The Influence of Accounting Records on the Financial Performance of Small and Medium Enterprises in Central Business District in Nairobi County

Abstract

Small and medium scale enterprises are gaining wide spread acceptance as viable drivers of economic growth. A sound accounting and internal control system in any business irrespective of its scale is crucial. Audits of small scale enterprises have proven to be worrisome for professional accountants because of the inadequacy of the internal controls. The study sought to establish whether a relationship exists between accounting systems, the manner in which accounting records were maintained by SMEs and their financial performance. The study adopted a descriptive research design on SMEs in Nairobi Central Business District. The study sampled 391 SMEs in Nairobi Central Business District. Systematic sampling technique was used to sample SMEs. Descriptive statistics and regression analysis was used to analyse the findings. The study found that revenue and expenditure accounts play a major role in ledger accounts. For ledger accounts to be effective, revenue and expenditure accounts must be well prepared to limit chances of negative financial performance of SMEs in Nairobi County. It found that an improvement in keeping and preparing purchases and sales ledgers can result in improved financial performance. It also found that all the SMEs in Nairobi CBD keep purchases and sales ledger, cash book, revenue and expenditure accounts, statement of income and balance sheet. It found that most SMEs neutrally agree that purchases ledger shows all purchases returns of the business, sales ledger shows all returns to the business and sales ledger shows all the receivables of the business. Finally, the study found that a large number of SMEs prepare balance sheets as they convey substantial information about the financial strength and current performance of an enterprise.