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CHAPTER ONE

INTRODUCTION

1.1     Background to the Study 

Small and Medium Enterprises(SMEs) contribute over 90% of the private sector production; they are the major sources of jobs in developing countries and also play a vital role in income generation in developing countries. They played very important roles in the process of industrialization as well as sustainability in every economy. These roles are more of economic sustainability in developed countries and more of economic growth in developing ones. (Modugu & Eragbhe, 2013). The SMEs also act as catalyst for growth and development of a national economy as shown by emperical studies (Anthony & Arthur, 2018; Chinweuba & Sunday, 2019 & Vijayakumar, 2018). According to World Bank 2019, SMEs play a major role in most economies, particularly in developing countries. They account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90% of businesses, more than 50% of employment worldwide with formal SMEs contributing up to 40% of national income (GDP) in emerging economies.In recent decades, Nigeria has made it one of the nation’s prime objectives to expand its industrial base through creation, sustenance and growth of small and medium scale enterprises for attainment of economic growth. The Small and Medium Scale Enterprises DevelopmentAgency of Nigeria and the National Bureau of Statistics (SMEDAN & NBS) in a collaborative study of Micro, Small and Medium Enterprises (MSMEs) in Nigeria carried out in 2013, defined SMEs as firms employing between 10 and 200 employees, and having the value of their assets between N5, 000,000 and N500, 000,000 (excluding land and building).

In recognition of the role of SMEs as catalyst for growth in the economic development of Nigeria, government had taken concerted efforts to boost the SME sector through fundamental policy support such as the creation of Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) in 2003 solely responsible for the promotion and development of this sector YOU WIN in 2011, N-Power and Trademoni schemes in 2016 and other funding access of the development banks and central bank of Nigeria such as SMEEIS in 2009.(SMEDAN and NBS Collaborative Survey, 2017) The purpose of these initiatives among several others by the federal government was to reduce poverty through job creation and ensure the realization of vibrant SMEs in the economy.

Unfortunately, this had not been realized in Nigeria due to constraints internal to the firm such as business failure and lack of standard accounting system in their business environment. The place of sound accounting and internal control systems in any business, irrespective of its scale, cannot be overemphasized. A vast majority of small-scale businesses cannot afford the complexity of a detailed accounting system even if they would have. Hence, the existence of single entries in their books and in some cases on incomplete records (Wood, 1979; Onaolapo, Fasina, Opoola & Olatunji, 2017).

An accounting system is used to record, retain and reproduce financial information relating to financial transaction flows and financial position. Financial transaction flows encompassprimarily inflows on account of incomes and outflows on account of expenses. (Onaolapo & Adegbite 2019)

According to Olatunji (2017), an accounting system is an orderly, efficient scheme for providing accurate financial information and controls. Regulatory requirements and internal administration policies are key considerations in the design of an effective accounting system. Thus accounting systems show the books, records, voucher, files and related supporting data resulting from the application of the accounting process which involves the design of documents and transactions flow through an organization. Accounting information system is a system of collecting, storing and processing financial and accounting data that are used by decision makers, by management or externally by other interested parties including investors, creditors and tax authorities (Manaye, 2016). Financial performance refers to a firm’s ability to achieve planned financial results as measured against its intended outputs. (Mutende, Mwangi, Njihia, & Ochieng, 2017) Financial performance is usually measured using financial ratios, such as ROE, ROA, return on capital, return on sales (ROS) and operating margin (Gilchris, 2013). According to Farah, Farrukh, and Faizan (2018) financial performance is an extent to which a company’s financial health over a period of time is measured. In other words, it is a financial action used in order to generate higher sales, profitability and worth of a business entity for its shareholders through managing its current and non-current assets, financing, equity, revenues and expenses.

Alasadi and Abdelrahim (2017) opined that the performance of SMEs is viewed from the satisfaction of the owner/manager in respect of variables such as profit, turnover and business development. This also sheds light on both the qualitative and quantitative interest of managers/owners on two types of performances - financial and non-financial measures of performance. In addition, most research in the 

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