Question

Questions: 1. Briefly contrast the accounting procedures in perpetual and periodic inventory systems (5 points) 2. The December bank statement for Kowal Publishing Co. reports a balance of $13,847.59 at December 31, 2018. Kowal's accounting records, however, show a balance of $15,245.47 in the same bank account prior to preparation of the bank reconciliation. Which amount should be included in the amount of cash reported in Kowal's balance sheet at December 31, 2018? Explain your answer. (5 points)

Answer 1

Question No. 1

Periodic Inventory

The periodic system uses an occasional physical count to identify the level of inventory and the cost of goods sold . Purchases are recorded in the purchases account and the inventory account along with the cost of goods sold account are updated at the end of a set period—this could be monthly, bi-monthly, quarterly or even yearly.

The calculation of Cost of goods sold under the periodic inventory system is given below:

Opening Balance of Inventory + Cost of Inventory Purchases - Cost of Closing Inventory = Cost of Goods Sold

In large organizations with a number of products, performing a physical count can be difficult and time-consuming. That is the reason many companies/entities perform a physical count only once a quarter or even once yearly. For entities under a periodic system it means that the inventory account and cost of goods sold figures are not necessarily accurate.

Perpetual Inventory

The perpetual system keeps track of inventory balances on a regular basis, with entries made automatically whenever a product is purchased or sold. Purchases and returns are also recorded hand-to-hand in the inventory account. The inventory account balance should be accurate unless there is no theft or damage. The cost of goods sold account is also updated on a continuous basis after each sale occurs. Perpetual inventory systems employs enhanced digital technology to track inventory in real time using updates sent electronically to central databases.

Key Differences

Periodic inventory accounting systems are normally better suited for small businesses due to its cost-efficiency of acquiring the technology and staff to support a perpetual system. However, the lack of accurate information about the cost of goods sold or inventory balances could jeopardize the business decisions.

Businesses with high sales volume and multiple retail outlets need perpetual inventory systems. The perpetual inventory system has a number of advantages like the ability to early detection of inventory-related errors. The perpetual system can describe every transaction in great detail at the unit level. Under the perpetual system, the cost managers can make gauge the correct timing of purchases with a proper knowledge of the stock of goods in hand at every business place.

Question No. 2

If we do our accounting on ‘Mercantile Basis’, in our accounting records bank balance is reduced as soon as a check is issued even if not cleared through bank yet. Similarly we increase our bank balance right after depositing a check in bank even if not credited by bank. The effect of the same will be taken by the bank after sometime. Sometimes, at the year end, such effects take place in next financial year.

The effects of checks issued but not presented for payment in bank and checks deposited but not credited by the bank shall be reversed in bank reconciliation statement to get to the balance as per pass book.

However, to depict a correct and fair view of bank balance at the year end, balance as per accounting records should be taken in balance sheet.

Therefore, in current situation amount as per Kowal’s accounting records of $ 15,245.47 should be included in the amount of cash reported in Kowal’s balance sheet at December 31, 2018.