THE CRITICAL APPRAISAL OF ACCOUNTING METHOD IN THE PETROLEUM/PETROCHEMICAL COMPANY INDUSTRY (A CASE STUDY OF ELEME PETROCHEMICAL COMPANY LTD)
Accounting has been described as the language of business. This is true; in fact it could be seen as the language of life because everybody is involved in accounting consciously or unconsciously in their daily life.
This research work is on the topic ``A critical accounting appraisal of accounting method in the petroleum/petrochemical industry.
Accounting methods have been defined as the medium through which the fundamental accounting concepts are applied to financial transactions and to the preparation of financial statement.
It is the item of adopted in recognising, measuring and valuing an item of revenue, expenses, gain, loss or any asset or liability. Because of the existence of more than one accounting methods due to the complexity of business types and transactions arose need for the research.
In this work, therefore, the researcher has been conducted a study into the accounting methods as application in petroleum/petrochemicals industry with a direct contact at eleme petrochemical company ltd. It is directed to find out, if there exist accounting methods and whether they conform with the required standard.
The study has been divided into (5) five chapters. It had taken us through the background of the study, information about the company and variety of review literature.
In the process of research, various research instruments and methodology have been employed to arrive at each conclusion gotten. To this effect sine recommendations have been made in areas of lapses. The researcher therefore believes that if this work is not neglected by the parties involved. It will be grant help to them.
TABLE OF CONTENTS
Title Page - - - - - - - - i
Certification - - - - - - - ii
Dedication - - - - - - - iii
Acknowledgement - - - - - - iv
Abstract - - - - - - - - v
Table of Content - - - - - - vi
1.1 Backgrounds of the Study - - - - 1
1.2 Research Problem - - - - - 7
1.3 Objectives of the Study - - - - 8
1.4 Research Questions - - - - - 8
1.5 Research Hypothesis - - - - - 9
1.6 Significance of the Study - - - - 10
1.7 Scope of the Limitations of the Study - - 10
1.8 Definition of Terms and Acronyms - - 11
Review of Related Literature
2.1 Introduction - - - - - - 13
2.2 Evolution and nature of Accounting - - 14
2.2.1 Evolution of Accounting - - - - 14
2.2.2 Nature of Accounting - - - - - 15
2.3 Definition, Meaning and purpose of Accounting 16
2.3.1 Definition and Meaning of Accounting - - 16
2.3.2 Purpose of Accounting - - - - 17
2.4.1 Accounting Concepts and Conventions - - 19
2.5 The Accounting Equation and Systems - - 22
2.5.1 The Accounting Equation - - - - 22
2.5.2 The Accounting System - - - - 22
2.6 Accounting Methods - - - - - 23
2.6.1 Accounting Techniques - - - - 25
2.6.2 Revenue and Expenses - - - - 33
2.6.3 Stock Valuation Methods - - - - 35
2.6.4 Depreciation - - - - - - 38
2.7 Accounting Process, Cycle and Classification
of Accounts - - - - - - 47
2.7.1 Accounting Process - - - - - 47
2.7.2 Account Cycle - - - - - - 48
2.7.3 Classification of Account - - - - 50
2.8 Petroleum Accounting Framework - - 50
2.8.1 Petroleum Operation Historical Background - 51
2.8.2 Nature of Petroleum Accounting - - - 52
2.8.3 Petroleum Accounting Policy - - - 53
2.9 Oil and Gas Accounting Methods - - - 53
2.9.1 Full Cost Method - - - - - 54
2.9.2 Successful Efforts Methods - - - - 54
2.10 Other Accounting Treatments - - - 54
2.10.1 Depreciation - - - - - - 54
2.10.2 Valuation of Period and Intermediates - - 55
2.10.3 Transfer Pricing - - - - - - 55
2.10.4 Accounting Basis - - - - - 56
2.10.5 Accounting for the Deferred Taxes - - 56
2.10.6 Functional Currency - - - - - 56
2.10.7 Accounting for Joint Venture - - - 57
2.10.8 Cost of Providing Amenities for Communities 57
Research Design And Procedures
3.1 Introduction - - - - - - 58
3.2 Area of the Study - - - - - 58
3.3 Population of the Study - - - - 59
3.4 Sample Determination and Sample Techniques 59
3.5 Source of Data - - - - - - 60
3.6 Method of Data Collection - - - - 61
3.7 Data Presentation and Analyze Method - - 62
4.1 Introduction - - - - - - 71
4.2 Data Analysis and Results - - - - 71
4.3 Test of Hypotheses - - - - - 84
4.4 Testing of Hypotheses - - - - - 84
4.5 Discussion of Findings - - - - 92
Summary Conclusion And Recommendation
5.1 Introduction - - - - - - 93
5.2 Summary - - - - - - - 93
5.3 Conclusion - - - - - - 94
5.4 Recommendation - - - - - 95
1.1 Background of the Study
The critical appraisal of the accounting methods in the petroleum and petrochemical industry.
Accounting is concerned with providing the needed information regarding the financial activities of the economic entities, so that user’s of the information may make decision about the entities.
Accounting to Okezie (2006), Accounting does not have a partial definition considering the diversity of economic entities which cuts across sizes and boundaries. Organization entities vary in shapes and sizes, ranging from sole-trader, partnership, co-operative societies, social and religious organization, government, privates limited liability companies to Multinational Corporation.
Accounting was once defined as what accountants do; this definition is still useful today trough narrow.
Accounting to Littleton (1953), the central purchase of accounting is to make possible of the periodic matching of cost (effort) and revenue (accomplishment). Accounting may also be defined as “an art of recording, classifying and summarizing in systematic manner and in terms of money, transaction and events, which are in part of least of financial character and interpreting the result thereof (AICPA 1961).
Historically accounting development has four phases namely:
a. Stewardship Accounting:- This insist origin in the function which accounting served from the earliest times in the history of our society, the stewardship render an account periodically of their stewardship.
b. Management Accounting:-This is linked with the advent of industrial capitalism, here the industrial revolution presented a challenge to the development of accounting as a management tool, this lead to some attempt made at developing costing techniques as guided to management divisions. Accounting to Glautier (1985) the advent of management accounting demonstrated the ability and capability of accounting to develop and meet changing socio-economics needs.
c. Social Responsibility:- This is a new phase of accounting, the widens the scopes of accounting by considering the social effect of the business decision as well as their economics effects.
d. Financial Accounting:-This originated as a result of the development of large scales business which were made possible by the industrial revolution, financial accounting in connect with the emergence of two Accounting Statement – (i) Balance sheet and (ii) profit and loss account. For the disclosure of information to shareholders in joints stock companies (Okezie 1995). In Nigeria, financial accounting is gradually growing from (CAN ACT of 1965, the companies Act of 1968, Nigerian Accounting Standard Board (1982) and the recent companies and Allied Matter Decrease of 1990 (Okezie 1995).
The Nigerian Accounting Standard Board has within its short existence contributed to the development of financial accounting through the publication of the statement of accounting standard to be applied in the preparation for the financial statement in Nigeria.
The preparation and presentation of accounting information is based on some basic concepts conventions, policies, procedures and methods. These have been accepted and issued in the form of accounting standard by the bodies as the international level and the Nigerian (Robert 1999).
Accounting concepts help to describe the economic event which deals with the existence of all kinds of business units, these are contained in SASI, these are entity concepts, going concern concepts, periodicity concepts, realization concepts, matching concepts consistency concepts and historical cost concepts.
Accounting conventions – determine the rules which govern the accounting procedures there are substance overform, objectivity, fairness, materiality and prudence respectively.
Accounting policies has to do with the adoption a principles, conventions, and procedures in the preparation and presentation of financial statement judgment in required in the choice of accounting policies which are appropriate and best suited to present the “true and fair view” of a company financial positions.
Accounting procedures help to systematically record classify summaries and report transactions as well as interpret, or provide annual for proper understanding of the financial statement.
While on accounting methods is the medium though which the fundamental accounting concepts are applied to financial transaction and to the preparation of financial statement. It methods in recognizing, measuring and valuing items of revenue, expenses gains, loss or any assets or liability. There are different methods of recording financial transaction calculating profit, measuring depreciation, valuing stock etc. (Okezie 2006)
The accounting bases in one of such method there are two distinctive accounting basis, also there is the measuring of depreciation. Depreciation is the gradual fall in the value of fixed asset arising from wear to tear passage of time and obsolence the different methods of calculating depreciation are straight line, reducing balance, sum-of the digits, revaluation, annuity and sinking fund methods. These methods of depreciation base on passage of time, while the methods of depreciation based on the level of usage or output are services hours and productive output methods respectively.
Stock valuations method are LIFO, FIFO, WAP SAP. Others are specific identification standard cost base stock, latest purchases price next in first out adjusted selling price/retail inventory methods respectively (Robert 1999).
There are two basis accounting methods used by the petroleum industry. They are – the full cost method and the successful effort methods.
The full cost methods is associated with acquisition exploration and development activities are capitalize irrespectively of whether or not the activities result in the discovery of reserves. Under the successful effort methods, cost association with successful well capitalized, while cost of unsuccessful acquisitions and exploration under the methods and the basics of amortization of pulled cost are only of unit production. There also exist the third methods known as Research Recognition Accounting (RRA), but it is not recommended as well: statement of accounting standards (14 and17) related to the preparation of the financial statement of the petroleum industry.
1.2 Research Problem
No meaningful development can be achieved in any organization without adequate planning and management of its financial resources. This cannot be done without strict adherence to accounting principles and guidelines as recommended by regulatory bodies, consoderm of the important roles of the petroleum industry in Nigeria.
A survey of available data shows that the profit form petrochemical companies is in the profit from petrochemical companies is in the decrease and mostly their target are not always reached because of the methods of accounting being used in their operations. This scenario raises the following questions of concern.
- Does accounting methods exist in the petrochemical industry?
- Are all the proper booking and accounting are processes observed under the industry in questions?
- How efficient and effective is the administration machinery with regards to accounting principle and guidelines?
1.3 Objectives of the Study
(NASB) under the Statement of Accounting Standard (SAS).
The main objective of the study is to asses them financial operations and accounting methods used in the company. Specifically, this study is designed to achieved the following objectives.
1. To enhance one understanding of the effect of the used of accounting methods on the company operations.
2. To find out whether or not the area under study have actually toed the line, doctrine, principles and practice recommended by the Nigerian Accounting Standard Board
3. To evaluate the application of the various methods of accounting in the day to day running of the organization as a whole.
4. To explore avenues or strategies for achieving and ensuring effectiveness in the financed operation of the company.
1.4 Research Questions
To guide the researcher in achieving the desired objectives and addressing the problems of the study. The following questions are formulates.
1. Are there existing accounting methods in use in the operations of the company?
2. Are the methods in used in line with the company’s policies on accounting standards and operations?
3. How effective is the administrative process?
4. What are the strategies for ensuring efficiency and effectiveness?
1.5 Research Hypothesis
To statistically validates the accounting methods used in the petrochemical industry, the following hypothesis are formulated and stated in their null form.
HO: There are no accounting methods in use in the financial operations of the organization as required and recommended by the Nigerian Accounting Standards Boards (NASB) under the Statement of Accounting Standards (SAS) on petroleum and petrochemical companies operations in Nigeria.
HO: The methods used are not in line with the company’s policies on accounting standard operation.
1.6 Significance of the Study
At completion of this study, it is hoped that this would be significant in the following ways:
⦁ It will help in the understanding of the structural frame work and implementation of the accounting methods and guideline of the petroleum industry.
⦁ It will help in broading the knowledge of the general public or the difference between the operations and financial structure of the petroleum/petrochemical industry and other manufacturing companies in Nigeria economy.
⦁ The study will provide literature on petroleum/petrochemical industry (theory and practices) and make the study useful to students and researchers alike, who may be interested in the study.
1.7 Scope and Limitations of the Study
The study covers the finance and accounting departments of eleme petrochemical company limited, located in port Harcourt, Rivers State.
This coverage is limited by times, finance, and respondents attitude towards researchers.
a) Time - the limited time give to the researcher for this work serve as a limitancy factor as the researchers cannot claims to have had enough times to carryout the study.
b) Finance - the finance cost of the research work also serve as a limitation, given the fact that the researchers is a student and not a buoyant.
c) Respondents Attitude Towards Researcher
⦁ Although detected explanations made as to the purpose of this study some people were reluctant to answer and return the questionnaires passed to them in time.
1.8 Definition of Terms and Acronyms Catalysts:
Are chemical substances that are used to speed up the cracking of hydrocarbons
Cracking: Is a process whereby large hydrocarbon molecules are broken down into one through hating process and use catalysts.
Feed Stock: Is a raw material for petroleum refining petrochemical process units and liquefied natural gas plants.
Hydrocarbon: Is a compound of carbon and hydrogen or a carbon of such components which may exist in solid, liquid or gaseous forms.
NNPC: Nigerian National Petroleum Corporation
National Gas: Are liquids which can be extracted form natural gas filed liquid (NGL) facilities such as butanes and in cases ethane.
Olefins: Are classes of hydrocarbon which include ethylene and propylene.
Petrochemical: Is a chemical derive form petroleum or natural gas processing.
Polymerization: Is the process of chemically joining molecules of hydrocarbon into long chains of complex molecules.
Refining: Is the process of distilling crude oil into light or heavy fractions or cracking heavy products into usable products feeds to etc..