A STUDY OF ACCOUNTING RECORDS IN SMALL SCALE BUSINESS

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

Accounting records are the documents and books of account used to record, classify, summarize, and report the financial transactions of a business. Accounting records include source documents (invoices, receipts, credit notes, debit notes, payment vouchers, bank statements), journals (sales journal, purchase journal, cash receipts journal, cash disbursements journal, general journal), ledgers (general ledger, subsidiary ledgers for accounts receivable and accounts payable), trial balance, and financial statements (income statement, balance sheet, cash flow statement). Accounting records provide the raw data for preparing financial statements and for making informed business decisions (Horngren, Datar, and Rajan, 2018). (Horngren et al., 2018)

Small scale businesses (also called small and medium enterprises, SMEs, or micro enterprises) are businesses that operate on a smaller scale than large corporations in terms of employment, assets, and annual turnover. In Nigeria, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) classifies small enterprises as those with 10-49 employees and annual turnover between ₦5 million and less than ₦50 million. Micro enterprises have 1-9 employees and annual turnover below ₦5 million (SMEDAN, 2020). Small scale businesses constitute over 90% of all businesses in Nigeria, employ approximately 60% of the workforce, and contribute about 48% to the national GDP. They operate across all sectors: manufacturing, trade, services, agriculture, construction, and information technology. (SMEDAN, 2020)

The importance of accounting records in small scale businesses cannot be overstated. Accounting records serve multiple critical functions (Okafor and Amalu, 2018). (Okafor and Amalu, 2018)

Financial Planning and Budgeting: Accounting records provide historical data (past sales, expenses, profits) that are used to prepare budgets and forecasts. Without accurate records, business owners cannot plan effectively.

Performance Measurement: Accounting records enable business owners to track sales, expenses, profits, and losses over time. Owners can identify which products are profitable, which customers are paying on time, and which expenses are excessive.

Cash Flow Management: Accounting records (cash book, bank statements) enable owners to track cash inflows and outflows, identify cash shortages before they occur, and manage working capital.

Tax Compliance: Accounting records are required for filing tax returns (Company Income Tax, Value Added Tax, Personal Income Tax for sole proprietors). Without records, owners cannot compute taxable income or substantiate deductions.

Access to Finance: Banks and other lenders require financial statements (derived from accounting records) to assess creditworthiness. Without records, small businesses cannot access loans.

Decision Making: Accounting records provide the quantitative information needed for decisions about pricing, purchasing, hiring, investment, and expansion.

Fraud Prevention and Detection: Accounting records (especially internal controls like segregation of duties, approvals, reconciliations) help prevent and detect fraud.

Business Valuation: If the owner wants to sell the business or bring in investors, accounting records are needed to value the business.

Despite the importance of accounting records, many small scale businesses in Nigeria do not maintain proper accounting records. Okafor and Amalu (2018) found that only 28% of small scale industries in South-Eastern Nigeria maintained complete and up-to-date accounting records; 44% maintained incomplete or irregular records; and 28% maintained no written records at all. Among those with records, the most common was a simple cash book (22%); few maintained ledgers (10%), sales ledgers (8%), or purchases ledgers (6%). (Okafor and Amalu, 2018)

Several factors contribute to poor accounting record keeping in small scale businesses (Adeyemi and Fadipe, 2019). (Adeyemi and Fadipe, 2019)

• Lack of accounting knowledge: Many small business owners lack training in accounting. They do not understand the importance of records or how to maintain them.
• Cost: Business owners perceive accounting software and professional accountants as expensive.
• Time constraints: Owners, who often manage all aspects of the business, claim they have no time for record keeping.
• Informal business operations: Many small businesses operate informally (no registration, no bank account, cash transactions), encouraging informal record keeping.
• Cultural factors: Some business owners rely on memory or trust rather than written records.
• Perceived irrelevance: Some owners do not see the value of records for their small business (“I know my customers; I don’t need records”).

The consequences of poor accounting record keeping are severe (Nwankwo, 2017). (Nwankwo, 2017)

• Inability to determine profitability: Owners do not know whether they are making a profit or loss.
• Cash flow crises: Owners do not track customer payments or supplier obligations, leading to cash shortages.
• Inability to access finance: Banks reject loan applications due to lack of financial statements.
• Tax penalties: Owners pay penalties for late filing or incorrect returns.
• Fraud vulnerability: Without records, owners cannot detect employee theft or supplier overcharging.
• Business failure: Poor financial management, including poor record keeping, contributes to the high failure rate of small businesses (50-70% within five years).

The legal framework for accounting records in Nigeria is provided by the Companies and Allied Matters Act (CAMA) 2020. Section 377 requires that every company (including small scale businesses registered as companies) keep proper accounting records that are sufficient to show and explain the company’s transactions, disclose the company’s financial position with reasonable accuracy, and enable the directors to prepare financial statements. However, many small businesses are not registered as companies (they operate as sole proprietorships), and enforcement is weak (Federal Republic of Nigeria, 2020). (Federal Republic of Nigeria, 2020)

The COVID-19 pandemic (2020-2021) highlighted the importance of accounting records. Small businesses that maintained proper records were able to: (1) apply for government relief funds (CBN’s Targeted Credit Facility, which required financial statements); (2) negotiate with suppliers and landlords based on documented financial positions; (3) identify cost reduction opportunities; and (4) plan for recovery. Small businesses without records struggled to access relief and plan for survival (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Several theories explain the relationship between accounting records and business performance. Stewardship theory (Donaldson and Davis, 1991) suggests that accounting records enable business owners to demonstrate responsible stewardship of resources to stakeholders (creditors, tax authorities, investors). Agency theory (Jensen and Meckling, 1976) suggests that accounting records reduce information asymmetry between owners and managers (if the owner hires a manager). Contingency theory (Chenhall, 2003) suggests that the optimal accounting system depends on the business’s size, complexity, and environment. Small businesses may need simpler accounting systems than large corporations. (Chenhall, 2003; Donaldson and Davis, 1991; Jensen and Meckling, 1976)

This study examines the accounting records in small scale businesses, focusing on the types of records maintained, the extent of record keeping, the challenges faced, and the relationship between record keeping and business performance.

1.2 Statement of the Problem

Despite the legal requirements (CAMA 2020) and the theoretical importance of accounting records for business success, many small scale businesses in Nigeria do not maintain proper accounting records. This problem manifests in several specific issues.

First, the prevalence of poor record keeping is high. Okafor and Amalu (2018) found that only 28% of small scale industries in South-Eastern Nigeria maintained complete and up-to-date accounting records; 44% maintained incomplete or irregular records; and 28% maintained no written records at all. Among those with records, the most common was a simple cash book (22%); few maintained ledgers (10%), sales ledgers (8%), or purchases ledgers (6%). (Okafor and Amalu, 2018)

Second, the types of accounting records maintained are limited. Many small businesses maintain only a cash book (recording cash receipts and payments). Few maintain sales ledgers (to track customer balances), purchase ledgers (to track supplier balances), inventory records, fixed asset registers, or payroll records. Without complete records, owners cannot prepare financial statements or make informed decisions (Adeyemi and Fadipe, 2019). (Adeyemi and Fadipe, 2019)

Third, the factors contributing to poor record keeping are not well understood. Is the lack of records due to lack of accounting knowledge? Cost? Time constraints? Informal business operations? Cultural factors? Perceived irrelevance? The relative importance of these factors is unknown. Without understanding the causes, interventions cannot be targeted effectively (Okafor and Amalu, 2018). (Okafor and Amalu, 2018)

Fourth, the relationship between accounting records and business performance is not well documented. Do small businesses with complete accounting records have higher profitability? Better cash flow? Higher loan approval rates? Lower tax penalties? The magnitude of the performance difference is unknown (Nwankwo, 2017). (Nwankwo, 2017)

Fifth, the impact of COVID-19 on small business record keeping is unknown. The pandemic disrupted business operations, but it also highlighted the importance of records for accessing relief funds. Did the pandemic increase or decrease record keeping? The impact is unknown (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Sixth, there is a significant gap in the empirical literature on accounting records in small scale businesses in Nigeria. Most studies focus on large corporations. Few studies focus specifically on small scale businesses. Most studies are descriptive (percentages) rather than analytical (testing relationships). Few studies examine the relationship between record keeping quality and business performance outcomes. This study addresses these gaps (Okoye, Okafor, and Nnamdi, 2020). (Okoye et al., 2020)

Therefore, the central problem this study seeks to address can be stated as: *Many small scale businesses in Nigeria do not maintain proper accounting records. The types of records maintained are limited. The factors contributing to poor record keeping are not well understood. The relationship between accounting records and business performance is not documented. The impact of COVID-19 is unknown. This study addresses these gaps by studying accounting records in small scale businesses.*

1.3 Aim of the Study

The aim of this study is to examine the accounting records in small scale businesses in Nigeria, with a view to determining the types of records maintained, the extent of record keeping, the factors affecting record keeping, the relationship between record keeping and business performance (profitability, cash flow, access to finance, tax compliance), and the impact of COVID-19, and to propose evidence-based recommendations for improving accounting record keeping in small scale businesses.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Identify the types of accounting records maintained by small scale businesses (source documents, cash book, sales ledger, purchase ledger, general ledger, inventory records, fixed asset register, payroll records, financial statements).
2. Assess the extent of accounting record keeping (complete, incomplete, none) among small scale businesses.
3. Identify the factors affecting accounting record keeping in small scale businesses: lack of accounting knowledge, cost, time constraints, informal business operations, cultural factors, perceived irrelevance.
4. Determine the relationship between accounting record keeping quality (complete vs. incomplete vs. none) and business profitability (profit margin, net income).
5. Determine the relationship between accounting record keeping quality and cash flow management (frequency of cash shortages).
6. Determine the relationship between accounting record keeping quality and access to finance (loan application success rate, loan amount).
7. Determine the relationship between accounting record keeping quality and tax compliance (tax penalties, audit issues).
8. Assess the impact of the COVID-19 pandemic on accounting record keeping practices.
9. Propose evidence-based recommendations for improving accounting record keeping in small scale businesses.

1.5 Research Questions

The following research questions guide this study:

1. What types of accounting records are maintained by small scale businesses (source documents, cash book, sales ledger, purchase ledger, general ledger, inventory records, fixed asset register, payroll records, financial statements)?
2. What is the extent of accounting record keeping (complete, incomplete, none) among small scale businesses?
3. What factors affect accounting record keeping in small scale businesses (lack of accounting knowledge, cost, time constraints, informal business operations, cultural factors, perceived irrelevance)?
4. What is the relationship between accounting record keeping quality and business profitability?
5. What is the relationship between accounting record keeping quality and cash flow management (frequency of cash shortages)?
6. What is the relationship between accounting record keeping quality and access to finance (loan application success rate)?
7. What is the relationship between accounting record keeping quality and tax compliance (tax penalties)?
8. How did the COVID-19 pandemic affect accounting record keeping practices?
9. What recommendations can be proposed for improving accounting record keeping?

1.6 Research Hypotheses

Based on the research objectives and questions, the following hypotheses are formulated. Each hypothesis is presented with both a null (H₀) and an alternative (H₁) statement.

Hypothesis One (Record Keeping and Profitability)

• H₀₁: There is no significant relationship between the quality of accounting records (complete vs. incomplete vs. none) and the profitability of small scale businesses.
• H₁₁: Small scale businesses with complete accounting records have significantly higher profitability than those with incomplete or no records.

Hypothesis Two (Record Keeping and Cash Flow)

• H₀₂: There is no significant relationship between the quality of accounting records and the frequency of cash shortages in small scale businesses.
• H₁₂: Small scale businesses with complete accounting records have significantly fewer cash shortages than those with incomplete or no records.

Hypothesis Three (Record Keeping and Access to Finance)

• H₀₃: There is no significant relationship between the quality of accounting records and loan application success rates in small scale businesses.
• H₁₃: Small scale businesses with complete accounting records have significantly higher loan application success rates than those with incomplete or no records.

Hypothesis Four (Record Keeping and Tax Compliance)

• H₀₄: There is no significant relationship between the quality of accounting records and tax penalties in small scale businesses.
• H₁₄: Small scale businesses with complete accounting records have significantly lower tax penalties than those with incomplete or no records.

Hypothesis Five (Accounting Knowledge and Record Keeping)

• H₀₅: There is no significant relationship between the owner’s accounting knowledge and the quality of accounting records.
• H₁₅: Small scale businesses with owners who have accounting knowledge (training, qualification) have significantly higher quality accounting records than those with owners who lack accounting knowledge.

Hypothesis Six (Perceived Irrelevance and Record Keeping)

• H₀₆: There is no significant relationship between the owner’s perception of record keeping (irrelevant vs. relevant) and the quality of accounting records.
• H₁₆: Small scale businesses with owners who perceive record keeping as relevant have significantly higher quality accounting records than those who perceive it as irrelevant.

Hypothesis Seven (COVID-19 Impact)

• H₀₇: There is no significant difference in the quality of accounting records before and during the COVID-19 pandemic.
• H₁₇: The quality of accounting records was significantly better during the COVID-19 pandemic than before (as businesses sought relief funds).

Hypothesis Eight (Business Size and Record Keeping)

• H₀₈: There is no significant relationship between business size (annual turnover) and the quality of accounting records.
• H₁₈: Larger small scale businesses (higher turnover) have significantly higher quality accounting records than smaller small scale businesses.

1.7 Significance of the Study

This study holds significance for multiple stakeholders as follows:

For Small Scale Business Owners:
The study provides empirical evidence on the benefits of maintaining proper accounting records (higher profitability, better cash flow, higher loan approval rates, lower tax penalties). Business owners can use this evidence to justify investing time and money in record keeping (training, software, hiring accountants). The study also identifies the most important records to maintain (cash book, sales ledger, purchase ledger).

For Small and Medium Enterprises Development Agency of Nigeria (SMEDAN):
SMEDAN is responsible for supporting small businesses. The study provides evidence on the record keeping gaps and training needs of small businesses. SMEDAN can use this evidence to: (1) design record keeping training programs; (2) develop simplified record keeping templates; (3) provide subsidies for accounting software; and (4) monitor record keeping compliance.

For Banks and Microfinance Institutions:
Banks require financial statements for loan applications. The study provides evidence on the record keeping quality of small businesses, which affects their creditworthiness. Banks can use this evidence to: (1) develop simplified financial statement templates for small businesses; (2) provide record keeping training as part of loan conditions; and (3) offer lower interest rates to businesses with good records.

For the Federal Inland Revenue Service (FIRS) and State Internal Revenue Services:
Tax authorities rely on accounting records for tax assessment and audit. The study provides evidence on the record keeping quality (or lack thereof) of small businesses. Tax authorities can use this evidence to: (1) simplify tax filing for small businesses; (2) provide record keeping guidance; (3) offer amnesty for past non-compliance; and (4) target enforcement on businesses with no records.

For Professional Accounting Bodies (ICAN, ACCA, ANAN):
Professional bodies train accountants. The study provides evidence on the record keeping needs of small businesses (simplified systems, practical training). Professional bodies can use this evidence to: (1) develop certification programs in small business accounting; (2) offer low-cost accounting services to small businesses (pro bono); and (3) encourage members to serve small business clients.

For Academics and Researchers:
This study contributes to the literature on small business accounting in several ways. First, it provides evidence from a developing economy context (Nigeria), which is underrepresented. Second, it examines the relationship between record keeping and business performance outcomes. Third, it identifies factors affecting record keeping. The study provides a foundation for future research.

For the Nigerian Economy:
Small businesses are the engine of the Nigerian economy (90% of businesses, 60% of employment, 48% of GDP). When small businesses maintain proper accounting records, they are more profitable, pay more taxes, access more credit, and survive longer. This study contributes to improving small business performance and, ultimately, economic development.

1.8 Scope of the Study

The scope of this study is defined by the following parameters:

Content Scope: The study focuses on accounting records in small scale businesses. Specifically, it examines: (1) types of records maintained (source documents, cash book, sales ledger, purchase ledger, general ledger, inventory records, fixed asset register, payroll records, financial statements); (2) extent of record keeping (complete, incomplete, none); (3) factors affecting record keeping (lack of accounting knowledge, cost, time constraints, informal business operations, cultural factors, perceived irrelevance); (4) relationship between record keeping and business performance (profitability, cash flow, access to finance, tax compliance); and (5) COVID-19 impact. The study does not examine large corporations, public sector entities, or non-profit organizations.

Organizational Scope: The study covers small scale businesses as defined by SMEDAN: small enterprises (10-49 employees, annual turnover ₦5 million – ₦50 million) and micro enterprises (1-9 employees, annual turnover < ₦5 million). The study includes businesses across sectors: manufacturing, trade (wholesale/retail), services (professional, technical, hospitality), agriculture, construction, and information technology. The study excludes medium enterprises (50-199 employees) and large enterprises (200+ employees).

Geographic Scope: The study is conducted in Enugu State, Nigeria. Enugu State is selected because it has a mix of urban and rural small businesses, and is representative of South-Eastern Nigeria. Findings may be generalizable to other Nigerian states and to other West African countries, but caution is warranted.

Sample Scope: The study targets a sample of small scale business owners in Enugu State. The sample includes businesses from the Enugu metropolis (urban) and surrounding rural local government areas (rural). The sample includes both registered (CAC) and unregistered businesses. The sample includes both sole proprietorships and partnerships (no limited liability companies with multiple directors).

Time Scope: The study covers the period 2022-2023. The study includes retrospective questions about record keeping before, during, and after the COVID-19 pandemic to assess changes.

Data Sources: The study uses primary data from: (1) structured questionnaire for small business owners (record keeping practices, factors, performance outcomes); (2) interviews with a subset of business owners (qualitative insights); and (3) secondary data from SMEDAN, CAC, and FIRS.

1.9 Definition of Terms

The following key terms are defined operationally as used in this study:

Term	Definition
Accounting Records	Documents and books of account used to record, classify, summarize, and report financial transactions. Includes source documents, journals, ledgers, trial balance, and financial statements.
Source Documents	Original documents that provide evidence of transactions. Examples: invoices, receipts, credit notes, debit notes, payment vouchers, bank statements.
Cash Book	A journal that records all cash receipts and cash payments. It serves as both a journal and a ledger for cash.
Sales Ledger	A subsidiary ledger that records transactions with individual customers (accounts receivable).
Purchase Ledger	A subsidiary ledger that records transactions with individual suppliers (accounts payable).
General Ledger	The primary ledger that contains all balance sheet and income statement accounts.
Inventory Records	Records that track inventory quantities, costs, movements, and reorder points.
Fixed Asset Register	A record of an entity’s fixed assets (property, plant, equipment), including acquisition cost, depreciation, and disposal.
Payroll Records	Records of employee salaries, wages, deductions (taxes, pension), and net pay.
Financial Statements	Formal records of financial activities: income statement (profit/loss), balance sheet (assets/liabilities/equity), cash flow statement.
Complete Records	Accounting records that include all source documents, journals, ledgers, trial balance, and financial statements.
Incomplete Records	Accounting records that lack one or more components (e.g., cash book only, no ledgers, no financial statements).
No Records	No written accounting records; owner relies on memory or informal notes.
Small Scale Business	A business with 1-49 employees and annual turnover below ₦50 million (micro and small enterprises as defined by SMEDAN).
Profitability	The ability of a business to generate profit. Measured by profit margin (profit/sales) and net income.
Cash Flow	The timing of cash inflows (from sales) and outflows (for expenses). Measured by frequency of cash shortages.
Access to Finance	The ability of a business to obtain loans from banks or microfinance institutions. Measured by loan application success rate (approved/ applied) and loan amount.
Tax Compliance	The degree to which a business meets its tax obligations (registration, filing, payment). Measured by tax penalties (amount paid for late filing, underpayment).
COVID-19 Pandemic	The global coronavirus pandemic that disrupted business operations in Nigeria from 2020 to 2021.

CHAPTER TWO: REVIEW OF LITERATURE

2.1 INTRODUCTION

This chapter presents a comprehensive review of literature relevant to the study of accounting records in small scale businesses. The review is organized into five main sections. First, the concept of small scale business is defined and explained, including classification criteria, characteristics, and economic importance. Second, the attributes of a proper accounting record are discussed, including the qualitative characteristics of useful accounting information. Third, the types of books of accounts maintained by small scale businesses are identified and explained: source documents, journals, ledgers, trial balance, and financial statements. Fourth, the benefits of adequate accounting records in small business are examined, including improved decision-making, access to finance, tax compliance, fraud prevention, and business survival. Fifth, a summary of the literature review identifies gaps that this study seeks to address.

The purpose of this literature review is to situate the current study within the existing body of knowledge, identify areas of consensus and controversy, and justify the research questions and hypotheses formulated in Chapter One (Creswell and Creswell, 2018). By critically engaging with prior scholarship, this chapter establishes the intellectual foundation upon which the present investigation is built. (Creswell and Creswell, 2018)

2.2 CONCEPT OF SMALL SCALE BUSINESS

Small scale businesses (also called small and medium enterprises, SMEs, or micro enterprises) are businesses that operate on a smaller scale than large corporations in terms of employment, assets, and annual turnover. Definitions vary by country and by regulatory agency, but they typically use quantitative criteria such as number of employees, total assets (excluding land and buildings), and annual turnover. In Nigeria, the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) provides the official classification (SMEDAN, 2020). (SMEDAN, 2020)

Enterprise Category	Employment	Annual Turnover	Assets (excluding land/buildings)
Micro Enterprise	1-9 employees	Less than ₦5 million	Less than ₦5 million
Small Enterprise	10-49 employees	₦5 million – ₦50 million	₦5 million – ₦50 million
Medium Enterprise	50-199 employees	₦50 million – ₦500 million	₦50 million – ₦500 million

For the purposes of this study, “small scale business” encompasses both micro and small enterprises as defined by SMEDAN. These enterprises are the focus of the study because they constitute the majority of businesses in Nigeria and face the greatest challenges in maintaining accounting records (SMEDAN, 2020). (SMEDAN, 2020)

Small scale businesses possess several qualitative characteristics that distinguish them from large corporations and affect their accounting practices (Abor and Quartey, 2010). (Abor and Quartey, 2010)

Owner-Management: The owner is actively involved in day-to-day operations and makes most strategic decisions. The owner often has technical skills in the core business but may lack accounting and financial management training. This characteristic often leads to poor record keeping because the owner does not understand accounting or prioritizes production over paperwork.

Limited Specialization: The owner and few employees perform multiple functions—production, marketing, finance, administration, and accounting. There is no dedicated accounting department; accounting is often done by the owner or an administrative assistant with no formal accounting training. This leads to incomplete or inaccurate records.

Limited Access to Formal Finance: Small scale businesses rely primarily on owner savings, family contributions, and informal sources rather than bank loans or equity investment. Poor accounting records are a major barrier to accessing formal credit because banks require financial statements.

Simple Management Systems: Formal strategic plans, budgets, and accounting systems are rare. Decisions are often made on an ad hoc basis rather than systematically. Record keeping is often informal (notebooks, scraps of paper) rather than formal (ledgers, journals).

High Vulnerability: Small scale businesses are more vulnerable to economic shocks, competition, and management deficiencies—including poor accounting records—than large corporations. Failure rates are high (50-70% within five years). Poor record keeping contributes to these failures.

Limited Regulatory Burden (in practice): While legally required to register and file tax returns, many small scale businesses operate informally and do not comply with regulatory requirements, partly due to accounting deficiencies (they cannot prepare financial statements).

The economic importance of small scale businesses cannot be overstated. In Nigeria, MSMEs constitute over 90% of all businesses, employ approximately 60% of the workforce, and contribute about 48% to the national GDP (SMEDAN, 2020). They are particularly important for employment generation because they are more labor-intensive than large corporations. They contribute to income distribution by spreading economic opportunities across geographic regions and population segments. They foster entrepreneurship and innovation by providing entry points for new business ideas. They also serve as suppliers and distributors for large corporations, forming an integral part of value chains (Abor and Quartey, 2010). (Abor and Quartey, 2010)

2.3 ATTRIBUTES OF A PROPER ACCOUNTING RECORD

A proper accounting record is one that possesses the qualitative characteristics of useful accounting information as defined by the International Accounting Standards Board (IASB) Conceptual Framework (IASB, 2018). These characteristics ensure that accounting records provide reliable, relevant, and comparable information for decision-making. (IASB, 2018)

Relevance: Accounting information is relevant if it is capable of making a difference in decisions. Relevant information has predictive value (helping users predict future outcomes) and confirmatory value (confirming or correcting prior expectations). For small scale businesses, relevant accounting records help owners predict cash flow, profitability, and tax liability (IASB, 2018). (IASB, 2018)

Faithful Representation: Accounting information faithfully represents the economic substance of transactions if it is complete, neutral (free from bias), and free from error. For small scale businesses, faithful representation means that all transactions are recorded (complete), amounts are accurate (free from error), and the owner does not manipulate records to evade taxes (neutral). Many small businesses have incomplete records (missing transactions) and inaccurate records (errors) (IASB, 2018). (IASB, 2018)

Comparability: Accounting information should be comparable across periods (to identify trends) and across entities (to benchmark performance). For small scale businesses, comparability requires consistent application of accounting policies from year to year. Many small businesses change their record keeping methods frequently, making trend analysis difficult (IASB, 2018). (IASB, 2018)

Verifiability: Accounting information should be verifiable, meaning that independent observers can reach consensus that the information is faithfully represented. For small scale businesses, verifiability requires source documents (invoices, receipts, bank statements) to support recorded transactions. Many small businesses lack source documents, making verification impossible (IASB, 2018). (IASB, 2018)

Timeliness: Accounting information should be available to users before it loses its ability to influence decisions. For small scale businesses, timeliness means recording transactions promptly (daily or weekly) rather than at year-end. Many small businesses record transactions infrequently (monthly, quarterly, or annually), leading to errors and omissions (IASB, 2018). (IASB, 2018)

Understandability: Accounting information should be presented clearly and concisely for users with reasonable knowledge. For small scale businesses, understandability means using simple record keeping systems (cash book, simple ledger) rather than complex systems designed for large corporations. Many small business owners cannot understand complex accounting records, leading to abandonment (IASB, 2018). (IASB, 2018)

Okafor and Amalu (2018) assessed the quality of accounting records in small scale industries in South-Eastern Nigeria using these attributes. They found that only 28% maintained complete and up-to-date accounting records; 44% maintained incomplete or irregular records; and 28% maintained no written records at all. The most common deficiencies were: lack of source document retention (67% of businesses), lack of bank reconciliations (58%), and lack of subsidiary ledgers (72%). (Okafor and Amalu, 2018)

2.4 TYPES OF BOOKS OF ACCOUNTS FOR SMALL SCALE BUSINESSES

Small scale businesses need to maintain several types of books of accounts to record their financial transactions properly. The complexity of the accounting system should be proportionate to the size and complexity of the business. A micro enterprise (1-9 employees) may function well with a simplified system: a cash book, a simple ledger, and basic source document retention. A small enterprise (10-49 employees) typically requires a more comprehensive system: subsidiary ledgers for receivables and payables, inventory records, and monthly financial statements (Horngren, Datar, and Rajan, 2018). (Horngren et al., 2018)

Source Documents: Source documents are the original records of transactions that provide evidence that a transaction occurred. They are the foundation of any accounting system. Without source documents, transactions cannot be verified, tax deductions cannot be substantiated, and disputes with customers or suppliers cannot be resolved (Horngren et al., 2018). (Horngren et al., 2018)

Source Document	Purpose	Example
Invoice	Record of sale (sales invoice) or purchase (purchase invoice)	Customer buys goods on credit; supplier sends invoice
Receipt	Proof of payment	Customer pays cash; business issues receipt
Credit Note	Reduction in amount owed (return of goods, allowance)	Customer returns damaged goods
Debit Note	Increase in amount owed	Additional charges after invoice
Payment Voucher	Authorization for payment	Business pays supplier; payment voucher is created
Bank Statement	Record of bank transactions (deposits, withdrawals, transfers)	Monthly statement from bank
Payroll Register	Record of employee salaries, wages, deductions	Monthly payroll summary

Cash Book: The cash book is a journal that records all cash receipts and cash payments. It serves as both a journal (chronological record) and a ledger (the cash account). The cash book is the most basic and essential accounting record for a small business. It has two sides: debit side (cash receipts) and credit side (cash payments). The cash book should be reconciled with the bank statement monthly (Garrison, Noreen, and Brewer, 2018). (Garrison et al., 2018)

Sales Journal (Sales Day Book): The sales journal records all credit sales of goods. Each entry includes the date, customer name, invoice number, and amount. At the end of the period, the total is posted to the general ledger (sales account) and individual customer accounts are posted to the sales ledger. For small businesses with few credit sales, the sales journal may be combined with the cash book (Garrison et al., 2018). (Garrison et al., 2018)

Purchase Journal (Purchase Day Book): The purchase journal records all credit purchases of goods (inventory, raw materials). Each entry includes the date, supplier name, invoice number, and amount. At the end of the period, the total is posted to the general ledger (purchases account) and individual supplier accounts are posted to the purchase ledger (Garrison et al., 2018). (Garrison et al., 2018)

Sales Ledger (Accounts Receivable Ledger): The sales ledger is a subsidiary ledger that records transactions with individual customers (accounts receivable). It shows how much each customer owes, when payment is due, and whether payment has been received. Without a sales ledger, the business cannot track customer balances, leading to bad debts (Garrison et al., 2018). (Garrison et al., 2018)

Purchase Ledger (Accounts Payable Ledger): The purchase ledger is a subsidiary ledger that records transactions with individual suppliers (accounts payable). It shows how much the business owes each supplier, when payment is due, and whether payment has been made. Without a purchase ledger, the business cannot track supplier balances, leading to late payments and damaged relationships (Garrison et al., 2018). (Garrison et al., 2018)

General Ledger: The general ledger is the primary ledger that contains all balance sheet and income statement accounts. It is the central repository of accounting data. Accounts in the general ledger include: assets (cash, accounts receivable, inventory, equipment), liabilities (accounts payable, loans), equity (owner’s capital), revenues (sales), and expenses (rent, utilities, salaries). The general ledger is used to prepare the trial balance and financial statements (Garrison et al., 2018). (Garrison et al., 2018)

Inventory Records: For businesses that hold physical stock (retail, wholesale, manufacturing), inventory records are essential. Inventory records track: quantities on hand, quantities sold, cost per unit, reorder points, and value of inventory. Without inventory records, the business cannot know what stock it has, what is selling, what is obsolete, or when to reorder. This leads to stockouts (lost sales) or overstocking (high carrying costs) (Horngren et al., 2018). (Horngren et al., 2018)

Fixed Asset Register: The fixed asset register records information about the business’s fixed assets (property, plant, equipment). For each asset, the register shows: description, acquisition date, acquisition cost, depreciation method, depreciation rate, accumulated depreciation, and net book value. Without a fixed asset register, the business cannot calculate depreciation for tax purposes or track asset disposals (Horngren et al., 2018). (Horngren et al., 2018)

Payroll Records: Payroll records track employee salaries, wages, deductions (taxes, pension, health insurance), and net pay. For each employee, records show: hours worked, overtime, bonuses, deductions, and net pay. Without payroll records, the business cannot calculate PAYE (Pay-As-You-Earn) tax, pension contributions, or prepare annual tax returns (Horngren et al., 2018). (Horngren et al., 2018)

Trial Balance: The trial balance is a list of all general ledger accounts and their balances at a specific date. It is used to check that total debits equal total credits (arithmetic accuracy). If debits do not equal credits, there is an error in the records. The trial balance is the starting point for preparing financial statements (Garrison et al., 2018). (Garrison et al., 2018)

Financial Statements: Financial statements are the final output of the accounting system. For small businesses, the minimum required financial statements are:

• Income Statement (Profit and Loss Statement): Shows revenue, expenses, and net profit (or loss) for a period. Answers: “Is the business making a profit?”
• Balance Sheet: Shows assets, liabilities, and owner’s equity at a point in time. Answers: “What does the business own and owe?”
• Cash Flow Statement: Shows cash inflows and outflows from operating, investing, and financing activities. Answers: “Where did the cash come from and where did it go?”

2.5 BENEFITS OF ADEQUATE ACCOUNTING RECORDS IN SMALL BUSINESS

Adequate accounting records provide numerous benefits to small scale businesses. These benefits have been documented in empirical studies and are summarized below.

Improved Financial Planning and Budgeting: Accounting records provide historical data (past sales, expenses, profits) that are used to prepare budgets and forecasts. With accurate records, the business owner can predict future cash flows, set realistic sales targets, and plan for major expenditures. Without records, the owner operates reactively rather than proactively (Okafor and Amalu, 2018). (Okafor and Amalu, 2018)

Better Decision Making: Accounting records provide the quantitative information needed for decisions about pricing, purchasing, hiring, investment, and expansion. For example, records show which products are profitable and which are not, which customers pay on time and which are slow, and which expenses are increasing and which are decreasing. Without records, decisions are based on guesswork (Nwankwo, 2017). (Nwankwo, 2017)

Enhanced Cash Flow Management: Accounting records (cash book, bank reconciliations) enable the business owner to track cash inflows and outflows, identify cash shortages before they occur, and manage working capital. Without records, the owner may be surprised by cash shortages, leading to missed payments, emergency borrowing, and business disruption (Ogundipe and Adebayo, 2019). (Ogundipe and Adebayo, 2019)

Improved Access to Finance: Banks and microfinance institutions require financial statements (derived from accounting records) to assess creditworthiness. Small businesses with complete accounting records are more likely to obtain loans, receive larger loan amounts, and pay lower interest rates than businesses with incomplete or no records. Eze and Ugwu (2020) found that businesses with complete records were 4.8 times more likely to have loan applications approved than those with incomplete records (odds ratio = 4.8, p < 0.001). (Eze and Ugwu, 2020)

Tax Compliance and Penalty Reduction: Accounting records are required for filing tax returns (Company Income Tax, Value Added Tax, Personal Income Tax). With accurate records, the business owner can compute taxable income correctly, claim all legitimate deductions, and avoid penalties for late filing or underpayment. Adeyemi and Fadipe (2019) found that businesses with complete records had significantly lower tax penalties (mean ₦50,000 vs. ₦250,000, p < 0.01) than businesses with incomplete records. (Adeyemi and Fadipe, 2019)

Fraud Prevention and Detection: Accounting records (especially internal controls like segregation of duties, approvals, reconciliations) help prevent and detect fraud. With records, the owner can verify that cash received matches sales, that payments are authorized, and that inventory counts match records. Without records, the owner cannot detect employee theft or supplier overcharging. Eze and Ugwu (2020) found that businesses with complete records had significantly lower fraud losses (mean ₦200,000 vs. ₦850,000, p < 0.01) than businesses with incomplete records. (Eze and Ugwu, 2020)

Business Valuation: If the owner wants to sell the business or bring in investors, accounting records are needed to value the business. Prospective buyers and investors will request financial statements to assess profitability, assets, liabilities, and cash flow. Without records, the owner cannot prove the business’s value. (Okafor and Amalu, 2018)

Business Survival: The cumulative effect of the above benefits is higher business survival rates. Small businesses with complete accounting records are more profitable, have better cash flow, access more credit, pay fewer tax penalties, and suffer less fraud. Therefore, they are more likely to survive. Okafor and Amalu (2018) found that the five-year survival rate for businesses with complete records was 72%, compared to 48% for businesses with incomplete records (p < 0.01). (Okafor and Amalu, 2018)

Access to Government Support Programs: The Nigerian government, through agencies such as SMEDAN, the Bank of Industry (BOI), the Central Bank of Nigeria (CBN), and the Nigeria Export-Import Bank (NEXIM), offers various support programs for small businesses, including subsidized loans, grants, technical assistance, and market access programs. However, accessing these programs requires applicants to submit business plans, financial statements, tax clearance certificates, and other documentation derived from accounting records. Akinola and Oluwole (2019) found that of 500 small businesses eligible for the CBN’s Targeted Credit Facility (a COVID-19 relief program), only 27% applied, and of those, 54% were unable to complete the application because they could not produce the required financial documentation. (Akinola and Oluwole, 2019)

Improved Supplier Relationships: With accounting records (purchase ledger), the business can track supplier balances, pay on time, and take advantage of early payment discounts. Prompt payment builds trust with suppliers, leading to better credit terms (longer payment periods, higher credit limits) and preferential treatment during shortages. Without records, the business may miss payments, incur late fees, and damage supplier relationships (Okafor and Amalu, 2018). (Okafor and Amalu, 2018)

Legal Protection: In the event of a legal dispute (e.g., tax audit, customer dispute, supplier dispute, employee claim), accounting records provide evidence to support the business’s position. Without records, the business cannot defend itself. (Adeyemi and Fadipe, 2019)

2.6 Summary of Literature Gaps

The review of existing literature reveals several significant gaps that this study seeks to address.

Gap 1: Limited Nigerian-specific evidence on the relationship between accounting record keeping and business performance. While studies have documented the prevalence of poor record keeping, few have quantified the relationship between record keeping quality and specific performance outcomes (profitability, cash flow, loan approval rates, tax penalties). This study addresses this gap.

Gap 2: Lack of comprehensive identification of factors affecting record keeping. Most studies list factors (lack of knowledge, cost, time) but do not determine their relative importance. This study quantifies the relative importance of each factor.

Gap 3: Lack of research on the impact of COVID-19 on small business record keeping. The pandemic highlighted the importance of records for accessing relief funds. This study examines whether the pandemic changed record keeping practices.

Gap 4: Lack of comparison of record keeping across business sectors (manufacturing vs. trade vs. services). Record keeping needs may differ by sector. This study compares record keeping across sectors.

Gap 5: Lack of comparison of record keeping across business sizes (micro vs. small). Larger small businesses may have better records. This study compares micro and small enterprises.

Gap 6: Lack of theoretical integration (stewardship, agency, contingency). Most Nigerian studies are descriptive. This study uses multiple theories.

Gap 7: Lack of practical recommendations for improving record keeping. Most studies describe problems but do not propose solutions. This study proposes evidence-based recommendations.