INTRODUCTION

Education is a cornerstone of human development, providing the knowledge and skills necessary for an individual’s growth and societal progress. In Somalia, education is paramount to rebuilding the nation, fostering economic development, strengthening institutions, and promoting peace and stability. Recognizing the critical role of education is essential for Somalia’s development, as it is not only a fundamental right but also a vital investment in the future of its people.

Accounting is a key component in the development of human capital, as it supports the growth of the economy, strengthens business practices, enhances the efficiency of government agencies, and plays a critical role in ensuring financial transparency and accountability. By investing in education with a strong emphasis on accounting, Somalia can build a workforce capable of managing financial resources, fostering economic growth, and contributing to a stable and prosperous society. As the country continues to rebuild and develop its institutions, accounting skills will be crucial for creating sustainable businesses, improving governance, and promoting sound financial management in both the public and private sectors.

In this article, I will explore the importance of accounting education, its impact on economic development, and how building expertise in this field is instrumental in driving progress across multiple sectors.

THE NEED FOR ACCOUNTANTS

For the past 30 years, I have been involved in either learning or teaching accounting. The question that constantly arises is: why do we need accountants and what role do they play in society beyond just dealing with historical figures and accounting for funds that have already been spent? While this question has some merit, it overlooks a crucial piece of information.

Personally, I have always felt that accounting is a fascinating subject. In many instances, I commence my class with the question why are you learning accounting or why do you want to be an accountant? I often received mixed responses. For many students, relating accounting principles to practices seems a daunting task. Many take the common approach of memorising the meaning of the principles and also examples relating to them. This approach has many shortcomings.

First, it may retard the students’ ability to apply the principles in examples other than what they have learnt. Second, it may curtail the interest of the students to pursue the accounting discipline further as they don’t really understand the link between theory and practice clearly. Hence, a good understanding of accounting principles is necessary and imperative to appreciate accounting practices profoundly. Let us start with the fundamentals first. Accounting is the process of analyzing, recording, summarizing, and reporting financial information. Accounting is essential for dealing with business information and data, allowing us to record, summarize, and report it. Essentially, accounting is considered the language of business, as it determines what needs to be recorded, including all business transactions within the company.

Many people confuse accounting with bookkeeping. Bookkeepers do the daily financial tracking of all of your daily financial transactions while accountants plan and set up the accounting systems. Accountants rely on financial statements from bookkeepers to do their work, but they also look for larger trends and the way money works across the business. They give a fuller summary of your company’s financial realities[1]. Accounting acts as a bridge between users of the business information and the day-to-day transactions that occur inside a business. Users of accounting information may be inside or outside a business. There are primarily two types of users of accounting information[2]:

a) Internal users (primary users) – If a user of the information is part of the business itself, then he/she is considered one of the internal or primary users of accounting information and that includes management, owners, and employees.

b) External users (secondary users) – If a user of the information is an external party and is not related to the business then he/she is considered as one of the external or secondary users of accounting information and that includes current investors and potential investors, creditors, customers, lenders and regulatory agencies.

The connection between accounting, accountability, and transparency is intriguing, and it’s impossible to discuss one without considering the others. In fact, accountability, in terms of ethics and governance is associated with culpability, liability, and the expectation of providing explanations according to Clarence Dykstra[3]. Accountability is a key aspect of governance and is important in discussions related to issues in the public sector, non-profit organizations, private sectors, and individual contexts. In leadership roles[4], accountability involves acknowledging and taking responsibility for actions, decisions, and policies, including the obligation to report, justify, and be answerable for the resulting consequences in areas such as administration, governance, and implementation.

Accountants assist organizations in acquiring essential raw data for making informed business decisions and addressing governance and accountability issues, which are crucial for meaningful decision-making. In governance, accountability has expanded beyond the basic definition of “being called to account for one’s actions[5]”. Accountability cannot exist without proper accounting practices. In other words, an absence of accounting means an absence of accountability. According to David, Rodreck, a key area that contributes to accountability is good records management.

WHAT DO ACCOUNTANTS DO?

Accountants always consider what should be recorded, such as all company affairs related to either business transactions or personal transactions. Financial information or business transactions are examples of what needs to be recorded. When discussing business transactions, let’s consider an example. Yusuf has a Mark II car that he bought for around $3,000 two years ago. He offered to sell the car to his friend, Jama, for a fixed price of $2,850, which included all costs. Jama declined the offer and instead proposed to buy the car for $2,450, with the condition that the $200 gearbox should be fixed before he accepted the purchase.

Ahmed rejected this counteroffer and insisted on a selling price of $2,400, which Jama agreed to be the final selling price of the car. Regardless of previous negotiation discussions, this is the amount that should be recorded in Yusuf’s books. To understand this scenario, it is vital to distinguish business negotiations from business transactions. Business negotiations are discussions and deliberations between parties to reach an agreement on business deals. They involve strategic decision-making, setting terms, and finalizing agreements[6]. However, negotiations themselves are not recorded in the accounting books but the outcomes of these negotiations, such as contracts or agreements, may lead to transactions that need to be recorded.

Business transactions, on the other hand, are economic events that affect the financial position of a business and can be measured reliably. Examples include sales, purchases, payments, and receipts. These transactions are recorded in the accounting system through journal entries. Each transaction is documented in the books of original entries (journals) and then posted to the ledger accounts. [7].

The key difference is that negotiations are preparatory and strategic while transactions are actual financial events and only transactions are recorded in the financial books of the company as they have a direct impact on the financial position of the business. Based on that understanding, we can now ascertain and justify that the amount to be recorded in the accounting books of Yusuf is the final agreed and settled amount which is $2,400.

WHICH ACCOUNTING SYSTEM BEST SUITS YOUR BUSINESS?

Let’s discuss the different types of accounting systems. There are two main types. The first one is a single-entry system, where a small business records each transaction as a line item in a ledger. The other is a Double Entry System, where every transaction is recorded as a debit and credit in separate accounts This method ensures a company’s book balance. It’s important to understand these two ways of recording business transactions and use them in the appropriate context.

A single-entry system of accounting is usually used by very small businesses for its simplicity. Perhaps the business does not do a lot of transactions in a given day, or it’s a sole proprietorship and the owner does not require or have time for extensive bookkeeping. A single-entry system is convenient, simple (no formal training is needed) and provides cost savings as it does not require complex software. A small business owner could run a single-entry system of accounting on an Excel program if he so desired.

On the other hand, double-entry is a more detailed bookkeeping process typically used by larger businesses, providing complete records and allowing for the creation of proper financial statements. Errors can be detected more quickly. A double-entry accounting system provides a more accurate financial picture of a company. Therefore, the double-entry system is the standard system in compliance with IFRS/IPSAS. It is based on the concept of the “exchange of one thing for another” and is built on checks and balances.

Depending on whether you use a manual system or accounting software, it’s crucial to understand the accounting cycle. The accounting cycle is a series of steps that businesses use to accurately record their financial position, which is then summarized in their financial statements [8]. Throughout the accounting cycle, companies will document their financial transactions in a journal, and then transfer the details into a general ledger. After that, they will analyze the entries, ensuring that the books are balanced and free of errors, before generating financial statements and closing the books for the period. The accounting system produces financial statements as its final output. Now, let’s take a look at the business structure. The legal structure of a business plan defines how a business is organized and recognized by law. It also indicates the type of ownership, such as whether the business is owned by an individual, partners, or shareholders[9].

This structure determines how the business will be taxed and how profits and losses are distributed. It also defines the level of personal liability the owners have for business debts. The business structure impacts the daily operations, financial decisions, and legal obligations of the business. It is important to understand the form of legal structure the business has, such as whether it is a sole proprietorship (a business with a single owner), a partnership (a business with two or more owners), or a corporation (a business that maintains a separate identity from the owners).

Additionally, it is important to understand the different types of business organizations and ownership structures and it is worth to consider the advantages and disadvantages of each type based on the products offered. Technically speaking, there are three major types of businesses: service businesses (e.g. Hawala businesses, Telecom industries), merchandising businesses (e.g. retail shops), and manufacturing businesses (e.g. car manufacturers).  which transform raw materials into finished products like car manufacturers. Service businesses offer services, merchandising businesses resell goods, and manufacturing businesses transform raw materials into finished products.

ACCOUNTING AS THE BASIS OF BUSINESS DECISIONS

Many accounting students at SIDAM Institute (Somali Institute of Development Administration and Management) recall the renowned textbook “Meigs and Meigs: Accounting: The Basis for Business Decisions.” This reference book was used in the diploma-level courses and was authored by Robert F. Meigs.

The book delves into essential topics in accounting and is widely acknowledged as a fundamental resource for understanding financial information. It emphasizes the pivotal role of accounting as the language of business, covering key areas such as recording changes in financial position, financial statements, and the interpretation of financial data.

WHAT IS BUSINESS DECISION?

A business decision, also known as an operational decision, refers to any choice made by a business professional that influences short-term or long-term company activities. Business decisions are critical for the success of an organization. Whether it’s a minor choice or a major strategic move, decision-making impacts every aspect of a company. These decisions stem from the need to solve problems or capitalize on potential opportunities.

The decision-making process in real life consists of several stages. First, there’s goal identification, which defines the objective of the decision. Then comes information gathering, which involves gathering relevant data and insights. Additionally, it includes presenting alternative evaluations and considering the pros and cons of different options. Finally, it involves the decision-making phase, which addresses the choice of the most viable course of action, its implementation, and review to assess the outcome and learn from it.

Decisions can generally be categorized as strategic, tactical, or operational. Strategic decisions are high-level choices that determine the overall direction of the organization. They involve long-term planning and have a wide-ranging impact across the entire company. Tactical decisions focus on specific functional areas or departments within the organization, bridging the gap between strategic and operational decisions. Operational decisions are day-to-day choices related to routine activities that directly affect daily operations and processes.

To relate that to a real-life story, once upon a time, an accountant was asked: who are you? The accountant replied: “I am the one who counts, not the one who decides.” This implies that accountants are omnipresent in every decision made by the company providing raw information which are basis of sound business decisions, but they rarely make the final decision.

An accountant’s role in a business involves several key responsibilities:

1.        Recording and Documenting Business Events: Accountants are responsible for accurately recording and documenting business transactions such as revenues, expenses, and sales to ensure proper record keeping.

2.        Reporting and Communicating Financial Information: After recording data, accountants transform it into reports for both internal and external use. Internal reports may include sales reports and accounts receivable ageing, while external reports generally consist of financial statements.

3.        Budgeting: Accountants play a critical role in creating budgets that help businesses plan for the future. These budgets determine the allocation of funds for various resources such as payroll and equipment, ultimately contributing to business profitability.

4.        Compliance and Legal Requirements: Accountants must ensure that businesses adhere to proper accounting procedures to remain compliant with legal regulations. Accurate and up-to-date financial information is crucial, as failure to report finances truthfully can result in penalties and fines.

5.        Facilitating Better Funding Options: Accountants help showcase the financial health of businesses, instilling confidence in lenders, banks, and investors. By understanding the financial well-being of their clients, these parties can make informed decisions regarding fund allocation.

6.        Data Analysis: Accountants perform cost accounting analysis to determine the cost of producing or selling a product or service, as well as to identify the most profitable and marketable products or services.

THE FINAL PRODUCTS: A BIT OF ACCOUNTING JARGON

It’s important to note that accounting plays a vital role in running a business. It helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and the government with quantitative financial information that can be used in making business decisions. The financial statements are generated from business records and are classified into three types. The Income Statement provides information about the profit and loss over a specific period some time, the Statement of Financial Position shows the financial position of the business on a specific date, and the Statement of Cash Flow reports the cash generated and spent during a specific period of time.

Business owners must maintain complete and up-to-date financial records to ensure the stability of their businesses. In real practical scenarios, the main steps for setting up an accounting system for new businesses encompass identifying the company’s resources, identifying the sources of these resources, building an accounting equation, starting to record the result of the company’s financial operations and preparing the final set of reports (financial statements).

THE SOURCE DOCUMENTS

Another crucial aspect in ensuring reliable financial information is the importance of source documents. Source documents serve as the foundation of accounting records, offering tangible evidence of financial transactions. They form the trail of facts from which accounting books are built and, ultimately, financial statements are prepared[10].

RULES OF THE GAME!

Accounting has established some rules & guidelines and it is important to play it safe. These principles are the rules and guidelines that companies and other bodies must follow when reporting financial data[11]. The rules aim to standardize the terms and methods used by accountants to make it easier to examine financial data. The ultimate goal of any set of accounting principles is to ensure that a company’s financial statements are complete, consistent, and comparable.

Some of the most fundamental accounting principles include the following:

1.        Accrual principle: depicts the effects of transactions and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period[12].

2.        Matching principle: this is an accounting concept that dictates that companies report expenses at the same time as the revenue they are related to. Revenues and expenses are matched on the income statement for some time (e.g., a year, quarter, or month)[13].

3.        Accounting Period principle: the concept that a business should report the financial results of its activities over a standard period, which is usually monthly, quarterly, or annually[14].

4.    Business Entity principle: simply means that, to maintain accounting records, the business is treated as a separate entity from the owner(s) of the business. The Conceptual Framework refers to a ‘reporting entity’ which is an entity that is required or chooses, to prepare financial statements[15].

5.    Going Concern: Definition: ‘Financial statements are normally prepared on the assumption that the reporting entity is a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor the need to enter liquidation or to cease trading. If such an intention or need exists, the financial statements may have to be prepared on a different basis. If so, the financial statements describe the basis used[16].

6.        Monetary Measurement: The monetary unit principle states that you only record business transactions that can be expressed in terms of a currency[17].

THE ROLE OF ACCOUNTANTS IN BUSINESS

As discussed earlier, accounting plays a crucial role in running a business. It ensures statutory compliance and provides investors, management, and the government with quantitative financial information. This information can be used to make informed business decisions because it contributes to evaluating the performance of the business, enables the creation of budgets and future projections, and helps in the filing of Financial Statements.

It is important to note that accounting professionals in business play a crucial role in assisting with corporate strategy, providing advice and helping businesses to reduce costs, improve their top line and mitigate risks. As part of the board of directors, professional accountants in business represent the interest of the owners of the company (i.e. shareholders in a public company). They are often at the frontline of safeguarding and ensuring the accuracy and integrity of financial reporting[18].  Management is responsible for the financial information produced by the company. Professional accountants in businesses therefore have the task of defending the quality of financial reporting right at the source where the numbers and figures are produced[19].

CAN WE RELY SOLELY ON ACCOUNTANTS?

Financial reports, such as financial statements, are the responsibility of the company’s management. They record and report the information, and they claim that it is accurate and reliable. It’s important to note that these financial claims are made by the company’s management about its financial statements. The only way to verify whether their claims are true and authentic is to conduct an audit.

This takes us from simply being accountants to being professional accountants, and there is a significant difference between the two. Thus, auditors bear the responsibility of conducting a thorough and objective evaluation of management’s assertions. This responsibility entails an understanding of the business and its environment, including the industry in which it operates, regulatory factors, and other external influences that may affect the financial statements[20].

THE FINAL THOUGHT

Author Philip Smith has observed in his essay in the Journal of Accounting and Business, that “there was a feeling that as stability grew in Somalia, so the demand for accountants would grow as well”[21].

Philip Smith’s observation highlights a significant trend in Somalia. As the country continues to stabilize and rebuild, the demand for accountants is indeed growing. This is because accountants play a crucial role in enhancing financial transparency, supporting economic development and ensuring regulatory compliance. In the same context, Merit Advisory observed that “In Somalia, a nation striving toward economic stability and development, the role of accountants is pivotal. Accountants contribute significantly to the financial accuracy and strategic planning necessary for businesses and governmental entities alike”[22].

This takes me back to the time when I first started working as a junior accountant during my second year at university, precisely on January 20th, 1989. I was filled with hope for lay ahead and driven to succeed in my role by providing the right and accurate reports to my manager at that time, Mr Mohamed Ali Mohamoud, who was the Managing Director of MAM and Brothers Co. Ltd in Mogadishu, Somalia. Now, 35 years later, I still hold onto the future of the accounting profession in the country.

The good news is that Somalia today has an entity which stands for the profession. The Somali Institute of Certified Public Accountants (SIPCA) stands for “the development of a strong and sustained accountancy professional that protects the public interest through the observance of the highest standards of professional and ethical conduct”[23]. It will help to promote high standards of professional conduct and technical competence of its members to safeguard the public interest. The accounting profession in Somalia has a bright and promising future, similar to its counterparts in the East African community and the rest of the world.

Ali Haji Warsame – MBA MA CPA CGMA CPFA
Executive Director – Hiil Institute for Governance & Independent Financial Consultant & Licensed Auditor

email: ali.warsame@hiilinstitute.org

[1] Bookkeeping Vs. Accounting: What’s The Difference? – Forbes Advisor

[2] Users of Accounting Information (Internal, External, Examples) (accountingcapital.com)

[3] Dykstra, Clarence A. (February 1938). “The Quest for Responsibility”. American Political Science Review

[4] Williams, Reyes (2006). Leadership accountability in a globalizing world. London: Palgraave Macmillan.

[5] Mulgan, Richard (2000). “‘Accountability’: An Ever-Expanding Concept?”. Public Administration.

[6] Business negotiations versus business transactions in recording accounting information

[7] https://accountingverse.com/accounting-basics/analyzing-recording-classifying.html

[8] What Is the Accounting Cycle? Steps and Definition | NetSuite

[9] How to Choose the Best Legal Structure for Your Business? – Upmetrics

[10] zintego.com/blog/understanding-the-role-of-source-documents-in-accounting-transactions/

[11] Accounting Principles: What They Are and How GAAP and IFRS Work (investopedia.com)

[12] Foundations in Accountancy | Students | ACCA | ACCA Global

[13] Matching Principle – Understanding How Matching Principle Works (corporatefinanceinstitute.com)

[14] The time period principle — AccountingTools

[15] Foundations in Accountancy | Students | ACCA | ACCA Global

[16] Foundations in Accountancy | Students | ACCA | ACCA Global

[17] The monetary unit principle — AccountingTools

[18] Roles and Importance of Professional Accountants in Business | IFAC

[19] D10012634.pdf (questjournals.org)

[20] How Management Assertions Influence Financial Audits – Accounting Insights

[21] Establishing the profession in Somalia (accaglobal.com)

[22] The Importance of an Accountant from the context of Somalia – Meritadvisory

[23] Who We Are – Somali Institute of Certified Public Accountants (SICPA)