the review of adoption of accounting practices by SMEs. In this chapter the research looks at the literature of the different world scholars and authors who has contributed towards the topic of the research project. The chapter will provide a ground to assess the adoption of accounting practices by SMEs. The chapter will also give flesh to key words of the research project namely SMEs and accounting practices.

2.2 Theoretical Review 2.2.1 Definitions of a Small and Medium Sized Entity

Evidence from literature reveals that there is no universally agreed definition of an SME across all academic disciplines. This is so because no single definition can capture all the dimensions of a small and medium-sized entity, nor can be expected to reflect the differences between entities in different industrial sectors or countries at different levels of development. Most definitions are however based on size and they use fundamental 7

bases such as number of employees, financial position or annual turnover (Beck et al., 2005; Ghafoor and Iqbal, 2007; Zindiye et al., 2008). However, none of these bases are pegged at the same level across disciplines and national boundaries (Holt, 2008).

In virtually every jurisdiction, from the largest economies to the smallest, over 99% of companies have fewer than 50 employees (Pacter, 2009) quoted in South Africa Institute of Chartered Accountants (SAICA),(2010). In the European Union SMEs are defined in the Commission Recommendation of May 6, 2003. Concerning to this recommendation an enterprise is regarded as small or medium sized if it has; not more than 250 employees and, not more than 50 Million Euro turnover rasp, a balance sheet total of less than 43 Million Euro, and if not more than 25% of the shares of such an enterprise are in the ownership of another enterprise.

In Zimbabwe, the Ministry of SMEs (2000) defines a small enterprise as a business that employs not more than 50 people while operating as a registered entity and a medium enterprise as one employing up to 75 and 100 people. The Small Enterprises Development Corporation (SEDCO) (2010) does not differentiate between small and medium entities but defines a small and medium enterprise as a firm that has not more than 100 employees with maximum annual sales of up to US$830 000.

According to the Hong Kong Institute of Certified Public Accountants (2005) an entity is considered to be an SME in Hong Kong if it does not exceed any two of the three criteria pegged as total annual revenue of HK$50 million, total assets of HK$50 million, 8

at the reporting date, and 50 employees. The International Accounting Standards Committee Foundation (IASCF) (2007) defines an SME as an entity that does not have public accountability and thus publishes general purpose financial statements for external users. SMEs are entities which do not have the onerous requirement of filing their financial statements with any regulatory body for the purpose of issuing financial instruments.

These entities do not hold assets in any fiduciary capacity for a group of outside investors (banks, insurance entities, security brokers, funds, etc) but the owners, who usually are also managers. However, Sian and Roberts (2006) went further to differentiate a micro entity from an SME. They defined micro-entities as the smallest entities within the SME spectrum and that these entities have less than 10 employees (including those that do not have any employees).

It can be seen from the foregoing definitions that there is no one universally agreed definition of an SME. However, for the purpose of this research, an SME is considered as an entity that employs less than 100 people, generating less than US$800 000 in annual turnovers and holding assets only for the owner managers. The majority of the entities that participated in this study can well be described as micro-entities, according to Sian and Roberts (2006) as they employ less than 10 employees including the owner.

2.2.2 Accounting practices of SMEs

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In most jurisdictions, the law requires all or many of the SMEs to prepare financial statements and, often, to have them audited. In Zimbabwe, all companies are required to keep proper books of accounts in compliance with Section 140 of the Companies Act (Chapter 24:03) and to prepare and submit tax returns based on these financial statements to the tax authority, Zimbabwe revenue authority (ZIMRA), in compliance with various pieces of tax legislation. A study by Lalin and Sabir (2010) concludes that regulations are the main drivers why SMEs prepare financial statements.

Holmes and Nicholls (1998) conclude that the volume of accounting practices in SMEs is dependent on a number of operating environmental factors that include size of the business, business age and industrial grouping. They further argue that most owners and managers of SMEs engage public accountants to prepare required information and that owners and managers search for additional information, but only to a limited extent. Ismail and King (2007) conclude that the development of a sound accounting information system (AIS) in SMEs depends on the owners’ level of accounting knowledge.

Marriot and Marriot (2000) argue that the professional accountants should develop their services to also include graphic presentations and comments and interpretation of the amounts in financial statements. Evaraert et al. (2006) and Jayabalan and Dorasamy (2009) however argue that the high cost of hiring professional accountants leaves SME owner-managers with no option but to relegate accounting information management.

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Zhou (2010) proposes the use of accounting software by owner managers in SMEs to improve accounting practices but laments that developers of accounting software are yet to produce the medium-sized software for SMEs.

An early study of users of financial statements in SMEs (Page, 1984) revealed that owners, managers, tax authorities and lenders are the main users. According to Olson et al. (2004), contemporary studies are discovering that the number of users of accounting information in SMEs is increasing to include venture capitalists and customers in supply-chains. Wichman (1983) concludes that accounting and marketing pose major challenges to management of SMEs and recommends that managers or owners in SMEs must learn about accounting or hire experts.

Walhlstedt (1996) believes that conventional accounting reports play a significant role in SMEs but argues that the reports must be adjusted in order for them to be understood, proposing the use of the cash basis rather than the accruals basis. McMahon (1999) argues that financial reporting practices in SMEs seem to fall short of what is dictated by various external financial reporting imperatives that exist for them, further arguing that owner-managers appear particularly reluctant to produce financial reports which might become accessible to outside parties either directly or through the offices of regulatory authorities.

The primary purpose of accounting is simply to help people make decisions throughout their everyday lives. It provides service to different organizational bodies from a small

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time business to a multinational company. Baysa and Lupisan (2011) defined accounting as a service activity. They said that the main function of accounting practices is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions. They stated that the primary duty of accountants is to render services by providing information about economic entities that is measure in terms of money.

In another accounting book, Manuel (2011) gave the definition of accounting as a language that communicates essential information for decision making. The author also noted that all businesses have one common factor: they all need vital information before making critical decisions. This is where accounting comes in as it plays a vital role in tracking down the activities and resources of a business and reporting back these activities in the form of relevant information.

In another literary work, Abelada (2010) stated in one of his books that accounting is introduced primarily for a business enterprise. He specified that the practice of accounting has evolved in response to the need of business managers for relevant financial information necessary to run a business effectively and to guide them in making short and long term plans or making decisions.

2.2.3 Accounting concept of capital maintenance

Different entities adopt different concepts of capital in Maseko and Manyani 173 reporting their financial performance and position. They can choose between financial 12

and physical concepts of capital. Under the financial concept of capital maintenance, a profit is earned only if the financial (or monetary) amount of net assets at the end of the period exceeds the financial (or monetary) amount of net assets at the beginning of t he period, excluding any distributions to and contributions from equity owners during period, (Framework, para 104a). On the other hand, profit, under the physical capital maintenance concept, is earned only if the physical productive capacity (or operating capability) of the entity at the end of the period exceeds the physical productive capacity at the beginning of the period, after excluding any distributions to and contributions from equity owners during the period, (Framework, para.104b).

According to the Framework (para. 109) all price changes affecting the assets and liabilities of an entity are viewed as changes in the measurement of physical productive capacity. Such price changes are treated as capital maintenance adjustments, making part of equity not profit. The concept of capital chosen indicates the goal to be attained in determining profit even though there may be some measurement difficulties in making the concept operational (Wingard, 2009).

According to a study by Tanwongsval and Pinvanichkul (2008), SMEs ranked ‘assessing profitability’ second on the continuum of reasons for preparing financial statements well after ‘sole purpose of tax preparation’ which was ranked first. Page (1984) also argues that owners in SMEs focus on profitability and the measures of net profit and net current assets when they are evaluating their firms.

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2.2.4 Measurement issues

Measurement is defined as the process of determining the monetary amounts which the elements of the financial statements are recognized and reflected in the financial statements, (Framework, para.99). There are a number of measurement bases which are employed to different degrees and in varying combinations by entities when preparing their financial statements ( von and Wingard, 2009). The four common bases of measurement employed in financial statements includes the following; historical cost basis, current cost basis, realizable value basis and present value basis.

2.2.4.1 Historical Cost

Historical cost is a generally accepted accounting principle requiring all financial statement items be based upon original cost. Historical cost means what it cost the company for the item. It is not fair market value. This means that if a company purchased a building, it is recorded on the balance sheet at its historical cost. It is not recorded at fair market value, which would be what the company could sell the building for in the open market.

Historical cost method, over a period of time has been subject to many criticisms, especially as it considers the acquisition cost of an asset and does not recognize the current market value. Historical costs are only interested in cost allocations and not in the value of an asset. While it tells the user the acquisition cost of an asset and its depreciation in the following years, it ignores the possibility that the current market value of that asset may be higher or lower than it suggests. 14

Another main criticism of historical accounting method is its obvious flaws in times of inflation. The validity of historic accounting rests on the assumption that the currency in which transactions are recorded remains stable, i.e. its purchasing power remains the same over a period of time. Another main point with regards to inflation is rise in prices for an asset. An asset purchased at a point in time may be expensive in future. The traditional accounting principles record all assets at an original cost and continue to use these historic figures throughout the asset's life, while economists make a more intelligible assumption that money has a time-value attached to it.

The economist's approach is broadly embraced in the corporate finance model whose objective is centered on value creation for the shareholders. In addition effects of inflation may not be the same for all the companies in the market and historical cost accounts become almost unhelpful when comparing corporate performance.Under the historical cost basis of accounting, assets are 174 J. Account. Taxation recorded at the amount or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition.

Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances (for example, income taxes), at the amounts of cash or cash equivalent expected to be paid to satisfy the liability in the normal course of business, ( Framework, para . 100a). Historical cost is the most commonly adopted basis by entities in preparing their financial statements and it used in combination with other measurement bases, (para.101). Von and Wingard (2009) argue that a major disadvantage of the historic cost concept is that it follows the financial capital

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maintenance concept (in nominal monetary units only) and as such overstates profit in the period of rising prices, which could lead to an erosion of capital.

2.2.4.2 Current Cost

Current cost accounting is a technique of accounting that attempts to provide value of assets on the basis of their current replacement cost rather than the amount they were bought for. Current cost accounting is calculated by adjusting the historic cost of inflation and depreciation of the assets. It is a valid method of accounting but difficult to understand. According to System National Accounts (SNA), 2008 current cost accounting is a valuation method whereby assets and goods used in production are valued at their actual or estimated current market prices at the time the production takes place (it is sometimes described as “replacement cost accounting") Current cost accounting has ramifications that permeate the entire SNA. It affects all the accounts and balance sheets and their balancing items.

A fundamental principle underlying the measurement of gross value added, and hence Gross Domestic Product is that output and intermediate consumption must be valued at the prices current at the time the production takes place. This implies that goods withdrawn from inventories must be valued at the prices prevailing at the times the goods are withdrawn and not at the prices at which they entered inventories.

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Under current cost basis of accounting, assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent asset acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents that would be required to settle the obligation currently (Framework, para. 100b). The physical capital maintenance concept requires the adoption of the current cost basis of measurement (Wingard, 2009). 2.2.4.3 Realizable Value

Net realizable value is a valuation technique mandated under Generally Accepted Accounting Principles. The technique requires that you calculate the estimated selling price of inventory items, less any reasonably predictable costs of completing the inventory, transporting it, and/or disposing of it. Net realizable value should be determined, because a company is supposed to record its inventory at the lower of cost or market, and net realizable value is one of the factors considered in this determination. There is an ongoing need to examine the value of inventory to see if its recorded cost should be reduced, due to the negative impacts of such factors as damage, spoilage, obsolescence, and reduced demand from customers.

Further, writing down inventory prevents a business from carrying forward any losses for recognition in a future period. Thus, the use of net realizable value is a way to enforce the conservative recordation of inventory asset values. Under the realizable (or settlement) value basis of accounting, assets are carried at the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal. 17

Liabilities are carried at the settlement values; that is the undiscounted amount of cash or cash equivalents expected to be paid to satisfy the liabilities in the normal course of business (Framework, para. 100c). 2.2.4.4 Present value

Present value (PV) is an accounting term that measures how money needs to be invested today in over to finance future business initiatives, projects, and obligations. In order to determine the present value of future costs, accountants use formulas based on the time value of money. These formulas feature variables such as the length of time involved and the prevailing interest rate. In other words, the present value of an amount to be received in the future is the discounted face value considering the length of time the receipt is deferred and the required rate of return (or appropriate discount rate under the circumstances). Present value is the result of the time value of money concept, which recognizes that today's dollar is worth more than the same dollar received at a future point in time.

The interest, or discount, rate used in PV calculations is a key element in determining the PV. This importance is emphasized when the future amounts occur over an extended period of time, due to the power of compounding. Under the present value basis of accounting, assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business. Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be required to settle the liability in the normal course of business (Framework, para. 100d). The selection of the measurement basis and concept of capital

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maintenance will determine the accounting model used in the preparation of financial statements. 2.2.5 Accounting bases 2.2.5.1 Cash basis accounting

In cases when an entity is a micro or even a very small entity, it might be more appropriate to use cash basis accounting (EC, 2008). Cash basis means that cost or income is accounted for at the equivalent amount of cash paid or received for it. This means that an entity recognizes a transaction only when cash is received or paid. The cash book or the receipts and payment accounts is the main book in this system. In modern businesses, especially in retail shops, a point-of sale or cash register machine is used. 2.2.5.2 How to record expenses on the cash basis?

The cash basis records expenses by entering checks. The cash basis payment process begins with a bill. Because the cash basis does not use accounts payable, bills are not entered into the accounting system until they are paid. Purchase orders are not entered into a cash basis system, therefore you need to set up a manual filing system to track both purchase orders and unpaid bills. Cut a check and enter the check as an expense in the accounting system.

The expense is displayed in your financial reports using the date of the check. This is the primary difference between cash and accrual basis accounting. Cash basis accounting records the expense using the date of the check to determine when the expense is reported in your financial statements. Accrual basis accounting uses the date of the bill 19

to record the expense regardless of when the check is cut. Using the cash basis, there is no way to get accrual basis reports because information about the bill date, the actual transaction date, has not been entered?

Remove the check payment stub from the check and staple it to the bill, and send the check to the vendor. File the paid bill in a paid bills file, sorted alphabetically by vendor, with the newest bills on top or in the front of the file. When looking for a paid bill, it is most commonly a recently paid bill. Filing the bills by vendor and chronologically, with the newest bill in the front of the file, will make finding the one you want quick and easy. 2.2.5.3 Accrual basis accounting

It is based on the accruals concept of accounting which states that revenue and costs are accrued (that is, recognized as they are earned or incurred, not as money is received or paid), matched with one another so far as their relationship can be established or justifiably assumed, and dealt with in the statement of comprehensive income for the period which they relate (Framework, para.22).

Profit under this type of accounting, is the difference between realized revenues and associated costs, measured either by historic costs or by current costs. This involves accruing any receipts which have been earned in the financial year and accruing any payments which relate to purchases made in the financial year. The corollary of this is that any receipts received or payments made in the current financial year which relate to accruals made in the last financial year, will not affect the current year’s profit.

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An entity may take a choice between the two bases of cash or accruals or apply both depending on the nature of its business transactions. However, in some jurisdictions, entities may be required to adopt one prescribed basis. For example, in Zimbabwe, Section 14 of the Value Added Tax (VAT) act (Chapter 23:120) requires that all registered operators account for both cash and credit supplies (sales and purchases) using the accruals (invoice) basis of accounting.

The cash (payment) basis is only available to registered operators who apply to Zimbabwe Revenue Authority (Zimra) for exemption from using the accruals (invoice) basis. According to Stan Snyder, the difference between cash and accrual basis accounting has to do with the time frame in which revenues and expenses are recorded and reported. Cash basis accounting will suffice if your business is a simple one. However, the accrual basis will give a more accurate picture of the results of business operations. 2.2.5.4 Comparing cash and accrual basis accounting

Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds, no matter when the sale was made. Checks are written when funds are available to pay bills, and the expense is recorded as of the check date, regardless of when the expense was incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred.

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Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports.

2.2.5.5 When should use cash or accrual basis?

The primary advantage of the cash basis is that it is quick and easy. For a business that does not sell on credit, and pays bills as they are incurred, it may be all that is necessary. The cash basis records only cash transactions, making the cash account a crude measure of how well the business is performing. However, when a business makes sales or purchases on credit, the cash basis does not accurately reflect the results of operations. The cash basis does not provide a system for managing unpaid bills or for tracking customer receivables. When a business makes sales on account i.e., on credit, the accrual basis of accounting will not only record the revenue in the proper time period, it will also keep track of accounts receivable: amounts due from customers on completed sales. The accrual basis matches revenue to the time period in which it was earned, making your financial reports more meaningful.

Expenses recorded on the accrual basis may be coded to the proper time period by entering bills in the accounts payable account. Using accounts payable also provides

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reports showing amounts owed to vendors, making it easier to organize and prioritize bills and manage your cash flow. The accrual basis gives a more accurate picture of profit or loss because it includes all revenues and expenses, paid or unpaid. Note, another advantage of using the accrual basis in Microsoft Office Accounting is that an accounting system set up on the accrual basis can also generate cash basis reports. This is the best of both worlds, matching revenues to expenses and giving information on accounts receivable and accounts payable while still being able to generate reports that approximate what happened on a cash basis. 2.2.5.6 How to record revenues on either the cash basis or accrual basis?

Most business owners understand accounts receivable intuitively. A business creates invoices at the point of sale and between the time the sale is made and the payment is received the company has accounts receivable. Therefore, to record revenues on the accrual basis, use the invoice form to record sales. When cash is received at the point of sale, the cash receipts form is used and there are no accounts receivables on that sale. To record revenues on the cash basis, use the cash receipt form to record sales. 2.2.5.7 How to record expenses on the accrual basis?

The accounts payable process is merely the flip side of the accounts receivable coin. To use the accrual basis to record expenses, use accounts payable by first entering bills, and then issuing checks to pay the bills. Firstly, the accounts payable process begins with an order placed with a vendor. The order may be verbal, or it may be represented by a purchase order. Many small businesses do not use purchase orders even though they are an excellent way to track orders and the details related to those orders.

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Note, in Microsoft Office Accounting Professional, purchase orders can be converted into bills, allowing the user to compare and verify the purchase order details to the bill at the time of entry. For those businesses not using purchase orders, the accounts payable process begins when a bill is received. Enter bills into accounts payable immediately upon receipt. File unpaid bills in an accounts payable file. Bills are filed alphabetically by vendor, with the newest bill on top.

When bills are ready to be paid, the Pay Bills form shows all unpaid bills. It can be filtered by due date and sorted by vendor name or due date. Credits can be applied to individual bills and full or partial payments made. After the checks are generated in Office Accounting, you can use the program to print them. If you are using voucher checks, the program will print the reference number of each bill being paid on the voucher for easy identification by your vendor.

Tear off the check stub and staple it to the bill. The check stub records the check date, amount of each payment, and reference number (the vendor's invoice number). File the bill with the check stub in the paid bills file. Paid bills should be filed in an organized manner, sorted alphabetically by vendor with the newest bills on top or in the front of the file. When you are looking for a paid bill, it is most commonly a recently paid bill. Filing the newest bills chronologically, in the front of the file, will make finding the one you want quick and easy. 2.2.5.8 Hybrid systems — combining cash and accrual basis

Each system has its advantages and disadvantages. It is difficult, if not impossible, to maintain a purely cash basis accounting system that shows a complete picture of 24

business operations. The accrual basis, while more accurate than the cash basis, requires several extra steps in recording transactions.

Many businesses use a hybrid system, writing checks for purchases when the date of the purchase is the same as the date the expense was incurred, and entering bills when the bill date is not in the same month as the check date. Likewise, the cash receipts form is used for sales where payment is received at the point of sale, and an invoice is used for sales made on credit. This method yields an accrual basis system, but has the advantage of ease of entry for cash purchases or sales.

Many businesses use this combination of invoices, sales receipts, checks, and bills. This hybrid system is completely acceptable from an accounting standpoint and produces accurate accrual basis financial reports as long as proper attention is paid to transaction dates. 2.2.5.9 Benefits and costs of accrual basis accounting

The extra effort required in using the accrual basis is offset by the organizational and reporting capabilities of your accounting system. The extra effort required to enter invoices and receive payments is offset by the ability to track details about amounts due from customers. The extra effort required to enter bills and pay bills is offset by the ability to track details about amounts due to vendors. When bills are entered immediately upon receipt, any bill can be found by looking in the accounts payable reports. With this system, if a bill cannot be found in the reports you can be confident that it has not been received. Likewise, all unpaid invoices may be tracked in accounts

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receivable reports, and a complete history of customer payments may be found in the customer records.

While the cash basis of accounting will suffice if your business is a simple one, the accrual basis will, in most cases, give a more accurate picture of the results of business operations. Using the accrual basis, the profit and loss report will include revenues that have been earned but not received and expenses that have been recorded but not paid. The accrual basis allows you to generate reports on customer receivables and vendor payables, and send statements to customers detailing the amounts due. The balance sheet will show amounts due from customers (accounts receivable) as an asset, and amounts due to vendors (accounts payable) as a liability. In addition, using the accrual basis allows you to generate both accrual basis and cash basis reports. Using the cash basis will yield only cash basis reports. 2.2.6 Financial Record Keeping

Financial records, for example the sales day book (sales journal), purchases day book (purchases journal), and cash receipt book, cheque payments book, petty cash book, general journal, nominal ledger, debtors’ ledger and creditors’ ledger must be kept and maintained in a sound accounting system (McMahon, 1999). A journal is the book of original entry, since the entries are first recorded in a journal. From the journal the entries will be posted to the designated accounts in the general ledger.

With manual systems there are likely to be a sales journal, purchases journal, cash receipts journal, petty cash journal, and the general journal. With computerized 26

accounting systems, it is likely that the general journal will be used sparingly. The software is likely to record the other transactions automatically as invoices are entered, cheques are prepared, receipts processed, and so on (Averkamp, 2003). A ledger contains summarized financial information that is classified by assignment to a specific account number using a chart of accounts.

A ledger can be a physical book or also refer to software or spreadsheets where the financial information is recorded. A General Ledger contains a summary of all the information recorded in subsidiary ledgers, which are ledgers that break down and show more information according to classifications. Financial information for ledgers is taken from the company's journal (Koornhof, 1993). A cash book is a financial journal that contains all cash receipts and payments, including bank deposits and withdrawals.

Entries in the cash book are then posted into the general ledger. The cash book is periodically reconciled with the bank statements as an internal method of auditing (Koornhof, 1993). However, not all SMEs may need to keep and maintain all the previous mentioned financial record but an entity has to decide this on the basis of its needs. When the entity makes the judgment of what financial records to maintain, it also needs to take into account whether some financial records are compulsory to be kept by regulatory authorities like ZIMRA.

2.2.7 Financial statements

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The IAS 1 prescribe that financial statements should be prepared but not all SMEs prepare their financial statements in such a manner. Some of the statements are not relevant to their operation in business. Some of the SMEs adopt the preparation of these statements but not exactly the same as required by IAS1. Therefore in this research, the researcher shall base on the basic preparation of financial statements in order to assess that the SMEs are adopting the accounting practices. The statements include the income statement, balance sheet and the statement of cash flows and the statement of changes in equity. 2.2.7.1 Income Statement

The income statement is important because it shows the profitability of a company during the time interval specified in its heading. The period of time that the statement covers is chosen by the business and will vary. The income statement is also referred to as statement of profit or loss and other comprehensive income. The elements directly related to performance are income and expenses. According to the framework income is defined as an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence’s of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different 28

names including sales, fees, interest, dividends, royalties and rent. Gains represent other items that meet the definition of income and may not, or may not, arise in the course of the ordinary activities of an enterprise. Gains represent increases in economic benefits and as such are no different in nature from revenue. Hence, they are not regarded as constituting a separate element in the IASB Framework.

The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary activities of the enterprise. Expenses that arise in the course of the ordinary activities of the enterprise include, for example, cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash and cash equivalents, inventory, property, plant and equipment. Losses represent other items that meet the definition of expenses, may, or may not; arise in the course of the ordinary activities of the entity. Losses represent decreases in economic benefits and as such they are no different in nature from other expenses. Hence, they are not regarded as a separate element in the IASB Framework. IAS 1 prescribes the presentation of the statement of profit or loss and other comprehensive income as follows: Revenue

xxx

Cost of sales

xxx

Gross profit

xxx

Other expenses

xxx

Profit before tax

xxx

Income tax expense

xxx

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Profit for the year

xxx

Other comprehensive income

xxx

Total comprehensive income for the year

xxx

2.2.7.2 Balance Sheet

The accounting balance sheet is one of the major financial statements used by accountants and business owners. The balance sheet is also referred to as the statement of financial position. The balance sheet presents a company's financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point in time. Because the balance sheet informs the reader of a company's financial position as of one moment in time, it allows someone, like a creditor, to see what a company owns as well as what it owes to other parties as of the date indicated in the heading. This is valuable information to the banker who wants to determine whether or not a company qualifies for additional credit or loans.

Others who would be interested in the balance sheet include current investors, potential investors, company management, suppliers, some customers, competitors, government agencies, and labour unions. The major elements of the statement of financial position are assets, liabilities and equity. According to the framework assets are defined as resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. Equity is the residual interest in the assets of the entity after deducting all its liabilities. 30

IAS 1 prescribes the presentation of the financial position as follows:

Assets

Noncurrent assets

xxx

Current assets

xxx

Total assets

xxx

Equity and liabilities

Total equity

xxx

Noncurrent liabilities

xxx

Total equity and liabilities

xxx

2.2.7.3 Cash Flow Statements

IAS 7 statement of cash flows requires an entity to present a statement of cash flows as an integral part of its primary financial statements. Cash flows are classified and presented into operating activities (either using the 'direct' or 'indirect' method), investing activities or financing activities, with the latter two categories generally presented on a gross basis. IAS 7 was reissued in December 1992, retitled in September 2007, and is operative for financial statements covering periods beginning on or after 1 January 1994. The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement

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of cash flows, which classifies cash flows during the period according to operating, investing and financing activities.

The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition.

Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity's cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8] Cash flows must be analyzed between operating, investing and financing activities. [IAS 7.10]

Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows: 

operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]



investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6] 32



financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]



interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period [IAS 7.31]



cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35]

For operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18]. The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the statement of cash flows under the direct method would appear as follows:

Cash receipts from customers

xx,xxx

Cash paid to suppliers

xx,xxx

Cash paid to employees

xx,xxx

Cash paid for other operating expenses xx,xxx Interest paid

xx,xxx

Income taxes paid

xx,xxx

Net cash from operating activities

xx,xxx

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The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method would appear as follows:

Profit before interest and income taxes

xx,xxx

Add back depreciation

xx,xxx

Add back amortization of goodwill

xx,xxx

Increase in receivables

xx,xxx

Decrease in inventories

xx,xxx

Increase in trade payables

xx,xxx

Interest expense

xx,xxx

Less Interest accrued but not yet paid xx,xxx Interest paid

xx,xxx

Income taxes paid

xx,xxx

Net cash from operating activities

xx,xxx

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2.2.7.4 Statement of changes in equity

Barry Elliot and Jamie Elliot mentioned that Statement of Changes in Equity (SCE) is a primary statement and should be presented with the same prominence as the other primary statements. The components should be the gains and losses that are recognized in the period in so far as they are attributable to shareholders. When IAS 1 had a major revision in 1997 it placed greater emphasis on the components of Statement of Comprehensive Income rather than the bottom line as a result SCE is essential in disclosing true business performance.

Peter Atrill and Eddie McLanney (2011) defined SCE as a financial statement, required by IAS1 which shows the effect of gains and losses and capital ejections or withdrawals on the equity base of a company. SCE itself is part of the financial statements which depicts changes in an entity’s equity between the beginning and the end of the reporting period to reflect the increase or decrease in its net assets during the period.

Except for changes resulting from transactions with owners in their capacity as owners and transaction costs directly related to such transactions, the overall change in equity during a period represents the total amount of income and expense, including gains and losses, generated by the entity’s activities during that period. According to IAS 1, SCE an entity shall present a statement of changes in equity showing in the statement: (a) Total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and to non-controlling interests;

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(b) For each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with IAS 38; and (c) For each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period, separately disclosing changes resulting from: (i)

Profit or loss;

(ii)

Each item of other comprehensive income ; and

(iii)

Transactions with owners in their capacity as owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control.

2.2.8 Tax accounting in SMEs

Income tax systems in most OECD countries are accrual based (Europian Commission, 2008). Under cash accounting, income tax is paid on revenues only when cash is received, and input costs are claimed only when cash is paid out. Cash accounting systems targeted at SMES to compute taxable income based on entries of revenues actually received and costs actually incurred. Cash basis can significantly reduce compliance costs depending on the additional supporting documentation that SMEs as taxpayers are required to keep and maintain. Other simplification measures may include simplified bookkeeping requirements (McMahon, 1999).

In Zimbabwe the tax

authority, ZIMRA, introduced a presumptive tax system which covers all SMEs and informal traders not registered for tax.

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The Zimbabwe VAT system requires businesses to keep and maintain proper books of accounts including the filing of tax invoices. Most SMEs qualify to compulsorily register for VAT under Section 23 of the VAT act (Chapter 23:12). However, the number of SMEs operating in the economy cannot be verified but it is estimated that 90% of all registered tax payers in Zimbabwe are SMEs (Ngorima, 2009).

Tax accounting is methods that focus on taxes rather than appearance of public financial statements. Tax accounting is governed by the Revenue Authorities which dictates the specific rules that companies and individuals must follow when preparing their tax returns. Tax principles often differ from Generally Accepted Accounting Principles. Balance sheet items can be accounted for differently when preparing financial statements and tax payables.

2.2.9 International Financial Reporting for SMEs (IFRS for SMEs)

On 9 July 2009, the IASB published an international financial reporting standard (IFRS) designed for use by small and medium-sized entities (IFRS for SMEs). This is the first set of international financial reporting requirements developed specifically for SMEs. SMEs are estimated to represent more than 95 per cent of all entities, according to the IFRS foundation (2010). Since the early 1970s, IFRSs have been designed to meet the needs of entities whose securities trade in public capital markets. This has affected the scope of issues covered in IFRSs, the amount of implementation guidance and the volume of disclosures (Institute of Chartered Accounting of Zimbabwe (ICAZ, 2010).

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SMEs generally have fewer resources, limited access to capital markets, less business complexity and fewer external users of its Maseko and Manyani 175 financial statements, compared to larger listed entities. Users of financial statements of SMEs will be more interested in current liquidity and short-term cash flows than long-term forecasts of cash flows and earnings (Sian and Roberts, 2006).

The complexities posed by full IFRSs in financial reporting by SMEs led countries like the UK to develop a standard of its own that was used by SMEs in financial reporting; the financial reporting standard for smaller entities (FRSSE), with extant local accounting standards applicable to all non-listed entities. Kenya, by contrast, is a country that adopted IFRSs in full and these have been applicable to all listed and non listed entities since 1999 (Sian and Roberts, 2006).

In Hong Kong the small and medium-sized entity financial reporting framework and financial reporting standard (SME-FRF and SME-FRS) was issued in August 2005 (HKICPA, 2008). The introduction of an IFRS specifically for SMEs was necessitated by many challenges faced by these entities in adopting full IFRSs in financial reporting, the main of which was the excessive disclosure requirements, based on a cost-benefit analysis for SMEs (Nazri, 2010). One major interest of SMEs that adopted full IFRSs was to reduce the cost of preparing financial statements according to the Institute of Chartered Accountant in England and Wales (ICAEW, 2008). Full IFRSs were designed

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for financial reporting that meets the needs of equity investors in large entities with shares trading on public capital markets.

The full IFRSs cover a wide range of issues, including a sizeable amount of disclosures for easy understanding by a wide range of users in these large public companies. Users of the financial statements of SMEs do not usually have similar needs, but, rather are more interested in assessing shorter-term cash flows, liquidity and solvency (McMahon, 1999). Also, many SMEs complained that full IFRSs impose a burden on them - a burden that has been growing as IFRSs have become more detailed and more countries have begun to use them (IFRS foundation, 2010).

Concerns have been raised about the burden to financial statement preparers and the relevancy of the resulting information to lenders, vendors, credit rating agencies, family investors, development agencies and others who use SME financial statements (ICAZ, 2010). A fundamental change in the way companies, and SMEs in particular, report financial information to their lenders and insurers is also critical to minimize credit risk and business failure (ICAEW, 2008). For small businesses, the cost of complying with IFRSs could be greater than the benefit received. A full set of accounts that comply with IFRSs are less relevant for the small business user who is most likely to be the owner manager (Stern and Barbour, 2005), quoted in Stainbank (2008).The introduction of an IFRS for SMEs in July 2009 by the IASB was a welcome development in many countries, especially in developing countries (Juping, 2010; 176 J. Account. Taxation).

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2.3 Empirical Review A study conducted in Zimbabwe on 100 SMEs by (Manyani, 2011) brings out that SMEs do not keep complete records of accounts due to lack of knowledge in accounting and the cost of engaging professional accountants. Consequently, the use of accounting information to support measurement of financial performance by SMEs is ineffective. The study proposes that regulatory bodies must develop specific guidelines for SME accounting and organize accounting training programmed for entrepreneurs in small businesses. They also recommend the application of mandatory record keeping to improve accounting practices of SMEs in Zimbabwe.

(Attom, 2011) Studies 217 out of 250 SMEs in Ghana and reports that 59% do not practice formal accounting at all. The reasons they gave to this include low levels of education and inadequate knowledge in accounting which makes it difficult for them to appreciate the need to practice accounting in their business. In a study of 148 respondents in Nigeria (Enugu), Okoli (2011) links proper record keeping and profitability of small scale enterprises and assert that due to inadequate record keeping, the small scale operators could not assess their performances effectively. He argues that in order to enhance the profitability of small scale enterprises and their continuity, there is need for adequate record keeping which will help the proprietors to keep track of the performance of these enterprises.

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Mensah et al. (2007) states that a significant number of enterprises in their survey kept no records pertaining to operations, finance, audited accounts, tax returns, and so on. Gilbert Kwabena Amoako (Ghana) researched that all the micro and small enterprise could not receive credit from the banks and promotional institutions on grounds that the formal banking sector considered them a high risk area, and hence charged them high cost for borrowed funds from the banks.

In assessing the financial statements of micro and small enterprises, Aryeetey et al. (1994) claims the existence of practical problems in deriving records and figures that make up the statements. One reason for that is because for almost all enterprises the owners keep all the records in memory and hence the lack of records of all kinds sales, marketing, accounting, credit borrowing from lending institutions, staff costs, owners emoluments, etc. Owners of SMEs do not keep proper records and thus, they are not able to provide data about their entities.

The research conducted by DeThomas and Fredenberger (1985) found that 81 percent of the small enterprises regularly obtained summary financial information. Ninety-one percent of the summary information was in the form of traditional financial statements (balance sheets, profit and loss statements, fund statements), the remainder being bank reconciliation and operating summaries whereas no business was regularly receiving cash-flow information. The study further found that 61 percent of respondents felt the financial statements provided the information they required for planning and decisionmaking. Nevertheless, only 11 percent of respondents reported that they had used

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financial statement information formally as part of managerial evaluation, planning and decision making, 2 percent of businesses utilized financial ratio analysis, and few made even simple historical comparisons.

Thomas and Evanson (1987) studied 398 small pharmacies (in Michigan, North Carolina, Nebraska, Rhode Island and Washington) to examine the extent to which financial ratios were used in a specific line of small retail business and tested for a relationship between use of financial ratios and business success. The study used regression analysis to examine the relationship between financial ratio usage and SMEs profitability. However, they could not demonstrate any significant relationship between earnings-tosales and the number of financial ratios used by the owner in operational decisionmaking. When efforts were made to include the effects of other managerial practices and variations in business environments, no association between use of individual ratios and total earnings or total to sales was found.

2.4 Summary In this chapter, the research has identified accounting practices that can be adopted by SMEs and the definitions of key words in the research. The research has managed to spell out the how important is to adopt the accounting practices by SMEs. The research exposed accounting practices that can be adopted such as measurement issues, accounting basis, financial recording and tax accounting by SMEs. In the following chapter, the research is going to look at research methodologies, which are how the information is acquired to base the conclusions of the research. 42

CHAPTER 3 RESEARCH METHODOLOGY

3.1 Introduction This chapter specifies the methods and procedures used to conduct the research which provided the material for findings made. This chapter was used to guide implementation of research study towards the realization of the intended objective. The focus of this chapter is on research design, research instrument and data collection procedures. This chapter also gives the population that was selected for investigation. These components determine the effectiveness and representativeness of research results. The merits and demerits of data collection methods and research techniques that were used in the research are also discussed in the chapter.

3.2 Research Design Shumba (2004:4) denotes that research design is a systematic strategy and plan for selecting, rationalizing, and organizing the sequence of procedures for collecting and handling the evidence on the basis of the research or the research problem which are to be answered or solved. The research used questionnaires to gain data from the respondents. The research draws a sample from two areas the SMEs at the show ground and the Green Market Area in Mutare. The research considered such a sample because in those areas that’s where most SMEs are situated in Mutare. The research design used 43

in this study was basically the descriptive method. The research design provided the glue that holds the research project together. A descriptive survey design was used for the purpose of carrying out this research, which was deemed to be the most appropriate and the justification for this is provided below. 3.2.1 Descriptive Research

Descriptive research design is a type of research method that is used when one wants to get information on the current status of a person or an object. It is used to describe what is in existence in respect to conditions or variables that are found in a given situation whilst experimental research is an attempt by the researcher to maintain control over all factors that may affect the result of an experiment. In doing this, the researcher attempts to determine or predict what may occur.

In this research descriptive research was used as the research aimed at identifying accounting practices that can be adopted by SMEs and to assess whether these accounting practices have been adopted or not by a selected number of SMEs. Descriptive research design used both qualitative and quantitative as the research managed to collect data on the adopted accounting practices by SMEs and assessing whether they have been adopted or not.

This design was found to be more suitable for this study as it greatly helped in discovering the association of different variables and was easy to apply unlike experimental research which requires a control and an experimental group. This design

44

was cheap and therefore it reduced the financial constraint without negatively affecting the effectiveness of the research.

3.3 Sampling 3.3.1 Population

According to Kendra Cherry, (2003) a sample is a subset of a population that is used to represent the entire group as a whole. When doing research, it is often impractical to survey every member of a particular population because the sheer number of people is simply too large. The sampled population comprised of 30 SMEs in Mutare. The non probability convenience sampling technique was employed to distribute the questionnaires to owners of SMEs. A convenience sample is simply one where the units that are selected for inclusion in the sample are the easiest to access. The sample was chosen on the basis that the questionnaires are distributed to many SMEs and out of many SMEs we select the 30 SMEs required. 3.3.2 Probability Sampling

Probability sampling is a procedure that is devised where each person or item is given a known chance of inclusion whilst non probability sampling is whereby respondents are selected in such a way that a calculable chance of inclusion cannot be determined. With probability sampling we should be able to calculate the probability of an individual being selected for the sample at the beginning of the process whilst with non probability sampling there is some element of judgment in the selection. Non probability sampling surveys cannot claim the characteristics of random sampling and again, a procedure is 45

devised to justify the sampling method and limit any possible selection bias. A well conducted non random survey can produce acceptable results more quickly and at lower cost than a random sample. Examples of probability sampling are random sampling, stratified sampling, cluster sampling and multistage designs sampling. Examples of non probability sampling are quota sampling, judgmental sampling, snowball sampling and lastly convenience sampling which is the one used in this research. 3.3.3 Convenience Sampling

The researcher chose convenience sampling among probability sampling methods because of its advantages overweighing its disadvantages discussed below. These advantages of convenience sampling include the following; it is very easy to carry out with few rules governing how the sample should be collected unlike probability sampling such as random sample which is difficult to carry. Convenience sampling has a relative cost and the time required to carry out it is very short unlike probability sampling techniques which is expensive and requires a lot of time to carry it out. This enables the researcher to achieve the sample size you want in a relatively fast and inexpensive way. The convenience sample may help you gathering useful data and information that would not have been possible using probability sampling techniques, which are more formal access to lists of populations.

However there are some disadvantages of convenience sampling which includes the following; the convenience sample often suffers from biases from a number of biases 46

and since the sampling frame is not known, and the sample is not chosen at random, the inherent bias in convenience sampling means that the sample is unlikely to be representative of the population being studied. This undermines the ability to make generalizations from the sample to population being studied. Whilst convenience sampling should be treated with caution, its low cost and ease of use makes it preferred choice for this research among other probability sampling methods.

Given the population size of 30 SMEs the questionnaires were going distributed to the SMEs at the Green Market and the Showground until it reaches the respondents of 30 SMEs the researcher presented the data from those respondents. The convenience sampling was used when the researcher makes a judgment to take the SMEs at the Green Market and the Showground in Mutare as many SMEs are situated around that area and that makes it convenient to use such a method.

3.4 Data Collection Methods Cooper and Schindler (2003) define data as the facts presented to the research from the study environment. It is from this data that the research draws conclusions to a research study. Data is set into two forms namely primary and secondary data. Primary data refers to data structures of variables that was collected and assembled for the current research problem. Secondary data is data at hand prior to the research. The data would not have been collected to serve answers to the research questions but information can be drawn from such a sources. In this case, the researcher used primary data because the

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data was specifically collected to assess the accounting practices adopted by SMEs in Mutare. 3.4.1Primary Sources

To gather data pertaining the adoption of accounting practices by SMEs the research employed questionnaires. The research based most of the study on this type of data collection procedure due to the following reasons: current data encompassing all the latest developments running concurrently with the research is obtainable for the research. Data, which validates the research, is acquired through this means. Data collected is more reliable, valid and relevant compared to secondary sources there might be biased opinions and views expressed in the written material which might be difficult to avoid. However primary research has its own disadvantages which when well controlled the quality of the research study is not compromised. The disadvantages of primary research are: because primary research is very intensive it is expensive to effectively carry out compared to secondary data which is cheap to obtain the data. Primary research is time consuming and requires proper planning to use time efficiently compared to secondary sources which is already available and does not take more time to obtain the information. The research designed a time schedule for collecting data such that every minute was used fruitfully.

3.5 Research Instruments

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According to Wegner, (1998), research instruments are tools used in data collection to find solutions to the problems under investigation. These research instruments include questionnaires, interviews, and observation and observer participation. Instrumentation refers to the methods of data collection used in the research. The researcher used questionnaires for this research. 3.5.1 Questionnaire

A standard questionnaire was designed to address the research objectives. One standard structured questionnaire was drafted for all the targeted respondents to ensure comparability of results. The questionnaire consisted of closed questions and the respondents were requested to tick the answer they thought was the most appropriate. The questionnaire selected some accounting practices among the others. The researcher delivered the questionnaire in person. An appointment date and time was set for the collection of the questionnaires to lessen the burden on the respondents of getting hold of the research once they have completed filling in the questionnaire. This also helped to ensure that the questionnaire got into the hands of the intended respondents. In order to validate the questionnaire, researcher carried out a pilot test. Preliminary analysis was carried out before the actual sending of questionnaires. This was done so as to establish clarity, validity and reliability of the instrument employed. The pilot study helped the research to reveal the misconceptions of the respondents and the need to rephrase some of the questions for more clarity and relevance.

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Advantages of Questionnaire over other research instruments include the following; questionnaires possessed a potential to cover wide geographical coverage as they can be sent to any location or site of research interest compared to interviews which needs the interviewer and the interviewee to be available at the moment of interview. Questionnaires are generally cheap to administer, as the only expenses incurred are printing and telephone. In this regard since the research was conducted by the student with limited financial resources. A questionnaire saved time and was an inexpensive way of surveying a large crosssection of people compared to other methods and given the little amount of time data for the research can be easily obtained. A questionnaire allowed the research to guide participants along lines of thought as responses obtained from close-ended questions were easy to analyze compared to other methods such as interviews on which the respondents can go out of hand when asked questions they are not able to answer. Anonymity of respondents was assured, generally resulted in more honest responses unlike when interviews are held the researcher will have direct contact with the respondents. However there are some disadvantages of questionnaire which includes the following; some respondents failed to interpret questions and thus gave inaccurate answers although the researcher tried to structure closed questions in the questionnaires. The validity of the data was reduced by unwillingness or inability of some respondents to give full and accurate replies to the questions as some of the respondents were not able to understand some of the questions. Some respondents were unwilling to provide

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information even though the research had made an assurance of confidentiality of results and signed a nondisclosure agreement with the respondents.

3.5.2Data Validation

Borg (1977), mentioned that validity is the degree to which a test measures, what it purports to measure. Melivilee et al (1996) also agreed with Borg when he said the term validity means that an instrument measures what it is intended to measure and that it measures this correctly. This therefore refers to appropriateness and usefulness of a specific inference made from the test score. In performing the research, the research was concerned with two types of validity namely: Content validity which is the degree to which tests items represents the content that the test is designed to measure and sampling validity which is the degree to which the samples are an adequate sample of total population. The research checked on reasonableness of responses before using them to draw up conclusions. The reasonableness check was carried out based on the comments passed by a respondent after answering a questionnaire. This was carried out in order to reduce sampling risk that is the risk of drawing up a conclusion from a sample that would be different from that which would have been drawn had a 100% survey been done.

3.6 Summary This chapter dealt with the methods used in this research to collect primary data. It also outlined the merits and demerits of these methods in the selection of respondents. The 51

research methodology presented is deemed to be effective and is believed to minimize research errors making the study well representative. The next chapter presents and analyzes the findings obtained through this research methodology.

CHAPTER 4 DATA PRESENTATION AND ANALYSIS

4.0 Introduction This chapter focuses on the analysis and presentation of data gathered from the field research. The research used the circulated questionnaires results as the source of data referred to in this analysis. (See appendix 1 for the questionnaire schedule.) In this report, the research analyzes the extent to which SMEs have adopted modern accounting practices.

4.1 Questionnaire Response Rate The research distributed 30 questionnaires to owners of SMEs in Mutare. This was done over two days where questionnaires were sent on the first day and on the second day that’s when the questionnaires were collected. For the purpose of this research the researcher used the questionnaires that were fully completed which is a total number of 21 questionnaires, which is 70% when expressed as a percentage. The research was

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satisfied by this rate of response. Credit is given to all those who facilitated the distribution and filling in of questionnaires.

Table 4.1 Questionnaire Response Rate Respondents

Owners

Number of

Number of

Number of

Response

questionnaires

questionnaires

questionnaires

rate

administered

fully completed

not respondent

21

9

30

Response rate = No. of questionnaires fully completed

X 100

Total no. of questionnaires administered

Graph 4.1: Questionnaire Response Rate of respondents in percentages

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70%

Response Rate

70% of SMEs fully respondent 30% of SMEs not respondent

4.2 Research Findings The research gathered some findings detailed in this chapter on the adoption of accounting practices by SMEs in Mutare. 4.2.1 Background of Accounting

Q. Do you have a background of accounting? The above question sought to assess if the respondents have background of accounting as an important tool to analyze the adoption of accounting practices by SMEs in Mutare. The question was a starting point for the research to effectively analyze the adoption of accounting practices by SMEs.

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Of all the respondents to the question 48% of the respondents showed that they have a background of accounting. All the other 52% of the respondents have no background of accounting. The responses were analyzed as below on graph 4.2: Graph 4.2: Background of Accounting

4.2.2 Measurement Issues

Q. What are the measurements issues being adopted by SMEs in Mutare and how many of those SMEs adopting them? The above question was meant to address what sought of measurement issues being adopted by SMEs and how many of those SMEs adopting them. Most of the respondents who use the measurement issues use net realizable values as compared to other measurement issues such as historical cost, current cost, and present values. Net 55

Realizable Value is mostly used by SMEs because there main asset is inventory which is supposed to be recorded at the lower of cost. Inventory need to be examined so as to see if its recorded cost should be reduced due to the negative impacts such as damage, spoilage, obsolescence and reduced demand from customers. Some of the SMEs who own fixed assets of which there are few use historical cost to present their assets in the balance sheet. There are no SMEs who use current cost and present values as they are more complex to use and some SMEs do not use any measurement issues to value their assts they just record. The table below and the graph 4.3 summarize the above information:

Table 4.2 Measurement issues adopted Measurement

Net Realizable

methods

Value

Number of

10

Historical Cost

5

SMES adopting

56

Current Cost

0

Present Value

0

Graph 4.3 Measurement issues

4.3.3 Accounting Bases

Q. What accounting bases being adopted by SMEs in Mutare and how many SMEs adopt the accounting bases? The above question meant to address what sought of accounting bases adopted by SMEs and how many of the SMEs adopting each base. The SMEs either adopt cash or accrual bases as their accounting bases. The research reveals that SMEs are more comfortable with the cash basis, supporting the propositions of Walhlstedt (1996) for the adoption of cash basis accounting in SMEs.

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Cash accounting is easy and clear as compared to accrual accounting which is complex as it requires understanding of double entry book keeping and accounting processes. Accrual basis accounting requires the recording of revenue and expenses for all transactions regardless of whether cash is received or not. Estimation and apportionment of revenue and expenses is also needed under the accruals basis in order to apply the matching concept in reporting period performance and this requires accounting skills which are lacking in SMEs. 72% of the SMEs adopt the cash basis and 28% of them adopt accrual basis as depicted by the following table 4.3 and graph 4.4:

Table 4.3 Accounting bases adopted Accounting bases

Number of SMEs adopting

% of SMEs adopting

Cash Basis

Accrual Basis

15

72%

58

6

28%

Graph 4.4 Accounting bases adopted

4.2.4 Financial Record Keeping

Q. What are the financial records kept by SMEs in Mutare and how many SMEs practicing them? The above question meant to address what sought of financial records kept by SMEs and how many SMEs are practicing them. Financial records are in two categories, the journals and the ledgers. The first analysis was the journals or day books and many SMEs kept sales day books and the purchases day books. However there are little accounting captured on pay roll records and expenditure records as evidenced by a few SMEs keeping books to record pay roll and expenses. Most of the SMEs are the owners and the employees of their business so they do not require the payroll record. Some of

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the SMEs they do not account for expenses they just do business for survival purpose that means they are comfortable when they are able to restock their goods and sale the goods and got the whole profit in their pockets. The asset register record is kept by those SMEs that are growing so as to safeguard their assets.

Table 4.4 Accounting Records Practiced Type of day

Sales day

Purchase

Expenditure

Pay roll

Asset

books

book

day book

records

records

register

Number of

16

12

9

SMEs adopt

Graph 4.5Accounting records adopted

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6

6

The second analysis is the adoption of ledgers. The types of ledgers prepared by SMEs include the following; receivables accounts, payables accounts, cash book and noncurrent assets records. Some of the SMEs in Mutare do not prepare the above ledgers at all. Most SMEs in Mutare prepare cashbooks as they mainly deals with cash transactions and a few prepare receivables and payables accounts. Most of SMEs deals with cash if they want to purchase stock they pay in cash and they also sale the goods in cash so most of them do not see the importance of preparing receivables and payables accounts. Some of the SMEs which are growing prepare noncurrent assets records so as to safeguard their assets. Some SMEs do not even prepare any of these ledgers, they just transact their transactions in cash and they restock without writing it down and they do business for survival purposes. The analysis is shown in the table 4.5 and the graph 4.6 below:

Table 4.5 Books of accounts adopted Type of book

Cash Book

of accounts Number of

17

Payables

Receivables

Noncurrent

Accounts

Accounts

Assets Record

10

10

SMEs adopting

61

6

Graph 4.6 Books of Accounts Adopted

4.3.5 Financial statements adopted

Q. What are the financial statements being adopted by SMEs in Mutare and how many SMEs are adopting? The above question meant to address what are the financial statements adopted and how many SMEs adopting them. The research shows that most of the SMEs do not prepare a complete set of financial statements with some not preparing any financial statement at all. An entity may fail to prepare financial statements even with well-maintained books of accounts because the preparation of financial statement requires accounting skills and this, as reflected by the results, is lacking in 52% of SMEs. 62

Out of the 21 SMEs, 11 of them prepare the income statements as they would want to get how much profit are they getting. Out of the 11 that prepares the statement of income 7 of them goes on to prepare the statement of changes in equity and the statement of financial position. Among the 7 SMEs that prepare the statement of financial position, 4 of them continue to prepare the statement of cash flows.

The 10 SMEs remaining do not prepare any financial statement and their reason was they do not see any need to prepare the accounts as they are satisfied with what they are getting from their businesses. The need to prepare a complete set of financial statements increases as an entity grows, especially into medium size. It is at the medium size that entity financial performance reporting will not only be limited to internal users but also to external users such as lenders. The SMEs who adopt full financial statements are those growing to medium size and they hire expects and some employ expects such as accountants, bookkeepers and so on to prepare financial statements for them.

Table 4.6 Financial statements adopted Financial

Statement of

Statement of

Statement of

Statement of

statements

income

changes in

financial

cash flows

equity

position

Number of

11

7

7

SMEs

63

4

None

10

adopting

Graph 4.7Financial statements adopted

4.3.6 Tax Accounting

Q. How many SMEs adopt tax accounting? Out of all the respondents 52% of the SMEs adopt tax accounting. The 52% respondents prepare tax returns and submit the returns to ZIMRA. The remaining 48% do not submit their tax returns meaning they are not remitting to ZIMRA.

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Graph 4.8 Tax Accounting

4.4 Conclusion In this chapter the analysis shows that SMEs do not adopt complete records because owners do not appreciate the need to keep accounting records, the high cost to hire expects like accountants and some lack of the necessary accounting knowledge. As a result there are few SMEs adopting modern accounting practices in full in Mutare.

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CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS

5.0 Introduction Having analyzed and presented results on the extent to which SMEs have adopted modern accounting practices in Mutare, in this chapter, the research wrapped up by looking at three issues. Firstly, a provision of an outline or a summary of all the work contained in chapter one to chapter four. Secondly, it provides conclusions to this research based on the objectives that were set and the results presented in the preceding chapter. Lastly, it provides recommendations to the SMEs, regulatory body and the Ministry of Small- Medium Enterprise based on the research objectives.

5.1 Summary of Findings The research findings assisted the researcher in effectively meeting the set objectives of the study. This research attention was to assess the adoption of accounting practices by SMEs in Mutare. A brief background of the study and the statement of the problem identified were outlined. The objectives of the study, the research questions to be answered, and assumptions, scope of the study and the importance of the research were 66

also given. A comprehensive review of both theoretical and empirical literature was carried out. The research also gave an explanation of the research methodology applied in carrying out the research. The research design, research population and the sample size together with explanations on why they were selected were also provided. The data collection method and instruments used together with the data presentation and analysis plan were provided. The research found out that there are few SMEs adopting accounting practices. The first objective was to identify accounting practices that can be adopted by SMEs in Mutare and this objective has been met. SMEs are adopting certain accounting practices but not all of them are adopting them. In summary the accounting practices include the following; measurement issues (the SMEs uses the net realizable value and the historical cost); the SMEs mainly adopt cash basis compared to accrual basis because they mainly deal with cash; tax accounting (some SMEs are complying with ZIMRA requirements by filling in returns and then pay the amount they owe to ZIMRA). The financial records adopted include the sales day book, purchase day book, expenses record, asset registers, and the pay roll records; the ledgers include the cash book, receivables accounts, payables accounts, and the noncurrent asset records although these ledgers are prepared by few SMEs since they deal with cash mainly; and finally the financial statements adopted include the income statement, statement of changes in equity, the statement of financial position and the statement of cash flows.

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Most SMEs mainly prepare the income statements but they did not conform to the International Accounting Standard 1 (IAS1) they just prepare a simple income statement where they subtract the expenses from the revenues so that they get profit. The results shows that some of the SMEs do not adopt complete records because owners do not appreciate the need to keep accounting records, the high cost to hire expects like accountants and some they lack necessary accounting knowledge. As a result there are few SMEs adopting modern accounting practices in full in Mutare thus answering the second objective which was to assess whether those accounting practices have been adopted or not by a selected number of SMEs.

5.2 Conclusion The main aim of the research was to assess the adoption of accounting practices by SMEs in Mutare. The research implies that to a lesser extent SMEs are adopting all accounting practices and it is because of some SMEs owners who do not appreciate the need to keep accounting records, they are high cost to hire accounting expects, lack of necessary accounting knowledge and some they do not prepare because they fear to be followed by regulatory authorities. The research was adequately done and results obtained are a true representation of the whole population.

5.3 Recommendation It is the aim of every research to come up with practical solutions to certain problems and to give guidance to various SMEs as to how they can add value on their businesses in respect of various activities. This research is no exception.

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Accounting training programs and workshops for SMEs should be initiated by the Ministry responsible for SMEs thus the Ministry of Small and Medium Enterprise for those who do not know about the importance of adopting accounting records to come to grips with it. This strategy will help them to advance their accounting practices and bring about the possibility of formalizing their operations. As a means of motivation, the authorities should design specific guidelines for SMEs accounting and provide templates for accounting practices of SMEs.

This strategy will reduce the technicalities involved in maintaining accounting records and also make the whole process very simple and friendlier. Since most of the respondents seem not to support attempts of making it mandatory to maintain proper accounting records and subsequently produce final accounts we recommend the adopting of accounting practices in SMEs become mandatory. The authorities should maintain that proper accounting is important in any business and that it is crucial in tracking all aspects of the business from the information contained in the books.

The government should put in place a regulatory body to ensure that SMEs keep proper books and prepare final accounts. This will not only ensure the proper declaration of income and increase tax revenue to the government but also make available proper data for national income accounting which usually influences major government policies. To the extent that such information is required by business owners and government, the necessary legal instruments and proper monitoring must be in place to ensure compliance. Also if the government put in place a regulatory body this means the SMEs

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will improve in running their businesses so as to employ more people of whom it results in a decrease in the rate of unemployment in the country and also the economy will grow since the country is full of SMEs.

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Institute of Chartered Accountancy Zimbabwe (ICAZ 2010). Small and Medium-sized Entities news. (Available on www.icaz.org.zw, retrieved 6 Sept 2010). IASB (2009). International Financial Reporting Standard for Small and Medium-sized Entities. 9 January. IASC Foundation Pubs. London. Ismail NA, King M (2007). Factors influencing the alignment of accounting information in small and medium sized Malaysian firms. Keasy K, Short H (1990). The accounting burdens facing small firms: An empirical research note. J. Acc. Bus. Res., 20(80): 307-313. Lalin H, Sabir RI (2010). Research on Usage and Usefulness Perception of Financial Accounting Practices in Less Developing Countries: A case of Cambodia. Marriot N, Marriot P (2000). Professional accountants and the development of management accounting service for the small firm: Barriers and possibilities. McMahon RGP (1999). Putting SME Financial Reporting into Theoretical and Practical Perspective. Res. Paper Series 98-10. The Flinder Univ. South Aus. Adelaide. Nazri M (2010). A standard for SME Financial Reporting In: SME Toolkit Malaysia. Intl. Fin. Corp. Aug., 2010. Ngorima M (2009). Expert Calls for redrafting of Tax Law In: The Chartered Secretary.

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QUESTIONNAIRE (Appendix 1) Questions to Owners/ Managers of SMEs Q1. Do you have background of accounting? Yes

No

Q2. Complete the table below: List of Accounting Practices Measurement Issues:

Adopted or Not Yes

No

1.Historical Cost 2. Current Cost 3. Realizable

Value 4. Present Value

Accounting Bases: Financial Record Keeping:

Financial Statements: Statements

1.Cash Basis 2. Accrual Basis 1. Day Books 2. Cash Books 3. Cheque Books 4. Journals 5. Ledgers 1.Income 2. Balance Sheet 3. Cash flow

Statements Tax Accounting

If the SMEs owners say no to answers give reasons why do they not adopt those accounting practices …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… …………………………………………………………………………………………………………………………………………………… 74

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