Accounting -weaknesses

• Resource conservation


  The practice of caring for natural resources such as air, water, soil, minerals, plants, and animals, involving using resources judiciously and sustainably, reducing waste, and protecting ecosystems
• Resource conservation is essential because resources are limited and need time to renew
• Resource conservation will help to ensure the long-term availability of resources and minimize environmental impact
• Trial balance


  A list of all the balances of the ledger accounts divided into debit and credit columns, with each column totaled, where the total of the debit column should always equal the total of the credit column
• Errors Found by Preparing a Trial Balance

  • Failing to record part of a transaction in the ledger
  • Making two debit entries or two credit entries in the ledger
• Errors Not Found by Preparing a Trial Balance

  • Making an error of omission (failing to record a transaction)
  • Making an error of commission (wrong ledger account but correct side)
  • Making compensating errors (two independent errors of equal amounts which cancel each other out)
• Internal control


  The overall policies and procedures which a business adopts to ensure assets are protected, financial reports and records are accurate and reliable, business is run efficiently, and all laws and regulations are followed
• Main Principles of Internal Control

  • Separation of Duties
  • Clear lines of responsibility and proper authorisation
  • Appropriate security of assets
  • Maintaining an efficient accounting and documenting system with verification checks built in
• Cash Control


  1. Separation of Duties

  2. Clear lines of responsibility and proper authorisation

  3. Appropriate security of assets

  4. Maintaining an efficient accounting and documenting system with verification checks built in
• Internal Control over Accounts Receivable (or Debtors)

  1. Separation of Duties

  2. Clear lines of responsibility and proper authorisation

  3. Appropriate security of assets

  4. Maintaining an efficient accounting and documenting system with verification checks built in
• Internal Control over Accounts Payable (or Creditors)

  1. Separation of Duties

  2. Clear lines of responsibility and proper authorisation

  3. Appropriate security of assets

  4. Maintaining an efficient accounting and documenting system with verification checks built in
• Internal Control Over Non-Current Assets

  1. Separation of Duties

  2. Clear lines of responsibility and proper authorisation

  3. Appropriate security of assets

  4. Maintaining an efficient accounting and documenting system with verification checks built in
• Limitations of Internal Control

  • Human involvement
  • Collusion
  • Costs may outweigh the benefits
  • The business is too small to employ extra staff
  • Computer fraud
• Human involvement


  The internal control systems will only be as effective as the personnel involved. Some individuals will find ways around internal control procedures - this is when errors or fraud may occur.
• Collusion


  When two or more people conspire as one to commit a fraud. Internal control systems are usually only designed, through the segregation of duties, to prevent one individual from perpetrating a fraud on their own.
• Costs may outweigh the benefits

  The cost of introducing an internal control procedure may outweigh the benefits to be achieved. The business must consider the cost as well as the impact on staff, customers and business operations.
• Business too small to employ extra staff

  The cost of implementing ideal internal control systems may be too high for a small business. In a small business the owner will need to do a lot of the checking, authorising, verification and monitoring procedures.
• Computer fraud


  Because computer accounting systems often only involve one person, segregation of duties and checking procedures is more difficult to implement. The individuals who input data and operate the computer system often do so without supervision and therefore it is difficult to detect any fraud they may commit.
• To Outweigh


  To have a greater impact or significance than. In this context, the cost of implementing the procedure might be excessive or disproportionate to the benefits achieved.
• Benefits


  The advantages or positive outcomes achieved by implementing an internal control procedure, such as increased efficiency, reduced errors, improved compliance, etc.
• Cost


  The resources, time, and effort required to implement and maintain an internal control procedure.
• Short-Term Sources of Finance

  • Bank Overdraft
  • Trade Credit
  • Factoring
  • Credit Cards
• Bank Overdraft


  A bank lending agreement under which a business is allowed to make payments in excess of the current 'cash at bank' balance
• Bank Overdraft


  • Jonny's Tiling has $400 in his business cash at bank account, and needs to buy some supplies costing $500. With an overdraft previously arranged with the bank, Jonny could buy the $500 supplies using the $400 in his account and overdraft borrowing from the bank of $100.
• Bank Overdraft


  • The purpose is to provide a temporary short-term loan for the next 30 – 90 days and is used for buying inventory and paying ongoing bills rather than to finance long term non-current assets
  • The bank sets an overdraft limit (a maximum amount the business can be overdrawn by)
  • The balance of the 'cash at bank' account will go up and down depending on deposits and withdrawals, but must not exceed the overdraft limit
  • If the cash at bank ledger account is a debit balance ('in the black') it will be shown as an asset; if there is a credit balance ('in the red') it is shown as a liability
  • The benefit is its flexibility – the amount borrowed goes up and down as the funds are needed and the firm is only charged interest on the amount borrowed
  • Banks usually expect the overdraft to be 'fully fluctuating' (i.e. the account should occasionally go into the black) so it is not suitable as a long-term funding source
  • Interest needs to be paid and the rates are usually quite high
• Trade Credit


  A business buys on credit and is given a period of time to pay (perhaps as much as one or two months), it is effectively using the supplier's funds to help finance the business
• Trade Credit


  • If the supplier does not charge interest on the amounts owed, this effectively amounts to an interest-free short-term loan
  • This is only a very short-term means of freeing up cash temporarily and businesses should beware of extending the time of repayment
  • Not only may the supplier start charging high interest on amounts owing, but they might also threaten to cut off supply until amounts owing are paid, which could worsen what is probably already a bad situation
• Factoring


  A process where a business sells its accounts receivable (debtors) to a finance company for an amount less than the full value and receives cash immediately
• Factoring


  • The finance company then collects the full amount owing from the debtors over a period of time
  • The difference in value is the finance company's profit on the exercise
  • The advantage is that the business frees up money otherwise tied up in accounts receivable, which can be used more productively elsewhere and also does not have the cost and aggravation of following up slow-paying debtors
  • The disadvantage is the commission that has to be paid to the finance company
• Credit Cards


  May be used to pay for some expenses and supplies
• Credit Cards


  • Have the benefit of convenience but they are a very expensive form of short-term finance; if the credit card balance is not paid off within the interest-free period
  • Interest rates on unpaid credit card balances are usually more than twice the rate applicable to term loans
• Long-Term Sources of Finance

  • Term Loans
  • Leasing
• Term Loan


  A source of finance from a bank or a finance company that is borrowed for a set period of time and has to be repaid at the end of this term (often a period of 1- 10 years)
• Term Loans


  • May be secured or unsecured
  • If a loan is secured, the lender holds the title to certain assets (usually land) so that if the loan is not repaid, the lender can sell the asset to recover their money
  • An unsecured loan is preferable for the borrower, since they will not be placing their own or the firm's assets in direct risk
  • However, as the risk to the lender is higher for an unsecured loan, the rate of interest charged tends to be higher than for a secured loan
• Leasing


  An agreement to rent an asset such as plant and equipment, land and buildings, motor vehicles for a fixed period of time rather than buying the asset
• Leasing


  • The business has control and use of the asset but legally does not own the asset
  • At the end of the lease period, the asset is returned to the lessor (operating lease) or an amount is negotiated to buy the asset (finance lease)
  • The benefit is that the firm can have the use of the assets without having to pay for their purchase
  • The disadvantage is that the lease payments must be kept up, even in hard times and the business does not have the right to sell the assets within the lease period nor, in the case of buildings, benefit from any increase in value over time
• Guarantor


  A person who is responsible for paying back the borrowee making sure it is guaranteed
• A guarantor is only needed if the borrower does not have enough money or can't pay back the Creditor's money that they let the debtor use
• Interest rate


  The financial institution would need to consider the risk if interest rates increased and if whoever they are lending to is still able to make capital and interest repayments
• Return of Investment


  A performance measure or indicator used to evaluate the efficiency of an investment or compare the efficiency of several investments, usually calculated every year