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« Ozodi Osuji Lectures #22: Introduction to Corporate Finance | Main | Ozodi Osuji Lectures #24: Introduction to Marketing »

November 04, 2005

Ozodi Osuji Lectures #23: Introduction to Accounting

by Ozodi Thomas Osuji, Ph.D. (Seatle, Washington) --- Those who consider themselves as intellectuals generally find accounting uninteresting. I can speak for myself, I found the subject boring. In fact, I often fell asleep in accounting classes. The subject is simply too realistic and detailed to appeal to my way of thinking. I like to deal with ideas and, more importantly, to engage in idealizations. I am a walking, talking Plato (see Republic).

I see a person, an object or a social institution and I try to understand it, speculate on its nature and imagine how to improve its perceived imperfections. I am at home in the world of philosophy and psychology. Accounting? Give me a break.

Much as I did not like accounting, in management I found that it is probably the most crucial piece of information one needed to have. Managers deal with managing businesses’ money. That money must be well spent and accounted for. One must, therefore, understand how money is spent and accounted for. It is not a question of whether one likes it or not, one must understand basic accounting if one is a manager in a business organization, and that includes for profits, non-profits and government organizations.

African governments are largely mismanaged because their leaders do not take the time to study accounting and understand how their monies are accounted for. They delegate that responsibility to the accounting staff, as they should. But the accounting staff realizing that the politicians know next to nothing about accounting takes them to the cleaners.

One does not have to be an accountant but one needs to be able to understand what accountants do and be able to read financial papers. Thus, if one is a leader in politics, I recommend that one take a few courses in accounting until one is comfortable with reading accounting statements.

If you understand accounting, you can go to a government department, ministry and ask for its budget and monthly financial statements. These are public properties and must be given to you. You study how the department manages its money and on the basis of studying the ministry’s finances know how well it is doing its work or not?

Can you pick up the Federal government’s budget, your state government’s budget, your local government’s budget, your city’s budget and study it, them, and on the basis of that study understand what the government(s) is doing right or wrong? And, more importantly, can you understand whether the government is spending our money well or not?

I believe that it is because the average Nigerian knows next to nothing about accounting that the idiotic persons that call themselves our political leaders take us to the cleaners and steal our monies. If the average Nigerian could keep his eyes on a particular ministry and know how it spends its money and calls attention to wrongful spending of money, may be we would begin to have responsible leaders?

My goal in this lecture is to stress the importance of understanding accounting and call attention to studying it and giving some general information on it. This lecture is not meant to replace taking courses in accounting. Accounting is a detailed, rigorous affair. It is filled with arithmetic and statistics and that I will not get into in this few pages presentation. I am here to give an overview of the subject and leave it to you to go seek out more information on it.

There are two parts to account, what one might call the book keeping part of it and what one might call managerial accounting.

The book keeping part of accounting deals with such things as journaling, accounts entries, preparing accounts receivables, accounts payables, pay rolls, monthly financial statements and budgets.

The managerial aspect of accounting involves working with management and understanding what it is it wants to accomplish and giving accounting information on it. Yesterday, we talked about building a textile factory. Some one must cost it out. How much would the factory itself cost? The machinery, the land, the building? How much would labor cost? How much do we have in hand and if we do not already have the money, why are we even talking about building a new factory? Managerial accounting is a complex subject and is probably best left to accountants. The part of accounting that the typical manager deals with, on a daily bases, is the book keeping part of it.

The business firm is a money spending and receiving unit. Money comes in and money goes out. Proper records must be kept of these monetary transactions. Most accountants all over the English speaking world, which includes Nigeria, follow the Generally Accepted Accounting Principles. They follow the same method in keeping their journals, in doing accounts payable, receivable, pay rolls and the same methods in preparing monthly financial statements and annual budgets and annual audits.

What you have to do is study how each of these accounting procedures is done, and be able to read them.

BUDGETS

Budgets are statements of how a company plans to spend its money during the year. It shows expected revenue and how that revenue would be spent. It has lines (items) of how much would be spent on each item. How much money is going to be spent on rent (of the building where the business is housed), buying equipments for doing the businesses business, paying employees, running the office etc? I will not talk about the specifics of budgets here. Obtain your city government’s budget, your local government’s budget, your state’s budget, the federal government’s budget and take a look at them. They all follow the same pattern and if you can read one you can read them all.

A budget is a statement of future revenues and expenditures. Each unit of the business is assigned a certain amount of money to spend during the year and is expected to make a certain amount of money during the year.

MONTHLY FINANCIAL STATEMENTS

The annual budget is divided up into twelve months. Each month, each unit of the firm has a certain expected revenue and expenditure. Book keepers prepare monthly financial statements that show management how each unit in the firm did in the past month. How much money it did, in fact, receive and how much money it, in fact, spent. The income and expenditure is compared to budgeted income and expenditure and where it balances, that is a wash. In most cases, there are variances, plus or minus, that is, more money was obtained or less money was obtained, more money was spent or less money was spent on budgeted items.

Obviously, every business ought to stay within budget, for if you spend more than you receive you must have borrowed that money from somewhere, internally (from other units of the business, those making profits) or externally, from customers extending credit to you or from borrowings from commercial banks etc. A business that spends more than it pulls in is obviously heading towards bankruptcy.

The accounting department prepares monthly financial reports for the business and for each unit of the business and gives them to the appropriate supervisors, managers and CEOs. The CEO takes a hard look at the financial statement and ascertains what unit of his business is making money and what units is losing money. If he is smart, he makes immediate adjustments in the units losing money. May be he needs to let go of a manager whose unit is losing money? May be something must be done differently in units that are losing money?

A manger must take a careful look at his monthly financial statements and make adjustments. For example, suppose the unit is paying more money on personnel cost than was budgeted, say, due to salary increases given to employees during the year, how is this impacting the overall budget? Why did you give salary increases and or bonuses if you did not ascertain where the money to pay for them would come from? How about the cost of health insurance, has it raised more than was budgeted for and is eating up your budget? (Employee benefit packets may constitute 25% additional payment to their base wages.)

The point is that the accounting department gives managers financial information on how they are doing and they are supposed to make adjustments to their units’ financial operations, so that by the end of the year they are in the black, not in the red (balanced or better, make profits).

PAY ROLL

The accounting staff prepares employees pay roll. Every two weeks or so, employees receive their pay checks (or they are electronically wired to their banks). Someone has to do the job of preparing pay checks. Someone must ascertain that there is money to pay employees. (Sometimes businesses do not have the money in the bank to pay their employees. If they have lines of credits with local banks, employee paychecks may be cashed by the said banks. Employees expect their checks at the end of the pay period and could care less whether the employer has no money in the bank to cover their wages. Bank credit lines lend businesses the money to pay staff until the company makes money to replenish its money in the bank. Of course, interests are paid on such short term loans from the bank.)

Whereas it is the job of the accounting staff to prepare the pay roll, it is the job of the manager to take a good look at it and make sure that it is properly done. For one thing, you must make sure that all the monthly deductions are done properly: tax deductions (IRS), pension deductions (Social Security), workers comp deductions, health insurance deductions, unemployment deductions, 401K deductions and the other deductions that must be made from paychecks. If a manager knows how to supervise payroll, the thieves that proliferate in Nigeria’s governments would not be able to pad some of their friends payrolls hence steal from the government.

ACCOUNTTS PAYABLE AND RECEIVABLE

The accounting department prepares accounts receivable, money coming to the business from its dealings (sales, for example,) and accounts payables (moneys the company pays other people, for services rendered to it. At the end of the month, these are prepared from the Journal entries kept by accounting clerks and given to the manager to see the nature of transactions taking place during the past month. What was purchased last month (payable) and what was sold last month (receivable)? Did income and payments balance? If not, maybe it is time to stop spending and start receiving?

Businesses exist to produce some things and sell them to the public, market. What is the product that the business produces and is there a market for it? Is the business selling what it wants to sell? Is it selling it at the right price and is it making profits? Accountants keep record of these transactions.

AUDITS

At the end of the year, outside auditing firms are invited into the audit the business’ books, to make sure that the business is spending its money where it said it is doing so and to make sure that it is following the right accounting procedures in keeping its records.

External auditors give managers objective feedback on how they are doing. Internal accountants may be tempted to pad the books. In Nigeria, accountants are likely to cook the books. But external auditors can give management objective information on the state of its finances and lead it to take corrective measures.

(In Nigeria, one can see officials bribing auditing firms to tell lies about how they spent their moneys. What are Nigerians but the devil himself? These people’s genius lies in figuring out ways to cheat and steal and cover their tracks. If Nigerian corrupt public officials think that you are getting too close to catching them, they would burn the building where accounting records are kept, to prevent you having access to their records of mismanagement.

Not to worry: we know that many Nigerians are rogues; we can seek ways to catch these rogues, we can check mate them.

DEPRECIATIONS

Accountants look at the business’ equipments and account for their productivity. They depreciate old equipments. If you bought a car for your business at $20,000 and the car is slated to last ten years, it follows that each year it produces $2000 profit to the company and is depreciated by that same amount of money. At the end of ten years, when it has no more value, the car is neither producing, contributing to the company nor being depreciated (for tax purposes).

Accountants do a lot for businesses and the reasonable manager must work closely with his accountants and obtain daily, weekly and monthly information from them as to how his business is doing, financially. He must also work with his financial managers to decide where to obtain money to expand his business and if he makes profits where to invest his money.

In small business, the chances are that the sole proprietor does the accounting, book keeping and financial work of his business. When he begins to make profits, perhaps, he hires an accounting clerk to do the book keeping aspect of his work. It is businesses with over a million dollars annual budget that can afford to hire internal accounting staff. Medium businesses rely on external book keepers coming in, say, once a month to do their books for them.

For our present purposes, we do not need to know all the details of what accountants do; what we need to know is the critical role of accountants in keeping monetary records for businesses’. These people are absolutely indispensable for the health or lack of it of any business. The manager must work closely with accountants if he wants to have a proper accounting of his business.

In Nigeria, we all know how in shambles our financial management is. Our state governors go to Abuja and receive their states share of Federal revenue sharing. They see that money as their personal monies and do with them as they please. They bank some of them overseas and squander the rest in riotous living. They do not devote such monies where they ought to go, serving the people.

Why in hell is it the case that governors sign for state moneys? What does a governor know about money, anyway? Why not have the state treasurer (an accountant) go sign for the state money? Why not professional accountants have handle state money and pay the governor his salary but not have him touch money? Since the governor remains the boss, he then has the ability to fire accountants who steal state moneys.

Corruption in Nigeria is so well known that we need not rehash that sad story here. What is salient is that with proper accounting and auditing practices we can actually begin to reduce Nigerians tendency to thievery.

More to the point, if most Nigerians understand how to read financial statements, study their governments’ budgets and pay attention to how every penny of their monies are spent, may be we would start reducing our economic waste?

Consider the issue of per-dium paid public officials. How much money was budgeted for Obasanjo to spend on his numerous foreign junkets? The man is almost always outside the country. He stays in the world’s best hotels. He flies in his own private jet. How much money did we budget for him to be squandering in this manner?

In the USA, every official has a budget available to him. How much he can spend in a night in hotels is specified. He must come back with receipts and give them to the accounting department. If he uses government vehicles for his private business, he is fired and or must refund the public for so doing. If President Bush flies Air force one to a private dinner, he must repay the taxpayers of America the cost of that flight.

Obasanjo and other Nigerian leaders are all over the world spending the people’s money: how do we account for all these idiotic spending? The leaders see their states money as their personal moneys and do with them as they please, no proper accounting procedures followed. It is really pathetic that in the twenty first century folks could be behaving like primitive men.

CONCLUSION

As I see it, one of the solutions to the seeming intractable problem of corruption in Nigeria is for just about every person to understand something about accounting; at least enough to be able to read governments accounting books, and where misspending are found, call for correction and punishment of implicated public officials.

Ozodi Thomas Osuji

Ozodi@africainstituteseattel.org

November 4, 2005

Posted by Administrator at November 4, 2005 11:45 AM

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