CHAPTER II

REVIEW OF RELATED LITERATURE

This chapter will feature publications relevant to this research, including

publications, books, web pages, as well as other related studies such as thesis

and dissertation and other references that can be used as a basis for review.

Related Literature 

Foreign 

Krishna and Pavithran (2018) made a study to find out the accounting

practices of SMEs in Kerala. They found out that most of the enterprises are not

aware of the need of accounting practices and they made them only because it is

mandatory. They are also not fully aware about the various statements and the

benefits of preparing them. The study found out that the enterprises are not using

the accounting statements for planning, comparison and decision making and

suggest the authorities to take necessary steps to enrich these entrepreneurs

about the importance of accounting system and the benefits it could provide for

their business. 

Mekonnen (2019) in his paper Accounting practices of Small and Micro

Enterprises in North Shewa Zone, Amahara Regional State of Ethiopia revealed

that more than 50% of the enterprises do not keep their accounting records due

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to lack of accounting knowledge, higher cost, time waste, labour intensive, etc.

Even those who prepare the record still lack accounting knowledge.

Local

According to Legaspi, JL (2018) the use of appropriate and adequate

management accounting techniques can solve everyday business problem and

can become a source of competitive advantage. This study describes the

managerial use of management accounting information in developing country

using a greater number and extensive description of the SMEs demographic

profile, the level of its usefulness and understands ability about the function of

each management accounting practices undertaken. The findings of the study

suggest that in the present day’s business environment, enterprises are in need

of the help of more accountants as their business partner. Small enterprises

obtained higher appreciation about the use of statement of cash flow analysis

and operating budgets while financial budgets, capital budgeting decisions,

managing customers’ relationship and operating budgets were the very useful

tools for the medium enterprises. It was appropriate that medium firms utilized

more tools due to the nature and complexity of their operations. Small-sized

enterprises might not really need some of the tools investigated, as medium-

sized would. Overall, small and medium manufacturing enterprises know the

cost-benefit approach of utilizing each tool for the organization activities. It can

be effective in some situations but may not be successful in others. Therefore,

2
the appropriateness of management accounting information depends upon the

resources, operating activities, strategies and the size of the organization.

Related Studies

Foreign 

(Kasozi Ahmed and Nkundizana Denis, 2019) This study examined the

effect of accounting practices on the performance of small and medium-sized

enterprises (SMEs) in Uganda. The authors found that SMEs that had better

accounting practices, such as maintaining accurate financial records and using

financial statements to make decisions, had higher financial performance than

those with poor accounting practices. The study highlights the importance of

accounting practices in improving the financial performance of SMEs.

(Nweze Vincent Uchenna and Ezejiofor Raymond Anthony, 2018) This

study investigated the relationship between accounting practices and financial

performance of small and medium-sized enterprises (SMEs) in Nigeria. The

authors found that SMEs that employed proper accounting practices, such as

budgeting, cash flow forecasting, and financial reporting, had better financial

performance than those that did not. The study emphasizes the importance of

accounting practices in enhancing the financial performance of SMEs.

(Abdul-Rahaman Abdulai and Dorcas Anom, 2018) This study examined

the relationship between accounting practices and the financial performance of

small and medium-sized enterprises (SMEs) in Ghana. The authors found that
3
SMEs that had better accounting practices, such as using financial statements to

make decisions and having an internal control system in place, had better

financial performance than those with poor accounting practices. The study

suggests that proper accounting practices can enhance the financial

performance of SMEs.

(Girmachew Kahsay, Girma Zelek, 2019) examined factors affecting use

of accounting records on small & micro enterprises in Debre Birhan city, Ethiopia.

The study used descriptive research design. 276 SMEs were sampled for the

study. Results revealed that use of accounting records were poorly rated

depicting that the management of SMEs didn’t  invest in accounting  services  .T

he finding implied  that capital and access to credit did have positive relations 

but insignificant . On the other hand, education and age had positive and

significant relation.  The researcher recommended that all SMEs should insure

correctness in reporting and general record management as it enhances

efficiency and effectiveness. Both governmental and non-governmental

authorities are also advised to provide short- term training in accounting practice

and reporting standards so as to improve the knowledge of accounting system.

  (Garedew Ganecho Gebremedihin, 2019) examined challenges that 

affect the application  of  accounting  practice of  micro  and small  scale 

enterprises is  common  difficulties.  To achieve the research objective the

researcher applied descriptive research design, primary data were collected by

4
using proportionate stratified sampling technique from samples of 209 owners.

Chi- square test was used to examine the factors that affect the application of

accounting practices. The result of the study concluded that respondents  have 

understanding  on  contribution  of  accounting  practice  for  growth  of 

enterprises  but  they  aren’t  properly implementing because of lack of skills to

handle assets and liability to prepare financial stat ements, distrustful attitude of

owner , cost of hiring qualified employee, finally fear taxation to disclose all

information .

(Mekonnen, 2019) in his paper Accounting practices of Small and Micro

Enterprises in North Shewa Zone, Amahara Regional State of Ethiopia revealed

that more than 50% of the enterprises do not keep their accounting records due

to lack of accounting knowledge, higher cost, time waste, labour intensive, etc.

Even those who prepare the record still lack accounting knowledge.

(Yunita Anwar and Nazli Anum Mohd Ghazali, 2018) This study compared

the effect of accounting practices on small business performance between

Australia and Indonesia. The authors found that accounting practices, such as

record-keeping, financial analysis, and budgeting, significantly affected the

performance of small businesses in both countries. The study emphasizes the

importance of proper accounting practices in enhancing the financial

performance of small businesses.

5
 (Al-Khalidi and Al-Khawaldeh, 2019) This study investigated the impact of

accounting information on the performance of small and medium-sized

enterprises (SMEs) in Jordan. The authors found that SMEs that had proper

accounting practices, such as preparing financial statements and using financial

ratios, had better financial performance than those with poor accounting

practices. The study highlights the importance of accounting information in

improving the financial performance of SMEs.

(Tchouadep, Kuate, and Nyefom, 2019) This study examined the

relationship between accounting practices and the financial performance of small

and medium-sized enterprises (SMEs) in Cameroon. The authors found that

SMEs that employed proper accounting practices, such as keeping financial

records and preparing financial statements, had better financial performance

than those that did not. The study emphasizes the importance of accounting

practices in enhancing the financial performance of SMEs.

Local

Synthesis

The review of related literature provided literatures and studies which are

similarly associated to this present study in terms of the accounting practices and

profitability of micro and small businesses. 

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 All authors mentioned agreed that most of the micro and small business

do not prescribe the use of proper accounting in relation to the profitability of their

business operation. It was found that most of them do not practice adequate

recording of transaction on their books and rely only on profitability based on

their own knowledge and experience operating a business. Common reasons

why micro and small businesses do not prescribe the use of proper accounting

practices are due to lack of accounting knowledge, skills, and cost of hiring

accountants. This is why authors have mentioned that most of the micro and

small businesses generates information and profit that is less efficient and

reliable.

On the other hand, only the study of Ibarra and Velasco (2015) conducted

in Metro Manila and several provinces of Quezon has shown that MSMEs are

either very knowledgeable or knowledgeable on accounting principles and

concepts.

References

Kasozi, A., & Nkundizana, D. (2019). The Effect of Accounting Practices on the
Performance of Small and Medium Enterprises in Uganda. International Journal
of Business and Management, 14(2), 223-232.

Nweze, V. U., & Ezejiofor, R. A. (2018). Accounting Practices and Financial

Performance of Small and Medium Enterprises in Nigeria. International Journal of
Economics, Commerce and Management, 6(5), 28-38.

Abdulai, A. R., & Anom, D. (2018). Accounting Practices and Performance of

Small and Medium Enterprises in Ghana. Research Journal of Finance and
Accounting, 9(18), 113-121.

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Anwar, Y., & Ghazali, N. A. M. (2018). The Effect of Accounting Practices on
Small Business Performance: A Comparative Study between Australia and
Indonesia. Journal of Accounting and Investment, 19(2), 119-129.

Al-Khalidi, D. M., & Al-Khawaldeh, K. S. (2019). The Impact of Accounting

Information on the Performance of Small and Medium-Sized Enterprises in
Jordan. International Journal of Accounting and Financial Reporting, 9(1), 27-42.

Tchouadep, A., Kuate, M. K., & Nyefom, R. N. (2019). Accounting Practices and
the Financial Performance of Small and Medium-Sized Enterprises in Cameroon.
International Journal of Economics, Commerce and Management, 7(6), 103-113.