Double Entry Double entry works to improve the accuracy of the data entry since it has an

inbuilt checking system since debits equal credits for all transactions. The accuracy of the double entry is verified at the end of the reporting period

by preparing a Trial balance. Only if the Trial Balance balances will the reports be prepared which works to ensure more reliable information for stakeholders.

Using double entry requires a higher skill level than single entry systems and a manual double entry system would also be more time consuming – this may work to increase administrative expenses and thus reduce profits.

Errors can still occur. The Trial Balance may still balance yet errors could have occurred such as omitting an entire transaction, reversing the debits and credits and recording transposition errors.

Trial BalanceThe Trial Balance (TB) is a check on the recording accuracy of the general ledger at the end of the reporting period. It works to ensure the accounting reports are more accurate or reliable for stakeholders. However, there can still be errors in the accounting data even if the TB balances. Transposition errors, omitting an entire transaction or transactions, reversing the debits and credits when posting and/or posting to an incorrect ledger account can all occur yet the TB balances.

Errors where the Balance sheet/Trial Sheet balances Transposition/recording errors Reverse debits and credits Omit transaction/Transaction not recorded at all Transaction posted to wrong account

Stock card Advantages include being to identify the balance of stock on hand without

the need for a physical stocktake Further, stock cards can assist management with stock ordering, eg. The

need to re- Order or perhaps to cancel an order if stock level is excessive A disadvantage of using stock cards is that they may require more

administrative time an expense which may work to reduce profit

Special Journals Collects transactions of a like nature together, eg. All cash receipts, thus it is

quick and easy to locate transaction if required Quick and easy to locate a transaction if necessary e.g. to locate a cash receipt

transaction, locate the cash receipts journal Allows posting of totals to ledger, thus reducing detail. Less detail means the

ledger is easier to interpret/analyse

Relevance

Exclusion of cents Timeliness Reporting period Entity

Correcting Errors Transposition and posting errors – typos Transaction not recorded at all – forgotten and omitted Debits and credits are reversed Transaction posted to wrong account

Identified CostAdvantages

100% reliable cost of sales is 100% accurate and thus profit is accurate (Income Statement)

The value of stock on hand is 100% accurate (Balance Sheet)Disadvantages

Requires that stock is tagged or coded this may work to increase administration expenses

Difficult to used if the stock is sold quickly (lots of tagging and coding) Difficult or impossible to use with some stock e.g. liquids, grains, fish

First In First Out (FIFO) Once a business has adopted a cost allocation method, it should be applied

consistently. This meet the accounting principle of consistency and the qualitative characteristic of comparability

Advantages Easy to administer since no need to tag/code Less expensive Probably approximates the actual stock flow Only option for some stock types (liquids, grains and fish)

Disadvantages Lacks 100% reliability

Credit customersAdvantages

Tends to lead to an increase in sales thus gross and net profit as customers prefer credit terms

If a business operates in a competitive market place and its competitors offer credit terms, it will lose customers if it does not offer to its customers. It means they get the stock now and pay for it later, perhaps when they themselves have sold the stock. So the major advantage in offering credit is that it stimulates sales and hence profits, especially where competitors offer credit.

Disadvantages Some debtors do not pay their debts and become bad debts. Bad debts are an

expense and reduce profits

Accounting for debtors takes more time and expertise thus it increases administration expenses and thus decreases profits

Bad debts means no cash inflow from that debtor or debtors. Not receiving the cash inflow may impact on the ability of the business to meet its cash commitments in a timely manner. It may have to run down its cash reserves and/or go into overdraft to meet cash commitments

Slow paying debtors may also impact on the business’s liquidity. Most businesses give debtors 30 day terms. If debtors turnover averages, say, 50 days, the business may have to run down its cash reserves and/or go into overdraft to meet cash commitments

Debtors ControlAdvantages

Inbuilt checking as the debtors control data in the general ledger can be compared to the ledgers in the debtors subsidiary ledger. This checking may lead to more reliable data for stakeholders

Allows for separation of duties as person a can do general ledger and person b can do debtors subsidiary ledger and they can verify each others data

Reduces detail in general ledger, trial balance and balance sheet which works to enhance understanding for stakeholders

“Reduces detail in the General Ledger, Trial Balance and Balance Sheet making the information more understandable for stakeholders.Allows verification by checking the debtors control account against the debtors subsidiary ledger. Errors could be detected and corrected thus improving the reliability of the data.”

Creditors Control

1. Reduces detail in the General Ledger, Trial Balance and Balance Sheet since only total information re creditors is shown: this makes it easier for stakeholders to understand the information.

2. Provides a check as the creditors control account can be compared to the individual creditor accounts which should equal. Errors can be detected thus increasing reliability of information.

3. Separation of duties is possible, that is, person A can control general ledger and person B can control subsidiary ledgers. They can check/compare their data thus improving reliability of data.

Control Accounts Allow total information to be recorded in the general ledger, trial balance and

balance sheet and the detail to be recorded in the supporting subsidiary

ledger. The total information makes it easier for stakeholders to quickly assess the status of creditors in the general ledger, trial balance and balance sheet

A cross-check can be made between the control account and the separate subsidiary ledger which works to enhance the accuracy of the date: particularly if different people manage each

Disadvantage Using control accounts is the additional recording time and skill thus

administrative expenses required to facilitate a control account system

Subsidiary ledgerAdvantages

Can remove the detail from the general ledger. This makes posting procedures to the general ledger even more streamlined. The general ledger provides information relating to total debtors through the debtors control account

Purchasing stock on creditAdvantages

Benefit to cash/liquidity position as cash outflow associated with stock purchases is delayed (which outweighs any disadvantages)

Allows time for (some) cash inflow from debtors before cash outflow to creditors

Disadvantages Accounting for creditors takes more time and skill so this may work to

increase administrative expenses and thus reduce profit (outweighed by advantages though)

Accrual AccountingAccrual Accounting is where profit is defined as revenue earned less expenses incurred over the reporting period.

A business can earn revenue in one reporting period and receive the cash in a previous or subsequent period

Some cash payments may relate to items owing form a previous reporting period or be paid in advance for a future period

The accrual method od accounting attempts to measure the revenue and expenses that belong to the same period of time

Accrual accounting counts revenue at the point of sale, thus credit sales are counted as revenue even if the debtor has not paid the invoice/s. Conservatism states that revenue, profits and assets should not be overstated for stakeholders. If a debtor or debtors become bad debts in the next reporting period then revenue, profit (Income Statement) and assets (Balance Sheet) would have been overstated for the last reporting period which is contrary to the principle of conservatism.

Discount Revenue

Revenue is an increase in assets or a decrease in liabilities, creditors control in this example, that leads to an increase in owners equity excluding capital contribution. Thus discount revenue fits definition of revenue.

Operating Activities Day to day activities of the business Should be the major source of cash inflow in a business with a good liquidity

Financing ActivitiesIf the major contribution to cash inflow is financing activities. This probably

means the owner has injected cash into the business and/or has taken out a loan or loans. The capital contribution and/or loans could be due to current liquidity problems and repayment of any loans, with interest, will put further pressure on future liquidity.Investing Activities

If the major contribution to cash inflow is Investing Activities. This suggests the sale of non current assets which would not happen on a regular basis and should not be relied upon to assist liquidity. The sale of noncurrent assets may also decrease the ability of the business to generate future cash inflow since non current assets are designed to assist the generation of revenue in future reporting periods.

Income StatementThe income statement for a trading business will clearly distinguish between

gross profit and net profit.The more frequently the Income Statement is prepared, the more frequently

management has access to information on business performance and the ability to detect possible problems. This allows management the opportunity to implement remedial action if required to improve performance

ClassificationAdvantages for stakeholders

Correctly classified data provides better quality information for stakeholders. More ‘understandable’

Allows easier tracking or monitoring of key data such as cost of goods sold, mark-up, gross profit and other expenses over time

Allows easier calculation of key performance indicators (KPIs) such as the gross profit margin (GPM)