Perpetual Vs Periodic Inventory System, Microsoft Excel, Bad Debt Estimation Methods

Perpetual inventory system

The essential difference between perpetual and periodic inventory system are as follows:

Perpetual inventory system	Periodic inventory system
Under this method, cost of goods sold and merchandise inventories are not updated continuously.	Under the periodic inventory system, inventories are updated on periodic basis. Updating of inventory balance in general ledger is done when physical inventories count are occurred. Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
As it is possible to count the inventories, it is possible to apply the cycle counting. However, the account entries would vary depending upon goods purchase and selling.	Application of cycle counting is not done and the reason is attributable to impossibility of having exact count of inventories. The balances of account entries are constant (Reimers, 2014).
Under this system a,, the transactions are available in detail at the individual unit level and therefore tracking the accounting records is much easier in perpetual inventory system (Azad et al., 2016).	Accounting records are not possible to track under this system of inventory management. Errors related to inventories are not possible to determine because the information is aggregated at very high level.
Depending upon the nature of acquire, stock acquisition is recorded in either merchandize account or raw material stock description.	All the purchases are recorded in purchase asset account under this system.

Date	Particulars	Amount	Amount
5/6/2017	Account receivable A/c.	Dr.	$20,000
	To,	Sales A/c		$20,000
5/6/2017	Cost of goods A/c.	Dr.	$4,800
	To,	Merchandise A/c.		$4,800

Date	Particulars	Amount	Amount
5/6/2017	Account receivable A/c.	Dr.	$20,000
	To,	Sales A/c		$20,000
5/6/2017	Merchandize inventory A/c.	Dr.	$7,200
	To,	Purchase A/c.		$7,200

Microsoft excel was developed to assist the accounting functions such as preparing financial statements like preparation of financial statements, budgeting and preparation of cash flow statements. It enables various add-ons for the activities of financial forecasting, modelling and integration of external data to allow performing other tasks (Ismail & King, 2014).

The spreadsheet assists in performing various tasks as follows’

• Budgeting: the spreadsheet helps in preparation of budgets, profit and loss account, cash flow statement that are some of the basic documents required for the presenting the performance of any company
• External data: the data can be imported from various sources into the spreadsheet for performing further calculations. Further, the data can be stored under various database and file before importing and allowing the users to have the access on it.
• Integration: spreadsheet can integrate with various other application of accounting software. For instance, it can be used with the preferred software of the users to align with the spreadsheet part.
• Calculation: it assists to calculate the figures in seconds through using various formulas (Nowak, Levinthal & Zwaenepoel, 2015).

It is evident from above discussion that the spreadsheet can be used for day-to-day activities of business. It assists the users in performing the accounting related tasks in much less time compared to the manual system or any other software.

Journal entries

In the Books ABC Limited
Journal Entries
Date	Particulars	Debit	Credit
Amount (in $)	Amount  (in $)
31/12/2015	Bad Debt Expenses Account…….Dr	55,000
	To Allowance for Doubtful Debts Account		55,000
31/12/2015	Income Statement Account………….Dr	55,000
	To Bad Debt Expense Account		55,000
10/1/2016	Accounts Receivable Account…………Dr	10,000
	To Sales Account		10,000
20/06/2016	Allowance for Doubtful Debts Account………Dr	12,000
	To Accounts Receivable Account		12,000
15/07/2016	Allowance for Doubtful Debts Account…….Dr	21,000
	To Accounts Receivable Account		21,000
25/08/2016	Cash Account………….Dr	12,000
	To Allowance for Doubtful Debts Account		12,000
31/12/2016	Bad Debt Expenses Account………..Dr	10,000
	To Allowance for Doubtful Debts Account		10,000
31/12/2016	Income Statement Account………….Dr	10,000
	To Bad Debt Expense Account		10,000

Ledger accounts (T accounts)

Debit	Bad Debt Expenses A/c.	Credit
Date	Particulars	Amount (in $)	Date	Particulars	Amount (in $)
31/12/2015	Balance b/d	–	31/12/2015	Income Statement	–
	Allowance for Doubtful Debts	55,000		Balance c/d	55,000
		55,000			55,000
1/1/2016	Balance b/d	–	31/12/2016	Income Statement	–
31/12/2016	Allowance for Doubtful Debts	–		Balance c/d	–

Debit	Allowance for Doubtful Debts A/c.	Credit
Date	Particulars	Amount (in $)	Date	Particulars	Amount (in $)
31/12/2015	Balance c/d	55,000	31/12/2015	Balance b/d	–
				Bad Debt Expenses	55,000
	Total	55,000		Total	55,000
			1/1/2016	Balance b/d	55,000
20/06/2016	Accounts Receivable	12,000	25/08/2016	Cash	12,000
15/07/2016	Accounts Receivable	21,000	31/12/2016	Bad Debt Expenses	10,000
31/12/2016	Balance c/d	44,000
	Total	77,000		Total	77,000

In the Books of ABC Limited
Balance Sheet
as on 31/12/2016
Particulars	Amount (in $)	Amount (in $)
Current Assets:
Accounts Receivable	500,000
Less: Allowance for Doubtful Debts	44,000	456,000

Two methods for the estimation of bad-debts are as follows:

Allowance method – the term allowance method state that it is the amount from the uncollectible accounts and which is receivable in the year and records the estimation for the bad-debts under the same accounting period of sale. This method is used for adjusting the accounts receivable in the balance sheet (Reimers, 2014).  

Write-off method – under the write-off method, when an amount is established as uncollectible, then the uncollectible amount is directly charged to the financial statements as bad-debt expenses (Bullivant, 2016). For instance, if Company XYZ Limited has charged $ 5000 as uncollectible as on 31^st December 2016, then the journal entries for the transaction will be as follows:

Date	Particulars	L/F	Debit amount	Credit amount
1/1/2017	Bad Debt Expense Account…….Dr		$ 5000
	To Accounts Receivable Account			$ 5000
	(Being the amount for bad-debt is charged against account receivable account)

Receivables of any company reveal the amount of credit that is to be received by the company in future. The net amount of receivable for the company is primarily shown in the percentage form. For instance, if a manufacturer delivers a box of goods amounting $500 to the client on 1^st January, the company will have the account receivable for the amount of $ 500 (Kai et al., 2017). The amount of account receivables are normally recorded in the asset side of the balance sheet as the client is legally obliged to pay the due amount to the company some time in future. As the company expects the amount in future, it forecasts the current asset position of the company for future. The problem arises when the amount is due from an unreliable client and there is likelihood that the payment will not be received which in turn will lead to bad-debts. However, the higher percentage of receivables is always preferable as the higher percentage reveals that the company is in better position in terms of liquidity. Therefore, receivable can be used to analyse the financial position of any firm (Wu, Olson & Luo, 2014).

Details	Amount
Credit Sale to Sam Limited	$   10,000.00
Partial payment received	$     3,000.00
Promise received outstanding to 16/10/2016
Dishonour of past promise due to non-payment	$               –
Partial payment received	$               –

Debit	Accounts Receivable Account	Credit
Date	Particulars	Amount	Date	Particulars	Amount
1/10/2016	Sales	$ 10,000.00	5/10/2016	Cash	$   3,000.00
16/10/2016	Notes Receivable	$   7,000.00	5/10/2016	Notes Receivables	$   7,000.00
			22/12/2016	Cash	$   7,000.00
	Total	$ 17,000.00		Total	$ 17,000.00

Debit	Notes Receivable Account	Credit
Date	Particulars	Amount	Date	Particulars	Amount
5/10/2016	Accounts Receivable	$   7,000.00	16/10/2016	Accounts Receivable	$   7,000.00
	Total	$   7,000.00		Total	$   7,000.00

Qantas is the largest airline in Australia by fleet size, international flights and destinations. Organization has built a reputation of operational reliability, operational excellence, customer and maintenance service. Following analysis has been carried out for guiding Ramesh to make investment in the company.

Periodic inventory system

Qantas make use of several metrics that helps in depicting its performance. There are investment grade credit metrics and rating given by credit agencies. The capital structure of group is consistent with investment grade credit metrics. Operating margin is one of the metrics used by Qantas for measuring the performance and it shows the investor’s revenue left over after paying all the variable costs.  An earning per share is another metrics used by company to show its performance overtime. Operating cash flow, underlying profit before tax and three-year rolling TSR performance. In order to ensure net benefits make available to stakeholders, Qantas has made use of balance scorecard.

The comprehensive income statement of Qantas shows the statutory profit of the year and makes the comparison with the previous year. Qantas has experienced an increase in statutory profit in financial year 2016. The statement provides a segregation of comprehensive loss, statutory loss and total comprehensive income of the two consecutive years. Comprehensive loss of Qantas has increased to $ 179 million in the current year and comprehensive income stood at $ 850 million. Statement of comprehensive income depicts fair value of financial instruments. It also depicts the recognized income tax benefits.

Todd Sampson has been selected as independent non-executive director in year 2015. He has familiarity about new media, marketing and digital transformation. As the directors of company, he would bring in expertise of modern marketing techniques and digital tools necessary to stay ahead of their competitors.

Revenue seat factor is regarded as unit of capacity that is used for comparing the competence of several airlines. RSF is obtained by dividing functional income of airline group by obtainable seat miles. Higher RSF indicates that airline if generating more profits. RSF for Qantas group stood at 80.1% for financial year 2016.

EBIT represents retribution before interest and taxes and it is a measure of profit of organization and comprise of interest and expenses of income taxes. EBIT for Qantas stood at $ 820 million.

Revenue received in advance is the current liability if such revenue has received within a year. In this case, cash asset account will be debited and liability account will be credited. Revenue received in advance of Qantas for financial year 2016 stood at $ 1986 million.

Retained earnings are the percentage of earnings that is not paid to shareholders but it is reinvested in the company. Such value is recorded in the section of shareholders equity under the balance sheet statement. Retained earnings of Qantas for financial year 2016 stood at $ 100 million (Qantas.com.au 2017).

Working capital ratio is obtained by dividing current assets by current liabilities. It depicts the ability of organization to clear of its short term obligations using current assets.

Current assets for FY 2016 = $ 3458

Current liabilities for FY 2016 = $ 7028 million

Working capital ratio= (3458/7028)= 0.49

Working capital ratio of Qantas stood at 0.49 in the financial year 2016. The figure represents that company is not efficiently utilizing its current assets for paying short-term obligations. Working capital ratio is not favourable.

Following table depicts the information about current assets of Qantas for FY 2016 and 2016.

Particulars	2015	2016
Current Assets
Cash & Cash Equivalent	2908	1980
Receivables	959	795
Other Financial Assets	613	229
Inventories	322	336
Assets Classified as held for sale	136	17
Other	111	101
TOTAL CURRENT ASSETS	5049	3458

Conclusion:

From the above analysis, it is concluded that the group financial position was strengthened in the year 2016. A strong balance sheet was maintained by Qantas and has sustainable outlook. Therefore, it is recommended to Ramesh to make investment in Qantas and buy their shares. It also maintains optimum capital structure and that is in line with credit grade metrics.

References:

Azad, R., Azad, R., Azad, K., & Akbari, F. (2016). The Effect of Cost Accounting System Inventory on Increasing the Profitability of Products. Journal of Industrial and Intelligent Information Vol, 4(1).

Bullivant, G. (Ed.). (2016). Credit management. Routledge.

Ismail, N. A., & King, M. (2014). Factors influencing the alignment of accounting information systems in small and medium sized Malaysian manufacturing firms. Journal of Information Systems and Small Business, 1(1-2), 1-20.

Kai, M. A., Rui, M. I. A. O., YANG, W. C., Zhou, P. E. N. G., Bowen, S. U. N., & HU, N. Y. (2017). A management method of accounts receivable based on credit rating for rail equipment manufacturing industry. In Proceedings of the 23rd International Conference on Industrial Engineering and Engineering Management 2016 (pp. 227-231). Atlantis Press, Paris.

Klychova, G. S., Faskhutdinova, ?. S., & Sadrieva, E. R. (2014). Budget efficiency for cost control purposes in management accounting system. Mediterranean Journal of Social Sciences, 5(24), 79.

Mates, D., Puscas, A., Ursachi, A., & Ajtay, E. (2016). The influence of accounting system regarding accounting and taxation of entities. Journal of legal studies, 17(31), 58-63.

Nowak, A., Levinthal, D., & Zwaenepoel, W. (2015, March). Hierarchical cycle accounting: a new method for application performance tuning. In Performance Analysis of Systems and Software (ISPASS), 2015 IEEE International Symposium on (pp. 112-123). IEEE.

Qantas.com.au. (2017).  Retrieved 5 May 2017, from https://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf

Reimers, J. L. (2014). Financial Accounting: Business Process Approach. Pearson Higher Ed.

Reimers, J. L. (2014). Financial Accounting: Business Process Approach. Pearson Higher Ed.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & Managerial Accounting. John Wiley & Sons.

Wu, D. D., Olson, D. L., & Luo, C. (2014). A decision support approach for accounts receivable risk management. IEEE Transactions on Systems, Man, and Cybernetics: Systems, 44(12), 1624-1632.