Response to Question 1
Eisen (2007) defines a debit balance as a positive value which represents the net balance of the transaction. Debit balance represents the amount of money owned at the close of the transaction. He refers to credit the balance as the amount of money remaining in a margin account or cash account after all obligations get paid for or cleared. In accounting, increase in the sum of one account has an equal or greater than the decrease in another account.
Therefore, depending on how the increases or decreases in the account get recorded, the normal balance of a given account is either a debit balance or a credit balance. For example, debits increase assets accounts while credits increase liability accounts. As such, assets accounts usually have a debit balance while asset accounts reflect a credit balance. Although owner’s equity is positive when debit balance is higher than the credit balance, it does not necessarily mean that debit balance is more favorable than a credit balance. As long as a business firm can pay for liabilities, there is no much difference (Eisen, 2007).
Response to Question 2
Warren et al. (2013) defines payment terms as rules that suppliers impose on customers regarding the payment for goods and services supplied. These rules are imposed to ensure that customers pay for supplies received within a reasonable period. Some suppliers extend discounts to their customers to encourage them to accelerate their payments. They classify accounting payments into two components (Warren, Reeve & Duchac 2013).
(a) Discount terms.
Discount term is a statement composed of two parts. The first item constitutes the percentage of discount allowed, and the second part composed of the number of days within which customers should make payments to the supplier in order to qualify for a discount. For example, 1/10 implies that the supplier is willing to give the customer 1% discount if the customer makes payment o goods and services supplied within a span of ten days (Warren, Reeve, & Duchac, 2013).
(b) Net terms.
Net terms are a statement indicating when the full amount of goods and services supplied to the customer is due for settlement or payment. Therefore, terms of “net 1” also abbreviated as “n/15” implies that the customer should make full payment of goods and services supplied within fifteen days. Therefore, by offering 2/10 and n/45, Luo Company’s competitor has the best terms of payment. Customers are getting a bigger discount and also a longer time to pay for goods and services supplied to them on credit. Such favorable terms of payment may translate into more sales hence a wider market share. Thus, if Luo Company can switch to the terms of payment used by its competitors, its action would cancel the competitive edge enjoyed by the competitor. Customers will have similar offerings and would feel comfortable buying on credit from either of the two companies. The sales team will not have a unique selling point and competition will be leveled (Warren, Reeve, & Duchac, 2013).
According to Foss et al. (2009), inventories consist of finished goods, raw materials and work in progress held by a firm in its course of doing business, either for purposes of production or sale. They suggest that after purchase, the cost of inventory may include delivery costs, custom or excise duties and purchase price less any discount allowed by the seller. Perpetual inventory system updates costs of goods sold, all inventories, allowances accounts, and purchase returns, continuously after every sale, return transaction or purchase (Foss, Fromm, & Rotenberg, 2009).
Whereas perpetual system makes two journal entries of sales transaction, one on cost of goods sold and the other on the sale value of inventories. Periodic inventory system, on the other hand, calculates inventories once at the end of a given time. It credits all purchase returns in inventory accounts and debits every purchase direct in the inventory account. Periodic system just makes one entry at the end of a given time.
Further, closing entries are only done in periodic inventories to update cost of goods sold and inventory. To determine the value of closing inventory and cost of goods sold through periodic costing, the weighted average cost of each unit on the inventory gets multiplied by the number of units sold and remaining units at the end of the inventory period. Average cost system calculates the cost of goods sold and cost of closing inventories for a given period using weighted average cost of a unit of inventory (Foss, Fromm, & Rotenberg, 2009).