Gebissa Dori Final Thesis After Defence

OROMIA STATE UNIVERSITY
COLLEGE OF FINANCE AND MANAGEMENT STUDIES
DEPARTMENT OF PUBLIC FINANCIAL MANAGEMENT
THE ROLE AND CHALLENGES OF ACCOUNTING PRACTICES OF

SMALL AND MEDIUM ENTERPRISES ON DUGDA WOREDA, EAST
SHOA ZONE
MSC THESIS SUBMITTED TO COLLEGE OF FINANCE AND

MANAGEMENT STUDIES DEPARTMENT OF PUBLIC FINANCIAL
MANAGEMENT OF OROMIA STATE UNIVERSITY IN PARTIAL
FULFILLMENT OF AWARD OF MASTER OF SCIENCE DEGREE IN
PUBLIC FINANCIAL MANAGEMENT
BY
GEBISSA DORI DALECHA
ADVISOR: KENO TELILA (PHD)
MAY, 2022
BATU, ETHIOPIA
Oromia State University
College Of Finance And Management Studies
Department Of Public Financial Management
The Role and Challenges of Accounting Practices of Small and Medium

Enterprises on Dugda Woreda, East Shoa Zone
By
Gebissa Dori Dalecha
A Thesis Submitted to the School Accounting and Tax Administration

Department of Public Financial Management of Oromia State University in
Partial Fulfillment of the Requirements for the Degree of Master of Arts in
Public Financial Management
Advisor: Keno Telila (PhD)
May, 2022
Batu, Ethiopia
DECLARATION
I, Gebissa Dori Dalecha, Registration Number PGP/PFM/W/12/0114 do here by declare that

this study is my original work and that it has not been submitted partially or in full by any
person for an award of degree in any other university/institution/.
Declared by: Gebissa Dori Dalecha
Signature: -------------------
Date: May 7, 2022
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CERTIFICATE
I certify that this Thesis work entitled “The Role And Challenges of Accounting Practices Of
Small And Medium Enterprises on Dugda Woreda, East Shoa Zone” has been under taken
independently by Gebissa Dori Dalecha under my guidance and supervision.
Advisor: Dr. Keno Telila Signature: _ Date _20/04/2022
Place: Oromia State University
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Approval Sheet
College of Finance and Management Studies
Department of Public Financial Management
This is to certify that research proposal prepared by Gebisa Dori on “The Role And Challenges
of Accounting Practices Of Small And Medium Enterprises on Dugda Woreda, East Shoa
Zone” and submitted in partial fulfillment of the requirement for the degree of master in Public
Financial Management complies with the regulation of the university and meets the accepted
standards with respect to originally and quality.
Advisor: DR. Keno Telila (PhD) Signature: _ Date _20/04/2022
Name of the Internal Examiner: _________________Signature_____ Date_________
Name of the External Examiner: ________________Signature______ Date________
Name of Head of Department: _________________Signature______ Date________
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ABBREVIATIONS AND ACRONYMS
FMSEDA Federal Micro and Small Enterprise Development Agency

ICT Information Communication Technology
IFRS International Financial Reporting Standards
SME Small and Micro Enterprise
SPSS Statistical Package for Social Science
UN United Nation
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ACKNOWLEDGMENTS
First and foremost, I would like to thank the Almighty for his great support to accomplish this
research work and for his infinite support in my entire life success.
Next, I would like to express my heartfelt gratitude to my major advisor, Dr. Keno Telila, for his
valuable professional guidance, constructive comments and devotion of his precious time in
reading and correcting this paper from the beginning up to the end of the study. His constructive
advices are extremely helpful in the realization of this study.
I would also like to extend my thanks to my staff members and colleagues for their genuine and
technical supports they have rendered me in one way or the other in the work of this research.
Besides, I am greatly indebted to my wife Ms. Beshatu Futtasa for her unreserved
encouragements for the accomplishment of my work. In addition my appreciation goes to my
kids Amanti Gebissa and Amarti Gebissa who supported me during feeding of data in SPSS-
version 24.
Furthermore, I like to acknowledge my friends for their insightful guidance, in organizing related
reference materials. Lastly but not least, my acknowledgement also goes to Dugda Woreda
SMEs leaders and office workers who took part in interview, responding to the questionnaire and
document analysis for the purpose of my research work.
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TABLE OF CONTENTS
DECLARATION..............................................................................................................................i
CERTIFICATE................................................................................................................................ii
ABBREVIATIONS AND ACRONYMS.......................................................................................iv
ACKNOWLEDGMENTS...............................................................................................................v
TABLE OF CONTENTS...............................................................................................................vi
LIST OF TABLES..........................................................................................................................ix
ABSTRACT....................................................................................................................................x
CHAPTER ONE..............................................................................................................................1
INTRODUCTION...........................................................................................................................1
1.1. Background of the Study.......................................................................................................1
1.2. Statement Of the Problem.....................................................................................................3
1.3. Research Questions...............................................................................................................5
1.4. Objectives Of The Study.......................................................................................................6
1.4.1. General objective............................................................................................................6
1.4.2. Specific Objectives.........................................................................................................6
1.5. Significance of the Study......................................................................................................6
1.6. Delimitation of the Study......................................................................................................7
1.7. Limitations of the Study........................................................................................................7
1.8. Definition of Key Terms.......................................................................................................7
1.9. Organization of the Study.....................................................................................................8
CHAPTER TWO.............................................................................................................................9
REVIEW OF RELATED LITERATURE........................................................................................9
2.1. Theoretical Review...............................................................................................................9
2.1.1. Concept of Accounting Practices...................................................................................9
2.1.2. Concept of Small and Medium Enterprises..................................................................10
2.1.3. Roles of Accounting Practices in Small and Medium Enterprises...............................11
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2.1.4. Qualities of Effective Accountant................................................................................12
2.1.5. Challenges of Small and Medium Enterprises in Accounting Practices......................13
2.2. Empirical Literature............................................................................................................15
2.3. Research Gap......................................................................................................................17
2.4. Conceptual Framework.......................................................................................................17
CHAPTER THREE.......................................................................................................................18
RESEARCH METHODOLOGY..................................................................................................18
3.1. Research Design..................................................................................................................18
3.2. Research Methods...............................................................................................................18
3.3. Sources of Data...................................................................................................................18
3.4. Population, Sample and Sampling Techniques...................................................................19
3.4.1. Population of the Study................................................................................................19
3.4.2. Sample Size and Sampling Techniques........................................................................19
3.5. Data Collection Instruments................................................................................................20
3.5.1. Questionnaire................................................................................................................20
3.5.2. Interview.......................................................................................................................20
3.6. Reliability and Validity Test...............................................................................................21
3.6.1. Validity test..................................................................................................................21
3.6.2. Reliability test...............................................................................................................21
3.7. Methods Of Data Analysis..................................................................................................21
3.8. Ethical Considerations........................................................................................................22
CHAPTER FOUR.........................................................................................................................23
DATA PRESENTATION, ANALYSIS AND INTERPRETATION...........................................23
4.1. Introduction.........................................................................................................................23
4.2. Demographic Characteristics Of Respondents...................................................................23
4.3. The Nature Of The Business Of Smes................................................................................26
4.4. The Accounting Practices Of SMES In Case Of Dugda Woreda.......................................27
4.5. The Roles Of Accounting Practices In Success Of SMES.................................................32
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4.6. The Challenges Of SMES In Accounting Practices............................................................37
CHAPTER FIVE...........................................................................................................................42
SUMMARIES, CONCLUSIONS AND RECOMMENDATIONS..............................................42
5.1. Summary.............................................................................................................................42
5.2. Conclusions.........................................................................................................................44
5.3. Recommendations...............................................................................................................45
REFERENCES..............................................................................................................................47
APPENDICES...............................................................................................................................53
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LIST OF TABLES
Table 4.1: Sex of respondents........................................................................................................24

Table 4.2: Age of respondents.......................................................................................................24
Table 4.3: Respondents Educational background..........................................................................25
Table 4.4: Experience of respondents............................................................................................25
Table 4.5: Subject of studies..........................................................................................................26
Table 4.6: Response on nature of business....................................................................................26
Table 4.7: Responses on the accounting practices of SMEs in case of Dugda Woreda................28
Table 4.8: Response on maintaining accounting records..............................................................31
Table 4.9: Response on the roles of accounting practices in success of SMEs.............................33
Table 4.10: Response on the challenges of SMEs in accounting practices...................................38
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ABSTRACT
This research investigated the role and challenges of accounting practices of small and Medium
Enterprises of Dugda Woreda of East Shoa Zone. In this study, descriptive survey method was
employed to capture quantitative and qualitative data from both primary and secondary sources.
The primary data was collected through self-administered questionnaire and in-depth interview.
Among the target 383 SMEs leaders, 196(51.17%) of them were taken as sample of the study.
Furthermore, the researcher used simple random and purposive sampling techniques for leaders
and experts respectively. Accordingly, the questionnaires were distributed to small and medium
enterprises leaders in the study area. For further verification interview was conducted with one
manager, finance officer and two auditors at head of the office. For the aim of data analysis, the
study used descriptive statistics executed by means of SPSS version 24. The findings of the study
revealed that majority of small and medium enterprises did not keep proper accounting records
pertaining to their business activities. The major factors for the entities failure to maintain
proper accounting records and prepare a complete set of financial statements were: lack of
accounting knowledge with mean of 4.33; it makes your enterprise pay more tax with mean of
4.19; high cost of hiring a qualified accountant with mean 4.12; poor management of business
records with mean of 4.08 and negative perception towards book keeping with mean of 4.01.
Based on these finding it was recommended that it had better if national regulators develop
specific accounting guidelines for small and medium enterprises and provide training for
entrepreneurs in small businesses.
Keywords: Accounting, Practice, Small, Medium, Enterprises
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CHAPTER ONE
INTRODUCTION
1.1. Background of the Study
There is growing recognition of the important role Micro, Small and Medium Scale Enterprises
(SMEs) play in the economic development of most countries. They are often described as
efficient and prolific job creators, the seeds of big businesses and the fuel of national economic
engines. Luetkehhorst (2004) argues that SMEs are particularly important in supporting
economic growth and livelihoods in developing countries. Even in the developed industrial
economies, the SME sector is the largest employer of workers (Adjei. 2012). SMEs also played
role in the economic growth and sustainable development of every nation (Moore, Petty, Palich
and Longernecker, 2008). The percentage contribution of SMEs to Gross Domestic Product
(GDP) ranges from 60% in China, 57% in Germany, 55.3% in Japan, 50% in Korea and 47.3%
in Malaysia. SMEs in Ghana provide about 85% of manufacturing employment and are believed
to contribute about 70% to Ghana's GDP (Frimpong, 2013).
The SMEs sector contributes to the economic advancement through poverty reduction, wealth
generation, and provision of job opportunities (Kithae, Gakure, and Munyao, 2012). These
enterprises are an essential component of the economic fabric in most of the developing
countries. They play a highly important role in furthering innovation, growth, and prosperity
(Dalberg, 2011). Yason (2014) also believed that SMEs, despite having different products,
services and business strategies, have a common and immediate need for an adequate accounting
infrastructure that will provide them with timely and accurate financial statements.
Padachi (2012) also observed that proper system of accounting indicates how well the business is
performing and what decisions are necessary to be made in order to keep the business in the
market and emphasized the need for businesses to maintain proper books of accounts. Ademola,
Samuel & Ifedolapo, (2012) noted that in keeping proper accounting records, policies, systems,
procedures, operations and personnel are required to administer the records. According to Reed,
(2010), proper record keeping provides evidence of how the transactions were handled and
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substantiates the steps that were taken in order to comply with business standards. The success or
failure of any business depends on keeping accurate and timely accounting information to give a
clear financial business image (Ankrah, Mensah & Ofori-Atta, 2015). However, prior research
reported that most SMEs did not keep complete records of accounts assigning several reasons.
In that regard, it is worth considering to what extent these SMEs follow established accounting
principles. Accounting forms a vital element of any business. It plays a critical role in the success
or failure of contemporary business institutions (Smirat, 2013). Accounting systems are
responsible for recording, analyzing, monitoring and evaluating the financial condition of
companies, preparation of documents necessary for tax purposes, and providing information
support to many other organizational functions. In the context of Small and Medium Enterprises
(SMEs), accounting information is important as it can help the firms manage their short-term
problems in critical areas like costing, expenditure and cash flow (Mitchell et al., 2000).
According to Hatteu (2012) the accounting system provides information for making decisions
about small business. He stressed the importance of understanding which entry system should be
used and how accounting equations work. He advocates that accounting system should be easy to
use, accurate, timely, consistent, understandable, dependable and complete. The accounting
record of small businesses needs to follow the standard of generally accepted accounting
principles. In addition, a good accounting system is not only judged by how well records are kept
but also by how well it is able to meet the information needs of both internal and external
decision-makers (Mbroh and Attom, 2011).
In Africa, Amoako (2013) pointed out that accounting information users in SMEs is on the
increase and the quality of accounting information utilized within the SME has a positive
relationship with an entity’s performance as well as survival. Several studies indicate that family
businesses tend to use accounting and financial information for decision-making less than non-
family businesses (Gallo, Tapies & Cappuyns, 2004). In addition, Okoli, (2011) in his work
linked proper record keeping of SMEs to profitability and asserted that as a result of inadequate
record keeping, small scale business operators could not effectively assess their financial
performance. Therefore, he suggested that SMEs should keep adequate records which would
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help the owner-managers to keep track of the performance of their businesses and also enhance
their continuity.
Accounting plays a critical role in the success or failure of contemporary business institutions.
Accounting systems are responsible for recording, analyzing, monitoring and evaluating the
financial condition of companies, preparation of documents necessary for tax purposes,
providing information support to many others organizational functions. Accounting systems
provide a source of information to owners and managers of SMEs operating in any industry for
the use in measuring financial performance (Maseko and Manyani, 2011). Ademola, et al. (2012)
note that record keeping is not only inevitable for individuals; it is the organizations life wire.
According to Maseko and Manyani (2011) the owners of SMEs who operating in any industry
use accounting information to measure it financial performance.
However, Mensah et al. (2007) states that a significant number of enterprises in their survey kept
no records pertaining to operations, finance, audited accounts, tax returns, and so on. Until
recently, all the micro and small enterprise could not receive credit from the banks and
promotional institutions on grounds that the formal banking sector considered them a high risk
area, and hence charged them high cost for borrowed funds from the banks. So the researcher
was inspired to assess the role and challenges of accounting practices in small and medium
enterprises in the context of Dugda Woreda.
1.2. Statement Of the Problem
In the business markets, the SMEs struggle for the survival and growth. There are numerous
reasons for discontinuity of the business among the SMEs in addition to the pressure posed on
them by the rapidly-changing market conditions. These reasons include lack of sufficient
working capital, poor managerial skills, and insufficient employment of the essential business
and management practices. Employment of accounting practices, which can provide the
management with crucial information, is vital for ensuring the efficiency and effectiveness of the
business (Ahmad, 2012). Much like the large enterprises, the SMEs need to employ management
accounting information and practices so as to improve their levels of performance, manage with
the lack of resources, and boost the values of these enterprises (Nandan, 2010).
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Yet there has been little research on accounting practices in SMEs, particularly in recent years
(Lavia and Hiebl, 2015). However, it has been reported that many SMEs failed to keep adequate
accounting records to generate the much needed accounting information that owner-managers
and other users require for their decision making purposes which led to major problems
(Madurapperuma, Thilakerathne, & Manawadu, 2016).
In the same way, according to Lavia and Hiebl (2014) the practice of accounting in SMEs is low
and different from large companies. SMEs need special care when it is about accounting
practices because they have separate capitals; also because they are faced with more managerial
skill challenges than large organizations. Some of these challenges are related to different bodies.
The lack of managerial capabilities, shortage in financing and human resources in SMEs pushes
them to outsource to improve their organization. This problem facing accounting functions in
SMEs are a lack of expertise or resources (Hasnah et al, 2011). The majority of SMEs tend to fail
because of the lack of planning, marketing knowledge, absence of managerial skills and
competency of capabilities (Kamyabi and Devi, 2011).
Furthermore, SMEs are lack of accounting knowledge to perform the accounting function
internally under Resource Based Theory (Evaraert et al, 2010). The lack of expertise becomes
advantageous to SMEs to extend their services into advisory and consulting services to business
needs of the SMEs especially under the manufacturing services (Hasnah et al, 2011). By
supporting this, Okoli (2011) in his work linked proper record keeping of SMEs to profitability
and asserted that as a result of inadequate record keeping, small scale business operators could
not effectively assess their financial performance. Therefore, he suggested that SMEs should
keep adequate records which would help the owner-managers to keep track of the performance
of their businesses and also enhance their continuity. The findings of Mbroh and Attom (2011)
gave evidence that SMEs still failed to keep proper books of accounts due to low levels of
education and inadequate knowledge in accounting on the part of the owner-managers and lack
of money to hire qualified accountants.
According to Maduekwe (2015) SMEs in South Africa are perceived to be failing partly due to a
lack of or ineffective use of management accounting practices such as budgets, Performance
Management Tools (PMTs) and pricing tools. Ahmad (2012) argued that one of the reasons for
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business failure is poor management ability which includes accounting problem-solving. Further,
a study conducted in Zimbabwe on 100 SMEs by Maseko and Manyani (2011) brings out that
SMEs do not keep complete records of accounts due to lack of knowledge in accounting and the
cost of engaging professional accountants. Consequently, the use of accounting information to
support measurement of financial performance by SMEs is ineffective. The study proposes that
regulatory bodies must develop specific guidelines for SME accounting and organize accounting
training programs for entrepreneurs in small businesses. They also recommend the application of
mandatory record keeping to improve accounting practices of SMEs in Zimbabwe.
Specifically, studies conducted in Addis Ababa, Ethiopia indicates that entrepreneurs who set up
these enterprises lacked business management skills, capital, and as such, many of them faced a
number of problems that include poor record keeping and financial management, which resulted
in failure of most of such enterprises (Zeru, 2010; Mosisa, 2011). Consequently, the accounting
practices of informal businesses does not supply complete and relevant financial information
needed to improve economic decisions made by entrepreneurs in SMEs. It has been noted that
the majority of informal businesses do not keep complete accounting records because of lack of
accounting knowledge. Most SMEs do not prepare financial reports at all. Financial analysis is
not done as a result. The researcher also used as a gap as many researches were not conducted at
that Woreda level and the members of SMEs have not accounting knowledge and skill to manage
their finance as the expert. Thus, this research filled both the area and knowledge gap by
conducting the research at Woreda level by including the practices and role of accounting
practices for success of SMEs. Therefore, the purpose of this study was to analysis the role and
challenges of accounting practices in small and medium enterprises of Dugda Woreda.
1.3. Research Questions
This study to seek out answer the following major research questions:
1. What are the accounting practices of small and medium enterprises in Dugda Woreda?
2. What are the roles of accounting practices towards the success of small and medium
enterprises in Dugda Woreda?
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3. What are the challenges of accounting practices of small and medium enterprises in
Dugda Woreda?
1.4. Objectives Of The Study
1.4.1. General objective
The general objective of this study was to assess the role and challenges of accounting practices
of small and medium enterprises in Dugda Woreda of East Shoa Zone, Oromia, Ethiopia.
1.4.2. Specific Objectives
The specific objectives of this thesis were:
1. To identify the accounting practices of small and medium enterprises in Dugda Woreda.
2. To investigate the roles of accounting practices towards the success of small and medium
enterprises in Dugda Woreda.
3. To examine the challenges of accounting practices of small and medium enterprises in
Dugda Woreda.
1.5. Significance of the Study
The study provided feedback to the Oromia Regional State in making policy measures to be
under taken regarding those accounting practices in SMEs. Moreover, it also served Dugda
Woreda SMEs office in improving their accounting practices of the SMEs by exposing the
challenges faced in accounting practices. The members of SMEs also got key points that they
should improve in relation to accounting practices of their SMEs. In addition, it may expect to
help serve as an input for the upcoming researchers to further investigate the points under
considerations. Furthermore, the study will be boosted the exiting literature regarding SMEs.
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1.6. Delimitation of the Study
The study was conducted on the accounting practices of SMEs in Dugda Wareda of East Shewa
Zone. For this research, it was important to note that the researcher has covered periods from
(2021and 2022) when these SMEs started operating at the Woreda. Dugda Woreda was chosen it
is where the researcher involved in supervising accounting practices personally known.
Conceptually, this study focused on accounting practices in SMEs, major challenge in generating
reliable between adequate and accounting information for use in decision making and
sustainability and the role of accounting practices for SMEs. Geographically, the study was
delimited to Oromia Regional State, East Shoa Zone of Dugda Woreda.
1.7. Limitations of the Study
The scope and magnitude of accounting practices of SMEs face wider that the current study
attempted to consider different things in order to maximize the worth of research findings.
However, it was not to mean that this study was free from limitations and the researcher
acknowledged them as follows. While respondent responses remained confidential, the
situational impact or social bias could have led participants to respond in a manner different from
their true feelings. The necessity of honest responses from participants and the assumption that
the data given reflected honest opinions could be possible limitations of this study. During the
data, collection from the participants through interview, the participants will not willing to be
recorded their responses; this may affect the quality of the study to some extent. Therefore, the
finding of this research paper did not represent the completely SMEs of Dugda.
1.8. Definition of Key Terms
Accounting Practice is the routine manner in which the day to day financial activities of a
business entity are collected and recorded.
A Small and Medium Enterprise accounting practices refers to the method by which it’s
accounting policies and implemented and adhered to on routine basis, typically by an accountant.
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1.9. Organization of the Study
The study was structured as follows. Chapter one introduction, Chapter two presented literature
review with respect to the theoretical perspective of practices, challenges and role of accounting
practices. Chapter three provided the research design, in which it comprises the main principles
of research methodology and the adopted research design for the study. Chapter five presents
both the quantitative and qualitative features of mixed method results and analysis of findings.
Finally, chapter five presents summary of major findings, conclusions, and recommendations.
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CHAPTER TWO
REVIEW OF RELATED LITERATURE
This chapter covers concept of accounting practices, meaning of small and micro enterprises,
purposes of small and micro enterprises, role of accounting practices for small and micro
enterprises success, qualities of effective accountant, challenges of small and micro enterprises in
accounting practices and related empirical studies.
2.1. Theoretical Review
2.1.1. Concept of Accounting Practices
A good accounting system is not only judged by how well records are kept but by how well is
able to meet the information needs of both internal and external decision-makers. Maseko and
Manyani (2011), suggested that for a small or micro business, accounting practices will involve
the maintenance of adequate Cash Book (if possible with analysis), Bank Accounts (with policies
on deposits and withdrawals), Petty Cash system, irregular or regular preparation of Bank
Reconciliation statement, Credit Policies with creditors for Purchase s and with customers on
Sales, Stock-keeping policy, Fixed Asset register and Budgeting for the entire business. The
accounting transactions of an enterprise need to be recorded in the accounting books. The
process of recording and maintaining these books is known as book-keeping. Efficient financial
mangers dwell on the past and present in order to predict the future and for proper evaluation and
comparison of financial activities. To achieve this aim, proper book-keeping remains integral. In
this respect, Lalin and Sabir (2010), reports that the main drivers why SMEs prepare financial
statements is pressure from regulatory authorities.
Accounting information is useful in such activities as: the evaluation of enterprises’ position in
terms profitability, liquidity, activity and leverage; measurement of performance; and assessment
of the profitability of alternative courses of action (Mosisa, 2011). Padachi (2012) also observed
that proper system of accounting indicates how well the business is performing and what
decisions are necessary to be made in order to keep the business in the market and emphasized
the need for businesses to maintain proper books of accounts.
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2.1.2. Concept of Small and Medium Enterprises
There is no universal definition for Small and Medium Enterprises (SMEs) and it varies from
size, type, assets, revenue, employees, as well as industry to industry from one country to another
(Ilori, 2014). According to Belal (2013), there are many definitions of SMEs in the literature.
These definitions are based on the capital base, number of employees, ownership, management
and sales volume. Internationally an SME is defined by the annual turnover and the number of
full-time employees in the firm (Wolmarans & Meintjes, 2015). According to Maphiri (2015) in
developing countries SMEs are mostly characterized as one-person businesses, in which the
working staff can be family members who are often unpaid but are active in the enterprise.
In South Africa, SMEs are defined as distinct and separate business entities; including
cooperative enterprises and non-governmental organizations that are self-managed by a single
owner or more which includes its branches or subsidiaries, in any (Aminu & Shariff, 2015). In a
nutshell; Wise (2014) state that no single definition of SMEs appears to be universally
recognized, but it is found that SMEs are in general: formally registered with government- or
other registration bodies; obligated to pay taxes and social security charges; able to allow their
employees to take sick- and annual leave while receiving compensation; able to provide skills
training for their employees; able to invest in capital with a payback of longer than twelve
months; and able and inclined to contribute to the local community.
In Ethiopia, according to the new Micro &Small Enterprises Development Strategy of Ethiopia
(Fe MSEDA, 2011) the working definition of MSEs is based on capital and Labor. According to
regulation, “micro enterprise” means an enterprise having a total capital, excluding building, not
exceeding Birr 50,000 in the case of service sector or not exceeding Birr 100,000 in the case of
industrial sector and engages 5 workers including the owner, his family members and other
employees (Art. 2(1)). The same regulation defines “small enterprise” as an enterprise having a
total capital, excluding building, from Birr 50,001 to 500,000 in the case of service sector or Birr
100,001 to Birr 1,500,000 in the case of industrial sector and engages 6 to 30 workers including
the owner his family members and other employees (Art.2(2)).
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Nyman, Kennon, Schutte and Von Leipzig (2014) also concur that SMEs contribute considerably
to the national GDP and to private sector employment. Love and Roper, (2013) also concur that
SMEs play a vital role in economic development as they have been the main source of
employment generation and output growth, both in developing as well as in developed countries.
SMEs are also the fastest growing segment of most economies and are perceived to be more
flexible and adaptable in terms of structure and speed of response than larger organizations
(Kumar, 2012).
Providers of finance more often than not, rely on information before making the final decision to
either invest or not to invest in a given business. Banks for example, will need to know whether
the SME seeking finance will be able to pay the principal amount as well as the interest before
going ahead to grant the facility. This is particularly true of financial accounting information
about a firm’s operations. An adequate accounting system will generate the needed financial
accounting information for whatever purpose. It is recommended that SMEs keep detailed
accounting records and audit their financial statements on an annual basis. This will enable the
banks to make a proper evaluation of SMEs, which should improve their accessibility to credit
(Olufunso et al., 2010).
Small and Medium Enterprises (SMEs) as well as entrepreneurship activities are crucial to the
development of any economy (Esuh & Adebayo, 2012). Etuk et al. (2014) sounded that SMEs
have the potential to contribute meaningfully to the economy because of the benefits they are
associated with. Small businesses are recognized all over the world as crucial contributors to job
creation, general health and welfare of economies. In general, job creation, strong entrepreneurial
base, technological advancement and increased local raw materials usage are obvious
consequence of SMEs’ development (Nkwor-Azariah & Nkwor, 2015).
2.1.3. Roles of Accounting Practices in Small and Medium Enterprises
The success or failure of any business depends on keeping accurate and timely accounting
information to give a clear financial business image (Ankrah, Mensah & Ofori-Atta, 2015).
According to Hatteu (2012), the accounting system provides information for making decisions
about small business. Hatteu stressed the importance of understanding which entry system
11
should be used and how accounting equations work. Hatteu advocates that accounting system
should be easy to use, accurate, timely, consistent, understandable, dependable and complete.
The accounting record of small businesses needs to follow the standard of Generally Accepted
Accounting Principles (GAAP).
A report submitted by the European Commission Enterprise and Industry Directorate-General on

the accounting systems for small enterprises (2008), suggested the following as the main books
to be kept by an SME owner: Purchase day book, Sales day book, Cash book, Petty cash book,
Expenditure book, Payroll records, Assets register etc. Peren and Grant (2000) noted that
decision making processes in small scale enterprises are more sophisticated than anticipated but
they lacked effective accounting information and control system to support their decisions.
Furthermore, there is some evidence to suggest that small firms are aware of the importance of
accounting information (International Federation of Accountants, 2006).
According to Ismail & King (2005), accounting services can provide SMEs with the professional
support needed to manage their costing, expenditure, cash flow, and provide information that can
support monitoring and control functions of businesses. For example, financial accounting and
reporting is a crucial issue for SMEs because they are required to submit financial statements to
financial institutions for loan consideration. This is also one of the reasons for the International
Financial Reporting Standards (IFRS) for SMEs. The IFRS for SMEs is a financial reporting
standard that can be used for preparation of financial statements for SMEs. These financial
statements include the income statement and statement of financial position. These standards
need to be applied by an accountant. While management accounting was originally concerned
with costing, it is nowadays taken to cover other areas including support for decision-making
(Collier, 2015).
2.1.4. Qualities of Effective Accountant
According to Mohd & Nasir (2009), accountants are professionals who handle the financial
information of a business. They record transactions, and keep relevant books of accounts. Stone
(1998) noted that accountants can specialize in tax and consulting. These responsibilities require
that accountants possess up-to-date skills and knowledge to stay relevant in society. Drucker
12
(1998) affirmed that since accountants are exposed to issues bothering on business and
economics in their education, they can supply business organizations with value added services.
This opinion is consistent with that of Lehmann & Freedenberg (2000) who noted that in order to
survive, SMEs owners need updated, accurate and timely accounting services. Also, Evaert et al.
(2006) stated that accountants have the expertise needed to apply financial reporting and tax
rules to a particular business environment.
Ademola, Samuel & Ifedolapo, (2012) noted that in keeping proper accounting records, policies,
systems, procedures, operations and personnel are required to administer the records. According
to Reed, (2010), proper record keeping provides evidence of how the transactions were handled
and substantiates the steps that were taken in order to comply with business standards.
Hamilton’s (2013) also study suggests that the identity of accountants is shaped by many
overlapping layers such as professional bodies, requirements of the discipline of accounting, the
employing organization and social factors. He argues that these factors along with training
processes hugely influence the professionalization process of accountants.
2.1.5. Challenges of Small and Medium Enterprises in Accounting Practices
Basically accounting system is worldwide live out that circulated some parallel part of the
organizational system, Ismail and King (2005), focused on correct position in relation to
accounting information requirements and accounting system capacity to generate information in
the context of Malaysian SME manufacturing firms where AIS alignment strongly related to the
six influencing factors (IT sophistication, owner/manager knowledge, owner/manager
commitment, external expertise, internal expertise and firm size). Zhou (2010) identified some
problems in conducting a study (Undeveloped SMEs Accounting Software, inadequate
managerial attention and untrained managers and employees regarding accounting information
systems) relating to implement accounting systems that SMEs faced.
The main reasons behind having such poor accounting environment are the lack of public
accountability, lack of regulations, lack of mandatory audit requirement, and lack of resources.
Owners and managers need to understand the role of accounting information in the form of clear
13
financial statements in ensuring proper justification for business transactions and state of affairs
(Amako, 2013).
Interestingly, however, others argue that the high cost of contracting professional accountants
has left SME owners with no better option but to relegate management of accounting information
(Evaraert et al., 2006; Jayabalan & Dorasamy, 2009). Among other challenges, financial
challenges have been noted to be a major cause of SMEs general poor performance. These
financial challenges are related to: funds availability, funds accessibility and funds management
(Ohachosim, 2014). It should be noted that accounting has a lot to do with ameliorating all these
challenges. The absence such accounting practices as adequate record keeping, material control
and effective budgeting tend to compound the financial challenges faced by SMEs (Ohachosim,
2014).
Maseko & Manyani, (2011) add that “the better use of accounting information obviously takes
place in situations where the SMEs have a certain level of accounting knowledge and technical
qualifications, which does not tend to prevail in small companies. Lack of business knowledge
could be the reason why most micro entities are not using accounting information to the
maximum”. Mutambanengwe, (2012) says that, “a critical weakness with the "informal" setup of
SMEs is the fact that they do not keep proper accounting records of their activities”. He adds that
“keeping accounts is seen as a waste of time, money and effort, and is also avoided as a means of
ensuring that there is no track record of what the proprietor would have done, in the event that
any government agency comes to visit. Bank accounts are also shunned for the same reason; with
transactions occurring on a cash basis”
Despite the positive outlook and growth trend of the sector, micro and small enterprises are faced
with a number of challenges, including insufficient managerial skills, lack of trained personnel,
poor access to financial resources, and low utilization of new technologies. According to Barrow
(2001), there is enough evidence which point to small firms being inefficient users of working
capital. Among these lack of an efficient and effective finical management system is a core
problem area (Feten, 2010). Of these difficulties, lack of financial resource and lack experience
of financial management are currently the most serious issues found in most research outputs
(Ageba & Amha, 2006). Lack of source of finance and inefficient financial management may
14
negatively affect MSEs’ profitability and as a result, the difficulties of business enterprises will
become greater.
As per study by Owualah, (1999) remarked that an entrepreneur in a small scale business in a bid
to achieve the organizational objective is therefore confronted with bundles of problems such as,
inadequate capital and lack of access to financial services, due to terms and conditions of
financial institutions (lack of collateral). Poor financial management, owner’s personal habits,
lack of training, inadequate infrastructures, marketing problems, employment and over reliance
on relations among others. On the other hand study conducted by As Njoku (2002) identifies,
inconsistencies in government policies is a major problem affecting small and medium scale
enterprises.
2.2. Empirical Literature
Mwangi, (2011:96) “carried out a study on accounting systems in small and micro enterprises in
Kenya. The results revealed that small and micro enterprises that extensively populate the
informal sector are profitable operations just like the enterprises in the formal business sector.
However, unlike in the formal business sector, the absence of accounting data makes it difficult
to carry out financial ratio analysis”.
Ohachosim, Onwuchekwa and Ifeanyi (2012) in their study titled “Financial Challenges of Small
and Medium-Sized Enterprises (SMES) In Nigeria: The Relevance of Accounting Information”
carried out a survey of 348 SMEs in Anambra State. Structured questionnaire were used in data
collection. Analysis was by means of ordinary least square (OLS). They found out that poor
accounting system is what characterizes most SMEs in Nigeria. We can reasonably infer that
more access to finance by SMEs will contribute, in no small measure, to their performance. In
their recommendation, they advised SMEs to consult accountants regularly so that they can be
able to maintain high and generally accepted accounting practices.
Yousef (2013) carried out a research on the use of accounting information by SMEs in the south
district of Jordan. Data were systematically collected using questionnaires from a sample of 136
SMEs. The study found out that the level of awareness on the importance of financial
15
management and accounting information is still very low among SMEs in the south district of
Jordan.
Onaolapo and Adegbite (2014) investigated the impact of accounting records on SMEs’
performance. Data were collected through interviews and questionnaires from a sample of 113
SMEs using a mixture of stratified and purposive sampling techniques. Descriptive statistics,
Chi-square and analysis of variance (ANOVA) were used for data analysis. The findings of the
study revealed that there is a strong positive relationship between accounting records keeping
and SMEs’ performance.
According to Onugu (2005), SMEs are performing below expectations. Amako (2013) found in
their study that SMEs performs below expectation because of the following ranging from lack of
infrastructure, unfavorable government policies, poor support and lack of technological input.
Also, most of the MSMEs in Nigeria are operating without a business plan. Additionally, their
rate of survival is low, their contribution to industrial employment and industrial production and
GDP is generally poor (Ohachosim, 2014).
Maseko and Manyani (2011) carried out an investigative study to reveal the accounting practices
(record keeping) for performance measurement of SMEs in Zimbabwe using Bindura as a case.
The study focused that most of the SMEs did not keep complete accounting records due to lack
of accounting knowledge for this reason it was not possible for measuring financial performance
through using accounting information.
Mosisa (2011) said that efficient accounting and financial management will help MSEs to
strengthen their profitability and, as a result, these difficulties can partly be overcome. MSEs that
keep proper record of revenues and expenses know the profitability of their firm very easily.
Further, keeping record of assets and liabilities will help to know the financial position of the
enterprises at any time, helps to make strategic business decisions, secure credit from lending
financial institution and pay reasonable amount of tax to the government.
16
2.3. Research Gap
[
These important roles of SMEs can best be sustained through the implementation of fundamental
financial and accounting practices. However, it has been reported that many SMEs failed to keep
adequate accounting records to generate the much needed accounting information that owner-
managers and other users require for their decision making purposes which led to major
problems further reported of weak internal accounting systems of some SMEs which resulted in
poor planning, weak expense control, low collection of accounts receivable, poor financial
condition, and inadequate information for decision making purposes. A core function of
accounting systems is to avail accurate information to owners and managers of SMEs operating
in any industry for use in the measurement of performance. A number of SMEs have not given
much attention to accounting record keeping in relation to their business transaction, despite its
importance in the success of businesses. The main research problem is, do the SMEs in Dugda
Woreda have in place proper books of account to generate information that business partners
require? The answer to the above question makes it imperative for the researcher to look at
financial accounting practices of SMEs in Dugda Woreda and the challenges behind SMEs
inability to keep proper accounting records.
2.4. Conceptual Framework
The challenges of accounting The roles of accounting practices

practices of small and medium towards the success of small and
enterprises medium enterprises
The accounting practices of small

and medium enterprises
Source: organized from literature review (2022)
17
CHAPTER THREE
RESEARCH METHODOLOGY
3.1. Research Design
This study adopted a descriptive survey because Gay (2009) says descriptive survey research
design involves collecting data in order to test hypothesis or answer questions concerning to
current status of the subject of study. The design involved assessing attitudes or opinions towards
individuals, organizations, events or procedures. Descriptive data was typically collected through
a questionnaire.
3.2. Research Methods
According to Kombo and Tromp (2006) qualitative and quantitative research approaches have
often been used together in the same research project and in many cases to obtain
methodological triangulation so as to maximize the quality of the collected data. Moreover, both
quantitative and qualitative approaches were employed, in order to express the respondent
opinion and perception in terms of percentage and words respectively.
3.3. Sources of Data
In this study, both primary and secondary data was used. The research used primary data to
assess the accounting practices of SMEs. This data was collected through questionnaire and
interview that are distributed and conduced with SMEs heads, experts of MSEs, process owners
of SMEs, Experts from Finance office and tax auditors. The secondary sources included
Ethiopian SMEs documents like directives, working manual, accounting records of SMEs,
annual plan/business plan and annual financial reports.
18
3.4. Population, Sample and Sampling Techniques
3.4.1. Population of the Study
According to the information obtained from the report of Dugda Woreda of SMEs, 383 SMEs
are in function and have above capital of 50,000.00 birr in the Woreda. So the population of the
study was one head of the office, 5 process owners of MSEs, 2 Experts from Finance office and
2 tax auditors and 383 SMEs leaders
3.4.2. Sample Size and Sampling Techniques
Out of the total 383 SMEs leaders, 196(51.17%) of them were taken in to account. In addition
one head of the office, 5 process owners of MSEs, 2 Experts from Finance office and 2 tax
auditors would be included. In order to determine the sample size different methods were
employed. For the sample size of SMEs determined by Yamane (1967) formula as with 95%
confidence level and e = 0.05 are assumed.
n = N/1+N(e)2
Where: n= sample size;
N=population;
e=permitted error (0.05).
n= 383/1+383(0.05)2
383/1.9575
= 195.65=196
So, out of 383 target population, 196 of them were taken as sample of the study.
Furthermore, the researcher employs different types of sampling techniques. The sample area of
Dugda Woreda was selected based on their representativeness of the study. SMEs members were
selected from different Kebeles of the Woreda. The SMES leaders were selected using simple
random sampling technique. Then proportional numbers of samples (SMEs members) allocated
19
and which can be considered as strata and simple random were used to drawn from urban and
rural based on their types of business they involved in. Proportional numbers of SMEs members
were selected based on the size from the samples. The SMES leaders were selected by using
simple random sampling to give equal chance.
In addition, one head of the office, 5 process owners of SMEs, 2 experts from finance office and
2 tax auditors were taken all in all in purposive sampling technique. Because there number was
limited and they are very important in proving the needed information.
3.5. Data Collection Instruments
3.5.1. Questionnaire
Questionnaires were one of the methods which are used to collect primary data and it is popular.
Before collecting primary date, questioners are pretested and have made adjustments according
to the result by the researcher. In this study, the researcher used questionnaire to collect primary
data. Primary data were collected from sample SMEs leaders using questionnaire. The
questionnaire comprises of both closed and open ended questions. Closed ended questions were
quicker and easier both for respondents. Most of the close ended questions were designed on
Likert scale, so that the variables were ranked to measure the degree of their strength or the
agreement or the disagreement of the respondents with the variables can be elicited. Adding open
ended questions allowed respondents to offer an answer that the researcher did not include in the
questionnaire. The questionnaire was translated into Afan Oromo by taking into consideration
the fact that English was not the language of the respondents. The survey was administered under
close supervision of the researcher. The questionnaires were distributed to SMEs leaders.
3.5.2. Interview
In this study, face-to-face interview was used for collecting data from one head of the office, 5
process owners of SMEs, 2 experts from finance office and 2 tax auditors in Dugda Woreda. The
semi-structured interview involved asking structured questions, followed by clarification of
unstructured or open-ended questions. This technique was considered suitable for an intensive
20
investigation and useful for tapping information about challenges and strategies that are revealed
by a respondent’s verbal behavior. The interview was conducted by Afan Oromo to get detail
information on the questions.
3.6. Reliability and Validity Test

3.6.1. Validity test
Thus validity measured how truthful the research results were or the extent to which scores truly
reflect the underlying variable of interest. The instrument was checked its content validity to
conduct research concerning the items included in the questionnaire. Validity was concerned
with the degree to which the designed questionnaire items fairly and accurately represented the
main variables.
3.6.2. Reliability test
Thomas, et al. (2008) says a pilot study was a preliminary study done to validate the research
methodology and instruments. The researcher is a resident of the town; hence, it was easier for
him to administer the instrument. Before the questionnaire was distributed to the respondents, it
was tested for reliability and validity. The researcher pre-tested the questionnaire for reliability
and validity to 10 heads from the small and medium enterprise under study. This was done in
order to get the respondents` reactions, attitudes and ability to answer the demand of the
instruments. Relevant adjustments were made such as language used and expressions making the
instruments relevant and suitable for the study. Cronbach’s alpha takes values between zero and
one. Sufficient construct reliability can be drawn from results that are 0.7 and above
(Steinkühler, 2010). The overall reliability of the items was 0.832.
3.7. Methods Of Data Analysis
The data gathered through various tools were analyzed in line with the study of the objectives
already identified and the findings are considered at each methodological level first. To
summarize and rearrange the data several interrelated procedures are performed during the data
21
analysis stage. Data editing, coding and tabulation were done prior to analysis. For quantitative
data which were obtained through closed ended questions from primary source analysis
Statistical Package for Social Science (SPSS) software version 24 were used for data input,
presentation and analysis. The data collected from questionnaire was analyzed through
quantitative descriptive statistical tools such as percentages, frequencies, standard deviation and
mean using Statistical Package for Social Science (SPSS) version 24.0 computer software.
Moreover, the qualitative data gathered from office leaders through interview were presented
qualitatively by reviewing the note taking, narrating, interpreting and reflecting on the key point
related to the study. The data collected by interview was triangulated the information obtained
through questionnaire. Eventually, the result obtained were summarized, concluded and
recommended depending on the data analyzed and interpreted.
3.8. Ethical Considerations
This study involved human beings and therefore the four basic ethical issues were taken into
account, namely; protection from harm, informed consent, the right to privacy, and honesty with
professional colleagues. The study began after ethical clearance by both the faculties of the
participants are identified through the possible participants who are invited to voluntarily
participate and no respondents is at any stage be subjected to any form of coercion, or feel
compelled to participate in the activities and/or evidence collection of the study. The
confidentiality and privacy are kept in the study. It was clearly informed to the respondents the
study is for academic purpose and the respondents are never been personalize in part of the
study.
22
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND INTERPRETATION
4.1. Introduction
This chapter deals with presentation, analysis and interpretation of data gathered from the
respondents through questionnaires and interviews. Through these tools, both quantitative and
qualitative data were gathered. The quantitative parts were analyzed through statistical measures
and the qualitative were analyzed through organizing and giving shape to the responses of
interviews by selecting words of expressions.
The data were collected from a total of 196 respondents via questionnaire. To this end, a total of
189 questionnaires were distributed to SMEs heads. Response rate of the questionnaires were
189(96.4%) from SMEs heads, while the remaining 7(3.6%) of the respondents did not complete
and return the questionnaire given to be filled by them. Moreover, one head of the office, 5
process owners of MSEs, 2 Experts from Finance office and 2 tax auditors were interviewed. In
general, this chapter organized the views (characteristics) of respondents and the presentation of
analysis of data and its interpretation.
4.2. Demographic Characteristics Of Respondents
The respondents were asked to indicate their background information. The details of the
demographic of the respondents are given in table 4.1 to 4.4 below. Four relevant demographic
variables of the respondents were gathered as background information. These are sex, age, level
of education, total service years and field of study. These characteristics of the respondents are
summarized below. In general, this chapter organized the views (characteristics) of respondents
and the presentation of analysis of data and its interpretation.
23
Table 4.1: Sex of respondents
Frequency Percent Valid Percent Cumulative Percent

Sex Male 146 77.2 77.2 77.2
Female 43 22.8 22.8 100.0
Total 189 100.0 100.0
Source: Field Survey of 2022
Regarding sex of respondents as shown in the Table 4.1 of item 1, among 189 SMEs heads,
146(77.2%) were male. And the remaining 43 respondents constituting 22.8% of the total are
female. As it can be generalized from the majority response, most of the managers of SMEs
were male. This indicates that gender participation in the study area is found to be
disproportional and less number of female heads was found in the SMEs.
Table 4.2: Age of respondents
Frequency Percent Valid Percent Cumulative

Percent
Age Below 20 21 11.1 11.1 11.1
21 to 25 133 70.4 70.4 81.5
26-30 years 34 18.0 18.0 99.5
31 to 35 years 1 .5 .5 100.0
Total 189 100.0 100.0
Likewise, under item 1 of the same Table 4.2, the age of the majority of the participants were
below 21 to 25years old. Most SMEs were found between the age range from 21 – 25 years old
that is 133(70.4%). Following this 34(18.0%) SMEs heads fall in the age ranges of between 26
to 30 years and the rest 21(11.1%) were below 20 years old. The age ranges indicate that most
respondents were young and only few are elders.
24
Table 4.3: Respondents Educational background
Frequency Percent Valid Cumulative

Percent Percent
Education less than grade 12 45 23.8 23.8 23.8
background Diploma 26 13.8 13.8 37.6
Degree 118 62.4 62.4 100.0
Total 189 100.0 100.0
As shown in Table 4.3 under item 1 the levels of educational attainment of the sampled
respondents are 118(62.4%) were degree holder. Among 189 SMEs heads the rest 45(23.8%) and
26(13.8%) are below grade 12 and diploma/level holders respectively. From this one can
understand as most of SMEs heads are degree holders. This may have a positive effect on
accounting practices to improve the performance SMEs.
Table 4.4: Experience of respondents

Percent Percent
Work 0-5 years 155 82.0 82.0 82.0
experience 6-10 years 34 18.0 18.0 100.0
Total 189 100.0 100.0
Regarding the experience of the SMEs shown under item 1 of Table 4.4, most SMEs of this
study were experienced that is 155(82%) in the service year range of below 5 years and the
remaining 34(18%) of respondents have 6 to 10 years of experience. From this, it is possible to
generalize that most of these SMEs are not well experienced. This indicates that most of
managers of SMEs did not know how to accomplish activities related to accounting practices for
their SMEs.
25
Table 4.5: Subject of studies
Frequency Percent Valid Percent Cumulative Percent

Subject Management 15 7.9 7.9 7.9
of the Accounting 17 9.0 9.0 16.9
study Economics 18 9.5 9.5 26.5
Business 9 4.8 4.8 31.2
management
others 130 68.8 68.8 100.0
Total 189 100.0 100.0
With regards to heads of field studies of these SMEs heads, they were found in different field of
study with business and other fields. So, the majority of SMEs managers are belonging to non-
business subject which constituting 130(68.8%) while the rest 18(9.5%), 17(9%), 15(7.9%) and
9(4.8%) were graduated in economics, accounting, management and business management
respectively. From this it is possible to conclude that most of respondents have no background of
accounting. This implies that poor accounting practices of SMEs emanates from this.
4.3. The Nature Of The Business Of Smes
Under this topic the types of business the SMEs were participating is treated. Under these
questions different types of business are presented to respondents to opt.
Table 4.6: Response on nature of business

Percent Percent
Nature of Retail 6 3.2 3.2 3.2
business Services 79 41.8 41.8 45.0
Manufacturing 51 27.0 27.0 72.0
Construction 53 28.0 28.0 100.0
Total 189 100.0 100.0
26
Table 4.6 show that the nature of for most of the SMEs 79(41.8%) are found in services, which
are followed by manufacturing 51(27%), construction 53(28%) and retailer 6(3.2%). From the
majority response, it was generalized that most of SMEs are engaged in service sector.
4.4. The Accounting Practices Of SMES In Case Of Dugda Woreda
The respondents were asked to rate the accounting practices of SMEs in case of Dugda
Woreda. Each of the question was rated in a 5– point Likert scale ranging from not at all
effective(1) to very effective (5). For the purpose of analysis the grand mean score obtained
from the data were interpreted as follow, 4.5-5.0 for Very Effective (VE), 3.5-4.49 for Effective
(E), 2.5-3.49 - average value for Neutral (N), 1.5-2.49 Not Effective (NE) and 1.0-1.49 for Not
at all Effective (NAE).
27
Table 4.7: Responses on the accounting practices of SMEs in case of Dugda Woreda
No Not at all Not Very Mea Std.

Accounting practices of
effective effectiv Neutra Effectiv effectiv n Deviatio
SMEs
e ll e e n
1 Proper accounting records 2 13 40 110 24 3.75 .805
for received cash 1.1% 6.9% 21.2% 58.2% 12.7%
2 Regular deposit of cash 10 6 118 55 4.15 .717

received 5.3% 3.2% 62.4% 29.1%
3 Periodic account 32 86 50 21 2.32 .884
reconciliation with the
16.9% 45.5% 26.5% 11.1%
records
4 Records on all 53 76 44 16 2.12 .917
disbursements(expenditure
s) 28.0% 40.2% 23.3% 8.5%
5 Periodic account 25 37 36 56 35 3.21 1.315
reconciliation with the
13.2% 19.6% 19.0% 29.6% 18.5%
bank statement
6 Daily statement from bank 36 54 40 43 16 2.73 1.245
on different types of
payments 19.0% 28.6% 21.2% 22.8% 8.5%
7 There is proper technology 20 95 61 11 2 2.37 .792
(ICT) for processing all 10.6% 50.3% 32.3% 5.8% 1.1%
records
8 All budgets are properly 38 81 39 25 6 2.37 1.046
inspected 20.1% 42.9% 20.6% 13.2% 3.2%
9 All purchases are done by 53 87 35 14 2.05 .874
the procurement unit and
documented 28.0% 46.0% 18.5% 7.4%
In this regard, items 1 of table 4.7 are designed to ask if proper accounting records for received
cash as the accounting practices of SMEs. The above depicts that 110(58.2%) and 24(12.5%) of
the respondents confirmed that they effective and very effective with regard to the proper
accounting records for received cash as the accounting practices of SMEs respectively. The mean
value (3.75(SD=.805)) also confirmed that as this proper accounting records for received cash as
28
the accounting practices of SMEs was effectively practiced. So this shows proper accounting
records for received cash practiced effectively as the accounting practices of SMEs.
Likewise, in replying to item 2 of the same table, 118(62.4%) and 55(29.1%) of the respondents
respectively stated that they were effective and very effective with the statement that regular
deposit of cash received was observed the accounting practices of SMEs. The mean is also
agreed highly that is 4.15(SD=0.717) and its effectiveness was high. From the above data it is
concluded as regular deposit of cash received was observed in the accounting practices of SMEs
was taken as effective practice.
In relation to this, item 3, the respondents stated that 86(45.5%) and 32(16.9%) of them not
effective and not effective at all respectively on the idea of periodic account reconciliation with
the records was observed in the accounting practices of SMEs. The mean is also confirmed that
low rate that is 2.32(SD=.884) and its practice was low and confirmed the periodic account
reconciliation with the records. Based on this it is concluded as ineffective in periodic account
reconciliation with the records was observed in the accounting practices of SMEs were taken as
weakness.
In this regard, items 4 of table 4.7 were designed to ask if records on all disbursements
(expenditures) as the accounting practices of SMEs. The table depicts that 76(40.2%) and
53(28%) of the respondents confirmed that they not effective and not at all effective with regard
to the records on all disbursements (expenditures) as the accounting practices of SMEs
respectively. The mean value 2.12(SD=.917) also confirmed that as this records on all
disbursements (expenditures) as the accounting practices of SMEs was not effectively practiced.
So this shows records on all disbursements (expenditures) are not practiced effectively as the
accounting practices of SMEs.
respectively stated that they were effective and not effective at all with the statement that
periodic account reconciliation with the bank statement was observed the accounting practices of
SMEs. The mean is also agreed highly that is 3.21(SD=1.315) and its effectiveness was moderate
29
in its rate. From the above data it is concluded as periodic account reconciliation with the bank
statement was observed in the accounting practices of SMEs was taken as not effective practice.
respectively stated that they were effective and very effective with the statement that daily
statement from bank on different types of payments was observed the accounting practices of
SMEs. The mean is also agreed highly that is 2.73(SD=1.245) and its effectiveness was
moderate. From the above data it is concluded as daily statement from bank on different types of
payments was observed in the accounting practices of SMEs was taken as effective practice.
In relation to this, item 7, the respondents stated that 95(50.3%), 61(32.3%) and 20(10.6%) of
them not effective, neutral and not effective at all respectively on the idea of there was proper
technology (ICT) for processing all records was observed in the accounting practices of SMEs.
The mean is also confirmed that low rate that is 2.37(SD=0.792) and its practice was low and
confirmed there was proper technology (ICT) for processing all records. Based on this it is
concluded as ineffective in proper technology (ICT) for processing all records was observed in
the accounting practices of SMEs was taken as weakness.
In this regard, items 8 of table 4.7 were designed to ask if all budgets were properly inspected as
the accounting practices of SMEs. The above depicts that 81(42.9%) and 38(20.1%) of the
respondents confirmed that they not effective and not at all effective with regard to the records
on all disbursements (expenditures) as the accounting practices of SMEs respectively. The mean
value 2.37(SD=1.046) also confirmed that as budgets were properly inspected as the accounting
practices of SMEs was not effectively practiced. So this shows all budgets are properly inspected
is not practiced effectively as the accounting practices of SMEs.
Likewise, in replying to item 9 of the same table, 87(46%), 53(28.%) and 35(18.5%) of the
respondents respectively stated that they were not effective, not effective at all and neutral with
the statement that all purchases were done by the procurement unit and documented was
observed the accounting practices of SMEs poorly. The mean is also agreed moderately that is
2.05(SD=.874) and its not effectiveness in its rate. From the above data it is concluded as all
30
purchases are done by the procurement unit and documented was observed in the accounting
practices of SMEs was taken as found at low level of effective practice.
During the interview one of the participants said the SMEs have great problem of keeping
“SMEs maintained files of invoices and receipts, journals, ledgers, vouchers, cash book, payroll
records and assets register were not found.” The poor usage of invoices and receipts, journals,
ledgers, vouchers, cash book and payroll records were also observed by the researcher during
document analysis. So the researcher witness that there is poor usage of using different
documents for making the accounting practice fruitful.
Table 4.8: Response on maintaining accounting records
Items Responses Amount of response

Frequency %
1 Your SME maintains Yes 189 100.0
accounting records? No 0 0
Total 189 100.0
2 Which accounting records do Day books 25 13.2
you keep?
ledger accounts 10 5.3
Cash book only 26 13.8
Asset register 13 6.9
Personal jotters/notes 115 60.8
None 0 0
Total 189 100
As it is depicted in table 4.8 item 1, all 189(100%) of the respondents in the study area replied
that they had habit of maintains accounting records of SME. So, it is possible to sum up as all
participants have forwarded the type of accounting record they used to keep their records.
Literatures also stressed on Howard (2009) emphasized that many small businesses failed to
keep adequate records. This leads to major problems and quite possibly the closing of the
business. Evidence shows that keeping good records helps to increase the chances of business
survival. In essence, the SMEs owners or manager should be personally involved in record
31
keeping (Sian, 2006). Proper record keeping ensures long term sustainability of the business and
anticipates long term prospects.
Table 4.8 showed that the ways of keeping accounting records of the SMEs 115(60.8%) are
using personal note book, which are followed by cashbook only 26(13.8%), day books
25(13.2%), ledger accounting with 10(5.3%) and asset register 13(6.9%). From this it is
concluded as the most managers of SMEs used personal note book as means of keeping
accounting records. This depicts that there is poor culture of using the legal supported types of
accounting records like lager and day books.
4.5. The Roles Of Accounting Practices In Success Of SMES
The respondents were asked to rate the roles of accounting practices in success of SMEs in
Dugda Woreda. Each of the question was rated in a 5 point Likert scale ranging from strongly
disagree (1) to strongly agree (5). For the purpose of analysis the grand mean score obtained
from the data were interpreted as follow, 4.5-5.0 for strongly agree, 3.5-4.49 for agree, 2.5-3.49
for moderately agree for undecided, 1.5-2.49 disagree and 1.0-1.49 strongly disagree role.
32
Table 4.9: Response on the roles of accounting practices in success of SMEs
No The roles of Accounting Stron Mea Std.
practices gly Strong n Deviatio
Disag Disagr Undeci ly n
ree ee ded Agree agree
1 Increased SMEs 12 18 26 68 65 3.83 1.188
accountability 6.3% 9.5% 13.8% 36.0% 34.4%
2 Help to correctly 3 11 23 89 63 4.05 .913
determine profit 1.6% 5.8% 12.2% 47.1% 33.3%
3 Help the business 18 12 96 63 4.08 .881
actualize set goals and 9.5% 6.3% 50.8% 33.3%
objectives
4 Help for better 3 26 24 90 46 3.79 1.013
budgeting system 1.6% 13.8% 12.7% 47.6% 24.3%
5 Make the management 3 24 27 85 50 3.82 1.016
system efficient 1.6% 12.7% 14.3% 45.0% 26.5%
6 Save SMEs from 11 41 107 30 3.83 .762
Inefficient, improper
and untimely decision 5.8% 21.7% 56.6% 15.9%
making
7 Easy in accessing 4 21 28 85 51 3.84 1.016
credit/finance. 2.1% 11.1% 14.8% 45.0% 27.0%
8 Easy in determining the 10 10 47 71 51 3.76 1.074
results of operation 5.3% 5.3% 24.9% 37.6% 27.0%
9 Help in tracking 13 38 85 53 3.94 .870

account receivables and
6.9% 20.1% 45.0% 28.0%
payables
10 Help in filing of 5 12 16 96 60 4.03 .948
accurate profits tax 2.6% 6.3% 8.5% 50.8% 31.7%
returns.
11 Help in determining the 4 25 34 86 39 3.71 1.024
of financial position of 2.1% 13.2% 18.0% 45.5% 20.6%
the business
12 Able to detect losses 1 17 24 76 70 4.05 .955
and theft in the business 0.5% 9.0% 12.8% 40.4% 37.2%
33
In this regard, items 1 of table 4.9 were designed to ask if the roles of accounting practices in
success of SMEs by increasing SMEs accountability or not. The above depicts that 68(36%),
65(34.4%) and 26(13.8%) of the respondents confirmed that they agree, strongly agree and
undecided with regard to the accounting practices increased SMEs accountability respectively.
The mean value of 3.83(SD=1.277) also confirmed that as the roles of accounting practices in
success of SMEs in increasing SMEs accountability was found at high agreement rate. So this
shows that the roles of accounting practices in success of SMEs increased SMEs accountability
was found at high rate.
stated that they agree and strongly disagree with the statement that accounting practice helped to
correctly determine profit. The mean is also disagreed that is 4.05(SD=.966) which shows high
rate of agreement. From the above data it is concluded as the roles of accounting practices in
success of SMEs helping to correctly determine profit. As a result MSEs in developing countries
are not competitive in global economy. To survive international competition and achieve the
goals of MSEs require the financial management skill and production expertise to be able to
match product quality requirement and scale up quickly (UN, 2008).
In relation to this, item 3, the respondents stated that 96(50.8%) and 63(33.3%) of them agree
and strongly agreed respectively on the idea of accounting practices helped the business actualize
the set goals and objectives. The mean is also confirmed that high rate that is 4.08(SD=0.881)
and its influence is high and confirmed the role of accounting practices in helping the business
actualize set goals and objectives was highly accepted by the respondents. Based on this it is
concluded as accounting practices helped the business actualize set goals and objectives at high
rate.
In this regard, items 4 of table 4.9 were designed to ask as the roles of accounting practices in
success of SMEs in helping for better budgeting system. The above depicts that 90(47.6%),
46(24.3%) and 24(12.7%) of the respondents confirmed that they agree, strongly agree and
undecided with regard to the effective accounting practices help for better budgeting system. The
mean value 3.79(SD=1.013) also confirmed that as the roles of accounting practices in success of
SMEs helped for better budgeting system accepted highly since it was rated at high rate. So this
34
shows that the roles of accounting practices in success of SMEs accepted as it did not help for
better budgeting system since it was rated at high rate.
success of SMEs by making the management system efficient or not. The above depicts that
85(45%), 50(26.5%) and 31(20.8%) of the respondents confirmed that they agree, strongly agree
and undecided with regard to the accounting practices make the management system efficient
respectively. The mean value of 3.82(SD=1.016) also confirmed that as the roles of accounting
practices in success of SMEs in making the management system efficient was found at high rate
of agreement. So this shows that the roles of accounting practices in success of SMEs to make
the management system efficient is accepted and found at high rate.
Likewise, in replying to item 6 of the same table, 107(56.6%), 41(21.7%) and 30(21.7%) of the
respondents stated that they agree, undecided and strongly disagree with the statement that
accounting practiced to save SMEs from inefficient, improper and untimely decision. The mean
is also disagreed that is 3.83(SD=0.762) which shows high rate. From the above data it is
concluded as the roles of accounting practices in success of SMEs by saving SMEs from
inefficient, improper and untimely decision at high rate. Accounting practices and functions is
very important role to SMEs because it can provide them better management control and assist in
decision-making, helping them to access new market and maximize profits in the corporate
world (Dorasamy et.al, 2010).
In relation to this, item 7, the respondents stated that 85(45%), 51(27%) and 28(14.8%) of them
agree, strongly agree and undecided respectively on the idea of accounting practices helped to
easy in accessing credit/finance. The mean is also confirmed that moderate rate that is
3.84(SD=1.016) and its influence is medium and confirmed the role of accounting practices in
easy in accessing credit/finance was moderately accepted by the respondents. Based on this it is
concluded as the role accounting practices is accepted at moderate rate for making easy in
accessing credit/finance.
success of SMEs in easily determining the results of operation. The above depicts that 71(37.6%)
35
and 51(27%) of the respondents confirmed that they agree and strong agree, with regard to the
effective accounting practices helped in easy in determining the results of operation respectively.
The mean value 3.77(SD=1.074) also confirmed that as the roles of accounting practices in
success of SMEs helped for easily in determining the results of operation it was rated at high
rate. So this shows that the roles of accounting practices in success of SMEs accepted as it makes
things easy in determining the results of operation since it was rated at high rate.
success of SMEs in helping in tracking account receivables and payables. The above depicts that
85(45%), 53(28%) and 38(18.8%) of the respondents confirmed that they agree, stromg;y agree
and undecided with regard to the effective accounting practices help in tracking account
receivables and payables. The mean value 3.94(SD=1.265) also confirmed that as the roles of
accounting practices in success of SMEs help in tracking account receivables and payables
showed their agreement since it was rated at high rate. So this shows that the roles of accounting
practices in success of SMEs accepted as it did help for better help in tracking account
receivables and payables since it was rated at high rate.
success of SMEs by helping in filing of accurate profits tax returns or not. The above depicts that
96(50.8%) and 60(31.7%) of the respondents confirmed that they agree and strongly agree with
regard to the accounting practices help in filing of accurate profits tax returns respectively. The
mean value of 4.03(SD=0.948) also confirmed that as the roles of accounting practices in success
of SMEs in making the management system efficient was found at high rate. So this shows that
the roles of accounting practices in success of SMEs to help in filing of accurate profits tax
returns is accepted and found at high rate. According from Harun et al. (2010), the critical
financial information that is mostly needed by the SMEs to increase their competitiveness or
success can be categorized into four groups: (i) taxation, (ii) financial accounting, (iii)
management accounting and (iv) strategic planning and these services differ between “fast
growth stage” and “global enterprise companies”
stated that they agree and strongly disagree with the statement that accounting practiced to help
36
in determining the financial position of the business. The mean is also agreed that is
3.71(SD=1.024) which shows high rate. From the above data it is concluded as the roles of
accounting practices in success of SMEs by helping in determining the financial position of the
business at high rate.
In relation to this, item 12, the respondents stated that 76(40.4%) and 70(37.2%) of them agree
and strongly agreed respectively on the idea of accounting practices helped to able to detect
losses and theft in the business. The mean is also confirmed that moderate rate that is
4.05(SD=0.955) and its influence is high and confirmed the role of accounting practices in able
to detect losses and theft in the business was highly accepted by the respondents. Based on this it
is concluded as the role accounting practices is accepted at high rate for making easy in able to
detect losses and theft in the business.
4.6. The Challenges Of SMES In Accounting Practices
The respondents were asked to rate the challenges of SMEs in accounting practices in Dugda.
Each of the question was rated in a 5 point Likert scale ranging from very low (1) to very high
(5). For the purpose of analysis the grand mean score obtained from the data were interpreted as
follow, 4.5-5.0 for very high in affecting the implementation, 3.5-4.49 for high in affecting the
implementation, 2.5-3.49 - average rate of in affecting the implementation for undecided, 1.5-
2.49 low in affecting the implementation and 1.0-1.49 very low in affecting the implementation.
37
Table 4.10: Response on the challenges of SMEs in accounting practices
No Challenges of Mea Std.

Accounting Practices Very Mediu Very n Deviat
low Low m High high ion
1 It is time consuming 22 2 108 57 4.06 .882
11.6% 1.1% 57.1% 30.2%
2 It makes your 1 5 9 117 57 4.19 .686

enterprise pay more 0.5% 2.6% 4.8% 61.9% 30.2%
tax
3 It is difficult to 3 15 22 92 57 3.98 .939
maintain the system 1.6% 7.9% 11.6% 48.7% 30.2%
4 High cost of hiring a 1 10 12 108 58 4.12 .786
qualified accountant 0.5% 5.3% 6.3% 57.1% 30.7%
5 Lack of accounting 4 5 104 76 4.33 .636
knowledge 2.1% 2.6% 55.0% 40.2%
6 Accounting reports 13 81 43 41 11 2.77 1.051
too difficult to
6.9% 42.9% 22.8% 21.7% 5.8%
understand
7 Lack of guiding or 2 7 22 116 42 4.00 .765
specific accounting
1.1% 3.7% 11.6% 61.4% 22.2%
standard for SMEs
8 Accounting reports do 9 84 21 55 20 2.96 1.164
not add value to the
4.8% 44.4% 11.1% 29.1% 10.6%
business
9 Negative perception 2 17 14 101 55 4.01 .908
towards book keeping
1.1% 9.0% 7.4% 53.4% 29.1%
10 Poor management of 3 16 15 83 72 4.08 .969
business records 1.6% 8.5% 7.9% 43.9% 38.1%
The response of sample population of item 1 of table 4.10 indicates that, time consuming of
accounting practices have challenges of SMEs in accounting practices; about 108(57.1%) and
57(30.2%) responded as the time consuming have agreed influence on accounting practices of
SMEs agreed at high and very high respectively. The mean is also high which 4.06(SD=0.873).
38
From this, it is possible to conclude that the SMEs in accounting practices was challenged by
assuming as the practice is time consuming at high rate.
The response of sample population of item 2 of table 4.10 indicated that, think as it made the
enterprise pay more tax have negative impacts on SMEs’ accounting practices. About
117(61.9%) and 57(30.2%) responded agreed at high and very high rate as that makes the
enterprise pay more tax highly challenge the accounting practices respectively. The mean is also
high which 3.98(SD=0.939). From this, it is possible to conclude that believing as accounting
practices made the enterprise pay more tax was among challenges of SMEs in accounting
practices was accepted at high rate.
For item 3 in table 4.10, the respondents were asked to show their agreement whether difficult to
maintain the system is the most important challenges of SMEs in accounting practices. Based on
92(48.7%) and 57(30.2%) householders as said high and very high respectively. The average
mean 3.98(SD=.939) was responded as high scale. This reveals that for the item difficult to
maintain the system is the most important problems that challenges of SMEs in accounting
practices highly.
The response of sample population of item 4 of table 4.5 indicates that, high cost of hiring
qualified accountants have high influence on accounting practices. Accordingly 108(57.1%) and
followed by 58(30.7%) responded as the high cost of hiring a qualified accountant have
influenced the accounting practices at high and very high rate respectively. The mean is also high
which 4.12(SD=0.786). From this, it is possible to conclude as high cost of hiring a qualified
accountant was highly influence the accounting practices by making it poor at high rate.
Table 4.10 item 5 is concerning lack of accounting knowledge was the major problems that
challenges of SMEs in accounting practices. Accordingly, 43(22.8%) and 41(21.7%) of rated as
moderate and high influence on accounting practices respectively on the item and the mean score
of the respondent was above the average mean 2.77(SD=1.051) which showed that moderate
influence on effective accounting practices. This revealed that householders agreed as lack of
accounting knowledge in the area is the major challenges of SMEs in accounting practices
39
highly. Lack of specialized skills in accounting leads micro enterprises to become concentrated
in similar activities which in turn lead to market saturation (Tsegereda, 2002).
The response of sample population of item 6 of table 4.10 indicates that, accounting reports too
difficult to understand have challenges of SMEs in accounting practices; about 81(42.9%),
43(22.8%) and 41(21.5%) responded as the accounting reports too difficult to understand have
agreed influence on accounting practices of SMEs agreed at low, medium and high rate
respectively. The mean is also medium which 2.78(SD=1.052). From this, it is possible to
conclude that the SMEs in accounting practices was challenged by accepting accounting reports
too difficult to understand at moderate rate.
The response of sample population of item 7 of table 4.10 indicated that, think as it lack of
guiding or specific accounting standard for SMEs have negative impacts on SMEs’ accounting
practices. About 116(61.4%) and 42(22.2%) responded agreed at high and very high rate as that
lack of guiding or specific accounting standard for SMEs highly challenge the accounting
practices respectively. The mean is also high which 4.00(SD=0.765). From this, it is possible to
conclude that lack of guiding or specific accounting standard for SMEs was among challenges of
SMEs in accounting practices which was accepted at high rate. By supporting this finding
Sekitoleko (2008) point out a financial constraint to the growth of small scale business like lack
of working capital, high interest payment, lack of financial control, and corruption are crucial
factor.
For item 8 in table 4.10, the respondents were asked to show their agreement whether accounting
reports do not add value to the business is the most important challenges of SMEs in accounting
practices. Based on 84(44.4%), 21(11.1%) and 55(29.1%) householders as said low, medium and
high respectively. The average mean 2.96(SD=1.162) was responded as medium scale. This
reveals that for the item accounting reports do not add value to the business is the moderately
important problems that challenges of SMEs in accounting practices at medium.
The response of sample population of item 9 of table 4.10 indicates that, negative perception
towards book keeping have high influence on accounting practices. Accordingly 101(53.4%) and
followed by 55(29.1%) responded as the negative perception towards book keeping have
40
influenced the accounting practices at high and very high rate respectively. The mean is also high
which 4.01(SD=0.908). From this, it is possible to conclude as negative perception towards book
keeping was highly influence the accounting practices by making it poor at high rate.
Table 4.10 item 10 is concerning poor management of business records were the major problems
that challenges of SMEs in accounting practices. Accordingly, 83(43.9%) and 72(38.1%) of rated
as high and very high influence respectively and the mean score of the respondent was above the
average mean 4.08(SD=.969) which showed that high influence on effective accounting
practices. This revealed that householders agreed as poor management of business records in the
area is the major challenges of SMEs in accounting practices highly. By supporting this idea, the
lack financial managerial skill is a serious threat to the continued survival and profitability of
small businesses in developing economies. As a result, economic activities are conducted by
managers with no managerial skills, lack the ability to prioritize objectives and utilize scarce
resources optimally. Hence, managerial efficiency is a key ingredient of long-term survival and
profitability in small businesses (Zeleke, 2009). Lastly, respondents were asked to give the
major strategies of improve the accounting practices of SMEs. Accordingly, they mentioned these
solutions during interview, and using open ended question, that the majority of respondents
indicated the assistance and support provided by the City finance office. In addition to this using
most of the SMEs suggested that accounting training program from universities or accounting
bodies as a way to improve their accounting practices, they need book/record keeping training,
strengthen monitoring and supervision, organize training for heads and owners, would hire
consultants to improve their accounting practices. One of the expert said that. “The government
should also come out with the necessary legal guidelines to make the preparation of proper
books of accounts mandatory in order to improve SMEs practice of accounting in Oromia.” By
supporting this, Refer from Harun et al (2010) in Nik 2010, was noted that SMEs would need to
go four stages of growth before reaching the stage when they could compete globally. The stages
are: 1. Start-up stage where the business model applied is validated; 2. Fast-growth stage where
the business is growing for survival; revenue starts to grow as products or services receive
market acceptance; 3. Sustainable stage where profitability can be sustained and the entity
reaches a maturity level with proven business model and leadership; and 4. Global enterprise
where the entity continues looking for other opportunities to sustain growth.
41
CHAPTER FIVE
SUMMARIES, CONCLUSIONS AND RECOMMENDATIONS
This section deals with the summaries, major findings or results of the study concluded and
recommendations made on the basis of the conclusions.
5.1. Summary
The purpose of this study was to assess the role and challenges of accounting practices in small
and medium enterprises in the case of Dugda Woreda and to come up with remedial solutions in
order to improve the current practices. To this end, descriptive survey research design was
adopted to carry out the study. In order to solve the aforementioned problems the following
basic questions were raised in the study:
 What were the accounting practices of SMEs in Dugda Woreda?
 What were the roles of accounting practices towards the success of SMEs in Dugda
Woreda?
 What are the challenges of SMEs towards accounting practices in Dugda Woreda?
So as to find answer to these questions, the following procedural steps were undertaken:
searching related resources to frame background of the study, formulating basic question,
developing instrument for data collection, selecting methods of identification of respondents,
complete analysis of the study and finally writing report. Data that are essential for the study
were collected by using questionnaire a n d interview as data gathering tools. The subjects of
the study are SMEs heads, head of the office, process owners of MSEs, Experts from Finance
office and 2 tax auditors of Dugda Woreda. MSEs heads were selected Dugda Woreda primarily
using stratified and simple random sampling and out of the total number of 196 MSEs heads
and one head of the office, 5 process owners of MSEs, 2 Experts from Finance office and 2 tax
auditors were selected using purposive sampling technique for the interview. Out of the total
number of questionnaires distributed to unemployed youth, 189(96.4%) were properly filled,
returned and used in the analysis of data. Both quantitative and qualitative data gathered
42
through tools of data obtained were analyzed by using mean scores, standard deviation,
frequency and percentage. Interviews and open ended questions of questionnaire are also
discussed in detail. The quantitative data was analyzed by using SPSS version 24. Depending on
the analysis of the result made, the following major findings were obtained.
 The accounting practices of SMEs in Dugda Woreda.
The results revealed that majority of members of SMEs in the city not from business and related
fields that needs attention of accounting practices. The results also revealed that majority of
SMEs did not keep proper accounting records pertaining to their business. Furthermore, the
accounting practices of SMEs in case of Dugda Woreda: was not effective enough. Because the
following practices were identified as less performed with low mean. These are: Periodic
account reconciliation with the records with mean of 2.32; records on all
disbursements(expenditures) with mean of 2.12; there is proper technology (ICT) for processing
all records with mean of 2.37; all budgets are properly inspected with mean of 2.37 and all
purchases are done by the procurement unit and documented with mean of 2.05. Moreover,
SMEs did not maintain files of invoices and receipts, journals, ledgers, vouchers, cash book,
payroll records and assets register in their daily activity. In other for the SMEs to grow, there is
the need for a more effective and efficient accounting practices coupled with good control
procedures translating into preparation of complete set of financial statements not only for
internal users but also to external users.
 The roles of accounting practices towards the success of SMEs in Dugda Woreda
Consequences of poor accounting practices of youth job creating policy resulted in various
problems. From these the most influential challenges leaders were facing are different due to
knowledge about the practice or not. The following roles were underestimated by respondents.
Some of these are: lack of knowing increased SMEs accountability, Help for better budgeting
system, Make the management system efficient, Easy in accessing credit/finance and Help in
tracking account receivables and payables. Hence, the government and concerned bodies should
review job market laws and regulation in order to promote educated youth to be employed in the
formal sector which can help them to contribute their role for their country by managing the
financial activities wisely.
43
 The challenges of accounting practices of SMEs in Dugda Woreda.
The major challenges of SMEs in accounting practices in case of Dugda Woreda identified for
this study were: it makes your enterprise pay more tax with mean of 4.19; high cost of hiring a
qualified accountant with mean 4.12; lack of accounting knowledge with mean of 4.33; negative
perception towards book keeping with mean of 4.01 and poor management of business records
with mean of 4.08. It was therefore difficult for the heads to determine the profit earned or loss
suffered in the business during a particular accounting period in addition to availability of cash,
position of assets and liabilities to be able to strategize and make certain adjustments on their
businesses.
Furthermore, as major strategies to improve accounting practices; training program from

universities or accounting bodies as a way to improve their accounting practices, they need
book/record keeping training, strengthen monitoring and supervision, organize training for heads
and owners, would hire consultants to improve their accounting practices.
5.2. Conclusions
The major reasons for the entities failure to maintain proper accounting records and prepare a
complete set of financial statements were high cost of hiring qualified accountants and lack of
accounting knowledge on the part of some owner-managers. It was therefore difficult for the owner
managers to determine the profit earned or loss suffered in the business during a particular
accounting period in addition to availability of cash, position of assets and liabilities to be able to
strategize and make certain adjustments on their businesses. However, some of the SMEs kept
records of their business using the paper based method. This category of SMEs maintained files of
invoices and receipts, journals, ledgers, vouchers, cash book, payroll records and assets register.
Also, in most cases owner-managers are in charge of the bookkeeping and accounting functions for
their business; only few MSEs employed the services of accounting staffs and consultants. In other
for the SMEs to grow, there is the need for a more effective and efficient accounting practices
coupled with good control procedures translating into preparation of complete set of financial
statements not only for internal users but also to external users.
44
As most owner-managers lack the education and experience to handle all of their business
accounting needs, hiring an accounting practice to assist with the accounting functions of the
business is a great way to ensure the books are in line with ethical standards and the law. Also,
with the development of information technologies there is the need for SMEs to acquire computer
software to improve the accuracy of their record keeping and financial reporting. SMEs in the
Woreda should form a union through which a consultant would be hired to prepare accounts for
them at shared cost to be settled by the clients through the union. In this way, the problem of high
cost of accounting services that prevent most SMEs from preparing proper books of account would
have been greatly resolved.
5.3. Recommendations
Based on the findings and conclusions made above, the following suggestions were forwarded: -
 The study found that there was poor usage of accounting records. Therefore, all SMEs
emphasized the need of book keeping/accounting training by the professional accounting
bodies and to recruit suitable accounting officer for the purpose.
 The study revealed that lack of accounting knowledge was among the challenges that
affect the accounting practices of SMEs. Thus, the academic institutions and other bodies
which are responsible for SMEs should initiate accounting training programs for small
and medium scale businesses.
 This study recommends that record keeping in SMEs better to make mandatory to
improve their accounting practices and increase chances of them formalizing their
business operations.
 Lack of guiding or specific accounting standard for SMEs was challenge identified by
this study. Based on this it is recommended that national regulators advised to develop
specific accounting guidelines for SMEs and develop accounting training programs for
entrepreneurs in small businesses.
 The research result showed that there was no proper technology (ICT) for processing all
records. So the Oromia Education Bureau played its role urgently come up with programs
45
to improve education system; that expands employment generation to the upper most
level and implement programs that yielded multiple benefits by using ICT.
 It is better if the government works to create suitable conditions; so that youths create
their own jobs. Provision of finance (in the form of credit), work place and training on
entrepreneurship are important.
 It is advisable if the future researchers examine the accounting practices of SMEs across
the country in general and Oromia region in particular.
46
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52
APPENDICES

School of Accounting and Tax administration
Department of Public Financial Management
The purpose of this questionnaire is to gather data about “The Role and Challenges of
Accounting Practices in Small and Medium Enterprises of Dugda Woreda, East Shoa
Zone.” Thus, the study needs your participation to respond for the questionnaire and the results
obtain from the questionnaire will be further studied to better understand the magnitude of
challenging accounting practices and its roles in small and medium enterprises. The information
you provide remain secret and uses only for research purpose. Hence you are kindly requested
to be honest and frank. So please, fill the questionnaire as per the given instruction for each
item. I would like to thank you for your willingness to fill this question.
Thanks in advance for your cooperation!
General Direction
Put a “X” mark in the appropriate box that corresponding to your choice or circle or
write your answer in brief for open- ended questions.
It is impossible to provide more than one answer for closed- ended questions
No need of write your name.
Part- I. Background information

Direction 1: The following are the respondent background. Hence fill all the
information that express you using the sign “X” in the box that corresponding to the
information.
1. Sex Male  Female 
2. Age 20 and below  21-25  26- 30  31- 35  35- 40 
53
Above 41 
3. Qualification- Diploma  BSc/BA/BEd  MSc/MA/MEd 
4. Experience- 0- 5 years  6- 10 years  11-and above 
5. Educational Background: Accounting  Management  Economics 
Business  Others 
Part II: Main Questions
Section One: Introductory Questions

1. Nature of business: Retail  Wholesale  Services 
Manufacturing  Construction 
2. Your SME maintains accounting records? Yes  No 
3. Which accounting records do you keep?
Day books  Ledger accounts  Cash book only 
Asset registers  E. Personal jotter/notes  F. None 
Section Two: Accounting practices of SMEs
The following are about accounting practices of SMEs; please rate by “X” mark according to
their effectiveness in your SME.
1 – Not at all Effective (NAE) 2 – Not Effective (NE) 3. Neutral (N) 4. Effective (E) 5 – Very Effective (VE)
No Items NAE NE N E VE
1 2 3 4 5
1 Proper accounting records for received cash
2 Regular deposit of cash received
3 Periodic account reconciliation with the records

4 Records on all disbursements(expenditures)
5 Periodic account reconciliation with the bank statement
6 Daily statement from bank on different types of payments

7 There is proper technology (ICT) for processing all records
8 All budgets are properly inspected
54
9 All purchases are done by the procurement unit and
documented
10. Please, list any other issues related to accounting practices that I missed to mention above
______________________________________________________________________________
Section Three: The Roles of accounting practices of SMEs

The following are about roles of accounting practices of SMEs; please rate by “X” mark
according to their effectiveness in your SME. Indicate your answer by putting a tick (X) mark
under the given scale.
Key: 1 – Strongly disagree (SDA) 2 – Disagree (DA) 3 – Neutral (N) 4 – Agree (A) 5 – Strongly agree (SA)
No Items SD D N A SA
1 2 3 4 5
1 Increased SMEs accountability
2 Help to correctly determine profit
3 Help the business actualize set goals and objectives
4 Help for better budgeting system

5 Make the management system efficient
6 Save SMEs from Inefficient, improper and untimely decision
making
7 Easy in accessing credit/finance.
8 Easy in determining the results of operation
9 Help in tracking account receivables and payables

10 Help in filing of accurate profits tax returns.
11 Help in determining the of financial position of the business

12 Able to detect losses and theft in the business
Please, would you list any roles that accounting play in your organization that I missed to
mentions.
______________________________________________________________________________
______________________________________________________________________________
55
______________________________________________________________________________
_____________________________________________________________________________
Section Four: Challenges Accounting practices of SMEs
The following are about challenges of accounting practices of SMEs; please rate by “X” mark according
to their effectiveness in your SME. For each statement, below, there are 5 alternative responses showing
whether you Very high (5), High (4), Medium (3), Low (2), Very low (1) with the statement. Mark "x'' the
appropriate number after each statement to indicate the degree of the challenges
No Items VL L M H VH
1 2 3 4 5
1 It is time consuming
2 It makes your enterprise pay more tax
3 It is difficult to maintain the system
4 High cost of hiring a qualified accountant
5 Lack of accounting knowledge

6 Accounting reports too difficult to understand
7 Lack of guiding or specific accounting standard for SMEs
8 Accounting reports do not add value to the business
9 Negative perception towards book keeping

10 Poor management of business records
12. Please, feel free to list any challenges that I missed to mention above
______________________________________________________________________________
______________________________________________________________________________
_____________________________________________________________________________
Interview Guide
1. What are the types of accounting records that are maintained by SMEs?
56
2. What are the types of financial reports that are being generated by SMEs?
3. Do you agree that accounting practices of SME lead to influence access to finance? A.
Yes B. No
4. Would you require provision of financial information for providing different services to
small and medium sized enterprise? A. Yes B. No
5. If yes how do you rank it? Very importantly 2) importantly 3) less importantly
6. What are the accounting practices that you follow in your organization?
7. What are the roles played by accounting practices in your organization?
8. Are there any problems being encountered in both the recording and reporting of
financial transaction of SMEs? If so elaborate?
9. What are the challenges of accounting practices you faced in your organization?
57

Gebissa Dori Final Thesis After Defence

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OROMIA STATE UNIVERSITY

COLLEGE OF FINANCE AND MANAGEMENT STUDIES

DEPARTMENT OF PUBLIC FINANCIAL MANAGEMENT

THE ROLE AND CHALLENGES OF ACCOUNTING PRACTICES OF

MSC THESIS SUBMITTED TO COLLEGE OF FINANCE AND

ADVISOR: KENO TELILA (PHD)

College Of Finance And Management Studies

Department Of Public Financial Management

The Role and Challenges of Accounting Practices of Small and Medium

Gebissa Dori Dalecha

A Thesis Submitted to the School Accounting and Tax Administration

Advisor: Keno Telila (PhD)

I, Gebissa Dori Dalecha, Registration Number PGP/PFM/W/12/0114 do here by declare that

Declared by: Gebissa Dori Dalecha

Date: May 7, 2022

Advisor: Dr. Keno Telila Signature: _ Date _20/04/2022

Place: Oromia State University

Oromia State University

College of Finance and Management Studies

Department of Public Financial Management

Advisor: DR. Keno Telila (PhD) Signature: _ Date _20/04/2022

Name of the Internal Examiner: _________________Signature_____ Date_________

Name of the External Examiner: ________________Signature______ Date________

Name of Head of Department: _________________Signature______ Date________

FMSEDA Federal Micro and Small Enterprise Development Agency

SPSS Statistical Package for Social Science

Table 4.1: Sex of respondents........................................................................................................24

Keywords: Accounting, Practice, Small, Medium, Enterprises

1.1. Background of the Study

1.2. Statement Of the Problem

1.3. Research Questions

1.4. Objectives Of The Study

1.4.1. General objective

1.4.2. Specific Objectives

The specific objectives of this thesis were:

1.5. Significance of the Study

1.7. Limitations of the Study

1.8. Definition of Key Terms

2.1.3. Roles of Accounting Practices in Small and Medium Enterprises

A report submitted by the European Commission Enterprise and Industry Directorate-General on

2.1.4. Qualities of Effective Accountant

2.1.5. Challenges of Small and Medium Enterprises in Accounting Practices

2.2. Empirical Literature

2.4. Conceptual Framework

The challenges of accounting The roles of accounting practices

The accounting practices of small

Source: organized from literature review (2022)

3.1. Research Design

3.2. Research Methods

3.3. Sources of Data

3.4.1. Population of the Study

Where: n= sample size;

e=permitted error (0.05).

3.5. Data Collection Instruments

3.6. Reliability and Validity Test

3.6.2. Reliability test

3.7. Methods Of Data Analysis

3.8. Ethical Considerations

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.2. Demographic Characteristics Of Respondents

Frequency Percent Valid Percent Cumulative Percent

Table 4.2: Age of respondents

Frequency Percent Valid Percent Cumulative

Name of the Internal Examiner: _______________Signature_ Date_______

Name of the External Examiner: ______Signature Date

Name of Head of Department: _______Signature Date