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The responsibility for related transactions should be divided among different departments/individuals because it then promotes departments/individuals to double check. In turn, splitting responsibility reduces overall errors/negative actions and promotes employee/department trust.

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Dividing the responsibility for related transactions among different departments or individuals is crucial for establishing internal controls and preventing fraud. This separation helps ensure checks and balances within the organization, reducing the risk of errors or intentional misconduct. It promotes accountability, transparency, and accuracy in financial reporting, fostering a more robust and trustworthy operational environment.

Source:

Wild, J and Shaw K (2021). Fundamental Accounting Principals (Twenty-Fifth Edition, 47.) McGraw Hill LLC

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While a positive gross profit indicates revenue exceeding the direct costs of goods sold, a business can still face a net loss when operating expenses surpass the gross profit. These additional expenses, including salaries, rent, and marketing, contribute to the overall financial picture. Other factors such as interest payments, taxes, and non-operating items may further impact the business's bottom line, leading to a net loss despite a positive gross profit.

Source:

Wild, J and Shaw K (2021). Fundamental Accounting Principals (Twenty-Fifth Edition, 47.) McGraw Hill LLC

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Dividing the responsibility for related transactions among different departments and individuals is a practice rooted in principles of internal control and risk management. Having various individuals responsible for specific aspects of financial activities not only makes it less likely for mistakes or dishonest activities to happen but also guarantees that the rules set by regulators are being followed. It ensures that the financial system works smoothly, lowers the chances of things going wrong, and makes certain that the organization is playing by the rules.

Source:

Wild, J and Shaw K (2021). Fundamental Accounting Principles (Twenty-Fifth Edition, 47.) McGraw Hill LLC

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A business can earn a positive gross profit on its sales and still have a net loss when the total of all the business expenses is more than its gross sales profit. Some ways a business could have a positive gross profit but still have a net loss are interest and debt payments, operating expenses, depreciation, and taxes. The net profit considers all expenses and takes into account many factors. If these additional costs exceed the gross profit, the business may end up having a net loss despite a positive gross profit.

Source:

Wild, J and Shaw K (2021). Fundamental Accounting Principles (Twenty-Fifth Edition, 47.) McGraw Hill LLC

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The responsibility for related transactions should be divided among different departments and individuals to make sure that everyone is kept in check and that responsibility and fault are easy to understand. For example, if two employees are working at a cashier and cash goes missing, it is difficult to pinpoint which employee is at fault. Issues such as fraud and mistakes are lessened with divided responsibilities, because more people are able to keep each other accountable. In the Fraud Triangle, the side of opportunity relates to this division of responsibilities, as an employee has less opportunity and ability for misconduct or fraud when they are being watched and watching others. When the company has checks and balances to ensure everyone is acting accordingly, the entire company runs much more smoothly. Lastly, internal controls are strengthened by division of responsibilities, because there is more room for error when a task is only delegated to one. Division keeps everyone on check and makes sure that internal controls are operating the best they can.

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A business can earn a positive gross profit on its sales and still have a net loss because at this point in the accounting process, net income has not yet been calculated. Gross profit is only net sales minus cost of goods sold. It does not include other expenses, like the net income does, and even if a positive gross profit is recorded, once other expenses are deducted the net income may show a net loss. When the costs of operating or the total expenses are higher than gross sales profits, then one can still have a net loss. This is important for companies to note, and in order to rectify this issue, they need to come up with a strategy that increases gross profit without further increasing expenses. Net income considers all expenses, such as rent and labor costs, and if these exceed gross profits, there will be a net loss.

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The responsibility for related transactions to be divided among different departments or individuals is due to risk error or inappropriate behavior. This is done to make sure that one department does not mistake a mistake in things like receiving cash or checks. It is also done this way to make sure no one commits fraud and takes money away from the company. Making different departments have to carry out specific tasks help them specialize in being good in one area instead of having to know each and every step.

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The following internal control activities can be found in the workplace. All employees fit into the organizational picture of internal control, whether or not their job responsibilities are directly related to these example activities.

Segregation of Duties

Duties are divided among different employees to reduce the risk of error or inappropriate actions. For example, responsibilities for receiving cash or checks, preparing the deposit, and reconciling the deposit should be separated.

Authorization and Approval

Transactions should be authorized and approved to help ensure the activity is consistent with departmental or institutional goals and objectives. For example, a department may have a policy that all purchase requisitions and invoice vouchers must be approved by the director. It is important that the person who approves transactions have the authority to do so and the necessary knowledge to make informed decisions.

Reconciliation and Review

Performance reviews of specific functions or activities may focus on compliance, financial, or operational issues. Reconciliation involves cross-checking transactions or records of activity to ensure that the information reported is accurate. For example, revenue and expense activity recorded on accounting reports should be reconciled or compared to supporting documents to ensure that the transactions are recorded in the correct account and for the right amount.

Physical Security

Equipment, inventories, cash, checks, and other assets should be physically secured and periodically counted and compared with amounts shown on control records. For example, the periodic confirmation of equipment by individual departments is a physical security control.

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Key Internal Control Activities | Internal Audit | Michigan Tech

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A description of key activities relating to internal controls at Michigan Tech in Houghton, MI. Provided by the independent Internal Audit department.

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A business can earn a positive gross profit on its sales and still have a net loss if its total operating expenses exceed its gross profit. An operating expense is an expense that a business incurs through its normal business operations. Gross profit is revenue from sales subtracted by the costs of goods sold.

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It is not difficult for the small business owner to go from seeing the gross profit the business generates to recording a net loss. Generating a gross profit is just the first part to having a business with a positive net income on the bottom line. You may want to think of gross profit as the money you have to run the business, and you want to make sure some of that money is left over for you.

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How Can a Company Make a Gross Profit but Be Losing Money?

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It is not difficult for the small business owner to go from seeing the gross profit the business generates to recording a net loss. Generating a gross profit is just the first part to having a business with a positive net income on the bottom line.

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There are two main reasons. The first is to reduce fraud risk. When the same person is responsible for all stages of a transaction, it is easier to carry out fraud and conceal that fraud. However, by distributing responsibilities, checks and balances are created, making fraud more difficult to commit. Second, it improves efficiency and accuracy. By specializing in specific tasks, individuals become more proficient and efficient. In addition, different departments can review each other's work, making it easier to spot errors.

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If the selling price exceeds the purchase cost, the company can make a gross profit. However, even if the profit from sales minus cost of sales is positive, the final profit or loss will be negative if operating expenses, ordinary expenses, and other costs exceed the gross profit. Specifically, this is the case when operating expenses are large or when extraordinary losses are incurred.

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Kohei Shimizu

When one department is responsible for all transactions, the potential for conflicts of interest increases. Involving different departments promotes fair and transparent transactions and increases confidence in the organization as a whole. Furthermore, having different departments evaluate transactions from different aspects allows for early detection and mitigation of risks. Rather than risks being managed centrally, they can be distributed to ensure stability throughout the organization.

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Kohei Shimizu

Even with gross profit, if other expenses or costs are increasing, this can result in a net loss for the period. Examples include increased labor costs and raw material prices. In addition, an unexpected event or disaster may occur that results in an extraordinary loss. This could affect the net loss for the period.

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Dividing responsibilities between departments strengthens a businesses internal controls and helps mitigate the risk of fraud. Having the same person perform all of the accounting functions can lead to errors or theft going undetected. Maintaining a segregation of duties for critical functions (such as cash received) is an important internal control.

Sources:

Wild, J and Shaw K (2021). Fundamental Accounting Principles (Twenty-Fifth Edition, 47). McGraw Hill, LLC

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Gross profit on sales is calculated by subtracting the cost of goods sold from the revenue made from sales. A net loss occurs when a companies total expenses[not just the cost of goods sold] are more than it's gross profit on sales. A company can have a positive gross profit and still have a net loss because the net income calculation includes fixed or overhead expenses. Examples of overhead or fixed expenses are rent, salaries and insurance. For example, if you sold a hundred hats at five dollars a piece and the hats one dollar each, you would have a four hundred dollar positive gross profit. If you had to pay an employee a thousand dollars a month to operate your business, the overhead cost deducted from your gross profit would result in a net loss of six hundred dollars.

Sources:

Wild, J and Shaw K (2021). Fundamental Accounting Principles (Twenty-Fifth Edition, 47). McGraw Hill, LLC

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A business can earn a positive gross profit on its sales and still have a net loss when total expenses exceed gross sales profits. Operating expenses have to be lower than the total gross sales profit in order to reflect a positive net gain, and businesses must pay attention to this in order to be profitable. Businesses who experience this loss can correct it by increasing gross sales profit without increasing expenses or ultimately lowering expenses.

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Per the Principles of Internal Control, the responsibility for related transactions should be established for and divided between multiple (at least two) departments and / or individuals to ensure that checks and balances are in place to prevent - or at least decrease - fraud and errors. This addresses the 'Opportunity' side of the Fraud Triangle.

Sources:

Wild, J and Shaw K (2021). Fundamental Accounting Principles (Twenty-Fifth Edition, 47). McGraw Hill, LLC

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The Gross Profit of a company is the Net Sales of that company less the Cost of Goods Sold. At this point in the accounting stage, we do not yet know the company's Net Income, because that item also takes into account the company's Expenses. The Cost of Goods Sold does not include items such as administrative salaries, office rent expenses, or office equipment depreciation. If a company's Expenses are too high, it can lead to a Net Loss even if there was a Gross Profit recorded.

Sources:

Wild, J and Shaw K (2021). Fundamental Accounting Principles (Twenty-Fifth Edition, 47). McGraw Hill, LLC

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to ensure that the work of one individual acts as check on the other. Dividing responsibility for related transactions among different departments or individuals is a way to ensure checks and balances within an organization. This practice helps to prevent fraud, errors, and conflicts of interest.

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A business can earn a positive gross profit on its sales while incurring a net loss due to operating expenses that exceed its gross profit. Gross profit is the income remaining after deducting the direct costs associated with the production or delivery of a product or service. It does not include other costs such as rent, salaries, marketing and administrative costs.