Chapter 2

REVIEW OF RELATED LITERATURE

Bookkeeping Skills

Bookkeeping is one of the most essential tasks of any business. Without proper

bookkeeping, your business could very quickly and easily crash into a wall. Small

business owners can do their bookkeeping on their own, but many invest in a

bookkeeping service that will save them not just precious time but the risk of making

very costly financial mistakes. Bookkeeping is one aspect that most business owners

would not love to involve themselves in. On the contrary financial management is very

crucial to sustaining and expanding a business. Without it, there is risk of hitting cash

flow crisis, wasting money, scrambling for receipts and facing other financial information

issues that could lead to the closure of a business (Meck, 2014)

Entrepreneurs have to be knowledgeable about accounting concepts so as to

competently embark on bookkeeping. Knowledge and understanding of accounting

concepts, which are the basis for recording business transactions and preparing

accounts, may probably result in accurate bookkeeping. The outcome of accurate

bookkeeping is financial business records which reflect a true reflection of a businesss

performance, hence entrepreneurs and funders relying on factual information for

decision making (Nyathi, 2015).

Moreover, bookkeeping is a process of recording transactions using either single-

entry or double-entry methods in an accounting equation format. Transactions recorded

are classified under the elements of financial statements and recorded based on

accounting concepts. Having clarified and explained what bookkeeping is, it is

imperative to provide the theoretical framework as a rationale towards analyzing

bookkeeping competence within the retail microenterprises (Leutner, 2014).

Consequently, bookkeeping execution as a part of the

business operation system will be influenced by factors such as the competence,

educational background, perception and deemed importance record-keeping by the

person recording the transaction. As the Systems Theory has a functional orientation all

functional activities of the retail clothing micro-enterprise will influence the outcome of

the trial balance and the general set objectives of the company (Stichweh, 2010).

On the study based on human capital and venture capital, the key driver of

business growth and success is the entrepreneurs skills. Human capital plays different

roles within entrepreneurial activities as the focus is on skills, knowledge and

experience acquired to the value of an enterprise. Therefore, bookkeeping skill and the

knowledge to undertake bookkeeping tasks is valuable to an enterprise and forms part

of the key drivers towards business growth (Dimov, 2010).

The debit-credit method maintains a balance between debits and credits in a

single transaction, in all transactions together, and in account balances. The debit-

credit method uses debit and credit rules which affect the elements of financial

statements as follows: assets are decreased by credits and increased by debits;

liabilities and owners equity are decreased by debits and increased by credits; income

is decreased by debits and increased by credits; and expenses are decreased by

credits and increased by debits (Bhutta & Shah, 2013).

 Those things which would come into business are referred as Debit and those

things which would go out from business are referred as Credit. According to this

assumption it satisfies the rules for debit and credit for balance sheet items only like

assets, liabilities and owners equity, however does not apply for income statement

items like incomes, expenses and net income/net loss. As income comes into business

it must be debit and expenses are costs go out from business it must be credit. But why

they both have their normal balance adversely related to the above assumption.

Moreover, why they both treated oppositely in trading profit and loss account regarding

the aforementioned logic, highlights the second theme of this study (Lovins, 2013).

Financial statements can be prepared with the help of either single-entry or

double entry bookkeeping. While single-entry bookkeeping refers to a system where

every transaction is registered only once in one account, double-entry bookkeeping

refers to a system which always involves two accounts and two entries of the same

amounts (debits = credits). However, within systematic single-entry bookkeeping, a

transaction may be entered more than once to provide a performance result (Monsen,

2010).

Every businessman is, ultimately, interested to know the final result of the

business. These are called final accounts because they are the last accounts, prepared

at the end of the year. Ajusting entries serve the ultimate purpose of keeping accounts.

Their purpose is to analyze the effect of various incomes and expenses during the year

and the resultant profit or loss (Narotama, 2015).

 Thus, adjusting entry plays a significant role in reconciling ending balances of an

account. Errors in the preparation of the financial statements of one or more prior

periods may be discovered in the current period. Errors may occur as a result of

mathematical mistakes, mistakes in applying accounting policies, misinterpretation of

facts, fraud or oversights etc. The correction of these errors is normally included in the

determination of net profit or loss for the current period. We consider as fundamental

errors those errors that has significant effect on the financial statements of one or more

prior periods that those financial statements can no longer be considered to have been

reliable at the date of their issue (Bekiaris, 2011).

Cash flow is the amount of money that the business is able to retrieve from

customers and debtors (cash inflow) and the same amount of money that the business

is able to spend (cash outflow) in a period. Cash flow is referred to the inflow of cash to

the business as well as the outflow of cash from the business It is equally as

important as the income statement and balance sheet for cash

flow analysis. Without a cash flow statement, it may be difficult

to have an accurate picture of a companys performance.

(Wingerard, et al., 2013)

With respect to business management, cash flow is viewed as the lifeblood of a

business as cash must be available when it is needed. Therefore a companys ability to

manage cash is vital to survival and wealth. Predicting cash flows of future periods can

help a manager identify future financial problems. Cash flow prediction allows the

company to know its cash position and to make the necessary expenditures for such
items as debt repayment, acquisitions and payment of expenses. In addition, the

difference between forecast and actual cash flows needs to be analyzed to understand

and measure a firms performance (Schaeffer, 2008).

The basis for successful working capital management is to monitor cash flows of

a business. The importance of the commonly used phrase cash is king, by saying that

cash is constantly moving through the business. Cash enters the business as the

customers pay for the products bought and cash leaves the business as payments are

made to suppliers and for other operating expenses that the business incurs (Moore, et.

al., 2010).

A large number of businesses fail due to the absence of cash rather than the

absence of profits. Cash flow management is vitally important for the business because

it would assist in profitability, future planning and sustainability. The practice of basic

concepts of cash flow management will assist businesses plan for the unforeseen

eventualities that almost all businesses encounter (Patel, 2010).

Many business owners do not put much focus on cash flows. The biggest

mistake owners are making is that they are confusing profits of the business with the

cash flowing into the business. The article also mentioned that, as soon as businesses

are reported to have a positive cash flow balance, they make large purchases and

forget about the post-dated cheques issued or the payments needed to be made at a

later time. Only then do businesses realize they have insufficient funds to pay the

obligations. The article also mentioned that businesses do not plan and prioritize the

payments of the expenses in order of importance and due dates (Loo, 2009).
 The correct identification and use of appropriate classifications ensure that the

business assets are accurately recorded asset transactions recorded in the general

ledger. This procedure provides detailed descriptions to assist staff to identify and use

the correct classifications for assets. These procedures apply to all staff involved in the

acquisition, management, custody, maintenance and disposal of the business assets

(Landes, 2009).

Accounts are usually listed in order of their appearance in the financial

statements, starting with the balance sheet and continuing with the income statement.

Thus, the chart of accounts begins with cash, proceeds through liabilities and

shareholders' equity, and then continues with accounts for revenues and then

expenses. Many organizations structure their chart of accounts so that expense

information is separately compiled by department; thus, the sales department,

engineering department, and accounting department all have the same set of expense

accounts (Edward, 2016).

The chart of statements quite just projects your investments so that reports get

more understanding. It creates an ordered system to read the financials. Outdoors it,

you would have all the same info, but it would not be all over the place, and very difficult

to decipher. Some larger manufacturers will use a detailed version, while most small

manufacturers can get away with a much shorter, more soaked down version but they

are all the same. Regardless of business size, industry, or entity standard, they all

accept a chart of accounts (Kerzner, 2013).

 Each and every business firm invariably shall keep separate accounts for the

business. In case of company form of organizations there is separation of ownership

from the management, so the problem of keeping separate accounts for the company

will not arise. But in case of sole proprietorship and partnership (unlimited) enterprises,

there is no such separation of ownership from the management (Spadaccini, 2009).

It is very important to have taxation knowledge whether as an individual or a

business entity. The taxation knowledge includes tax laws which functions as a guide to

mainly minimize the chargeable income. It is a mandatory thing to update yourself as an

individual tax payer or as a business entity with the latest tax laws. By having sufficient

taxation knowledge, one can know the items that can be claimed for tax reliefs and

exemption given by the government of a country and can compute the tax rates

accurately based on the countrys tax rate schedule (Palil, 2010).

Taxation is used as a main fiscal tool by the government to collect revenue to

achieve economic and social objectives, and for redistributing income. Tax knowledge is

an essential element in a voluntary compliance tax system, particularly in determining

inaccurate tax liability. Possessing tax knowledge would lead to higher compliance

rates. Similar note, the absence of tax knowledge may lead to noncompliance behavior

among taxpayers, either intentionally or unintentionally (Loo, 2009).

Knowledge of taxation is the reasoning and meaning of arrest on tax laws. The

people should have a knowledge and understanding of tax regulations, due to meet tax

obligations, taxpayers need to know about taxes in advance. Without their knowledge

and understanding of the tax rules, the public may not want to pay taxes. With their
understanding of tax good, the public will better understand the importance of paying

taxes, and what benefits can be felt directly and indirectly. With the knowledge and

understanding of tax rules, the people will be open-minded, that taxes are purely used

for the needs of the nation and its people. With this understanding of the tax, the level of

corruption and fraud that may occur can be minimized. Simultaneously, the level of

compliance of taxpayers to pay taxes will increase (Santi, 2012). Students

perception of the need of tax education crosstab shows that most of them are agree that

tax is an important subject to be learnt in high education since nobody could escape

from it. As potential taxpayers they also need to know what and how the obligation to

calculate, pays, and reports their own taxes will be done. Most of them perceive it is

also important as well as it is needed that tax as a knowledge has to be learnt at high

education level (Hastuti, 2014).

For SMEs, taxation can be imposed either on the enterprise as a separate entity

from the owner, or imposed on the owners income from business returns. Both natural

persons (individuals) as well as legal or juristic persons (e.g. companies, close

corporations and trusts) are liable for income tax. This knowledge of taxation would help

individuals on how to minimize tax in a legally accepted way (Schneider, 2014).

Entrepreneurial intent

Intention serves as mediating factor between entrepreneurial action and potential

exogenous influence (traits, demographics, skills, social, cultural and financial support).

They suggested that entrepreneurial intention helps in explaining the reasons on why

certain individuals tend to start own business before opportunity scan or deciding type

of business to involve in. They stated that entrepreneurs themselves should benefit from
a better understanding of their own motives, intention affords them a chance to

understand what factors drive them to make their decisions to pursue entrepreneurial

career and how the venture becomes reality (Krueger, 2007).

Entrepreneurial intention defined as willingness of individuals to perform

entrepreneurial behavior, to engage in entrepreneurial action, to be self-employed, or to

establish new business. It usually involves inner guts, ambition and the feeling to stand

on ones feet. An individual may have potential to be entrepreneur but not make any

transition into entrepreneurship unless they have such intentions (Ismail et al., 2009).

The scholars found that students with high attitude towards self-employment are

more likely to demonstrate increased intention for developing entrepreneurial activities.

Furthermore, a direct and significant relationship between subjective norm and

entrepreneurial intention has been observed and surveyed by Russian students from

one medical and two technical universities in St. Petersburg who surveyed science and

engineering students from two European universities London-UK and Grenoble-France

(Souitaris et al., 2007).

Behavior of a person is solely depends upon individuals beliefs and attitudes,

and those beliefs and attitudes play a very important role in determining individuals

action. Individuals perceptions on ability to perform specific tasks increase the

likelihood of attitude converting into intention and subsequent behavior. Attitude

towards behaviour is the extent to which people perceived that there are good

opportunities for them to start-up a business, or the degree on their attachment towards
high status of entrepreneurs. Individuals who get to know their referents have started a

business be more likely to see it as legitimate (Appoloni, 2009).

The attitudes of students toward entrepreneurship that are assessed through

analyzing their motivations to start with business strongly represented in the

respondents opinions was ambition for freedom followed by intention for self- realization

and the strongest pushing factor is connected with searching for opportunity to earn

better income. Those who attached higher importance to motivation factors intend to

start with business in the near future, but students with lower motivations were thought

to postpone the starting with business into distant future (Venesaar, 2010).

If an individual holds positive attitude toward self-employed, considers

entrepreneurship to be aligned with his overall goals in life and sees an opportunity to

perform an entrepreneurial action. One is motivated to become involved in such

entrepreneurial activities when he has the attitude towards becoming an entrepreneur.

Then, most likely, he will form an entrepreneurial intention (Carsrud, 2009).

The desirability to be entrepreneur is the measure of individuals attitude

toward entrepreneurship. He suggested that attitude can be developed and

strengthened through information cues from previous experience and role model.

External information cues (availability of resources) and internal (individuals

perception on their capability and taskspecific knowledge) can enhance

entrepreneurial self-efficacy and in turns, strengthen their attitude toward

entrepreneurship (Dell, 2008).

 Subjective norms are the individuals perceptions of values, beliefs and norms of

influential individuals including family members, teachers, other entrepreneurs, friends

etc, that are regarded as important tothe individuals desire to comply with those norms.

It is believed that it is able to shape the formation of the entrepreneurship intentions of

the individual. However, for an individual with high internal locus of control, social norms

are less predictive of intentions (Krueger et al., 2000).

Subjective norm was tested on a Norwegian business founders and it was

found to be significantly associated with self-employed intention. It was found that

found that the more supportive subjective norm on entrepreneurial behavior, the

stronger the individuals entrepreneurial intention. Peer pressures plays great role in

motivating someone in engaging activities like entrepreneurship (Kolveried and

Isaksen, 2010).

On the other hand, a certain study failed to confirm the role of subjective norm in

the formation intentions in the case of Greek students. This indicates that the opinion of

people that are close to these students (family, friends, important people, etc.), exert

less influence about entrepreneurial activities. This can be explained by the fact that

entrepreneurship is not well embedded in Greek culture and mentality, a finding which

was raised extensively in a similar sample of students and business faculty members

(Papadimitriou, 2012).

Students who need entrepreneurial exposure have a higher score on

perceived behavioral control. This implies that the greater the students expose to

entrepreneurial issues, the greater will be their perceived behavioral control. He further
mentioned that those who perceive entrepreneurship need to be taught in University will

have a higher score on perceived behavioral control (Pihie, 2009).

Individuals with early characteristics and entrepreneurial personality have

higher entrepreneurial control beliefs and these beliefs will lead to higher

entrepreneurial intention. Those who have entrepreneurial personality patterns such

as locus of control appear to be more confident that they could be successful. In short,

the greater the individual believes that he is capable to be a successful entrepreneur

with high probability of succeeding; the stronger is the entrepreneurial intention.

(Schmitt-Rodermund, 2010).

Furthermore, starting a business is significantly related to great level of self-

efficacy and positive attitude towards entrepreneurship. People with experience of

being successful will have higher self-efficacy and more confident with their ability to

repeat that behavior, as compared to those who do not have prior experience. This

supports Ajzens theory where perceived behavioral control relies on past experience

with the behavior (Basu and Virick, 2011).