Question

Why is the perpetual inventory system superior to the periodic system for business purposes? What are the two allowance methods used to account for bad debts. Explain who would be most interested in each and why. Why is accounting important to the business would Which accounting method should be used to meet GAAP requirements and why when recording a sale when a cash discount is offered?

Answer 1

PERPETUAL INVENTORY SYSTEM

IT IS A METHOD OF ACCOUNTING FOR INVENTORY THAT RECORDS TH SALE OR PURCHASE OF INVENTORY IMMEDIATELY THROUGH THE USE OF COMPUTERIZED SYSTEMS IT IS A CONTINUAL TRACK OF INVENTORY BALANCES.

PERIODIC INVENTORY SYSTEM

IT IS AN ACCOUNTING METHOD IN WHICH DETERMINE THE AMOUNT OF INVENTORY AT THE END OF EACH ACCOUNTING PERIOD OR IN SPECIFIC PERIODS.

THE PERPETUAL INVENTORY SYSTEM IS SUPERIOR TO PERIODIC SYSTEM. THIS IS BECAUSE:

1. WHILE USING PERPETUAL INVENTORY SYSTEM WE CAN KNOW TH QUANTITY OF INVENTORY AT ANY TIME. IT IS EASIER MORE CONVENIENT TO KEEP CONTROL OVER STOCK THAN PERIODIC SYSTEM.

2. ANOTHER ADVANTAGE OF PERPETUAL INVENTORY SYSTEM IS IT PROVIDES GREATER ACCURACY DUE TO EACH INVENTORY IS RECORDING ON A SEPARATE LEDGER

3. PERPETUAL INVENTORY SYSTEM GIVES VALUABLE INFORMATION TO BUSINESS OWNERS SUCH AS DISCOUNTS , PURCHASE, AND RETURNS.

4. IT REDUCES THE PHYSICAL INVENTORY COUNTS.

5. IT HELPS IN FORMULATING PROPER PURCHASE POLICIES.

6. IT ALSO HELPS TO DETECT THEFT OR LEAKAGES IMMEDIATELY.

THE ABOVE POINTS ARE THE SOME OF THE USES OF PERPETUAL INVENTORY SYSTEM.

                                                                                                                                                 

THE TWO ALLOWANCE METHOD USED TO ACCOUNT FOR BAD DEBTS ARE;

1. THE PERCENTAGE SALES METHOD

2. THE ACCOUNTS RECEIVABLE AGING METHOD.

      PERCENTAGE SALES METHOD

IN THIS METHOD WE MUST FIRST EXAMINE HISTORICAL RECORDS. IT IS BECAUSE TO ARRIVE AT A PERCENTAGE OF CREDIT SALES THAT RESULT IN UN COLLECTABLE AMOUNTS. TO CALCULATE ANTICIPATED BAD DEBT FOR THE PERIOD, WE MUST MULTIPLY PERIOD SALES BY THIS PERCENTAGE OF SALES. THEN DEBIT BAD DEBT EXPENSE AND CREDIT ALLOWANCE FOR DOUBTFUL ACCOUNTS.

TH ACCOUNTS RECEIVABLE AGING METHOD

BY USING THIS METHOD WE CAN CALCULATE BAD DEBT EXPENSE BY CLASSIFYING ACCOUNTS RECEIVABLE OF A BUSINESS ACCORDING TO LENGTH OF TIME FOR WHICH THEY HAVE BEEN OUTSTANDING AND THEN ESTIMATING THE PROBABILITY OF NON COLLECTION OF EACH CATEGORY.

                                                                                                                                                     

ACCOUNTING

ACCOUNTING REFERS TO THE SYSTEMATIC AND DETAILED RECORDING OF FINANCIAL TRANSACTIONS OF A BUSINESS.

IMPORTANCE OF ACCOUNTING IN BUSINESS

1. IT HELPS TO KNOW THE INCOME AND EXPENDITURES.

2. IT ENSURES STATUTORY COMPLIANCE.

3. IT PROVIDES QUANTITATIVE FINANCIAL INFORMATION TO INVESTORS, MANAGEMENT ETC. IT CAN BE USED IN MAKING IMPORTANT BUSINESS DECISIONS.

4. IT HELPS TO KNOW THE FINANCIAL POSITION OF THE COMPANY.

5. ACCOUNTING HELPS TO CREATE BUDGETS AND FUTURE PROJECTIONS.

6. IT HELPS TO CO-ORDINATE AND CONTROL ALL THE ACTIVTIES IN THE BUSINESS.

7. ACCOUNTING IS AN IMPORTANT TOOL FOR MANAGEMENT. IT IS REGARDED AS "LANGUAGE OF BUSINESS."

                                                                                                                                                     

GAAP REQUIRE ACCRUAL ACCOUNTING BECAUSE IT PRESENTS MORE ACCURATE PICTURE OF COMPANY'S FINANCIAL POSITION.