Factors Affecting the Adoption of a Formal Accounting System in Small and Medium Enterprises with Special Reference to Anuradhapura District

Abstract

Small and Medium Enterprises (SMEs) are the most important category in an economy as they contribute to the economic development by generating employment opportunities and consumer’s essential goods and services. But long term survival and success of SMEs is dependent on their ability to maintain a proper accounting system. But most of the SMEs have not adapted to maintaining an accounting system. The main purpose of the study is to identify factors which affect the adoption of a formal accounting system in Small and Medium Enterprises with special reference to Anuradhapura district. In the present study, one dependent variable and five independent variables are considered. The results suggest that financial accounting practices, owner/manager knowledge and size of the business have significant positive impacts on the adoption of a formal accounting system, while age of the firm and external pressure have insignificant positive impacts on the adoption of a formal accounting system by SMEs. A self- administered questionnaire was developed and disseminated to eighty respondents, and they were considered for further statistical analysis. The data were analyzed and hypotheses were tested through descriptive statistics, correlation analysis and regression analysis. However, the small sample size raises the issue of generalization, which future studies should seek to address. Further, the study recommends that SMEs can get the most benefits by adopting a formal accounting system, and accredited authorities should design specific guidelines for SMEs accounting and provide templates for accounting practices of SMEs.