ACC2231 – Errors Which do not Affect the Trial Balance

Accounting errors that do not affect the trial balance fall into one of six categories as follows:

  1. Error of Principle
  2. Errors of Omission
  3. Error of Commission
  4. Compensating Error
  5. Error of Original Entry
  6. Complete Reversal of Entries

Error of Principle

An error of principle in accounting occurs when the bookkeeping entry is made to the wrong type of account. For example, if a 1,000 spent on motor vehicle maintenance is debited to the motor vehicle account instead of the asset account;

The error was,
Dr Cr
Motor vehicle 1,000
Cash/Bank 1,000
Should be,
Dr Cr
Motor vehicle maintenance 1,000
Cash/Bank 1,000
Correcting entries
Dr Cr
Motor vehicle maintenance 1,000
Motor vehicle 1,000

Error of Omission

Errors of omission occur when a bookkeeping entry has been completely omitted from the accounting records.

Example, the payment 4,000 from a debtor has been omitted in both books.

The error was,
Dr Cr
– no transaction at all  nil
– no transaction at all  nil
Should be,
Dr Cr
Cash/Bank 4,000
Debtor 4,000
Correcting entries
Dr Cr
Cash/Bank 4,000
Debtor 4,000

Error of Commission

Error of commission occurs when an item is entered to the correct type of account but the wrong account. For example is cash received of 2,000 from Nur is credited to the account of Nor.

The error was,
Dr Cr
Cash/Bank 2,000
Nor 2,000
Should be,
Dr Cr
Cash/Bank 2,000
Nur 2,000
Correcting entries
Dr Cr
Nor 2,000
Nur 2,000

Compensating Error

A compensating error occurs when two or more errors cancel each other out. For example, if the fixed assets account is incorrectly totalled and understated by 600, and the wages account is also incorrectly totalled and overstated by 600, then the posting to correct the error would be as follows:

Correcting entries
Dr Cr
Fixed Assets 600
Wages 600

Error of Original Entry

An error of original entry occurs when an incorrect amount is posted to the correct accounts.

A particular example of an error of original entry is a transposition error where the numbers are not entered in the correct order. For example, if cash paid to a supplier of 2,140 was posted as 2,410 then the correcting entry of 270 would be.

A good indicator for a transposition error is that the difference (in this case 270) is divisible by 9.

The error was,    
  Dr Cr
Accounts payable 2,410
Cash/Bank 2,410
Should be,
Dr Cr
Accounts payable 2,140
Cash/Bank 2,140
Correcting entries
Dr Cr
Cash/Bank 270
Accounts payable 270

Complete Reversal of Entries

Complete reversal of entries errors occur when the correct amount is posted to the correct accounts but the debits and credits have been reversed. For example if a cash sale is made for 400 and posted incorrectly as follows:

Accounting Errors – Incorrect posting
Account Debit Credit
Sales 400
Cash 400

As you can see, by right, the nature for sales account should always be at the credit side. Same goes to the cash account. When we made a cash sale, the cash receive will increase the the cash account (asset account). Then the rule is debit the cash account.

Then to correct the accounting error the original entry must be reversed and the correct entry made, this can be achieved by doubling the original amounts as follows:

Accounting Errors – Complete Reversal of Entries
Account Debit Credit
Sales 800
Cash 800

Why it is 800? Actually there are two transaction of 400 we have to make. The first transaction is to ‘zerorize’ both account. Taking out 400 from the sales by debiting the sales account and another 400 from the cash account by debiting the amount to cancel the originally entered figure.

The second transaction, is to record the normal transaction because all the said accounts are now at ‘zero’ state. You can see that when the second transaction is done, there were 2 same transaction just to correct the errors. The amount now is double!

 

The type of accounting errors that do not affect the trial balance are summarized in the table below.

Summary of Accounting Error Types
Accounting Errors Description
Error of Principle in Accounting Correct amount, wrong type of account
Errors of Omission in Accounting Entry missed from accounting records
Error of Commission Correct amount and type of account but wrong account
Compensating Error Two or more errors balance each other out
Error of Original Entry Correct accounts, wrong amounts
Complete Reversal of Entries Correct amount and account, entries reversed

Where possible all accounting errors should be identified and corrected, if the accounting errors are immaterial to the accounts then, as a last resort, the balance could be carried in the balance sheet on a suspense account or written off to the income statement as a sundry expense.

ACC2232 – Inventory Control and Valuation

In order for the organization to stay competitive, the inventory control and valuation is important. An inventory valuation allows a company to provide a monetary value for items that make up their inventory. Inventories are usually the largest current asset of a business, and proper measurement of them is necessary to assure accurate financial statements. If inventory is not properly measured, expenses and revenues cannot be properly matched and a company could make poor business decisions.

For your benefits, let’s watch some short videos regarding the valuation of inventory.

The two most widely used inventory accounting systems are the periodic and the perpetual.

  • Perpetual: The perpetual inventory system requires accounting records to show the amount of inventory on hand at all times. It maintains a separate account in the subsidiary ledger for each good in stock, and the account is updated each time a quantity is added or taken out.
  • Periodic: In the periodic inventory system, sales are recorded as they occur but the inventory is not updated. A physical inventory must be taken at the end of the year to determine the cost of goods

Regardless of what inventory accounting system is used, it is good practice to perform a physical inventory at least once a year.

JUST IN TIME (JIT)

  • No material are purchased and no product are manufactured until they are needed
  • To reduce or eliminate inventories at every stage of production
  • Minimize storage cost

FIFO (First In First Out)

  • First material in will be the first material issued
  • Most logical method and accepted by IRB
  • Lower cost, higher profit

LIFO (Last In First Out)

  • Most recent material received, will be the first to be issued
  • Not really logical and not accepted by IRB
  • Higher cost, lower profit

WEIGHTED AVERAGE

  • Material issued is valued at average cost price
  • Accepted by IRB
Weighted Average  = Total Cost of Inventory
Unit Cost Total Units in Inventory

Like FIFO and LIFO methods, AVCO is also applied differently in periodic inventory system and perpetual inventory system. In periodic inventory system, weighted average cost per unit is calculated for the entire class of inventory. It is then multiplied with number of units sold and number of units in ending inventory to arrive at cost of goods sold and value of ending inventory respectively. In perpetual inventory system, we have to calculate the weighted average cost per unit before each sale transaction.

There are so many videos you can find in the YouTube. Varies in minutes duration but why not? Just spend a couple of minutes to understand various presentations. Who knows, you might get addicted! Hahaha

I also uploaded the a calculation sheet to calculate the FIFO, LIFO and WACO. If possible try to download this, make 3 copies and we will use them in class.

Download this… Store Ledger Card

Example – FIFO

Use the following information to calculate the value of inventory on hand on Mar 31 and cost of goods sold during March in FIFO periodic inventory system and under FIFO perpetual inventory system.

Mar 1 Beginning Inventory 68 units @ $15.00 per unit
5 Purchase 140 units @ $15.50 per unit
9 Sale 94 units @ $19.00 per unit
11 Purchase 40 units @ $16.00 per unit
16 Purchase 78 units @ $16.50 per unit
20 Sale 116 units @ $19.50 per unit
29 Sale 62 units @ $21.00 per unit

Example – LIFO

Use LIFO on the following information to calculate the value of ending inventory and the cost of goods sold of March.

Mar 1 Beginning Inventory 60 units @ $15.00
5 Purchase 140 units @ $15.50
14 Sale 190 units @ $19.00
27 Purchase 70 units @ $16.00
29 Sale 30 units @ $19.50

Example – AVCo

Apply AVCO method of inventory valuation on the following information, first in periodic inventory system and then in perpetual inventory system to determine the value of inventory on hand on Mar 31 and cost of goods sold during March.

Mar 1 Beginning Inventory 60 units @ $15.00 per unit
5 Purchase 140 units @ $15.50 per unit
14 Sale 190 units @ $19.00 per unit
27 Purchase 70 units @ $16.00 per unit
29 Sale 30 units @ $19.50 per unit

 

ACC 2232 – Economic Order Quantity (EOQ)

What is EOQ?

EOQ is the acronym for economic order quantity. The economic order quantity is the optimum quantity of goods to be purchased at one time in order to minimize the annual total costs of ordering and carrying or holding items in inventory.

EOQ is also referred to as the optimum lot size.

The formula to calculate the economic order quantity is the square root of [(2 times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost per unit to carry an item in inventory)].

EOQ 1EOQ 2
HOLDING COST

  •  Interest on fund borrowed
  •  Storage charges (rent)
  •  Insurance and security
  •  Cost of obsolescence of stocks

ORDERING COST

  •  Clerical costs preparing purchase order and transportation

ORDERING COST

  •  Cost without having stock
  •  Loss of contribution
  •  Loss of customer future sale/goodwill
  •  Production stoppage
Let’s try this!
Annual demand quantity : 1500 units
Ordering cost: RM30 per order
Cost per unit of item: RM5
Holding cost: 20% of inventory cost
Calculate the EOQ.
Another one…
Nadzmi runs a mail-order business for gym equipment. Annual demand for the AbsFlexer is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?
However, the EOQ implementation has to be based on the following assumptions….
Assumptions:

  • Demand is constant
  • Holding and ordering cost are constant
  • Unit price is constant
  • Quick delivery
  • Replenishment is made instantaneously (the whole batch is delivered at once)

BUACC 3701 – Week 3 Long Term Financial Planning and Corporate Growth

Oh! It’s you again…. hehe.

Looking at the topic that is Long Term Financial Planning and Corporate Growth, I just break it down to some general areas to get your brains working. Long term means for a very lengthy duration. It could be more than a year (if you consider one year is long enough), or it can be 5 years, 10 years, 15 years. For example, the plan formulated by our Prime Minister (hmmm…) TN50 (Transformasi Nasional 2050) a plan which heading to the year 2050 with much development we are going to do and many things we going to achieve. Talking about numbers… a lot! A lot of effort, sweat, ideas to achieve the desired TN50 (and a lot they can make too!) Hahaha.

So, what is the long term is for? It is about financial planning. The same thing you plan what you gonna be in 5 years from now. Simple, what you want to eat tomorrow, you have to start thinking from today, If you want to eat a nice succulent steak at super duper expensive restaurant, you have to start finding some money for it. Of course, you need to plan your finance, how much to have, how to save, how to spend and most importantly, how to start. So now, you have Long Term Financial Planning… It is a plan to finance you for your future. Simple, kan, kan, kan?

Lastly is Corporate Growth..Why are you studying this for? Of course, if it is not for you, then it will be for those companies you gonna serve. By having good financial planning, you can build the organization, the empire and your life, stay there for a long long time. There is nothing gonna stop you. Speaking about nothing gonna stop us from planning, Then I will treat you with an old song, Nothing’s Gonna Stop Us Now. After that, we will continue with the topic….see ya later!

Financial planning (business)

From Wikipedia, the free encyclopedia

Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The Financial Plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the time frames involved.

The Financial Planning activity involves the following tasks;—-

  • Assess the business environment
  • Confirm the business vision and objectives
  • Identify the types of resources needed to achieve these objectives
  • Quantify the amount of resource (labor, equipment, materials)
  • Calculate the total cost of each type of resource
  • Summarize the costs to create a budget
  • Identify any risks and issues with the budget set

Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set.

The role of financial planning includes three categories:

  1. Strategic role of financial management
  2. Objectives of financial management
  3. The planning cycle

When drafting a financial plan, the company should establish the planning horizon,[1] which is the time period of the plan, whether it be on a short-term (usually 12 months) or long-term (2–5 years) basis. Also, the individual projects and investment proposals of each operational unit within the company should be totaled and treated as one large project. This process is called aggregation.[2]

 

CORPORATE GROWTH

Corporate growth can be defined in numerous ways and be achieved in several strategic forms. In general, the matter of whether—and at what rate—a company is growing can be highly ambiguous. A company can experience strong sales growth, but simultaneously be losing market share and experiencing financial losses. In such a case, the company’s volume is rising, but that of its competitors is rising even faster. And, on the bottom line, sales growth means little when the company cannot turn a profit.

The same company may be gaining market share, but losing sales volume and money. This suggests that volume is falling throughout the industry, but only less so for this company. In any case, it still loses money on its operations.

Consider a third case, where a company’s earnings are rising, but it’s losing sales volume and market share. This is quite possibly the only favorable scenario, because it suggests that the company is cutting marginal operations to concentrate on what it does best—in effect, becoming smaller but more profitable.

While these criteria can provide some insight into the true nature of the firm—whether it really is growing or not—they also can provide some indication of what type of firm the company is: a dog, a question mark, a cash cow, or a star.

A dog is a company with low or declining market share and low or declining market growth, typically a description of a dying firm. A company with low or declining market share but a high rate of sales growth is a question mark, because its success depends on whether it can outperform competitors in terms of sales growth and eventually gain market share.

Alternatively, a company with low or declining sales growth but high or increasing market share is a cash cow because its position in the market is secure even though the industry in which it operates has matured. Such a company is typically overrun by successful question marks and becomes a dog. In the meantime, however, it generates a healthy income.

A company with high or growing market share and high or growing sales volume is called a star because it is outperforming its competitors. Dogs typically lose—or will lose—money, while stars typically make—or will make—money.

Whether in terms of market share or sales volume, growth may be pursued in one of three ways. In a high-growth company, either or both market share and sales volume growth are pursued vigorously, even at the expense of short-term profitability. This is a risky strategy because the company risks going bankrupt before it can achieve commanding positions in terms of market share and/or sales volume.

A slow-growth company concentrates on maintaining profitability while pursuing incremental gains in market share and/or sales volume. The slow-growth strategy emphasizes financial longevity.

The third growth strategy is based on negative growth, or retrenchment. A company in retrenchment is purposely sacrificing market share and sales growth with the singular goal of emphasizing short-term profitability. In other words, the company is abandoning operations in markets where it has the fewest advantages, vis-à-vis competitors.

When the retrenchment has run its course, the company is left with a core business in which it enjoys solid advantages over competitors, and may take advantage of its superior profitability to pursue either a high- or slow-growth strategy. In effect, retrenchment strategies establish bases for the other growth strategies.

OTHER ASPECTS OF CORPORATE
GROWTH

Whether a company is in a growth industry or a mature market, corporate growth is necessary for a company to remain healthy. Companies that compete in a growing market must grow in order to maintain market share. Without such growth, they fail to realize benefits of growth such as economies of scale and the ability to attract talented managers and employees. Especially in global markets, economies of scale allow growing companies to make significant investments in research and development and worldwide marketing.

Similarly, companies competing in mature markets must find ways to grow. Otherwise, they are forced to compete on the basis of price and face declining margins. In order to achieve growth such companies typically exit slow-growth products or market segments that aren’t very profitable and enter those markets or related markets that are growing more quickly. They may develop and nurture new businesses that will replace or complement their maturing core business. Other growth strategies for companies competing in mature markets include acquiring smaller competitors or consolidating fragmented industries into a single-source operation. Growth companies in mature industries may include electric utilities, large retailers, and railroad companies.

As desirable as corporate growth may be, a study, conducted by the Corporate Strategy Board, of 3,700 U.S. and international companies for the period from 1990 to 1997 found that only 3.3 percent of those companies had consistent profitable growth in revenues, net income, and shareholder returns for the period. Of the companies studied, only 21, or less than I percent, achieved consistent growth over the past 20 years.

John Simley ,

updated by David P. Bianco ]

Read more: http://www.referenceforbusiness.com/encyclopedia/Con-Cos/Corporate-Growth.html#ixzz4oNWEsfvB

Here are some notes that can help…

The slides…  Ross_7e_PPT_Ch04

The notes… Week 3 Additional Notes

And lastly…the questions…. hahahaha   Week 3 (Ch 4)- Tutorial Questions

And some presents for you… Look what I found!

Questions for this chapter, same like those in the outlines and ANSWERS!!!!!

rossfund_ch04 and chapter4 answers