CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Since the prospects of getting white collar jobs has become harder and harder, many people, educated and noneducated, are reverting to being self-employed. One way of being self- employed is to start a small business. A small business is any business that is independently owned and operated (Kuehl, 2006). Generally, Small and medium enterprises (SMEs) are businesses whose turnovers fall below certain limits. The current definitions categorize businesses with less than 10 employees as “micro,” those with fewer that 50 employees as “small” and those with less than 250 as medium”. SMEs therefore need to have between 20-500 employees (Williams, 2010). The definition of an SME may also depend on the number of employees, business turn over and assets (Aremu & Adeyemi, 2011).
SMEs play a big role in the economy as they provide employment and taxes in all sectors of the economy including agriculture and mining. Small and medium enterprises make up the backbone of the world economy (Aremu & Adeyemi, 2011). For example, they account for 67.1% of the European Union non-financial business economy workforce. Hence, in many countries in the world it has been recognized that an SME-friendly business environment is crucial for growth and jobs creation (Kuehl, 2006). In some key industries, such as textiles, wood products, metal products, publishing, construction and furniture-making, SMEs account for more than 70% of all jobs.
Small and medium scale businesses play a pivotal role in the development of the economy of developing countries in terms of generation of employment opportunities, utilization of locally endowed resources, generation of revenue for the government through tax, re-distribution of income thereby contributing to poverty reduction (Prasad et al., 2001).
Book keeping is the process of recording all financial transactions in a systematic and logic manner. Proper book keeping is important to an enterprise in terms of its sustainability and growth.
It helps the owner carry out proper business evaluation and monitor its progress. Without book keeping the entrepreneur can run risks of fund mismanagement and loss of business expansion opportunities. Business records prevent theft and ensure proper organization of the business. Without proper book keeping it will be difficult for the owner to find accurate net profit, determine the correct financial position of the business and be unable to formulate business plans and policies for the future (Wanjala et al., 2014).
Bookkeeping is the recording off all financial transaction in a systematic and logical manner. Transactions include sales, purchase income, and payments by an individual or organization. Book keeping is usually performed by a book keeper using common methods of bookkeeping such as single entry and double entry systems. While these systems may be seen as “real” book keeping, any process that involves recording of financial transactions is a bookkeeping process (Haber, 2004). Primary bookkeeping records all business transactions and allocates the income and expenses to various income and expenses account in separate account records (McCarthy, 2000). The single book keeping can be done with book keeping software to speed up manual calculation (Haber, 2004). Double entry book keeping system involves recording of financial information in a financial accounting system where a financial transaction impacts at least two different accounts. In modem accounting, this is done using debits and credits and serves a kind of error system. If at any point the system of debits doesn’t equal to the sum of credits then an error has occurred. In SMEs, bookkeeping vary in size, frequency, sensitivity, maturity and the level of growth of the SMEs including the relative importance of fixed working capital. The system of book keeping depends on the operator of the SMEs (Enon, 2000).