Problems in Implementing Double-entry

Accounting System in SMEs of Bangladesh:

A Case Study on Barisal City
Course Name: Research Methodology
Course Code: AIS 4205

Submitted to
Abdul Alim Baser
Assistant Professor
Department of AIS
University of Barisal

Submitted by
Tusher Ghosh
12 AIS 058
On behalf of Group 02
8th Semester
Batch: 1st
Department of AIS
University of Barisal

Date of submission
24 August, 2017
List of Group Members:

S.N. Name Roll Number Signature

01 MD. Ashraful Islam 12 AIS 009

02 Rokya Islam 12 AIS 030

03 Imran Fakir 12 AIS 032

04 Bipul Barai 12 AIS 050

05 Tusher Ghosh (GL) 12 AIS 058

06 MD. Masrul Mia 12 AIS 062

Acknowledgement

Now-a-days, small and medium enterprises (SMEs) have come to the forefront of
development agenda due to the recognition of their contribution in fostering economic
growth, sustaining global economic recovery, generating employment and reducing poverty.
The central bank has been at the forefront of SME development in Bangladesh. The
government has rightly identified SMEs as the priority sector for transforming Bangladesh
into a middle-income country. In line with government's thrust, BB has been instrumental in
designing and implementing SME sector development initiatives as part of its development
financing agenda.

As a part of academic program, we have prepared this report on Problems in Implementing

Double-entry Accounting System in SMEs of Bangladesh: A Case Study on Barisal City.
Our endeavor will come true if the actual purpose of this study becomes fulfilled.

At the very first, we would like to express our cordial and deep respect to the course teacher,
Abdul Alim Baser, Assistant Professor, Department of AIS, for his proper guidance, valuable
advice, instructions which helped us a lot to complete this study. We are very lucky for
getting this opportunity to complete this report under his guidance and supervision.

We owe our deepest gratitude to our parents and family members. We would not be able to
complete the study successfully devoid of their continuous inspiration and encouragement.

Finally, all praise and indebtedness to the Almighty God, the Lord of Glory and Honor, for
all the blessing showers upon us to complete such a study.
Letter of Transmittal

24 August, 2017
Abdul Alim Baser
Assistant Professor,
Department of AIS,
University of Barisal,
Barisal.

Subject: Submission of Report on Problems in Implementing Double-entry Accounting

System in SMEs of Bangladesh: A Case Study on Barisal City.

Dear Sir,

This is the report which is suggested by you as a part of our academic program for the Course
of Research Methodology, Course code: AIS 4205. This report has been prepared to cover
topic Problems in Implementing Double-entry Accounting System in SMEs of Bangladesh:
A Case Study on Barisal City. We have tried our level best to make it done as per your
instructions. Our level best trying has given here to carry out a meaningful and effective
study on this topic to make the study efficient enough.

We shall be always available for any supplementary interoperation & thank you for giving us
the opportunity to complete a report on the above topic. We do sincerely hope this report will
live up to your expectation.

Sincerely yours,

_______________
Tusher Ghosh
On behalf of Group 02
12 AIS 058
8th Semester
Batch: 1st
Department of AIS
University of Barisal
Declaration

I, on behalf of Group 02, do hereby solemnly declare that the work presented in this report
has been carried out by myself and has not been previously submitted to any other
University/College/Organization for an academic qualification / certificate/ diploma or
degree.

The work I have presented does not breach any existing copyright and no portion of this
report is copied from any work done earlier for a degree or otherwise.

I, on behalf of Group 02, further undertake to indemnify the Department against any loss or
damage arising from breach of the foregoing obligations.

___________________
Tusher Ghosh
On behalf of Group 02
12 AIS 058
8th Semester
Batch: 1st
Department of AIS
University of Barisal
Table of Content Page

01. Introduction 01

02. Purpose of the Research 01-02

03. Significance of the Research 02

04. Literature Review 02-03

05. Research Methodology 03-04

5.1 Data Collection
5.2 Sample Size
5.3 Data Analysis Techniques
5.4 Limitations of the Study

06. Results and Discussion 04-07

07. Recommendations 07-08

08. Conclusion 08

09. References 09

10. Questionnaire
Problems in Implementing Double-entry Accounting System in SMEs
of Bangladesh: A Case Study on Barisal City

Abstract:
The paper studies a case situation on Barisal city to analyze the problems in implementing
double-entry accounting system in Small and Medium Enterprises in Bangladesh. Simple
analysis tools are used in MS Excel to evaluate the data collected from different areas of
Barisal city area. However, the study concludes that none of the sampled entities use formal
accounting in their organization for recording transactions and economic events. The study
finds that, lack of accounting knowledge, lack of skilled manpower, misconception about the
usefulness about the accounting and cost of formal accounting are the main reasons for not
implementing double-entry accounting system in most SMEs.

Keyword: SMEs, Barisal, Double-entity, Accounting, Bangladesh.

01. Introduction:
The contribution of Small and Medium Enterprises (SMEs) to the economic development of
most developing countries is overwhelming and plays a social and political role through
employment generation, increasing the standard of living and maintaining a balanced regional
development (Mittal & Batra, 2004). Small enterprise is not an exception in the economic and
social world, but a fundamental aspect of the way in which a society organizes itself and
produces (Day J, 2000). While the performance levels of small businesses have traditionally
been attributed to general managerial factors, such as manufacturing, marketing and
operations, accounting systems may have a strong impact on the survival and growth of
SMEs. A large number of business failures have been attributed to inability of financial
managers to plan and control properly the current assets and the current liabilities of their
respective firms (Dodge HR, Robbins JE, 1992). The main factors that contribute to success
or failure of small business are categorized as internal and external factors. The external
factors include financing (such as the availability of attractive financing), economic
conditions, competition, government regulations, technology and environmental factors. The
internal factors are managerial skills, workforce, accounting systems and financial
management practices (K Padachi, 2012). The accounting department is generally viewed as
a service unit to support the firms operations by providing information on costs and
performance indicators. Nayak and Greenfield also reported evidence that micro-firms lack
signs of any systematic accounting practices (Nayak A, Greenfield S, 1994). Various studies
have found similar results for small firms and the key reasons include lack of time, resources
and skills of small business managers.

02. Purpose of the Research:

SMEs all over the world have been playing a vital role in promoting economic development,
structural change, hunger and poverty reduction, potential contribution to the overall industry,
employment generation, achieving millennium development goals, eradication gender
inequality and women empowerment. SMEs now occupy an important position in the
national economy. Thats why, it is required that a proper understandable and informative
accounting systems exist in SMEs to meet the information need of the SMEs and the society
at large.
The purpose of this study is to:
- Determine the main obstacles faced by the SMEs in Bangladesh to implement the
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 formal accounting systems that means the double-entry systems of accounting; and
- Recommend the necessary actions to take in order to overcome the obstacles.

03. Significance of the Research:

Small and medium enterprises (SMEs) are treated as the engines of growth and drivers of
innovation worldwide. They play a significant role in driving economic growth and
generating jobs. In Bangladesh, the sector is actually changing the face of the economy.
SMEs are playing a vital role for the country's accelerated industrialization and economic
growth, employment generation and reducing poverty. SMEs now occupy an important
position in the national economy. According to the Daily Star, they account for about 45
percent of manufacturing value addition, about 80 percent of industrial employment, about 90
percent of total industrial units and about 25 percent of the labor force. Their total
contribution to export earnings varies from 75 percent to 80 percent. The industrial sector
makes up 31 percent of the country's gross domestic product (GDP), most of which is coming
from SMEs. The total number of SMEs in Bangladesh is estimated to be 79,754
establishments. Of them, 93.6 percent are small and 6.4 percent are medium. The country's
SME sector has created 15 lakh jobs between 2009 and June 2014. Now, private and foreign
banks disburse half of all farm loans and a third of these are going to SMEs. In this situation,
it is of paramount importance that SMEs, specially the medium the organizations, report their
financial activities in such a way that is useful for decision making. Though it is possible to
implement formal accounting in this sector, majority of the currently operated SMEs do not
keep proper accounting records. So what are the obstacles that is deterring SMEs from
implementation of formal accounting? If we can find out the answer of the question, it will
help us to solve the problems by taking proper actions and a formal, understandable, useful
accounting system can be established for SMEs. If the information produced by SMEs
accounting system is relevant and reliable, it will in turn serve the information need of many
parties including the SMEs itself.

04. Literature Review:

The quality of accounting information utilized within the SME has a positive relationship
with an entitys performance and survival (Lybaert, 1998; Kinney, 2001).

Similarly, it has been emphasized that there is the need for financial information for small
and micro business units due to the volatility normally associated with their situation such as
unstable cash and profit positions, and reliance on short-term borrowing (McMahon &
Holmes, 1991; Dodge, Fullerton & Robbins, 1994).

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. In the process of planning for profit, financial
information is assembled in a way that can help make informed judgment and take decisions
concerning the organization (Copeland & Dascher, 1978).

The high rate of failure of small scale enterprises in developing countries like Bangladesh,

2
has generally been traced to poor management and accounting systems employed by these
enterprises (Ofonagoro, 1983). In spite of the considerable amount of studies conducted in
accounting over the last few decades, there has been little effort on investigating the
accounting systems maintained by SMEs and their effectiveness (McChlery et al., 2005).

The existence of practical problems in deriving records and figures that makes up the
statements. One reason for that is because for almost all enterprises the owners keep all the
records in memory and hence the lack of records of all kinds sales, marketing, accounting,
credit borrowing from lending institutions, staff costs, owners emoluments, etc. Owners of
SMEs do not keep proper records and thus, they are not able to provide data about their
entities. (McMahon,1999).
Maintaining a proper system and efficiently handling it is always a major challenge.
(Amaoke, 2013).
The SMEs might not keep the accounting records as it is time consuming and expensive. The
enterprises might feel that spending much time and expenses in keeping the records are not
that beneficial for them. Another reason for not keeping the record is it requires technical
skills and knowledge which is not available for certain causes and if it is available it will
involve more expenses because they need to hire more efficient staffs that will have the
proper skill and knowledge for maintaining the records. As the proper records will be kept it
will definitely expose the financial position of the firm and if it tends to be profitable the
enterprise might need to pay more tax. The SMEs might feel there is no need to keep the
records for the above reasons and find it difficult to maintain the system. (Amaoke, 2013).

05. Research Methodology:

5.1 Data Collection

Research methodology refers to the methods that have been followed to conduct the research.
The study has been conducted based on the primary data which is collected in fiend survey. A
predetermined questionnaire was used to gather data from the respondents. Group members
collected the data by visiting the medium sized enterprises located in downtown area of
Barisal City. It should be noted that very small sized shops, tea stall for example, which are
usually managed by the owner himself, had been excluded from the sample.

5.2 Sample Size

The study analyzes the sample taken from Barisal city area. Sample is selected randomly and
data is collected mainly from three areas of Barisal city namely, Rupatoli, Notuallabad and
Sadar Road. A total of fifty small and medium sized enterprises were taken as sample to draw
conclusion on the total population.

5.3 Data Analysis Techniques

The study uses simple data analysis technique to analyze the data and produce information to
draw conclusion. To analyze the data collected in field evidence, a spreadsheet analysis was
conducted using MS Excel to find out different ratios which is used in drawing conclusion
and recommendation.
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5.4 Limitations of the Study
The study suffers from following limitations :
- Small sample size;
- Only cover a small geographical area i.e. Barisal city only;
- Poor response rate and lack of cooperation;
- No fund allocation.

06. Results and Discussion:

The following table summarizes the method of accounting followed by the sample companies
for recording their economic activities.

Table 1: Method of Recording Economic Activities by Sample Companies

Number of entities
S.N. Method of Recording Followed Observation follow each method %

01 Complete Double-entry 50 0 0%

02 Incomplete Double-entry 50 1 2%

03 Records Sales, Purchase, Inventory, 50 32 64%

A/R, A/P

04 Records only Sales on Account 50 18 36%

05 No Bookkeeping 50 0 0%

Source: Data from Field Survey

Table 1 states that most (64% of total sample entities) of the business entities of the sample
records their amount of sales, purchases, inventory, accounts receivable and accounts payable
for their organization. Thirty six percent of the total sample firms records only sales on
account. Our field survey finds that none of the entities records their books of accounts using
complete double-entry accounting method. Only a 2% of the sampled firms follow formal
accounting loosely that means they keep ledger for important group of accounts, submit
income tax return regularly and pays VAT. However, we found none of the entities that does
not keep any sort of record of their economic activities.

Table 2: Reasons for not maintaining proper books of accounts

S.N. Reasons for not Maintaining Number of

proper Books of Accounts Observation entities follow %
each method

01 Not Necessary 50 26 52%

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02 Lack of Skilled Manpower 50 22 44%

03 Lack of Accounting Knowledge 50 28 56%

04 Costly 50 19 38%

05 Increases Income Tax/VAT 50 15 30%

06 Other 50 04 8%

Source: Data from Field Survey

Table 2 summarizes that 56% of the sample entities does not keep proper records of their
economic activities for lacking of accounting related knowledge. Half of the fifty entities
owners think that accounting is not necessary for their organization. Total of 22 entities of 50
sample entities lacks skilled man power for keeping proper books of accounts. However, 38%
of sample companies doesnt use accounting for the additional cost for implementing
accounting in their firm. 30% of the owners thinks that keeping proper books of accounts
would increase their income tax liability and VAT payment.

Table 3: Interviewers response rate to asked questions

Yes (%) No (%) No

S.N. Questions Asked Comment
(%)

01 Do you think proper bookkeeping is necessary for 64 36 0

your organization?

02 Do you think any training/workshop on accounting 86 14 0

can increase your ability for proper recording?

03 Would you like to attend in any training/workshop 34 26 40

to increase your accounting knowledge?

04 Do you prefer to accept help from an outside 2 42 56

person who is expert in accounting and can
improve your entitys recording pattern?

Source: Data from Field Survey

Table 3 summarizes the responses to the questionnaire by the respondents. Our field survey
finds that 64% of the owners thinks that proper bookkeeping is necessary for his organization
but 36% considers accounting is not necessary at all. Most of the (86%) respondents think
that training/workshop on recording proper books of accounts can increase their ability for
proper recording of the business transactions provided that 34% of the respondents are
willing to join if any such training/workshop is arranged and 40% did not expressed their

5
thoughts immediately. However, only 2% of the respondents are willing to allow any third
person to help them to maintain proper books of accounts, 42% directly refused the proposal
and 56% did not outlined their thoughts.

Table 4: Amount willing to spend for proper recording

Question Asked Observation Mean Amount

(Tk.)

How much would you like to spend for proper 23 3,540/month

bookkeeping for your organization?

Source: Data from Field Survey

Table 4 expresses that on an average an owner of SME is willing to spend BDT 3,540.00 per
month for the proper bookkeeping of his entity.

Table 5: General information about sample entities

Production 0%

Type of Organization Service 4%

Trade 96%

Sole Proprietorship 96%

Ownership Category Partnership 4%

Non-profit/Social 0%

Average Annual Sales Amount (TK.) 44,04,000

Average Number of Staff 3.54

Average Age of Organization (Years) 13.84

Average Net Assets Without Land & Building (TK.) 16,41,000

Any Training received for proper Bookkeeping by Owner None

Science 4%

Background of the Owners Arts 60%

Education
Business Studies 26%

Madrasa/Vocational/Others 12%

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 Source: Data from Field Survey

Table 4 outlines some general information about the sampled entities. Most of the entities
(96%) selected as sample trade type of organization involved in buying and selling
merchandise. Most of them (96%) of the entities have simple form of ownership which is sole
proprietorship. Sample organizations have mean annual sales amount of Tk. 44 lakh while
their average number of staff is 3.54 person. Entities selected have on an average 13.84 years
of operating age. Average operating net assets of the sample entities amounts to almost Tk.
16.5 lakh. In our field survey, we found not any single owner who received any training in
bookkeeping in past. However, 60 percent of the owner comes from arts background and
26% comes from business studies group. Vocational and Madrasa background reaches to
12% of the total sample entities.

07. Recommendations:
The results of our filed study suggest that none of the 50 sampled entities follow formal
double entry accounting method for keeping records of their economic activities and events.
The result is shocking for a country like Bangladesh where SME contributes a lot in the
overall economy by creating employment opportunity, increasing tax collection etc. Thats
why following recommendations can improve the situation:

(I) A simplified method for proper bookkeeping can be developed along with user
friendly software which allows a person with minimum knowledge of accounting to post
journal entry and prepare ledger from it.

(II) Some simple written books can be designed and published by the authorities like
universities which can help the owners/managers to gain basic knowledge on accounting and
help them to record their own business transactions properly.

(III) Training, seminar, workshops etc. can be arranged and invite the
owners/managers of the SMEs to participate and enrich their knowledge to record
transactions properly.

(IV) Government can offer a special tax rebate if SMEs records books of accounts
properly and file them with yearly tax return.

(V) The usefulness of using proper accounting can be communicated to the SMEs
owner/managers to make them motivated and implement accounting system in his/her
organization.

(VI) Banks can tighten its SME loan granting regulations and prefer to give loans to
those organizations whose books of accounts are fresh and updated.

(VII) Government can arrange diploma degree specializes in accounting for SMEs
and appoint those diploma degree holders in those organization that needs accounts officers.

7
It will in turn make the SMEs books of accounts updated so Govt. can collect the actual tax
amount at the same time appointing those diploma graduates in SMEs will increase
employment rate.

(VIII) Government can build a separate audit body for auditing the accounts of the
SMEs and find out those SMEs that do not prepare proper books of accounts to punish them
financially.

(IX) Greater importance can be given to Vocational and Business Studies education
that will make the implementation of accounting system more easily.

(X) Finally, a country wide awareness must be built to collect, record and process the
economic activities and events of SMEs so that SMEs can produce more relevant and
reliable information about their activities and performance which will in turn increase the
countrywide tax collection, employment rate and SMEs success rate.

08. Conclusion:
The importance of SMEs for a country like Bangladesh is enormous because SMEs creates
employment for the huge work force of the country, SMEs contributes a significant portion in
the Govt. exchequer, SMEs support the overall economy even when other sectors showing
weak performance. All of these factors justify the implication of proper accounting system
that gives proper treatment of all the economic events and financial transactions of the SMEs
which in turn create more updated and useful relevant information to make proper important
business decisions that results in increased SME success rate. However, the result of the
study is negative because none of the sample firms follow proper accounting guidelines even
if it possesses notable about of assets. The recommendations given in this study can be
implemented so that the problems can be solved and SME identify, records, process and
communicate the information about their economic events and financial transactions properly
which is useful for every user.

8
09. References
Amaoke, G.K. (2013). Accounting practices of SMEs: A case study of Kumasi Metropolis in
Ghana. International Journal of Business and Management, 8(24), 73-83.
Copeland, R. M., & Dascher, P. E. (1978). Managerial accounting. New York: John Wiley.
Day J, 2000. The value and importance of the small firm to the world economy. European
Journal of Marketing, 34(9/10): 10331037.
Dodge HR, Robbins JE, 1992. An empirical investigation of the organizational life cycle
model for small business development and survival. Journal of Small Business
Management, 30(1): 2737.
Dodge, H., Fullerton, S., & Robbins, J. (1994). Stage of the organizational life cycle and
competition as mediators of problem perception for small businesses. Strategic
Management Journal, 15, 121134.
K Padachi, 2012. Factors Affecting the Adoption of Formal Accounting Systems by SMEs
Business and Economics Journal, Vol. 2012: BEJ-67.
Lybaert, N. (1998). The information use in an SME: Its importance and some elements of
influence. Small Business Economics, 10 (2), 171191.
McChlery, S., Godfrey, A. D., & Meechan, L. (2005). Barriers and catalysts to sound
financial management systems in small-sized enterprises. The Journal of Applied
Accounting Research, 7 (3), 126.
McMahon, R.G.P. (1999). Recent SME research: A critical review. Small Enterprise
Research: The Journal of SEAANZ, 7(1), 68-75.
McMahon, R.G.P. & Holmes, S. (1991). Small business financial management practices in
North America: A literature review. Journal of Small Business Management, 29(2),
19-29.
Mittal, K.C. & Batra, G.S. (2004). Performance and growth of small scale industries in India.
Apeejay Journal of Management, 1(1), 100112.
Nayak A, Greenfield S, 1994. The use of management accounting information for managing
micro businesses. In: Hughes A, Storey D (Eds.), Finance and the Small Firm.
London: Routledge, pp. 182231.
Ofonagoro, A. O. (1983, September 30). Need for financial statement in small business.
Business Times, pp. 22.
Perren, L., & Grant, P. (2000). The evolution of management routines in small businesses: A
social construction perspective. Management Accounting Research, 11, 391411.
Kinney, W. R. (2001). Accounting scholarship: What is uniquely ours? The Accounting
Review, 76 (2), 275284.
The Daily Star, Potential of Small and Medium Enterprises by Md Fazlur Rahman, March 11,
2015.