ACCOUNTING INFORMATION SYSTEM AND THE GROWTH OF SMALL AND MEDIUM-SCALE ENTERPRISES: A STUDY OF SMEs IN LAGOS METROPOLIS

ABSTRACT

This study investigated the relationship between accounting information systems and the growth of small and medium-scale enterprises (SMEs) in Lagos Metropolis. It adopted relevant theoretical approaches to explain the subject, particularly Contingency Theory, the theory of accounting information system design, and the Technology Acceptance Model (TAM).

The study covered ten SMEs in Lagos State, consisting of five businesses located on Lagos Island and five on the mainland. Primary data were collected through structured questionnaires distributed to selected employees of the participating businesses. A purposive sampling method was used to select 200 employees from the ten SMEs, with 20 respondents selected from each business. The data obtained were analysed using descriptive statistics and the chi-square statistical method.

The findings showed that accounting information systems have a significant effect on the sales growth of SMEs in Lagos Metropolis. This was supported by a calculated chi-square value of 6.48, which was higher than the critical value of 5.74 at a 5% significance level and 4 degrees of freedom. The study also found that accounting information systems significantly affect the asset growth of SMEs, with a calculated chi-square value of 9.79 compared with a critical value of 7.59 at a 5% significance level and 5 degrees of freedom.

The study concludes that accounting information systems play an important role in improving the sales and asset growth of SMEs in Lagos Metropolis. It therefore recommends that SMEs should improve their accounting systems to ensure that financial information is accurate, dependable, and available when needed. Business owners should make greater use of accounting information when taking business decisions and regularly engage professional accountants to maintain proper accounting standards. The Lagos State Ministry of Trade, Commerce and Industry should also provide accounting training for SME operators who have limited knowledge of proper financial record-keeping. In addition, the government should introduce minimum accounting record requirements for eligible SMEs in Nigeria. Finally, business owners should ensure that the expenses involved in acquiring and maintaining accounting information systems are reasonable when compared with the benefits they provide.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Accounting is one of the major factors that influence the success and failure of business organisations in the modern business environment. It provides several important services, such as recording financial transactions, examining business activities, monitoring financial conditions, and assessing organisational performance. Accounting also helps businesses prepare financial records for tax purposes and provides information that supports other organisational activities (Amidu, John & Joshua, 2011). For small and medium-scale enterprises (SMEs), accounting information is especially important because it helps owners and managers deal with short-term financial issues relating to costs, expenses, and cash flow. It also provides useful information for monitoring business operations and ensuring that available resources are properly managed (Mitchell, Reid & Smith, 2000; Son, Marriot & Marriot, 2006).

Small and medium-scale enterprises are important contributors to the development of emerging economies. They support employment generation, rural development, youth empowerment, national income, technological progress, and balanced regional development. However, despite their contributions, SMEs in Nigeria operate in a difficult business environment affected by local and international economic challenges, as well as unstable government policies. These conditions have contributed to the frequent failure of many small and medium-scale businesses (Dasanayaka, Kankanamge & Sardana, 2011). Some of the difficulties faced by these enterprises are also related to their internal operations. Such challenges include inadequate working capital, competition from larger businesses, problems with obtaining raw materials, low production capacity, poor management practices, limited educational qualifications among business owners, financial difficulties, and unwillingness to adopt modern technology (Tafamel & Idolor, 2008; Osamwonyi & Tafamel, 2010).

Many small businesses are established as family-owned enterprises and are commonly managed by members of the same family. However, some also employ workers who are not related to the owners. Their management structures and business practices may therefore be influenced by family traditions, management approaches, and values transferred from one generation to another (Peters & Buhalis, 2004). SMEs have an important role to play in the development of the Nigerian economy, but their contribution depends largely on their ability to operate effectively and remain in business. One of the factors that supports their survival and growth is the establishment of proper internal control procedures and the accurate recording of financial transactions. When business transactions are properly documented, owners and managers can assess the financial condition of their enterprises and make better decisions at the end of each accounting period (Mbroh, John & Attom, 2011).

Ismail (2009) examined issues associated with the financial management of enterprises, while accounting information generally refers to financial data generated through accounting processes and systems. This information is usually presented in financial reports such as the income statement and statement of financial position. It may also include financial ratios derived from these reports. Accounting systems enable organisations to assess their financial conditions, monitor business activities, prepare tax-related documents, and provide information for other functions, including production, marketing, human resource management, and strategic planning.

SMEs that do not have suitable accounting information systems may find it difficult to assess their financial performance, identify outstanding payments owed by customers and suppliers, and estimate their future financial position. An accounting information system (AIS) is mainly designed to collect and record information relating to an organisation's transactions and other economic activities. It also performs the functions of storing, processing, and communicating relevant information to internal and external users to support informed decision-making (Stefanou, 2006).

The growth of computer technology in the 1950s brought major improvements in the storage and processing of information (Rashid, Hossain & Patrick, 2001). Computers made business information more useful by providing the ability to process large amounts of data, carry out calculations, and generate reports accurately within a shorter period. These improvements encouraged the development and use of different information systems, including Accounting Information Systems (AIS), Manufacturing Resource Planning (MRP) systems, and Human Resource (HR) systems. Consequently, information technology has significantly changed the methods through which organisations conduct their business activities (Elliot, 1992).

The introduction of modern technology has improved business operations by making it easier for organisations to manage financial transactions and production activities. As businesses expand, the amount of financial information that needs to be recorded, processed, and updated also increases. Traditional accounting methods that rely solely on manual recording of daily transactions may become inefficient and time-consuming as business activities grow. Manual accounting procedures can also lead to errors, reduced work efficiency, excessive paper use, and delays in preparing financial reports. These limitations have encouraged businesses to adopt accounting information systems that can collect, process, analyse, and present financial information more effectively (Saira, Zariyawati & Annuar, 2010).

Aremu and Adeyemi (2011) observed that many SMEs do not pay sufficient attention to proper accounting practices unless they are legally required to do so. They also explained that weaknesses in accounting procedures and poor financial record-keeping have contributed to the early closure of several small and medium-scale enterprises. These problems have continued partly because many Nigerian businesses do not produce or make adequate use of accounting information. As a result, the absence of an appropriate accounting information system, or its ineffective application, can make it difficult for SMEs to identify and resolve their financial and operational challenges.

1.2 Statement of the Problem

Small and medium-scale enterprises are recognised as important contributors to the Nigerian economy. The fact that many large organisations started as small businesses shows that SMEs have the potential to grow into major commercial enterprises. However, despite their contribution to economic development, many SMEs in Nigeria do not pay adequate attention to accounting information and the proper documentation of business transactions. This is a major concern because effective accounting practices are necessary for business survival, expansion, and long-term sustainability. One reason for this problem may be that some business owners and managers do not have sufficient knowledge of basic bookkeeping and accounting procedures.

It is also difficult to establish the extent to which some SME operators understand the importance of accounting information to the continued survival and growth of their businesses. The limited educational background of certain business owners and the employment of workers without the necessary accounting knowledge may result in incomplete, inaccurate, or unreliable financial records. These weaknesses can reduce the quality of information available to management and negatively affect the decisions made about business operations.

In addition, some SMEs fail to maintain proper accounting records or follow basic accounting procedures. As a result, they may be unable to determine their actual financial positions. This situation can limit their ability to secure loans and other financial assistance from banks and lending institutions, which are often needed for business expansion and diversification. Poor record-keeping can also create problems when preparing important financial reports, such as profit and loss accounts, statements of financial position, and cash flow statements. Where reliable financial information is unavailable, business owners may struggle to calculate their annual profits and assess the general performance of their enterprises.

SMEs in Nigeria therefore continue to experience accounting and financial management problems, including poor bookkeeping practices, inadequate use of accounting information in management decisions, and weaknesses in the accuracy and reliability of financial records. These challenges raise important questions about the extent to which accounting information systems can contribute to the growth and sustainability of small and medium-scale enterprises. In view of these concerns, this study examines the relationship between accounting information systems and SME growth in Lagos Metropolis, with particular emphasis on sales growth and asset growth.

1.3 Objectives of the Study

The main objective of this study is to examine the relationship between accounting information systems and the growth of small and medium-scale enterprises.

The specific objectives are to:

1. Determine the effect of accounting information systems on the sales growth of SMEs.

2. Examine the effect of accounting information systems on the asset growth of SMEs.

1.4 Research Questions

The study is guided by the following research questions:

1. What is the effect of accounting information systems on the sales growth of SMEs?

2. How do accounting information systems affect the asset growth of SMEs?

1.5 Research Hypotheses

The following null hypotheses are formulated to guide the study:

H₀₁: Accounting information systems have no significant effect on the sales growth of SMEs.

H₀₂: Accounting information systems have no significant effect on the asset growth of SMEs.

1.6 Operationalisation of Variables

This study examines the relationship between accounting information systems and the growth of small and medium-scale enterprises in Lagos Metropolis.

The dependent variable is the growth of small and medium-scale enterprises, which is measured using two indicators: sales growth and asset growth.

The independent variable is the accounting information system, which is measured through four components: ethical values (EV), effective accounting systems (EAS), human resources (HR), and investment in technology (IT).

The relationship between the dependent variable and its indicators is expressed as follows:

[
Y^* = f(Y_1,Y_2)
]

Where:

• (Y^*) = Growth of small and medium-scale enterprises

• (Y_1) = Sales growth

• (Y_2) = Asset growth

The independent variable is represented as:

[
X = f(X_1,X_2,X_3,X_4)
]

Where:

• (X) = Accounting information system

• (X_1) = Ethical values

• (X_2) = Effective accounting systems

• (X_3) = Human resources

• (X_4) = Investment in technology

Based on these relationships, the growth of small and medium-scale enterprises can be expressed as a function of the components of the accounting information system as follows:

[
Y^* = f(X_1,X_2,X_3,X_4)
]

When the relationship is presented in the form of a regression model, it becomes:

[
Y^* = \alpha_0+\alpha_1X_1+\alpha_2X_2+\alpha_3X_3+\alpha_4X_4+\mu
]

Where:

• (\alpha_0) = Constant term of the regression model

• (\alpha_1-\alpha_4) = Regression coefficients representing the estimated parameters of the accounting information system components

• (\mu) = Stochastic error term

1.7 Significance of the Study

An effective accounting information system is an important instrument for achieving sound business management. It provides management with reliable financial information that can guide decisions and help an organisation achieve its objectives. This study is expected to improve the understanding of business owners, managers, and other stakeholders regarding the importance of maintaining complete, accurate, and reliable accounting records. It will also explain how accounting information systems can support timely decision-making, effective business planning, and proper monitoring of organisational activities.

The study will also be beneficial to employees and consumers because reliable accounting information can help stakeholders assess the ability of an enterprise to continue providing goods and services and meet its financial responsibilities, including the regular payment of employees' salaries.

Government agencies may also find the study useful because proper accounting records can improve the availability of financial information required for taxation, business supervision, and the regulation of commercial activities.

Furthermore, the study will add to the existing body of academic knowledge on accounting information systems and the growth of SMEs. It may also provide useful information for students, researchers, and other individuals who intend to carry out further studies on related subjects.

1.8 Scope of the Study

This study is concerned with accounting information systems and the growth of small and medium-scale enterprises in Lagos Metropolis, Lagos State. The population consists of SMEs operating within Lagos Metropolis that are registered with the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).

1.9 Definition of Terms

Accounting: Accounting refers to the systematic process of identifying, recording, classifying, summarising, analysing, and communicating financial information to individuals and organisations that need it.

Accounting Information: Accounting information consists of financial data collected, processed, stored, and presented to help individuals and organisations make informed decisions.

Accounting Information System: An accounting information system is an organised arrangement, usually supported by computer technology, for collecting, recording, processing, storing, and communicating financial information. It helps an organisation maintain internal control, coordinate activities, and make appropriate decisions.

Small-Scale Businesses: Small-scale businesses are privately owned enterprises that generally operate with a limited number of employees and generate relatively lower sales revenue when compared with larger organisations.

Medium-Scale Enterprises: Medium-scale enterprises are businesses that operate above the level of small businesses but below that of large corporations. They generally reflect a higher level of business activity, resources, and development than small-scale enterprises.

Sales Growth: Sales growth refers to an increase in the revenue earned by a business from selling its products or services over a particular period. It is usually determined by comparing sales revenue from different periods.

Asset Growth: Asset growth refers to an increase in the total value of the assets owned or controlled by a business over a specified period.

Ethical Values: Ethical values are the moral principles and standards that guide appropriate, responsible, and acceptable conduct within an organisation.

Effective Accounting Systems: An effective accounting system is a system designed to produce accurate, relevant, and timely financial information. It supports external reporting responsibilities, including taxation and investment decisions, as well as internal functions such as measuring operational efficiency and profitability.

Human Resources: Human resources refer to the people employed by an organisation and the management activities involved in their recruitment, development, organisation, and supervision.

Investment: Investment refers to the use or allocation of money and other resources to acquire an asset or support an activity with the expectation of earning future income or increasing its value.

Financial Statement: A financial statement is a formal report that presents the financial activities and position of a business or other organisation. It provides information about the entity's assets, liabilities, equity, income, expenses, and cash flows.

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