ROLE OF ACCOUNTING CONCEPTS AND CONVENTION IN FINANCIAL REPORTING

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

Every business organization whether in the public or private sector is established to achieve certain objectives. This could be profit maximization as in the case of the private sector or efficient and timely provision of essential services at a reduced price, as in the case of the public sector. The performance of such business organization has to be reported in monetary terms to the owners of the business. (For example, shareholders in the case of private organization or the government as in the case of public) Accountancy plays a vital role in the stewardship of an organization. Accounting has been defined as the process of recording, classifying, reporting and interpreting the financial data of an organization.

While it is important for the accountant to have a sound knowledge of this phase of accounting process, it is often a relatively minor part of his total attention to the management reporting and interpretation of the meaningful implication of the data. (Welgenbad and Dittrich 1973:4) Accounting is therefore basically regarded as a language of communication in an organization like every system of communication; its main purpose is to give different types of information to interested persons. Because of this main purpose, accounting forms a major part of the total information system in any entity, be it business or non-business. (Inanga 1983) However, the following problems are encountered in the process of communicating this information. 1. As the information needs of these various groups do not tally, there are conflicts of interest among the various users of financial statements. 2. The problem of subjectivity in preparing the financial statements. Thus, it becomes necessary that in preparing the financial statement, the accountant be guided by some basic assumptions, principles, concepts and conventions in other to ensure a high degree of standardization in financial reporting.