Part 9

CASH DISBURSEMENTS Funeral expenses 30.00 Expenses of probate 200.00 General legal expenses 400.00 Repairs to building 220.00 Stationery, postage, etc. 10.00 Accountant's fee 80.00 Debts of deceased 500.00 Taxes 800.00 Insurance 10.00 George Williams, Jr., on account of legacy 2,200.00 John Williams, on account of legacy 2,500.00 Fred Williams, on account of legacy 2,220.00 Mary Williams, on account of legacy 3,100.00 George Robinson, on account of legacy 960.00 --------- 13,230.00 =========

The inventory at the date on which they wish to account is as follows:

Stocks and bonds $1,000.00 Mortgages 1,280.00 Cash in bank 877.00

Make up summary statement of the Executor's Accounts showing the balance due each legatee.

ACCOUNTS WITH TRUST PROVISIONS

=8.= In the accounts shown in the preceding illustrations the entire estate is distributed by judicial decree. When all of the property has been distributed, the custodian accounts will have been closed into the personal estate account, which in turn is closed by the distribution of the estate. In many cases the will of the deceased provides that certain beneficiaries shall have a life interest in certain of the assets. Quite frequently the widow is given the income on certain investments which will revert to the estate at her death. This is illustrated in the following example of trust accounts:

Edward Brown died on June 15, 1907, leaving a will which elected that after payment of all just and lawful debts the following legacies should be made:

To his widow, that part of the real estate consisting of his residence, the household effects therein, and the income from $50,000.00 to be invested.

To his son and daughter, $20,000.00 each, and an equal share of the above $50,000.00 at his widow's death.

The inventory made up for the preliminary accounting was as follows:

Cash in house $200.00 Cash in bank 1,500.00 Household effects valued at 2,500.00 Stocks 40,000.00 Book accounts 20,000.00 Merchandise, fixtures, and stock in trade 25,000.00

The real estate consists of

The residence of the deceased, valued at 15,000.00 5 houses valued at 15,000.00 (to be sold according to will)

REALIZATION AND LIQUIDATION ACCOUNTS

=9.= A _realization and liquidation account_ is an account showing the result of the liquidation of a business or an estate.

It is debited with the total assets as shown by the _balance sheet_ or _statement of affairs_, and is credited with all liabilities to outside creditors. The account is subsequently credited with the amounts realized on assets, and debited with liabilities liquidated together with the expenses of realization and cost of liquidation.

Realization and liquidation accounts are frequently prepared in the form of an _account of charge and discharge_ as shown in the preceding pages for executor's accounts.

STATEMENT OF AFFAIRS

=10.= A statement of affairs is frequently confused with a balance sheet. This is because, like a balance sheet, a statement of affairs exhibits the resources and liabilities of a business. The difference lies in the fact that a statement of affairs is made up partly from information gained from the books and partly from information secured from other sources.

A statement of affairs is used chiefly in the preparation of a statement of the condition of an insolvent concern, or one whose affairs have been, for any reason, placed in charge of an Administrator. In a going business, all facts that have a bearing on its financial standing should be recorded on the books, when the statement will be made in the form of a balance sheet.

Statements of affairs of a going business are sometimes made when it is desired to make a showing for a special purpose, or at a date other than a regular closing date. When the books have been improperly kept, a statement of affairs, or statement of assets and liabilities, is necessary to get all of the facts properly recorded.

=11. Statement of Affairs of a Bankrupt.= A statement of affairs of a bankrupt is prepared on a somewhat different basis than a similar statement for a going concern. Such a statement is prepared for the benefit of creditors, and should be based on the probability of the creditors receiving their claims in whole or in part.

On the left-hand side of the statement, the liabilities should be listed, showing whether they are actual, contingent, or provisional; which are preferable or ordinary, or secured partly or wholly by assets held by creditors of the concern as security for their claims. On the right, the assets of the concern should be shown. These should be classified as to whether they are free for distribution among the ordinary creditors or subject to special liability or claims and which must be liquidated before the assets can be released for distribution.

The assets may be listed on the basis of their value in a going concern, or on the basis of the prices they are estimated to bring at forced sale. The best practice is to list the assets to show, in one column, their nominal value, and in another column the amounts they are expected to realize. The statement is prepared for the express purpose of showing the probability of creditors—preferable, secured, partly secured, and ordinary—receiving their claims in full or being obliged to accept a dividend. In preparing such a statement, therefore, the investigation should be extended beyond the mere bookkeeping records. While the statement should be based on the properly balanced books of account, it must be supplemented by information from other sources.

The statement of liabilities should include, not only all of the liabilities shown on the books of the debtor, but all other enforcible claims, including contingent liabilities on account of the debtor's name being on commercial paper as an endorser.

Preferable claims for taxes, wages, and salaries which must be paid in full out of the assets of the estate, should be deducted from the assets in order to show the net value of the estate available for distribution among ordinary creditors. The details of such claims should be included among the liabilities, but without extending the amounts to the total column.

Claims of secured creditors also are entered on the liabilities side of the statement, but are not carried to the total column. Such claims are deducted from the assets forming the specific security held, the balance only being included among the assets available for distribution and carried to the total assets column.

Partly secured claims are entered among the liabilities, but the amount to which they are secured is deducted, and the balance, which must take the same chances of payment as other unsecured claims, is entered in the liabilities column. The corresponding assets are entered on the assets side but not extended.

These adjustments are necessary to show clearly the net assets that will be available for the ordinary creditors, and the total amount of claims to be satisfied out of these assets.

Every statement of affairs should also have appended to it schedules showing the fullest particulars of the different entries which appear in the statement. The names and addresses of all creditors should be given and the nature of the debt, whether a trading debt or for borrowed money, should be clearly shown. Full particulars of any security held should also be given.

It is much more difficult to ascertain the value of the assets of a bankrupt than the amount of the liabilities. While it is comparatively easy to get at the cost or book value of the assets, if the books have been properly kept, it is usually necessary to write off a considerable portion of this value to arrive at the amount likely to be realized on forced sale. It is usually advisable, therefore, to call in an appraiser, familiar with the line of business involved, to set the values of the assets on the basis of a going business and on forced sale.

By showing the book value of the assets and the values they are expected to realize, the probable deficiency as a result of the liquidation of the estate is readily seen. Book debts should be classified as good, doubtful, and bad. Good debts are extended at face value, doubtful debts at the amount they are expected to realize, while the bad debts are entered on the statement without extending any amounts.

Assets should be listed in the order of their availability, those most readily realized being placed first. At the bottom of the statement, in the form of a note, the dividend available for ordinary creditors, exclusive of expense of realization and liquidation, is shown.

A statement of affairs is shown, Page 27, which will make the explanation clear.

Every statement of affairs should, when possible, be accompanied by a _deficiency account_. The purpose of the deficiency account is to show, as far as may be, the cause of insolvency. This account is credited with the losses and shrinkage in the estate shown by the statement of affairs, the losses shown by the books, and the withdrawals of the owner or partners. It is debited with the capital at the last known date of solvency, all additions of capital, and all profits shown by the books. The balance is the net amount of the deficiency, and should agree with the amount shown by the statement of affairs. A deficiency account is shown in connection with the illustration of a statement of affairs.

STOCK BROKERS' ACCOUNTS[4]

=1.= The principal feature of brokerage accounting is that such companies are not supposed to make investments upon their own account, but to act as intermediaries or agents for those who desire either to buy or sell.

Footnote 4:

_Copyright, 1909, by American School of Correspondence._

As this is the case, such companies' profits depend entirely upon the commission charged their clients, which is charged whether they buy or sell for a client. There is also a margin of profit on the interest account, as large brokerage firms are enabled to secure money from banks at very favorable rates, sometimes much lower than the regular six per cent charged to customers.

The legitimate broker actually buys and sells, as instructed by his client. If a customer instructs the broker to buy one thousand shares of D. & R. G. preferred at 88½, the customer deposits the margin required by the broker, usually 10 per cent, and the broker at the first opportunity thereafter, buys in open market the one thousand shares of D. & R. G. stock ordered, paying in full for the same. The customer may have a certain time to take up this stock, say thirty or sixty days, but as he is still indebted to the company for ninety per cent of the purchase, he is required to pay six per cent interest upon the deferred payments until such time as the stock is finally taken up and paid for.

LARGE CAPITAL REQUIRED

=2.= It will be seen that in a multitude of transactions of this character, a very large amount of money is required by the broker, to carry on his business successfully. As very few of them have the amount of capital necessary, they resort to bank loans. Banks are very willing to loan money with listed stocks as collateral security, and frequently do so at favorable rates for the broker. This rate is determined by the condition of the money market, but is invariably less than the rate of interest charged to the client.

GRAIN PURCHASES

=3.= Purchases of grain at a stipulated price differ from stock purchases, inasmuch as the full amount of the purchase does not have to be paid until the delivery of the goods, although there are frequently charges, such as storage and insurance, which must be made upon long time purchases. These charges do not accrue, however, until after delivery. If a customer buys fifty thousand bushels of wheat in April for September delivery, the purchase is made by the brokers at the earliest date possible, in order to avoid any fluctuation of the market. When the broker makes the purchase he pays over the amount necessary to secure the same. If the deal is carried through to maturity, the grain is delivered to the broker who has made the purchase for his client, and is in turn delivered to the client upon the payment of the balance due, including all charges upon the same.

It is frequently the case, however, that before the actual delivery takes place, the client has ordered the broker to sell a sufficient amount to cover the deal. This may be either at an advance or a decline from the price purchased, but in either case the broker receives his commissions for both transactions—buying and selling.

BULLS AND BEARS

=4.= Investors who are always figuring upon an advance in prices are termed _bulls_, and those who are confident of lower prices are termed _bears_. If a seller sells for future delivery what he does not own, he is termed _short_ and becomes temporarily a buyer, in order that he may have a sufficient amount to fill his orders. If a buyer holds stock or grain for a rise, or contracts for future delivery, he is termed _long_ and becomes temporarily a seller, seeking to bring his holdings down to the normal demand.

EXACT BOOKKEEPING NECESSARY

=5.= It will be seen from the nature of the business that the bookkeeping department must be very exact, careful in its dealings, and as prompt as a bank in its action. Every precaution must be taken to safeguard the broker and protect the customer. The accounts must show, with each transaction, the brokerage or commission charges and, as in active times the transactions are very numerous, they must be quickly and accurately recorded in the books of the company.

BROKER'S COMMISSION

=6.= The percentage or commission due to the broker is included in the amount deposited to protect the deal, which is called a _margin_. If there should be a decline in price of either stock or grain, sufficient to cause the broker to feel insecure, he always reserves the right to call upon the customer for an additional deposit, even though the time of delivery has not yet arrived. In case the customer fails to make such additional deposit, the broker can sell the securities, grain, or other purchase, at once, in order to protect himself; the amount primarily deposited by the customer is thereby forfeited.

All orders for the purchase and sale of any article are received and executed with the distinct understanding that _actual delivery_ is contemplated and that the party giving the order so understands and agrees.

SECURITIES

=7.= It is understood and agreed between the broker and his client, that all securities carried in his account, or deposited to secure the same, may be carried in the broker's general loans, and may be bought or sold at public or private sale without notice, when such sale or purchase is deemed necessary by the broker for his protection.

It is also understood and agreed that the right is reserved by the broker to close transactions on all accounts without notice, when protection is exhausted, or when, in his judgment, it is near enough exhausted as to endanger the account, and the broker reserves the right to settle contracts with his client, in accordance with the rules and customs of the exchange where the order is executed.

BUCKET SHOPS

=8.= The class of brokerage concerns termed _bucket shops_ are those which do not actually carry out the orders of their customers, who neither buy nor sell anything, but who expect quick deals, frequent changes and, speaking plainly, merely _gamble_ with their clients, allowing them to take whichever side they prefer. The large margin which this fraternity receives is a commission on deals whether they win or lose.

In order to maintain at least a pretense of legality, there must be an _actual_ transfer of all stocks and commodities speculated in. The broker must acquire nominal possession of something which represents stocks, grain, cotton, or other commodities. To do this he must borrow money from the bank, or borrow stock or warehouse receipts from those who have them to lend. In either instance he charges interest to his speculative customers.

It is estimated that the brokers in New York City who are members of the various exchanges, have an average amount in call loans outstanding of about $600,000,000.00, all of which vast sum is used to finance the orders of the brokers' customers. In dull times the minimum falls as low as $350,000,000.00, but there have been periods of speculative activity when $1,100,000,000.00 have been thus employed. The interest rate charged brokers constantly varies, but those who have had dealings with them state that their accounts rarely show less than five per cent interest. The broker charges the customer six per cent, thus averaging one per cent profit upon all money borrowed.

The New York Stock Exchange was founded for a high and honorable purpose, the same being true of the New York Produce Exchange, The Chicago Board of Trade, and other institutions for coöperative trading and the determination of values, in accordance with the recognized codes of business, and in conformity with the laws of supply and demand. Such exchanges serve admirably the producer and the merchant. They have a valid function to the investor in railroad and corporation securities, and are indispensable in facilitating the massing and distribution of capital required by large commercial enterprises.

LEGITIMATE DEALERS

=9.= Every legitimate brokerage concern has its representative or representatives on the board of trade in the city wherein it is located, and they are members in good standing of the board. When an order is given by a customer, either through the wicket or by wire, it is immediately transferred to the floor man and he proceeds to buy or sell as the instructions are given. In an active market the client must take the chances of slight fluctuations, which are just as likely to be in his favor as against him. The floor man reports the sales or purchases as soon as made, with the price paid and from whom purchased. The entries are immediately made to the customer's account.

CLEARING HOUSE

=10.= The boards of trade in different cities maintain a clearing house somewhat similar to that used by the banks, to settle the deals of each member of the board each day. The deals consummated during the day's session are reported to the clearing house and the amounts due from and payable to each firm or individual member are computed. If the brokerage firm has purchased ten thousand dollars more than it has sold, a check is given to the board for ten thousand dollars, as there must be some other firm or firms who have sold more than they have purchased to whom this ten thousand dollars is due, and to whom it is paid. Deliveries of stock are made at the time the balance is paid.

RING SETTLEMENT

=11.= At the close of the day, settlements for grain purchases are made between brokers at an agreed _settlement price_. If brokers have bought and sold to each other in varying amounts, only the difference in the price is adjusted with each other. What are called _ring settlements_ save considerable time, money, and labor. The _ring settlement_ is a settlement between three or more parties without the necessity of margining and may be illustrated in this manner:

_A_ has bought 50,000 bushels of wheat of _B_, and has sold 50,000 bushels to _C_. By inquiry, it is found that _C_ has sold 50,000 bushels to _B_. It is ascertained that the transactions between _A_, _B_, and _C_ offset each other, and instead of each party being obliged to put up margins upon each transaction, a settlement may be effected by paying the difference in price, as the sale from _C_ to _B_ may be at a different price from the sale made by _B_ to _A_, and the sale made by _A_ to _C_, may have been at a still different price. By the adjustment between the different parties of the difference in price, the necessity of margining by _A_, _B_, or _C_ is rendered unnecessary.

ILLUSTRATION

_A_ bought 50,000 bushels of wheat of _B_ at $1.23; A sold 50,000 bushels of wheat to _C_ at $1.23½. By making up the ring it was found that _C_ has sold to _B_ 50,000 bushels at $1.22½. In making the settlement it is found that _C_ is indebted to _B_ ½ cent per bushel for the amount sold, as _B_ sold at ½ cent advance; _C_ is also indebted to _A_ ½ cent per bushel as he purchased of _A_ at a ½ cent advance on the price _A_ bought from _B_. The settlement of this deal would be made by _C_ giving his check for the amount due to _B_ and to _A_, and there would be no necessity for any one of the three brokers putting up a margin on the deals. The amount of grain is offset one by the other, and the difference in price has been adjusted by payment of cash.

COMMODITIES HANDLED

=12.= The commodities that are handled upon the board and by brokers in general—food stuffs—are wheat, corn, oats, pork, lard, and short ribs. The various listed stocks are also bought and sold, a considerable business is done in bonds, and in some exchanges mining properties are listed, bought, and sold; although the latter is not common in the larger and more important exchanges. Cotton is a very important factor in some exchanges, and tobacco in others.

CORNERING THE MARKET