Accounting Information in Decision Making in Small-Scale Business in Nigeria


An economic entity is a separate and distinct organization. It varies from state government to banks, retail stores, charitable organizations etc.

Economic entities are divided into two groups:

  1. Profit motivated organization
  2. Non-profit motivated organization.

The first type is referred to as a business entity for example life beer Breweries and NASCO groups etc.

The accounting focus more on this type of economic entity. While the second type, also known as the non-profit entities include organizations like the Red Cross society, the church and schools.

A business entity is an economic unit, which enters into business transactions that must be recorded, summarized and reported. This entity carries out those acts that result in profit. This business entity, which in accounting is generally considered a “going concern”, has a life cycle similar to that of a human being. The business goes through a number of stages during its period of existence.

These stages are as follows:

  1. Conception
  2. Birth or inception
  • Growth
  1. Maturity
  2. Death or decline


This is the period in which the business owner conceives the idea. He makes a choice after considering the various alternatives opportunities available to him within the limits of his resources.


At this stage, the business aspires to establish a foothold in the market. Sales in this stage are usually low and advertisement and other costs are high in order to enable the business to penetrate the market. This is the most critical stage in the age of a business entity. In a small-scale concern, the success and survival of the entity depends largely on the owner/manager’s personal effort.


At this stage, the entity experience a growth in sales and gradually has a greater percentage of the market business measurement becomes a greater importance here and the accounting system which had earlier been haphazard gradually becomes formalized the staff strength might also increase considerably at this point.


The entity reaches its peak at this stage. Sales and profit are at their highest and the organization is formally organized with various levels of control and supervision established.


Beyond the maturity stage, the typical business entity starts to decline. It faces various problems and experiences a fall in turnover and profit. This situation continues until the entity finally folds up.

The life cycle of a business varies in duration from business to business. Some business makes it changes from inception to decline within a shorter period of time than others. However, it is not uncommon for a business entity to remain static for some time during its life cycle. In such periods, the indication of improvement (notably profit in sales) do not show changes or the results might be fluctuating, which when taken together (averaged) produce a zero charge. This situation is in much small business organization from the business, which consequently hamper growth.

The inadequacy of information and measurement tolls in the business environment of small-scale business has been noted as a hindrance to better performance. The performance of a business in its life cycle depends largely on the quality of the decisions of its management.  Business decisions have to be timely to allow management to take advantages of opportunities.

The timing of a decision on the other hand, depends on the availability of information. This much-deserved information is created by the accounting system.

Before considering accounting information in the business environment, a brief review will be made of the various forms of business organizations.


Three main forms of business entities are identified. These entities have distinct legal characteristics and use basically the same type of financial statements.

  1. The Sole Proprietorship: this is also known as the one-man-form of business. The proprietor/owner owns all assets and bear all the liabilities of the entity. In the eyes of the law, the owner and the entity are regarded as one and the same. In most cases, the death of the proprietor terminates the life of the entity. For accounting purposes however, the firm and the owner are regard as two separate entities.
  2. The Partnership: A partnership is a business that is not a limited liability company and is owned by two or more persons. It is governed by an agreement known as the “Dead of partnership” and every partner is pointy and severally bound by the agreement. The death of the major partner may also terminate the life of the partnership as in the case of a sole proprietorship.
  3. The Control Company: This business entity is an artificial person at law. This means that the company itself has many of the rights and obligations that a person has. It can sue of be sued in its own name. It can enter into contract, borrow money and must pay income taxes. It is divided into private and public limited liability companies. As the name implies, the liability of a shareholder in a limited liability company during liquidation is restricted to the extent of his shareholdings unlike in partnership and sole proprietorship. The annual accounts of the limited liability company must be entitled and published as stipulated by the companies and Allied matters Decree (1990).


Generally speaking, there is no consensus on the definition of small-scale business worldwide. Different countries, constitution and individuals have put forward various description of a small-scale business based on the some parameter such as:

  • Turn over
  • Number of employees
  • Capital employed
  • Net worth (investment in asset)

The parameters adopted by a particular country or institution also vary from period to period and depends to a large extent on a country’s level of development.

In Nigeria for instance, according to Oshagbeani T.A. (1983), he stated that the third National Development plan (volume 1. P 353) define small-scale business as a manufacturing establishment employing less than ten people or worse investment in machinery and equipment do not exceed N60, 000.00. The government small-scale industry development programme defined a small-scale industry as “any manufacturing, processing or service industry with a capital investment in machinery and equipment (excluding land, building and working capital) of up to N150, 000.00. in the credit guidelines of the central bank of Nigeria CBN, small scale business are classified as those business with an annual turnover of less than N500,000.00.

Lastly, the 1989 industrial policy of Nigeria dine small scale business as “those with total investment of between N1, 000,000.00 and N2, 000,000.00 million excluding land but including working capital.


Small business in Nigeria has many similar features, which help to present a cleaner view of what contributes this category of business. These features include the following a stated by Kessey and Watson (1993).

  1. Low Capital Base: The majority base of small business is usually low as its major sources of finance are personal savings and loans from friends and relatives and moneylenders to an extent. This is due to difficulty encountered 0in places such as banks.
  2. Small Market Shares: The small-scale industry is closely integrated to meet only the demand of the community in which it carries on business. They therefore have little knowledge of and need for a wider and distant market.
  3. Management In A Personalized Way And The Enterprise Is Relatively Independence: In most small business, management(s) is usually the owners and supervise(s) all aspects of production, financing, marketing and personnel of the knowledge of any particular area of management.
  4. Poor Recording System: Little or no account of business costs and revenues are kept and the banking system is hardly even utilized. The result is that banking facilities for business financing and expansion are extended to only a few of the industrialists. This has gone a long way to hamper growth.
  5. Relatively Simple Technology: As a result of the low capital structure, small business cannot afford to purchase equipment employed in production. They therefore, user simple tools which are time wasting and retard the rate of production.

Various report have showed that a significant proportion of small scale industries rely heavily on the orthodox sources of inventible funds such as personal savings and concurs relatives, local credit societies and money lenders.

They do not meet the requirements to obtain them form well organizes financial institutions in the country. This is mainly due to the fact that they do not possess the required collateral or security to warrant a loan. Moreover, most of them do not keep any book of account of their revue and expenses. Only about 8% of these businesses keep any bank account. Hence they have little access to banks and other financial institutions.


The bulk of the business in Nigeria is small scale in nature. The performance of the economy depends on he operation of these forms of business due to vital role, which they play in he economy.

Government recognizes this importance and for the purpose of their sustained promotion, she has established various institutions include:

  1. Nigerian industrial development Bank (NIDB)
  2. The state development corporations
  3. Federal institute of industrial research
  4. State produce and marketing board
  5. Business and apprenticeship training centers.

The aim of these centers includes among other things to aid indigenous business in acquiring capital, the required technical knowledge, the essential managerial know-how and the further the interest small-scale industrialists.

The importance of small-scale industries can be seen in the vital role, which they play in the development of the economy. These include the following.

  • Source Of Employment: Research findings have shown that over seventy percent of employed people in Nigeria are in small-scale businesses and craft sector even though this sector contributes relatively small amount of the country’s gross domestic product each year.
  • Linkage: The small-scale industries serves as a link between the informal rural economy and the formal sector. It has a direct relationship with the local traditions and the rural communities on one hand and the large firms on the other terms of production of raw materials and semi-finished goods and the distribution of finished goods and services.
  • Training Entrepreneurs: Small-scale business also serves as schools for training and developing entrepreneurs. This furnished them with the knowledge and experience that will be useful in setting up large-scale business.
  • Increase In Balance Of Payment: The contributions of small-scale industries help to increase the balance of payment of the nation.
  • Industrialization: Small-scale businesses play an important role in the industrialization process of an economy. The establishment of much small-scale business will like electricity, water, good roads and other basic facilities. These provisions will lead to industrialization in the economy.
  • Utilization Of Local Raw Materials: Small-scale industries use raw materials obtained 0within the country. Money is not spent on the transportation of raw materials into the country thereby reducing the amount of foreign exchange paid to foreigners.


  • Inadequate Finances: On of the major problems of small-scale business is lack of adequate finance to fund the operations of the business.
  • Poor Accounting Records: Proper books and records are not kept and there is inaccurate or incomplete information about transactions. There is therefore no proper planning and inaccurate decisions by the owners.
  • Lack Of training Personnel: The management teams lacks the managerial expertise and technical competence to executor programmes. They are not able to recruit capable and experienced hands because of inadequate financial resources.
  • High Mortality Rate: The small-scale business has a higher mortality rate than the large businesses. This is due to lack of adequate finance and management expertise on the part of the sole proprietors.
  • Government policies and Economic Condition: Government policies and economic conditions affect the operation of small-scale businesses. A good example of this is the structural adjustment programme of the government.


Accounting information has been defined as all the statistical data that will assist users in the financial liquidity, profitability and viability of the reporting entity.  Statement of accounting standard two (SAS2) define accounting information as the data that are found in financial statement. The place of accounting in an organization is stated below:

“Modern accounting is widely recognized as a basic component of business management. Accounting is the means by which managers are informed of the financial status and progress of their companies, thus contributing to the continuing process of planning, control of operations and decision making. Accounting provides a method of systematically recording and evaluating business activities. A large portion of the information that a business manager requires is derived form accounting data helps managers accomplishes their objectives.

Accounting information as asserted by KEASSEY and WATSON (1993:55) is however, an economic good with some public good characteristics, which may result in sub-optional market outcomes when supply and demand is based solely upon individual calculations of the costs and benefits at the margin. Even the smallest of organizations engaged in economic activity generates a vast amount of potentially useful information with its unique ability to translate all claims into a common and widely –accepted (monetary) unit, is particularly sought after by contracting parties regarding the overall financial performance did not asset position of the business entity.

Virtually, all business organization has the need for keeping accounting records as the manager is confronted with a multitude of complex variables. A manager cannot be sufficiently informed of his business activity by observing daily operation instead on the accounting process to convert business organization into useful statistical data.


The accounting process has been described as consisting of recording, classifying, reporting and interpreting the financial data of an organization.

The accounting process in an organization thus conforms with the definition of accounting by the American institute of certified and public accountant as “the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are in part at least of financial character and interpreting the result thereof (Okwoli 1993:3

The first function of the accounting system is to create of the transactions of the business in monetary terms this recording function may be performed in various ways which include hand writing by pen, pencil on paper, printing with mechanical or electronic equipment or by making holds or creating magnetic impressions on cards or tapes.

In addition to the recording function the transactions will have to be classified into related groups and categories. This enhances the reduction of a mass of details into compact and usable forms.

The organization of accounting information is usable forms involves summarizing. The classified information is summarized into accounting reports designed to meet the needs of users.

These three steps of recording, classifying and summarizing –are the means through which accounting information is created. However, it will not suffice merely to create information. Accounting also involves the communication of the information to interested parties and interpretation as it relates to interested parties and interpretation as it relates to specific business decisions.


Decision-making is the fabric of which organized activity is made. Decision-making is infact inherent in the functions of a business manager. The high level strategic decisions which help to determine the future policy and direction of the organizations are of course, infrequent and often rest in the hands of only a few members of the top management loan. These decisions range from hiring a new employee, dreading on when to repair an essential raw material, the prize of which is expected to rise, purchasing a new piece of equipment, increasing or decreasing production, increasing wages of workers and so on. “The very justification of any accounting system rests on at least the assumption that the data and reports improve the quality of decision making”.


Accounting systems serve two principal purposes in the decision process. Firstly, they provide some of the stimuli by which problems are both recognized, and defined and the alternative courses of action are isolated and their consequences elaborated.

Secondly, accounting plays a role in the analysis and appraisal of the alternatives.

As problem stimuli, accounting systems are only a part of the whole complex of information in any organization both formal and informal, which is relevant for recognizing defining and molding alternative courses of action and it is rarely possible to put bonds on the sources of ideas. “It is possible however, to design information systems which specifically attempt to focus managerial attention, measures, financial and otherwise, are designed to do just this and the id4ea of various analysis and management by exception which are so influential in accounting are founded on such a rationale”.

(Itopwood 1976). The emphasis on idea of individual managerial performance and personal accountability which influences the design and operation of so many financial reporting system early results in the re enforcement of individual perspectives and prejudices rather than the stimulation of inquiry and debate.

The effectiveness of the decisions made by a manager depends on the accuracy of the accounting information supplied him by the accountant.


The relevance of accounting information to the operation of business organization and society can be established by looking at the ways accounting information has helped small-scale firms to improve on their performance. This will lead us to the analysis of the use of accounting information.


  1. AS A TOOL FOR CONTROL: “It was probably the control aspect as book keeping which appealed to them: a guard against the petty dishonestly and by no means petty incompetence commonly displayed by people undergoing their first experience of organized commerce and industry”.
  2. DECISION MAKING AND PLANNING: Hobbs and Moore (1979:6) said that “the two prongs functions of accounting is to provide financial information:
    1. As a record of past activities and
    2. As a guide to future action.
  3. ASSISTANCE IN CREDIT DEALINGS: Most of today’s business is conducted on a credit basis. Oshagbani (1983:101) observed, “the existence of credit facilities to a business organization will increase the volume of sales as customers will be attracted to those business which offer the best terms”.
  4. ASSISTANCE IN DETERMINATION OF PROFIT: The ultimate goal of all business undertaking is to make profit. It would be difficult if not impossible to ascertain whether a business is making a profit or loss without the help of complete up-to-date accounts. Most new traders depend on their business for livelihood. As a result, their drawings from the business for their personal use should depend almost entirely on the profitability of the business.

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