Bonds can be issued in any denomination, and by reason of this a loan
can be distributed among a large number of investors. Being secured
by mortgage on the company's property the bonds of a corporation are
very frequently more desirable investments than its stocks. Interest on
bonds must be paid before dividends can be declared.
Bonds can only be issued with the consent of the holders of a certain
per cent of the stock.
=49.= _Classes of Bonds._ The bonds of corporations are of several
classes, as follows:
A first mortgage bond is one secured by first mortgage on the company's
property.
A second mortgage bond is one secured by second mortgage. Interest
cannot be paid on second mortgage bonds until it has been paid on the
first mortgage bonds.
General mortgage bonds are those secured by a general mortgage on all
of the company's property.
Collateral bonds are secured by the deposit of collateral security.
A debenture is a bond with no other security than the good name of the
company.
Refunding bonds are those issued in place of maturing bonds which the
company does not wish to pay in cash.
Equipment bonds are those secured by the rolling stock of a railway,
and are also known as car trust certificates.
A gold bond is any form of bond, the terms of which specify that it
shall be paid in gold.
Registered bonds are those, the names of the owners of which must be
registered on the books of the company. Ownership of a registered bond
can be transferred only on the books of the company.
=50. Bond Liability.= When bonds are issued by a corporation, either
public or private, an account is opened under some such caption as
_bond issue_ or _bonds payable_. As fast as bonds are sold the proceeds
are credited to this account, which represents a liability. A new
account should be opened for each issue of bonds.
The bonds of a given issue will all bear the same date, with interest
payable from that date. We will suppose that a corporation issues its
bonds for $100,000.00 in denominations of $1,000.00 each. These bonds
are dated Feb. 1st, and bear interest at 5 per cent payable annually.
They are payable at the end of 10 years from date. The company agrees
to maintain a sinking fund of an amount sufficient to pay the bonds at
maturity if invested in securities drawing 4 per cent interest, and to
invest the fund in such securities which are to be placed in the hands
of a trustee.
During the first year bonds are sold in the amounts and under the
conditions which follow:
_First._ On the date of issue $10,000.00 of these bonds are sold at par.
_Second._ At the end of three months $10,000.00 of the bonds are sold
at 101 and accrued interest, yielding $10,225.00 of which $10,000.00 is
principal, $100.00 premium, and $125.00 interest.
_Third._ The next sale is $10,000.00 of the bonds at 98, interest
accrued $250.00, yielding $10,050.00 made up of principal $10,000.00,
less discount $200.00, and interest $250.00.
[Illustration: Ledger Accounts of a Bond Issue]
=51. Premium on Bonds.= When bonds are sold at a price above par, the
premium should be credited to a _premium on bonds_ account. When sold
below par, the discount may be charged to the same account.
=52. Interest on Bonds.= The interest paid on bonds may be charged
to an _interest on bonds_ account, which keeps it separate from the
regular interest account. When bonds are sold with accrued interest,
which is paid by the purchaser, the accrued interest is credited to
interest on bonds.
=53. Expense of Bond Issue.= All expenses incurred in the issue and
sale of bonds should be charged to _expense of bond issue_ account. The
account can be closed into profit and loss immediately, or it is proper
to spread it over the life of the bonds, charging off the proper amount
each year. It is also considered proper to charge discount on bonds to
this account.
=54.= Continuing the example in Art. 50, we find that the amount of
bonds outstanding is $30,000.00, and a sinking fund must be established
which will equal this amount when the bonds mature. Following the rule
in Art. 38, we divide the interest on $30,000.00 for one year at 4 per
cent ($1,200.00) by the compound interest on $1.00 for 10 years at 4 =
(.48024) obtaining as a result $2,498.75, the amount necessary to be
invested at the end of each year. This amount must be provided each
year for permanent investment to meet the principal and an additional
$1,500.00 must be provided each year for interest.
The entries which follow are the ones necessary to record the sales
shown in Art. 50.
--Feb. 1--
Cash $10,000.00
Bond issue $10,000.00
--------
--May 1--
Cash 10,225.00
Bond issue 10,000.00
Premium on bonds 100.00
Interest on bonds 125.00
--------
--Aug. 1--
Cash 10,050.00
Expense of bond issue
(discount) 200.00
Bond issue 10,000.00
Interest on bonds 250.00
At the end of the year when the interest is paid and the first
installment of the sinking fund is set aside, these entries are made:
--January 31--
Interest on bonds 1,500.00
Cash 1,500.00
--------
Sinking fund 2,498.75
Cash 2,498.75
The illustrations (page 240) show the status of all of these ledger
accounts at the end of the year.
MANUFACTURING AND COST ACCOUNTS
=55.= Manufacturing began in this country many years ago and was for a
long time confined to the eastern and New England states. Encouraged
and fostered by national, state, and local governments, and by
discoveries of sources of supplies, it has extended to all parts of
the country. Manufacturing has grown to proportions which place it at
the very head of our industries, if we except agriculture, the growth
of which has been largely influenced by the progress in manufactures.
One result is that the business of manufacturing has perhaps more than
any other, attracted capital from great numbers of investors, large and
small. Owing to its very nature, manufacturing readily lends itself to
the corporate form of organization, and it is for manufacturing that a
very great number of corporations have been formed. Manufacturing has,
therefore, been selected for a more complete exposition of corporation
accounting.
The accounts of a manufacturing business are to a certain extent
peculiar to itself. Regardless of the nature of the product, there
are certain underlying principles which should govern the devising of
a system of accounts for a manufacturing business. Perhaps the most
important feature to be kept in mind is to so arrange the system that
the cost of manufacturing the goods will be shown.
Correct cost accounting methods are of greater importance to the
manufacturer than the method of keeping accounts with his customers.
He cannot afford to wait until the end of the year for results; he
must know what his goods cost him if he is to intelligently make
selling prices. There are so many opportunities for fluctuations in
manufacturing costs that the accounts must at least show approximate
results at all times.
Cost accounting is a profession in itself, and it is not our purpose to
discuss, in this paper, all of the details of collecting data in the
factory and shop. The purpose of this paper is to show the accounts
with which a bookkeeper for a manufacturing business should become
familiar. Even when a manufacturer does not maintain a complete cost
accounting system the bookkeeper can produce some valuable statistics
by a proper arrangement of the accounts.
ACCOUNTS USED
=56.= For the purpose of illustration we have selected a representative
schedule of the accounts of a manufacturing business. The following
accounts are those which have a direct bearing on the manufacturing
branch of a business and do not include the administrative and selling
branches.
FACTORY ASSETS
1. _Real Estate._ Includes the cost of land and factory buildings.
2. _Machinery._ Charged with the cost of all machinery including total
cost of installation. Freight, cartage, and cost of erecting the
machine ready for use should be included.
3. _Patterns and Tools._ Charged through cash and purchase book
for all patterns and tools purchased. Charged through cash book
and journal--with proper credit to material and labor accounts--if
manufactured in the factory.
4. _Material Purchases._ Charged through purchase and cash books for
all purchases of material that enters into the product. Cost includes
charges for delivery. Credited for all material used in the factory.
This may be subdivided into several accounts to represent the different
classes of material used--as iron, steel, lumber, leather, hardware,
etc.
5. _Supplies Purchases._ Charged through purchase and cash books for
all purchases of factory supplies, like oil, waste, belt lacing, and
similar items. Credited for all supplies used in the factory.
6. _Finished Goods._ Charged for all goods finished, usually at cost of
manufacture. Sometimes a small factory profit is added. This account
represents a purchase account to the commercial department, as it
represents the cost of goods to them,
FACTORY EXPENSES
7. _Salaries._ Charged for salaries of superintendent, assistant
superintendent, and factory clerks.
8. _Labor._ Charged through cash and pay roll books for the amount of
all factory pay-rolls.
9. _Experimental._ Charged through cash and pay-roll books and journal
for all labor and material used in experimental work carried on for the
purpose of improving the product.
10. _General Factory Expense._ Charged through cash and purchase books
for cost of miscellaneous factory expense items not otherwise accounted
for.
11. _Power, Heat, and Light._ Charged for fuel, oils, water, wages of
engineer and firemen, electricity (when purchased), and all other items
entering into their cost.
12. _Building Maintenance and Repairs._ Charged through cash and
purchase books for materials purchased specially for repairs to
buildings. Charged through journal and pay-roll book for labor and
materials or supplies consumed in maintenance and repairs to buildings.
13. _Repairs to Machinery._ Treated the same as No. 12.
14. _Repairs to Patterns and Tools._ Treated the same as No. 13.
15. _Insurance._ Charged through cash book for all premiums paid for
insurance on buildings and contents.
16. _Taxes._ Charged for all state, county, and city taxes.
17. _Depreciation of Buildings._ An amount charged off each year to
cover depreciation.
18. _Depreciation of Machinery._ Treated the same as No. 17.
Depreciation based on estimated life of machine.
19. _Depreciation of Patterns and Tools._ Treated the same as No. 18.
SUMMARY ACCOUNTS
20. _Manufacturing Account._ Charged for cost of labor and material
consumed in manufacture of goods; charged for proper proportion of all
expense accounts; credited with cost of all finished goods. Balance
represents cost of all goods in process.
COLLECTING COST STATISTICS
=57. Routine Followed.= The notes following the names of the accounts
in the above schedule explain their purpose and show clearly how
charges are made direct to the expense accounts. Further explanations
are necessary in regard to charges and credits to manufacturing account.
Labor is easily disposed of as the amount standing to the debit of
labor account at the end of the month is transferred to the debit of
manufacturing account, closing labor account.
Material charges are more difficult to handle. In all well-regulated
factories all material is as carefully accounted for as cash. Proper
storage rooms are provided in which all material is stored. These rooms
are placed in charge of a man known as stockkeeper or stores clerk,
and no one is allowed to take material from the storerooms without
first presenting a written order, signed by the foreman, showing for
what purpose the material is to be used. This order is retained by the
stockkeeper and after he has posted the material to his own records he
sends it to the bookkeeper. From these orders, the bookkeeper compiles
a record of material withdrawn and, at the end of the month, the amount
is debited to manufacturing account and credited to material purchases.
The stockkeeper keeps a record of all material received and delivered
and the balance of his accounts shows the quantities of the different
materials which he should have in stock. His record should agree with
the balance of material purchases account.
When a stockkeeper is not employed it is necessary to have reports from
the factory. The bookkeeper should arrange to obtain daily reports from
the foremen showing all materials taken into their departments which
are to be used in the manufacture of the regular product. If any of
this material is to be used for the manufacture of tools or patterns
for use in the factory, or for repairs to tools, patterns, machinery,
or buildings, it should be noted on the report with a statement of
the exact purpose for which it is intended. From these reports, the
bookkeeper will compile his material records which will be credited
to material purchases, and charged to manufacturing account and the
different repair accounts at the end of the month.
Supplies are handled the same as materials, except that where this is
a small item it is sometimes treated as an expense account. Where a
considerable value is involved it is preferable to consider it as a
subdivision of the material account.
The expense accounts must be charged on a percentage basis for the
reason that the amounts actually expended vary in different months, and
an expense item paid in one month may cover that particular expense for
an entire year. Such items are insurance premiums and taxes, paid once
a year to cover twelve months. Other expense items like experimental,
power, and repairs are difficult to determine for a single month. It
is customary to base the charge for these items on the records for
the previous year. The amount of such expenses for a year is divided
by twelve and each month one twelfth of the amount is charged to the
manufacturing account and credited to the expense account. If there is
any discrepancy at the end of the year it is adjusted by a debit or
credit to finished goods.
Reports should be made daily by all foremen showing exactly what partly
finished goods are received in their department and the quantity
delivered to the next department. A record of these reports should be
kept, which will show at all times the quantity of goods in process in
each department. Reports of finished goods received in the stock room
will show the quantity manufactured, or rather finished, during the
month. See report form illustrated on page 53.
If all goods on which work had been started were finished, the charges
to manufacturing account would represent their exact cost, but there is
always a certain quantity of goods in various stages of manufacture,
and the amount already expended on them must be considered. Therefore
an inventory is taken of goods in process. Great care must be
exercised, in taking this inventory, that too high a value is not
placed on partly finished goods, for if the valuation is too high the
apparent cost of finished goods will be less than actual cost. It is
of utmost importance that the cost of manufacture be not understated,
for it is on this cost that selling prices will be based. This is
one reason why some manufacturers add a small-factory profit. Unless
a complete system of cost accounting is maintained, this inventory
of goods in process must be an estimate, but the record of goods in
process in each department will be of considerable assistance in making
the estimate.
[Illustration: Daily Report of Work in Process]
When the inventory is complete the amount should be deducted from the
total debits to manufacturing account, which will show the cost of
goods manufactured. This cost should then be credited to manufacturing
account and charged to finished goods account. Manufacturing account
will now show a debit balance representing cost of goods in process.
This method will produce very satisfactory results for factories in
which but one line of goods is manufactured, but does not supply the
information required where several styles, sizes, or lines are made.
For one line of goods it is only necessary to divide the total cost by
the quantity produced, as pounds, feet, dozen, or gross to find the
cost of a single unit. In the more complicated business a detailed cost
system would be required.
PAY-ROLL RECORDS
=58.= In connection with the labor account, the manner of keeping the
pay-roll record is of considerable importance. Like most other forms
of record, pay-roll books are made to suit the needs of the individual
concern. For a manufacturing business a feature to be kept in mind is
such an arrangement as will give the most complete record of the cost
of labor in each separate department. Where men are never transferred
from one department to another during a weekly or monthly pay-roll
period, this result would be obtained by a simple grouping of the names
by departments. In many manufacturing lines, however, workmen are
frequently transferred so that to obtain costs for departments it is
necessary to provide special forms for distribution.
But why go to the trouble of distributing the pay-roll by departments?
That we may more closely watch expenses and costs. The reports which
the bookkeeper receives from foremen show quantities of goods passing
through each department. If the pay-roll is sectionalized it will
enable the bookkeeper to determine the labor cost per unit of goods
manufactured in each department. A comparison of these costs from
month to month will be of value in showing changes in cost. The form
illustrated provides for a business having four departments and paying
employes both on piece work and day wage plans.
[Illustration: Pay-roll Register for Time and Piece Work]
EXPENSE INVENTORY
=59.= When the books are closed, it usually happens that certain
expense accounts show expenditures for items of expense that are not
accrued. Illustrations are insurance and taxes paid yearly in advance.
Suppose insurance premiums to the amount of $150.00 are paid on April
1st to cover insurance for one year. If the books are closed July 1st,
9/12 of this amount will have been paid for insurance that we have not
received--the premium has not been earned. The inventory will also show
unused material which has been charged to such expense accounts as
repairs. It is proper to take an inventory of these amounts, treating
them as assets in the balance sheet.
To properly record all such unearned expenses and make the books agree
with the balance sheet, an account should be opened under the title
of _Expense Inventory_, to which these items will be charged, with
corresponding credits to the proper expense accounts. After the books
have been closed, these items will be changed to the expense accounts,
and credited to expense inventory, closing the latter account.
EXPENSE LIABILITY
=60.= Certain expenses will have accrued which have not been paid. Such
an item is interest on bills payable, bonds, or mortgages, or taxes
due and unpaid. These items should be treated as liabilities in the
balance sheet. An account called _Expense Accrued_ should be opened
and credited with these items, with corresponding debits to expense
accounts. When the books have been closed, this account is closed
by crediting the items to the expense accounts from which they were
received.
BALANCE LEDGER
61. A form of ledger now in quite common use is known as the _balance
ledger_. The form differs from the standard ledger form in being
provided with an extra column in the center in which balances are
extended. If the bookkeeper when posting, extends the balance after
each item is posted, much time is saved in looking up accounts and in
taking trial balances. The nature of the account will usually indicate
whether there is a debit or credit balance. Accounts in the sales
ledger will usually show a debit balance, while one in the purchase
ledger will have a credit balance. If the balance is the opposite from
what is to be expected it may be indicated by placing the letter _D_ in
front of the amount in the balance column for debits, or the letter _C_
after the amount for credits.
[Illustration: WHEEL LATHE SHOP IN THE BALDWIN LOCOMOTIVE WORKS,
PHILADELPHIA, PENNA.]
[Illustration: Center-Ruled Balance Ledger]
SAMPLE TRANSACTIONS
62. The following transactions exhibit the accounts which are special
to a manufacturing business without including the commercial accounts
which record sales. The manner of keeping those accounts is the same
for a manufacturing business as for any other.
Being a business conducted by a corporation these accounts include the
stock accounts usually kept in the general books. The auxiliary stock
books are omitted, it being felt that the special illustrations of
such books will have been sufficient to give the student a thorough
understanding of their uses.
The books required in the manufacturing business, omitting sales
accounts, are _invoice register_ or _purchase book_, _cash book_,
_journal_, _pay-roll distribution book_, _purchase ledger_, and
_general ledger_.
A corporation known as the Atlas Manufacturing Co., is organized with
an authorized capitalization of $100,000.00, with the provision that
business is to begin when $50,000.00 of the stock has been subscribed,
and $25,000.00 paid in. The incorporators are Henry Biddle, John
Noonan, David Snow, Henry Farwell, and George Dunn. Each incorporator
subscribes for $10,000.00 stock payable one-half down and one-half in
30 days. The detailed record follows:
--March 1--
Received subscriptions to the capital stock,
payable one-half down, and one-half in 30
days, from the following. Stock is to be
issued when paid in full.
Henry Biddle $10,000.00
John Noonan 10,000.00
David Snow 10,000.00
Henry Farwell 10,000.00
George Dunn 10,000.00
Received cash in payment of subscriptions
from the following:
Henry Biddle 5,000.00
John Noonan 5,000.00
David Snow 5,000.00
George Dunn 5,000.00
Received from
Henry Farwell
His note at 30 days with 6% interest in payment
of installment on his subscription 5,000.00
--------
Deposited cash in Second National Bank 20,000.00
--2--
Received from
Derby Desk Co.
Invoice #1, terms N/30
Charge to office fixtures 350.00
--3--
Leased for two years from Jacob Newman
a factory building at an annual rental of
$1,800.00, payable quarterly in advance.
Gave him check No. 1 for 3 months' rent.
--4--
The following invoices are entered--
Meyers Engine Co.
Invoice No. 2, terms N/30
Charge to machinery 1,500.00
--4--
Patton Machine Co.
Invoice No. 3, terms N/30
Charge to machinery 3,500.00
--4--
Danforth & Co.
Invoice No. 4, terms N/30
Charge to material 960.00
--5--
The following invoices are entered--
Franklin Printing Co.
Invoice No. 5, terms 2/10, N/30
Charge to office supplies 165.40
--5--
Slade Oil Co.
Invoice No. 6, terms 3/10, N/30
Charge to supplies 54.25
--6--
Norwich Machine Co.
Invoice No. 7, terms N/30
Charge to machinery 8,500.00
--6--
Paid freight by check No. 2 to
T. Fogarty, Agt.
Machinery 216.20
Materials 11.60 227.80
------
--8--
Francis & Co.
Invoice No. 8, terms 3/10, N/30
Charge to materials 640.00
--9--
Stevens & Co.
Invoice No. 9, terms 3/10, N/30
Charge material 225.00
--9--
Gave Danforth & Co.
Check No. 3
To pay bill of March 2 960.00
Less 2% 19.20 940.80
------
--10--
Lackawana Coal Co.
Invoice No. 10, terms N/30
Charge power, heat, & light 185.00
--11--
Gave Franklin Printing Co.
Check No. 4.
To pay bill of March 4 165.40
Less 2% 3.31 162.09
------
--12--
Danforth & Co.
Invoice No. 11, terms 2/10, N/30
Charge material 315.00
--13--
Drew check No. 5.
for 2 weeks' pay-roll 220.50
Charge machinery
for cost of installing 178.50
Building maintenance
for repairs to building
per pay-roll distribution 42.00
--15--
Gave Derby Desk Co.
Check No. 6
To pay bill of March 1 350.00
--15--
Gave Slade Oil Co.
Check No. 7
To pay bill of March 5 54.25
Less 3% 1.63 52.62
------
--17--
Gave Francis & Co.
Check No. 8
To pay bill of March 7 640.00
Less 3% 19.20 620.80
------
--18--
Gave Stevens & Co.
Check No. 9
To pay bill of March 8 225.00
Less 3% 6.75 218.25
------
--19--
Eureka Tool Co.
Invoice No. 12, terms N/30
Charge tools 250.00
--20--
Check No. 10
for 1 week's pay-roll
Charge labor 326.25
Charge tools 27.50 353.75
------
(Making tools for shop per
pay-roll distribution)
--22--
Received from Danforth & Co.
Credit memo
for damaged goods in lot
covered by invoice dated 3/12 63.00
Credit material
Gave them check No. 11
For acct. 252.00
Less 2% 5.04 246.96
------
--27--
Check No. 12
for 1 week's pay-roll $ 342.70
Charge labor per
pay-roll distribution
--30--
Gave Norwich Machine Co.
Note of Henry Farwell 5,000.00
Accrued interest 25.00 5,025.00
------
Gave them check No. 13
to pay their account 3,475.00
--31--
Salaries check No. 14
for salaries of Supt. & Clerks 350.00
=63. Manufacturing Data.= The following data has been collected by the
bookkeeper from the reports of superintendent and foremen, and from the
inventories taken at the end of the month.
Material issued to factory 1,003.35
Material used for building repairs 50.00
_Inventories_
Supplies 45.00
Rent (unexpired) 300.00
Power, heat, and light (Coal) 150.00
Office supplies 140.40
Goods in process--material 602.00
Labor 400.00 1,002.00
------
We will now close the ledger to ascertain manufacturing results for the
month, by making the following adjusting entries in the journal--
Debit Manufacturing Account
for material issued to factory.
Debit Building Maintenance and Repairs
for material used in repairs.
Credit Material Purchases
for both of the above.
Debit Manufacturing Account
for Labor Account
for Supplies used--found by deducting
inventory from supplies purchases.
for Salaries Account
for Rent one month
for Power, Heat, and Light--found as above
for Building Repairs
for Office Supplies--found as above
Credit accounts representing above
for amounts charged.
The manufacturing account will now show, on the debit side the total
manufacturing expense for the month. The next step is to find the cost
of finished goods to be credited to manufacturing account and charged
to finished goods account. Our inventory of goods in process, which
includes material and labor only, amounts to $1,002.00. The labor
account and reports from foremen show that the amount of these items
used in the factory is $1,672.30. In round numbers, the former is 60%
of the latter, that is, sixty per cent of the work started is still in
process. We will assume, therefore, that this is a fair percentage to
be used in determining the expense items invested in goods in process.
Taking 60% of the total manufacturing expense gives $1,400.13, which,
deducted from the total, leaves $933.42 as the cost of finished goods.
In this case the per cent of goods in process is large for the reason
that it is the first month of operation. The results in succeeding
months will be more nearly equal. If the factory is running regularly,
turning out practically the same quantities each month, the quantity of
finished goods will just about equal the work started in any one month.
Should we wish to show a factory profit of 10%, it will be necessary
to add 10% to the cost of finished goods which will then represent the
cost to be used by the sales end of the business. Since we have no
account to which this amount can properly be credited, we will open
a new account called _contingent profits_, which will be closed into
profit and loss at the end of the year.
Since we are not closing the books for the purpose of making a balance
sheet, we do not close the expense accounts into an expense inventory
account as explained in article 59. Instead, the balances are allowed
to stand until such time as the books are finally closed.
[Illustration: Invoice Register with Distribution Columns.]
[Illustration: Invoice Register with Distribution Columns]
[Illustration: Check and Disbursement Record]
[Illustration: Manufacturing Journal]
[Illustration: Manufacturing Journal]
[Illustration: Manufacturing General Ledger]
[Illustration: Manufacturing General Ledger]
[Illustration: Manufacturing General Ledger]
[Illustration: Manufacturing General Ledger]
[Illustration: Purchase Ledger]
[Illustration: Purchase Ledger]
[Illustration: General Ledger Trial Balance]
[Illustration: Purchase Ledger Statement]
EXERCISE
The transactions given in this exercise are a continuation of the
business referred in to the preceding articles. During the month of
April the following transactions are recorded.
Material purchases $2,670.00
Supplies purchases 127.50
Patterns and tools purchases 150.00
Cash received on subscriptions 25,000.00
Deposited in Bank 25,000.00
Checks drawn
Purchase accounts 5,500.00
Salaries 375.00
Pay-rolls 1,670.20
distributed as follows:
Labor $1,652.70
Machinery repairs 17.50
David Snow 10,000.00
(Stock purchased at par by Company)
The following data is obtained from the reports of foremen and
inventories taken at the end of the month:
Material issued to factory
to be used in manufacturing goods. 2,261.00
Material used in machinery
repairs 16.70
Inventories, April 30
Supplies 147.00
Rent (unexpired) 150.00
Power, heat, and light (Coal) 75.00
Office supplies 118.40
Goods in process--material 615.00
Labor 410.00 1,025.00
------
1. Find value of goods in process, using the same percentages in
estimating expense items as shown for material and labor.
2. Make journal entries closing accounts into manufacturing account to
show cost of goods completed during the month.
NOTE:--To find total cost of material and labor, used and partly
used, add to the amounts shown for one month the inventory of the
same items at end of preceding month.
3. Make trial balance of general ledger after books are closed as shown
in model set.
[Illustration: GENERAL OFFICES OF THE A. B. DICK COMPANY, CHICAGO,
ILL.]
THE VOUCHER SYSTEM AND ACCOUNTING CHARTS
VOUCHER SYSTEM OF ACCOUNTING
1. _Voucher._ A document which vouches the truth of accounts.
_Receipt._ An acknowledgment of money paid.
The voucher system is sometimes referred to as a modern system of
accounting, but a study of the above standard definitions indicates
that it is modern only in respect to forms of records and routine.
In the nomenclature of accounting the term voucher is quite commonly
used in the same sense as the term receipt. The only distinction
appears to be that a voucher is usually understood to be an
acknowledgment of the payment of a particular item on account, while
a receipt may be an acknowledgment of the payment of money without
reference to the item or items covered.
Since the transaction of business began receipts or vouchers in some
form have undoubtedly been used. Some form of acknowledgment of money
paid has always occupied a place in business. But at first, receipts
were not required--they were incidental; given as a matter of courtesy;
a "thank you" in written form.
When the first man, after paying his grocery bill, was forced to pay
it a second time because the merchant had failed to mark his account
"paid," he _demanded_ a receipt. He learned then and there that
accounts, and those who keep them, are not infallible. He told his
neighbors, and the custom of demanding receipts for money paid, came
into being.
The receipt was demanded as a matter of self-protection, to prevent
the possibility of payment of an amount being successfully demanded a
second time. But the receipt was not an integral part of the accounting
records of a business; it might or might not be demanded without
affecting the records. So long as business was conducted by single
proprietors or small partnerships, this was satisfactory, since the
receipt was not required as a record between partners.
With the advent of joint-stock companies and corporations, came
ownership by a large number of investors. Having their capital
invested, these owners had a right to know what was being done with
their property, and there came a demand for a more strict accounting
of money and property entrusted to the care of the managers of the
business.
As business expanded and corporations grew in size and power, with
wider spheres of activity, it became necessary to divide the operations
of business concerns into departments, with corresponding divisions of
authority. This meant the creation of a central authority to whom an
accounting must be made by the departments or branches.
Audits were introduced. Not only did stockholders want to know that
the business was honestly conducted, but the managers demanded proof
that property entrusted to subordinates was accounted for and that
the accounts were accurate--that is, truthful. Not satisfied with
the evidence offered by entries in account books, auditors asked
for further proof of the payments recorded; they demanded receipts,
_vouchers_.
The voucher as used in modern accounting practice is then something
more than a receipt for the payment of money; it is a proof that
property has been administered as claimed by the accounting records. "A
document which vouches the truth of accounts,"
=2. Use of Vouchers.= The most general use of the voucher still is as
an acknowledgment of the payment of money. In fact, when we speak of a
voucher it is usually understood to mean a receipt or acknowledgment of
the payment of money for a specific purpose.
A voucher states the exact purpose for which the money is paid, the
items either being listed or reference made to a specific invoice or
account. Then when receipted it becomes a voucher in fact and takes its
place as an integral part of the accounting records. The voucher may
be said to form a connecting link, furnishing proof that the money was
expended as shown in the records and that it was received by the payee.
In this respect it acts as a check against a misappropriation of funds.
As the system of vouchers for payment of money came into more general
use, many accountants argued that it should be carried still further.
Sales records were vouchered by original orders, shipping receipts,
and invoice copies, and purchases by the regular vouchers, but there
was no voucher for transactions involving transfers of values from one
account to another. In making journal entries involving such transfers,
many opportunities for fraud were opened. Just such entries have been
frequently used to cover up fraudulent transactions.
The logical step to make the voucher system complete in every detail
was the introduction of the journal voucher. If a voucher is provided
for each journal entry, the bookkeeper can produce authority for every
transaction recorded in his books.
The journal voucher is a voucher of authority, that is, it authorizes
the entry involved and must be signed by an officer having power
to make such authorization. To the bookkeeper, it is in many cases
a protection, for if a question arises as to the legality of a
transaction, he can produce his authority for the entry, which will
place the responsibility where it belongs.
We have come in contact with cases in which the bookkeeper, following
the explicit instructions of an officer of a company, has made entries
clearly intended to defraud either creditors or stockholders, only to
be later made the "scapegoat" and held jointly responsible with his
superior officer.
Not all such entries show their clear intent, though their real
purpose be fraudulent. Some of them are so ingenuous and supported by
such plausible explanations, that the bookkeeper has no suspicion of
their real nature. A case in point: a corporation was organized in a
small town to engage in a manufacturing enterprise. Like many another
corporation of similar character, the benefits which would accrue to
the town, were dwelt upon at length by the promoters, and citizens
were induced to invest their savings in small blocks of stock. Also,
like many another enterprise entered into and managed by men with no
technical training, this little factory struggled along for a few
years, always operated at a loss. But a change came; an experienced
manager was secured and the business began to exhibit symptoms of a
healthy growth. The second year showed a profit; almost enough to wipe
out the deficit. The third year the business outgrew the capacity of
the plant, and $20,000.00 was invested in new machinery. Not an old
machine was discarded. The manager instructed the bookkeeper to charge
$15,000.00 of the amount to repairs, explaining that it would off-set
the amount which should have been charged off as depreciation in former
years. Perhaps,--but it made the books show a small loss instead of a
substantial profit for the year. And it is significant that several
holders of stock, worth face value, and more, sold their holdings to
the manager at an average price of .65. If no profit could be made on
such a volume of business as had been transacted that year, what hope
for the future?
[Illustration: Fig. 1. Voucher to be Receipted and Returned]
To what extent a bookkeeper is justified in presuming to conserve the
morals of his employer, is not a subject for present discussion. Just
where the line should be drawn between moral and legal responsibility,
is sometimes difficult to determine. But that bookkeeper innocently
assisted in robbing unsuspecting stockholders. Had he insisted on the
signed authority of the manager--that is, demanded a voucher--the entry
might never have been made; he, at least, would have been freed from
any possible charge of complicity.
=3. Forms of Vouchers.= The essential feature of a voucher is that it
must show clearly the purpose for which it is drawn, and provide a
proper form of receipt. There are many forms of vouchers designed to
meet the requirements of different businesses.
[Illustration: Fig. 2. Back of Voucher Showing Distribution]
The most simple form of voucher is a statement of items paid, with a
receipt to be signed by the payee. A remittance in the form of cash or
a check accompanies the voucher, the receipted voucher being returned
by the payee. A form of voucher of this class is shown in Fig. 1.
The items paid can be listed on the voucher, or there may be a
reference to certain invoices included in the payment. Some accountants
attach the original invoice to the voucher, but for certain reasons we
do not advocate this practice. Until the receipted voucher is returned
there is no record of the items covered, unless the invoice has been
copied.
[Illustration: Fig. 3. Combined Voucher and Check Used by the
Pennsylvania Railroad Company]
Some houses are slow in returning receipted invoices, resulting in many
annoying delays. If the invoice is kept on file we at least have a
record of the transaction, and it may be very necessary to refer to the
invoice for prices or other information.
The back of the voucher is usually printed with a form for a
distribution of the amount to the account or accounts to which it
should be charged. A typical form is shown in Fig. 2. For permanent
filing a voucher of this style is folded so that the number appears at
the top, followed by the name of the payee, and the distribution record.
=4. Voucher Checks.= A step in advance of the early form of voucher
with separate check is the voucher check. This is a form which combines
the voucher and check.
Of voucher checks there are many forms, each designed to meet some
special condition, or to conform with the ideas of the accountant.
While these forms exhibit many variations in detail they may be divided
into two general classes: folded voucher checks and single voucher
checks.
The folded voucher check is usually twice the width of an ordinary
check, making it regular check size when folded. This is intended to
provide a receipt for the payment of items listed, by the endorsement
of the check. Several such forms are illustrated.
Fig. 3 is a form of combined voucher and check used by the Pennsylvania
Railroad Company, The account is transcribed on _A_, this being a
sheet twice the width of a check. This form is made in duplicate, _B_
being the carbon copy which is filed as a record of authority for the
issuance of the voucher. The check itself, shown in _C_, is written on
the back of the original voucher. _A_. When folded, this form is the
size of a regular check and goes through the bank in the usual manner.
The endorsement of the payee is a receipt in full for the items covered
by the voucher.
This is a representative form of the folded voucher check. Naturally
the details recorded will vary in different businesses, but the general
plan is subject to slight changes. Some objection is raised by banks to
the folded form. The claim is made that considerable inconvenience is
caused in handling in the bank, by checks slipping between the folds.
Many of the earlier forms of voucher checks were not checks until
certain conditions had been complied with. On the face of the voucher
was printed "when properly receipted this voucher will be paid through
... Bank." This required a receipt in some special place, instead of
the usual endorsement of a check, and it was not always easy to tell,
at a glance, the amount to be paid.
Very naturally, objections were raised by the banks against the use of
these complicated forms, but forms have been simplified in ways that
have largely overcome these objections.
[Illustration: Fig. 4. Form of Voucher Check that Requires no Folding]
An improvement is the ordinary check form arranged to provide a valid
receipt for stated items. Such a form is illustrated in Fig. 4. This is
an ordinary check form of regulation size, on which is noted the item
or items paid. The checks are put up in pads and numbered as used. When
endorsed, the check provides a valid receipt for the items covered.
[Illustration: Fig. 5. Duplicate Voucher Check in Loose Leaf Form]
[Illustration: Fig. 6. Voucher Distribution Sheet]
A voucher check with some advantageous features is shown in Fig. 5.
This is made in duplicate. _A_ is the original voucher check, while _B_
is the duplicate. When sent out, the stub shown in _B_, a duplicate of
the statement on the original check, is attached to the check. This is
detached by the payee for his records, and enables him to deposit the
check without waiting to make the entry in his cash book.
These voucher checks are made in sheets and punched for filing in a
loose-leaf binder. The balance of the form shown in _B_, the part
remaining after the check and duplicate statement have been removed, is
a copy of the check, and remains in the binder.
The checks are numbered consecutively, but the voucher number is
entered when used and corresponds with the number of the voucher paid.
The office record of the items paid is made on the voucher form shown
in Fig. 6. These are numbered consecutively, in the order in which they
are approved, and when paid are filed in numerical sequence.
Another style of loose-sheet voucher check is illustrated in Fig. 7.
This form is made on the typewriter, in triplicate, and includes the
original check, a receipt and a copy of the check. The forms are made
two to a sheet, and when a check is to be written the triplicate sheet
is placed in the machine, three copies being made at one writing.
[Illustration: Fig. 7. Triplicate Form of Voucher Check that Provides a
Receipt and a Copy of the Check]
[Illustration: PLANT OF THE W. L. GILBERT CLOCK CO. AT WINSTED, CONN.]
The triplicate form, or copy of the check, is the permanent record
from which posting is done. Both the check and receipt are mailed and
the payee is expected to return the receipt. If not returned within a
reasonable time, the payee is followed up by letter and asked to return
the receipt, as this becomes a part of the permanent office records.
[Illustration: Fig. 8. Duplicate Voucher with Check Attached]
An excellent form of voucher with check attached is shown in Fig. 8.
The voucher is made in duplicate, the check being attached to the
original. The duplicate is kept on file for the office record, while
the original, with check attached, is mailed to the vendor. He detaches
the check and deposits it, keeping the original statement in his files.
In the event of discrepancies, the vendor is expected to return both
voucher and check, endorsement being considered as a receipt in full
for items included in the statement.
=5. Journal Vouchers.= As previously explained, a journal voucher is
a properly signed authorization of a journal entry. Journal vouchers
are not intended to be used for the ordinary journal entries of a
business, as closing entries and ordinary adjusting entries. They are
more particularly intended for special credit items or allowances, and
special transfer or adjusting entries.
Fig. 9 illustrates a convenient form of journal voucher. This form is
intended to be filed in a loose-leaf binder, and when so filed, becomes
the journal itself, posting being made direct to ledger accounts. The
usual method, however, is to make the entry in the journal and file
this voucher as an evidence of authority.
A journal voucher should require the final approval of some one man
before it becomes valid. The head of a business can keep in touch with
all special allowances by having the journal vouchers brought to him
for his signature.
[Illustration: Fig. 9. Journal Voucher for Adjusting Entries]
One reason for the use of journal vouchers in large establishments
having several departments is that special credits and allowances
are constantly coming up, with which only one department manager is
familiar. His O. K. is obtained, and the voucher must be approved by
the manager, which makes these men responsible for the transaction.
=6. The Voucher Register.= Though the form of voucher is of
considerable importance, and should be designed to meet the
requirements of the business, the keystone of the voucher system
of accounting is the voucher register. Wherever used, the voucher
register possesses certain uniform characteristics, but in each
business the form takes on special features; in fact, the voucher
register is distinctively a special form.
The voucher register is really a form of purchase book, with other
features added, and takes the place of these records. In addition
to the usual features of the purchase book or invoice register, the
voucher register furnishes a complete record of payment of bills, and
shows at all times the net amount of Accounts Payable. Another most
important feature is that it exhibits all expenditures, for whatever
purpose. A voucher is provided and properly registered for every check
issued, insuring a receipt in proper form for every dollar paid out.
When properly handled, the voucher system does away with the purchase
ledger, no ledger accounts with creditors being necessary. The
register in connection with a file of unpaid vouchers, furnished a
complete record of each individual creditor's account. At the same
time, a controlling account is provided, which exhibits the total of
outstanding accounts, and balances with the voucher register.
To furnish representative illustrations, we show several forms of
voucher registers, which exhibit the special features usually found in
such records. These may be used as guides in designing registers for
any business.
Figs. 10 and 11 show forms identical in general arrangement, except
that one is designed for a mercantile business, while the other is
intended for a manufacturing establishment. The columns beginning at
the extreme left are as follows: _Date Entered_, _Voucher Number_,
_Name of Payee_ and nature of account, _Date of Invoice_, _Vouchers
Payable_ (the total), and _Date Due_. The columns following are for
distribution of the total to the different accounts. Columns are
provided for those accounts in each group to which most frequent
charges are made. The amounts of the vouchers are extended in these
columns and footings carried forward to the end of the month.
In every business there are certain expense accounts to which charges
are infrequent, not more than one charge a month, and in some cases
one or two in a year. Examples of these accounts are insurance, taxes,
rent, etc. To add columns to an already large voucher register for the
accommodation of these few items is impractical, hence the Sundries
column is provided for charges to accounts for which special columns
are not provided. Space is allowed for entering the names of the
accounts, and each item is posted direct to the ledger account.
[Illustration: Fig. 10]
[Illustration: Fig. 11]
[Illustration: Fig. 12]
[Illustration: Fig. 13]
Typical Forms of Voucher Registers
[Illustration: Designed for Use in Different Businesses]
The form of voucher register illustrated in Fig. 12 is designed for use
where a complete voucher system, including the use of journal vouchers,
is maintained. The special feature of this form is the addition of
several columns for credit accounts. Space is provided for entering
the names of the accounts to be credited, the amounts being carried to
the proper ledger columns. This makes it possible to enter any journal
voucher, and since full particulars are shown in the voucher itself, no
explanations are required in the register.
At the right of these forms are columns for recording particulars of
settlement. A column headed _Unpaid Vouchers_ will also be noted.
On the last day of the month, when all items have been entered, the
amounts of all unpaid vouchers are extended in this column, and the
total is carried forward to the next month's sheet, where it is
entered in the _vouchers payable_ column. When these vouchers are
paid, particulars of payment are entered on the sheets containing the
original record; as would have been done if they were paid in the month
in which they were entered.
The footings of all columns are carried forward to the end of the
month, when the totals of all distribution columns, excepting sundries,
are posted to the debit of the corresponding ledger accounts. The
footing of the _vouchers payable_ column, less unpaid amount brought
forward, must agree with the total footings of all distribution
columns, since it represents the total of all vouchers registered. The
net amount, that is, the footing of the _vouchers payable_ column, less
the amount of unpaid vouchers brought forward, is posted to the credit
of a vouchers payable account.
On the credit side of the cash book, two columns headed _Vouchers
Payable_ are provided for the entry of payments. One column is headed
Discount and the other _Amount of Check_, the discount column being a
memorandum only. At the end of the month the total of these columns is
posted to the debit of the vouchers payable account, the controlling
account of the voucher register. When the footing of _unpaid vouchers_
is brought forward at the end of the month, it should agree with the
balance of the vouchers payable account.
Another method of handling unpaid vouchers is to provide both _debit_
and _credit_ columns on the voucher register, headed _Suspense
Accounts_, as shown in Fig. 13. All unpaid vouchers are carried to
the credit column at the end of the month, and when paid the entry
is made in the debit column. Footings of the suspense columns are
carried forward in pencil, for, when all amounts on one sheet have been
paid, those items need not be considered in obtaining the balance.
One advantage claimed for this method is that it keeps the _vouchers
payable_ column free of all but current items.
Another feature of this form, Fig. 13, is the absence of a check number
in the _payment_ column. In this case, a voucher check is used, which
necessitates but one series of numbers. When bills are audited, the
voucher checks are made out and numbered, but the dates are omitted
until payment is made, when they are entered with other particulars
under the head of _Payments_.
An objection is sometimes made that with the voucher system, allowing
but one line to an invoice, no provision is made for partial payments.
This can be easily overcome with this form of register. Any unpaid
balance of a current item will be carried to the _suspense_ column.
If further partial payments are likely to be made, the amount should
be entered in the _credit_ column and the name of the payee in the
_remarks_ column. Several lines should then be allowed for the account,
permitting the entry of as many separate payments.
When all bills are paid as soon as audited, taking advantage of cash
discounts, there is no necessity for columns intended to care for
suspense items. All vouchers will be paid not later than during the
month next following the date of entry, and there will be no unpaid
vouchers not found on the current or next preceding month's record.
=7. Operation of Voucher System.= While accountants have introduced
many details into the operation of the voucher system, all intended
to make the application of the system more nearly perfect in some
particular business, the general routine of conducting the system is
summed up in the following:
1. Auditing of invoices.
2. Executing and registering vouchers.
3. Filing audited vouchers.
4. Paying vouchers.
5. Filing paid vouchers.
6. Indexing paid vouchers.
=8. Auditing of Invoices.= When invoices are received they should
immediately go to the purchasing agent. If there is no regularly
appointed purchasing agent, or in a business like a department store
where there are several buyers, the invoices should be kept by the
auditor, comptroller, or chief accountant until the goods are received,
when he will obtain the O. K. of the person who ordered the goods or
incurred the obligation.
Pending the receipt of the goods, the invoices should be filed
alphabetically, under the name of the vendor. The file may be one
of the flat files which can be kept on the desk or if the number of
invoices be large, a section of a vertical file drawer can be used.
When the goods have been received, which will be attested by a report
in some form by the receiving clerk, the invoice is O. K.'d for
quantities and prices by the buyer, and extensions are checked by the
auditor or chief accountant.
=9. Executing and Registering Vouchers.= As soon as the invoices are
audited, vouchers are executed and entered in the invoice register.
Extensions are made to the proper columns, placing the accounts on the
books, just as would be done if invoices were credited to accounts of
the vendors in the general or purchase ledgers.
Vouchers should never be made for invoices in dispute, as to prices
or on account of claims for shortage, damaged goods or other cause.
Until such claims are adjusted, the invoices should be kept in a file
reserved for items in suspense. When the books are closed, such items
must be included under liabilities in the balance sheet. To avoid
actually entering them on the books, they may be entered in the balance
sheet under some such caption as "_Suspense Accounts_."
=10. Filing Audited Vouchers.= The vouchers are now ready for filing
until date of payment. This does not apply if invoices are always paid
as soon as audited, but in the majority of business houses at least a
part of the vouchers will not be paid until the last due date; or if
discounts are taken, they will be paid on the last discount date.
Some provision must be made for bringing these vouchers to notice on
the date at which they should be paid. For this purpose, a "tickler"
or date file is used. This consists of a file with an index of 31
numbered index sheets, intended to represent the days of the month, and
sometimes a set of twelve index sheets printed with the names of the
months.
The audited vouchers are filed under the date when payment is to
be made, either the discount date or the last due date, by placing
them back of the index sheet bearing the corresponding number. To
illustrate; if an invoice is dated the 2nd of the month, and terms are
2/10, the last discount day will be the 12th, and the voucher will be
filed back of the No. 12 index sheet. If payment is due in a subsequent
month, the voucher is filed back of the corresponding monthly index,
then on the first of the month these vouchers are distributed under the
proper dates.
=11. Paying Vouchers.= Each day the vouchers filed back of that day's
index are removed from the file for attention. If for any reason they
are not to be paid that day, they should be filed under the next date
when it is desired to bring them to notice. It may be well to note at
this point that the vouchers and invoices are usually filed together in
the date file.
The check is now written and entered in the cash book or the check
register, attached to the voucher, and mailed. Or if a voucher check is
used it is only necessary to date and enter. These payments are posted
from the cash book to the voucher register. It is not a safe plan to
enter the voucher check direct in the voucher register, as postings to
the cash book are liable to be overlooked. Payments in one day may be
recorded on widely separated pages of the voucher register, while in
the cash book or check register they would be entered consecutively,
making posting much less difficult.
When the voucher and check have been mailed the invoices are placed in
a temporary file, indexed alphabetically, where they are kept until
the return of the receipted voucher. It will be noted that we do not
advocate mailing the original invoice with the voucher. This temporary
file is examined from time to time, and if any vouchers have been out
an unreasonable length of time, the vendors are asked to sign and
return them, or sign duplicates sent for the purpose.
When the voucher check is used, the temporary file for invoices is not
required. The checks, if cashed, must be returned through the bank, and
the invoices can be filed permanently.
=12. Filing Paid Vouchers.= On the return of the voucher, properly
receipted, the invoices which it pays are removed from the temporary
file, when all are ready for permanent filing.
The invoices are permanently filed in an alphabetically indexed file,
under the names of the vendors, keeping all invoices from each firm
together. At some time before filing, preferably when the voucher is
executed, the voucher number should be entered on the invoice, and
when several invoices are paid by one check, they should be fastened
together with a staple or other suitable device.
The paid vouchers should be filed in numerical sequence, with indexes
numbered by 100's and 20's to separate them and to assist in locating
any desired number. If we want to find voucher No. 964, we turn to the
index 900, constituting the main division, then to index 60, back of
which the desired voucher will be quickly located. A file should be
procured of suitable size to accommodate the voucher to be filed.
[Illustration: Fig. 14. Card Index of Vouchers Paid]
=13. Indexing Vouchers.= With the permanent filing of the paid
voucher the transaction is closed, with one exception. There must be
another index to the voucher file. Knowing the number, we can quickly
locate any voucher or find its record on the register, but if we want
to locate the voucher paid to Jackson & Co.--without knowing the
number--we have no guide.
Reference to the original invoices, filed alphabetically, on which the
numbers are noted, will locate the voucher, but there are vouchers for
which no invoices are on file. To locate these by name of payee, an
alphabetical index is necessary, and it is advisable to include all
vouchers even when invoices are on file.
For this purpose, a card index is recommended, and a suitable form
is shown in Fig. 14. A card is used for each person or firm to whom
vouchers are issued, and all vouchers are listed by date and number.
The cards are filed alphabetically, making it easy to find any name.
=14. Voucher File.= The manner of filing and indexing invoices and
vouchers, from the receipt of the invoices to the permanent filing of
the paid voucher, has been explained. For the file itself, the vertical
file is recommended.
[Illustration: Fig. 15. File Showing Method of Indexing Vouchers]
Fig. 15 illustrates one drawer of a vertical file, subdivided with the
different indexes required, showing how in a small business a single
drawer can be made to answer all purposes.
In a large business several drawers would be required. The first drawer
would be for pending invoices, where would be filed invoices for which
shipments have not been received. The second drawer would contain
audited vouchers held for payment, and suspense items; the latter
including invoices held for adjustment of claims. Paid invoices and
paid vouchers would each require a separate drawer.
Files should be selected with reference to the size of the papers to be
filed. Manufacturers of such equipment now supply cabinets in sections,
in a great variety of sizes, making it possible to build up a filing
cabinet with drawers to fit every paper of standard size.
DEMONSTRATION
=15.= The operation of the voucher system in respect to the records in
the register is demonstrated in the illustration, Fig. 16, the record
showing how the following transactions are handled. Invoices listed
have been audited for payment.
[Illustration: Fig. 16. Voucher Register Showing Entries]
--Jan. 12th--
National Mercantile Co.
100 bbls. flour $4.25 $425.00
Dated Jan. 9th
Terms 2/10, N/30
--Jan. 12th--
Western Grocer Co.
50 cases soap 2.10 105.00
Dated Jan. 8th
Terms 2/10, N/30
--Jan. 14th--
Morton Salt Co.
100 bbls. salt .85 85.00
Dated Jan. 11th
Terms 1/10, N/30
--Jan. 15th--
Paid voucher No. 1 to
National Mercantile Co.
--Jan. 15th--
Paid voucher No. 2 to
Western Grocer Co.
--Jan. 16th--
Watson & Snow
60 bbls. vinegar, 3000 gals. .14 420.00
Dated Jan. 12th
Terms N/30
--Jan. 17th--
Jennings Coal Co.
3 tons coal 6.50 19.50
Dated Jan. 17th
Terms N/30
--Jan. 18th--
Paid pay roll
Wages of laborers 125.50
Office salaries 37.50
--Jan. 19th--
Paid voucher No. 3 to
Morton Salt Co.
The illustration, Fig. 16, shows the complete record of these
transactions in the voucher register. The total footings of all
distribution columns agree with the total of vouchers payable column,
proving the extensions to be correct. The combined totals of checks and
discounts equal the total payment column. Unpaid vouchers are extended,
and the total of this column added to the total payments equals the
total of vouchers payable.
[Illustration: Fig. 17. Cash Disbursement Book]
Our voucher register being in balance, footings are now posted. The
total of _vouchers payable_ column is posted to the credit of that
account in the general or private ledger, and the footings of the
distribution columns are posted to the debit of their respective
accounts.
Fig. 17 illustrates how the payments are recorded on the disbursement
or credit side of the cash book. When the checks are written they are
entered in the cash book, from which they are posted to the voucher
register. Voucher numbers are entered when the amounts are posted.
At the end of the month the columns are footed, and the totals of the
discount and check columns are posted to the debit of vouchers payable.
Footings of _discount_ and _total_ columns are posted to the credit of
discount on purchases and bank accounts.
The vouchers payable account in the ledger would now appear as follows:
_Vouchers Payable_
Dr. Cr. Balance
$777.00 $1,216.50 $439.50
We have already seen that the voucher register balances, and turning to
that record, we find the footing of the unpaid vouchers column to be
$439.50, which agrees with the balance of vouchers payable account.
EXERCISE
Prepare a form of voucher register providing for distribution to the
following accounts: Merchandise, Purchases, In-Freight, Expense,
Salaries, and Sundries. One of the chief requisites of the accountant
is the ability to prepare suitable forms for accounting records. Care
should be used in preparing this form to omit no detail that should be
included in such a voucher register.
When the register has been prepared, record the following transactions.
--Feb. 12th--
Enter the following invoices
#1 Jones & Laughlin
For merchandise $164.20
Date 2/10, Terms 2/10, N/30.
#2 Francis & Roberts
For expense
Date 2/12, Terms cash 27.50
--Feb. 13th--
#3 David Nelson & Sons
For merchandise 239.80
Date 2/11, Terms 3/10, N/30
Paid Henry Meyer
For salary 25.00
Check #1
--Feb. 14th--
Paid Jones & Laughlin
by check #2, Voucher #1
less cash discount
--Feb. 15th--
Paid Francis & Roberts
by Check #3, Voucher #2
less cash discount
--Feb. 16th--
Paid David Newman
for rent 40.00
Check #4
--Feb. 17th--
Enter the following invoices
#4 National Furniture Co.
For office furniture 65.00
Date 2/16, Terms 2/10, N/30
#5 Watkins & Hollister
For merchandise 84.00
Date 2/15, Terms 2/10, N/30
--Feb. 19th--
Paid David Gillette, Agt.
For in-freight 9.62
Check #5
Foot all columns as for posting at end of the month.
UNIT SYSTEM OF VOUCHER ACCOUNTING
=16.= In all classes of accounting records, the unit system is rapidly
gaining in popularity. The unit system, so called, consists of
individual records of each transaction or each item recorded, instead
of a combination of several transactions in one record.
The increase in the use of the unit system has been brought about very
largely by the improvements in typewriters, which make it possible to
produce several copies of a given document at one writing. An example
of the application of the unit idea is seen in modern sales records,
where duplicate invoices are made, one copy serving as a sales sheet
and posting medium.
[Illustration: A VIEW IN THE GENERAL OFFICES OF THE S. OBERMAYER CO.,
CINCINNATI, OHIO]
The unit system has been very successfully applied to voucher
accounting, saving much time and resulting in very complete records.
Compared with ordinary voucher systems, the most prominent feature of
the unit system is a method of distribution by filing, rather than by
means of a voucher register.
All vouchers are made on the typewriter, in manifold, one or more
copies being used for record purposes only. The original is used
exactly as described in the preceding pages.
An essential feature of the system is that a copy of the voucher is
provided for each account to which it is to be distributed. When one
account only is involved, the voucher is made in duplicate, but if the
amount is to be distributed to two accounts an extra copy is required.
The voucher should be so arranged that the distribution can be shown on
the face of the duplicate and triplicate copies.
The duplicate voucher is filed according to its distribution, instead
of recording the amount in the voucher register. A vertical file is
used for this purpose. The index cards are headed with the names of the
accounts, and are arranged in the order of the accounts in the ledger;
this being the order in which the same accounts would be arranged in a
voucher register. Back of each index is a folder in which the vouchers
are filed.
Each voucher copy is filed in the folder representing its proper
account, and is securely fastened to the folder with a staple or paper
fastener. When this voucher is filed it is also recorded on the outside
of the folder, which is printed as shown in Fig. 18.
This form is designed for a record of amounts, distributed under the
proper monthly headings. The amount of each voucher is carried to the
current month's column. At the end of the month, the footing of the
column shows the amount to be charged to that particular account in the
general ledger.
To arrive at the total of vouchers payable account, a recapitulation
sheet, ruled as shown in Fig. 19, is used. This is an index card, and
is placed in the front of the file. Totals of all account folders
are entered in the proper columns of this sheet, at the end of each
month. Payments are posted to this sheet at the end of the month, from
the cash book, and the balance extended. This balance, of course,
represents the unpaid vouchers and is checked against the unpaid
voucher file.
[Illustration: Fig. 18. Front of Folder for Unit System of Voucher
Accounting]
[Illustration: Fig. 19. Monthly Recapitulation for Unit System of
Voucher Accounting]
The totals of the different account columns are posted to their
respective accounts in the general ledgers, either directly from the
recapitulation sheet, or through the journal. The recapitulation sheet,
as here shown, is a transcript of the vouchers payable account, and
might be used as a ledger card, but it is generally considered better
practice to carry the account in the general or private ledger, as
usual.
Such a voucher system furnishes a complete record, with much less
transcribing of items, than is involved in the use of the voucher
register. The copy of the voucher is made at the same writing as the
original, the amount of each individual voucher is entered but once,
on the account folder, and monthly totals, only, are carried to the
distribution columns on the recapitulation card.
This system is equally well adapted to the loose-leaf method. A sheet
is used for each account, behind which the vouchers are filed, and a
monthly recapitulation sheet is provided for distribution.
COMBINED PURCHASE LEDGER AND INVOICE FILE
=17.= Not every business readily adapts itself to a complete voucher
system. Special conditions sometimes arise which make it seem advisable
to keep ledger accounts with all firms from whom the business is making
purchases. A case in point is a business, lacking capital to pay all
bills promptly, necessitating payments on account, or by note, instead
of payments covering certain invoices in full.
To obviate the difficulties, in maintaining a complete voucher record,
under these and similar conditions, many substitutes have been devised.
As an example of what may be accomplished in this direction, we
illustrate a system which is in successful operation in a manufacturing
business.
In the ledger, the usual nominal accounts are kept but no purchase or
voucher register is used. Columns are provided on the credit side of
the cash book for such expense accounts as are usually paid in cash,
that is, for which no invoices are rendered, and for accounts payable.
For the purchase accounts with firms and individuals, a vertical file
is used. Each creditor is assigned a folder, on the front of which a
suitable record form is printed. This form is shown in Fig. 20. The
name and address are written at the top, and the ledger account is kept
in the columns at the extreme left of the form. All of the columns for
distribution are left blank, it being seldom that purchases from one
firm are distributed to more than a half dozen different accounts.
When an invoice has been O. K.'d it is immediately filed in the proper
folder. The total is entered in the credit column and distributed to
the proper accounts, the names of which are written at the head of the
distribution columns. Payments on account are posted to these ledger
accounts from the cash book.
If the distribution is properly made, the totals of all distribution
columns will agree with the total of the credit column. At the end of
the month the total of these distribution columns on the individual
account folders are drawn off on the monthly recapitulation sheet
illustrated by Fig. 21. The totals shown by the recapitulation are
posted to the debit of the corresponding ledger accounts, while the
grand total is posted to the credit of accounts payable account;--which
is the controlling account of the purchase ledger. Totals of payments
on account are posted to the controlling account from the cash book.
The proof of accuracy of the controlling account is found in the usual
way, by checking against the balances of the individual purchase
accounts.
With this system, invoices are filed, and the amounts posted, with
practically one operation. The items which make up each ledger account
are distributed as soon as posted, totals only being carried to the
recapitulation sheet, from whence they reach the ledger.
Accounts are quickly located, as the folders are indexed
alphabetically. When an account is balanced it must be left in its
place until the end of the month, provided credits have been entered in
the current month, so that totals of distribution will be carried to
the recapitulation sheet. At the end of the month, all accounts which
balance may be transferred to a section of the file reserved for closed
accounts. Should any of these accounts again become active, they are
transferred to the regular file without the slightest confusion.
For the purpose of saving time, the balances of all open accounts may
be drawn off when the totals of the distribution columns are obtained.
[Illustration: Fig. 20. Combined Purchase Ledger and Voucher System]
[Illustration: Fig. 21. Monthly Recapitulation and Distribution Sheet]
While not recommended for general adoption this system has its points
of merit, and in certain contingencies would undoubtedly prove very
satisfactory. The main reason for its publication in this work is to
show the possibilities of modifying a system, in respect to details,
without destroying its more important features. The voucher feature,
the obtaining of a formal receipt for every payment, can be maintained
just as effectively with this system as with a more formal voucher
system.
THE PRIVATE LEDGER
=18.= A ledger, devised to contain such accounts as the principals
of a business desire to keep from the knowledge of the bookkeeper or
other office employes, is known as a private ledger. The title is also
frequently used to designate an ordinary general ledger.
The accounts most frequently found in the private ledger are Capital
accounts, Profit and Loss, Reserves, Surplus, Bills Payable, Bonds
and Mortgages Payable, and Controlling accounts with the general or
personal ledgers. It may also contain such accounts as Salaries of
Officers, or Partners, Investment and Drawing accounts, and accounts
with real or nominal assets. If it is desired to keep from the
employes, knowledge of the exact nature of any transaction, or the
standing of a particular account, it can be done by making use of the
private ledger.
When both ledgers are used, the private ledger contains only those
accounts which it is desired to keep _private_, while the general
ledger is kept for all other accounts, except those included in the
personal ledgers.
The private ledger is most commonly used in large businesses where, for
various reasons, a number of employes have access to the books, and
it is desired to keep them in ignorance of the private affairs of the
concern. The private ledger is usually kept by one of the partners, an
officer, the auditor, or the chief accountant.
=19. Advantages of Private Ledger.= The primary advantage of the
private ledger to the principals of a business, is that by its use,
they can keep to themselves all details of transactions of a special
nature.
Some other advantages that accrue to the principal may be enumerated as
follows:
He can, through the private ledger, keep an eye on the activities and
condition of the business as a whole, or of any particular department
or branch of that business.
He can keep in touch with the liabilities, or with the total amount of
personal accounts outstanding.
He can absolutely control the distribution of expense in manufacturing
operations.
He can keep from his employes, knowledge of the profits or losses of
the business.
Partners can keep private the amount of their investments, or the
salaries drawn.
Salaries paid to individual officers or employes can be kept private.
Dividends declared, capital subscribed, investments of a special
nature, or amount of assets of any kind, can all be kept from the
knowledge of employes.
=20. How Operated.= Accounts in the private ledger must not conflict
with accounts in general or personal ledgers, and the fact that
private accounts are kept should not interfere with the balance of the
general books. To insure against any such conflict, a private ledger
controlling account is kept in the general ledger.
In the general cash book, and sometimes in the journal, debit and
credit columns headed _Private Ledger_ are provided. All entries
affecting private ledger accounts are extended in these columns, but no
particulars are recorded. At the end of the month, the totals of these
columns are posted to a private ledger account in the general ledger.
This controlling account then appears in the general ledger trial
balance, and must agree with the balance of accounts in the private
ledger.
With the private ledger a private journal is used, in which entries
affecting private ledger accounts are made, with explanations in detail.
As an example of the use of the private ledger we will suppose that a
payment of $500.00 is to be made to a certain party, and it is desired
to keep that transaction private. The bookkeeper is instructed to draw
a check for the amount, to be charged to private ledger account. He
enters the check in the general cash book, debiting private ledger and
crediting cash or bank. The entry is posted from the general cash book
to the private journal, where full particulars are recorded, from which
it is posted to the private ledger. In the case referred to, the amount
of the check is debited to the proper nominal account, and credited to
a general ledger account.
The general ledger account in the private ledger is a controlling
account which agrees with the private ledger account in the general
ledger. Only entries affecting general ledger accounts are posted to
this account. Entries involving changes in private ledger accounts
only, are made in the private journal direct.
Some concerns keep the controlling accounts with the sales and purchase
ledgers in the private ledger. At the end of the month, total debits
and credits to accounts in these ledgers are entered in the private
journal. These totals are obtained from the general cash book, sales
book, purchase book, and any other books from which postings are
regularly made.
[Illustration: Fig. 22. Cash Book with Columns for Private Ledger
Accounts]
When a private ledger is kept, it precludes the possibility of forced
balances in the general ledger trial balance, since the balances of the
private ledger accounts must agree with the private ledger controlling
account in the general ledger, and if sales and purchase ledger
controlling accounts are kept in the private ledger, these must balance
with the personal accounts in those ledgers. The use of a private
ledger not only acts as a check on trial balance errors, but simplifies
the trial balance by making possible a proof of ledgers in sections.
Fig. 22 is an illustration of a cash book with columns for the private
ledger account.
=21. Manufacturing Accounts in the Private Ledger.= Not infrequently,
manufacturers find it advisable to keep private certain details
which affect costs, or even all knowledge of the exact cost of their
manufactured product. This may be done by keeping certain manufacturing
controlling accounts in the private ledger.
In determining the cost of manufacture of any class of goods, three
elements enter into the computation; material, labor, and expense. To
determine the cost of the first two items is comparatively simple,
requiring only an efficient system of records in the factory. But to
determine the amount of expense of all classes, included in the cost of
a given article, job, or operation, is more difficult.
A system of records that will show the exact cost of such items as
power, heat, or taxes properly chargeable to an individual job or
operation is obviously impossible, and it has been found necessary to
apportion these, and all similar items of expense, on a percentage
basis. Usually this percentage is based on some element of cost which
can be determined with accuracy.
Cost accountants and engineers have worked out this percentage on the
basis of various elements of cost, as direct labor, material, machine
hour, man hour, or a combination of two or more of these elements. The
exact method used, which must be adapted to the conditions existing in
the individual factory, does not enter into this discussion.
Since there are numerous items of expense of the character referred
to, it is customary to group them, for purposes of cost computation.
Sometimes all such expense items are grouped under the one head of
General Expense. It is by means of a controlling account in the private
ledger, that the distribution of expense is made, thereby keeping
private the exact cost of manufacture.
The known cost of a certain job or article--the cost of material and
labor--is frequently referred to as the prime cost. The duties of the
cost clerk may end with determining the prime cost, his computations
not including expense items.
The total cost of material and labor for the month is charged to
private ledger account, material and labor accounts receiving proper
credit. The exact amounts of the various items of expense for the month
are also charged to private ledger account, with credits to expense
accounts.
In the private journal, these items are charged to various controlling
accounts, and credited to the general ledger controlling account. The
usual entries are:
Manufacturing Account $______
General Ledger $______
For material $______
For labor $______
Expense Distribution $______
General Ledger $______
For rent $______
For power $______
For repairs $______
Etc. Etc.
The percentage of expense for the current month on whatever element
based, has been determined from the actual results of the preceding
month. To illustrate, we will suppose that expense is apportioned on
the basis of direct labor; the cost of this item during the month was
$1,600.00, and the amount of expense charged to operation of the plant
during the same period was $240.00;--which gives us a ratio of 15%.
We wish to determine the cost of jobs as they are completed during the
current month. The records turned in by the cost department give us the
actual cost of material and direct labor, but not knowing the exact
ratio of expense to direct labor for this month, we use last month's
ratio, and add an amount equal to 15% of the known cost of direct
labor. When the actual results for the month are determined it is quite
probable that the ratio will vary from last month's record, as either
factor may change. It will be necessary to adjust this difference,
which is the reason for an expense distribution or expense adjustment
account in the private ledger.
By keeping the expense controlling account in the private ledger, the
principal can keep private, not only the actual cost of an article, but
the percentage of expense and the basis of the expense apportionment.
If thought desirable, he can add further amounts for the purpose of
establishing a selling price.
In actual operation, the amount of expense to be charged against
completed work will be computed, and the following entry made:
Manufacturing Account $______
Expense Distribution $______
The amount of expense charged
to jobs completed.
If the expense ratio used were exact, the expense distribution account
would balance at the end of each month, but owing to the fluctuations,
a balance will remain. This is adjusted by increasing or decreasing
the percentage used during the following month, and in this way the
accounts are kept in balance.
Manufacturing account has been charged with labor, material, and
expense,--the total manufacturing cost. Completed goods are charged to
a finished goods account, the entry being:
Finished Goods $______
Manufacturing Account $______
Net cost of goods completed
But manufacturing account will not balance, for there always will be
work in process, and the balance of the account will be the cost to
date of this work in process, a most important record.
This discussion is not intended to cover every possible use of
the private ledger, but, by means of examples, to suggest its
possibilities. The explanations and examples should afford the student
many hints of value.
EXERCISE
On a certain date, the following transactions are recorded on the books
of Carter & Adams:
Purchases on account $560.00
Sales on account 420.00
Paid for rent 75.00
Sales for cash 82.00
Henry Carter (partner)
Withdrew cash 50.00
John Adams (partner)
Advanced to the business 300.00
What items in the above list of transactions should, in your opinion,
be posted to the private ledger? On journal paper, make the entries and
show necessary private ledger accounts.
CHARTING THE ACCOUNTS
=22.= The proper arrangement of the accounts of a business is best
shown by a chart, in which the accounts to be kept are grouped
according to their relative importance. In laying out a chart of
accounts, they should be first separated into their proper divisions.
The natural divisions are capital, trading, and profit and loss.
Each division contains only those accounts that naturally belong
in that particular class. These divisions are then subdivided into
groups containing specific kinds of accounts, the groups being
arranged in logical sequence. As an example, the trading division of
a manufacturing business is divided into manufacturing and trading.
There may be several subdivisions of the manufacturing account; several
classes of goods may be manufactured and a manufacturing account kept
for each class, or it may be necessary to manufacture completed parts,
each requiring a complete manufacturing process. Detailed costs being
required for each of these completed parts, manufacturing accounts
are kept for each, the main division representing the cost of the
finished product, as a result of the assembling of the parts. The
completed parts are treated as raw material, when drawn for use in the
finished product, the total costs being finally absorbed by the main
manufacturing account. One of the many examples that might be cited
is a packing business, operating its own can factory and keeping a
manufacturing account to show the cost of cans. Other accounts show the
cost of the product packed in those cans, and both costs are absorbed
in the cost of the commodity as marketed.
The trading account is similarly subdivided. In a department store,
the manager of a department may receive a certain percentage of the
profits of his department. This necessitates trading accounts for each
department. A mercantile concern may operate branch stores and keep
trading accounts with each, on the books of the main office; a factory
may produce several lines of goods, with a corresponding subdivision of
trading accounts.
A chart of accounts not only furnishes a guide to the bookkeeper,
but presents in the most logical form, the natural divisions of the
business. It is both a working guide and a mirror of the accounting
records.
=23. Chart of Small Trading Business.= The most simple chart of
accounts is one for a small trading business conducted by a single
proprietor. Following is a chart of the accounts of such a business.
[Illustration: Fig. 23. Chart of Profit and Loss Accounts]
A study of this chart will disclose the reasons for the general
grouping of the accounts. The first general group, capital accounts is
subdivided into assets and liabilities. The assets are grouped in the
order of their availability; the order in which they can most readily
be converted into cash. The liabilities are grouped according to the
security; unsecured, secured and capital.
There being but one trading account, it is represented by a single
group, purchases and in-freight representing the cost of goods, and
sales the gross proceeds. The balance of this account exhibits the
gross profits.
[Illustration: Fig. 24. Chart of Profit and Loss Accounts]
We now come to the profit and loss account by which the trading or
gross profits are absorbed. This group contains, first, the revenue
producing accounts not represented in the trading account; second, the
revenue expenditures or expense accounts. The outer brackets of the
chart group all of the accounts under _Debit_ and _Credit_. This shows
that the balances of the accounts are debit or credit as the case may
be.
We have traced the profits to the profit and loss account, but in
closing the books they will finally be absorbed by the proprietor's
capital account. The chart, Fig. 23, traces the profits from trading
to proprietor's account. In the trading account, the gross profit
completes the balance. This profit is now absorbed by the profit and
loss account. Net profit completes the balance of profit and loss
account, and is, in turn, absorbed by the proprietor's account. Here,
the net profit added to previous investment, equals the present worth.
The chart, Fig. 24, also traces profits to the proprietor's account.
=24. Chart of Manufacturing Accounts.= A chart of the accounts of a
manufacturing business follows similar lines to that of a trading
business, the only change being the addition of the accounts of the
manufacturing group. The accounts of this group will depend both upon
the nature of the business and the extent to which the details of
operation are recorded.
A chart of the accounts of a harness and saddlery manufacturing
business is given herein. This business is divided into three
departments; harness, collar, and saddlery.
A record of the gross profits, resulting from the operation of each
department, being desired, we have three manufacturing and three
trading accounts.
The chart shows the accounts classified to exhibit detailed operations
of each department. The number of accounts in this chart is 98. This is
rather more than is required in the average business of this character,
but the chart furnishes a good illustration of the possibility of
segregating accounts of various classes.
Even so large a number of accounts, with the minute subdivisions here
shown, does not present the difficulties that might appear at first
glance. The principal requirement is a thorough knowledge of the items
entering into each account; the actual keeping of the accounts is a
matter of close attention to these details. When an elaborate chart of
accounts is laid out, it should be accompanied by detailed explanations
and instructions. Some large concerns issue printed instructions which
are given to all officers and employes who may be called upon to
determine, to what account an item should be charged.
CHART OF ACCOUNTS--HARNESS MANUFACTURING
CAPITAL ACCOUNTS
_Assets_
1 Cash
2 Bills Receivable
3 Accounts Receivable
Inventories--Harness Department
4 Finished Stock
5 Leather
6 Hardware
7 Supplies
Inventories--Collar Department
8 Finished Stock
9 Leather
10 Hardware
11 Supplies
Inventories--Saddlery Department
12 Finished Stock
13 Leather
14 Hardware
15 Supplies
Inventories--Machinery
16 Machinery--Harness
17 Machinery--Collar
18 Machinery--Saddlery
Inventories--Tools
19 Tools--Harness
20 Tools--Collar
21 Tools--Saddlery
Inventories--General
22 Office Fixtures and Supplies
23 Delivery Equipment
24 Real Estate--Land and Buildings
_Liabilities_
25 Accounts Payable
26 Bills Payable
27 Mortgages
Reserves
28 Depreciation of Buildings
29 Depreciation of Machinery
30 Depreciation of Tools and Fixtures
31 Bad Debts
32 Capital Stock
33 Surplus
MANUFACTURING ACCOUNTS
_A_ Harness Department
34 Purchases--Leather
35 Purchases--Hardware
36 Purchases--Supplies
37 In-Freight
38 Labor--Cutting Department
39 Labor--Manufacturing Department
40 Inventory Adjustment
_B_ Collar Department
41 Purchases--Leather
42 Purchases--Hardware
43 Purchases--Supplies
44 In-freight
45 Labor--Cutting Department
46 Labor--Manufacturing Department
47 Inventory Adjustment
_C_ Saddlery Department
48 Purchases--Leather
49 Purchases--Hardware
50 Purchases--Supplies
51 In-Freight
52 Labor--Cutting Department
53 Labor--Manufacturing Department
54 Inventory Adjustment
_D_ Manufacturing Expense Adjustment
55 Power, Heat and Light
56 Engine Room Supplies
57 Salaries--Superintendent and Factory Clerks
58 Wages Engineers and Miscellaneous
59 General Factory Expense
60 Repairs and Maintenance--Buildings
61 Repairs and Maintenance--Machinery
62 Repairs and Maintenance--Tools
Trading Accounts
_E_ Harness Department
63 Sales
64 Returns and Allowances
65 Inventory Adjustment
_F_ Collar Department
66 Sales
67 Returns and Allowances
68 Inventory Adjustment
_G_ Saddlery Department
69 Sales
70 Returns and Allowances
71 Inventory Adjustment
_H_ Profit and Loss
72 Interest Credits
73 Cash Discount Credits
74 Rent Credits
_I_ Administration
75 Insurance and Taxes
76 Salaries--Officers
77 Salaries--Bookkeepers and Clerks
78 Printing and Stationery
79 Legal Expenses
80 Postage, Telegraph and Telephone
81 Office Expenses
82 Traveling Expense--Officers
83 Misc. General Expense
_J_ Sales Expense
84 Advertising
85 Salaries--Salesmen
86 Commission
87 Traveling Expense--Salesmen
88 Trade Show Expense
89 Out-Freight and Express
_K_ Collecting
90 Collection Fees
91 Cash Discounts Allowed
_L_ Delivery Expense
92 Wages
93 Maintenance Horses and Wagons
94 Maintenance Motor Trucks
_M_ Depreciation Adjustment
95 Buildings
96 Machinery
97 Tools and Fixtures
98 Bad Debts
=25. Chart Explained.= The following explanations will give the student
a working knowledge of the operation of these accounts. Accounts, 1 to
33, inclusive, comprising assets and liabilities, are omitted, as no
instructions will be required for keeping these accounts. All accounts
are referred to by number.
34. _Purchases--Leather._ Charged with all purchases of leather for use
in harness department. Credited with all leather transferred to other
departments.
35. _Purchases--Hardware._ Charged with all purchases of hardware for
use in harness department. Credited with all hardware transferred to
other departments,
36. _Purchases--Supplies._ Charged with all purchases of supplies
and materials, other than leather and hardware, for use in harness
department. Credited with all transfers to other departments.
37. _In-Freight._ Charged with the cost of freight and cartage on all
purchases for the harness department. Totals pro-rated to department
purchase accounts at the end of each month.
38. _Labor--Cutting Department._ Charged with the wages of all men
employed in cutting department, including foreman.
39. _Labor--Manufacturing Department._ Charged with the wages of all
harness makers, and others employed in the harness manufacturing
department.
40. _Inventory Adjustment._ An account used for the temporary
adjustment of inventories for the purpose of obtaining monthly
balances. At the end of the fiscal period, or whenever the books
are closed, the balance of this account is transferred to inventory
accounts.
Accounts 34 to 40, inclusive, are finally closed into a harness
manufacturing account.
The same instructions apply to accounts 41 to 47, inclusive, in respect
to the collar department, and to accounts 48 to 54, inclusive, in
respect to the saddlery department.
55. _Power, Heat and Light._ Charged with all fuel and electric power,
consumed for power, heat and light.
56. _Engine Room Supplies._ Charged with all oils, waste and other
supplies, used in the engine room.
57. _Salaries--Superintendents and Factory Clerks._ Charged with
salaries of general superintendent, superintendent's clerk and all
clerks employed exclusively in the factory, as time keepers and clerks.
58. _Wages--Engineers and Miscellaneous._ Charged with wages of
engineer and assistants, wages of shipping clerk and assistants, wages
of receiving and stock clerks, wages of all general laborers whose time
is not chargeable to a specific department.
59. _General Factory Expense._ Charged with all miscellaneous items of
factory expense not provided for in other accounts.
60. _Repairs and Maintenance--Buildings._ Charged with all material and
labor consumed in the repairs and maintenance of buildings.
61. _Repairs and Maintenance--Machinery._ Charged with same items as
No. 60, as applied to machinery.
62. _Repairs and Maintenance--Tools._ Same as No. 61, applied to tools.
Accounts 55 to 62, inclusive, are closed into a manufacturing expense
adjustment account, monthly. This account is credited with expense
charged to each departmental manufacturing account, the distribution
being made on a percentage basis.
63. _Sales--Harness Department._ Credited with the amount of all sales
in the harness department.
64. _Returns and Allowances._ Charged with all returns and allowances
on account of harness sales, except cash discount.
65. _Inventory Adjustment._ An account used for the temporary
adjustment of inventories of finished stock, for the purpose of
obtaining monthly statements of gross profits. At the end of the
fiscal year, the balance of the account is transferred to inventory of
finished goods account, through the trading account.
Accounts 63 to 65, inclusive, are closed into a harness trading
account, at the end of the fiscal year. For purposes of comparison,
monthly trading statements are made, leaving these accounts undisturbed
until the end of the year.
Accounts 66 to 68, inclusive, and 69 to 71, inclusive, are handled
exactly the same manner, in relation to the collar and saddlery
departments.
72. _Interest Credits._ Credited with all interest collected on past
due accounts, or received on outside investments.
73. _Cash Discount Credits._ Credited with all discounts earned by the
prepayment of bills.
74. _Rent Credits._ Credited with all amounts received from rentals
of property owned by the company, or as a result of subletting leased
property.
75. _Insurance and Taxes._ Charged with all sums paid for fire,
liability or other insurance, state and municipal taxes, and license
fees.
76. _Salaries--Officers._ Charged with the salaries of all
administrative officers, and directors' fees.
77. _Salaries--Bookkeeper and Clerks._ Charged with amounts of salaries
of all bookkeepers, stenographers, and other office clerks.
78. _Printing and Stationery._ Charged with the cost of all stationery
and printed matter used in the offices.
79. _Legal Expense._ Charged with attorney's fees and all expense of
litigation.
80. _Postage, Telegraph and Telephone._ Charged with all sums paid for
postage, and telegraph and telephone service.
81. _Office Expenses._ Charged with sundry items of office expense, not
provided for in other accounts.
82. _Traveling Expense--Officers._ Charged with all legitimate
traveling expenses incurred by officers in the interest of the company.
83. _Misc. General Expenses._ Charged with all expense items not
otherwise accounted for.
Accounts 72 to 83, inclusive, are closed into an administration account.
84. _Advertising._ Charged with all sums paid for advertising,
including periodical advertising, catalogs, circulars, and novelties.
85. _Salaries--Salesmen._ Charged with the salaries of all traveling
salesmen.
86. _Commissions._ Charged with all commissions paid to brokers or
salesmen.
87. _Traveling Expenses--Salesmen._ Charged with all legitimate
expenses of salesmen, incurred in the interest of the company.
88. _Trade Show Expense._ Charged with all expenses incurred on
account of exhibitions at trade shows. Sometimes treated as a part of
advertising expense.
89. _Out-Freight and Express._ Charged with all freight and express
paid on goods sold at delivered prices.
Accounts 84 to 89, inclusive, are closed into a sales expense account.
90. _Collection Fees._ Charged with all fees paid to banks, attorneys
or others, for the collection of accounts.
91. _Cash Discounts Allowed._ Charged with all allowances to customers,
for prompt payment of bills.
Accounts 90 and 91 are closed into a collecting account.
92. _Wages._ Charged with the wages of drivers and barn men.
93. _Maintenance.--Horses and Wagons._ Charged with cost of feed,
stable supplies, repairs to harness and wagons, blacksmithing and
horse-shoeing.
94. _Maintenance--Motor Trucks._ Charged with all expense of up-keep
and repairs to delivery trucks.
Accounts 92 to 94, inclusive, are closed into a delivery expense
account.
95. _Depreciation--Buildings._ Credited monthly with current charges
for depreciation.
96, 97, and 98. Handled the same as No. 95.
Accounts 95 and 98 are closed into a depreciation adjustment account.
[Illustration: Manufacturing Ledger with Closing Entries]
[Illustration: Manufacturing Ledger with Closing Entries]
[Illustration: Manufacturing Ledger with Closing Entries]
The illustrations (pp. 48-50) show how all of these accounts are
assembled into main groups, and finally closed into profit and loss,
and capital accounts. An explanation of the accounts in the harness
department will be sufficient to show how all of the accounts are
treated.
Harness manufacturing, account _A_, is charged with accounts 34 to 39,
inclusive, and the proper portion of account _D_. It is credited with
the cost of all finished goods, the amount being transferred to account
_E_, harness trading. It is credited with the increase in inventories
over the preceding month, this amount being transferred to account 40;
if inventories show a decrease, the amount is charged.
Harness trading, account _E_, is charged with cost of finished goods
from account _A_; with account 64; with gross profits, transferred to
profit and loss, account _H_. It is credited with sales, account 63;
with increase in inventory, account 65.
Gross profits on account of trading are closed into profit and loss.
Inventory adjustment accounts Nos. 40 and 65, are still open and the
balances show total inventories. The actual amounts of inventories are
transferred to accounts 4 to 7, inclusive. This will leave a balance
in inventory adjustment account No. 40, representing work in process
in the harness factory. These inventory adjustment accounts are closed
only at the end of the fiscal year, or when the books are closed. At
the beginning of a new fiscal period the inventories are again charged
to inventory adjustment accounts, and adjusting entries made monthly in
manufacturing and trading accounts.
REVIEW QUESTIONS.
PRACTICAL TEST QUESTIONS.
In the foregoing sections of this Cyclopedia numerous illustrative
examples are worked out in detail in order to show the application of
the various methods and principles. Accompanying these are examples for
practice which will aid the reader in fixing the principles in mind.
In the following pages are given a large number of test questions
and problems which afford a valuable means of testing the reader's
knowledge of the subjects treated. They will be found excellent
practice for those preparing for Civil Service Examinations. In some
cases numerical answers are given as a further aid in this work.
REVIEW QUESTIONS ON THE SUBJECT OF THEORY OF ACCOUNTS