1. Why is the perpetual inventory system superior to the periodic system for bus
ID: 2486647 • Letter: 1
Question
1. Why is the perpetual inventory system superior to the periodic system for business purposes?
2. What are the two allowance methods used to account for bad debts. Explain which outside interest would be most interested in each and why.
3. When can Corporation use the cost method of accounting for the outstanding common stock of another corporation?
4. Why is accounting importaint to the business world?
5. Which accounting method should be used and why when recording a sale when a cash discount is offered?
Explanation / Answer
A perpetual inventory system is superior to the older periodic inventory systems because it allows for real-time tracking of sales as well as inventory levels for individual items, helping to prevent stock outs. A perpetual inventory also does not need to be adjusted manually by the company's accountants except to the extent it disagrees with the physical inventory count due to loss, breakage or theft.
The allowance method creates bad debt expense before the company knows specifically which customers will not pay. Based on prior history, the company knows the approximate percentage or sales or outstanding receivables that will not be collected. Using those percentages, the company can estimate the amount of bad debt that will occur. That allows us to record the bad debt but since accounts receivable is simply the total of many small balances, each belonging to a customer, we cannot credit Accounts Receivable when this entry is recorded.
We must create a holding account to hold the allowance so that when a customer is deemed uncollectible, we can use up part of that allowance to reduce accounts receivable. This holding account is called Allowance for Doubtful Accounts. Allowance for Doubtful Accounts is a contra-asset linked to Accounts Receivable. The allowance is used the reduce the net amount of receivables that are due while leaving all the customer balances intact.
To record the bad debt, which is an adjusting entry, debit Bad Debt Expense and credit Allowance for Doubtful Accounts. When a customer is identified as uncollectible, we would credit Accounts Receivable. We cannot debit bad debt because we have already recorded bad debt to cover the percentage of sales that would go bad, including this sale. Remember that allowance for doubtful accounts is the holding account in which we placed the amount we estimated would go bad. This amount is just sitting there waiting until a specific accounts receivable balance is identified. Once we have a specific account, we debit Allowance for Doubtful Accounts to remove the amount from that account. The net amount of accounts receivable outstanding does not change when this entry is completed.
A company needs to earn a profit to thrive, and basic accounting is important for determining whether its revenue is greater than its expenses. While basic accounting is fairly simple, finding all areas where a company is spending and earning money is potentially challenging.
Investments tend to make the process more complicated. Companies need to invest to grow, but the cost of an investment changes over time. In addition, companies have the ability to change how they deal with investments in order to pay less in taxes. Accountants are able to analyze this data and determine better ways of reporting revenue, spending and investment.
Noticing changes over time is also difficult, and companies rely on accurate accounting to determine if their tactics are working well. Tracking changes in customer interest after an advertising campaign, for example, requires tracking sales before and after the campaign has begun. Accountants are able to collect this information and factor out other variables that can cause changes. Most accountants now use computer tools to help them deliver more informative analytical reports.
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