Australia Failed to record inventory pruchased on credit.

[Joanne]

Hi There,

I have a question regarding the ramifications of not recording inventories purchased.

my question is.... if a client fails to record the purchase of inventory acquired on credit. The inventory and related creditors accounts should have been recorded but were not.

What will the effect this error will have on the following Assets, liabilities or Net Profit would one of the following be Understated / Overstated / No Effect

 

[MTK]

Hey Joanne
Creditors are recorded under liabilities in the statement of financial position. This means that if they are not recorded, the total liabilities will be underestimated. This does not mean however that assets are underestimated too, assets are recorded separately in the statement of financial position. And since neither assets nor liabilities are recorded in the income statement, there will be literally no effect on the net profit.

 

[Fidget]

It's an "Error of Omission" (one of the 5 types of fundamental accounting errors that don't affect the trial balance). So, nothing actually went through the books, and therefore the trial balance isn't affected, and neither is the subsequent P&L/Balance sheet drawn up from the T.B, and nobody knows anything about it until one day the phone rings and it's the supplier wanting to know when they're getting paid.

 

[Triest123]

Hi There,

I have a question regarding the ramifications of not recording inventories purchased.

my question is.... if a client fails to record the purchase of inventory acquired on credit. The inventory and related creditors accounts should have been recorded but were not.

What will the effect this error will have on the following Assets, liabilities or Net Profit would one of the following be Understated / Overstated / No Effect

=> Under Periodic Inventory System,

Net Profit => Overstated (i.e. Cost of goods sold would be understated if "purchase" failed to booked)

Asset => No effect (as the closing inventory is base on physical stocktake figure)

Liability =>Understated

 

[Mcvin]

Relating the the above question and answer from Triest123. Would the outcome still be the same under Perpetual Inventory System? I am struggling to get a full grasp on these two methods. I thought that the Asset would be understated as well.