EFFECT OF ACCOUNTING PRACTICE ON PROFITABILITY

OF MEDIUM INTERPRISE (IN CASE WOLKITE TOWN)

WOLKITE UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

A RESEARCH PAPER SUBMITTED TO THE DEPARTMENT OF

ACCOUNTING AND FINANCE IN PARTIAL FULFILMENT OF BA
DEGREE IN ACCOUNTING AND FINANCE
BY; ID_NO
ABI GIRMA…………………………………………….BER/029/11
ADVISOR, MR. MULALEM H.
AUGUST, 2021

WOLKITE, ETHIOPIA
 DECLARTION

I declare that the research entitled effect of accounting practice on profitability of medium
enterprise on wolkite trade and industry development beurou submitted for Award of Bachelor
of Art Degree in Accounting and Finance. Wolkite University is my original work and it hasn’t
been presented for the award of any other Degree, fellowship or other similar titles of any other
university or institution.

Approved by

Advisor Mr, Mulalem H. Signature------------------- Date-----------------------

Examiner

Name-------------------------------------- Signature-------------------- Date----------------------

Name--------------------------------------- Signature-------------------- Date--------------------

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 ACKNOLDGMENT

First of all, I would like to thanks the almighty God who helped me throughout my life in all
aspects for all his sincere, faithful and immense devotion to help us for the accomplishment of
this essay work and to bring us here from the start. Much appreciation is expressed to our adviser
Mr. Mulalem. Who put me in the right track of this paper research and for continuous and
constructive comment and unreserved assistances from early title selection till the final write up
of this essay I would also like to express my gratitude for the financial and material support
provided by my family. Finally, l would also like to extend my thanks to the employee of
medium enterprise in Wolkite town for their questioner response.

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 ABSTRACT
Medium scale enterprises are very important for economic growth and the development of a
country. Having Proper book of account and timely reporting the financial information is a
decisive and pillar for the profitability of medium enterprise. The study was aim to assessing the
effect of accounting practices on profitability of medium enterprise in Wolkite town. To conduct
the study both primary and secondary source of data were used. More data obtained from
primary type of data gathered through interview, questionnaire, and observation; and the
secondary data is obtained from annual reports and financial statements of the enterprise by
reviewing the records and accounting procedures from different departments which have
relation with book keeping and accounting records. The researcher was used cluster random
sampling technique for questionaries’ distributed for the employer of enterprise from five sectors
of enterprise hence the geographical area and heterogeneity among the enterprise. For the
achievements of study quantitative type of research were used and the recorded data are
analyzed and presented using tables, percentage, and descriptions. The study revealed that the
majority of studied firm has no formal accounting practice. To improve its profitability medium
enterprise should have effective accounting practice and qualified accountants.

TABLE OF CONNTENT

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ACKNOWLEDGEMENTS..........................................................................................................................................i
ABSTRACT............................................................................................................................................................. ii
TABLE CONTENT...................................................................................................................................................iii
List of Table..........................................................................................................................................................v
CHAPTER ONE.......................................................................................................................................................1
INTRODUCTION.................................................................................................................................................... 1
1.1 BACKGROUND OF THE STUDY........................................................................................................................1
1.2 STATEMENT OF THE PROBLEM.......................................................................................................................2
1.3 RESEARCH QUESTION.....................................................................................................................................3
1.4.2 SPECIFIC OBJECTIVE.....................................................................................................................................4
1.5 SIGNIFICANCE OF THESTUDY..........................................................................................................................4
1.6 SCOPE OF THE STUDY.....................................................................................................................................4
1.7 LIMITATION OF THE STUDY............................................................................................................................ 4
1.8 ORGANIZATION OF THE PAPER.......................................................................................................................5
CHAPTER TWO......................................................................................................................................................6
REVUIEW LITERETURE...........................................................................................................................................6
2.1 THEORETICAL PERSPECTIVE............................................................................................................................6
2.1.1 DEFINITION OF TERMS.................................................................................................................................6
2.1.2 Basic concepts of accounting practice.......................................................................................................7
2.1.3 Characteristics of accounting information and its users..............................................................................7
2.1.4 Qualitative Characteristics of accounting information and its users...........................................................8
2.1.5 ACCOUNTING PRACTICE JOBS....................................................................................................................10
2.1.6 DEFERENT TYPES OF ACCOUNTING SERVICES...........................................................................................11
2.1.7 Difference between accounting and book keeping...................................................................................12
2.1.8 Business transactions and the accounting equation.................................................................................12
2.1.9 Financial statements..................................................................................................................................12
2.1.10the accounting cycle.................................................................................................................................14
Definition of accounting cycle............................................................................................................................14
2.1.11 effect of not keeping accounting practice for medium enterprise..........................................................15
2.2 EMPIRICAL PERSPECTIVE.............................................................................................................................15
CHAPTER THREE..................................................................................................................................................17
RESEARCH DESIGN AND METHODOLOGY...........................................................................................................17
3.1 INTRODUCTION.............................................................................................................................................17
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3.2 DESCRIPTION THE STUDY AREA....................................................................................................................17
3.3 TYPES AND SOURCES OF DATA.....................................................................................................................17
3.4 METHODS OF DATA COLLECTION.................................................................................................................17
3.5 Target population.........................................................................................................................................18
3.5.1 Sampling Techniques.................................................................................................................................18
3.6. METHODS OF DATA ANALYSIS AND PRESENTATION...................................................................................19
CHAPTER FOUR...................................................................................................................................................20
DATA ANALYSIS AND FINDING............................................................................................................................20
4.1 Background information of respondents......................................................................................................20
4.2 Overview of accounting practice..................................................................................................................23
CHAPTER FIVE.....................................................................................................................................................31
SUMMURY, CONCULUSION AND RECOMMENDATION......................................................................................31
5.1 SUMMURY....................................................................................................................................................31
5.2 CONCULUSION..............................................................................................................................................32
5.3 RECOMONDATION........................................................................................................................................33
REFERENCE......................................................................................................................................................... 34
APPENDIX............................................................................................................................................................35

LIST OF TABLE
Table 1 Demographic characteristic................................................................................................................20
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Table 2 Qualification of respondents; educational background, field of study and work experience.................21
Table 3 Experience before they joined the medium enterprise...........................................................................22
Table 4 Training and exams regarding accounting practice...............................................................................22
Table 5 Preparation of financial statements timely basis to know profitability..................................................23
Table 6 types of financial statements prepares by the enterprise........................................................................23
Table 7 Utilization of accounting records and procedures to accomplish desired rate of return & factors that
hinder utilization of accounting practice.............................................................................................................24
Table 8 Relationship between accounting practice and profitability..................................................................25
Table 9 Extent of accounting practice used as profitability measurement tool...................................................25
Table 10 Existence of certified accountants.......................................................................................................26
Table 11 Information about the current accounting practice on profitability.....................................................26
Table 12 Information about accounting practice to know financial position and operating result.....................27
Table 13 Information about role of accounting practice in monitoring and achieving desired profitability level
Source: Questionnaires result, 2021...................................................................................................................28
Table 14 Information about continuous and sufficient training for employees..................................................28

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 CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Medium scale enterprises are important ingredients for stable and equitable growth in the any
nation of economy. They are playing great role to solve different social problems in developed
and developing country. Ethiopia takes to development and expansion of medium enterprises as
a main way to solves many of social problems. More of town, which is in Ethiopian are within
alarming social problem like unemployment, lack of houses shortage and low level of
investment. These studies were conducted in Wolkite Town which found in south nation
nationality and people of Ethiopia as a case study. present time various reforms and
development activities are being carried out to improve the situation. One of those is the
promotion and developments of mediums enterprises in the towns. This is to enhance the
promotion of sector and emphasizing on employment Creation through development of medium
enterprises in the town.

accounting practice is a part of today's business life which is necessary to understand the
financial and operating result of organization and it play a critical roles in the success of
contemporary business organization. accounting serve as a critical for recording profitability
monitoring and evaluating the financial position and operating result of medium enterprise and
preparation of a documents necessary to evaluate profitability(Amidu 2011).Accounting practice
and accounting information are important as it can help the firms to manage their operations in
critical areas like costing, expenditure and cash flow by providing information to support in
monitoring and controlling desired profitability level. Since profit is the motive of any business
enterprise, utilizing accounting practice properly is mandatory, to achieve the desired rate of
return. So utilize accounting records and procedures, enterprise shall an accountant. (Ademola,
2012)

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In successful medium enterprise owner needs, an accountant and a lot of accounting information
system in order to able to make sound and timely decisions on profitability of a business. (Miko,
1998)l

although, a number of criticisms and limitations can be attribute to accounting practices, it

produces use full accounting information that remains the most important and substantial source
of profit decision for most medium scale enterprise. (Ademola, 2012)As a result of the increasing
important role that the accounting practice plays today in medium scale enterprise, it was
consolidates central place within the information system of an enterprise. (Anyigbi, 1999)
The accounting practice helps to businesses enterprise to produce financial statements that show
financial position and operating results on the operation on medium enterprise. Without
accounting information, comparisons between firms will be too difficult. (European commission,
2008.

There were prior studies conducted on accounting practice which tried to show that how all
components in accounting practice is to improve the organizational performance of medium
enterprise in other part of Ethiopia town. But they were not study the effect of accounting
practice have on profitability of medium enterprise. Therefore this study was attempted to
examine the effect accounting practice on organizational performance to measure profitability of
medium enterprise in Wolkite town.

1.2 STATEMENT OF THE PROBLEM

The problem the Enterprise faced are association with accounting practice that include difficult
to give information on their income and expenses (they do not know whether they have lost or
profited from their business activities) in presenting their financial position, management
decision and this leads to problem to access to finance.(Tafa Mosisa, 2011)

Review of existing literature revels that, a number of medium scale enterprises have not given
much attention to the functions and roles of accounting practices for their profitability in relation
to aim their business transactions. This can be lack of sound knowledge about book keeping
practices of the business.(Nandan, 2010) Most medium scale enterprises prefer to recruit
unskilled personnel especially clerical and accounting staff. This is a problem for the profitability
and success of a business. Enterprise. (Nanadan, 2010)
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In addition to this, most medium scale enterprises fail to keep proper books of account and also
fail to observe and follow basic accounting procedures. As a result, they able to portray the exact
profitability positions of their business. (Goltz, 2011)Adeboye, (2005), also concludes in its
research conducts on this issue that, medium Scale enterprises faced poor record keeping and
inefficient use of accounting information problems to support their financial decision making,
especially profit decision. As previously researchers mentioned medium enterprises are
significant components of developing country economy like Ethiopia. But there is a lack of study
with empirical evidence concerning their account practice and its effect on profitability by rising
credit from bank and making Investment in the town. Therefore this study examine effect
accounting practice on profitability of medium enterprises by putting components of account
practice provided with empirical study to measure the profitability of medium Enterprise in
Wolkite town.

1.3 RESEARCH QUESTION

1. What extent is accounting record and procedure being used as profitability measurement tool?

2. What extent is the accounting practice and basic procedures implemented and applied to
accomplish the planed profit?

3. What are the roles of accounting practice on profitability in Wolkite town's medium
Enterprise?

4. What factors hinders the utilization of accounting practice in enterprise in Wolkite?

1.4 OBJECTIVE OF THE STUDY

1.4.1 GENERAL OBJECTIVE

The general objective of the study is to examine the effect of accounting practice on profitability
of medium enterprise in wolkite town.

1.4.2 SPECIFIC OBJECTIVE

The specific objectives of this research were aim to achieve the following:

1. To assess the accounting record and procedure being used as profitability measurement tool.

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2. To understand basic procedures and accounting practice implement to accomplish planed
profit

3. To determine the role of accounting practice on profitability of the enterprise in Wolkite.

4. To assess the major factors that hinders the utilization of accounting practice in Wolkite
enterprise

1.5 SIGNIFICANCE OF THESTUDY

This study will have the following importance;

First, the output of the study may help the enterprise to correct its problems on the application of
accounting procedures and accounting records. Second, this study was help to serve as a
literature to individuals who want to carry out further research on this topic. Finally this study
would be a source of knowledge to medium scale enterprises on creating the awareness of the
importance of accounting practice on profitability and how to maintain proper accounting
records use to return on investment and how to prepare financial statements effectively.

1.6 SCOPE OF THE STUDY.

The effect of accounting practice is very vast issue. However, this study is delimited only to
focus on the effect of accounting practice on profitability of medium enterprise in Wolkite town.
Even though roles of accounting practice on profitability are important and comprehensive,
the study cover As much as possible the of accounting practice on profitability of medium scale
firm which Focuses only in Wolkite town.

1.7 LIMITATION OF THE STUDY

Limitation of this study is concerned with many constraints which have arisen as an impact on
the quality of the study from deferent factors. Most of the constraint is arise from targeted
population. Few employee and owner are doubt to response neutrally. They are hesitated by
manager& government policy. There is transportation cost and time constraint.

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1.8 ORGANIZATION OF THE PAPER.

This paper include five chapters, The first chapter is an introduction part which includes back
ground of study, statement of the problem, research question, objective of study, significant of
study, scope of study. Subsequently, chapter two presents important related literature review
dealing with the accounting practice and profitability and chapter three presents the research
methodology used in conducting the study, chapter four analysis and interpretation and chapter
five include summary, conclusion and recommendation.

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 CHAPTER TWO

REVUIEW LITERETURE
This chapter presents the theoretical literature including the definition of medium scale
enterprises; and the empirical evidence on effect of accounting practice of medium scale
enterprises and profitability.

2.1 THEORETICAL PERSPECTIVE

2.1.1 DEFINITION OF TERMS

Accounting practice: is the routine manner in which the day to day financial activities of a
business entity are gathered and recorded. Composite activity of collecting, analyzing, recording,
summarizing, reporting, and interpreting the financial position or transaction of any organization
or government units. The practice of accounting is highly skilled and technical profession that
affects public welfare. (Goltz, 2011)

Accountant: an accountant is any person who possesses a professional license to practice

accountancy from recognized professional body and has legal capacity and authority to carry out
the duties of accountants in accounting practice. (Nandan, 2010)

Profitability: the term profitability is referred to as the ability to make profits progressively over
a long period of time (Nandan 2010). It arise from a result properly function of both employer
and manager of enterprise. This makes the enterprises existence for a long period of time.

Medium scale enterprise : medium scale enterprises refers to medium size firm result from the
slow and steady growth that result from a successful small business .As a company earns more
revenue, it sets aside the capital needed for assets eventually bridging the gap between small
business and large corporations.(European commission,2008)

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2.1.2 Basic concepts of accounting practice
Definition of accounting

Accounting is concern with the processes of recording ,sorting and summarizing data related to
business transaction and events .Such data are to a large extent of financial in nature and are
frequently expressed in monetary terms .Accounting is also concerned with reporting and
interpreting the data .(Fess warren,1984)

Basic accounting principles and assumptions

If the management of a company could record and report the financial data as it saw fit,
comparisons among companies would be difficult, if not impossible. Thus, financial accountants
follow generally accepted accounting principles in preparing reports. These reports allow
stakeholders to compare one company to another. Accounting principles and concepts develop
from research, accepted accounting practices, and pronouncements of authoritative bodies. The
generally accepted accounting principles impact how companies report and what they report. The
accounting concepts are as follow. (Fess Warrren, 1984)E) Matching concept; is linked closely
to accrual accounting & to revenue recognition. The matching principle states that to determine
the income of a company for an accounting period, the company computes the total expense
involved in obtaining revenue of the period &relate these total expense to (match theme
against)the total revenue rewarded in the period.

2.1.3 Characteristics of accounting information and its users

A) Business entity concept: this concept states that the economic activities and transactions of a
business unit should be recorded separately from the activities or transaction of the owner(s).In
other words, the business is viewed as an entity separate from its owners, creditors or other
stakeholders.

B) Cost concept: the cost concept is the basis for entering the exchange price or cost into the
accounting records for the transactions .Using the cost concept involves two other important
accounting concepts, objectivity and the unit of measure.

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C) Objectivity concept: it requires that the accounting records and reports should be upon
objective evidence. In exchange between a buyer and seller, both try to get the best price. Only
the final amount agreed upon is objective enough for accounting purposes.

D) Unit of measure concept: it requires that economic data be recorded in dollars (in monetary
unit).money is a common unit of measurement that allows for the reporting of uniform financial
data and reports.

F) Full disclosure principle: means that published financial statements and related notes should
include any economic information about the accounting entity that is significant enough to affect
the decision of informed &prudent users of financial statements.

G) The periodicity assumption; implies that the economic activities undertake, during the life
an accounting entity are assumed to be divisible various artificial time period (usually a year) for
financial reporting purpose.

2.1.4 Qualitative Characteristics of accounting information and its users

Characteristics of accounting information

Accounting information is composed principally of financial data about business transactions,

expressed in term of money .Generally the qualitative characteristics of accounting information
are as follows .(Mosich and Larson,1982)

A) Understandability: the accounting information should be understandable to users who have

reasonable knowledge of business and economic activities and who are willing to study the
information with reasonable diligence

B) Relevance: to be relevant, information must be predictive value and feedback value and
the information should be able to related to decisions and able to influence decisions.
Relevance can be evaluated according to three qualitative criteria.

I) Timeliness: accounting information should be timely if it is to influence decision.

II) Predictive value: accosting information has predictive value when it decision makers
forecast more present events.
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 III) Feedback value; accounting information has feedback value when it enables decision
makers to confirm or correct prior expectation.

C) Reliability; the accounting information should be verifiable, representational faithful, and

neutral.

I) Representation faithful (Validity): accounting information should be presents what it purpose

to represent &should ensure that the selected method of measurement has been used without
error or bias.

II) Verifiability (objectivity free from error); Accounting information should be variable
(objective) when a light degree of consensus can be secured among independent measure using
the same measurement method that is the measurement result can be duplicated.

III) Neutrality: Accounting information result implies completeness of information .An

omission of information can lead to bias if it is intended to induce or inhabit a particular
behavior.

D) Comparability: in order to be comparability to user, the enterprise should use uniform

accounting procedures in different fiscal years.

Users of accounting information

An accounting information system provides data to help the decision making process of
individual of outside the business as well as business are affected in some way by the
performance of the business organization while the decision making individuals inside the
business are the responsible for the performance of the business.

A) Internal users: There are internal users who are directly involved in the day-to-day activities
of an organization example managers, owners.

B) External users: There are also several different groups of external users of accounting
information such as creditors, labor unions, customers, government unit, competitors, regulatory
authorities, trader association, and so on. (Mosich and Larson, 1982)

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 2.1.5 ACCOUNTING PRACTICE JOBS
The four mains types of accounting are:

Public accounting

Management accounting

Government accounting

Internal auditing

A) Public accounting :public accounting is broadest and most varied type of accounting .These
of accountants are experienced in book keeping ,financial analysis and account management
services. The duties some are expects the public accounts range from taxes preparation and
advice to consultations in the area of employee compensation and accounting system design.
Some also audit their client's financial recorded and ensure statements have been managed
properly .They primarily look at historical financial data and discover problems. (Wosha, 2014)

B) Management accounting :Management accountants are those that some one employee for
the purpose recording and analyzing their companies financial data .They use those data to
carryout task including assets management ,budgeting, performance evaluation and cost
management. They are also often involved in budgeting for release of enterprise new products
and preparing financial data for the enterprise. (Wosha, 2014)

C) Governmental accounting: Accountants in governmental perform public accounting duties

for government agencies to make sure revenue and expense definite are carried out with regards
to the law. Those accountants are involved in budgeting and government assets and assets
management .Therefore ,unless you are the government agency or something related ,it would
safe for you to overlook this .(Martinez,2014)

D) Internal auditing :Internal auditing accountants under internal auditing review the
company's financial management practice, checking for this managements, fraud and waste.
(Martinez,2014)

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2.1.6 DEFERENT TYPES OF ACCOUNTING SERVICES
There are many services along with the different types of accounting areas .Some of the most
common are

Bookkeeping

Chartered accounting

Tax accounting

Financial controller services

Forensic accounting

Accounting audit

1) Book keeping :Book keeping involves basic tasks for small to medium business to ensure
the accuracy of accounts where they will work closely with an accountant .Book keeper may
update financial systems using financial accounting software's or record hard copy financial
information .Furthermore ,accounts payable and receivable are commonly monitored as part of
book keeping .

2) Chartered accounting :is a members of professional of accounting body .Chartered

accountants are often skilled in a number of areas from management to auditing .Also ,they
sometimes focuses on a particular specialization with in accounting field.

3) Tax accounting: As per its title tax accounting is in the field of income tax for individuals and
the various tax requirement placed on the business .Tax accountant are experts when it comes to
claims how to avoid paying tax inefficiently.

4) Financial controller service: It involves the management of various functions of the business
from assigning work dealing with new clients and overseeing staff .In other words financial
controller are the head of accounting department and practice

5) Forensic accounting: involves tracking missing funds and other discrepancies that may
appear on the course of accounting practice or financial report.

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6) Accounting audit: Auditors are involved in checking financial statements and reports to
ensure the accuracy and validity of statements.

2.1.7 Difference between accounting and book keeping

Accounting is often confused with book keeping, but they are different in meaning. Book
keeping is a mechanical process that records a routine economic activity of a business whereas
accounting includes book keeping and goes well beyond it in scope. Book keeping is the
recording of business data in prescribed manner but accounting is primary concerned with the
systematic way of recording ,analyzing, classifying, reporting ,and interpreting accounting
information.(Jerry J .Weygant and Donald,1998)

2.1.8 Business transactions and the accounting equation

A business transaction is the occurrence of an event or a condition that must be recorded. A
particular business transaction may lead to an event or a condition that result in another
transaction. For example, the purchase of merchandise on credit will be followed by a payment
to the creditors, which is another transaction. (Fees Warren, 1984)

Accounting equation

Accounting equation is the business equation which you should remember, when you start on
accounting system on throughout the system as well. Account (Mosisa) (Placeholder2) in
equation show the relationship between three items; assets, liabilities and capital. Assets are any
things which have a value, and owned by business or individual Equities are the financial rights
to assets of the business. Equities to asset of the business are two types; equity of the owner and
equity of the creditor. The value of owner's equity is called capital and the financial right of
persons to whom business owes money is called liability. The basic accounting equation is
written as: Assets =equities or Assets =liability + capital. (Fees Warren, 1984)

2.1.9 Financial statements

Reports prepared about the status or financial position or progress of business after passing all
the accounting processes is called financial statements. The principal financial statements of
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proprietorship are the income statement the statement of owners ‘equity, the balance sheet, and
statement of cash flows. The order in which the statements are normally prepared and the nature
of the data presented in each statement are as follows

A) Income statement: the income statement reports the revenues and expenses for a period of
time based on the matching concept. This concept is applied by matching the expenses with the
revenue generated during a period by those expenses .The income statement also reports the
excess of the revenue over the expenses ( net income /net profit) or the excess of expenses over
the revenues(net loss).(Fees Warren ,1984)

B) Statement of owner's equity: the statement of the owner's equity reports the change in the
owner's equity for a period of time. It's prepared after the income statement because the net
income or net loss for the period must be reported in this statement. Similarly; it is prepared
before the balance sheet, since the amount of the owner's equity at the end of the period must be
reported on the balance sheet. Because of this, the statement of owner's equity is often viewed as
the connecting link between the income statement and balance sheet. (Fees Warren, 1984)

C) Balance sheet: the balance sheet reports the assets, liability, and owner's equity as a specific
date, usually at the close of the last day of a month or year. (Fees Warren, 1984)

D) Statement of cash flows: is a summary of the cash receipt and cash payments for a specific
period of time, such as a month or year. It consists of three sections; operating activities;
investing activities and financing activities. Cash flows from operating activities section
summarized the cash receipts and cash payments from operations. Cash flows from investing
activities section reports the cash transactions for the acquisition and sale of relatively permanent
assets; whereas the cash flows from financing activities section reports the cash transactions
related to cash investments by the owner, borrowing ,and cash withdrawals by the owner.(Fess
Warren ,1984)

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2.1.10the accounting cycle

Definition of accounting cycle

Accounting cycle refers to the series of procedures used to record, classify, summarize business
transactions and preparing financial reports .The accounting cycle or process includes the
following basic procedures.

1) Collection of data about economic events

2) Analyzing data about economic events

3) Recording economic events in a journal

4) Posting to ledger accounts

5) Preparing unadjusted trial balance

6) Preparing and posting adjusting entries

7) Preparing adjusted trial balance

8) Completion of the worksheet (optional)

9) Preparation of financial reports

10) Recording and posting closing entries

11) Preparing a post -closing trial balance.

Generally, accounting cycle is the sequence of procedures in which that begins with analysis and
journalizing of transactions and ends with the post -closing trial balance. (Fees Warren, 1984)

Nature and classification of accounts.

An account is a business form used to record additions (increases) and deductions (decreases) for
each individual asset, liability, owner's equity, revenue and expense items. A group of related
accounts of specific business enterprise is referred to as ledger. The simplest form of an account
is "T-account" ; and it has three parts; title to write the name of the account and spaces for
recording increases and decreases in the account(item) in term of money, i.e.(left and right
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sides). Generally accounts are categorized as balance sheet accounts and income statement
accounts .Balance sheet accounts are also called real or permanent accounts, whereas income
statement accounts are called nominal or temporary accounts .The balance sheet accounts are
assets, liability, and owner's equity and income statement accounts are revenues and expenses.
(Fees Warren, 1984)

2.1.11 effect of not keeping accounting practice for medium enterprise

Good accounting information is very necessary and crucial in order to take efficient and
significant strategic decision. Business decision needs to be supported by good quality financial
information and properly recorded accounting which is very important and in timely manner.
Success or failure of any enterprise is depends on keeping accurate and timely accounting
information to give a clear business image. Most of enterprises owner and manager do normally
their business activities without any accounting or financial judgment and take many important
investment and credit decision without any accounting and financial analysis. The study revealed
that there is a significant negative effect of not having accounting practice on the profitability of
medium enterprise.

2.2 EMPIRICAL PERSPECTIVE

Accounting practice is very important for the long life existence of every business activity . A
review of the existing body of research reveals that the importance of keeping proper accounting
records, accounting practice, the reasons for keeping accounting records and preparation of
financial statements, and extent of record keeping and the nature of accounting practices
maintained by medium enterprises have been documented. According to liberty (1998), the
quality of the accounting practice utilized within the medium enterprises has a positive
relationship with an entity's profitability. Similarly, it has been emphasized that there is need for
financial information for medium enterprises due to the volatility normally associated with their
situation such as unstable cash and profit positions. In the words of Ocala (1993), many medium
enterprises have problem of accounting practice and systems of accounting .He argued that
accounting practice could help medium enterprises to manage their problems in such areas as
costing, expenditure and cash flow by providing information to support monitoring and control.
Poor According is a major challenge to the profitability of medium scale enterprises. The study
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recommends that medium scale enterprises managers and/or owners needs to learn about proper
accounting or engage the services of accounting experts for accounting reporting
purposes ,Tanwongsval and pinvanichkul (2008),comment on the reasons why medium scale
enterprises prepare financial statements and argue that on the list, medium scale enterprises
rank first assessing profitability, second to the purpose of tax returns .According to those
researchers ,owners of medium scale firms consider profit maximization at the most important
financial objective. This has led to the accounting argument that medium scale enterprises
owners pay attention to profitability.

Research gap

As earlier mentioned medium enterprise are significant component of developing countries

economy like Ethiopia and there is a lack of empirical evidence concerning their accounting
practice and its effect in rising credit from neighbor micro finance institution and making
investment of medium enterprise in Wolkite. Then this study examined enterprise accounting
and its effect an assessing finance in Wolkite to provide empirical evidence of this gap.

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 CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1 INTRODUCTION
This chapter describes how this research is carried out, a method used by researcher based on
type of research, description of studied area research design, source and method of data
collection, sampling technique, data analysis method and interpretation.

3.2 DESCRIPTION THE STUDY AREA

Wolkite is capital city of Gurage zone district and 158km from Addis Ababa on the main road of
Jimma and 430km through nation and nationality and people of Ethiopia (SNNPRS) Hawasa. In
Wolkite works the intention of assessing the effect of accounting practice on profitability of
medium enterprise to poverty reduction, job creation and business development interim of
enterprise expansion and unemployment reduction perspective. This paper is designed to study
the effect of accounting practices on profitability of medium Enterprise which located in Wolkite
town.

3.3 TYPES AND SOURCES OF DATA

To conduct the research both primary and secondary data source was used. Primary data sources
are information collected through various methods to obtain current information which fits with
the precise purpose of the study. Secondary data sources including financial statements, reports
and manuals were also used to conduct the study. Both primary and secondary sources of data
were relevant to conduct this study because the more inclusive the source, the reliable
information was received.

3.4 METHODS OF DATA COLLECTION

The primary source of data for this study was gathered through interview, questionnaires, and
observation; due to the reason that all the sources are relevant to undertaken the study
effectively. The questionnaire was collected from the employer of the medium enterprise in
Wolkite town. The secondary sources of data will obtained from different manuals, documents,
annual reports and financial statements of the enterprise by reviewing the organizations records
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and accounting procedures from different departments which have relation with book keeping
and accounting records.

3.5 Target population

In this studies to select a sample size a list of population formally registered in Wolkite town by
trade and industry development bureau were obtained. The total population of study is 260
enterprises which include construction 65, manufacturing 56, service 68, trade 52 and urban
agriculture 19 sector of enterprise.

3.5.1 Sampling Techniques

Cluster sampling technique is used to the study participant. This is because of heterogeneity and
geographical areas description among enterprise and because of needed to insure adequate
sample size selection of subgroup by cluster sample technique is applied among deferent sector.
Then sample random sampling techniques are preferred for this study. The 72 respondent were
selected to this study

Sample Size.
The sampling size and given population were determined by statically formula (K.K Watson,
2002).by using simple random techniques

n=N/1+N (e2)

n=sample size,

N=target population,

e = error term

Assume the error is 10% which is 0.1 in order to minimize error

Then sample size is determined,

260/1+260(0.1)2=72

From the target population questioners were distributed to 72 employers of medium enterprise
and interview were for manager and owner of enterprise. From five sector of enterprise 72

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employers are randomly selected and questioner was distributed for them to analyses and
interprets data that obtained from owners, managers and employer of medium enterprise.

N (Construction) =65*72/260=18

N (manufacturing) =56*72/260=16

n (service) =68*72/260=19

n (trade) = 52*72/260=14

n (agriculture) =19*72/260=5

Sample size is determined from construction, 18 manufacturing, 16 service 19 trades 14 and

urban agriculture 5 are selected.

3.6. METHODS OF DATA ANALYSIS AND PRESENTATION

The results of this study were presented in frequency distribution tables and percentages. Those
methods of data presentation are appropriate for quantitative type of data research.

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 CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

This part of the study presents analysis and interpretation of data collected through questioner
from sample of employment of medium enterprise in Wolkite town and interview results from
manager of the medium enterprise. In order to get information for the study totally seventy two
questionnaires were distributed to the employees of medium enterprise and the questionnaires
were filled and responded by 58 of the respondents. This gives 81% giving response rate. Out of
questionnaires retrieved from construction, 16 from manufacturing, 12 from service, 18 from
trade, and 10 and from agriculture, 2 are responded respectively. Furthermore, to get additional
data about the role of accounting practice on the profitability of that enterprise, financial
statements and accounting records also used. This chapter deals with analysis and interpretations
on the base of data gathered through questionnaires

4.1 Background information of respondents

Table 1 Demographic characteristic

Age group(years) sex total

male % female %

Less than 30 17 29 13 22 51

31-40 12 21 11 19 40

41-50 5 9 - - 9

Above 50 - - - - -

Total 34 59 24 41 100

Source: questionnaires result, 2021

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Table 4.1.1 Shows that majority of the respondents (51%) are under the age category of less than
30 years .There are no respondents under the age category of above 51 years. Respondents 59%
are males and 41% are females. This indicates that enterprises are recruits more male than
female.

Table 2Qualification of respondents; educational background, field of study and work experience

Item description Response Frequency Percentage%

1 Educational Certificate - -
background
Diploma 18 31

B.A/BSc 27 47

MSc/MA& 13 22
above

Field of study
2 Accounting &
finance 35 61

Economics 14 24

management 7 12

Other 2 3

Work
3 experience in Less than 2
enterprise years 19 33

2-4 years 23 39

4-6 years 11 19

Above 6 years 5 9

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 Total 58 100

Source: Questionnaires result, 2021

Regarding the above table 4.1.2, majority of the respondents are specialized in accounting and
finance which accounts for 61% of the total sample respondent’s .The remaining 39% are
specialized in management, economics and cooperative departments. As indicated in the item 3
of the table, 33% of the respondents have service years ranging from 0-2 years, 39% of the
respondents have service years of 2-4 years, 19% of the respondents have service years of 4-6
years and the remaining 9% have been working in medium enterprise in Wolkite for 6 years and
above. This shows that most of the respondents have been working in that company for more
than two years. This shows that, the employees have a good knowledge of accounting practice.
As it is presented above, the majority of the respondents have a good educational qualification
that is BA/BSc Degree and MA/MSc Degree which may enables them to have good idea of
accounting practice .Moreover, majority of the respondents studied the fields related to business
which may enables them to understand the utilization of accounting practice and related issues.

Table 3Experience before they joined the medium enterprise

Did you have any accounting Response frequency percentage

practice experience before you
joined enterprise Yes 16 28

No 42 72

Total 58 100

Source: Questionnaires result, 2021

According to the above table, most of the respondents (72%) had no experience before they
joined to the enterprise as employer and the rest 28% had work experience before they joined
medium enterprise. These indicate the majority have no accounting practice before they joined
enterprise.

Table 4Training and exams regarding accounting practice

Percentage%
Does enterprise provide Response Frequency
training and exams

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 regarding accounting Yes 24 41
practice before engaged in
accounting activity? No 33 59

Total 58 100

Source: Questionnaires result, 2021`

As table 4.1.4 shows that, most of the employees (59%) had not given a formal training and
exams regarding accounting practice. And 41% have formal training and exam regarding
accounting practice this may affect the capacity of the accountants.

4.2 Overview of accounting practice

Table 5Preparation of financial statements timely basis to know profitability

Item response Frequency percentage

Does your enterprise yes 42 72

prepare financial
statement on timely No 16 28
bases to know financial
performance of the
total 58 100
firm?

Source: Questionnaires result, 2021

According to the above table 4.2.1, almost all the respondents (72%) showed that medium
enterprise prepares financial statements timely to know profitability level.

Table 6types of financial statements prepares by the enterprise

Item Response frequency Percentage%

What type of financial Income statement 22 38

statement is your
enterprise prepare? Statement of 20 34
owners’ equity

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 16 28
Balance sheet

Total 58 100

Source: Questionnaires result, 2021

Regarding the above table , all of the respondents believe that enterprise prepares income
statement and balance sheet also of the sample respondents replied that the enterprise prepares
cash flow statement .The enterprise prepares income statement, balance sheet ,and cash flow
statement, which enables to measure it's operating result, financial position and cash position.

Table 7Utilization of accounting records and procedures to accomplish desired rate of return &
factors that hinder utilization of accounting practice

Item Response Frequency Percentage%

Is your enterprise utilize

to accomplish targeted Yes 20 34
rate of return
No 38 66

total 58 100

Source: Questionnaires result, 2021

Regarding to table 4.2.3, majority of the respondents (66%) respond that medium enterprise
doesn't utilize accounting records and procedures to achieve the desired rate of return and small
portion of the respondents (34%) replied that the enterprise utilizes accounting records and
procedures to achieve desired rate of return. The factors that hinders utilization of accounting
practice replied by the respondents are; lack of rich work experience, absence of continuous and
sufficient training, and lack of awareness about the role of accounting practice on profitability of
medium enterprise.

Table 8 Relationship between accounting practice and profitability

Item Response frequency Percentage%

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 What is a relationship Significant
between accounting positive 35 60
practice and relationship
profitability?
Significant
negative -
relationship

Insignificant
positive 23 40
relationship

Insignificant -
negative
relationship

total 58 100

Source: Questionnaire result, 2021

Majority of the respondents (60%) believe that accounting practice and profitability have a
significant positive relationship and the remaining 40% of the sample respondents replied that,
accounting practice and profitability have insignificant positive relationship.

Table 9Extent of accounting practice used as profitability measurement tool

Item response frequency Percentage%

To what extent is Very

accounting records and effective 15 26
procedure being used as
profitability
measurement tool? Effective 31 53

Ineffective 12 21

total 58 100

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Source: Questionnaires result, 2021

Regarding to the above table, 53% of respondents believe that the extents of accounting records
and procedures being used as profitability measurement tool is effective and the26% of the
respondents replied that the extent of accounting practice used as profitability measurement tool
is very effective. Were as 21% of the sample respondents replied that the extents of accounting
practice used as profitability measurement tool is ineffective.

Table 10 Existence of certified accountants

response frequency Percentage%

Item

Does your Yes 16 28

enterprise have
certified accountant No 42 72
who utilize and
implement
total 58 100
Accounting practice

Source: Questionnaires result, 2021

The above table indicates that 72% of the respondents believe that the enterprise have not
certified accountants who implement and utilize accounting practice effectively and the
remaining 28% of the sample respondents replied that enterprise have accountants with
certificate.

Table 11 Information about the current accounting practice on profitability

Item Response frequency Percentage%

Know a days the role of Strongly 44 76

accounting practice on
profitability has been Agree 14 24
increasing

Disagree - -

Total 58 100

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Source: Questionnaires result, 2021

According to the above table, most of the respondents (76%) strongly agree that the role of
accounting practice on profitability has been increasing and 24% of the respondents agree with
the above statement. In general the above table shows that about current accounting practice on
profitability of medium enterprise.

Table 12 Information about accounting practice to know financial position and operating
result

Statement opinion frequency Percentage%

Accounting practice is a Strongly agree 46 79

critical tool to know the
financial position and Agree 12 21
operating result of a firm

Neutral - -

Disagree - -

Strongly - -
disagree

Total 58 100

Source: Questionnaires result, 2021

As table 4.2.8 indicates that, almost all of the respondents strongly agreed that the accounting
practice is a critical tool to know financial position and operating result.

Table 13 Information about role of accounting practice in monitoring and achieving desired
profitability level Source: Questionnaires result, 2021

Statement opinion frequency Percentage

Accounting practice help Strongly agree - -

in monitoring and
achieving desired Agree 31 53
profitability level

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 Neutral 10 17

Disagree 5 9

Strongly 12 21
disagree

total 58 100

As table 4.2.9 indicates that, 53% of the sample respondents agree with the statement accounting
practice helps in monitoring and achieving desired profitability level. Nearly 21% of the
respondents strongly disagree with the above statement and 17% were neutral and 9% is dis
agree

Table 14 Information about continuous and sufficient training for employees

Statement Opinion frequency Percentage%

There have been Strongly agree - -

continuous and
sufficient training for Agree - -
accountant

Neutral - -

Disagree 9 16

Strongly 49 84
disagree

Total 58 100

Source: Questionnaires result, 2021

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According to the above table, majority of the respondents replied that there have not been

continuous and sufficient training for accountant only 16% is having continuous and sufficient

training and 84% are not having training with accounting. This is affect the profitability of the

enterprise so the manager and employer have taken continuous and sufficient training fo0r the

long life existence of the business enterprise.

Presentation of Data from interview

Analysis of interview response

1. What is your role as a business manager?

As manager response, the manager is a main determinant of the success of the business firm. The
main role of the manager is including the overall responsibility, administrative and finance and
some other responsibility. The main role of majority of the manager is overall responsibility.
In this case managers were overseas operational aspect of the enterprise.
2. Is there any factor that hinders to the profitability of your enterprise?
They response that the main factor that affect the profitability of their enterprise is degree of
computation they face in the market. There is a lot of computation in the market that makes the
profitability of the enterprise make lower. Marketing campaign is also another factor that affect
the profitability of enterprise that play a pivotal role in the determining the profitability of the
business. Understand the factor that hinders to the profitability of medium enterprise is a crucial
for the owner of the enterprise to make suitable modification.
3. What was source of start-up the expansion of the enterprise?
There were deferent available for the financing medium scale sector. It includes, own saving
friend/relative, micro finance bank and informal lender. Even if this source s are available, they
having access to some source is a major constraint and obstacle for the growth of enterprise.

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 CHAPTER FIVE

SUMMURY, CONCULUSION AND RECOMMENDATION

5.1 SUMMURY.

The finding of the study is summarized as follows:

Most of the employees of the enterprise are male and younger’s. Majority of the employees of
enterprises are specialized in accounting and finance. Most of the employees of the haven’t good
level of educational qualification. The employees of medium enterprise had low work experience
before they joined that enterprise. Majority of the employees of the enterprise hadn't given a
training and exam regarding accounting practices soon they employed before they engage in
accounting activities. The enterprise prepares financial statements such as income statement,
balance sheet, and statements of cash flow timely to know profitability level.

The accounting practices and profitability have a significant positive relationship. Accounting
records and procedures was being used as the profitability measurement tool effectively.
Enterprise has not enough certified accountants who implement and utilize accounting practices.
The role of accounting practices on profitability has been increasing. Accounting practices is a
critical tool to know financial position and operating result of the enterprise. Accounting
practices helps more in monitoring and achieving desired profitability level. The enterprise has
not given continuous and sufficient training for accountants.

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 5.2 CONCULUSION

Based on the finding of the study, the researcher drawn the following conclusions as: The study
shows that the majority of the work forces are male and youngster. So, the company is
advantageous as those are included in the productive age group. According to the finding of the
study, majority employees of the enterprise are specialized in accounting and finance. This
shows that the employees have knowledge in accounting practices, which have good impact on
the performances of the enterprise. Based on the finding of the study, most employees of
enterprise have No good level of educational qualification that is BA Degree, MA Degree and
above. This indicates that there is insufficient skilled man power in the organization, which
affects the accounting practices and profitability negatively.

Regarding to the finding of the study, the enterprise hadn't given training and exam regarding
accounting practices soon they employee before they engage in accounting activities. This study
shows that the enterprise low profitability. Based on the result of the study, the accounting
practices and profitability have significant positive relationship and accounting practices was
been used as profitability measurement tool. This indicates that the role of accounting practices
on profitability has been increasing and it's a critical tool to know financial position and
operating results. Based on the finding of the study, the enterprises haven’t certified accountants
and it have not been providing sufficient and continuous training for accountants. This has a
negative impact on the operational capacity of accountants.

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 5.3 RECOMONDATION
Depending on the study’s conclusion, the following recommendations are forwarded the scope
that they would help to solve some of the problem of the study; To solve the shortage of a well
skilled man power due to lack of experience, the enterprise should be highly engaged in
employees training and development program. To improve the capacity of employees the
enterprise should give capacity improvement trainings continuously. To improve its profitability
it should have effective accounting practice and qualified accountants.

Generally, employees should be given Continuous trainings so that their skills will keep to-date
relevant. Owner and manager of enterprises should undertake basic training in accounting
practice in order to knowing their assets, liability and capital. Government should support the
expansion and spread of enterprises business activities. Sound policies and regulations should be
developed since this sector is very crucial for country development. Government should
accelerate the development of market for financial service suited to the special characteristics of
medium enterprise

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 REFERENCE
th
Adeboye, 2005, 6 edition, Record keeping and accounting procedures in medium enterprises.

Ademola, 2o12, 11thedition, the roles of record keeping in the profitability of small scale &
medium scale enterprises.

Amidu, 2011, 6th, accounting practices of medium scale enterprises

Anyibo, 1999, role of accounting information on the performance of small and medium scale
enterprises

European commission, 2008, functions and roles of accounting information in profitability of

large and medium firms

Fess warren, 1984, 16th edition, accounting principles, western publishing company.

Goltz, 2011, factors influencing the alignment of accounting information in small and medium
sized firms

Jerry and Donald E., 1998, 9th edition, intermidet accounting, New York

Lybaert, 1998, accounting practice and profitability

Martinez, 2014, accounting practice careers

Mico, 1998, accounting principles of medium scale business

Mosich and Larson, 1982, 5th edition, intermidat accounting, McGraw-Hill company

Nandan, 2010, challenges of book keeping in small and medium enterprises

Ocala, 1993, book keeping and accounting practice

Tafa Mosisa, accounting practice on small and medium enterprise and its effect on access to
finance in Addis Ababa

Tanwaongsvol&Pinvanichkaly, 2008, book keeping on small and medium enterprise Wosha,

2014, accounting practice jobs

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 APPENDIX
WOLKITE UNIVERSITY

COLLEGE OF BUSINESS AND ECOMOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Questionnaire will be filled by the employees of Medium enterprise of Wolkite town.

Dear respondent, I will like to assure that this research is for academic purpose only and any
information you provide will be kept confidential and results will be reported in an aggregate
from that does not disclose the identity of individual respondents.

This questionnaire is designed for the employees of medium enterprise in Wolkite town. To
collect information about accounting practice and its effect on the profitability of that enterprise.

Part I background information

1, Gender A, male B, Female

2, Age A, less than 30 years B, 30-40, years C, 41-50, years

3, education A, certificate Diploma C, MA/BA D, Mac

4, field of study A, Accounting finance B, Economics C, management

5, did you have any accounting practice experience before you joined the enterprise?

A, yes B, No

6, if your question No ‘’5’’ is yes how long did you work as an accountant?

A, Less than 2 years B, 2-4 years C, 4-6 years D, 6-10 years

7, how long did you work as an accountant in medium enterprise in Wolkite?

A, Less than 2 years B, 2-4 years C, 4-6 years D, 6-10 years

8, does enterprise provide exam and training regarding accounting practice

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 Part-II: question regarding accounting practice

9. Is your enterprise prepares financial statements timely to know profitability level?

A, Yes B. No

10. If your response in question no "2" is yes please list the financial
statement(s)------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
----------------------------------------------------.

11. Is your enterprise utilizes accounting records and producers properly to accomplish the
desired rate of return?

A. Yes B. NO

12. Is your enterprise follows basic accounting procedures to prepare financial reports?

A. Yes B. No

13. What is the relationship between accounting practice and profitability?

A. Significant positive relationship C. Insignificant positive relationship

B, Significant negative relationship D. Insignificant negative relationship

14. To what extent are the accounting records and procedures being used as profitability
measurement tool?

A. Very effective C. In effective

B. Effective

15. What was the hinders to the utilization of accounting practice? Please
specify------------------------------------------------------------------------------------------------------------

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---------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------

16. Is your enterprise having certified accountants who implement and utilize the accounting
practice effectively? A. Yes B .No

Part II

Interview question for Manager

1. What is your role as a Manager of

enterprise? .....................................................................................................................................................
........................................................................................................................................................................
......................................................................................................................
2. Is there any factor that hinders to the profitability of your enterprise?

…………………………………………………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………

3. What was source of capital during start-up of the medium business enterprise?

…………………………………………………………………………………………………………………………………………………………………
……………………………………………………………………………………………………………………………….

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