STATISTICS IN BUSINESS; PRIVATE BOOKS; JOURNAL VOUCHERS; BUILDING
EXPENSES AND INCOME
STATISTICS IN BUSINESS
Value of Business Statistics
Because of the complexity of modern business it is practically
impossible for the management or an executive of a large organization
to rely on personal observations and impressions when formulating
plans and policies. To do so would lead to frequent errors and
costly mistakes of judgment. The human mind cannot adequately grasp
the significance of a multitude of facts in the variety of their
occurrence. In consequence many problems of management are today being
solved by the intelligent use of statistical records or tabulations
of past and present operations. By this means the pertinent facts
regarding a business are classified and summarized, and the analysis
of complicated figures and large aggregates is made possible. The
relation of the groups to each other and of each group to the past,
the relation of the unit to the whole, and so on, is best shown by the
tabulation of facts in the form of figures. By reducing the facts to
figures comparisons can easily be made and the proportion of one thing
to another is more accurately presented. By divesting facts from their
aspect in daily life and the caprices of temperament, a truer estimate
of tendencies can be made. Because statistics generally deal with large
masses or great numbers, standards, ratios, and types can easily be
established. The mortality statistics of insurance companies afford a
good example of general averages or ratios that hold true when applied
to such an uncertain proposition as the length of human life. Business
statistics, however, cannot attain this accuracy because facts of a
similar kind are not of such frequent occurrence and consequently the
average is not so reliable. But the manager who is acquainted with the
limitations of the statistical method and who intelligently understands
the business forces with which he is dealing, finds it sufficiently
accurate in the great majority of instances. The frequent and almost
universal use of the sampling method of testing mailing lists, the use
of figures as to the density of population in selling campaigns, and
the increasing use of time studies in factories, show that statistics
can be made to serve as a valuable guide in arriving at important
decisions.
Railroad Statistics
Railroad companies have for a long time used statistics to aid them
in interpreting the mass of detail involved in operating over a
large area. The figures are generally grouped into two classes: (1)
those showing results of operations, such as annual reports; and (2)
tabulations of operating details. The latter are devised mainly for the
purpose of checking and control. Another classification, more minute,
is the grouping of railroad statistics according to their nature into:
1. Statistics pertaining to maintenance of roadbed,
track, buildings, signals, etc.
2. Cost of maintaining locomotives, cars, and rolling
stock in general in good condition.
3. Expenses connected with the movement of trains.
4. Expenses in connection with the securing of new business.
5. Administrative expenses.
By comparing the figures for each group the existing relationship leads
to valuable conclusions.
The compilation of figures showing receipts per passenger, average
journey per passenger, average haul of merchandise, receipts per ton
of freight, relation of cars run to business done, proportion of
loaded and empty car space, cross hauling of empty cars, percentage
of empty to loaded cars, compilations showing cost per passenger
mile or ton mile—these are all valuable and pertinent facts about
railroad operation. The most significant way of stating some facts is
by means of figures. This is especially true of such important and
related phases of operation as, for example, the ratio of the pay-roll
to operating revenue, a comparison of the pay-roll of engine men
and trainmen with the engine and train mile, or a comparison of the
business done with the pay-roll at each station.
Manufacturing Statistics
Statistics are being increasingly utilized for recording facts in
connection with production, especially in factories where a system
of cost-keeping is in vogue. Various forms and cards are frequently
used to collect the required data which is then grouped or classified
in various ways. The performance of each workman is recorded and the
various records are combined into groups and compared. Statistics as
to output, orders on hand and in process, figures showing idle time,
capacity of machines and actual use, are examples.
Mercantile Statistics
The use of statistics in mercantile establishments is perhaps even
more prevalent than in factories. This is chiefly because factories
handle comparatively few lines, whereas mercantile houses generally
carry or deal in a large number. The figures compiled are generally
concerned with one or more of the following:
1. Sales. The comparison here is by totals, departments, cash and
charge sales, salesmen, territories, lines, percentages to total, new
business, etc.
2. Profits. The same classification is applied as for sales. Generally
discounts and profits are compared.
3. Inventory of stock. Comparison made by cost or selling price,
purchases, quantities sold, used, balance, percentages of sales,
departments, lines, etc.
4. Cost of conducting the business. Comparison made by classes of
expense, departments, percentage of sales, etc.
5. Collection. Comparison made by percentage of sales, territory, etc.
6. Notes, etc., due. Comparisons made with sales, territories, lines.
7. Goods returned. Comparisons made with lines, territories, percentage
of sales.
8. Efficiency of employees. Tabulations made showing profits,
percentage on standard of work performed, comparisons between
departments.
9. Advertising. Compilations by departments, mediums, results, etc.
10. Turnover. Compilations showing total business and rate of turnover,
compared by departments, lines, number of sales, etc.
11. Cash. Statistics giving receipts and disbursements in convenient
groups.
12. Mark-ups and mark-downs. Statistics by departments, percentages,
etc.
13. Summaries of operation. These are generally compiled periodically
but are carried on continuously as long as is desirable.
14. Production. Statistics showing amount, completed work, work in
process, orders on hand, time lost, total costs, unit cost, labor cost,
material cost, overhead. All are classified into groups or further
subdivided for comparison.
Each individual manager selects the particular set of facts which he
thinks will best show the trend of the business. The complexity of the
business usually determines the number of reports.
Use of Graphs in the Presentation of Statistics
[Illustration: _Chart Showing Comparison of Sales with Cost of
Advertising_]
Long experience or special aptitude may qualify a man to grasp readily
the full significance of statistical compilations in a variety of forms
without the use of charts or graphs. The quicker and surer method,
however, in driving home the essential points of statistics is their
graphic presentation. For the majority of business men the graphic
method will accomplish what statistical tabulation fails to do. While
facts are of prime importance, their method of presentation affects
their usefulness and is therefore of greater importance. The great mass
of figures that accountants and efficiency men only too often present
in incomparable form, sometimes far in excess of requirements, is best
classified by means of charts.
Advantages of the Use of Graphs
[Illustration: Chart Showing Comparison of Sales with Gross Profits]
The arguments in favor of the use of charts are that the importance
of written words or figures is apt to be judged from the amount of
space used, or the time spent in writing or compiling them; whereas the
graphic method shows the vital facts in a way which compels attention.
The statistics are easily compared and when figures are visualized in
graphic form relations are seen at once. One week is readily compared
with another, one year with the previous year, one man’s performance
with another’s, and so on.
Graphic methods are not only in many cases better but also cheaper.
This is especially true if a number of copies have to be made. It
requires more work to copy a mass of figures than to draw a few lines
or figures by means of blue-print tracings. If many copies are needed,
the photographic method of reproduction may be used. Then again, in
statistical tabulations it is necessary to rearrange the figures in
various orders so as to make different tabulations comparable.
[Illustration: _Chart Showing Comparison of Sales, Purchases, and Sales
Salaries_]
[Illustration: _Chart Showing Comparison of Sales with Cost of Sales_]
Principles of Graph Construction
The following principles should be observed in making graphs:
1. Graphs should be simple so that the full significance is readily
seen. If a chart requires a great deal of study its very purpose is
defeated. As a general rule, only two lines should be used. This is
especially true if the lines are apt to intersect one or more times.
If there are a number of interrelated figures to be presented, it is
better to make separate charts on one sheet or to place them together
in some other way.
2. Most statistics can be presented by one or more curves where the
quantity is expressed by the distance of the curve from the base line,
and the time is represented by the horizontal movement of the curve.
3. For a curve the vertical scale should be so selected that the zero
line will appear on the diagram. This may require a break in the graph,
as shown on page 585.
4. When the scale represents percentages the 100% line should be
emphasized in some distinctive way.
5. The curves should be sharply distinguished from the ruling of the
paper.
6. The lettering and the figures should be so placed as to be read as
easily from the base as the bottom, or from the right-hand edge of the
diagram as the bottom.
7. The titles should be clear and complete and, if necessary, subtitles
and descriptions should be used.
The illustrations on pages 585-588 show how data lend themselves to
graphic presentation.
PRIVATE BOOKS
Purpose and Content
Private books are sometimes kept when it is not desirable for
employees to know certain important data relative to the business.
Secrecy then is the main purpose in their use in a great many
businesses. The general knowledge of certain facts about the business
or certain processes or methods of procedure which belong peculiarly
to the business might be harmful. Where competition is particularly
keen between two or more concerns, instances have been known of
the employees of one concern being the paid agents of the other,
thus securing information essential to underbidding on contracts.
It is desirable at times to keep the employees of a partnership or
a corporation in ignorance of the earning capacity of the business
or of any secret contracts covering price agreements that may be
in effect according to which larger rebates are to be allowed one
concern than another. Other items about which it may be necessary to
maintain secrecy are: the valuations at which patents, franchises, and
other intangible assets are carried; partner’s capitals, drawings,
and salaries; manufacturing costs; the method and rate at which the
overhead expense is apportioned over the product; the policy as to the
creation of reserves of various sorts; the profit and loss account; the
methods of financing as indicated by notes payable; and so on.
Operation of Private Books
No particular difficulty is experienced in the keeping of private
books. A full set of records composed of journal, cash book, and
ledger, may be maintained, though there is often no need for a cash
book. These records, while containing essential information about the
business, are usually spoken of as being subsidiary to the general
books in the sense that the general books are operated by an employee
who maintains a controlling account for the private books. In order to
gather the material for the controlling account the books of original
entry of the general records must be provided with additional columns
for the private ledger. Any item about which it is desirable to keep
employees in ignorance is simply charged or credited to private
ledger with no explanation on the general books as to its ultimate
disposition. The same item as taken into the private books is, by means
of a journal entry, given its proper disposition, with the offset as a
charge or credit, as the case may be, to a general ledger controlling
account which is carried on the private ledger. These two controlling
accounts—the one on the general ledger with the private ledger, and the
one on the private ledger with the general ledger—are complementary to
each other, thus making both ledgers self-balancing. A consolidation of
the two trial balances, the one from the general ledger and the other
from the private ledger, with both controlling accounts eliminated or
treated as canceled items, is necessary in order to present the full
statement of the business.
To illustrate the way in which secrecy covering certain types
of transactions may be maintained, it may be well to trace a few
transactions through the books. Suppose it is desired to make a cash
rebate to a favored customer. The check is drawn payable to private
ledger account and run through the cash book as a charge in the
private ledger column, to be posted ultimately to the private ledger
controlling account on the general ledger. The check is entered as
a cash receipt on the private cash book with the credit to general
ledger. A check is then drawn on the private ledger cash payable to
the favored customer, with the proper charge to Sales Rebates and
Allowances or other similarly named account, and posted to that account
on the private ledger. In a similar way checks for dividends, salaries,
etc., can be drawn to the order of private ledger and their proper
distribution be shown only on the private books.
At the time of closing the books, if some temporary proprietorship
accounts are carried on the general ledger and some on the private
ledger, those carried on the general ledger are closed off by transfer
to the Private Ledger Controlling account instead of, as usually, to
the summary Profit and Loss account. The adjustment of the books is
usually made both on the general ledger and on the private ledger.
If certain fixed assets subject to depreciation are carried on the
general ledger, the adjustment of their values will have to be made by
debit as usual to Depreciation account, with a credit to the suitable
Depreciation Reserve account. This Depreciation account, of course, is
in closing charged to Private Ledger instead of to Profit and Loss. If
the Merchandise Inventory account and the Sales and Purchases accounts
are carried on the general ledger, the cost of goods sold will be
developed as usual on the general ledger and then transferred to the
Private Ledger account. More often, however, most of these adjustments
on account of depreciation reserves and reserve for doubtful accounts
and the merchandise inventories are handled only on the private ledger.
The Profit and Loss account as carried on the private ledger shows the
net profit and usually all appropriations of that profit. The result is
that the dividend accounts, the various reservations of profits, and
Surplus account are handled only on the private books.
The private books are usually kept by the general auditor, the
secretary, or general manager of a corporation, and by one of the
partners or a trusted employee in the case of a partnership.
JOURNAL VOUCHERS
Need for the Journal Voucher
Since the introduction of special journals to take care of cash, sales,
and purchases, the present-day journal is used principally as a record
for adjusting entries between accounts, the opening and closing entries
of the ledger, and any other unusual transactions for which no other
specialized form of book has been provided. For this reason it is very
important that all the evidence which may be necessary to explain or
to prove the correctness of an entry, together with the authority for
making it, shall be instantly available in some convenient form. This
not only saves much time and irritation in hunting up scattered data
to explain an unusual entry, but it relieves the bookkeeper of any
personal responsibility which might attach to him for making entries
not strictly in accordance with correct accounting principles. It
has been seen in an earlier chapter that the authorization of cash
disbursements by means of the formal voucher gives a valuable control
over cash and the bookkeeping record of it. In like manner, for entries
appearing in the journal, the use of the journal voucher accomplishes
these purposes.
The forms in which journal vouchers are made out vary with the
requirements of each business, but in general they are very simple and
follow the same general principles. Two features are essential: (1) the
voucher must show clearly the purpose for which it is drawn; and (2) it
should provide proper authority, with full explanation of the reasons
for making the entry. The usual form is illustrated below:
[Illustration: _Journal Voucher (face)_]
[Illustration: _Journal Voucher (reverse)_]
The entries at the top of the back of the voucher give information
for filing purposes only. Where the original vouchers are kept in a
loose-leaf binder (thus constituting the journal), only the duplicates,
folded lengthwise and filed in an upright binder, need have the
notations made on the back.
Method of Use
The same form of voucher may be used in two ways. A regular journal
may serve as the posting medium to the various ledger accounts
affected. In this case each entry is given a number which corresponds
with the number on the voucher. All the original data and the
explanations which are necessary to authorize the entry are attached to
the vouchers which are filed away by months in numerical order.
The second method is to make out vouchers in duplicate. The original,
with the approval of the proper officials and a brief explanation,
is filed in a loose-leaf binder which constitutes the journal. The
duplicate, numbered like the original, has attached to it all bulky
papers, correspondence or other evidence, and is filed away by months
in numerical or alphabetical order, whichever best serves the purpose
of the accountant. This method saves the time of recopying the debits
and credits in a bound book, and also makes it possible to separate
journal entries for use in different posting departments.
There is still some objection to loose-leaf general journals, however,
though it is gradually disappearing with the use of proper safeguards.
Index to Journal Vouchers
If vouchers are filed numerically and it is found advisable to keep
an alphabetical list for the purpose of bringing together all journal
vouchers on one subject or from one firm, a supplementary card index
giving year, month, and voucher number, may be kept which will serve
for several years—as shown below:
[Illustration: _Card Index for Journal Vouchers_]
If it is desirable to keep a record of the amounts also, this simple
form may be extended to include voucher numbers and amounts as follows:
[Illustration: _Card Index for Journal Vouchers_]
Content of Voucher
Vouchers for the different journal entries should comprise the
following information: in general, correspondence or memoranda approved
by proper authority, which should explain the reason for the entry and
refer to the original charge or item against which the entry applies.
Vouchers for returned purchases should have the following information
attached: the shipment record, the stock record, the credit memorandum
from the vendor, and correspondence or signed memoranda explaining why
requirements were not up to standard.
Monthly depreciation charges should have attached a list of the capital
accounts, the percentage of depreciation charged to each, and the
one-twelfth which applies to the present month.
Adjustments for allowances on contracts should have the reference
or copy of the contract agreement, all correspondence which finally
disposes of the settlement, and references to any other legal or
official authority which was instrumental in effecting the present
settlement.
In making unusual deductions or reserves at the time the books are
closed, all the data bearing on the subject should be gathered, or,
if this is not possible, very clear references should be made to the
places where such material may be found. This is important, because
investigations may be made at any time either to readjust or to confirm
the entries, or to locate the responsibility for making them.
Little time is needed to gather all the facts bearing on a transaction
at the time it is entered on the books, but if the present officials
are promoted or leave, it may at a later date take days or weeks to
collect the information necessary to explain the reason for the entries
made.
Other Methods of Authorizing Entries
A method sometimes used of authorizing journal entries requires the use
of a loose-leaf journal for its easy operation. Every entry made by
the bookkeeper is sent for approval to the auditor, manager, or other
responsible person. Approval is evidenced by signature or initialing.
Where the use of the formal journal voucher is found to be cumbersome,
this method gives satisfactory results.
Similar to the journal voucher as authority for entry is the debit
and credit slip used for authorizing inter-ledger postings. In a
large establishment where the sales ledger, for instance, is divided
alphabetically among a number of ledger clerks, adjustments as between
the different ledgers are usually made by means of these debit and
credit slips, which when properly signed by the head bookkeeper give
the authority for making the necessary ledger entry.
BUILDING EXPENSES AND INCOME
Allocation of Building Expense
It is purposed here to draw attention to two problems in connection
with the bookkeeping records of buildings owned by the business.
The one problem has to do with the proper allocation of the various
building expenses as between the different departments of a business
such as manufacturing, selling, general administration, etc., and even
the subdepartments within these general classifications. It frequently
happens that the same building is used partially for manufacturing and
partially as a warehouse and sales room, while it may also contain
the administrative offices. Within each of these groups there may be
various subdepartments. A large store may be departmentalized and it
may be desirable to show the results of operation by departments. If
cost accounting by departments is determined upon, it becomes necessary
to carry the departmental analysis beyond the gross profit stage,
in which case building expense must be taken account of and spread
equitably over the various departments. Likewise, within the factory
it may be desirable to allocate the item of building expense over the
various departments of storeskeeping, costing, and production proper,
and even a further analysis may be necessary depending somewhat on
the detailed information desired. Where building expense has to be
spread over these various departments and subdepartments, an equitable
basis of distribution must be found. A common basis is the amount of
floor space used by the various departments. This method is not always
fair inasmuch as some portions of the building are subject to heavier
wear and tear, and therefore to heavier maintenance and depreciation
charges, than other portions. Consideration must be taken of all the
physical factors involved in order to secure an equitable distribution
of the expense.
Ownership versus Renting
The second problem has to do with the gathering of information as to
the relative advantages of owning or renting a building. The chief
elements of expense which must be met in connection with the ownership
of buildings are maintenance, depreciation, taxes, and insurance.
In determining the relative advantages of ownership or leasing, the
item of interest on investment in buildings must also be taken into
consideration. It is doubtful, however, whether this last item should
be brought onto the books as a cost of ownership. As in the case of a
manufactured product, the item of interest is best handled by means of
a statistical record rather than as an entry upon the financial records
of the business.
Methods of Bookkeeping
Two methods of presenting the information on the books are met with.
In the one case, an account is kept with Building Expense and Income
to which are charged all expenses in connection with the building and
to which are credited any items of income, as from subleasing, etc.
Instead of having the one account, separate accounts may be kept and
cleared at the end of the fiscal period through Building Expense and
Income account before transfer to Profit and Loss. The difference
between the net cost of building ownership, as indicated by Building
Expense and Income account, and the market rental value of similar
space and accommodations elsewhere will represent the net advantage
or disadvantage of ownership as compared with leasing. At this point,
before making the comparison, it will be necessary to take into
consideration the item of interest on the money invested.
The second method is simply a variation of the first so far as
securing the information desired is concerned. Under it the Building
Maintenance account is charged with all expenses as above and credited
with a fair rental value as determined by market conditions for similar
space elsewhere. The difference between the charges and credits to the
Building Maintenance account will be an indication of the profit or
loss on the policy of the ownership. A theoretical objection to this
last method is that the crediting of a fair rental to the account makes
necessary a charge to a rent account, which will have to be shown as
a charge to some department or phase of business activity, such as
the factory, sales department, etc. As in the case of interest, the
best authority inclines towards treating rent as an item of financial
management rather than as a burden to the other departments of the
business. Practically, however, where the expense of rent is actually
incurred through the use of a building belonging to outside parties,
the prevailing practice at the present time is to charge rent expense
to the departments using the accommodations. Consistency seems to
demand that both interest and rent be treated in the same way, and
handled as financial management items.
Workmen’s Dwellings and Social Betterment Work
To maintain a fairly constant supply of labor, a corporation
frequently finds it necessary to provide housing accommodations for
its employees. This may be because the concern is located far from a
settled community and outside capital cannot be induced to provide
the needed accommodations. Accordingly, corporations oftentimes spend
large sums in so-called social betterment work, and it is customary
for the corporation to charge a fair rental on workmen’s dwellings.
The expense in connection with such work is to be treated rather as an
item of extraordinary expense just as the income from the corporation’s
investment in workmen’s dwellings must be treated as income outside
the regular operations of the business. The problem here is simply the
determination of the proper place to show the items of expense and
income in the profit and loss summary for the period.