Part 6

The statement was entered in the journal and accounts representing each item were opened in a new ledger. The balance was credited to surplus account and the books were in balance. Subsequently, the different expense accounts were opened as the transactions requiring their use arose.

Had the directors insisted, the accountant would have been obliged to enter real estate and machinery at the values shown in the old accounts, but an inventory of merchandise would have been necessary in any event.

A safe rule in changing the books of a corporation to double entry is to make a statement of assets and liabilities, including capital stock in liabilities. Then open the necessary accounts and credit the difference in the statement to surplus account.

In the case referred to the following facts were shown by the books:

Cash in Office $156.72 Cash in Bank 7,264.20 Accounts Receivable 11,978.50 Accounts Payable 9,647.60 Capital Stock 75,000.00

The inventories and appraisals resulted in the following valuations:

Real Estate (Land and Buildings) $38,000.00 Machinery 27,750.00 Material 11,227.60 Supplies 648.50 Goods in Process 3,984.70 Manufactured Goods 5,290.00

A cost system was desired by the management, consequently in opening new books it was necessary to provide for the needed accounts. The complete entries used to change these books from single to double entry are shown in the model journal illustrated, page 29.

EXERCISE

The books of the Star Coal Company, a corporation with a paid-up capital of $10,000.00, have been kept by single entry. The following facts are gathered from the books:

Cash in Bank $3,500.00 Personal Accounts Debit Balances 6,500.00 Cash in Office 200.00 Personal Accounts Credit Balances 2,500.00

An inventory results as follows:

Coal 3,750.00 Horses and Wagons 800.00 Furniture and Fixtures 300.00

Make necessary journal entries to change to double entry. Provide a reserve of 5% for uncollectible accounts, 10% for depreciation of horses and wagons, 10% for depreciation of furniture and fixtures. Declare a dividend of 10% and transfer balance of profits to surplus, making all journal entries to record these transactions.

TRIAL BALANCES AND COMPARATIVE STATEMENTS

=14.= The construction of comparative statements is one of the most important duties of the bookkeeper. The ability to properly classify the accounts that make up trading and profit and loss statements, and balance sheets is a valuable asset to the bookkeeper who aims to advance to the highest position.

Statements of this kind, unless properly classified, are unintelligible to the average business man. A mere statement of the balances of the ledger accounts arranged without respect to their relationship, one to the other, may show that the ledger is in balance, but does not present information of special value to the manager of a business. What he wants—and expects—is a statement from which he can readily extract desired information; it must emphasize the salient points.

The classification of accounts has already been touched upon, but no harm will be done by placing still greater emphasis on the importance of this feature. For with the right classification of accounts in the ledger, the trial balance itself will supply some very interesting information, instead of being a mere list of balances. The following rules should be observed in the arrangement of accounts in the ledger.

All asset accounts should be assembled in the first section and grouped according to their classification; i. e., active, fixed, and passive or fictitious.

The liabilities should be divided into secured or funded, unsecured or floating, and capital; the latter includes any reserve accounts that may be maintained.

The expense accounts should follow and should be subdivided as to selling, general, and administrative.

The trading accounts should be grouped and divided into purchases, in-freight, and sales.

If a manufacturing business, the manufacturing accounts should be divided as to purchases, labor, and expenses.

The advantages of card and loose leaf ledgers are apparent in connection with the proper arrangement of accounts. They readily lend themselves to any desired classification, and new accounts as needed can be inserted at any point.

For the purpose of showing some of the possibilities in the classification of accounts, we give a few examples of model trial balances.

TRIAL BALANCE

_Assets_ Cash $264.20 Bank 4,728.50 Accounts Receivable 6,270.00 Inventory (Jan. 1) 7,860.00 Real Estate 10,000.00 Furniture and Fixtures 5,000.00

_Liabilities_ Mortgage Payable $3,000.00 Bills Payable 5,000.00 Accounts Payable 6,120.00 Capital Stock 20,000.00

_Profit and Loss_ Advertising 475.00 Salesmen's Salaries 300.00 Traveling Expenses 189.70 General Expense 74.00 Interest and Discount 22.60 Building Maintenance 37.00 Taxes and Insurance 42.00 Salaries 525.00

_Trading_

Purchases 5,500.00 In-Freight and Cartage 96.20 Sales 7,219.00 --------- --------- 41,361.60 41,361.60

If the accounts in this trial balance were listed without regard to the groups in which they belong, it would merely show that the ledger balances. In its present form, it gives at a glance much valuable information. Total expenses and expenses of each class are readily ascertained, sales are shown, and expenses can be compared with sales. With the exception that it does not show the changes in the account of the inventory, this trial balance exhibits the condition of the business.

Supposing that an inventory is taken, the following statements are quickly prepared.

BALANCE SHEET _Assets_ Cash $264.20 Bank 4,728.50 Accounts Receivable 6,270.00 Inventory (Feb. 1) 7,995.00 Real Estate 10,000.00 Furniture and Fixtures 5,000.00

_Liabilities_ Mortgage Payable $3,000.00 Bills Payable 5,000.00 Accounts Payable 6,120.00 Capital Stock 20,000.00 Surplus 137.70 --------- ---------- 34,257.70 34,257.70

TRADING STATEMENT Inventory (Jan. 1) 7,860.00 Purchases 5,500.00 In-Freight 96.20 ---------- 13,456.20 Less Inventory (Feb. 1) 7,995.00 ---------- 5,461.20 Sales 7,219.00 Gross Profit 1,757.80 --------- --------- 7,219.00 7,219.00 --------- ----------

PROFIT AND LOSS STATEMENT Gross Profit $1,757.80 Advertising $475.00 Salesmen's Salaries 300.00 Traveling Expenses 189.70 General Expense 74.00 Interest and Discount 22.60 Building Maintenance 37.00 Taxes and Insurance 42.00 Salaries 525.00 Net Profits 137.70 --------- --------- 1,780.40 1,780.40 --------- ---------

The facts that sales were $7,219.00, or that the expense for salesmen's salaries was $300.00 mean nothing in themselves. It is only when compared that they exhibit vital facts. If we find that last month's sales were $8,400.00 and salesmen's salaries the same as this month, we know at once that our present selling cost is proportionately higher than during the preceding period.

The following trial balance should be compared with the preceding and the difference in their values, in respect to the information given, carefully noted. The accounts in this trial balance are arranged in the order in which they were found in the ledger.

TRIAL BALANCE Dr. Cr. Capital Stock $30,000.00 Sales 45,411.40 Accounts Receivable $7,190.00 Accounts Payable 2,720.00 General Expense 727.00 Salesmen's Salaries 3,000.00 Salaries, General 3,600.00 Interest and Discount 126.70 Returns and Allowances 942.20 Inventory 9,687.00 Purchases 26,250.00 In-Freight $396.40 Bank 6,470.00 Traveling Expense 1,759.00 Taxes and Insurance 236.50 Real Estate 25,000.00 Fixtures 3,000.00 Surplus 10,000.00 --------- --------- 88,258.10 88,258.10 --------- ---------

WORKING BALANCE SHEET

=15.= A form much used by accountants combines the trial balance with the balance sheet, trading and profit and loss statements. The compilation of the information required for this form is greatly facilitated by a proper classification of accounts in the ledger. The form is known as a working balance sheet.

A working balance sheet is shown in Fig. 15 a. The figures used are taken from the last trial balance shown, and furnish a graphic illustration of the difference between proper and improper classification of accounts. It will be noticed that the first two columns constitute the trial balance. Following this are columns which classify the accounts under the headings of _Trading, Profit and Loss_, and _Balance Sheet_. The balance of each account is extended to its proper group.

At the bottom of the form, trading and net profits are extended as a memorandum only. Since no inventory has been taken these figures are not exact, but represent approximate results on the supposition that the inventory would be practically the same as when the last inventory was taken. Of course, if there was a noticeable change in the quantity of merchandise in stock, an estimate would be made and taken into consideration in making this statement of probable profits.

EXERCISE

From the following trial balance, prepare a working balance sheet showing actual gross and net profits.

TRIAL BALANCE Bank $8,460.00 Capital Stock $25,000.00 Sales 11,201.00 Purchases 10,000.00 Returns and Allowances 400.00 Interest and Discount earned 260.00 General Expense 425.00 Salaries 360.00 Rent 300.00 Taxes and Insurance 37.60 Selling Expense 421.00 Inventory (Jan. 1st) 8,864.00 Fixtures 2,500.00 Accounts Receivable 5,680.00 Accounts Payable 1,274.00 Cash in Office 287.40 --------- --------- 37,735.00 37,735.00 Inventory (Feb 1) 9,650.00

COMPARATIVE STATEMENTS

=16.= The trial balances shown in the preceding pages illustrate some of the advantages of properly classified accounts. The information gained can be made of still greater value by the construction of comparative statements; for, as has been stated, the chief value of many of the figures shown lies in the opportunity for comparisons. Statements which permit of comparison of items of a like nature from month to month furnish a valuable survey of the progress of the business.

The following is a trial balance taken from the books of a manufacturing business, and will be used as a basis for the construction of comparative statements.

TRIAL BALANCE

Dr. Cr. Cash in Office $162.50 Bank 8,500.00 Accounts Receivable 7,500.00 Bills Receivable 4,500.00 Inventory, Materials (Jan. 1) 9,500.00 Inventory, Manufactured Goods (Jan. 1) 6,000.00 Real Estate 20,000.00 Machinery and Tools 17,500.00 Furniture and Fixtures 3,500.00 Bills Payable $7,000.00 Accounts Payable 5,000.00 Capital Stock 50,000.00 Surplus 10,000.00 Undivided Profits 900.00 Advertising 1,200.00 Salesmen's Salaries 1,000.00 Salesmen's Expenses 720.00 General Expense 430.00 Interest and Discount 97.50 Salaries Administrative 900.00 Factory Expense 850.00 Factory Labor 1,750.00 Repairs to Machinery 150.00 Depreciation 175.00 Taxes and Insurance 25.00 Material Purchases 4,600.00 In-Freight and Cartage 126.00 Sales 16,491.00 Returns and Allowances 400.00 --------- --------- 89,488.50 89,488.50 --------- ---------

In Fig. 16 _a._ is shown a working balance sheet in which the accounts as found in the trial balance are segregated in the four groups, _Manufacturing, Trading, Profit and Loss_, and _Balance Sheet_. First, the trial balance is entered in the two columns at the left. Next, the manufacturing account is made up by extending the inventory of material at end of preceding period, the manufacturing expense accounts, material purchases and freight on same. This gives the total charges to manufacturing account, but not the month's expenditures, for the present inventory of material must be considered. An inventory shows the value of material in stock to be $4,550.00. Deducting this leaves $12,626.00, the total operating cost for the month. To find the cost of goods completed during the month an inventory is taken of work in process, the amount is deducted from the total operating cost and the result, $9,126.00, represents cost of goods manufactured.

The trading account is now made up, this $9,126.00 taking the place of purchases, and the gross profit is carried to profit and loss account.

The manufacturing, trading, and profit and loss accounts are now ready for analysis, which is made on a percentage basis. In the analysis of the manufacturing account, the total operating cost is used as a basis and the different items of manufacturing cost are figured on this basis. We find that the expense items are 23.3% and the material 76.7% of the total which furnishes a tangible basis for a comparison of the same items in other months. Having the percentage of each item, we can note the fluctuations from month to month, and know where to retrench if any item appears to be increasing too rapidly.

The basis of the analysis of the trading and profit and loss accounts is the turnover. Figuring on this basis, we find the total expenses, exclusive of manufacturing costs, to be 41% of the turnover, and the net profit, 20%. The gross profit is 60% of the turnover. Ordinarily the total expense and net profit would equal the gross profit, but in this case there is a capital profit of $97.50 from interest earned.

Sometimes these comparative percentages are figured on the gross sales, but the turnover is considered the proper basis, for it is less subject to marked fluctuations. The sales in one month may show abnormal profits, while in the next these profits may return to normal. If based on sales, the cost percentages would fluctuate accordingly, when in reality they may have remained stationary.

PROOF WITHOUT A TRIAL BALANCE

=17.= A comparison of the accounts in the last trial balance with the working balance sheet shows them to be arranged in the order in which they would appear in the balance sheet and profit and loss statements.

It should be remembered that manufacturing and trading accounts are subdivisions of the profit and loss account, and that the profit and loss account is a statement of income and disbursements including differences in inventories.

If it is desired to show the actual condition of the business at the end of each month, the inventory must be added. There may be objections to actually closing the books each month, but the complete statement can be made by adding the current inventories as shown in the working balance sheet illustrated. The amounts of these inventories and the gross and net current profits are, in such cases, memoranda only. The inventories may be arbitrary estimates, and while the results shown may not be exact they will be found of value for purposes of comparison; and care in estimating inventories will greatly increase their value.

Reference to our working balance sheet shows that the profit and loss statements—with current inventories added—agrees with the balance sheet in one respect. The current profit exactly agrees with the difference between assets and liabilities as shown by the balance sheet.

To prove the ledger without the usual trial balance these rules should be followed:

_First:_ Make up trading and profit and loss statements, taking balances direct from the ledger accounts, deducting current inventories.

_Second:_ Make up balance sheet using current inventories in listing assets.

If the current profit and loss agrees with the difference between assets and liabilities the ledger may be assumed to be in balance. This is, in effect, a sectional trial balance, since the accounts in the trial balance are all represented in the two statements. The reliability of this proof is not affected by the fact that the inventories are arbitrary—and perhaps inaccurate—since the same amounts are used in both the balance sheet and profit and loss statement.

BOOK INVENTORIES

=18.= To make the foregoing plan still more effective, perpetual inventories should be carried in the ledger. A perpetual or book inventory is an account showing the value of merchandise received, sold, and on hand. If an accurate account is kept of merchandise received and sold, the perpetual inventory will show the amount that should be in stock. To prove the accuracy of the account, it is necessary to take an actual inventory of the merchandise in stock, just as it is necessary to count the cash before we can know that the amount on hand agrees with the cash account.

A detailed perpetual inventory should be kept on cards or in a loose leaf book. A card or sheet is used for each article or class of material carried in stock. The sheets or cards should be arranged alphabetically according to the names of the articles. To make the system effective one person should have charge of these records and no goods should be taken from stock without an order or other proper record.

At the end of the month the receipts will be shown by the purchase accounts. The deliveries will be tabulated from the cards, and the necessary adjustments made on the ledger account. Adjustments should be made by journal entry debiting inventory accounts and crediting trading account for increase in inventory, and _vice versâ_ for decrease in inventory.

Fig. 18 _a._ is a typical form of stock ledger sheet for a loose leaf book. The form should in all cases be made to suit the requirements of the business in which it is to be used.

Fig. 18 _b._ is a card form of stock ledger which gives more detailed information about the article in stock. On the top line is recorded the name of the article, size or kind, where kept, and date of verification of the record. The second line gives the unit and maximum and minimum limits. The unit represents the unit in which the article is bought—as pounds, tons, dozen, feet, yards, etc. It is customary to establish a minimum limit, below which the stock is not allowed to go before re-ordering, and a maximum limit of a quantity sufficient for the needs of the business. The record of receipts and disbursements includes a detailed record of cost, including freight and cartage, and columns for costs per unit. This makes it possible to calculate the value of the stock in hand without referring elsewhere for prices.

In some lines of business it is possible to ascertain the quantities sold, at the end of each month, from the sales records. This applies where an article is sold in but one grade or size, and necessitates keeping sales records which show sales of each article. An example is the coal business. For such a business a card like the one shown in Fig. 18 _c._ can be used to good advantage. This provides for a monthly record of purchases and sales.

In this illustration the manner of indexing is shown. The cards are first arranged alphabetically under the names of the articles. If there is more than one size, the cards bearing the records of a certain article are filed in the order of their sizes. Indexed in this manner any card that may be desired is quickly found.