By Ali Haji Warsame, MBA, CPA
Executive Director, Hiil Institute for Governance
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 Somalia 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]:
- 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.
- 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, nonprofit 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.
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
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