General Accounting (5)
-
Upload
martin160464 -
Category
Documents
-
view
217 -
download
0
Transcript of General Accounting (5)
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 1/419 P u b l
i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 2/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 3/419
.
NorthwesternUni-
theStudents'
ofAccountancy.
mann,Finney&
untants.Authorof
ntroductory;Prin-
mediate;andPrin-
anced.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 4/419
OFARTOFTHISBOOK
ANYFORM,BYMIMEO-
EANS,WITHOUTPERMIS-
EPUBLISHERS.
1
2
944
TATESOFAMERICA
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 5/419
ageofcommerce—thelanguagein
businessisrecorded,itsoperationsare
conditionisstated,anditsbudgetfore-
ploysthefamiliarlanguageinwhich
pressed,itislikethelanguageof contract
egivenspecialsignificancetowordsand
whopreparesthereportsandthe
ddressedtoofrequentlyarein the
gepartnersofwhomonlyone fully
eoftheactivityinwhichtheyare engaged.
seful,mustbe understoodbyboth
er,bythe writerandthereader.Unfor-
the casewithaccounting.Business
nabletoreadtheir accountsandare
raspthe significanceofthereports
einmakingmanagerialdecisions;
tlyarehandicappedintheirserviceto
tywithaccounts;andmanyinvestors
zethereportsofcompaniesinwhich
dsorcontemplateplacingthem.
tateof affairsrestsnotwiththe
ntantsandeducators.Thisbookis
swho,althoughnotinterestedin
n,realizetheimportanceofageneral
t.
ncerethankstoProfessorRalph
ProfessorTheodoreLangofNewYork
.B.Gritzof AlabamaPolytechnic
nuscriptandwhosecommentsand
pful.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 6/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 7/419
..........1
LUSSTATEMENTS.....15
25
NTS..........07
ERS.........._
STING......
TRY.
NTS............6g
OOKSOFORIGINAL ENTRY.79
M.............gg
............g-r
............J05
U3
NGTHEBOOKS......121
COUNTS.........12g
FACCOUNTS.......
............
RTH— CAPITALSTOCK....161
RTH— CAPITALSTOCKWITHOUT
3
RTH— TREASURYSTOCK......181
RTH— SURPLUS.......187
RTH— SURPLUSAVAILABLEFORDIVI-
03
BLE..........209
NCESRECEIVABLE..215
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 8/419
SAGAINSTRECEIVABLES231
ETS255
ETS—DEPRECIATIONANDOTHER
5
SETS275
DASSETS285
CKS297
DS307
NGENTLIABILITIES325
ANDCREDITS;INSTALLMENTSALES.349
MPARATIVESTATEMENTS395
GCAPITAL405
OS419
LYSIS429
CATIONOFFUNDS439
ECTIVESTORY455
G469
NCESHEETS473
NCESHEETS491
TANDLossANDSURPLUSSTATE-
11
TORSHIPSANDPARTNERSHIPS.... 529
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 9/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 10/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 11/419
worth.
wned.Liabilitiesarecreditors'
businessistheexcessofthe valueof
s.
et.
nessis astatementoftheassets,
the businessonagivendate.It
rmillustratedbelow,whichisan expres-
s— Liabilities=NetWorth.
r31,1942
0.00
00
sofabusiness areequalledbythe
the equityoftheowners.Thisrela-
efollowingrestatementofthe foregoing
es+NetWorth.
thebasisofthe balancesheet
r31,1942
orth
0AccountsPayable$7,000
WORTH18,000
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 12/419
ap.1
areintendedtoshowthe general
eetandthe natureofsomeofthemore
of.Abalancesheetispresentedafter
ssumedfact.(Theillustrationsare
oseof developinganunderstandingof
iderationsofnaturalcontinuityorcom-
ationshavebeensacrificedtothatpur-
dto compareeachbalancesheetwith
gone,andnotecarefullythechanges
on.
orporationisorganizedandissues
00parvalue.
941
ock$100,000
panyborrows$25,000.00froma
amount.Observehowthecaptions
h"areusedonthe rightsideofthe
oseofmoreclearlyseparatingthe claims
of theowners.
941
Worth
S:
ecompanybuysmerchandisefor
00.
941
orth
:
sPayable$25,000
nt.Thecompanybuysmerchandise
0,000.00.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 13/419
EET
941
Worth
:
sPayable$25,000
0$55,000
ate.The companypays$40,000.00
ost$5,000.00,andthebuildingcost
tcaptionsappearontheleftsideofthe
heassets;thesecaptionsare:
therassets whichnormallywill
he relativelynearfuturethrough
ebusiness."Relativelynear
asmeaningoneyear.
ypermanentpropertyusedin the
andnot intendedforsale.
941
Worth
TIES:
ble$25,000
,000AccountsPayable.30,000$55,000
TH:
k100,000
ote.Thecompanyborrows$15,-
notesecuredbyamortgageonits real
earontherightside ofthefollowing
heliabilitiesaccordingtothe immediacy
ptionsare:
eswhichmaturein therelatively
eanswithinoneyear.
eswhichmaturein therelatively
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 14/419
0,000
941
0
0$55,000
000
andisewhichcost$5,000.00issold
eceivedtherefor.Thistransaction
.00anddecreasesthemerchandise
profitincreasesthenetworth.
balancesheetshowstwoelementsof
hichistheportionof networthcon-
rs;andsurplus,whichisthe increasein
ofitableoperations.
,500
941
0$55,000
000
rchandisewhichcost$30,000.00is
onaccountfor$45,000.00.
941
Worth
NTLIABILITIES:
ble...$25,000
00AccountsPayable.30,000$55,000
7,500FIXEDLIABILITIES:
eMortgage15,000
pitalStock$100,000
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 15/419
EET
s.Variousexpensestotaling$5,000.00
reasingthecashandthenetworth.The
ectedby areductioninthesurplus.
941
Worth
NTLIABILITIES:
ble...$25,000
00AccountsPayable.30,000$55,000
,500FIXEDLIABILITIES:
eMortgage15,000
pitalStock....$100,000
ompanypays$300.00foraone-year
0.00forcoal.
ancesheetpresentation,expense
edintotwoclasses:
viceswhichshouldimmediatelybe
eseshouldbedeductedfromSurplus,
xpensesalreadyincurred.
viceswhichwillbenefita future
anassetvalueto thebusiness;
he assetsideofthebalancesheet.
etshowstwosuchitemsofdeferred
surance,whichisthecostoffuture
thecostofthecoalto beusedin
941
orth
ENTLIABILITIES:
ble...$25,000
00AccountsPayable.30,000$55,000
,800FIXEDLIABILITIES:
eMortgage15,000
pitalStock....$100,000
rplus12,500112,500
ocalleddeferredcharges.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 16/419
ap.1
xpensesmaybepaid inadvance,so
advance.Toill ustratetheeffectupon
ethatthecompanyleasesa portionofits
annualrentalof$1,000.00,whichis
ransactionresultsin a$1,000.00
therent incomewilleventually
plusshouldnot beimmediatelyincreased
ntwillnotbe fullyearneduntiltheendof
ethebalancesheetshouldshowa
eright side.
941
Worth
ENTLIABILITIES:
tesPayable...$25,000
00AccountsPayable.30,000$55,000
0$142,800FIXEDLIABILITIES:
eMortgage......15,000
ERREDINCOME:
000RentCollectedinAdvance.. 1,000
ETWORTH:
tock----$100,000
..........12,500112,500
sheetisheaded"Liabilitiesand
ditis neitheraliabilitynora partof
ementsofboth.Itis notstrictlya
ayableincash;butits presenceina
etheexistenceof anobligation;the
ectedinAdvance representsanobliga-
occupytheleasedpremises.Ina sense,
sortofnet worthitem,becausethenet
thefuturewhentheservicehas been
asbeenearned.
acheraskedhowmanywantedto
ddidnot goup."No?"askedthe
nny.Hehadsomethings todoyet.
omeby and.by;buttheadditionto net
tilthe incomehasbeenearnedbythe
whichthecollectionhasbeenreceived
is oftenusedinsteadoftheDeferred
ntheforegoingbalancesheet.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 17/419
ngbalancesheet,whichshowsthe
ngfromnumeroustransactionsoccurring
ar,anewcaption,"OtherAssets,"
t isassumedthatthecompanypur-
cipationofapossibleadditionto its
edassetbecause,accordingtothedefini-
tsareusedinthe operationsofthebusi-
soused.Alsoit isassumedthatthe
permanentinvestmentsinstocksofother
r31,1941
00
0
0,000
00
69,000
000
e..1,000
alancesheetwaspreparedwithout
ertainaccruedassetsandaccruedliabili-
nconsiderationinmonth-endoryear-
$375.00hasaccruedonnotesreceiva-
cted;thisaccruedinterestisanasset;
ned,althoughithasnotbeencollected,
chisproperlyaddedto Surplus.Taking
esheetwill affecttheCurrentAssets
he mannershownbelow:
00
0
0,375
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 18/419
s haveaccruedforthefollowing
450.00
axes3,375.00
thebalancesheet willinvolve
esand decreasesinsurplus,asindi-
00
075
et,afteradjustmentsforaccruals
below:
er31,1941
00
0
,375
00
000
..1,000
ems.Theitemof$300.00shownin
piredInsurancerepresentsthecost on
cy.Halfoftheyearhasexpired;there-
dbedeductedfromSurplusasan expense
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 19/419
eriod;and$150.00shouldremainas a
tinganassetintheform ofanexpense
xmonths.
costof$400.00,approximatelyone
efore$100.00shouldbedeductedfrom
rred,andthe remaining$300.00should
arge.
expensesaffecttheDeferredCharges
he balancesheetasfollows:
0
ected$1,000.00asrentalfortwelve
has expired;therefore$500.00has
dedto Surplus,and$500.00remainsasa
eet,aftertheseadjustmentsofdeferred
itshavebeenmade,appearsasfollows:
r31,1941
00
0
0,375
0
000
e.500
0
eforegoingbalancesheetshows
estreceivabletotaling$60,375.00.The
wwhatportionofthis totalcanprobably
s,thebalancesheetshouldshowthe
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 20/419
Chap.1
eivablesaftertheestimatedlosshas been
ofthereceivablestotheirestimatednet
correspondingreductioninthenetworth,
ngpartialbalancesheetin whicha
mthereceivablescausesacorresponding
ORTH:
k$100,000
50$115,250
0
9,375
mthereceivablesastheestimatedloss
."Thereadershould notallowhimself
oductionofaccountants'fancylan-
orBadDebts"meansnothingmore
tProbablyCannotBeCollected."The
orbaddebts isintendedtoreducethe
fthereceivablestotheamountwhich
matelycollected.
eetaftertheprovisionofa reservefor
ppositepage.
Thebuildingwasshowninallof the
atitscost,$35,000.00.Letusassume
stimatedWeof35yearsfromthe dateof
willhavenovalueatthe endofthat
esswillsufferatotal depreciation
00.00duringthe35-yearlife ofthe
eneralcustomtoignoredepreciation
he fixedasset,whentheentireamount
s.Itisnow recognizedthatdeprecia-
andcontinuouslythroughoutthelife
customarytodeductthelosslittle by
Forinstance,indealingwithdeprecia-
ost$35,000.00,theaccountant'sthink-
thebuildingcost$35,000.00andhas
arswithnoscrapvalue,theannualdepre-
raight-linebasis)is $1,000.00;the
xmonthsago;thereforethedepreciation
quisitionis $500.00.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 22/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 23/419
ESHEET_ 13
nofthebuildingcouldbe shownin
s:
nValueResulting
........._ 500
.....................34,500
......$39,500
epreciationisusuallycalled a
Thereadershouldclearlyunderstand
tareservefordepreciationjs_not& fund
asidetoprovidemoneyfor theeventual
et.A reservefordepreciationismerely
shrinkageinthe valueofabuildingor
fromwearand tearandtheactionof the
geoftune.
Companyaftertheprovisionofa
thebuildingis shownonpage12.A
sheetwiththe oneonpage11shows
ciationhascaused a$500.00reduction
dingandinthesurplus. Noreserves
onofland,becauseland usedasabuild-
ydeclineinvalueas theresultofwear
theelements.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 24/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 25/419
xpenseshownina company'soperat-
nthenatureof thecompany'soperations
saccountingsystem.Anumberof
s chapter.
ngcompany.
mpleillustration,thestatementofa
ealestateagencyandthatrecordsall
untandallofitsexpensesin oneaccount
CORPORATED
Expense
ber31,1941
$10,000.00•
0
panyearnscommissionsfromsales,
ment,insuranceagencycommissions,and
s;assume,also,thatitkeepsa separate
income,butthatit keepsonlyone
ementmayappearasfollows:
NCORPORATED
Expense
ber81,1941
,000.00
00
,800.00
0.00
00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 26/419
LUSSTATEMENTS[Chap.2
asfollows:
NCORPORATED
Expense
ber31,1041
,000.00
00
,800.00
0.00
.00
0.00
ense525.00
725.00
5.00
00
125.00
0
mpany.
handisingcompanyisthe excessof
oodssold.Thenetprofit istheremainder
ngexpensesfromthegrossprofit.
ber31,1941
615,460.00
680.00
0.00
urnmerchandisethatisunsatisfactory
ymayreceiveacreditallowancefor
ththeinvoice,asto quantityorquality.
andisingcompanythereforemayshow
owances,andnetsales,as follows:
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 27/419
SURPLUSSTATEMENTS17
ber31,1941
dAllowances13,260.00
615,460.00
680.00
0.00
ecordofthecostof eacharticlesold.
nsivetomaintainandit isarather
tethecostofgoodssold byaprocedure
gh'smethodofweighingthesmokefrom
hedthetobaccothatwentinto the
oftheashesand dottleremainingin
mainderthe weightofthesmoke.
yaddtheinventoryatthe beginningand
eriod;fromthis totalhewilldeductthe
period;theremainderhewillcallthe
tis thecostofgoodssold,lost,
sedofduringthe period.
ssstatementis expandedbelow
onofthecost ofgoodssold.
ber31,1941
dAllowances13,260
:
1940$42,300
:
ances5,826
4,217623,870
ber31,194150,710
Sold 615,460
680
0
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 28/419
LUSSTATEMENTS[Chap.2
veintheirtotalamountof $278,-
assifiedinthefollowingstatement.
ber31,1941
dAllowances13,260
:
1940$42,300
:
ances5,826
4,217623,870
ber31,194150,710
Sold 615,460
680
890
0
,050
8,250
30
:
600
4,680
0,710
04,720
es:
ble4,500
3,075
7,215
comeTaxes$87,505
xes12,065
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 29/419
SURPLUSSTATEMENTS19
gschedules.
ndicatetheprocedureofshowing
sstatementanddetailsin supporting
Y
u
ber31,1941
dAllowances1,500.00
—Schedule170,675.00
825.00
—Schedule235,400.00
25!00
—Schedule316,495.00
930.00
dule43,385.00
e$4,315.00
Schedule41,125.00
YSchedule1
ber31,1941
1940$19,740.00
:
ances1,210.0073,915.00
ndPurchases$93,655.00
ber31,1941,22,980.00
5.00
YSchedule2
ber31,1941
000.00
0
ense4,000.00
uipment50.00
0
5,400.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 30/419
LUSSTATEMENTS[Chap.2
YSchedule3
ber31,1941
00
dFixtures60.00
5.00
6,495.00
YSchedule4
xpenses
ber31,1941
225.00
5.00
00
115.00
25.00
otherearnings,such asinterestand
orcommissionsandotherformsof
s,arenotprofitsbutincome.Therefore
facompanyengagedinsellingpurchased
usuallycalledaprofit andlossstatement,
oss, whereastheoperatingstatementof
gsotherthanprofitsonsales ismore
ntofincomeandexpense.
presentingtheillustrationsinthis
ainuniformityofpatternso astoavoid
erstood,however,thatanyonewho
operatingstatementmayavailhimself
ffreedomto drawitupin anymanner
arestwayof presentingthefacts.
anyshowsthecompany'sfinancial
thereforetheheadingshould showthe
1941."Ontheotherhand,a profit
theresultsof operationsduringastated
ingofthestatementshouldshowthe
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 31/419
SURPLUSSTATEMENTS21
Ended December31,1941."Donot
rtheYearEnded December31,1941";
businessdoesnot remainstaticduringa
andlossstatement:"December31,
n aday.Anddonothead it:"For
er31,1941";whatperiod?
agivenperiod shouldshowthesur-
eperiod,allincreasesanddecreasesdur-
anceattheendofthe period.Asimple
ementis shownbelow:
ber31,1941
40$132,610
r—PerProfitandLossStatement75,440
0
017,000
41$191,050
tshownintheprofit andlossstate-
otanexpense;theyarea distributionof
e surplusstatementbecausetheir
aseinsurplus.
llybelievedthattheprofitandloss
expensestatement)shouldshowonly
operationsofthebusinessduringa stated
mentistoshowonly theresultsof
notincludeextraneousprofitsand
orlossesresultfromtransactionsor
normalelementofregularoperations.
hatownedallofthe stockofasubsidiary
partof acompany'splantproperty
esultedin aloss.Extraneousprofitsand
mittedfromtheprofit andlossstatement
tatementwillnotgeta confusedideaof
eratingresults.Sincetheyareomitted
atement,theymustbeincludedinthe
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 32/419
LUSSTATEMENTS[Chap.2
mentistoshowthe resultsofopera-
,it shouldnotincludeanyprofitsor
period.If,forexample,anerrorin the
rofitswasdiscoveredin 1941,thecorrec-
esurplusstatementfor1941.Toinclude
ementfor1941 wouldcauseamisstate-
tsof thatyearalso.
sstatementmaybe summarizedas
fthe period.
ularoperationsoftheperiod,as
s statement.
s.
sesof priorperiods.
period.•
ontainingtheseelementsisshown
Y
ber31,1941
40$22,650.00
ndedDecember31,19413,190.00
oryonDecember31,19401,000.00
_ 750.00
Taxes$320.00
.045.00
41$19,545.00
ts.
entscustomarilypreparedatregular
s.
entsshowtherelationshipsexisting
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 33/419
DSURPLUSSTATEMENTS23
r31,1941
orth
NTLIABILITIES:
yable...$2,500
00$15,000NotesPayable1,500$4,000
TH:
tock$10,000
urplus—ExhibitB.4,50014,500
ber31,1941
40$3,850.00
r—ExhibitC1,800.00
940$150.00
,150.00
41$4,500.00
Expense
ber31,1941
00
0
ntsaregivenidentifyingexhibitletters
of cross-reference.
hesurplusat theendoftheyear and
urtherdetails regardingthesurplusare
wsthechangesinsurplus duringthe
ninthis statementcarriesareferenceto
ncomeandexpensearefound.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 34/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 35/419
procedures.
chaptersare intendedtopresentonly
neproceduresofbookkeeping—enoughto
tounderstandthenature ofdebitand
edgerand ofvariousbooksoforiginal
frecordingtransactions,posting,taking
tatements,andclosingthebooks.
ustratedanddiscussed;thereader
herrecordsmaybeused forthesame
methodsincommonusearedescribed;
berthatvariationsofthesemethodsmay
sameobject.Furthermore,thereader
ccountingrecordsserveonlyonepurpose:
chsomeoneisentitledtohave.Hence
esareapplicableto everybusiness;the
houldbethosebest adaptedtoservethe
.
tsofthesechapterswillbe sufficient
obtaininformationfromaccounting
romonewhorecordstheinformation)
withthebasicprinciplesandprocedures
mtounderstandsuchrecordsas hemay
.
onofthestatementsillustratedin
sdesirableto keeprecordsshowingthe
es,andnetworthresulting fromthe
ss.Thechangesinassets,liabilities,
din accounts,whichmayberuledin
followingpage.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 36/419
NTDATEEXPLANATIONAMOUNT
witheachasset,eachliability,and
Eachaccounthas twosides,as
creasescanbe recordedononesideand
changesinassets,liabilities, andnet
emainderof thischapter,inwhich
onthe operationsofBentonRealty
mmissionsforsellingrealestate.
orded initsaccountas follows:
heleft side.
theright side.
dby thefollowingcashaccount,
ed ontheleftsideand disbursementsare
5.00;thedisbursementstotal$1,-
balance,is$9,550.00.
ntriesinasset accountsisalsoillus-
ountwhichcontainsa recordofthe
ent:
ntainentriesonthe leftsidecharging
orrealestatesold forthem;theentries
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 37/419
treductionsintheaccountreceivable
ctionsfromtheclients.
Mar.15|Cash collection||150|00
5|00|Mar.|27JCashcoUection|175)00
deoftheseaccountsshowthe amounts
btors.
ecordedinitsaccountas follows:
heright side.
theleft side.
din thefollowingaccountwiththe
mpanypurchasedtheofficeequipment:
deoftheaccountshowsthe amount
ly.
ceduresareappliedinasset andlia-
dbythe followinggraphicexpression
ncreasesanddecreasestherein:
ifferenceinprocedure,thebalances
heleftsidewhereasthebalancesin lia-
rightside.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 38/419
untshavethis featureincommon:
rinterestsin theassetsofthebusiness.
interestsof creditors;networth
tsofthe proprietors.
tatesthatnetworthaccountsshould
ts,as follows:
heright side.
theleft side.
ptwithvariousincreasesand
lustratedbelow:
edtothetwosides ofanaccountas
reafterweshallrefertothem asthe
sewordsare derivedfromtheLatin:
editmeans"hetrusts."Theywerefirst
tskeptwereaccounts withdebtorsand
bit,sideofthe followingaccount
he owedthecompany$250.00on
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 40/419
00.
nnetworth).
sset).
eequipmentatacostof $1,200.00,fromWhite&
creaseinasset).
ncreaseinliability).
00asacommissionforsellinga parcelofrealestate.
et).
e(increaseinnetworth).
mithacommissionof$250.00,butmadeno collec-
n accountreceivableasset).
e(increaseinnetworth).
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 41/419
mpany$500.00onaccount.
ecreaseinliability).
sset).
0.00fromJohnSmithonaccount.
h asset).
einaccount receivableasset).
Brownacommissionof$375.00,butcollectednothing
einaccount receivableasset).
e(increaseinnetworth).
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 42/419
5.00fromFredBrowntoapplyonaccount.
shasset).
seinaccountreceivableasset).
375.00.
nnetworth).
sset).
ostockholders,$200.00.
easeinnetworth).
sset).
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 44/419
ntriesforeachtransactionareequal;
ngerrorsaremade,thetotaldebit
eequaltothetotal creditentries.The
he creditsintheledgerof BentonRealty
bylistingthe totaldebitsandcredits
00
0
0
1,200.00
5.00
theequalityof thedebitsandcredits
cesin theaccounts,asillustratedbelow:
NY
941
0
0
5.00
mtrialbalance.
ischapteritwas statedthataccount-
eparationof thestatementsillustrated
heforegoingtrialbalance,showing
edgeraccounts,providestheinformation
tatements.
NYExhibitC
Expense
41
25.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 45/419
Y
1941
Y
41
550.00
Q,35Q
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 46/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 47/419
S
profits.
sstatementofa merchandising
page17.
ber31,1941
dAllowances13,260
:
1940$42,300
:
ances5,826
4,217623,870
ber31.194150,710615,460
680
0
sandaccounts.
presentedcertaintypicalmerchan-
herwiththeaccountsinwhichtheyare
dgerprovidesinformationrequiredfor
llustrated above.Theaccountsare
ondensedform.
acompanyinvested$9,000.00cashandmerchan-
xchangeforcapitalstockofapar value
d).
ory(assetacquired).
nalnetworth).
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 50/419
TS
F.Baileytoapply onaccount.
h asset).
ein accountreceivableasset).
ling$450.00.
nnetworth).
sset).
00.00tothestockholders.
easeinnet worth).
sset).
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 52/419
UNTS[Chap.4
ancesprovideallofthe information
tatements,withoneexception:thevalue
dofAugustmustbe determinedby
erwisemeasuringthemerchandise,and
s,bytakingaphysicalinventory.Let
ventorydisclosesavaluationof$900.00
formationavailable,thefollowing
ed:
ExhibitC
941
dAllowances25
$1,000
:
esandAllowances...100
_ 502,650
31,19419002,750
5
ExhibitB
941
00
0.00
125.00
ExhibitA
1,1941
rth
ENTLIABILITIES:
able$600
NETWORTH:
alStock$10,000
ExhibitB.125 10,125
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 54/419
S
ordedin oneaccount,whichmayshow
turity,thus:
enameof themakerofthenoteand
Creditentriesare identifiedbyname
noteisreceivedareindicatedbelow:
mJohnMakerfora cashloan
creaseinnotereceivableasset).
ashasset).
mJohnMakertoapply on
edbyhim:
creaseinnotereceivableasset).
seinaccountreceivableasset).
noteiscollectedareindicatedbelow:
arinterest:
shasset).
decreaseinnoteasset).
includesthefaceof thenote
ollected(increaseincashasset).
orthefaceofthenote (decreaseinnote
reaseinnetworth).
ordedinoneaccount.Eachcredit
e payeetowhomthenoteis givenand
edebitsrecordingpaymentsareidenti-
namesofthepayees,thus:
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 55/419
MATTERS45
noteisgivenareindicatedbelow:
esPayeefor acashloan:
shasset).
easeinliability).
esPayeeto applyonanaccount
aseinaccountpayableliability).
easeinnotepayableliability).
notepayableispaidareindicated
arinterest:
easeinnoteliability).
ashasset).
udesthefaceofthenoteand
efaceof thenote(decreaseinliability).
creaseinnetworth).
ashasset).
dabriefdiscussionol thereservefor
t,in thebalancesheet,thereserveis
ceivablestoreflecttheestimatedrealiz-
es.
stimateismadeof probablelosses
creditentries aremade:
expenseaccountandthe debitrecordsa
bts—thiscreditrepresentsadeductionfrom
he receivables.
bleisdeterminedtobeuncollectible,
ade:
ts.
ablethatisuncollectible.
l,assumethat abusinessbegan
dthat,atthe endofthatyear,the
ed$50,000.00andthemanagementesti-
osseswouldtotal$1,000.00.Thefollow-
wouldbemade:
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 56/419
ERS[Chap.5
00(thisdebitrecordsanestimateddecrease
ybad debtlosses;itshouldbe shown
ntheprofit andlossstatement).
bts—$1,000.00(thiscreditrecordsanesti-
ountsreceivableasset).
deductionontheassetsideof the
000.00
s1,000.00$49,000.00
uncollectible,itshouldbe"written
fa $200.00accountreceivableare:
ts—$200.00.
able—$200.00.
accountis indicatedbelow.Assume
heaccountiswrittenoff,thetotal
hereserveforbaddebtsareshownin the
000.00
ebts1,000.00$24,000.00
tiswrittenoff,theaccountsandthe
lancesheetas follows:
800.00
ebts800.00$24,000.00
writingoffan uncollectibleaccount
eivablesandthereservefor estimated
vingunchangedthenetamountesti-
ainedabrief discussionofdeprecia-
esaresetupin theaccountsatannual
ollowingdebitandcreditentries:
sanexpenseaccount;thedebitrecordsa
shouldbe shownamongtheexpensesinthe
ation—thiscreditrepresentsadeduction
e assetaccount.
umethata deliverytruckispur-
00andthat itisexpectedtohavea life
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 58/419
ERS[Chap.5
pensesandaccruedincome.Because
transactionsbutmerelyadjustthe
moretrulyreflecttheconditionat the
calledadjustingentries.
ustmentforaccruedexpense,assume
ndaryearare$700.00andthatit is
entsonJune30. Thetaxesarenotpay-
heyear,butthe profitandlossstate-
eyearshouldshowa $350.00taxexpense,
heetshouldshowanaccruedliability
adjustingentryshouldbemade:
expensetobeshowninthe profitandloss
50.00(aliabilitytobeshownin thebalance
ustmentforaccruedincome,assume
6%bondsof $100,000.00parvalueon
fDecember,onemonth'sinterest,or
.Theadjustmentforthisaccrued
eivable—$500.00(anassettobeshownin
500.00(anearningtobeshownin theprofit
its.
ntsatthecloseof anyperiod,con-
vento theproprietyofmakingadjust-
sanddeferredcredits.
ustmentforadeferredexpense(or
that,atthebeginningofa year,acom-
earinsurancepolicyata costof$900.00,
nexpiredInsuranceaccount,as follows:
thepolicy,theentire costwas
set—insuranceprotectionforthree
,onethird ofthecostmustbe regarded
;thisportionofthecost shouldtherefore
seaccountby thefollowingadjustment:
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 59/419
S
—$300.00(anexpensedecreasingnetworth).
e—$300.00(decreasaintheasset).
earas follows:
inthe UnexpiredInsuranceaccount
eferredChargescaptiononthe asset
inthe InsuranceExpenseaccount
expensesintheprofit andlossstatement.
rredincomeadjustment,assumethat,
mpanycollected$1,000.00asrentin
aportionofits building,andthata
wascreditedasfollows:
efourthofthe renthasbeenearned
romthedeferredincome toanearned
owingadjustment:
ance—$250.00.
0.00.
earas follows:
einthe RentCollectedinAdvance
ndertheDeferredCredits captionon
cesheet.
einthe RentIncomeaccountshould
ssstatement.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 60/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 61/419
NG
ayhaveledthereaderto assumethat
bymakingdebitandcreditentries
unts.This,however,isnotthe custom-
scustomaryfirstto recordthetrans-
alentry.
theonlybookoforiginalentry;
lowingfactswithrespectto each
stobe debitedandcredited.
ebit andcreditentries.
outthetransaction.
ownin thefollowingillustration:
andiseforstockof$20,-
.
onduein20 days,with
eofyesterday.
becreditedare indentedslightlyto
ountstobedebited.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 62/419
NG
cordingin theledgeraccountsthe
dbythejournal entries.Followingare
cedbypostingtheentriesfor thefirst
entryshowsthedateof thetransac-
ejournalpagefromwhichtheentrywas
unt.
deachjournalcreditis posted,the
eredin thejournal,asillustratedbelow:
andiseforstockof$20,-
n theledgerandtheledgerpage in
ss-referencebetweenthetwobooks.
n tracingledgerentriesbacktothe
er.
estorecordall transactionsintheir
dgerclassifiesalltheseentriesaccording
transactionsoccurredonagiven
rnal;ifhewishes toknowthetotal
ncashduringaperiod,he willlookinthe
dvantageofprovidingspacewhere
tionofeachtransactioncanbewritten.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 63/419
NG
rnal.
rerecordedinthe followingjournal.
entrybecarefullyreadtoascertainwhat
elpfulifeachentryis interpretedon
ebitsandcreditsstated inthepreceding
thefirstentry:
e acquisitionofthecashasset;
ordthe acquisitionofthemer-
recordtheinitial networth.
andiseforstockof$20,-
.
onduein20 days,with
eofyesterday.
.
ysat 6%forinvoiceof
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 64/419
OSTING[Chap.6
duein 20dayswith6%
eivedJune4.
.
oiceJune2.
ances
1.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 65/419
NDPOSTING55
.
ances
o2.
oiceJune14.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 66/419
OSTING[Chap.6
GreenonJune5,with
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 68/419
OSTING[Chap.6
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 69/419
NG
albalance.
edrawnfrom theforegoingledger:
41
0
0
nces90.00
lowances300.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 70/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 71/419
RY
heonlybookoforiginalentry,but
g specialbooksdesignedforrecording
ns.Ifatransactionis recordedinone
nalentry, itisnotalso recordedinthe
fspecialbookscanbeillustratedby
recordedinajournal inChapter6.
e onaccountconsistsofadebitto
tandacredittoSalesaccount.Ifthese
inabookwhichcontainsnothingbut
esofthecustomersto bedebitedshould
ow;thecreditto Salesisimplied,because
lesbook.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 72/419
RY
in twoways:(1)thecreditto Salesis
reditto Salesispostedonlyonce.
ncesbook.
koforiginalentrycontainsarecord
ditmemorandums.
ancesBook
ances— debit
dited,andthecreditswerepostedto
Thetotalwaspostedtothedebit of
ances.
gbookareequivalenttoseven
rchasesaccountandcreditingtheparties
isewaspurchased.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 73/419
RY
AllowancesBook
Al
ccountswerepostedindividually;
ecreditofReturnedPurchasesand
ementsbooks.
cashreceiptsbookshowsthe name
edebittoCash isimplied.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 74/419
RY
nethenatureofthe transaction
okentry.Threetransactionsmay
tthebank.
bookcreditsNotesPay-
nthedisbursements
se$25.00;theentries
netdebitof$4,-
tcollected.
kentriescreditNotes
dInterestIncome$4.00,
tpaid.
ntriesarerequired.
ainsarecordofthe transactions
edinthe specialbooksoforiginalentry.
ormerchandise.
%,forinvoiceofJune 1.
%,forinvoiceofJune 3.
%,forpurchasereceived
n30 days,forinvoice
adertracethepostingsfromthe fore-
ryto thefollowingledgeraccounts.
oseinChapter6, except:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 75/419
Y
columnsindicatethebooksfromwhich
g.,CR1meanscash receiptsbook
columntotals,fewerentriesappear
Sales,ReturnedSalesandAllow-
edPurchasesandAllowances,and
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 76/419
NTRY[Chap.7
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 77/419
Y
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 78/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 79/419
kkeeperstopost atthesametime,
dedinto thethreefollowingsections:
er—containingaccountswithcus-
—containingaccountswithtrade
ngallotheraccounts.
subsidiaryledgers.
nto thesethreesections,thegeneral
etwofollowingaccounts,whichare
alsof certaincolumnsofthebooksof
edebitbalanceofthisaccountis
lancesintheaccountsreceivable
editbalanceofthisaccountis equal
sintheaccountspayableledger.
lledcontrollingaccounts;thetwo
detailedaccountswithdebtorsand
aryledgers.
ts.
pterisbasedonthesametransac-
Chapter7.Thegeneralledgerillus-
esameasthatin Chapter7,exceptthat
andcreditors'accountshavebeen
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 80/419
gers;but,sincetheyhavebeenreplaced
ts,itwillbepossibleto takeatrial
gerindependentlyoftheother ledgers.
inalentryarethe sameasthosein
cialcolumnshavebeenaddedwhere
stingofcolumntotalsto thecontrolling
is followedbyanexplanationofthe
gerand tothesubsidiaryledgers.The
l ofthepostingsfromthevarious
e ledgers,whichappearonpages74
alesandallowancesbook.
salesbook.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 81/419
alesandallowancesbook.
ancesBook
edtopage32—ReturnedSalesandAllow-
edtopage2—AccountsReceivablecon-
s:
dtoanaccountintheaccountsreceivable
edpurchasesandallowancesbook.
book.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 82/419
urchasesandallowancesbook.
AllowancesBook(Page1)
edtopage10—AccountsPayablecontrolling
edtopage42—ReturnedPurchasesand
s:
toanaccountintheaccountspayablesub-
viouslyillustratedhadonlyone
ingbookhasthree.AnAccounts
isprovidedsothatthecolumntotalcan
gaccount.Thisnecessitateshaving
hichtoenterthe amountstobeposted
neralledger,and theGeneralLedger
orthatpurpose.The Cashdebitcol-
sarytopermitthepostingofa column
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 83/419
edtopage1—Cashaccount.
ntheGeneralLedgercolumnpostedtothe
t,onthepages asnumberedintheL.F.
e2—AccountsReceivablecontrolling
s:
AccountsReceivablecolumnpostedtoan
ceivableledger.
.
nprovidedinthefollowingcashdis-
onssimilartothoseexplainedin thepre-
ashreceiptsbook.
k(Page1)
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 84/419
S
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 85/419
COUNTS75
e2)
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 86/419
NTS[Chap.8
Allowances(Page42)
w:
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 87/419
S
eof thegeneralledger:
ce
trol)1,930.00
0
)$4,650.00
nces90.00 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 88/419
NTS[Chap.8
able
ocedurecanbeappliedwheneverit
ilsfrom thegeneralledger.For
arriedinanumberof banks,thegeneral
rollingaccountcalledCashinBanks,
theachbankmaybekept inasubsidiary
ofreal estateareowned,thegeneral
rollingaccountwithRealEstate,sup-
ershowingthe costofeachparcelof
an Expensecontrollingaccountmay
ger,withdetailedexpenseaccountsina
oreherethanto indicatethatthe
durehasmanyapplications.Ifyouever
edger toobtaindesiredinformation,
eaccountsmaybecontrollingaccounts,
dinformationcanbeobtainedfromthe
ords.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 89/419
KSOF
ns.
enhavemanycolumns,andatfirst
everycomplex.Usually,however,it
dtheir natureifitis rememberedthat
originalentryareintendedto indicate
adeinledgeraccounts,andthatspecial
rthepurposeoffacilitatingtheaccom-
oksoforiginalentry areintendedto
ollowingpurposes:
ntotalsto controllingaccounts.
ntotalsto accountsfrequently
nofdata.
hanonelineto recordonetrans-
hanonebooktorecordone trans-
counts.
ountcolumnsinbooksoforiginal
ustratedinthe precedingchapter.
uentlydebitedorcredited.
accountappearin thecashreceipts
nbereducedbyprovidinga special
ount.Entriescanbemadein thespe-
e GeneralLedgercolumn,andthetotal
bepostedat theendofthemonth.The
ashreceiptsbookon page80isan illus-
ountsfrequentlycredited.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 90/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 91/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 93/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 94/419
SINBOOKSOF ORIGINALENTRY85
00fromC. J.Barnesinsettlementofan invoice
scountof 2%.
ecialcolumn) $20.00
0
rton,termsf.o.b.destination;thecustomerwas
tand deducttheamountthereofwhenpaying
s$700.00andthe freightwas$25.00;thenet
5.00.
olumn)$ 25.00
ceivedfrom JohnHolmes;whenitwasdeposited,
hange.
nge(specialcolumn)$.25
0
nvolvingtheuse ofthreeofthespe-
edabove:
tton$1,000.00
0.00
nddeductedby him15.00_ 35.00
on$965.00
k.50
64.50
20.00
nge.50
.00
page 84containsspecialdebit
cordingof thesetransactions.
kwitha specialcreditcolumnfor
so illustrated.
stofthe specialcolumnsillustrated
ngother thanthesavingofposting;
gfeatureisalwaysanincidentalbenefit
s severalentries,becausecolumntotals
by theledgerpagenumbersentered
he cashreceiptsandcashdisburse-
hichcontainall oftheillustrative
er.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 95/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 96/419
NSINBOOKSOFORIGINALENTRY87
toodthatthespecialcolumnsillus-
thischapterarenotthe onlyonesthat
he illustrationshasbeenmerelyto
sesofsuchcolumns.Thoseincludedin
houlddependupon thenatureofthe
ansactionstoberecorded.
thatspecialcolumnsmaybeprovided
her thancashbooksiftheywill facili-
ransactionsorwill reducethelaborof
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 97/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 98/419
ountingmechanismforrecording
olveanimmediateorprospectivedis-
sentialelementsofthesystemare
ter,andacheckregister.
dicatestheessentialfeaturesofa
aybeaddedasdesired.
Y
ue
anynllpJuly13
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 99/419
&Companypur-
mTheOsborneCompany;
edwasitemizedonthe
397,datedJuly3,1941.
ivedtheywerechecked
hat thegoodscharged
oiceandthepurchase
steachothertoseethat
ndtheinvoicewas
nsions,andfootings.
werefound tobe
mpanypreparedthe
easeparatevoucher
fromthesamesup-
navoucherjacket,and
cher.
hevoucher,thus
tionproceduresmen-
ompleted.
gned thevoucher
ment,becauseacheck
ssued;theperiodduring
ntis availabledoesnot
ysafterthedateof
nthevoucher
tobe paidimmediately
cherregisterserves
forpurchasesand
,asthischapterwill
eof theaccountspay-
tratedat theleft,
e,Payee,Explanation,
efortherecordingof
naboutthevoucher;the
bercolumnswillbe
aid;the moneycolumns
bitandcreditentries.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 100/419
eris enteredintheVouchersPayable
bitcolumn.(TheVouchersPayable
he AccountsPayablecontrolling
areprovidedforall accountsfre-
ustrationcontainsmanymoredebit
ntsforwhichspecial columnsarenot
ntriesin theSundryAccountsdebit
egister,wherespaceis providedfor
ount aswellasthe amount.
egisteronpage90debitsPurchases
sVouchersPayable.
aid immediately,itisfiledina
tilthe dateonwhichit shouldbepaid.
oucher,it ispresentedtotheperson
orizedisbursements;hesignsthevoucher
yment,"and
deaninternalcheckoverdisburse-
beapprovedandthe checkdrawnby
ster,showinganentry forthecheck
ecorded intheregisteronpage 90.
voucherisrecordedbya creditto
mentofeachvoucherisrecordedby a
theoffsettingcreditis toCash.(Dis-
creditedifadiscountis taken.)
dinthecheckregister,notationsare
dCheckNumbercolumnsofthevoucher
w:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 101/419
ckregisterandthenotationsinthe
oucherregisteraremade,thevoucheris
(usuallyinnumericalorder)whereit
eorotherdocumentsareavailableas
oftheentries andthedisbursement.
ssoonas drawn,theproceduredis-
xceptthatthereisno occasiontofilethe
tthe paymentdate.Paymentismade
y.
erandthevoucherregisteronpage
widefacingpages,containtherecordof
ssuggestedthat thereaderobserve
ction,notingtheaccountsdebitedand
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 102/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 103/419
M[Chap.10
ckregisters.
orofficesuppliesandstationery.
ckregisters.
e andinterest.
ckregisters.
cher1.
sefromL.N.Whitely.
month.
ckregisters.
sefromF.R.Mason& Co.
cher7.
rAugustrent.
ckregisters.
sefromGeorgeMartin.
voucher9.
tamps.
ckregisters.
sefromDalton&Doane.
onth.
ckregisters.
ndcheckregisters.
enteredbelowthecolumntotalsin
isters,andinthe L.F.columnofthe
sectionofthevoucherregister,indicate
completed.
:
Payablecolumn.
aldebitcolumnsanditemsin theSundry
Payablecolumn.
ntonPurchasesandCashcolumns.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 104/419
SYSTEM95
yableledger.
he vouchersystemistheelimination
payableledger;theindividualliabilities
minedbymerelynotingthe"open"items
atis,the itemswithoutnotationsin
umbercolumns.
the totalsoftheVouchersPayable
dcheck registersontheprecedingpages
ntrollingaccountwithVouchersPayable:
Aug.3l|VRlIl3,638|oO
balanceof$3,625.00.Theopen
re shownbythevoucherregistertobe:
n$1,750.00
ne1,875.00
cherregisterservesbothasa bookof
bsidiaryrecordsupportingthecontrolling
ble.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 105/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 106/419
changesinsurplus.
our townlikedtoknowhowmuch
o hesetoutbarrels atthecornersof
pouts,andaftereach rainhemeasured
demptiedthebarrelsintothe cistern.
theamountsoftheir incomeand
arrels calledaccounts.Afterpreparing
eendofa yearorotherperiod,they
tthey canbeusedto measuretheresults
xtperiod.The processofemptying
ingthebooksorclosingthe ledger.
Chapter3isrepeatedbelow.The
ebeenpostedfrom pages1and2 ofa
gagedinselling realestateonacom-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 107/419
hap.11
loseonly theaccountswithbalances
plusduring theperiod.
Cash,JohnSmith,FredBrown,and
sshowtheamountsofassetsat theend
seaccountsare nottobeclosed.
accountwithWhite&Company
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 108/419
incomeandexpenseaccountsare
rnalentryisfollowedbythe accounts
t.
comeaccountand
o thecreditofProfit
5
ccountisnowclosed;thatis, ithas
tbalance of$1,125.00hasbeen
e oftheProfitandLoss account.
nt.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 109/419
and theDividendsPaidaccounts.
asincreasedbythe netincome
alanceofthe ProfitandLossaccount)
dividendspaid(shownby thedebitin
t);thebalancesinthesetwoaccounts
bythe twojournalentriesshownbelow.
journalentriesis shownbytheledger
account.
accountandtransfer
ntingthenetincome
account.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 111/419
theSurplusaccount.
ount.
ffectedbytheclosinger
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 112/419
OOKS103
the endofAprilis shownbythe
941
ng
35.00
0
0.00
001,200.00
00$900.00
0.00
0,000.00
0.00—
12,160.00$12,160.00
emonth.You oweme$100.00.
closemybooks."
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 113/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 114/419
tinued
serveasthe basisofanillustration
thebooksofamerchandisecompany.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 115/419
[Chap.12
Septembercost$1,150.00.
werepreparedfromtheforegoing
ss
er,1941
:
94111,000.00
mber30,19411,150.00
Sold 2,550.00
0.00
600.00
er,1941
600.00
0.00
941$350.00
Worth
sPayable$700.00
00NetWorth:
alStock..$5,000.00
chandisingcompanyaccomplishes
erminingthe netincomeforthe
ounts(suchasDividendsPaid)
sduringtheperiod,are closed.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 116/419
ndoftheperiodis enteredinthe
theforegoingledgerappear
sfollowedbythe ledgeraccounts
unt.Thefirstentrycloses theInven-
gitsbalance (representingthe
ry)to thedebitofProfitand
000.00
withtheinventory
riod.
...2]1,000|00|
ount.Thesecondentryclosesthe
sferringitsbalanceto thedebitof
ount.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 117/419
Thethird entryplacestheSeptem-
ooksasanasset,withan offsetting
ecredit toProfitandLoss
mtheopeninginventoryandpur-
ebitedtothataccount.
0
0inventoryonthe
creditProfitand
eof.
ventoryaccountshowsthevaluationof the
ofSeptember.
0.00intheProfit andLossaccountisthecostof
ber.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 118/419
t nowhasacreditbalanceof $600.00,thenet
account.
0.00
oSurplus.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 119/419
ngentries.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 120/419
OOKS111
ooksofamerchandisecompanyis
lbalances.
er30,1941
g
00~
.00
00.00
000.00
050.00$6.050.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 121/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 122/419
tinued
indicatestheaccountswhichwill
ustrationshowingasomewhatmorecom-
ON
31,1941
00.00
00
194025,000.00
0.00
.00
4027,361.00
ances1,500.00
Allowances1,000.00
0.00
0
0
0.00
0
onofthestatementsattheend ofthe
nalentries,accountantssometimesmake
milar tothefollowingillustration.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 123/419
ial balanceareclassifiedaccording
theywill beused.
theyeardoesnotappearin thetrial
elowthe trialbalancefigures,inthe
oss statementandthebalancesheet,
th ofthesestatements.
r isshownasthebalancingfigurein
s,andis extendedtothecreditSurplus
heyearisshown asthebalancing
ns,andis extendedtothecreditBalance
ON
ber31,1941
.
es.
.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 124/419
OOKS115
ONExhibitC
ss
ber31,1941
dAllowances1,500
:
1940$25,000
ndAllowances1,000
ndPurchases$91,000
ber31,194126,00065,000
000
0
000
00
:
025
8,975
0
dOtherIncome$11,099
0
ONExhibitB
ber31,1941
40$27,361
itC10,089
00
41$32,450
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 125/419
[Chap.13
ONExhibitA
r31,1941
Worth
:
00AccountsPayable$7.375
otesPayable4,000$11.375
RTH:
0CapitalStock$35,000
5067.450
ntriestoclose thebooksattheend
iththe inventoryatthe
edaccounts.
Allowances1,000.00
hasesandAllowances
ted,theProfit andLossaccounthas
.00,representingthecostofgoodsavail-
ar.
941,inventoryonthe
e ProfitandLossaccounthasa
00,representingthecostofgoodssold
0
.
ances1,500.00
count.
ted,theProfit andLossaccounthas
0.00,representingthegrossprofiton
t andlossstatementonpage115.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 126/419
OOKS117
0.00
eaccounts.
0
seaccounts.
0
0.00
accounts.
sexpenseaccounts.
ted,theProfit andLossaccounthas
9.00,representingthenetincomeforthe
to Surplus.
ount.
toreducethenumberofclosingjour-
elateditems.Theextentto whichsuch
matterof personalpreference.An
dureis givenbelow:
1941)26,000.00
Allowances1,000.00
1940)23,000.00
ances1,500.00
theendofthe yearand
allaccountswithbal-
ationofgross profiton
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 127/419
0.00
0
unts.
00
0.00
sincomeaccounts.
to Surplus.
ount.
accounts.
plus accountsappearbelow.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 128/419
OOKS119
accountsafterthebooksare closed
atedbelow.
erenotaffected:
00.00
00
0.00
.00
ereclosed:
ances
Allowances
ngaccountswerechangedbythe
kswereclosed,the
alanceof$25,000.00,
yattheendof 1940;
esentingtheinventory
mountof26,000.00
swereclosed,theSurplus
27,361.00,representing
940.Itnow hasabal-
plusattheend of1941,
0
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 129/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 130/419
GTHEBOOKS
indicatestheaccountswhichwill
ustrationinthischapter.
ANY
31,1941
00.00
0.00
00
194035,000.00
—StoreBuilding8,000.00
—StoreFixtures1,200.00
0.00
—DeliveryEquipment.900.00
00
—OfficeEquipment...400.00
00
.00
5,000.00
ce600.00
4026,250.00
ances500.00
Allowances1,200.00
0.00
0
ense800.00
0
0
0
1941,$46,500.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 131/419
OSINGTHEBOOKS_ [Chap.14
d,adjustingentriesmustbe made
ems,andfor baddebtanddepreciation
describedinChapter5.
...........375
......................375
ncepremiumstoanexpense
ance........................400
00
n incomeaccount.
able.........................150
.150
est onthenotesreceivable.
........300
.......................300
est onthemortgage.
00
.....................700
eserveto$1,500.00.
uilding........................2.000
— Store Building..........2.000
5%of$40,000.00.
ixtures........................300
— StoreFixtures..........300
7H%of$4,000.00.
ryEquipment...................600
— DeliveryEquipment.... 600
20%of$3,000.00.
quipment......................150
— OfficeEquipment.......150
7H%of$2,000.00.
ments.
etshowingthetrial balancebefore
onoftheadjustingentries,thetrial bal-
ndthedistributionofthe adjustedbal-
eofthe statementsinwhichthebalances
ngpapersarefrequentlypreparedby
hepreparationofstatementsandclosing
ppearonpages124and125.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 132/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 133/419
SINGTHEBOOKS[Chap.14
ANYExhibitC
ss
ber31,1941
dAllowances600
:
1940$35,000
esandAllowances1,200
ndPurchases$203,800
ber31,194146,500157,300
200
00
ense800
850
50
:
pment150
175
5,175
dOtherIncome$15,725
250
ANYExhibitB
ber31,1941
40$26,250.00
C12,476.00
00.00
41$29,725.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 134/419
DCLOSINGTHEBOOKS125
ANYExhibitA
r31,1041
000
ebts1,50023,500
ble150
450
ciation10,000
0
ciation1,500
00
ciation1,500
ciation550
eciatedValue45,450
0.00
300.00
6,300.00
.00
ce200.00
.00
0
ntriestoclose thebooks.
nventoryatthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 135/419
SINGTHEBOOKS[Chap.14
0
Allowances1,200.00
edaccountsandcharge
ases.
nassettheinventory
ances500.00
0
edaccountsandcredit
•
0.00
0
ding2,000.00
ures300.00
uipment600.00
ense800.00
eaccounts.
0
pment150.00
seaccounts.
sincomeaccounts.
0
0
sexpenseaccounts.
to Surplus.
ount.
.
of theledgeraftertheadjustingand
posted.Observethattheonlyaccounts
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 136/419
DCLOSINGTHEBOOKS127
beenclosedare thosewithbalances
esheet.
ANY
—December31,1941
00.00
500.00
00
ble150.00
194146,500.00
—StoreBuilding10,000.00
—StoreFixtures1,500.00
0.00
—DeliveryEquipment1,500.00
00
—OfficeEquipment550.00
00
.00
300.00
.00
ce200.00
0
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 137/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 138/419
NTS
buysitsgoodsreadyforresale,and
sesaccountwhichshowsthecostof
Amanufacturingconcernbuysraw
ofmanufacturealsoinvolvesexpendi-
eatvarietyofmanufacturingexpenses;
ontainaccountsinwhichallof these
berecorded.
ementsofmanufacturingcost:
dmanufacturingexpense.
eddirectmaterials)includeonly
toandbecomepart ofthefinishedprod-
erationof thefactorydonotbecome
t;thereforetheyare classifiedasindirect
edasa manufacturingexpense.
anbest beshownbycontrastwith
whoworkontheproductwithtools,
ntheprocessof production,aredirect
entsandforemenwhosupervisethework
ersandjanitorswhoseservicesareinci-
duction,areindirectlaborers.
ormanufacturingoverhead,includes
onwhichcannotbeclassedas material
ringexpenseincludes,amongother
preciationofthefactorybuildingand
supplies;taxesandinsuranceonthe
e;andrepairsandupkeepof thefactory.
ecostoffinishedgoodsmanufactured
ever,bymerelyaddingthe expendi-
materials,directlabor,andmanufactur-
eunfinishedgoods,calledgoodsin
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 139/419
COUNTS[Chap.15
d oftheperiod,andonemust deductthe
odstodeterminethe costofthegoods
mayhavebeengoodsinprocessat
,and thesemustalsobetakeninto
howstheelementsincludedinthe
goodsmanufactured:
itD
sManufactured
1941
1940$12,000
andAllowances1,500
ases$105,300
r31,19419,000
alsUsed$ 96,300
00
epairs300
t6,000
pense2,500
nses30,775
dManufacturingExpenses$207,825
ntory,December31,194015,000
ventory,December31,194111,000
ed$211,825
statements.
entandthe surplusstatementofa
onotnecessarilydifferfromthose ofa
noneparticular:theprofitandloss
ringcompanyshowsthecostofgoods
inedbythestatementofcostofgoods
profitandlossstatementofatrading
fgoodspurchased.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 140/419
GACCOUNTS131
itC
ss
ber31,1941
lowances2,000
December31,1940$20,000
ed,perExhibitD211,825
tory,December31,1941.17,000
Sold 214,825
175
60
ense8,000
ense2,50039,860
15
0
andFixtures750
pense70023,990
9,325
e:
es1,2001,300
itB
ber31,1941
40$71,450.00
er ExhibitC18,025.00
41$83,475.00
nufacturingcompanyusuallydiffers
mpanyinthattheformerincludesfixed
acturingoperations,andinventoriesof
s,andfinishedgoodsinsteadofa single
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 141/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 142/419
GACCOUNTS133
albalanceandend-of-yearinven-
oingstatementswereprepared.The
erthepostingof adjustingentriesfor
msandforbaddebt anddepreciation
esakeofclarity,theaccountbalances
rdingtothestatementsinwhichthey
ngedinthe sequenceinwhichthey
s.
the booksofthismanufacturing
ediatelyafterthetrialbalance.
ATEMENTOPCOSTOF
12/31/40$12,000.00
4,000.00
Allowances$1,500.00
00.00
epairs300.00
3,500.00
yandEquipment...6,000.00
0
pense2,500.00
y—12/31/4015,000.00
ATEMENTOFPROFITAND
ances2,000.00
—12/31/4020,000.00
60.00
ense8,000.00
ense2,500.00
00
0.00
andFixtures750.00
pense700.00
0
00.00
00$302,700.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 143/419
COUNTS[Chap.15
21,675.00$302,700.00
ATEMENTOFSURPLUS:
0.00
ALANCESHEET:
00.00
00.00
00
—F.B15,500.00
t60,000.00
—M.&E21,000.00
00.00
—F.&F2,250.00
00
.00
es1,275.00
0
,1941:
00
00
ries.
mentsofmanufacturingcostare
accountinsteadoftoProfitand Loss.
uceabalanceinthe Manufacturing
costofgoodsmanufactured.
eginningoftheyear:
000.00
y15,000.00
accountwiththecostof
eginningoftheyear.
ear:
2,000.00
,000.00
accountwiththecostof
e beginningoftheyear.
800.00
4,000.00
dFreightaccounts.
Allowances1,500.00
00.00
hasesandAllowances
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 144/419
owEces
ec.31"1941
"Dec.31"1941.. .
ofitEdL"ss.. ..
O»O
O
OC OC O
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 145/419
COUNTS[Chap.15
000.00
000.00
rawmaterialsattheend
750.00
accountwiththecost
775.00
00.00
epairs300.00
0
pense2,500.00
3,500.00
yandEquipment..6,000.00
gexpenseaccounts.
fperiod:
y11,000.00
000.00
cessinventoryatthe
cturingaccountrepresentsthecost
ringtheyear;theaccountisclosedby
wingpage,transferringits balanceto
entries.
similarto thosewithwhichthe
closingthe booksofatradingcompany.
Loss withnetsales:
0
.
ances2,000.00
sandAllowances
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 146/419
CCOUNTS137
Losswiththecostofgoods sold:
20,00000
iththe inventoryof
ningof theyear.
0
1,825.00
gaccount,andto
thecost ofgoods
year.
17,000.00
finishedgoodsatthe
60.00
ense8,000.00
ense2,500.00
eaccounts.
s:
00
0.00
pense700.00
andFixtures750.00
seaccounts.
eandexpense:
00.00
00
0
to Surplus.
dendspaidduring
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 148/419
COUNTS
oundledgers.Mostledgersare
eafbinders;eachaccountisgivena
heetsare keptinnumericalorder.Itis
relationshipsofgroupsofaccountsbya
tothat illustratedbelow.Numbering
owingchartofaccountsillustratesthe
ERVES—1to99.'
e.
bts.
eivable.
s.
s.
ation—Buildings.
ment.
ation—MachineryandEquipment.
ation—Tools.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 149/419
OFACCOUNTS[Chap.16
ation—DeliveryEquipment.
s.
ation—FurnitureandFixtures.
xpiration.
89:
.
DCREDITACCOUNTS—100to199:
139:
NotesPayable.
nterest.
—Common.
—Preferred.
79:
99:
Advance.
200to299:
mmon.
erred.
NTS—-300to499:
9:
aterials.
sandAllowances.
—400to499:
dings.
inery,Equipment,andTools.
xpense.
wer.
.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 150/419
ARTOFACCOUNTS141
yandEquipment.
oryExpense.
599:
Allowances.
o699:
s.
ngExpense.
veryEquipment.
Sales.
ngExpenses.
to799:
nitureandFixtures.
ng.
ange.
eralExpense.
49:
ses.
899:
0to999:
ount.
steadofnames.
rsinsteadofaccountnamessaves
al entry,andsavestimeandeffortin
untNumber(insteadofname)col-
nalentryisindicatedbelow.Thecheck
atedhadonlythreemoneycolumns,as
hefollowingpage.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 151/419
COUNTS
,whenpayingvouchers,todebit or
thosefor whichcolumnswereprovided
ster.Thereforeit isdesirabletopro-
bit columnandaSundryAccounts
kregister.(Similarcolumnsarealso
oksoforiginal entry.)
disbursementsbookonpage143
maybeused.The factsrecordedare:
aid$400.00
kforabank drafttobesentto thecreditor.20
he bankinpaymentofthedraft$392.20
ursementsbookcontainsthefollow-
accountnumbersarethoseshownby
unts.
400.00
ange.20
es$8.00
Accounts,"itwasstated thatcon-
ucedintothe accountingsystemwhen
ythatit mustbedivided.
econtrollingaccountproceduremay
.Forinstance,controllingaccounts
ensecanbe keptinthegeneralledger,
ptinsubsidiaryrecords.
chartofaccounts,the generalledger
gcontrollingaccounts:
ense.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 152/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 153/419
COUNTS
wninthechartcouldbe keptina
dgersmaybekeptin theusual
arexpenserecordmaybekeptin the
ecord
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 154/419
ARTOFACCOUNTS145
the statementsweredeterminedby
s(Inv.),orthattheywerebroughtover
nt(ExhibitB,C,orD).
bitA
Y28
25,000.00
Debts1.000.00
00.00
vable..50.00
000.00
00.00
.00
50.00
eciation10,000.00
00.00
ent$35,000.00
eciation15,000.00
0000
000.00
eciation500.00
0.00
3,050.00
eciation300.00
0.00
0.00
300.00
25.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 155/419
OFACCOUNTS[Chap.16
ontinued
thT7ARY31RUARY28
0,000.00
.00
00
ble60.00
0
0,585.00
5,000.00
0
dvance$15.00
ctedinAdvance100.00
5.00
0.00
00
bitB
941
TC.
fPeriod$23,985.00
0
6,425.00
bitC
oss—1941
TC.
sandAllowances1,500.00
:
ry,Beginning$19,000.00
factured71,675.00
odsInventory,Endof
75.00
ard)$ 52,825.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 156/419
ARTOFACCOUNTS147
oss—1941—Continued
ghtforward)$ 52,825.00
15,000.00
0.00
Expense4,000.00
eryEquipment50.00
50.00
,400.00
25.00
:
0.00
00.00
ureandFixtures50.00
0
g125.00
alExpense1.635.00
6,495.00
930.00
s3,225.00
00
e$4,315.00
.00
0.00
25.00
bitD
dsManufactured—1941
TC.
7,000.00
chases$800.00
iod5,000.00
0
0
00
Labor(Forward)...$58,400.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 157/419
OFACCOUNTS[Ch«p.16
dsManufactured—1941—Continued
Labor$58,400.00
00
00.00
ngs200.00
nery,Equipment,and
00
r2,000.00
yExpense1,350.00
nses$12,975.00
eginning3,800.00
cess,EndofPeriod3,500.00
ed$71,675.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 158/419
profits.
entis intendedtoshowtheoperating
eriodoftime.The profitandlossstate-
atementofabsolutefact;usuallyitis
pinionof oneormorepersons,because,in
ement,itis necessarytomakemany
pervaluationofthe inventoryandthe
ad debts,depreciation,andotherlosses.
argelymattersofopinion,andsince
er,conditionsoftenariseinwhich
tsofprofitsmaybedefendedbydifferent
cesofdoubtit isconservativetomake
rronthe sideofunderstatingtheprofits
em.Iftheestimatesare laterfoundto
swillbepleasantlysurprisedratherthan
ditorswillhavenoreasonto claimthat
onservatismunderstatesthebook
dtheearningsofthecompany;such
pressthevalueofthecompany'ssecurities
iceupontheir holders.
ountantisobligedtosaila careful
ofinflatedprofitsandthe Charybdisof
manypoints inthecoursehemuststeer
sopinions,however,shouldbedeter-
edruleswhichareknownasaccounting
reamongthemostimportantofthese
peratingandextraneousprofits.
pensein theproperperiod.
ofitsandsavings.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 159/419
[Ch«p.17
pitalandrevenueexpenditures.
rectlyaspossible.
providefor alllosses.
nservatism.
eperiods,aconsistencyinthebases
atingandextraneousprofits.
ebysalesof thecommodityinwhich
eousprofitsaremadebysales ofassets
ebusiness.Profitsonsalesof mer-
ofits;profitsonsalesof buildings,equip-
xtraneousprofitsunlessthebusinessdeals
dities.
andthe statementsareprepared
peratingprofitsandlossesshouldbe
extraneousprofitsandlosses.Operat-
to theProfitandLossaccountandshown
ment;extraneousitemsshouldbeclosed
wnhi thesurplusstatement.Thisdis-
nedinorderthat theProfitandLoss
llshowtheresultsofregular operations,
dextraordinarytransactionsextraneous
mayperhapsmakethereasonfor
erstood:
rations$ 40,000.00$50,000.00
00.000.00
00.00
atit madeaprofitof$140,000.00
astyear,the statementwouldbetruebut
estanexpansionofbusinesswhollyat
ecompany'sprofitandlossstate-
of $40,000.00thisyearandaprofitof
resultingfromregularoperations.And
dshowthatthis yearitalsomadean
000.00fromthesaleoffixedassets.
th respecttoextraneouslosses;
e surplusstatementratherthaninthe
Butthisvery properruleissubjectto
toshowagood operatingincomemay
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 160/419
OFITS151
ensesfromitsprofit andlossstatement,
rplus,andinsistthat theyareextraneous
der-linesituations.Forinstance,
twasclosedduringtheyear,and that
edinthedispositionof itsinventories.
partment'soperationswereapartofthe
astrequire thelossfromliquidationof
gedtoProfit andLoss?Ordothe
becomeextraneouswhenthedecisionto
esequestionsarenotansweredhere;
erelycalledto thefactthat,becausesuch
dvantageofinanattemptto makea
ngincome,nooneshouldrelyon the
onein determiningthetotalprofitor
statedperiod;thesurplusstatement
derstandthisdistinctionbetween
s,showninthe profitandlossstatement,
dlosses,showninthe surplusstatement,
publicmaynotbe familiarwiththedis-
ttheprofit andlossstatementtellsthe
eralsotothesurplus statement.For
tlybeensometendencyto combinethe
owextraneousprofitsandlosses,aswell
nts,belowthenetoperatingincome,in
lowingillustration.
ssandSurplus
ber31,1941
70,000.00
000.00
00
donedPlant15,000.00
ncomeTax—1939...$1,500.00
00
eDividends$19,500.00
00.00
0.00
4025,000.00
41$39,500.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 161/419
[Chap.17
nseintheproper period.
tatementpurportstoshowthenet
uringastatedperiodoftime, itshould:
cabletothe period;therefore:
madetotakeup income
ot beenenteredinthe
otbeencollected.
dbutnotdelivered,thesale
eprofittaken,provided
epurchaser.Thegoods
session,buttheyare held
plicabletothe period;therefore:
madetotakeup expenses
enotbeenenteredin the
dexpensesincurredpriorto the
e included,eventhough
ceiveduntilsometime
od.
abletoafutureor priorperiod.
vanceisapplicabletoafuture
redby settingupa
prior periodbutwhichwas
tandlossstatementfor
shouldnotbe includedin
ntfor thecurrentperiod
ecurrentperiodwould
dbe creditedtoSur-
profitsofthepriorperiod.
icabletoanotherperiod.
ldbedeferredtoa future
npreparingtheprofitandl oss
should bechargedto
the profitandloss
eriod.
napplicabletotheperiodis omitted
or lossesaretherebyignored,itis evident
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 162/419
OFITS153
illbe incorrectlystated—soevident,in
arcelybeworthmentioning.But
attentionshouldbe calledtothisfact.
pointis oftenoverlooked.Expenses
oksbecausetheyhavenotbeenpaid;
auseithas notbeencollected;purchases
timeisrequiredto passtheinvoices
andtheydonot comethroughfor
ngofthenext period.
medoubt oftentimesexistsconcerning
sactionproperlybelongs.
tsandsavings.
resultsfrommanufacturingathing
whichit couldbepurchased.Com-
ucttheirownfixedassets,andwhenthis
nthepriceat whichtheycouldbepur-
clinationto valuethefixedassetsata
eandtotakeupa so-calledprofit.There
rnessin suchaprocedure;whyshould
facturingfacilitiestomakefixedassets
regotheopportunityofmanufacturing
esoldata profit?Theansweristhat,
fixedassetscurtailedthe manufacture
hichisunlikely),theprofitandloss
treallyhappenedinsteadofwhatmight
ufactureofthefixedassetsmayincrease
hedepreciationcharges,butapresent
creasedfutureprofitsmust notbe
dprofit.
alandrevenueexpenditures.
ment,orthe assumptionofanobliga-
ment,forabenefitreceived.Thereare
es,knownascapitalexpendituresand
pitalexpendituresresultinbenefitsofa
sland,buildings,andmachinery;such
pitalizedbychargestoassetaccounts.
einthenatureofexpenses,andshouldbe
unts.
saretofurnishan accuraterecordof
ties,andcapital,it isessentialthata
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 163/419
[Oup.17
ebetweenthesetwoclassesofexpendi-
hased,acapitalexpenditureismade;
anexpenseaccount,ortheassetswill be
tsunderstated.Ontheotherhand,if
evenueexpenditureismade;the
apitalizedbybeingchargedto anasset
beovervaluedandthe profitsoverstated.
tinguishbetweencapitalandrevenue
yprinciplesareinvolvedthatacomplete
neduntillaterchapters.Justnow the
edistinctionmustbemadein accordance
counting,ortheprofitswill beincor-
yaspossible.
olvedinthe correctvaluationof
rsaredevotedtothis subject.Atthis
ostatethefollowinggeneralprinciples:
atereservesshouldbeprovidedfor
theinventoriesshouldbevaluedat the
ylossestakenon currentassetsin
uirementsofgoodaccountingshouldbe
perations.
ryinvestmentsinstocksandbonds
werofcostormarket,andanylosses
hargedagainstcurrentoperations.
arketvalueofpermanentinvestments
ealizationatcurrentvaluesisnot con-
ecreasesinmarketvaluesofpermanent
videdforbytheestablishmentofa
becreatedbya chargetoSurplusrather
distinguishsuchlossesfromthose
rations.
nsshouldbechargedwithdepre-
ortizationapplicabletofixedassets;
uationsinthemarketvalueoffixed
ovideforall losses.
nservatismshouldgovernthe
ertainingtothedeterminationofprofits.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 164/419
FITS155
tsshallnotbe anticipatedmaybe
ditoperationswithanyunrealizedprofits..
sor exchangesinwhichthevalue
ecost(or bookvalue)ofthethingparted
attheprofitberealizedin cash;
izedif cashorpropertyisreceivedinthe
ctioncreatesavalidclaimagainst a
incomemaybeanticipatedinmany
entionedbelow:
xcessofcost.
signments,onshipmentsto
fmerchandisefromonedepart-
r investmentswithoffsettingcredits
ollectedinadvance.
eforalllosses"is tosomeextenta
ndneedssomeclarification.Itisnot
losses.Fori nstance,thereisno
easeinthe marketvalueoffixedassets.
edforsale; theyareintendedforuse,
uepresumablydonotaffecttheir use-
companyisa defendantinalawsuit;
ersedecisionmaybetooremoteto justify
nyloss.
redthatsomelosses shouldbe
againstcurrent operations;these
dhavebeenchargedtooperationsina
ooked,andextraneous(i.e.,non-operat-
sesmay,therefore,bemodifiedas
dbeprovidedforby chargestoopera-
beprovidedfor bychargestoSurplus;
becauseoftheremoteprobabilityof
d.
rvatism.
notjustifyan understatementof
vasionof incometaxes.Moreover,the
emaybeprejudicialtotheinterestsof
ersofother securitieswho,believing
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 165/419
[Ch.p.17
osperousthan itreallyis,maysell their
are reallyworth.
cessecretreserves.Toillustrate,
pany'sinventoryisworth$100,000.00,
y$75,000.00.Theprofitsfortheyear
00,andtheassetsandnetworthare
ebalancesheet.Thisunderstatement
directorsorofficialswhoauthorizedthe
swouldbea fairestimateofthelife
A2J %depreciationratewould,there-
ompanyprovidesdepreciationat5%
understatedeachyear,andthe assets
derstated.Asecretreserveisthus
that thedepreciationreserveisshown
actthat thereserveisexcessivemaybe
matecontrolof thebusiness.
esare asourceofstrengthtoa com-
ntofunusualor excessivelosses,thesur-
tisto say,afterthelosshas been
emaderestoringan understatedasset
settingcredittoSurplus.Butit isa
hetherdirectorshaveanyrighttocreate
nderstatementofthecompany'sprofits
ninformedstockholderstodisposeof
erthan theywouldacceptiftheprofits
tlystated.
eprocedurestowhichaccounting
ssentiallyequal,sanction.
so-called"cash"and"accrual"
erthecashbasisallconsiderationof
enseandincomemaybeignored;under
entsaremadeforall suchmatters.
eptable,achangefromonebasisto
fectthestatementofoperationsofthe
eis made.
ationregardedasmost conservative
verislower."Butvaluationatcost
zedasacceptable.Iftheinventoryat
savalueof $100,000.00atcostand
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 166/419
OFITS157
viousthat achangefromthecostor
sis ofinventoryvaluationforprofitand
willcauseanadditionof$10,000.00tothe
edbasistoanotheracceptedbasis
elyforthe purposeofaffectingtheprofit
eforsomelegitimatereason,the
dbedetermined,ifpossible,and stated
nthe profitandlossstatement.
madefromanacceptabletoanunac-
ebasis(orviceversa)for nootherreason
sethestatedprofits. Forinstance,
ratelyundervaluedorovervalued,
nandbaddebtsmaybeincreasedor
uresforadvertisingmaybeunjustifiably
dcharges.
nthe precedingparagraphs,itis
ecustomforaccountantstoincludeinthe
rauditreportswordssimilarto the
withacceptedprinciplesofaccount-
edduringthecurrentandtheprior
ywill.
tis, oneshouldnotbesurprisedto
mentofteninjectsanartificialcontrol
hownin theincomestatement.
isedwiththedeliberatepurposeof
hestatedprofit.Inventoryvaluations
ed netincomefigureinmind—not
nofquantitiesortheuseof obviously
viceswhichcanbemorereadilycon-
setheyaremattersofopinion,suchas the
tobeused,orthemarketprices toapply
ble,orquotationsapplicabletothe
notbeavailable),ortheamountof the
emadeforobsoletemerchandise.Or
perationsandcreditedtoreservesfor
s,andforotherlossesand contingencies
thaneyesingle tothereserverequire-
oughtto theeffectofthechargeson
tandlossstatement.Orthere maybe
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 167/419
[Chap.17
cescarriedforwardasdeferredcharges
eremaybeitems ofincomeand
enoughto theborderlinebetweenoperat-
ionstoprovideanarguablechoiceof
operlychargeableagainstincomemay
providedfor suchlosses,ortoreserves
xercisedwithabelief inthedesira-
rtedperiodicalearningsand leveling,
e peaksandvalleysincidenttobusiness
sinesshasbeen low,reducethe
ddefendtheprocedureontheground
ativelyinactiveand,therefore,that
nhasbeensuffered.Oradoptastandard
dssoldandthe inventoryatthestandard
adeferredchargeanyexcessof actual
fthe capitalstockiscloselyheld,
stockholdingofficers;thedifferencecan
dividends.
frequentlyapplied,notwiththe
nginganunsatisfactoryshowing,but
ch proceduresareproperandincon-
tingprinciples.Forinstance,businesses
y,andotherinsurablehazards.If
emiumsareproperoperatingexpense
ssesbelievethat,becauseofgeographi-
sons,thelosses willbelessthan the
hereforeadoptaso-calledself-insurance
servesagainstwhichlossescanbe
ccur.Itcertainlycannotbe saidthat
ina companyassumingitsownrisks;
surance"norinsuranceofanykind;it
butexperiencehasconvincedmanycom-
ein then1favor.Thequestionofimpro-
periodicalchargeto operationsandthe
ossto thereserve.Theseproducea
chiscontrarytothefacts.Theperiodi-
ortheamountscreditedto thereserve)
hat therewouldbeasimilar chargeif
d,andthatthecompany's.accountsshould
withother companiesthatdocarry
mstobethat,sincethere isadifference
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 168/419
OFITS159
eaccountsshouldbekeptinsuch away
einsteadofconcealingit,and thatno
justifiedunlessanduntila lossis
caloperatingchargeforatheoretical
rginganincurredloss toareserve,pro-
nceatvariancewiththefacts;some
entherearenolosses,and otherperiods
ossesthat dooccur.
profitandloss statement.
esheetwasregardedas thestate-
forpurposesofinvestigationofa com-
tand lossstatementwasgivenless
anceoftheprofitandlossstatement
ognized.Thisincreasingemphasison
ntimposeson accountantsafurther
properaccountingprinciplesandpro-
othetreatmentof somedebatable
ylittleeffectonthebalancesheetbut a
tontheprofitandloss statement.
balancesheetshowsaworkingcapital
hof$150,000.00,anddeferredchargesof
ofitandloss statementshowsanetprofit
of$5,000.00tothedeferredcharges
eworkingcapitaland wouldcauseonly
atementofnetworth,buttheincreasein
00.00to$9,000.00wouldbea major
creditanalysts,investors,andothers
atementincreasestheaccountant's
respecttomatterswhichcanbe
misrepresentationsbutalsowithrespect
oreor lessplausiblydefendedasques-
hrespectto stabilizingprocedureswhich
ctuationsinoperations.
lrulesforthe guidanceofaccountants
andlossstatements(andincidentallyof
s),perhapsoneruleshouldbe giventothe
Takethemwitha grainofsalt.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 169/419
[Gup.17
trememberthattheyare,toa
mattersofopinionbasedonestimates.
andbaddebtreserveprovisions,andthe
enseandincomeitems,areoftenmatters
mination.Twoequallyableandequally
differwidelywithrespecttothemand
s.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 170/419
CAPITAL
ation,asshownbyitsbalance
ollowingelements:
ofits.
nsidersomemattersrelativetothe
theproper methodsofaccountingforit.
stockofa corporationareevidenced
kstockcertificatesareboundinbooks
ks.Thestockcertificateshownonpage
to itsstub,hasbeenfilled outfor
asevidenceofhis investmentof$800.00
n.
gnedbythesecretaryand thepresi-
dis readytobedetached,stampedwith
giventoTuttle.The stub,whichwill
ook,showstheessentialfactsaboutthe
nbythecertificateandthestub are:
wnbyStub
.00
res50
0
orgeTuttle
MarquisCorporation
ateJuly1,1941 July1,1941
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 171/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 172/419
163
notalwayscontainthereceiptform
stubintheillustration.
esunderthewordsTransferredfrom
xtsection.
hecorporateformof businessorgani-
lderhasa righttotransferall orapor-
apitalstock.Suppose,forinstance,
wosharesofhisstockto HenryReid.
mentformwhichisprintedontheback
s:
ryReid
tionedandherebyauthorize
nsferonthebooksof
lthis 3rdday
ckofCertificate
eispresentedtothecorporationfor
ertificateiscanceledandattachedtothe
nallytaken.The openstubs(stubs
nceledcertificatesareattached)indicate
nding.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 173/419
msofTuttle'sendorsement,two
d:onecertificatetoHenryReidforthe two
him,and anothercertificatetoTuttle
retained.Thefollowingisthestubof
toReid;thestub ofthecertificateforsix
ldbe similarlyfilledin.
nsdiscussedhereafter,theowner-
nfersthefollowingrightsuponits owner:
toadditionalsharesofthesame
emanagementbyvotingat the
eprofits.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 174/419
K165
edistributionof theassetsofthe
ts dissolutionandliquidation.
e classofstock,thefourabove-
yedproportionately,shareandshare
However,thepre-emptiverightto
resmayberestrictedor entirelyelimi-
specttonon-votingstock.Different
dbydifferencesinthe rightstovote,to
hareinthe assetsinliquidation.
stodividendsgives itsholderscer-
pectto profits—usuallytherightto
ainrate(or ofastipulatedamount,in
eforeanydividendsare paidonthecom-
endsshouldnotbeunderstoodtobe
wever,becausethepaymentofdividends
s oncommonstockdepends,first,on
second,onthe declarationofdividends
rsofstockwhichis preferredasto
dividendsbecausethecorporationhasno
ctorshavewithheldthedividendson
areneededinthebusiness.
httoreceiveadividendbeforeone is
holdersmaybenon-cumulativeorcumu-
paiddividendsfor anyperiodbecome
surplus infutureperiods,andall pre-
mustbe paidbeforeanydividendscan
tock.
stoassets entitlesitsholderstopay-
anypaymentsaremadeto thecommon
enceextendsonlytotheparofthe
quidationvalueisspecified.Dividends
payableatliquidationunlessthestock
sexists sufficienttocoverthedividends
rs'righttovotehasfrequentlybeen
somestatesit cannotlegallybewithheld.
specialpreferencewithrespectto
htsdoesnot inferentiallygiveitany
otheotherfundamentalrights.Thus,
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 175/419
RTH[Chap.18
todividendsis notalsopreferredasto
beenspecificallyconferreduponit.
hasbeen givenaspecialrightcon-
sicrightsunlesssomerightis removed.
ferenceofopinionasto whetherstock
videndswithoutbeingspecificallystated
nsthe righttoparticipatewiththe
sabovethepreferencerate.
conclusionthatpreferredstockis
nrights.Itmaybecommonstockplus
hers.It isnecessarytoreadthecharter
certificate,anditmay benecessaryto
examiningthecharterprovisionsto
stock,one shouldstartwiththeassump-
he holdertothefourbasic rightsmen-
sumptionbyaddingthespecialrights
ndbyeliminatingthosebasicrightswhich
n.
indicatedtobe6%cumulative
analysisofitsrightswill beasfollows:
ewstock:
anagement:
ofits:
cumulativedividendsbefore
he common.
ebasicrightto sharepropor-
dation:
ce,thecommonandpreferred
y.
s.
hanoneclassofstockfrequentlyuse
iousclasses—asClassA,ClassB, and
eclassesmustnecessarilybecommon
mespecialprivilege,oraresubjectto
specttooneormoreof thebasicrights:
ent,intheprofits,inadditionalstock
on ofassetsinliquidation.
gnificancewhatever.Thedesigna-
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 176/419
K167
tternecessitatesthedeterminationof
hestockby referencetothestockcer-
arter.
esheet.
ndicatetheparvalueof thestock
parvalue)and shouldpresentinforma-
mountsofstockauthorized,unissued
Someillustrationsofadequatebalance
enbelow:
arvalue;Authorizedandout-
00,000.00
enotbeenissued,theconditionmay
arvalue:
$100,000.00
OOP.00
$75,000.00
nmethodofpresentingthesamefacts
arvalue;Authorized,1,000shares;
standing,750shares$75,000.00
assofstock,completedatashould
achclass.
arvalue:
,participating;authorized,1,000
hares$50,000
00shares;outstanding,1,250shares125,000
s.
gfactswithrespectto acorpora-
00.
ionshavebeenfullycollected,600-
s,$25,00pershareon 400shares.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 177/419
RTH[Chap.18
00 shareshavebeenissued,although
fthemhavenot beenfullypaidforby
cesheetmaybedrawnupas follows:
000
arvalue:
s.
00
0,000$100,000
ubscriptionsasanassetispermissible
aretobe collected.(Ofcoursethey
yfromordinaryaccountsreceivable.)
tobeno intentiontorequirethestock-
nceoftheirsubscriptions,theuncollected
tedontherightside ofthebalancesheet,
worth,thus:
arvalue:
s.
00
$40,000
ptions10,00030,000$90,000
unt.
ckofacompany,ofaparvalue of
0.Thefactscouldbe showninthe
H:
ar
ethatstockof aparvalueof
scountof $5,000.00.Onesometimes
chthe stockdiscountappearsonthe
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 178/419
K169
onofDeferredCharges,as inthefollow-
ORTH:
k—$100.00par
d,500shares$50,000
ce;thestockdiscountshouldbe
fromthestockin determiningthenet
eetshouldappearasfollows:
arvalue:
0shares$50,000
0
alaterchapteraboutincludingstock
eductingstockdiscountfromSurplus.
iredtopointoutthat astockpremium
orth,thata stockdiscountisadeduction,
eatedassuchinthe balancesheet.
ion,suchasincorporationfeesand
p inanOrganizationExpenseaccount.
ninthe balancesheetasadeferred
theNetWorthsection.Itshould be
ossiblebychargestoSurplus.Not
esarechargedtoaGoodwillaccount,
nentlycapitalized;thisisimproper.
opertyother thancash,thequestion
yisreallyworth theparvalueofthe
rththeparof thestock,aDiscount
ppearonthebooks.Suchanaccount
wever,becausedirectorsaredisposedto
ar ofthestock.Andinso doingthey
rights, forthelawallowsdirectors
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 181/419
RTH[Chap.18
dwhenthecompany'sassetsare
henetassetsare, inreality,notworthas
inthe NetWorthsectionofthebalance
eductions,suchasStockDiscount,that
t sideofthebalancesheet.Wateris
sissued inexcessofthevalueof the
seassetsareoverstatedin theaccounts.
ccountsmaybegrosslyoverstatedor
totheaccountsata figurethatisnot
Waterisalso injectedintothestock
dastockdividendis declaredagainst
edbya scalingdownoftheoutstand-
dbyreductionofeitherthe numberof
eachshare.Ifeachstockholdersuffers
oportionateinterestinthe corporationis
ybedonatedandresold,thusincreasing
ngthestockoutstanding;thecreditfor
sedto theovervaluedassetaccountsand
maybewrittendownbychargestosur-
esmaybechargedoffas expenses.The
ble,however,asit correctsoneerrorby
ely,themisstatementofoperatingprofits.
signored.
s,particularlyinsmallcompanies,
anythingswhichcanbedonein apart-
oneina corporation,andthatmany
orationswhicharenot requiredof
iallytruewhenabusiness thathas
ershipischangedtoa corporation.
cesofthepartnersmustin many
byformaldirectors'meetings,andminutes
kept.Profitscan nolongerbedistrib-
butmustbedividedin accordancewith
ver,theycanbedistributedonlyafter
dends,andnotin thefreeandeasy
butionsofdividendsmustnotimpair
cersmustbeauthorizedby theboard
ockmustnotbe increasedordecreased
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 182/419
Continued
PARVALUE
mittingtheissuanceofstockwithout
912in NewYork,uponrecommendation
ation,whichbelievedthattheissuance
wouldeliminatesomeofthe evils
ceofparvaluestock.
dtheexampleofNewYork;unfor-
riousstates differinmanyparticulars.
mmonstockwithoutparvalue,and
nceofpreferredstockwithoutpar value.
ementastoa minimumissuingprice;
mprice.Someprovidethatthe issuing
e directorsintotwoelements:stated
allyafixedminimumamountper share)
apitalStock,andthe remainder,which
.
wshavecreatedsomeconfusion
tingproceduresapplicabletono-par
sionhasbeenconsiderablyaugmented
wsapplicabletothepaymentofdivi-
k.
ctionstopar valuestockandtheo-
arstockarementionedbelow:
onashareof stockisnotatrue indi-
ni fthesharesareissued for
ediatelyhaveamarketvalue
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 183/419
RTH[Chap.19
oftheprospectsof largeprofits.
ckdependsuponthevalueof
tsandtheamountof itsearn-
printedonthe certificate.
acertificatehasnotinfrequently
or promoterstoextractmoney
heunsuspecting.Thereisan
tahundred-dollarshareof
rswhichmanypeoplefind
heearlyadvocatesofno-par
that,ifa stockcertificate
showedonlythe totalnumber
enumberof sharesrepre-
purchaserwouldbemore
o thematterswhichaffect
ely,thenet assetsandthe
n.Experiencedoesnotseem
necessarilytrue.
krelievesthestockholdersof
Theliabilityfordiscount
ofstockat lessthanpar.If
ofcoursebeno discount.
kreducestheincentivefortheover-
to balancethebooksatthe
ertiescanbeputon thebooks
stockcanbecreditedatthe
parstockpermitsthe issuance
hises,goodwill,andother
einsteadof atanarbitrary
osslyexcessive.Assumethat
oninwhichAistoi nvest
$100,000.00incash.Itis
eequali nterestsinthecapital
alue stocksystem,Amight
eof $100,000.00toequalthe
cash.Thiswouldencumber
excessiveproportionof
oselargepatentamortization
Undertheno-parvaluesystem,
edto Bforhiscashand
0,000.00,whileanother1,000
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 184/419
KWITHOUTPARVALUE175
Aforhispatentsand recorded
00.00.
lysuitedfor useinreorganizations
aretobecombinedandstock
.Ifparvaluestockis issued
donthefutureearnings,
eexcessearnings,tobe set
veryconsiderableamount
atetotheotherassets.If
anydesirednumberof shares
odwillmaystill beplacedon
gure.
dvantageswhennewcapitalis
nciallyembarrassedcompany
orthe sakeofillustration,
sufferedlossesuntilits stock
obtainadditionalcapitalby
ow.Parvaluestockprobably
causethepurchaserswould
ithno-parstock,sales
e whichwouldbeequitable
posingonthepurchasersthe
tock.
nfees,stocktaxes,feesforthe
eignstates,andother taxesmaybe
every muchinexcessofthefan* value
ovidethatno-parsharesshallbe
$100.00fortaxpurposes,whichwould
eexpenseiftheshares weresoldat,say,
hatthetotalamountreceivedby a
eofitsno-parstockshould becreditedto
reamountshouldberegardedas
atnoportionofit shouldbecreditedto
ablefordividends.Unfortunately,the
makeanysuchrequirement,andthe
hereforehaveassumedthattheywere
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 185/419
RTH[Chap.19
ingprice intotwoportionsforpurposes
onbeingcreditedtoCapitalStockand
ditedto Surplus.
ypermitthedirectorstodivide the
ockandsurplus elements.Otherstate
stated valuebutprescribeaminimum
elowwhichstockof no-parvaluemay
rationssubjecttothis requirementhave
herequiredminimumpershareand have
theissuingpriceas Surplus;others
suingpriceto CapitalStock.
lawsandthe diversityofpractice,
ncesheetas thevalueassignedtono-par
ing.Itmayrepresentthe entireamount
ayrepresenta statedvaluepermitted
mumrequiredbythelaw;or itmay
untarbitrarilyarrivedatbythe directors.
nnectionwithparvaluecapitalstock
ckandacredittoCapitalStockAuthor-
is impossibleinconnectionwith
eisno valuetoassigntoit. Thenumber
beindicatedbya memoranduminthe
follows:
yment,withoutthenecessityof
criptions,theentriesare:
hfullamountre-
000shares.
ceedsofthestockis toberegarded
ingentrymaybemodifiedas follows:
)25,000.00
,000shares,and the
naccordancewiththe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 186/419
KWITHOUTPARVALUE177
ycollectedwhenreceived,entries
ock100,000.00
100,000.00
1,000sharesofstock.
ock40,000.00
ofsubscriptionsto
40,000.00
ullypaid shares.
ock30,000.00
onremainingsub-
no-parbasis.
onsorganizedonapar basisto
arbasis.This maybedonewithoutin
ountspreviouslyshownascapitalstock
angingfromaparbasisto ano-par
eamostconvenientmethodofeliminating
etusassumethata company'sbalance
ngNetWorthsection:
$100.00pershare;authorizedand
s$100,000
endmentauthorizingachangefrom
uebasis,theold sharescanbecalled
par sharescanbeissuedintheir place,
hpicturecanbe presented:
ue;authorizedandoutstanding,
eof thenewno-parstockintotwo
ngnet worthpicturemaybepainted,
ue;authorizedandout-
0,000
)15,000$65,000
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 187/419
RTH[Ch«p.19
alue.
uedwithoutparvalue,a fixedprice
e preferredstockmayberedeemedby
presentsitsliquidatingvaluein theevent
ompany.Thisredemptionorliquidation
differentfrom thepriceatwhichthe
amount,then,shouldsuchpreferred
ncesheet?
,000sharesofpreferredstockwere
and thatitsliquidatingorredemption
pershare. Atthesametime,1,000
ereissuedat$40.00pershare.
areshowninthebalancesheetat
Worth sectionwillappearasfollows:
ue:
doutstanding,1,000shares$40,000
outstanding,1,000shares40,000
entationdoesnotindicatetheliquidat-
tock.Butif thepreferredstockwere
ueof $50.00pershare,thestatedvalue
dhavetobecorrespondinglyreduced,
ue:
doutstanding,1,000sharesatliquidat-
re $50,000
outstanding,1,000shares30,000
tiondestroystherecordof the
classofstock.Itis desirabletoretain
ncesheet,andto showtheliquidating
s:
ue;Statedatissuingprice:
outstanding,1,000shares(Liquidat-
e)$40,000
outstanding,1,000shares40,000
mon.
fpreferredandcommonshares
n units,withnoseparationofthe price
orifpreferredand commonsharesare
onofa business.Insuchcasesthe
tdifficultyinshowingseparatevaluations
rredstockinthe balancesheetunlessa
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 188/419
KWITHOUTPARVALUE179
savalueforeachof thetwoclassesof
,000sharesofpreferredstockand
tock,bothwithoutparvalue,areissued
.The charterprovidesaliquidating
or thepreferred.Thebusinessacquired
e directorsestablishastatedvalue
,anda statedvalueof$40.00forthe
anthenshowthe factsinthebalance
ue:
standing,1,000sharesatstatedand
0pershare$50,000
standing,1,000sharesatstatedvalue
0
edbythedirectors,themerefactthat
quidatingvalueof $50.00pershareis
accountantinpreparinga balancesheet
dividedbetweenthetwoclassesof
nabove.Theliquidatingvaluewill
ate asmaybedetermineduponfor
rredstockor theliquidationofthecom-
otnecessarilyrepresentapresent
anthastherightto insistuponshowing.
sentto someapportionment,the
dtoprepareabalancesheetin which
thefollowingmanner:
ue$90,000
resofpreferredstockwithaliquidating
and1,000 sharesofcommonstock.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 189/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 190/419
Continued
tion'sownstock,onceissuedand
ired.Itwill benotedthatthereare
nthisdefinition:
thecompany'sownstock;holdings
aniesshouldnot becalled
enissued;unissued stockshould
k.
thestockmusthave beenpaid
portantelementof the
ountcarrieswith itapersonal
corporatedebts;if such
orporationandreissued,
it,ifpurchasedwitha
ssuanceatadiscount.
ed,thestockwaspaid forin
s treasurystockandreissued
abilitybeing imposed
cquiredbydonation,bypurchase,
ount.Donationsmaybemadetoprovide
furnishworkingcapital,ortoeliminate
rto wipeoutadeficit,orto provide
asa bonustothepurchasersofa new
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 191/419
RTH[Chap.20
forother reasons.Itmaybepur-
holder,ortocreateamarketdemand
ardadownwardtendencyinthemarket
cesheet.
set;the acquisitionoftreasurystock
ntofstockoutstanding.Therefore,
shouldbeshownin thebalancesheet
orth section.Twomethodsareillus-
ar-value:
000shares$100,000
ares5,000
arvalue;authorizedandissued,1,000
res;outstanding,950shares$95,000
set.
metimesrequestedtoshowtreasury
thebalancesheet.Althoughthestock
ability,thepurchaseoftreasurystock
uisitionofanassetbut causesareduction
rth.Itis truethatthetreasurystock
,butsomayunissuedstockbe sold;it
rystock,likeunissuedstock,isnotan
ceofpossibleadditionalcapital.
parvaluestock.
ertheheading"Treasurystockin
rvalueofthe treasurystockisdeducted
ssuedstocktoshowthepar valueofthe
itatesuchadeduction,treasury
he accountsatitsparvalue,regardless
sacquired.Thepremiumanddiscount
esandsalesshouldberecordedin some
ryStock.Accountantsholdvarious
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 192/419
CK183
accounttouseforthatpurpose.It was
omtorecordsuchpremiumsanddis-
agrowingpreferencefortheuseof a
nsomestatesitis illegaltopay
ntreasurystockpurchasesuntilthe
bysubsequentresaleofthe stock;in
tousesomespecialaccountsuchas
onTreasuryStock.Tomakethepresent
kentriesassimpleas possible,discounts
rdedinCapitalSurplus. Entriesare
strativetransactions;thestockhasa
are.
purchasedat90:
edat 101:
dto thecompany:
92:
3:
none classofstock,thetreasury
catetheclasses,thus:TreasuryStock—
ck—Preferred.
no-parvaluestock.
riginallyissueditsno-parstockfor
afterthe passageofsometime,the
asfollows:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 194/419
OCK185
ownin thebalancesheetasfollows:
ue:Authorizedandissued,
100shares,atcost3,500
nds.
that thefirstcorporationinEngland
eeuponapplicationbyanumberof noble
metanddecidedhowmuchof their
ay.The righttoincorporateisno
rivilegeavailableonlyto theinfluential;
tyis nowopentoall.
wsindicatesthattherehas been
ockholderstheadvantageoflimited
mesafeguardingthecreditors.Corpo-
ttemptedtodoso byprovisionsintended
dividendsexceptoutof profits.Thus,
onhadcapitalstockof$100,000.00par
,000.00,dividendscouldbepaidtostock-
f the$25,000.00surplus.
dividendsdid notactasa restriction
urystock;consequently,ifthestock-
mentionedintheprecedingparagraph
0outofthecorporatetreasury,theycould
0.00dividendoutofsurplusandalso
urystockfor$25,000.00.Andthepoor
houghtthattheirdebtor'snet worth
w$100,000.00,wouldfindthatit had
00.
tlawsrestrictingdividendsare not
creditors.Recently,therefore,corpora-
avesetupaconceptoffixed orstated
thatthecombineddividendsand
shallnotimpairthisstatedcapital.In
theintentofsuchlegislation,however
mbineddividendsandcostoftreasury
ountofthesurplus.
o suchalaw,itmayhavea surplus
payadividendbecausethesurplus is
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 195/419
RTH[Chap.80
easurystockpurchase.Sucha condi-
eflectedbythe balancesheet.Several
oindicatetherestriction.Aclear
$100.00:
000shares;intreasury,250shares;
75,000
videndstothe extentof$25,000.00
of treasurystock)40,000
isindicatedbydeductionofthe
rplus,thus:
$100.00:Authorizedand
,000
aresoftreasurystock...25,000
000
tionisindicatedmerelybydeduction
hetotal issuedstockandsurplus,
$100.00:Authorizedandissued,1,000
ock—250shares25,000
115,000
eemto beasufficientlyclearpre-
enoticeofthedividendrestrictionto a
twhois notthoroughlyfamiliarwith
ngfromthepurchaseof treasury
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 196/419
-Continued
gfacts relativetothegrowthof
nyduringthefirstyearofits existence:
ofa parvalueof$1,000,000.00
premiumof25,000.00
ywaslocatedmadea dona-
theland wasworth20,000.00
surystockresultedin a
quipmentpurchasedby the
undnotto berequiredand
00.00
sedattheend oftheyearand
inexcessofcost;this
edto50,000.00
the yearwas_ 100,000.00
therrecently,thenetworthofthis
vebeenshowninitsbalance sheetas
ver,therehasbeenagrowingbelief
crementsinnetworthof sodiverse
inthestatedsurplusof $220,000.00
alancesheetinone amount.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 197/419
RTH[Ch.p.21
tsinnetworth.
rementsinnet worthbelongtoseveral
ennedbelow:
eproducedbythe
usiness,suchas
services.
seproducedbyunusual
nswhicharenota
suchasdisposals
treasurystock.
ethatentriesin
yin connection
majorportionsof
tsor lossesonnormal
edasoperating
s:
include,amongothers:
stock.
ntreceivedfor
eamount
ck
setsat dates
n,usually
plantsite to
einthedonor
:
edtransactionsin
sgreaterthan
ts disposedofwere
realizedprofits,
easesinthe value
eendisposedof.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 198/419
dprofit"isreally
nincreaseinthe
t becalleda
ized.
hmentionedinthe foregoing
veclassificationasfollows:
0,000.00
etsS20,000.00
tock5,000.0025,000.00
ock$25,000.00
00.0045,000.00
000.00
cesheet.
,thereisa growingbeliefamong
ousclassesofsurplusshouldbeseparated
unfortunatelyseemstobe nounanimity
houldbedone.Threevaryingopinions
edextraneousprofits,andcon-
eshownas Surplus.
praisalsshouldbeshownas
withoperatingprofitsonly.
reditedwithextraneousprofits,
zedprofitsfromappraisals.
eratingprofitsonly.
mpriserealizedextraneousprofits
rofitonAppraisalshouldshow
zedprofits.
cesinthebalancesheetswhichwould
tsholdingthethreeabove-described
sentedonthe followingpage.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 199/419
RTH[Chap.21
ndUnrealizedProfitReserves
nIII
ized
rplusSurplusSurplus Profit
~~$100,000~~ $100,000
,000$20,000
05,000
00
020,000
__ $50,000
100,000$120,000$100,000$70^000$50^000
rthmightbeshowninthe balance
ys,asfollows:
00
00
0
00
sal....50,000.00
opinionand treatmentillustrated
alanceina balancesheethasnouniver-
e.Untilaccountantsthemselvesagree
ecalledSurplus(sometimesreferredtoas
shouldbeclassified asCapitalSurplus,
eexpectedtohavea verydefiniteideaof
anygiven balancesheet.
et inwhichaCapitalSurplus
dthattheaccountantwhopreparedit is
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 200/419
sa significantclassification.Beyond
ancesheetcanusuallyonlyguess.He
nationofthebalancesheetalone,
sincludespaid-insurplus,extraneous
romassetwrite-ups,oramiscellanyof
uldunanimouslyagreeuponrules
eratingprofits,extraneousprofits,and
rth,thelaymanshouldrememberthat
ymentofdividendsmayallowthe
yanyattemptbythe accountantto
ninthebalancesheet,thesourcesof the
paydividendsfrom extraneous
as wellasfromoperatingprofits,andin
bletopaydividendsfromunrealized
sals.Thereforesomemayfeelthatit is
ssifymeticulouslythevariousincre-
tingupSurplus,CapitalSurplus,and
fthedirectorscanorder thatdividends
eseamountsaccordingtotheir pleasure.
25,000.00ofoperatingprofitsandmakes
extraneoustransactionsuchasthe sale
ountantclassifiestheseearningsas
rivedifthe directorsauthorizethe
ividendagainstcapitalsurplus?The
lytheearnedsurplus of$25,000.00.
outaswellhavethrowntheoperating
profittogetherin thefirstplaceand
mthetotal.
vantageisobtainedfromasurplusand
on:thesurplusstatementforeachyear
rmillustratedbelow)will moreclearly
ntsofnetworthduringthe year,andwill
uswerechargedwithdividendsduring
accesstoacompany'sstatements
usbeable toobtainanideaof thesources
any date.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 202/419
nthe balancesheet.
ustomarilydividedin thebalance
dsurpluselements(witha possiblesub-
gthe linesalreadydiscussedinthis
ossibleto tellexactlywhatthestock
n.
eamountshownascapitalstock
ers'originalinvestmentinthecompany.
rong,forthefollowingreasons:
beensoldat apremium;theamount
tascapitalstockwill thenbeless
nt.
beenissuedat adiscount;thepar
esheetwill thenbemorethanthe
ue,aportionof theproceedsofits
edtoCapitalStockandthe
creditedtoSurplus.
ebeenissuedin thepastandrecorded
creditto CapitalStock;thusa
onvertedintocapitalstock.
curredadeficitandobtaineddona-
he deficit.Forinstance,assume
ows:
g$100,000.00
5,000.00
halfofthen-stockto thecompany,
ybechangedto thefollowing:
g$50,000.00
0.00
hatthe amountshownascapital
anentcapitalnotdistributabletothe
ontinuanceandliquidationofthecom-
case;thecompanymayhavetheright,
n,to retirepreferredstock.And,sub-
itations,itmayreduceits capitalby
stock.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 203/419
RTH[Chap.21
atthe amountshowninthebalance
saccumulatedearnings.Thisalsomay
outabove,partofthesurplus may
sonparvaluestock,or fromdonations,
ssets,orfromanarbitrary treatmentof
oftheissuanceofno-parstockassurplus.
assumedthattheamountshownas
ountavailablefordividends.Thisvery
Thelaws relativetodividends-areso
ccountantsshouldnotpresumetoindi-
elsewhere,theamountwhichthecom-
dends;andthe readerofabalancesheet
eamountshownas surplusrepresentsthe
tantbelievescanbesodistributed.
sionitshouldbeapparentthat the
ncesheetascapitalstockand surplus
ydefinitesignificance.Thecombined
tthenetworth,butthe meaningofthe
tbeknownunlessoneknowsthehistory
rplusaccountsfromthe beginning
,andagoodbitof corporationlaw.
showthe networth?
oknowwithcertaintywhatis
stockandsurpluselementsshownin
alsounwisetoassumeunquestioningly
he balancesheetasnetworthreally
Someofthe reasonsarestatedbelow.
misstatedbyadeliberateorignorant
nciples,theresultbeing
eamountsofassetsand
arriedon theassetsideofthe
dbetreatedasnet worth
are:
countonstockis
der theDeferred
edeductedfrom
terminethetrue
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 204/419
ons.
stocapitalstockare
ssetsideof thebalance
e currentlycollected,
heetshould regard
nfromthe statednet
beclassifiedasan
as adeductionin
ortunately,when
amongtheassetsin
emergedwith stock
mountcannotbe
assetssuchasgoodwill.
ses,copyrights,and
sometimesextremely
areworthevenmore
theyappearin the
eyaresometimes
eralsuchintangibles
valueunlessthe com-
s.Therefore,if
lancesheet,the
derwhetherthey
hestatednet worth.
smayhavebeentransferredtoan
rve.(Suchreservesarefurther
ter.)Appropriatedsurplus
plus,butsurpluswhich
to beusedfordividends.
plusshouldbeincludedin
e balancesheet;however,
sasliabilitiesandsometimes
ption,eitherwiththe intent
hor fromafailuretounder-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 206/419
Continued
DIVIDENDS
s.
orporationstotheirstockholders
s:
s.
ypaidin cash;other
orscripor other
smaybegiventothe
.
gstockdividends,which
fthe networthfrom
tockdividenddoes
f theissuingcorpora-
portionof thenetworth
dequallyincreasesthe
entedbycapitalstock.
ividualstockholder's
tmerelyincreases
hichhis interestis
.Thesearealso calledliquidating
estockholdersallor apor-
.
ollows:
eturnthe capitaltothe
corporationisdis-
dividendsintendedto
pitaltothestockholders
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 207/419
RTH[Chap.22
usinessis beingreduced
ongerrequired.
tingfromthe paymentof
ntendedtobedividends
surpluslegallyavailable
ealswiththesubjectofdividendsout
itiesapartfromtheirstockholders,
sare,generally,notliableforthe debts
utesplacelimitationsuponthepayment
helimitationsbeing topreserveacapital
editors.Ingeneralitmaybe saidthatthe
pairmentof capitalbythepayment
tyofa dividendpaymentdependsupon
surplus,andnotupon itscashbalance;
mextraneousaswell asfromoperating
fordividends.Asidefromthese,
bletothecountryasa whole,canbe
ofthe manyvariationsinthecorpora-
ates,the followingmattersmaybe
scan bepaidfrompaid-insurplus
onparvaluestock,orthe
ofno-parstockover the
otherstates,suchdividends
tate,dividendsfrompaid-in
ferredstockholdersbutnotto
smay bepaidfromprofitsbefore
ceofstockis writtenoff;
annotbepaid untilthecom-
ckdiscountand hasaccumu-
he capital,moststatesprohibit
untilthecapitalis restoredand
afewstatespermit thepay-
rrentprofitsregardlessofthe
teddeficit.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 208/419
LABLEFORDIVIDENDS199
epaymentof anydividendsfrom
fassets;otherspermitthe
ndsfromasurplusthus
atepermits thedistribution
endsfromsuch asource.
easurystockis purchasedatless
gardedas aprofitwhichis
dividends;inotherstates
ucesurplusavailablefor
hestockis resoldatpar.
rchaseoftreasurystocknever
blefordividends,regardless
makessurpluspreviously
availabletotheextentofthe
k.
videndsonpreferredstockcanbe
source,whiledividendson
dfromearnedsurplusonly.
tionofcapitalstockwillnotbe
plusavailablefordividends;
aybe paidfromsurplusthus
ne stateascalingdownofthe
easurplusavailablefordividend
dstock.
lusavailablefordividendsmaybe
ctionfordepletion;insome
scannotbepaidfromsurplus
ts ofcreditorsarejeopardized;
htsofpreferredstockholders
.
requirementthatdividendsshall
estatutesincludespecific
amountofliabilities.For
statesprovidethatno divi-
abilitiesexceedtheassets;
maybepaidifthe liabilities
ssets;andincertainstates no
esstheassets exceedthe
stock.
rdiversitiesinthe corporation
nnotbeexpectedtoassumetheresponsi-
mountofsurplus whichislegallyavail-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 209/419
RTH[Chap.22
uently,thereaderofabalancesheet
eamountshownthereinas surplusis
ouldbeavailablefordividends
orpermanentlynotsoavailable.Such
maybeimposedbylaw ormayresult
somestatesfromthepurchaseof
seandnatureofthis restrictionwere
ailablefordividendsmaybecome
ebyreasonofcontractswithcreditors.
scussedinChapter37 isanillustration
equiredbya contract.
onmayconsideritinexpedientto
mountoftheaccumulatedsurplus
byprofitshavebeen,orareto be,used
splantadditions;they maytherefore
sbalanceso astoindicatethatlarge
cted.Tothisendtheymaydirectthat
transferredtoareserve bydebiting
countwithsometitlesuch asReserve
rvedoes notreflectalegalrestriction
ends;itis merelyanaccountingdevice
thesurplus,althoughlegallyavailable
ed forthatpurposebecauseitwould
todoso.Thedirectorscanat any
alancebacktosurplus.Meanwhile
nelementofthenet worthandshould
sectionofthebalancesheet.
ty.
een declaredandnoticeofthe
ntothestockholders,theunpaiddividend
and shouldbeshownassuchin the
rationbecomesinsolventbeforethe
holderswillbe entitledtosharepro
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 210/419
LABLEFORDIVIDENDS201
nthe paymentofdeclareddividends
hereare liabilitiesof$45,000.00,
0.00,andassetsof$40,000.00,distribu-
lows:
.00$36,000.00
0.004,000.00
,ifa corporationwhilesolventsets
entofthedividendandbecomesinsolvent
rthedesignatedpurpose,thefundwill
or thestockholders,andwillnotbe
ofcreditors.
the corporationwasinsolventwhen
,orifthe dividendwasillegal,orif
asnotgivento thestockholdersbefore
olvent.
ars.
ars,eventhoughcumulative,do
tilthey havebeendeclared.Thisis
ybesufficientsurplus toprovidefor
etshouldindicatetheamountofthe
dendsinarrearsbecausetheyconstitute
earningshavingprecedenceoverthe
ts.Thefactsare usuallystatedina
ordedsomewhatasfollows:"Dividends
n arrearssince... ,"or"Nodivi-
e preferredstocksince...," or
eamountof$ ...wereinarrearson
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 211/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 212/419
er,checks,bankdrafts,money
sitsinbanks.Depositsin savings
ifiedinthebalancesheetascash,not-
tofthe banktodemandacertain
Demandcertificatesofdepositmay
mecertificatesshouldnot besoclassified.
ebillsin thecashinplaceofmoney
ouldbediscouraged;ifsuchduebills
shouldbeshowninthe balancesheet
mofficers,employees,andsoforth,and
carriedintheoffice,itis customary
endituresuntilthefundis nearly
ordallof theexpendituresatonetime.
repared,allof thedisbursementsshould
shwill notbeoverstatedinthebalance
nvestmentsshouldnotbeshownas
eventhoughtheymayhave been
nvestmentsofexcessfundsandmaybe
shwithoutloss.
dein thebalancesheetbetweencash
atingpurposesandcashtiedup inspecial-
tobeusedforthe paymentofacurrent
hmoneydepositedwithatrusteefor
nterestandtaxesonmortgagedproperty,
arateitem,undertheCurrentAssets
availableforcurrentneedsshouldbe
notherthancurrentassets.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 213/419
ank forcollectionshouldbeshown
h orasareceivabledependsonwhether
adepositormerelyfor collection.
positor'saccountwiththe paper,the
dedinthe cash;otherwisenot.
ernalchecktosafeguardthecash
hreceiptsand disbursements.The
ontrolvarygreatlyindifferentorganiza-
ribedbelowshouldbeunderstoodto be
beattained,rather thanaprocedure
ationofcashisreducedif collusion
ealanabstractionofcashreceipts;there-
etheworkofhandling cashreceipts
oserecordsmustagree,asindicated
etotalsofcashregisterreceipts
dby atrustedemployee;
themailreceiptsshouldbe
withtheamountofthe remit-
dturnedoverto thebook-
eturnedin tothecashier.
ngupthe deposit,shouldsubmit
ployeementionedin(1),who
ntofthedepositwiththe
sshownbyhis ownlist.All
epositeddaily.Whenthe
edattheendof themonth,
e cashier,andthedeposits
mparedbytheemployeemen-
listspreparedbyhim.
akesupthecashbookshould
shier.
nal check,fraudwithrespectto
annotbepracticedandconcealedeven
sionof threepersons.Thefirst
othebooksandcannotfalsifythe records
tion;hecannotexpecttowithhold
orswithoutdetection,becausethedebtors
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 214/419
ettersfromthecredit departmentand
es.Ifthecashierwithholdsany cash,
greewiththefirstemployee'slist orwith
eiptsrecordmadefromtheremittance
finformation.Thebookkeeper,having
no opportunitytomisappropriateanyof
centivetofalsifyhisrecordsunlessheis
rtycollusion.
siteddailyin thebank,alldisburse-
eck.Thepersonauthorizedto sign
horitytomakeentriesin thecashbook;
mentbycheckcouldnotbeconcealed
opersons.Thecollusionofa third
ssary:
allchecksshallbesignedby one
byanother.
uchersystem,allowingthechecks
n,butonlyuponauthorization
gnedbysomeotherperson.
mbered.Allspoiled,mutilated,
epreserved.Somecompaniesevengo
chchecksberecordedintheir proper
rsementsrecord,withoutentryinthe
notationtothe effectthatthecheck
esafeguardedbya propersystemof
rmayeasilyconcealashortageby
rlytrueifthe functionsofbookkeeper
byoneperson.Lappingconsistsofa
fentriesdebitingCashandcrediting
meotheraccount.
$100.00incurrencyis received
shierpocketsthemoneyandmakes
oustoleaveA'saccountuncredited
e Amayreceiveastatementandmake
he factstolight.Therefore,within
0is collectedfromB,thecashierturns
its CashandcreditsAwith$100.00,
00.Thisprocessmaybecarriedon
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 215/419
eingshortallthe time,butthecreditto
beingdelayedonlyafewdays.
mers.
ngashortageconsistsoftakingmoney
andpassinganon-cashcreditthrough
eitemsuchas returnsandallowances.
greceiptsalreadydiscussedwillmake
naddition,itis desirabletohave
rtedbyduplicatecreditmemorandums,
ysomeoneinauthorityother than
stemofinternalcheck,itwasstated
uldbemadeby check.Howisthis
ursementsoftriflingamounts,for
nstance,mustbemadeincash?While
maynotactuallybemadebycheck,
tedby checksifapetty,sometimes
soperated.
mountwhichwillprovideforpetty
nabletime,andcashed;thecashis held
fthe checkisrecordedbyadebitto
thegeneralCashaccount.Asdisburse-
ettycashfund, receiptsandother
asevidenceoftheirpropriety.When
ed,anothercheckiscashedfor the
es;thischeckisrecordedbya creditto
andadebitto variousexpense(orother)
receiptsandothermemoranda.
count.
bank'sstatementatthe endofthe
hebalanceshownbythe depositor's
hecksareoutstanding;depositsmailed
yoftheperiod maynothavebeen
hebank;andthe proceedsofnotesand
collectionmayhavebeencreditedby
onthedepositor'sbooks.•
sprepared,therefore,thebank
led.Ifthedifferencesconsistentirely
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 216/419
booksbut notonthebank'sbooks,the
aredasfollows:
cember31,1941
nt$862.57
,notrecordedbybank untilJanuary216.31
g:
.04
ron thebankstatementwhichhave
company'sbooks,thetruebalanceis
nk statementorthebooks,andboth
edtothe correctbalance;forexample:
cember31,1941
nt$2,500.00
sbooks,butnotyettakenup bythe
mber311,000.00
g:
0
.85
ment,butnotyet recordedoncom-
ectedby bank:
500.00
ent300.00
85
0
sbeencompleted,entriesshouldbe
itemsshownbythebankstatement
ecompany,sothatthecash balancewill
ooksand inthebalancesheet.
n itsbalancesheet,acompanymay
oldingitscashbookopen"for afew
period.Thismeansthatremittances
rthecloseof theyeararerecordedas
ctionsfromaccounts receivableasof
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 217/419
hishastheeffectof overstatingthe
andunderstatingthelesscurrentasset
oastep furtherbydrawingchecks
odforthepaymentofcurrentliabilities,
entsasofthelast dayoftheperiod.
misstatesthecurrentposition,let
ngtransactionsactuallyoccurredin
cordedashavingtakenplaceonDecem-
ntsreceivable$25,000.00
ntspayable20,000.00
onditiononDecember31,1941is
olumn;themisstatedconditionisshown
00
00.0025,000.00
000.00
00.00$65,000.00
.0030,000.00
0.00$35,000.00
ollarsofcurrentassets
es 1.702.17
ofcurrentliabilities....10.33
mpanyshowsaworkingcapital
f1.70to1, andconsiderablyoverstates
tio ofcashtocurrentliabilities.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 218/419
be keptonledgersheetsruledin
lustrations.Suchanaccountisshown
disadvantage:thereisnocolumnin
of theaccount.Suchacolumnis
ling:
heamountshownin theBalance
adebitbalance;if,forany reason,the
balance,thisfact maybeindicatedby
nkorbyfollowingthe balancewith
gers.
maybesomanycustomers'accounts
annotbe keptbyonebookkeeper.In
edgermaybe dividedintosections,as:
oH.
P.
oZ.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 219/419
ithAccountsReceivablemaycontrol
s,but itismuchbetterto haveaseparate
chledger,sothateachsubsidiarybook-
edindependently.Itthenbecomes
tecontrollingaccountcolumnforeach
iousbooksof originalentry,asillus-
sheetsor cardsusedforaccounts
videdwithspacesinwhichtoenter
onrelatingtothedebtorwhichmaybe
urposes.Thedatavariesindifferent
usuallyismadetoshow theinforma-
ingillustrationrepresentingthehead-
t.
sneededonactiveaccountsextend-
tin aloose-leafbinder;ifthecurrent
ownthatsixothersheets mustbefound,
orinthetransfer binder,toinclude
showthecreditratinggiven
encies,suchasDun& Bradstreet.
wsthemaximumfixedbythe
ybedesiredonthe accountsothat
whetherthesalesmanappearsto be
tunitywiththecustomer,andsothat
epartmentcanseewhichsalesmenare
thatbecomedelinquent.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 220/419
oneimpression.
keapracticeofsendingmonthly
mersusebookkeepingmachinestokeep
.Themachinestypetheentriesand
anceaftereachentry.Suchconcerns
lumnledgerrulingwithdebit,credit,
erightside.
onth,astatementformisinserted
stomer'sledgersheet,andacarbon
ccountandthestatementareduplicates.
estatementisremovedfromthebinder
r.
tries.
howshowentriesinaccountswith
checkedandletteredtoindicateoffsetting
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 221/419
LE[Chap.24
ccountsreceivable.
esarenotlikelyto becollectedinthe
nthe regularorderofbusiness;such
showninthe balancesheetunderthe
omereceivablesofthisnaturearemen-
officers,directors,andstockholders
efromsaleswhicharecollectibleinaccord-
tterms)are notlikelytobecollected
shouldnotbeclassifiedas currentassets.
affiliatedcompanies,ifofamoreor
ouldnotbeincludedwithcustomers'
eet.However,ifacorporationsells
ompanyandreceivescollectionsas
romothercustomers,suchreceivables
manentadvances)mayproperlybe
untsreceivableundertheCurrentAssets
msof salerequirepaymentwithin
ore,thereaderofabalancesheethas the
ccountsreceivablearerelativelyquick
businesstheaccountsreceivableare
overalongperiodof time;theauthor
e installmentsextendoveraperiodas
udethe totalofsuchreceivablesunder
produceagrosslymisleadingratioof
abilities.In suchcasesthebalance
f thecurrentlycollectibleinstallments
aptionandthetotal ofthenon-current
rentcaption.Ortheissuemaybe
all sidecaptionsfromthebalancesheet;
tthereceivablesarecurrent,butthe
eetshouldbe onnoticethattheomission
ymeanthatthe receivablesarenotall
tibleoveralong periodoftune.
ers'accounts.
theaccountsreceivableledger
ces;someaccountsmayruninto
foverpayments,becauseofcreditsfor
tertheaccounthasbeencollectedinfull,
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 222/419
CEIVABLE213
in thesubsidiaryledger,thebalance
willbeequal tothetotaldebitbalances
ncesinthe subsidiaryledger.For
ryledger$6,500.00
ryledger175.00
gaccount$6,325.00
ntrollingaccountshouldnot
eet;that wouldindicatethatthere
00.Actuallytherearereceivablesof
f$175.00.Thebalancesheetshouldshow
bitbalancesinthe subsidiaryledger,
creditbalances.
NTLIABILITIES:
00CreditBalancesinCustomers'
gned.
theircurrentoperationstosome
ngtheir accountsreceivabletodiscount
ntcompaniesadvancefundsunderso
ntractsthatitis impossibletodiscuss
e.Toillustrateoneformof contract,
ntsreceivabletotaling$10,000.00
ountcompanycashamountingto8,000.00
argesacommissionof500.00
quityintheassignedaccountsof$ 1,500.00
ntitledtothefirst $8,500.00col-
soldtheaccountsisentitledto the
sinterestcharges.
yalsohas$20,000.00ofaccounts
dthatitshowsits accountsreceivable
ows:
500.00
mentbecauseitdoesnotdisclosethe
0.00ofthe$21,500.00isanequity in
ctisshowninthe followingstatement:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 223/419
LE[Chap.24
000.00
ts1,500.00$21,500.00
onofthe factsisnotadequate,
ningitsaccountsreceivableisusually
,andthusassumesa contingentliability
countcompany.Thebalancesheet
gentliability,eitherbya footnotetothe
wascontingentlyliableonDecember
$8,500.00asguarantorofassigned
showingthe receivablesinthebalance
000.00
countsReceivable
e1,500.00$21,500.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 224/419
S
uotedfromtheUniformNegotiable
otewithinthemeaningofthis actisanuncondi-
adeby onepersontoanother,signedbythe maker,
dorat afixedordeterminablefuturetimea sumcertain
er.
otearethemakerandthe payee.
ote byendorsement,hebecomesan
mthenote istransferredistheendorsee.
namedpayeeorordermustbe
.Paperwhichispayableto bearercan
eliverywithoutendorsement;however,
er istobetransferredmay require
ertomakethetransferorcontingently
edandillustratedbelow.F.K.
payeeofthe note.
ents(thetransferorassumesthefull
edbylawuponanendorser):
partytowhomthepaper is
oorder;thatis,Smith
otransferit.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 225/419
ANCESRECEIVABLE[Chap.25
wnameofpartytowhomthe
o bearerandcan
bsequentholderswith-
fiedlymaybeheldforthe pay-
esentedto themakerat
yhim,andif theendorseris
orin accordancewiththelegal
t(theendorserlimitshiscontingent
rdsWithoutRecourse):
trecoursemateriallylessenshis
ndorser.Hewarrantsthat
hehasa goodtitletoit,but
alobligationtopaymerely
otdoso.
ent(whichmustbeinfull):
sfers:
n agentforaspecialpurpose:
.
ortwopurposes:
nstruments.
ccommodationendorsements).
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 226/419
CEPTANCESRECEIVABLE817
dorsementforthelatterpurpose,
shestoborrow$1,000.00fromthe
l notmaketheloanunlesssomeperson
willendorsethenote.Fred White
Browninthisway.Brownmakesanote
Whiteendorsesit, thusassumingacon-
noteifBrowndishonorsitat its
edinjournalform,recordcertain
st-bearingnotes:
00
kerforcashloan tohim.
00
mMakertoapplyonhis
00
aker.
ansactionsinvolvingnotesbearing
00
mMakertoapplyonhis
00
mJohnMaker,with6%
ebtortoapplyonaccountcannot
shouldbe chargedbacktotheaccount
rsothatthe debtor'saccountwillshow,
mation,thatthenote wasdishonored.
ednotesareillustratedonthefollowing
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 227/419
ANCESRECEIVABLE[Ch«p.25
ectanon-interest-bearingnotefromthemaker
00
dnote.
ecta60-dayinterest-bearingnote.Themaker's
dwiththeinterestbecauseheowesthe interest
00
dnoteandaccrued
day,6%notefor $5,000.00,butgivesusanew
terest.
00
dnote.
00
ed.
-day,6%notefor$1,000.00,wecollecttheinterest
al,andreceivea newnoteforthebalance
akernote.
echargedtohim.
ble—Computingproceeds.
eyatthebank,wemayissueour own
ayendorseanddiscountatthebank any
swhichareacceptabletothe bank.
ednotesarecomputedasfollows:
ofthenote atmaturity(i.e.,
kwillbe entitledtocollectat
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 228/419
EPTANCESRECEIVABLE819
otes,thisvalueistheface.
,thevalueatmaturityisthe face
eriodofthenote.
countperiod,ortimefromthedate
ntatthebank'srate,on thevalueat
period.
ntfromthevalueatmaturity.
ethe proceedsoftwonotes:
gust1
maturity60days60days
August11
romdateofdiscountto
e noteNone5)4%
bythebank6%6%
:
,000.00
ote tomaturity:
est-bearing.
5J %for60daysis..55.00
00$6,055.00
50 days:
0.0050.00
.0050.46
04.54
gofnotes.
olenotes tothebank,wemust
ringourselvescontingentlyliablefor
gentliabilityshouldbeshownin our
cordingthediscounttransaction,we
edNotesReceivableDiscounted,as
entries:
receivelessthantheface:
nted6,000.00
datbank.
eceivemorethantheface:
nted6•0®® •®®
edatbank.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 229/419
SRECEIVABLE
estExpenseinthe entryforthedis-
representstheexpenseincurredfor the
11to September30,orforfiftydays.
orthe booksareclosedattheend of
nterestchargeshouldbe regardedas
the$30.00expenseapplicabletoSep-
sa deferredcharge.
54credit toInterestIncomeinthe
fthe Colenoteistheamountearned
romAugust1 toAugust11,whilethe
4.54is thereforeanearningofthe
ortionthereofshouldbe deferredat
egoingentrieshavebeenposted,the
tandtheNotesReceivableDiscounted
:
nted
hefollowinginformationwithrespect
ollected,asindicatedbythe credit
count.•
eshave beendiscounted;thedebits
countareoffsetbythecreditsi n
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 230/419
SRECEIVABLE
on.
ndicatethatourasset ofnotes
000.00,andthatwehaveacontingent
ediscountedintheamountof $12,-
waysofshowingthesefactson the
dmostinfavoramongpublicaccountants
,1941
00
ontingentlyliable,onAugust31,1941,onnotes
heamountof$12,000.00.
das follows:
lancesheetshowtheexcessofthe
Receivableaccountoverthecredit
vableDiscountedaccount;this
enotesreceivableonhand.(In
.00representstheDalenote,
eld.)
tyonnotesreceivablediscounted
ancesheettotals.
lepaidbymaker.
hisnote tothebankatmaturity;
tingentliabilityon hisnoteandcan
ngjournalentry:
nted6,000.00
00
makeratmaturity
asfollows:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 231/419
ANCESRECEIVABLE[Chap.25
edbymaker.
dforthe paymentofadiscounted
presentedittothemakerat maturity,
edpayment,andgivenpropernoticeof
nsome cases,noticeofdishonorcan
orallyorin writing.Inothercases,
per(thatis, paperoriginatinginone
er),protestandformalnoticeof dis-
cemayinanycasebegiven inthis
epaperdesirestodo so.
ionin writingbyanotarypublicto
entedan instrumenttotheperson
ddemandedpayment,andthatthe
nored.Noticeofprotestissent bythe
andto alloftheendorsers.
ngagestheservicesofthenotary
chhe maychargebacktothe
bemadeinthe eventthatadis-
snotpaidbythe makeratmaturity,let
ourpreviousillustration)dishonored
at itwasprotestedbythe bank.We
owingpaymenttothe bank:
ys55.00
dingthepaymentof thenote,
heentiredisbursementis chargedto
titledtoreimbursementofthe whole
te,interest,andprotestfee.
ntingentliabilityonthisnote;it
ty,whichwaspaid.Thereforethe
obemade:
nted6,000.00
00
bilityonColenotedis-
maturity.Seecashdis-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 232/419
CEPTANCESRECEIVABLE223
uotedfromtheUniformNegotiable
conditionalorderinwritingaddressedbyoneperson
ersongiving it,requiringthepersonto whomitis
ndorat afixedordeterminablefuturetimea sumcer-
earer.
hangeare:
gningtheorder.
owhomthebillis addressedand
payment.
whompaymentistobe made.
s.
ge;itisawritten orderinwhichthe
rsthebank(as drawee)topayacertain
dpersonortobearer.Abank draftisa
bankagainstitsdepositinsomeother
anorderdrawnby abankagainst
atusof cash,andconsequentlywill
hapter.
velopmentofbankfacilities,three-
quentlyused.IfA, livinginNewYork,
untreceivablefromBandanaccount
Francisco,hemighteffectasettlement
ga draftonBorderinghim topayC,
offundsfrom BinSanFranciscoto
oC. Withthebankfacilitieswhich
e,suchdraftsarerarelyused.In
eshallbeconcernedonlywithtwo-party
emanddraft,is illustratedonthe
Co.isbothdrawerandpayee.
eredtopay thedraftimmediately
he.isunderno obligationtodosounless
edraft.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 234/419
CEPTANCESRECEIVABLE825
O.D.sale.
ndisewhichisto beshippedbyfreight
C.O.D.terms,heobtainsanorderbill
Whenan orderbillofladingis used,
inthemerchandisefromthecarrier
oflading.
of ladingtoasight draftpayable
ebill ofladingandthedraft, and
Thebanksends thedraft,withbillof
n thepurchaser'scity;thisbanknotifies
thesightdraftandthe billoflading.
bank,paysthe draft,andobtainsthe
urnstheproceedstotheshipper's
pper'saccount.Eitherorbothof the
tionfee.
emerchandise,thesellerwilldebit
les;whentheproceedsofthe draftare
h(andCollectionandExchangeifsuch
it thecustomer.
stratedbelow:
ly20,1Q41
o theorderofOURSELVES
--.--»r)niiarg
^fY-Co.
sentedtothedraweetoobtainhis
turity.Thisagreementiscalledaccept-
xpressedbythefollowingwordswritten
:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 235/419
ANCESRECEIVABLE[Chap.25
nacceptedbythedrawee,itiscalled
word"acceptance"hastwomeanings:
naccepteddraft.
e:
e dateofthepaper,thus:
ytothe orderof(...)."
payablethirtydaysafterdate,
rdlessofthedate onwhichit
eofacceptancehasnobearing
ft,thedateofacceptanceneed
e dateoftheacceptance,thus:
ytothe orderof(...)," or
o theorderof( ...)."
payablethirtydaysaftersight,
willbe dueonJuly20.Since
suchadraft determinesthe
e ofacceptanceshouldbe
cceptances.
eapromissorynote,is adebtor's
acertainsumof moneyatafixedor
Therefore,mostaccountantsrecord
heNotes Receivableaccount,and
eNotesPayableaccount.
ollectionpurposes.
edraftsareused toreduceapast-
omiseto pay.Ifadebtorwill notpay
enttogivea promissorynoteoraccepta
stobe used,itwillbe drawnbythe
ebtorforacceptance.Ifthedrawee
wershouldrecordthefactby debiting
ditingthedrawee.Whenthedraftis
houldberecordedbyadebitto Cashand
e.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 236/419
EPTANCESRECEIVABLE287
ermsofsale.
erequirethe purchaserofmerchan-
fortheamountofthe invoice.Thisis
standpointfortwo reasons:first,the
cedtowritingand hasadefinitematu-
discounttheacceptance.
sheda creditstandingwiththe
shippedona straightbilloflading and
chaserforacceptance.Ifthepurchaser
tstanding,a draftwithanorderbill of
nttoa bankinthepurchaser'scity.
ptthedraftbeforethebankwill release
esale inthecustomarymannerby
ndacredittoSales.Whenthe draft
ed,heshoulddebitNotesReceivableand
ntheacceptanceiscollectedatmatu-
nd creditNotesReceivable.
acceptanceathisbank,hewillmake
iscountandatthe dateofmaturity
rinthis chapterinconnectionwithnotes
ftor abillof exchange,drawnbythe
oods sold,acceptedbysuchpurchaser,
evidencethatitarosefromasale of
ptancesareusedinconnectionwith
ustdescribed.
ELVES
ptorhereofarisr01
edrawer.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 237/419
SRECEIVABLE
geraccountfor thedescriptionof
sosmallthatit isadvisabletokeepa sup-
wallexplanatorydata.
creditsfornotetransactionsare
nt,whichmightappearasfollows:
rsonthe oppositepage.
eregisterrepresentnotesreceivable;
ceptance.Alloftheentriesin thenote
orywiththepossibleexceptionofthe
mnsheadedJ,F, M,andsoforth.These
erentmonthsoftheyear,andthe num-
he dayofthemonthon whichthepaper
ceivableinthebalancesheet.
notesandacceptancesreceivable
hecurrentasset captioninthebalance
omofficers,employees,subsidiaries,or
onscannotbeexpectedcurrently,may
ble,butnotunder thecurrentcaption.
ally,shouldnotbeshowninthebal-
sreceivable;apast-duenotehas lostone
sticsofanegotiablepromissorynote,
ata fixedordeterminablefuturedate.
ast-duenotesareincludedwithother
yare pastdueisdisclosedin thecom-
rt.
tsprovidesforlossesonnotesand
wellas forlossesonaccountsreceivable,
tedfromthetotal oftheaccounts,notes,
paratereservemaybeestablishedfor
s.
notesoracceptancesdiscounted
balancesheetin themannerindicated
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 238/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 239/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 240/419
AINST
ndthenotesreceivableshould
eetat thetotalthereof,lesscertain
debtsshouldalmost alwaysbepro-
reshouldalsobereservesfor returned
ght,andcashdiscountswhichwillbe
thecreationof areserveforbad
insttheperiodthatcausedtheloss
stomerswhoseaccountsproved
ealizablevalueof thecustomers'
owever,toaccomplishbothofthese
thefollowingdiscussionofthevarious
amountstobecreditedperiodicallyto
to thereserveisusuallydetermined
esandconsideringsupplementary
erveapercentageoftheaccounts
od.
ewitha percentageofthesalesfor
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 241/419
AINSTRECEIVABLES[Ch.p.26
sreceivableledgerisdrawnoffon
mnsheadedtoindicatevariousages,such
days,61to90days,3 to6months,and
eofeachdebtor'saccountis analyzed
componentelements,andtheaging
ntriessuchasthefollowing(whichis
J.H. Boyceonpage211):
g,NovemberSO,1941
ccountonpage211,itwill beseenthat
dcheckingtheentriesin theaccounts
npreparingthe agingschedule.
temsintheaccount,andtheseare,
hichenterintothe balance:
eaccountconsistsofthe$250.00
between61and90 daysoldonNovember
bitsandoneNovembercreditin anet
isbetween1and30 daysoldonNovem-
vebeen aged,thecolumnsare
estimatedonthebasisofthe total
Supplementaryinformationmustalso
ountswhicharenotoldmaybeknown
maybe goodreasontobelievethat
becollected.
thereserveisrecordedbya journal
ndcreditingReserveforBadDebts,
eofthe receivablesisnotonlyhelp-
baddebt losses;itfurnishesagoodidea
vables,andthereforeis informativeto
nancialconditionofthebusiness.For
eis frequentlyincludedinanaudit
paniedbyinformationasto theterms
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 242/419
SERVESAGAINSTRECEIVABLES833
ndits informativevalueisenhancedif
rativebasisshowingtheconditionontwo
ustratedbelow.
mber31,1640
fTotal
%$20,000.0041.67%
00.0024.7416,000.0033.33
00.0016.505,000.0010.42
00.0012.374,500.009.38
000.008.251,000.002.08
e 2,000.004.121,000.002.08
s1,500.003.09500.001.04
%$48,000.00100.00%
2,000.004.122,000.004.17
095.88%$46,000.0095.83%
mparisonofamountsandpercents)
velylesscurrenton December31,
e closeoftheprecedingyear;and
fact,thereserveforbaddebtsis a
totalaccounts.
tageofaccomplishingthesecond
bove,sinceit resultsinafairly accurate
onthebooks.However,itmayeasily
utelossestothe periodsduringwhich
rate,assumemonthlyclosings,with
tibles,andascertainedlossesasfollows:
prilMay
0,000$10,000$10^000
atendof
50
month075100130 170
monthby month,itisto beassumed
qual amountsbythesesales;hence,
andpoint,thechargeforbaddebtsshould
ly.Ifthe estimateof$150.00for
theendofMayiscorrect,theaverageloss
nFebruary$75.00
atendofMay150.00
5.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 243/419
SAGAINSTRECEIVABLES[Chap.26
hbymonth,areasfollows:
o setupreserve$100.00
gedtoreserve75.00
February(beforeaddition)$25.00
eservetodesiredamount85.00
y$110.00
toreserve100.00
March(beforeaddition)$10.00
eservetodesiredamount115.00
25.00
oreserve130.00
April(beforeaddition)$ 5.00*
eservetodesiredamount135.00
0.00
uringmonth170.00
May(beforeaddition)$40.00*
eservetodesiredamount190.00
0.00
eserveintoa debitbalance,theexcessoflossesover
d,andprobablywould,bechargeddirecttoBad
o ProfitandLossforthe monthwouldbethesame.)
produceanequitabledistribution
months,ifit canbeassumedthatthe
osales,whichisprobablya fairassump-
tthat aninequitabledistributionof
ymonthis shownbythefollowingcom-
nts.
iredbalanceofthereserveby multi-
eivablesopenattheendofthe periodby
ptionthatacertainpercentof thereceiv-
d.
asaccountsreceivableof$40,000.00
ultingfromformercredits)of $1,000.00.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 244/419
SERVESAGAINSTRECEIVABLES235
mpany'sexperienceshowsthatabout
sonthebooksatanytime willprove
allossmaybeestimatedat8 percent
00.Sincethereservealreadyhasacredit
y$2,200.00needbeaddedtothereserve;
ollowingjournalentry:
00.00
he totalestimatedloss.
ecommended,partlybecauseofthe
nconnectionwiththemethodofaging
ybecauseofthedifficultyofmakingan
mate.Ifthemethodisused,therate
vidingtheaveragelossesduring several
eamountofr eceivablescarriedduring
beendecidedupon,carefulconsidera-
matterofauniformpolicywith respect
etusassumethat therateinuse was
rienceofafive-yearperiodinwhichthe
epolicyofpromptlywritingoffaccounts
tremelydoubtfulofcollection.Assume
sestablished.Atthe endof1941,
ccountsonthebooks;ofthese,$10,000.00
collectibility,andtherepresumably
ning$190,000.00.Iftheextremely
writtenoffbeforetheadditionis madeto
llbe computedas5percentof$200,-
willbeshownin thebalancesheetas
,000.00
s10,000.00$190,000.00
ccountsarewrittenoffbeforethe
onditionwillbeshownin thebalance
,000.00
s...9,500.00$180,500.00
tthecompanymentionedabovehas
tsbaddebt lossesaverageabout1per
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 245/419
SAGAINSTRECEIVABLES[Chap.86
sis,thereservewill becreditedeach
h1 percentofthesales fortheperiod.
andpoint,thismethodprobably
bledistributionofbaddebt lossesamong
servecreditismadeonly onceayear,
naccuratestatementoftheestimated
eivablesshowninbalancesheetsprepared
at theendof1941is inareasonable
nthe receivablesopenatthatdate,
orlossesonreceivablesopenatthe begin-
vablesarisingfromsalesin1942),without
serve,willso reducethereservethat,by
illnolonger containanadequatepro-
blesthenopen.Onthe otherhand,if
gof 1942waslargeenoughtoabsorb all
veanadequatereserveagainstreceiv-
of thatyear,itsurelywasexcessiveat
nd thebalancesheetthenprepared
evalueofthereceivables.
ovisionsbasedonsales shouldbe
regardedasuncollectible,itshould
similartothefollowing:
00
leaccount.
ntwasfinallycollected.Thecollec-
ollows:
reviouslyWrittenOff75.00
Lane'saccount.
erve,towriteofftheaccount,proved
ountantscreditthereservewiththe
00
Lane'saccount,previously
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 246/419
ERVESAGAINSTRECEIVABLES837
whollysatisfactorybecausetheentry
account,writingoffthebalancetothe
badcredit recordinhisaccount.For
ableto reversethewrite-offentryand
nthedebtor'saccount,asfollows:
00
fLane'saccount.
lowances/cashdiscounts,andfreight.
panyhastotalaccountsreceivableof
31,1941,andhasprovidedareserveof
hisreservemaybean adequatepro-
but itdoesnotnecessarilyfollowthat
19,000.00fromtheaccounts.Cus-
tsforreturnedmerchandiseandallow-
manyofthedebtorswilltake thecash
eentitled;and,if thegoodsaresoldon
stomerstopaythe freightbutallow
entsinremittingfor themerchandise,
rsuchfreight.
prospectivedeductionsshouldbe
othatthe accountsreceivablewillbe
tat theestimatednetamountwhichwill
eductionshavebeenallowed.How-
ndallowances,cashdiscounts,and
.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 247/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 248/419
thatbuysits goodsincondition
erelythemerchandiseinventory;ina
ereareinventoriesof finishedgoods,
erials,andsupplies.Whethersupplies
alancesheetas acurrentassetora
ablequestion.
showtheinventoriesoffinishedgoods,
materialsin detail.Toillustratewhy
assumethatacompanyshowsmerely
ntoriesinitsbalancesheet,andthat the
esshowedthefollowing:
5,000.00
,000.00
edisclosed.Butsupposethat,upon
tsareshown:
mber31,1940
fTotal
013.33%$20,000.0028.57%
0040.0035,000.0050.00
46.6715.000.0021.43
%$70.000.00100.00%
terialshasgreatlyincreased,andthe
odshasmateriallydecreased.Sincethe
onvertedintocashuntiltheyhavebeen
requiretimeandtheincurringofmanu-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 249/419
27
torieswererelativelymuchlesscurrent
eywereatthe endof1940.
ermination.
finventoriesinvolvesquestionsof
hip,andpricing.Quantitiesmaybe
ount,measurement,orweighing;con-
necessitatetheentireeliminationora
bsoleteorshop-wornarticles;questions
mattersastheinclusionof allpurchases
ceived,whetherornotthegoodshavebeen
oodsoutonconsignment,andtheexclu-
signment;theproblemofpricingisoften
ortance,initsrelationtoassetvaluation
hatextensiveconsiderationisgiventoit
ngparagraphs.Althoughtheprinciples
pplicationofteninvolvespractical
valuationofinventoriesis"costor
er."Thecostormarketruleis incon-
countingprincipleofanticipatingno
losses.
urchasepriceattheend oftheperiod
merchandiseonhand.Sincepurchase
ngpriceswillpresumablydeclinewith
toryfromcosttothelowermarket
heperiodwhenthe pricedeclined;in
ule: provideforalllosses.
ehasincreased,sellingpricesmay
asedprofitmaybe realized.Butthis
zeduntil themerchandiseissoldatan
einventoryatavaluein excessofcost
odoso iscontrarytoconservative
uld beappliedtoeachitemin the
e
0$800.00
.00
0$1,300.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 250/419
41
eon grossprofit.
ketruleis aconservativeone,andis
pplicationoftherulemisstatesthegross
themarketpurchasepricesdecline.
companybuysgoodsat acostof
alfofthem for$7,500.00.Thetrue
sfollows:
of$10,000.00)5,000.00
0.00
toryvaluationoftheremaininghalf
ketisonly$4,000.00.Theprofitand
llybepreparedthus:
riod4,000.006,000.00
0.00
ementoffactswouldbe:
000.005,000.00
0.00
1,000.00
yShrinkage$1,500.00
tin thelastformillustrated,it
uetheinventoryatboth thecost($5,-
ostor market($4,000.00)inordertodeter-
putingthevalueoftheinventoryon
omuchworkthatit isusuallyregarded
the TreasuryDepartmentfortax
erordinarycircumstances,'market'
eprevailingat thedateoftheinventory
diseinthevolumein whichordinarily
r."Therestrictionastoquantityis
d,whollyinapplicablemarketvalues
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 251/419
27
kofthecostofgoods,but itisnot
thecost.Theproblemofascertaining
umberofdifficultpoints,amongwhich
purchasepricebut alsoallincidental
ht,drayage,andstorage,necessaryto
rket.Thetotaloftheseitemsis clearly
stofpurchases,butitis notasimple
ncidentalcostsamongindividualpur-
hatportionofthe incidentalcostsis
he inventory.
erchandiseofatrading company
manufacturingcompanycanbedeter-
hecostofa manufacturingcompany's
edgoods,includingmaterial,labor,and
nedonlyifadequatecostrecordsare
evaluationsdeterminedbycostsys-
mates,ofvaryingdegreesof accuracy.
vestmentbeincludedin manufactur-
his questionreceivedagooddealof
ts.Thosewhoadvocatedincluding
edthatthe costofthefixedassetsused
hecostofthearticlemanufactured;that,
narticlemanufacturedwiththeaid of
nexpensivebuildingcostsmorethanan
inexpensivefixedassets;and,therefore,
booksshouldincludeinterestonthe
.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 252/419
43
inginterestincostsadmittedthat
ectsthe costofthemanufacturedproduct,
heeffectofvaryingfixed assetcostsis
oncharges.Theyfurthermaintained
argedwithatheoreticalintereston
sets,theoffsettingcreditfor interest
hecostswill thusbeoverstated,bythe
ncometherein,andprofits willbeantici-
nufacturedgoodsaresold.
eretothetheory th'atintereston
eincludedinmanufacturingcost,but
ociationsofaccountantsregardthe
orrectintheoryand unpracticalin
pecttointerestasan elementofcost
nufacturerequiresagingorseasoningof
rcumstances,shouldinterestonthe
ngperiodbe addedtocost?
eritpermissibletomakesuchanaddi-
valuethusdetermineddoesnotexceed
oodscould bepurchased.Theapproval
wever,adeparturefromconservative
nizedthattheuse ofcapitalinthe
esnotresultinthe productionofincome
goodsaresold.Buttheadditionof
entoryrequiresan offsettingcreditto
kingupofprofitbeforethe saleofgoods.
ofwhichcosttouseif severalinvoices
eriodat differentprices,orifgoodsare
yearatvariouscosts.Fourmethodsare
chareconsideredcorrect;itis significant
pricesaredefinitelyknown,thereare
nventorypurposes.
vebeenmadeduringtheperiod,as
SI.00$100.00
1.10220.00
1.20300.00
1.25125.00
nventory.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 253/419
27
Thegoodsonhandareconsideredto
mostrecentpurchases;thereforethe
its@ SI.25$125.00
ts@ 1.2060.00
Thesalesareassumedtoconsistof
andtheinventoryat theendoftheperiod
anyopeninginventoryandtheearliest
nventoryiscomposedof:
0units@ $1.00$100.00
0units@ 1.1055.00
posedonlyrecently,andhasnot yet
Onecriticismraisedagainstitisthefact
onattheend ofaperiodmaydepend
ncyofpreviousinventory-takings.To
nventorywastakenafterthe second
tswerefoundto beonhand;theywere
0units@ $1.00$100.00
00unite@ 1.10110.00
5)$21000
terinventory,therecordswould
ts@ $1.05$210.00
1.20300.00
1.25125.00
nventorywouldberegardedas
ginventory,andwouldbevaluedat
insteadof at$155.00,whichwasthe
heassumptionthattherehadbeenno
methodpointoutthatit hasastabiliz-
odsofrisingorfalling prices,byapplying
ntsellingpricesandlettingthe inventory
tofthestabilizationofprofits. The
at,sinceartificialstabilizationof
e157), themethodisimproper.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 254/419
45
d.Thetotalcostoftheopeninginven-
edby thetotalunitsin theinventory
eightedaveragecostis thusdetermined:
0 =$1.14615
14615X150=•$171.92
Assumethatpurchasesandsaleshave
orderand amounts:
t$1.00
tsat$1.10
t$1.20
sat$1.25
$100.00$1.00each
220.00
300.00
25.00
86
ngaveragecostcomputationillus-
tionis peculiarlysuitedforthedeter-
toryvalueswhenunitcostsvarywidely
useofdifferencesinthequantityof
etusassumethata companymanu-
ellsheavilyinwarmmonthsand poorly
productionfluctuateswithsales.
nthlycostsofproductionduringtwo
xt page.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 255/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 256/419
47
ountsonmerchandisepurchases
einventoryvaluationandhenceuponthe
hequestionsinvolvedrequirecon-
iscountsand,incidentally,oftheir
ofitand lossstatement.And,sincea
uldbeaccordedtodiscountsonpurchases
epresentdiscussion,althoughconcerned
onpurchases,willnecessarilygivecon-
sales.
heldbyaccountantswithrespect
ounts,theirproperpresentationin
nt,andtheir relationtoinventory
temslikeinterest,and shouldbe
wingcondensedprofitandlossstate-
ON
ss
ber31,1941
dAllowances1,500
:
1940$25,000
esandAllowances.1,000
0
ndPurchases$91,000
ber31,194126,00065,000
000
lExpenses28,025
8,975
0
dOtherIncome$11,099
henatureofcash discounts,itmay
contingentuponpaymentwithina
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 257/419
27
cialandtimeelementsgivethema
hisrelationis increasedbyreasonof
alesmay beofferedtoobtainfundsfor
rowing;andthat,ontheother hand,
ndinterestmaybepaid toprovidefunds
tsonpurchases.Ifdiscountsare
meandexpense,thegrossinvoiceprice
inventoryvaluationpurposes.
ductionfromthe price;therefore,
bedeductedfromsalesin theprofit
untsonpurchasesshouldbededucted
erchandisecostforinventorypurposes
grossinvoicepricelessdiscountstaken.
sstatementis basedonthispointof
ON
ss
ber31,1941
ances$1,500
75
:
1940$24,750
Allowances$1,000
01,900
0
ndPurchases$89,850
ber31,194125,65064,200
825
lExpenses28,025
8,800
dOtherIncome$10,024
5
iew,itmaybe saidthatcashdis-
dnotbetreatedas animmediateincome,
tbe takendirectlyorindirectlyona
realizationuntil thegoodsaresold.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 258/419
49
ceof$1,000.00ispurchasedsubjectto
countis merelyasavinginthecost;
ordedat$980.00,andthatvaluation
ycost;if the$20.00istakenasan
egoodsareincludedinthe inventory
edprofitistakenonthe purchase.
pationofprofitresultsfromnot treating
ductionfromthesellingprice,aconsistent
wed.
purchasediscountsasincomemay
profit, thiswillpresumablybethe
t theendoftheperiod isgreaterthan
alargerproportionof discountswas
eriodthanduring thepriorone.Busi-
fore,issometimesdisposedtofeelthat
reticalaccuracymaynotbesufficient
nvolvedindeterminingwhatportion
valuedat thenetprice(becausedis-
dwhatportionshouldbe valuedatthe
ountswerenottaken),and(b)to justify
tand lossstatementofsignificant
company'sdiscount-takingpolicy
mentofinconsistencyinthetheory
onpurchasesareadeductionfromthe
eitsometimessaythatitspropriety
rentiftradepracticeswerectfangedand
tthenetprice(say $980.00)andapenalty
difpaymentwaspostponedbeyond
00wouldthenobviouslybe thepurchase
bea sortofinterestcharge.Thisis
soseemsto indicatethatconsistency
on-from-priceadvocatestotreatall
ntsasadeductionfromtheprice(and
aken)andtoshow asanexpenseall
heoryis,in fact,advocatedbysome
,perhaps,forthepurposesofconsistency,
withinformationastothe amountsof
edprofitandlossstatementis presented
paredonthe assumptionthat$1,300.00
savailableduringtheyear,andthat only
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 259/419
27
ON
ss
ber31,1941
ancea$1,500
75
:
1940$24,500
Allowances$1,000
able1,3002,300
0
ndPurchases$89,200
ber31,194125,48063,720
305
lExpenses28,025
9,280
dOtherIncome$10,504
00435
(formerlymorethanatpresent)
rmalrate shouldbetreatedasfinancial
tan abnormalrateshouldbetreated
ce.A2%rate hasbeenmentioned,
hestrate atwhichdiscountscanbe
s.
henawhole,acquiredata lump
which,becauseofdifferencesin nature
fferentprices.Todetermineacostfor
orthepartsremainingin theinventory,
apportionmentofthelump-sumprice.
andis purchased,developed,and
ots.Thetotalcost,assumedtobe
rtionedtoindividuallotsinthe ratioof
he followingpage.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 260/419
51
.
purchasedbeforetheend ofthe
nthe inventoryattheendof theperiod.
smaybe madebyafailureto includeall
entory.t-
hasemayberecorded,butthegoods
ventory.Thisomission,ofcourse,
entofthe profits.
rymay bemadeforthepurchase,
tedfrom theinventory.Thisomission
rstatementoftheprofits,sincethepur-
ndLoss)and theclosinginventory
)areequally understated.Theprac-
however,bothbecauseitresultsin an
hasesandinventoryintheprofitand loss
understatesthecurrentassetsandcur-
cesheet.Thus,afinancialcondition
anreallyexists,partlybecausethe
rstated,andpartlybecause,inmany
ayablewillhavetobepaidbeforethe
onvertedintocash.
mesincorrectlyrecordedassales.
onbetweenasaleandaconsignmentis
e goodspassesfromavendortoa
ignmenttheconsignorretainstitleto
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 261/419
27
entisnotasale,no profitresultsfrom
shouldbetakenup untilthegoods
ignee.
preparesstatementsorcloseshis
onsignmentshouldbeincludedin
uchgoods,for inventorypur-
pensesincurredinplacingthe
rk.
ngbusinessitis alwaysconsidered
ofit onworkinprocess;noprofit should
dsarecompletedandsold.Aspecial
nthecontractingbusiness,ifthecom-
esa considerableperiodoftime,and
orethecontractiscompleted.
-plusbasis,thereisno objection
on theworkdone;butifthe contract
alwaysdangeroustotakeupprofit
causeofthepossibilitythatunforeseen
profiti ntoamuchsmallerprofitor into
ointofagoingconcern,itis always
akingofaprofit untilthecontractis
metimesarisewhenapartnerorastock-
hecompletionofacontractandis tosell
ngpartnersorstockholders.Insuch
omarytoestimatetheprofit tobeearned
eup suchaproportionofthe profit
neuptothedate ofretirementbearsto
contractis takenataflatprice
onetodatehascost $25,000.00,and
0.00willcompletethe work.The
he uncompletedcontractmaybe
0
e15,000.0040,000.00
000.00
earnedtodate:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 262/419
yvalue.
edetermined,withvaryingdegrees
ods:
sicalinventoryistakenbylistingthe
stsshownbyinvoices,orlowermarket
ccurateofallmethods.
petualinventoryisarecordshowing
dcost)ofitems goingintoandoutof
keptwitheachkind ofarticle.Aform
lyisillustratedbelow:
edeterminedbytheapplicationofcost
ntities shownintheBalancecolumn.
yitis possibletodeterminetheinventory
heinconvenienceoftakingaphysical
however,totakephysicalinventories
r portionsthereof)atintervals,asa
heperpetualinventoriesandtodeter-
ckismysteriouslydisappearing.
methodisoftenusedto estimatethe
chhasbeendestroyedbyfireor otherwise.
tionofauniformrateof grossprofit;
ynotbewarrantedbythe facts,the
entorymaybeinaccurate.
ssumethata companymade25%
ring1941;aninventorywastakenat
occurredonMay25,1942. The
entoryatthedate ofthefirecouldbe
hownonthenext page.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 263/419
87
1941(physicalinventory)$10,000
y25,194294,000
dssold,January1 toMay25:
t—25%of$124,000.00....31,000
stofgoodssold93,000
hand,May25, 1942$11,000
sed toestimatetheinventoryif
alancesheetasofa datewhennophysical
od,whichisfrequentlyusedby
ainstores,enablesthemanagementto
ostofthemerchandiseonhandat the
eraltheoryofthe methodisindicated
n.
wing:
dpurchasesatcostandalso at
ummariescanbebuiltup asfollows:
0.00$86,000.00
0.00
0.00
001,000.00
8.500.00$90,000.00
8,000.00
(or retail)price$82.OOP.00
evaluedonan estimatedcostbasis
ce,ofgoodsavailableforsale—$58,500.00-5-
theinventoryis 65%of$82,000.00,or$53,300.00.
ubsequentdatescanbedetermined
hegeneralprocedurefollowed,but
ftheprocedureisusuallymuchmore
mark-upsandmark-downsinselling
oredintheillustration.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 264/419
relativelypermanentnatureused
sinessandnotintendedforsale.
ryisafixedassetbecauseit complies
the definition:Itisrelativelypermanent
operationofthebusiness,andit isnot
sitefor afutureplantis nota
ntpropertyanditisnot intended
theoperationofthebusiness.There-
fiedundertheFixedAssetscaptionin
edforoperationsbutno longer
t.Itis relativelypermanentproperty;
le;but itisnot usedintheoperation
edassets.
avingbodilysubstance.Strictly
setisintangibleifits valueresides,not
fthe assetitself,butinthe rightswhich
nitsowner.Tangiblefixedassets
achinery,tools,patterns,delivery
ixtures,andothersimilarproperty
e.Intangibleassetsincludegoodwill,
emarks,franchises,andothersimilar
bstancebuthavingvaluebecause
wnershipconfers.
ndamortization.
rever;wearandtearandtheaction
nimpairmentoftheiroperatingeffective-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 265/419
ETS[Chap.28
replacementsnecessary.Forthis
assetisasort ofdeferredchargetobe
uringthelife oftheasset.Thisexpiration
epreciation.
nvalue ofnaturalresources,
ells,and mines,causedbytheirconver-
oninvalueof intangiblefixedassets,
ts,andleaseholds,resultingfromthe
ets.
fied,withrespecttotheir natureand
hichtheyare subject,asfollows:
tion.
.
hinery,toolsand
pment,
ecttodepletion.
mines,oilwells.
.
ights,franchises,
tion.
oodwill.
untingtoshowfixedassets inthe
properdeductionsfordepreciation,
on.
othedeterminationofthecost of
nthis chapterunderthefollowing
nditures.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 266/419
DASSETS857
on.
urities.
ed.
cludestheoriginalpurchaseprice
es.Forinstance,thecostofland
e,broker'scommission,feesforexamining
ccruedatthedateof purchase,taxes
duringthe periodofconstructionofthe
sforlocalimprovementssuchassewers
sed,itstotalcostincludesthe
ncurredinmakingrepairsnecessitated
rchase,andcostsofalterationsand
gisconstructed,thecostincludes
hitects'feesandsuperintendents'
kmen'sliabilityinsurance,andtaxes
onstructionperiod.
udesthepurchaseprice,freight,
itis necessarytooperatethemachin-
hile,inorderto breakitinor testit,
maybe capitalized—thatis,regarded
achineryratherthanas anexpense.
nditures.
heownershipoffixedassetsare of
chshouldberecordedbyanincrease
sets.Inmostcasesthis isdoneby
ts;insome casesitisdoneby
eserves.
hichshouldbechargedtoexpense
bemadebetweencapitalandrevenue
ccountingforfixedassetsandfor profits
pitalexpenditureischargedtoan
kvalueofthefixedassetswillbe under-
nd networthwillalsobe understated.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 267/419
enueexpenditureischargedtoan
oanexpenseaccount,thebookvalue
overstatedandthenetprofitsand net
ed.
meofthe morecommontypesof
below:
eesecond-handma-
ssetaccount
ddepreciationwhichtook
eputintouse,theywere
hiswasacapital
ure
erepurchasedforusewith
itureischargeableto
thofoperations,are-
sarevenueexpendi-
machineswereagain
atacostof$400.00.
turebecauseitmade
depreciation;itshould
getotheassetaccount
ontocost;itshouldbe
e depreciationreserve
ofaccrueddepreciation.
machineryinafactoryisaproper chargetotheasset
arrangedinthefactoryforthe purposeofimproving
ducingthetime andcostofproduction,thereinstalla-
erlybechargedtothepropertyaccount,becausethat
debitedwithoneinstallationcharge.Ontheother
enditureasan expenseoftheperiodwouldscarcelybe
eexpenditureislarge.Thebest procedure,therefore,
ardtheexpenseasadeferredchargetobe writtenoffover
ebenefitedbythe reinstallation.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 268/419
DASSETS259
on.
tutilitycompaniestoincludeinterest
onperiodinthe costoffixedassets.
omeis earnedduringconstructionto
perationsbegin,ratesandearningsare
tment;sincetheinterestcannotbe
onsbegin,theutilityispermittedto
havebegunbyincludingit inthe
willdeterminetherateforservice.
ationforallowingindustrialsto
heconstructionperiod.Butthesanction
beencarriedoverintothe fieldof
withoutconsiderationofthedifference
,eitherbya utilityorbyan
arycostofconstruction;itcouldbe
s obtainedthroughtheissuanceofstock.
blepracticeinutility accounting,
dtocapitalizeinterestduringconstruc-
wellestablishedthatitis nolonger
oubtfulwhetheritcanbe defended
urities.
edbyan issueof1,000sharesof stock
pershare,didthefixedassets cost$100,-
ntquestionfor tworeasons:(1)if
than $100,000.00,thestockwasreally
hestockholdersmaybeliabletocreditors
ount;(2)ifthe$100,000.00valuation
axpurposes,thecompanywillnotbe
o deductdepreciationonthatvaluation.
evaluationisby showingthatsimilar
ashatpar ataboutthesametime.
conclusiveevidence.Assume,for
haresof stockatparforcash,and1,000
g;the10-sharesalemaybe merelya
alue,andmaybe challengedassuch.
moreconclusiveevidence.
ventcompanyhavecomeintocourt
snotworththepar valueofthestock
kwas,therefore,issuedatadiscount,
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 269/419
ETS[Chap.28
shouldbeheld forthepaymentofthe
ountequaltothe discount,courtshave
em,becausethe lawallowsthedirectors
blediscretionindeterminingthevalue
entforstock.
blymoreimportantfromthetax
onofthepropertymust beestablished
ketvalueof thepropertyitselforof
git; otherwise,thestatedcostmay
fordepreciation.Acompanyissued
nsharesfora patent,chargedthe
stbasedonthe parvalueofthestock
rn,deductedamortizationofthepatent
hortlyaftertheissuanceofthe common
mpanyissuedpreferredstockandgave
bonus.The patentvaluationwas
becausetheissuanceofthecommon
thatthe commonstockissuedforthe
ed.
manufacturedincludesmaterials,
ad;ifacompanyusesitsfactoryfor the
tsforitsownuse,should thecostofthe
threeelements?Thereisno question
orcosts;theyshould beincludedin
smanufactured.Thereislesscertainty
d.
seditsplantin 1940forthemanu-
ly,thatin1941it alsoconstructedsome
ollowingdataare determinable:
ssets
,000.00$50,000.00$25,000.00
000.0050,000.0025,000.00
0,000.0050,000.00??
000.00?
00,000.00
7
ntityoffinishedgoodswas manu-
0andsoldat thesameprice.Ifwe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 270/419
DASSETS261
overheadin1941 tofinishedgoodsand
eratioofthedirect labor,forinstance),
esults:
,000.00$25,000.00
000.0025,000.00
ionedonbasis
33,333.0016,667.00
333.00$66,667.00
ods200,000.00200,000.00"
66,667.00
showntobe $16,667.00morethan
ame quantityofmerchandisewas
eremadeatthesameprice.This
ofoverheadchargedtofixedassets.
headwasnotincreasedbecauseofthe
ts,andifwechargethe fixedassetswitha
evidentthatthechargetofixedassets
ditiontothenet profit,andthatthe
ga profitonworkdoneforitself
eisto chargethefixedassetswith
ryoverheadascanreasonablybe
ionoffixedassets.
onpurchasesof fixedassets,should
sa financialincomeorasareduction
?Thisisa questiononwhichsome
samongaccountants.
ussionofthenature ofcashdiscounts
es,anditistherepointedout thatto
urchasesasafinancialincomeimmedi-
he inventoryatthegrossinvoiceprice
ncome,becauseaprofit istakenon
sarerealizedonlyby sales.Itwas
tnoseriousdistortionofprofits results
hebeginningandtheendof theperiod
sis, andiftherehasbeen nomaterial
mountsorin theratiosofdiscountstaken
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 271/419
ETS[Chap.28
hasesatthegross invoicepriceand
immediateearningalsoresultsinan
eover,theanticipationismoreserious.
nningandend oftheperiodexercise
nfluenceupontheanticipationofprofits
epurchases;anydiscountearningtaken
assetisoffsetonlygraduallyby the
nchargesoverthelifeofthe asset.
ttreatingdiscountsonfixedassets
ceis apossibleoneofconsistency.
sepurchasesaretreatedasa financial
tsoncapitalexpendituresaretreatedasa
consistencyisintroducedintothe
stencyresultsinadistortionofwhat is
me.However,ifdiscountsonmer-
eatedasdeductionsfromcost,itis not
larlyconservativeproceduretothe
eceivegiftsoffixedassets,eitherfrom
citieswhichmakeapolicyof attracting
mwithplantsor withplantsites.
ostwerestrictlyapplied,suchassets
onlyattheamountof anyincidental
ptanceofthegifts.Sincethis rulemight
usinessbyrequiringit topresenta
ssetsweregrossly undervalued,therule
placingofsuchgiftsonthe booksatafan-
fixedasset accountmaybeoffsetby
distinctionis tobemaintainedinthe
ingandextraneousprofits,thecredit
Surplus.
notbe carriedinasingleaccount
teaccountsshouldbeopenedforthe
auselanddoesnot depreciateandneed
ildingsdodepreciateandare insured.
oesnotdepreciateapplies,ofcourse,to
e.Landusedforfarmingand deposits
bjecttodepletion.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 272/419
DASSETS263
dwhichisnotusedin operations(for
ctory,propertyheldasaspeculation,
nsions),itshouldnot beincludedin
eFixedAssetscaption.Theamounts
shouldindicatetheinvestmentinfixed
essoperations.
aseparaterecordwitheachparcel
o that,ifoneis disposedof,thecost,
gprofitorlosscanbe ascertained.
owned,amachineryrecordshouldbe
oreachmachine,containingthefollowing
chine).
cost.
data:
ovision,andaccumulatedamountprovided
ryrepairs,withinformationastodate,cost,
loperatingconditions,suchasovertime
onandoperatinglife.
mationdesirableforinsurancepur-
helpfulinprovinga claimforloss.The
ableasaguideto futurepurchases,and
llife andactualresidualvaluerealized
ssetishelpfulinmakingfuture estimates
appliedto similarequipment.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 273/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 274/419
-Continued
ER
e.
angedtheattitudeof manybusiness-
ciation.Beforethepassageofthelaw,
y:"HowlittledepreciationcanItake
howingaspossible?"Sincethepassage
manycaseshasbecome:"Howmuch
educemytaxableincome?"
onfrontedwiththetaskofconvincing
ationwasanexpensewhichshouldbe
heprofits;theirclientspreferredto write
ninyearsofpoorprofitsor oflosses,
eprovisionsinyearsofgoodprofits.
resshometheargumentthatdepre-
ichmustbeprovidedforin badyears
metbyseveralarguments.Onewas
noffsetbyanincreasein themarket
at theassets,evenafteranumberof
smuchas theycost.Thiswasmerely
ratingexpenseagainstan unrealized
atdepreciationprovisionswere
airskepttheassetasgoodasnew.It is
swertothisargumentthanProfessor
ndnowalmostclassicsentence:"All
blemarchto thejunkheap,andits
elayed,cannotbepreventedby repairs."
w,andbusinessmenwillinglydeduct
ndwouldalsogladlymakeadeduction
olescenceiftheywerepermittedto
scenceintheir taxreturns.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 275/419
ETS[Chap.29
.
0andwill lastforfiveyears,the
eofthe five-yearperiod.Eachyear's
gedwithaportionof thecost,andthe
shavinga decreasedvalueattheend
atdepreciationshouldbedetermined
gthecost,theestimatedlife,andthe
pvaluetobe realizedwhentheasset
cticethescrapvalueisusuallyignored,
oniscomputedbymultiplyingthecost
ableforincometaxpurposes.
f theoreticalmethodsofcomputing
chinvolveactuarialcomputations.
edbelow:
od.Apercentagerateisdetermined
ife(forinstance,20%fora
arlife) andtheannual
bymultiplyingthecostbythe
thodisacceptablefortax
ordiminishing-chargemethod.The
dthefirst yeartocost,and
ncreasingreserve.The
decreaseseachyear;thisis
causerepairchargeswillpre-
ssetages.Decreasingthe
settheincreaseinrepair
eamore uniformannualtotal
generallyacceptedfortax
ichthechargeis madeproportionate
maybeused,thus making
anyyeardependentuponthe
ear;aratepermile maybe
mobileequipment,thusmaking
roportionatetothemileage.
yacceptablefortaxpurposes.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 276/419
ANDOTHERDECREASESINVALUE267
lycreatetheirdepreciationreserves
eoftheirgrossrevenue.At
ntirelyillogical,as itwould
epreciationdependsuponthe
ratherthanupontheamount
em.But,ontheother hand,
fluencedbythe extentto
egross-revenuebasisof
maybedefendedbythisreason-
e,themore use;themoreuse,
rtaxpurposes,however,
omputedonthebasisof the
ty.
mpaniesprovidedepreciationonthe
ethodhastwothingsto recommend
apply,andit isacceptablefortax
sthedesiredresultofspreadingthecost
atedlifebyperiodicalchargestoexpense,
alueof theassettozeroat theendof
his methodisnottheoretically
ntoftheprofitand lossstatement.
t bethesameeachyear,andit maybe
eto expenseshouldbemadeina year
roflittle use.Butitis notalwayscon-
differences,andtheequalannualcharge
hstandingthetheoreticalinaccuracy.
depreciatedbookvalueof afixed
00.00and isdepreciatedbythe
anestimatedlifeoffiveyears,the
willbe$100.00,$80.00,$60.00,$40.00,
neerwouldprobablysaythatthe
ylittlephysicaldeteriorationthefirst
ecesrapidlytowardtheendof itslife.
romtheequalannual depreciation
edbyan engineeronthebasisofactual
ghtthereforebesomewhatasfollows:
basis$100.00$80.00$60.00$40.00$20.00$0.00
ineer'sbasis100.0090.0080.0065.0040.000.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 277/419
ETS[Chap.29
uesshownbythe booksrepresent
esoftheassets.It iswellknownthat,
xedassetssuffermostheavilyduring
useonlyalittleusemakesthemsecond-
theoreticaldepreciationbasis,the
asis,andthe valuesonasecond-hand
fore,besomewhatasfollows:
eaccount-
60.00$40.00$20.00$0.00
ineer'sbasis100.0090.0080.0065.0040.000.00
es100.0070.0065.0050.0035.000.00
iationprovisionsmaybesummarized
y residualvalue)ofadepreciating
enoffas anexpenseoverthe
deto bearaportionofthis total
gDepreciation(expense
eserveforDepreciation.
tofexpenseproperlychargeable
nitelydetermined,anarbi-
madeeachyear.
shownbythebooksmerelyrepre-
setnotyetwrittenoffto
respondwithavaluefixed
aphysicalconditionbasisora
ebasis.
erentriesto bemadewithrespectto
ullydepreciatedassets,salesandabandon-
eriodicallybyajournalentry
untandcreditingareserve.Forexample,
achinewhichcost$1,000.00andwhich
years,withnoresidualvalue,would
ngjournalentry:
100.00
—Machinery100.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 278/419
ANDOTHERDECREASESINVALUE269
eaccountwouldbeclosedtoProfit
daccumulate.
atethat thecreationofadepreciation
ta fundofassetsisbeing setasideto
he endofitsusefullife. Thecreation
meansonlythata bookentryhasbeen
nsedeductioninthe profitandloss
intheasset carryingvaluefromcostto
accountanditsrelateddepreciation
balances:
—Machinery$36,OCO.00
iationhasbeenprovidedattherate
t theaboveamountsrepresentthecost
nsapplicabletotwounitsofmachinery,
t$20,000.00hasbeenfullydepre-
preciationisallowableonthismachin-
edfromthe assetaccountbythe
—Machinery20,000.00
theaccountsthecostof,
reciationon,fullydepre-
othisprocedurebecausethebalance
actthat thecompanyownsmachinery
isnotcarriedat anyvalueinthe
treserveorundervaluationofnet assets
optionoftoohigh adepreciationrate.
orecontendthat,sincethedepreciation
eexcessiveinthepast,thereserve should
Surplus,andthatcreditstothe reserve
gtheremainingusefullife oftheasset.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 279/419
ETS[Chap.29
yadvocatetransfers,asindicatedby
es:
ted20,000.00
ountforthefullydepre-
—Machinery20,000.00
—FullyDepreciated
rvefordepreciationof
ontainthefollowingbalances:
—Machinery$16,000
ted20,000
—FullyDepreciated
how,undertheFixedAssetscaption:
tion16,000$64,000
epreciatedmachinerystillinusecould
sheetfootnote.
assetisdisposedof, anentryshould
etaccountwiththecost oftheasset
ionreservewiththedepreciation
tedforthe amountreceived.
moreorlessthanthe bookvalue,
eintheSurplusaccountforthe difference
thedate ofdisposalandtheamount
nsaregiven:
e.Assumethat,at thedateof
e assetandthereserveaccountshad
$2,200.00
valueof$300.00andwasdisposed
ngdebitsandcreditshould bemade:
00.00
torelievethereserveofthe
200.00
heassetaccountofthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 280/419
ANDOTHERDECREASESINVALUE271
ue.Assumethat theaccountshad
$1,760.00
valueof$740.00andwasdisposedof
wasaloss of$340.00;thefollowingdebits
:
1,760.00
alue.Assumethatthe accountshad
$2,200.00
valueof$300.00andwasdisposed
ewasa profitof$200.00.Thefollowing
emade:
2,200.00
theabandonmentofafixedasset
e,assumethattheassetcost$2,500.00
depreciationreservewas$2,200.00.
mustbe chargedtoSurplus:
2,200.00
by exchange,twoquestionsarise:
setacquiredand(2)anygainor losson
et.Theanswerstothesequestions
einformation.
heold assetiscarriedata gross
depreciationreserveof$400.00.Anew
ngeoftheold assetplusacashpayment
wassethasanascertainablemarket
canbeput onthebooksatthat value,
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 281/419
ETS[Chap.99
aloftheold assetcanbecomputedas
:
00
400.00
set:
1,100.00
n350.00
ordedasfollows:
—valuationofnewasset1,100.00
rovisiononoldasset400.00
250.00
—costofoldasset 1,000.00
nt750.00
hasno ascertainablemarketvalue,
hangecanbedetermined,andthenew
ebooksatthebookvalue oftheold
e cashpayment;theentriesare:
—tovaluethenewassetatthe$600.00
assetplusthe$750.00cash
00
—costofold asset1,000.00
n.
nbothrepresentreductionsinthe
eydiffer fromeachotherintwoimpor-
physicaldeterioration;depletion
quantity.Amachinedepre-
ncauseslittleifany reduction
hand,thecoalina mine,the
rin aforestaredepletedby
dassetsintomerchandise.
to dividends.
onanddepletionmustbeprovided
reknown,depletiononsuch
lwells,and timberlandsneed
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 282/419
ANDOTHERDECREASESINVALUE273
inetheamountof dividends
Thetheoryof thelawis
ditors,knowingthenatureof
ethatthe receiptsfromsales
rta returnofinvestment.
twerenotlegallydistributable
hecorporationwouldbeobliged
exhaustionoftheproperty.
he corporationexpectedto
ersimilarpieceofproperty,
,therefore,allowsthecorpora-
policybest suitedtoitsplans,
sarenotinjured, becauseof
ureofthe business.
reservein ordertocompute
onmaypaya dividendequal
etion.
utedbydividingthecostof the
atednumberoftons,barrels, thousand
sset,thusdeterminingaunitdepletion
nchargeforeachperiodis thencom-
nitchargeby thenumberofunitscon-
oma fixednatureintomerchandise.
$90,000.00ispaidfor aminewhich
0,000tonsof availabledeposit.The
$.30
agivenyear,thedepletioncharge
20,000,or$6,000.00.
ournal entrysimilartothefollowing:
00.00
astingasset.
rse,beprovidedonbuildingsand
astingasset.Ifthelife ofthewasting
ssthanthelife oftheplant,itis customary
astingassetasthelifeof theplantfor
isisdoneonthetheory thattheplant
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 283/419
ETS[Chop.29
e whenitisno longerneededforopera-
n.Asthelifeofthe wastingassetis
ntofannualoperations,thedepreciation
utedonthesamebasisthatis usedfor
ar
ost-Scrap)XTotalEstimatedUnits "
hevalueoffixedassets.
noftangiblefixedassetsandamorti-
ssetsaredecreasesin valuewhichare
ccurred,althoughtheamountsthereof
Provisionforthesedecreasesin value
fthebalancesheetand operating
toacceptedaccountingprinciples.
ssibledecreasesinfixedasset values
tureandfor whichreservesarenot
eservesmaybeestablishedoutof
atism.Thesecontingentlossesinclude:
assetmaybecomeobsoletefromtwo
erfectedwhichoperatesso
eoustodiscardthe old
chobsolescenceis
bytheasset mayhaveasale
fador afashion,or
eother product.If
f producingonlytheone
demandforthat
dassetobsolete.
expansionmaymakeanasset,
eofcarryingitsold load,
ervicerequired.
e.Aslong asthefixedassetsare
ong asitis expectedthatthey
rpose,declinesinmarketvalue
y reserves.Iftheassetsare
marketdeclinesarenotprospec-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 284/419
TS
efixedassets.
reclassifiedinaprecedingchapter
,orthedecreasein valuecausedby
s:Patents,copyrights,
dleaseholdimprovements.
tion.Examples:Trademarksand
bjecttoAmortization
purchase,itscostisthe purchase
einventor,itscostis thetotalofthe
ostsofworkingmodels,andexpensesof
dingdrawings,attorney'sfees,and
provenworthuntilithas stoodthe
;thereforethe costofasuccessful
bookvalueofthepatent.
enteenyears;hencethecostofthe
rittenoffduring thatperiod.Ofcourse,
sometimeafteritwasgranted,the
eit offinlessthan seventeenyears.
sisthetheoreticalperiodforwriting
siderationsoftenmakeitdesirableto
anthattime.Whenthe patentcovers
ketableonlyduringthe durationofa
eoffthepatentduringthe probable
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 285/419
SSETS[Chap.30
dsthattheproductmanufactured
ndcannotbemarketedprofitably,
elesseventhoughits legallifehas
t shouldbewrittenoff.
enty-eightyearswitha possibility
ltwenty-eightyears.Publications
blemarketforsolonga period,anditis
bletowriteoffthecopyrightcostas a
efromthefirstedition.
earonthebooksunlessa payment,
smadein obtainingthem.Franchises
hcasethecostneed neverbewritten
ora definiteperiodoftune,inwhich
ttenoff overthatperiod.Theymay
ofthe cityorothergovernmental
inwhichcaseitis advisabletowrite
thereisa tendencytolookuponsuch
dtomakenoprovisionfor writingoff
years.Itshouldnotbe entered
nlessrentalshavebeenpaidin advance,
ntsmaybewrittenoffto expenseover
ossessionofalong-timeleaseto
dwhererentsarerapidly advancingmay
,butthat isnotsufficientjustification
ueon suchaleaseandincludingit as
eet.
ethatthelesseeshallpaythe costsof
mentsoftheleasedrealestate,such as
built-inshelving.Suchimprovements
rtyand reverttotheownerof thereal
he lease;butthelesseeobtainsthe right
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 287/419
SSETS[Chap.30
odwill.Toillustrate,letus assumethe
00.00$15,000.00
tsof$100,000.00.If10%be
hebasicreturn onthenetassets
0,000.0010,000.00
reS— $5,000.00
snogoodwill;CompanyB,with
tlyhasagoodwill.
heprice tobepaidfor thegoodwill,
by thepurchaserandtheseller.It
rived atwithoutformalcomputations,
arefullycomputedby:
e probablefutureprofits,and
veralmethodsof estimatinggood-
bablefutureprofits.
sinesspays apriceforgoodwill,he
ssprofitsofthepast,but fortheprobable
.Theaccomplishmentsofthepast,
evidenceoftheprobableaccomplish-
nceit iscustomarytoestimatethe
ofpastprofits.Inmakinga statement
beusedasthebasis forcomputingthe
ouldbegiventothefollowingpoints:
-operatingprofitsandlossesshould
usualinnatureand not
etheyshouldnot beincluded
beusedinestimatingfuture
toadifferencebetweenpastand
houldbegivenconsideration.
entsalarieshavenotbeen
rifthe salarieshavebeen
nsshouldbemadefortheman-
dby thepurchaser,provided
ble.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 288/419
EDASSETS279
essinthepasthas beenduelargely
essability oftheoldmanagement,and
efor thissuccessarenottogo withthe
gement,theprofitsandthe goodwill
rgelypersonal,andconsiderationshould
matingfutureprofits.
usinessaretobe transferredtothe
than thatatwhichtheyhavebeen
s,recognitionshouldbegiven tothefact
hargeswillberequiredin thefuture,
becorrespondinglydiminished.
odwillonthebasisofaveragepast
gthetrendofthoseprofits.To empha-
profitsisindicativeofprobablefuture
companieswhoseprofitshaveaveraged
0.00$30,000.00$10,000.00
025,000.0015,000.00
020,000.0020,000.00
15,000.0025,000.00
010,000.0030,000.00
000'00$100,000.00$100,000.00
0,000.00$207000.00$20,000".00
odwill,amountto$150,000.00in
ncernshasmadeanaverageannual
s evidentthatitwouldbe unwiseto
he goodwillofeachbusiness.
awidefluctuation,fromaprofitof
s of$2,000.00in1940.Suchahistory
nceofdependableprofitsinthe future.
eotherhand,arevery uniformyear
tendencytoincrease.
ll(assumingthat10%is afairbasic
ydeclining;the profitforthelast year
etassetsexclusiveofgoodwill;and,if
tsis projectedfortwomoreyears,the
ts.
ethemostgoodwillof all,forits
ing.Infact,justas itwouldbeunwise
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 289/419
SSETS[Chap.30
nythingforgoodwill,becauseofits
would probablybeunfairtoDto base
profits.BecauseD'sprofits are
earslikelythatitsfuture profitswillbe
epastaverage.
goodwillareillustratedinthe follow-
strationsare basedonthefollowing
aserandsellerofa businesshaveagreed
an goodwill,shallbevaluedat$100,-
ve yearsnextprecedingthedateof
9,500.00,$19,000.00,$21,500.00,and
verageof$20,000.00.
annualprofits.Assumethat the
anamountequaltothe totalprofitsof
rs;thepaymentto bemadeforgoodwill
haseofpastprofits.Theamountis
gyear.$21,500.00
art "21,000.00
forthegoodwill$42,500.00
ofcomputinggoodwillbecauseit
hat thegoodwillisnotdependentupon
wlarge,but upontherelationofthe
ndthatno goodwillexistsunlessthe
ormalincomeonthenetassetsother than
agepastprofits.Thismethoddiffers
onlyone particular:averageprofitsare
dwillisto bevaluedattwoyears'
rofitsofthe pastfiveyears;thecomputa-
madeasfollows:
years(as statedabove)$20,000.00
sofpurchase2
s theprecedingonesinceitignores
pendentuponexcessprofits ratherthan
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 291/419
SSETS[Chap.30
fthepurchaseprice,the pur-
%thereof$12,500.00
0.00ofthepurchaseprice,the
will60,000.00
%thereof7,500.00
ibleassetofgoodwillhasno value
ofprofits.Therefore,itmaybe more
hepurchaserreceivesnetassetsand
0.00,thepurchaserreceivesonly
12^%is afairratefor thecapitali-
0.00ofprofits(whichareaccompaniedby
dbe usedforthecapitalizationofthe
arenotaccompaniedbyassets.The
tedbythefollowingcomputationof
thatthepurchaserandseller have
rrateforthe capitalizationofprofits
ndthattheremainingprofitsshouldbe
eyears$20,000.00
sapplicabletonetassets acquired—
500.00
edasindicativeofgoodwill$7,500.00
5%$loToOOToO
emosttheoreticallycorrectofall.
eet.
hebalancesheetat notmorethan
orit inacquiringagoingbusiness.
alancesheetshouldrepresentthe
notitsvalue atthedateofthe balance
ased,thegoodwillhasincreased;but
alancesheetas goodwillshouldnotbe
ecreased,thereisnoobligationto
oodwill.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 292/419
EDASSETS283
balancesheet,thereasonablenessof
nbetestedbyoneof the"capitalization
scribedintheprecedingsections,prefer-
t assetsotherthangoodwill,as
et(inother words,thenetworth
tminusthe goodwillstatedtherein)
tetocovera returnoninvestment
btainedfromthenet incomeshown
ement;
arnings,asthusdetermined,by
hrate (20%,forinstance)to
capitalizedvalueoftheexcess
uationthusdeterminedwiththe
nthebalancesheet.
sheetcouldbesurethat theamount
representedtheamountactuallypaid
withtheacquisitionofa profitablegoing
otsufferfromits presentdisrepute.
ncesheetshaveshownasgoodwillthe
ororganizationexpenses(whichshould
surplus),oradvertisingexpenditures
eductedfromtheoperatingprofits),or
opmentperiod,orthe amountsofstock
valueoftheassetsreceived.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 293/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 294/419
ETS
orvariouspurposes,amongwhich
esfortax,sale,consolidation,and
eriodofrising costs,thedepreciated
oncostislikelyto exceedthedepre-
nalcost.Forinstance,anappraisal
thefollowingvaluesof machinery:
perappraisal....$140,000.00
100,000.00
stnewoverorigi-
rappraisal35,000.00
ks25,000.00
reproductioncost
nalcost10,000.00
al$105,000.00
0
appraisalover
0
titude.
ntstookthepositionthatfixedassets
ooksandshowninthebalancesheetat
ardlessofhigherappraisedvalues,
etsto appraisedvalueswouldinvolve
ouldbeunwarrantedbecausethe
dbeanunrealizedprofit.However,
situationsofthissort:
eciation—perbooks$75,000.00
ssdepreciation—perappraisal105,000.00
amortgageontheproperty60,000.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 295/419
DASSETS[Chip.31
ponshowingthepropertyin the
ostlessdepreciation,heindicatedthata
securedbypropertyworthonly$75,-
sreliable,thebalancesheet wasobvi-
he accountantmightshowthefacts
r81,1941
ostNew,LessDepre-
heBlankAppraisal
r31,1941,$105,000.00):
25,000.00$75,000.00
0.00
hichtheappraisedvalueof thefixed
enthetically,isobviouslymuchless
pany'sstandpointthanoneinwhichthe
nthemoneycolumns,asfollows:
r31,1941
byTheBlankAppraisal
31,1941:
140,000
105,000
0
consideredtheirposition,and
heconclusionthatitis permissible
accountsifthewrite-upisnotcredited
tionsubsequenttotheappraisalis
tmethod.
llustration,theassetand deprecia-
oretheappraisalwasrecordedwere:
—Machinery$25,000.00
djustedtoagreewiththe appraisal
efollowingpage.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 296/419
FIXEDASSETSM7
—Machinery10,000.00
rementperAppraisal..30,000.00
achineryistheexcessof thereplace-
ginalcost;the $10,000.00credittothe
depreciationperappraisaloverthe
ndthe$30,000.00credittotheReserve
sthenetincrease;creditingthis reserve
tant'sdesiretokeepthe unrealizedprofit
heaccountswouldbeshownin the
r31,1941
byTheBlank
December31,1941:
140,000
$105,000
rementperAppraisal....30,000
xxx
ondmethod.
ecordingappraisalsareusuallymade
bove;thismethod,however,issubjectto
amely,acleardistinctionbetweenactual
upsisnotmaintained.Tomaintain
sirableto:
rtyaccountwhichwillbecharged
ctioncostnewoveroriginal
ciationreservewhichwillbecredited
eciationonreproductioncost
riginalcost.
ournalentrytotake uptheappraisal
ease40,000.00
—Machinery—Ap-
0
rementperAppraisal.30,000.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 297/419
DASSETS[Chap.31
nthus recorded,theaccountswill
nces:
$100,000.00
ease40,000.00
oncost)$25,000.00
—AppraisalIncrease...10,000.00
rementperAppraisal.30,000.00
veacombinedbalanceof$140,-
depreciationreserveshaveacombined
dtheunrealizedprofitisset upina
ononcost.
precedingillustration,thebooks
ecteddepreciationequalto25%ofthe
$140,000.00
5,000.00
5,000.00
ciation25%25%
saldisclosedaper centofaccrued
mthatshownbythebooks;forexample:
$140,000.00
8,000.00
2,000.00
ciation25%20%
showsonly 20%accrueddeprecia-
atthe depreciationprovidedinthe
sbeen excessive,andthatthetotal
nly 20%of$100,000.00,or$20,000.00,
ttheaccountswithrespectto this
on.However,itshouldbeunderstood
rees ofdepreciationshownbythebooks
ot necessarily,orevenusually,indicate
rvebasedoncostshouldbe adjusted.
preciationarenotintendedto equal
eringorappraisalbasis;theyare intended
vestedcostoverthe lifeoftheassetby
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 298/419
FFIXEDASSETS289
erations.Thedifferencebetweenthe
ertheappraisaland thepercentof
anaccountingbasismaybeignored
ppraisal,itispracticallycertainthatthe
of theasset,onwhichthebookdepreci-
or,and unlesstheconsequencesof
usmagnitudeastomakeadjustmentsto
of materialimportance.
,andassumingthatanadjustment
eentryis:
—Machinery5,000.00
nreservefrom$25,000.00
0(20%ofcost)and
stment.
amountof theexcessdepreciation,
sionreducedtheprofitsofprioryears and
sbalance.
e accountswillhavebalances
wwiththoseshownbytheappraisal:
stnew$100,000.00$140,000.00
0.0028,000.00
112,000.00
djustedtoreflectthe appraisalby
ease40,000.00
—Machinery—Ap-
rementperAppraisal32,000.00
e accountswillcontainthefollow-
$100,000.00
ease40,000.00
adjustedto20%ofthe
00.00
—AppraisalIncrease
ncreaseingrossvalue).8,000.00
rementperAppraisal.32,000.00
epreciationinprior
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 299/419
DASSETS[Ch«p.31
ethatthe appraisaldisclosesa
herthanthatreflectedbythe books;for
tnew$100,000.00$140,000.00
2,000.00
,000.00
ciation25%30%
dinthepast isinadequatebecause
fe oftheasset,andif itisdesiredto
djustmentmaybemadebythe following
—Machinery5,000.00
onreservefrom$25,000.00
0(30%ofcost—basis
chargeSurpluswith the
ofprioryears' deprecia-
adjustmenthasbeen posted)are
appraisalvalues:
tnew$100,000.00$140,000.00
0.0042,000.00
,000.00
djustedtoreflectthe appraisal
ease40,000.00
—Machinery—Ap-
0
rementperAppraisal28,000.00
e accountswillcontainbalances
$100,000.00
ease40,000.00
—Machinery(adjustedto30%of
$30,000.00
—Machinery—AppraisalIncrease
creaseingrossvalue)12,000.00
rementperAppraisal28,000.00
uatedepreciationinprior
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 300/419
IXEDASSETS291
.
,afteranappraisalhasbeenrecorded,
nces:
$100,000.00
ease40,000.00
—Machinery(oncost)$25,000.00
—Machinery—AppraisalIncrease10,000.00
rementperAppraisal30,000.00
matedoriginallifeoftwentyyears;
susedprior totheappraisal;theannual
herefore$5,000.00;fiveyearsofthe
ndhencetheaccumulatedreserve
0;fifteenyearsofestimatedlife remain.
hargedduringeach ofthesefifteen
sedoncostorwith depreciationbased
Therehasbeena differenceofopinion
squestion.
countantshaveheldtheopinion
xedassetisasort ofdeferredchargetobe
onsduringthelife oftheasset,depreci-
raisalshouldbe based,asbefore,oncost,
helife oftheassetwillbe chargedwith
e,noless.Accordingtothisopinion,
tobeclosedtoProfit andLosswouldbe
ournalentry:
5,000.00
—Machinery(oncost)...5,000.00
5%oftheoriginal costof
75,000.00remainingunde-
of theappraisal).
al,thenetappraisalvaluewas
enetbookvaluebased oncost,andthis
realizedprofitreserve.Butfifteen
willpresumablyhavenovalue,andthe
havedisappeared.Forthisreason,
Incrementshoulddisappearalso.It
byfifteen annualentriesasfollows:
rementperAppraisal2,000.00
Machinery—Appraisal
on—'••]5of$30,000.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 301/419
DASSETS[Chap.31
stheaccountswillcontainthefollow-
$100,000.00
ease40,000.00
—Machinery(oncost)$100,000.00
—Machinery—AppraisalIncrease40,000.00
rementperAppraisal—
preciated,theaccountscanbeelimin-
bitingthetwodepreciationreservesand
ounts.
entvalue.
sedonreplacementvalueisofcourse
axcomputations,manyaccountants
iationforgeneralaccountingpurposes
ementvalue(ifit isinexcessofcost),on
tureroperatinglow-cost,long-ago
eshimselfultimatelyinabad position
oncost.Forthe timebeinghismanu-
erthanthoseof anothermanufacturer
eexpensivemachinery,andhemaybe
gpricescorrespondinglylow.This
antageinmeetingcompetition;but
facturerifhegainallthe .business,butat
e himtoreplacehisfixedassetsat the
voidsuch aneventualcalamity,it
epreciationshouldbebasedonthe costs
replacingthemachinery,sothatmanu-
omputedatahigherfigure,and selling
setata higherfigure,andthemanufac-
ainstoget enoughforhisproductsto
xed assets.
viewadvocatethatannualentries
annersimilar tothefollowing:
y(tobeclosedtoP.& L.)7,000
—Machinery(oncost)5,000
—Machinery—AppraisalIncrease2,000
depreciationonreplacementvalue.
rementperAppraisal2,000
onofappreciation.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 302/419
FFIXEDASSETS293
edfor tworeasons:(1)thedebitis
duallytheUnrealizedIncrementaccount
eunrealizedprofitwillhavedisappeared
asset;and(2)Surplusshouldbe
etthefactthatchargingoperationswith
steadof$5,000.00resultedinshowinga
oSurplus)whichwas$2,000.00lessthan
s,theaccountswouldcontainthe
owninthe precedingsectionillustrating
the samejournalentrycouldbemadeto
eciation-on-replacement-value,the
scouldreply:Agood businessmanknows
behighenoughtoenablehim tobuy
oldisworn out;hecanrememberthis
ntsinsuchamanneras todistorthis
hargesareintendedtospreadthecost
sset'slifeasan expense;thetotaldepreci-
reaterthanthecost;whilethe low-cost
eciationexpenseshouldbebasedon its
ahigher-costasset,thedepreciation
enewcost.
adeclearerby analogy.Amer-
.00and marksittosell for$1.50.
etpurchasepricegoesupfrom$1.00to
advanceshissellingpriceto$1.85 sothat
for$1.35 andstillhave$.50for operating
Buthedoesnotsay thatthefirstarticle
nsiderit necessarytomisstatethecost
lemerelytoassurehisability toreplace
ment.
thischapterindicatethegeneral
untantsrelativetoappraisalsandsubse-
rdateofApril1940,theCommittee
oftheAmericanInstituteofAccountants
gtwopronouncements:
dnormallybe carriedintheaccounts
basisofvaluationis"imprac-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 303/419
DASSETS[Chap.31
corporationshouldrecordthe
setsdisclosedbyan appraisal,
terbechargedwithdeprecia-
sof theappraisedvalue.
preciation,ifmadeinaccordance
ion,wouldpresumablytaketheform
section"Entriesbasedon replacement
mmittee'sreasonforthisopinion
entfromtheargumentsformerlypre-
ohaveadvocatedbasingdepreciationon
easonofferedbytheCommitteein
tosubsequentdepreciationcanbesum-
panymustbeconsistent;ifthe balance
ntvalueofthepropertyis $150,000.00,a
0.00shouldnotbeusedfor purposesof
onchargesshowninitsprofitandloss
ifonevaluationappearsin thebalance
ntwithitshouldappearin theincome
supportof thispointofview,and
trendsofmajor importanceinthe
ounting:atendencytogiveincreasing
mentofearnings,andanemphasisupon
ofconsistency,itcanbecontended
sthecostbasis ofaccountingforfixed
goodbalancesheetshowing,itshouldnot
econcomitantpenaltyintheformof addi-
esagainstearnings.Itmayalsobesaid
esdownitsfixedassets doesnothesitate
reciationchargesonthelower values;
uirethatanaccountantwhosanctionsthis
onacomparableprocedureiffixedassets
mpossibletoforecasttheextentto
onouncementwillaltercurrentpractice.
withnoauthoritytoimposei tsfindings
strely uponthen:generalacceptability.
tantsmaybeimpressedwiththesound-
sistency;itis alsopossiblethattheymay
opertoshowappraisedvaluesinthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 304/419
FFIXEDASSETS295
heet,for reasonsthathaveseemed
mayfail toseeanyglaringinconsistency
nwhich,althoughthefixedassetsare
,thereisan unrealizedprofitreserve
appreciation,andanincomestatement
sedoncost.
f priceswasupward,andappraisals
sesinfixedassetvaluations;appraisals
eandrecordedtoestablishincreased
cidenttotheissuanceofsecurities.
chbeganin1929,the downward
developedanotherpointof view,andnot
epolicyofwritingdownfixedassets to
ces,nodoubt,thefixedassets were
oreconservativepictureofthefinancial
bythebalancesheet.In manyother
pearsthatthewrite-offtoSurpluswas
evingfuture operationsoflargedepreci-
tmorefavorableoperatingresultscould
tement.,
theproprietyofmakinga large
eeffectis torelievefutureperiodsofa
chargeswhichwouldotherwisebe
enses.Manyaccountants,however,
missibleif thewrite-downwasmadeby
notsanctioncreatingacapitalsur-
rsturnina partoftheirstock,orby
o-parstockbasis,orotherwise,andthen
esoffixedassetsbychargesagainstsuch
therwords,relievingfutureperiods
epreciationbywritingdownfixedassets
eductionin valueischargedagainsta
yoperatingprofitsofpriorperiods,but
hargeismadeto asurpluscreatedin
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 305/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 306/419
ments.
tockinvestmentsbecarried?The
pendsuponwhetherthe stockisheldby:
or.
mpany.
icabletotheseclassesofownersare
rofthis chapter.
rs.
tocksownedaremerchandise;under
sarepermittedtovalue securitiesowned
,namely:atcost,atmarket,oratthe
ta consistentbasismustbefollowed
missiontochangethe basisisreceived
helowerofcostormarketis, ofcourse,
aluation,forthereasonsstatedin the
aluationofmerchandise.
tors.
purposesofcomputingincome
wnedatcost.Adecreasein market
asaloss untilthesecuritiesaresold,nor
rprofitrepresentedbyan increasein
bya sale.
etvalueis notadeductiblelossfor
ersomecircumstances,butnotalways,
eneralaccountingpurposes.Slight
alueofpermanentinvestmentscanusu-
tmayrecoverbeforethesecuritiesare
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 307/419
CKS[Chap.32
nthe marketvalueoflong-term
enupinthe accountsaslosses.And
valueof temporaryinvestmentsshould
aslosses.
sultingfromadeclinein marketvalue
wayastopreservearecord ofthecost
curitiesaresoldata laterdate,itwillbe
tinorder tocomputethedifference
rice,whichisthe taxableprofitor
nyownssecuritieswhichcost$100,-
marketvalueofonly $90,000.00,the
oss invalueshouldbe:
10,000.00
tiestoMarket10,000.00
rketLoss onSecuritiesaccount
Loss(orpossiblySurplus)whenthe
etandrelatedreserveaccountswill
0,000.00
ritiestoMarket$10,000.00
ownontheasset sideofthebalance
Market10,000.00$90,000.00
tValue$90,000.00
ofstock.
or'sor speculator'staxableincome
lingsin stocksisthedifferencebetween
costof thestock.Ifstocksarebought
cash,thereisno questionastothecost
edifficultycomesindeterminingthe
xchangeforpropertyotherthancash,
stockpartedwithin exchangefor
forotherproperty,thepartiesto the
ueonthepropertyor onthestock.For
onthe propertyifthecontractstates
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 308/419
NSTOCKS899
ealestatefor $20,000.00,payableinso
uchstock.Ora valueisplacedonthe
thatB agreestobuyA'sstockfor
withsuchand suchrealestate.
ertyautomaticallyplacesavalue
a.In eitheroftheabovecases:
lossasfollows:
000.00
r lossasfollows:
$20,000.00
newlyacquiredassetonhisbooksat a
orpurposesofcomputinganyprofitor
osal.
statedinthe contractistentative
eptedbytheBureauofInternalRevenue
enta fairmarketvalueforeitherthe
amarketvalueforeitherthe stockor
hedat,say,$25,000.00,A'sandB'staxes
hanged.It willthenbedesirablefor
bookvalueofhisnewlyacquiredasset
00.00,becausetaxesonanysubsequent
ecomputedonthebasisof acostof
deatastatedprice,as inthefore-
sactionshouldberecordedonthe basis
thestockorthefair marketvalueofthe
of theexchange.
shafairmarketvaluefor either
A andBmaybepermittedtor eportno
eloss;inthat case,Ashouldtakethe
t theamountwhichthestockhadcost
stockontohisbooksatthe price
realestate.
corporationforsharesofits stock,
hestockshouldplaceit onhisbooksat
thisisnot determinable,atthefair
tygivenforit. Ifneithervalueis
mentmaysetthevalueatthepar ofthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 309/419
CKS[Chap.32
axpayertheburdenof proofthatparis
fstockat$50.00per shareandten
and latersellstensharesat $60.00per
t oraloss?For taxpurposes(andthe
eneralaccountingpurposesalso)the
etherthesharessoldcanbe identified;if
thefirstsharespurchasedwill beassumed
herefore,ifthetaxpayerdesiresto
ewill takecaretotransfertothe pur-
hesecondpurchase(whichcost$75.00
ossofthedifferencebetween$750.00
wopurchases,the20 shareshadbeen
tesothat thesharessoldcouldnotbe
ldwouldbe assumedtobethefirst ones
thusbeestablishedat$50.00per share,
sharewouldhavetobe reported.
nright isaprivilegeextendedbya
derstosubscribeforadditionalstock
ethestockrightattractive,thestated
belowthemarketprice.
grantingoftheright statesthedate
swillbe closedtodeterminethestock-
thewarrantswill beissued,andalsothe
onswillbepayable.Betweenthedate
thedateofthe issuingofthewarrants,
reinseparable,andthestockisdealtin
riodnospecialaccountingproblems
rightsarecarriedatthe costofthestock,
ghts-on,"theprofitonthesale ofthe
essoftheamountreceivedoverthecost
ed,thestockis dealtin"ex-rights";
oldseparately.Iftherights aresold,
arise:
son thesaleofthe rights?
y,shouldbe madeinthevaluation
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 310/419
NSTOCKS301
ofitorloss onthesaleof arightby
ostofthestockbetweenthe stockand
emarketvalueof therightandthe mar-
ights"atthe timeoftheissuanceof
methata shareofstockcost$100.00;
heacquisitionofthis shareofstock,the
ubscribeto anadditionalshare.(The
terialtotheillustration.)At thetime
therighthada marketvalueof$30.00
adamarketvalueof $120.00.The
etvalueof$30.00.Whatwasthe profit?
tockbetweenstockandright:
0.0080%
020
00
boveapportionment:
ostofstock)20.00
00
ountshouldbeadjustedtoreduce
f stockfrom$100.00,theoriginalcost,
ionof thecostregarded,underthefore-
pplicabletothestock.
vedforthe rightmayberegardedas
his basis,noapportionmentofcost
eright)is necessary,andnoadjustment
stockisrequired.
s.
or acontrollingportion,ofthe
y,therelationofparentandsubsidiary
roblemsarisewithrespectto thevalua-
mpanyshouldcarrythe investmentin
epropertreatmentto beaccorded
ts shareoftheprofitsof thesubsidiary.
nsidertheseproblemsfromthe
ompany'sbooksandstatements;con-
er(in Chapters47to49)to theprepara-
mentsoftheparentcompanyandthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 311/419
CKS[Chap.32
nyP(parentcompany)organized
ndacquireditsentireauthorizedstock
00.00.Itsbalancesheetimmediately
showamongtheassets:
sidiaryCompanyS—100%$100,000.00
anddividends.
deby theparentcompanywith
nddividendsofthe subsidiary?And
aswellas thestockinvestment,be
ompany'sstatements?
cedures,basedontwoverydifferent
lled,forpurposesofidentification:
t;and
onomicconcept.
the firstyearofits operation,the
$30,000.00,thusincreasingitsnet
00investedto$130,000.00.
t,if thesubsidiary'snetassets
,000.00to$130,000.00,thevalueof
estment,basedonunderlyingnetassets,
mount.Italsoseemsobviousthat,
edbythe parentcompany,thesub-
nductedforthebenefitofthe parent
0.00profitmadebythesubsidiaryis
ntcompany.Inotherwords,itappears
sjustifiedin makingthefollowingentry:
sidiaryCompanyS30,000.00
fSubsidiaryS30,000.00
bythe parentcompanyafterthis
entwillbe showninthebalancesheet
00,andthe$30,000.00willbe shownas
s statement.
,letusassumethat thesubsidiary
00.Sincetheparentcompanyhas
profitmadebythesubsidiary,it can-
he dividendreceivedfromthesubsidi-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 312/419
STOCKS303
shouldrecognizethatthereceiptofthe
apartofits subsidiaryinvestmentinto
sfactas follows:
sidiaryCompanyS.5,000.00
stration,letusassumethat,during
diarysuffersaloss of$15,000.00but
entcompanyadividendof$5,000.00
oryear.
owrecordthelossand theresulting
oftheinvestmentbythe followingentry:
bsidiaryS15,000.00
sidiaryCompanyS.15,000.00
ptofthedividendasfollows:
sidiaryCompanyS.5,000.00
zedasfollows:
000.00
00.00
ent$125,000.00
00
ent$105,000.00
year,theparentcompanywillhave
5,000.00andwillbecarryingthe invest-
chisequaltothe netassetsofthesub-
sted+$15,000.00profits-$10,000.00
galconcept.
pointaparent anditssubsidiary
tities,andtheprofitsearnedby thesub-
eparentcompanyuntiltheyarerealized
oughthereceiptofdividends.If this
eproperbasis forparentandsubsidiary
ntwillalwaysbecarriedatcostandthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 313/419
CKS[Chap.32
upasincomeonlythe dividendsreceived.
illustration:
,theparentcompany'sprofitand
sincomethe$5,000.00dividend
0,000.00netprofitearnedbythe
esheetwillshowthe investment
0insteadofat$125,000.00,the
netassets.
ear,theparentcompany'sprofitand
e$5,000.00dividendreceivedas
sidiarylost$15,000.00;andits
wthe investmentatitscostof
onciled?
scussedappeartopresentan irrecon-
egalconsiderationsofseparatecor-
mitthatprofits earnedbyasubsidiary
ilableforthepaymentof dividendsby
heyhavebeenrealizedby theparent
eiptofdividendsfromthesubsidiary.
estheinvestmentatcost,and takes
gardlessofthe resultsofthesubsidiary's
mpany'sstatementsmayreflectallsorts
ossstatementa$5,000.00income
en thesubsidiarymade$30,-
nefitoftheparentcompany;
ossstatementa$5,000.00income
en thesubsidiarylost$15,000.00;
eetthecostof theinvestmentregard-
easesinunderlyingnet assetvalues.
thatthe twobasesofaccounting
ronereason,onecannotsafelyunder-
mentsofa parentcompanyunlesshe
untinghasbeenused.Andforanother
whereacompanyhasjumpedfromone
dingyears,inorder tomakethebest
ryearningsasparentcompanyincome
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 314/419
NSTOCKS305
gsexceededthedividends,andshowing
ear whentheyexceededthesubsidiary's
sthatthemethodof accounting
abettername)wehavecalledthe
rulyreflectstheparentcompany'sincome
fits investments.Itsonlyfaultseems
pany'ssurplusiscreditedwithsubsidiary
otheparentcompanyin theformof
theparentcompany'ssurpluscontains
bleforthepaymentofparentcompany
nddesirablecompromisebetweenthe
ctedbyentriessimilarto thefollowing:
sidiaryCompanyS30,000
osedtoRestrictedSurplus)30,000
ubsidiary'sprofitsofthefirst
vestmentaccount,butbycredit
ounttoshowthat theseprofits
ymentof parentcompany
sidiaryCompanyS5,000
ectionofa dividend.)
estrictedsurplusto freesurplus
y'searningsnow realizedby
ghthecollectionofadividend,
leforthepaymentofdividends
n theparentcompany'sbalance
ustratedbelow.It isassumedthat
esurplusincludes$50,000.00realizedby
ningsnotreceivedindivi-
reseemstohavethefollowingmerits:
anytotakeup trueeconomicearnings
ustmentofthecarryingvalueofthe
tchangesintheunderlyingnetassets;
of thesurplusintotwoelements,it
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 315/419
CKS[Chap.32
gallyavailableforparentcompany
pterare basedonconditionsof
ershipbytheparentcompany.Ifthe
%but stillsufficienttoeffectacontrol
eproceduresdiscussedinthischapter
edonlybythe factthattheamounts
asis ofthepercentageofparentcompany
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 316/419
bonds,carryingsomanydifferent
eraldefinitioncanbestatedonlyin the
promisetopaytheprincipalofand
sfromanotein thatitis moreformal,
oratefinancing,notesareusuallygiven
ondsforlong-timeloans;this isamatter
necessarycharacteristicofanoteora
ompletelistofthe varioustypesof
tlineincludessomeofthe mostcommon
fobligor:
ergovernmentalsubdivisions.
nies,streetrailways,railroads,etc.
gandtradingconcerns.
hotels,officebuildings,etc.
pandmethodofcollectinginterest:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 317/419
DS[Ch«p.33
titletoproperty,usuallymadeby
ectto theconditionthat,upondue
tle tothepropertyisto revestinthe
rtgagewasconsideredasanactual
yanceoftitle;if thedebtwasnotpaid,
propertythenvestedinthemortgagee
rtgageis thatitis primarilyasecur-
ortgagedeeddoespurporttoconvey
hepledgedproperty,actuallyitserves
epropertytosecurepaymentofthe debt.
theithernotesor bonds.Ifthe
sonwhois willingtoloantheentire
ndmortgagemaybeused;the note
bligation,andthemortgageservesasthe
wthemoneyfromanumberofpersons,
rust deedareused.Thebondissue
tions,allof equalrankandallequally
However,sincethereareanumber
dersarenot knownwhenthebondissue
etheywill changewitheachtransfer
nnotnamethe lenderspersonallyas
gedproperty.Thereforeatrust deed,
ed,is used.Corporations,whenborrow-
dissues,generallyuse thetrustdeed.
rconveysthepropertyto athirdperson,
ompany,astrustee.Uponfinalpay-
tee executesanddeliversareleasedeed,
perty,createdby thetrustdeed,is
defaultinpaymentofthebonds,the
oreclosureproceedingsforthebenefitof
ssuanceofbondssecuredbya trust
urposes,amortgagetransactionandisso
irst,second,third,or evenmore
nsarenotmet andforeclosureensues,
ertymustgofirst tothesatisfactionofthe
rs,anyresiduetothesatisfactionofthe
lders,andsoon.Bondssecuredbyprior
bonds;theothersare calledjuniorbonds.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 318/419
NBONDS309
iscalledafirst mortgagebonddoes
thasa lienpriortoall others.To
eecompanies,A,B,andC,eachhave
operty.Aconsolidationiseffectedby
sarecombined,andanewissueof bonds
mortgageonall oftheproperty.This
ConsolidatedBonds,butit isreally
e.Onthe otherhand,assumethat
rtgagebondshavebeenissued,and that
eenpaid; thethirdmortgagebonds
hepledgedproperty.
milarto collateralnotesinthatthey
lateral.Toillustratetheuse ofthese
orationholdsstocksandbondsof several
propertyoftheholdingcompanyand
ortgagedtothe pointwherejuniorissues
eforetheholdingcompanyissuesitsown
ksandbondsof thesubsidiariesinthe
ateral.
anteetopaytheprincipalandinter-
oughitobligatesitselftodo so.If
st bemadebyathird party.Some-
uaranteestheprincipalandinter-
sidiaries,andsometimesacompany
thercompanyguaranteesthebondsof
nture,ismerelyan unsecuredbond.
dnote,inthat itrestsonthe general
agenerallienonall oftheunpledged
yormaynotbe asafeinvestment,
cialconditionoftheissuingcompany.
ncomebondis thatthepayment
onthe earningofincome.Ifthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 319/419
DS[Chap.33
eisnotsufficienttopaytheinterest,there
erest.Thebondmaybecumulative
ulative,anyinterestnotpaidinone
stfutureprofits;if non-cumulative,any
ostforever.Theprincipalmayor may
edprofit-sharingbondsbecause,in
dera definiterateofincomeregardless
title himtoparticipatewiththestock-
holdersmayparticipateprorata,
happlyto participatingpreferredstock,
ipationmaybelimited.
sholderthe righttoexchangethe
ty,usuallycommonstock,oftheissuing
atesthetermsonwhichthetransfer
orpar;orpar forthebond,andbook
andaccruedinterestforthebond,and
sforthestock;or parforthebond,
estock,andinterestanddividends
erarrangement.Suchbondsgive
meanda securedprincipalduring
ftheissuingcompany,witharight to
eoperationsofthecompanyare
nds.
threegeneraltypes,on thebasis
and interest.
thebondisregisteredon the
anyorits fiscalagent,and
drawntotheorderofthe
hastheadvantageofsafe-
stlossor theft,becausea
be accomplishedonlyby
vantages,however:(1)a
adeonly byassignmentand
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 320/419
NBONDS311
very;and(2) thecheck
sburdensome.
only.
stoprincipalonly,andcoupons
st,theowneris safeguarded
he debtorcompanyis
suing interestchecks.
eby delivery,andwithout
tcouponsareclippedand
posit orcollection.
cedingchapterwithrespectto
ebooksof investorsanddealers,
ofsecuritiesacquiredforproperty,the
iredforsecurities,profitsonsales,
itsonsaleswhenpurchasesweremadeat
veprovisionsfordecreasesinmarket
nvestmentsinbonds.
ofpremium.
ear6%bondfor$1,035.85,holdit
t par,mynetearningis:
$240.00
rity1,000.0035.85
mustreportas incomeeachyear
willreportthepremiumlost asadeduc-
bondmatures.Althoughthisisthe
asthebestaccountingprocedure.If
remium,itsvaluetendsto decreaseto
ches;therefore,forbalancesheetpur-
amortize(write off)thepremiumover
usgraduallytoreducethe carrying
m theincomestatementstandpoint,
thepremiumlossoverthelife ofthebond
erest income,insteadoftakingthe
henthebondmatures.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 321/419
DS[Chap.33
rtizedinequalperiodical amounts;
eforegoingillustrationandassuming
semiannualcoupons,thesemiannual
uldbe$35.85-f-8,or $4.48(actually
$4.49)andtheentryateach semiannual
miumamortized)4.48
riesisposted,thebond accountwill
ne|30([Amortization|j4J48
d,thebalanceinthebond investment
ucedto par.
nvestment,andthe periodical
hebond,areshownbelowonthe tax
tionbasisofaccounting:
sis
come
5
37$25.52
925.52
125.52
325.52
525.52
725.52
925.52
25.51
4.15
hthperiodistheamountof thepremiumminusthe
ofdiscount.
year,6%bondfor$965.63,holdit
atpar,mytotalearningis:
$240.00
ity$1,000.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 322/419
r thefirstthreeyearsI willreport
estcollected;in myreturnforthefourth
etheinterestplus thediscountrealized.
theinvestmentandtheincome
tionofthe factthatabondpurchased
easeinvalueasits maturityapproaches.
s,therefore,itappearsproperto amortize
ofthebond,thusgraduallyincreasing
bond.Andfromtheincomestatement
rtoregarda portionofthediscount
dinequalsemiannualinstallmentsof
allyseveninstallmentsof$4.30andone
collectionoftheinterestand the
ntateachsemiannualinterestdate
tamortized)4.30
miannualentriesisposted,thebond
ws:
d,thebalanceintheinvestment
easedtopar.
nvestment,andthe periodical
hebond,areshownbelowonthe tax
tionbasisofaccounting:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 323/419
DS[Chap.33
—effectiveratemethod.
sthat statedbythebond;the
yearnedon theinvestment.
apremium,theeffectiverateis less
woreasons:(1) theinvestmentismore
meisthecouponminusa portionofthe
foregoingillustrationofa$1,000.00,
asedataprice of$1,035.85,thenominal
verateisonly5%—or2J %each
installmentmethodofamortizing
ts,asdescribedon theprecedingpages,
mostpurposes.However,thetheo-
mputingtheamortizationrequiresthe
trate.The semiannualinterestand
ondboughtat apremiumareas
tofthe coupon.
hanamountcomputedbymultiplyingthe
tmentatthe beginningoftheinterest
miannualinterestrate.
ththe remainderofthecoupon.
dtothebondpurchasedfor $1,035.85,
firstsix monthsis:
fsemiannualcoupon$30.00
}^%of$1,035.8525.90
count—premiumamortized$4.10
hebondinvestmentaccountwill
75,asindicatedbelow:
une|30jAmortization|| 4J10
secondsixmonthsi s:
}£%ofnewbalanceof$1,031.7525.79
count—premiumamortized$4.21
mortizationisregardedastheo-
amountcreditedto incomedecreases
natelywiththedecreasein thecarrying
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 324/419
NBONDS315
ionentries,andthereducingbook
uringthefour-yearlifeof thebond,
—effectiveratemethod.
adiscount,theeffectiverateis
ate,fortwo reasons:(1)theinvestment
eincomeis thecouponplusaportion
0.00four-year6%bondboughtat
asboughton a7%basis—thatis,toyield
ndamortizationentriesonthe
ndbought atadiscount,are:
hanamountcomputedbymultiplyingthe
tmentatthebeginningof eachsemiannual
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 325/419
DS[Chap.33
ionentries,andtheincreasingbook
ringthefour-yearlifeof thebond,are
Balance
9.43
00
ondto netastatedratedepends
weenthenominalrateand theeffective
bond.Thus:
yieldmorethanthe nominalrate:
of theeffectiverateover
erthe discountfor
d,
ebond,themoreinterest
ythemoreaggregate
yieldlessthanthe nominalrate:
of thenominaloverthe
thepremiumforeach
ebond,themoreinterest
ythemoreaggregate
ondto yieldastatedrateis shown
otal premiumordiscountdependsupon
ablesusuallycontainapageshowing
nsix months,apageforbondsmaturing
smaturingina yearandhalf,andsoon.
ependsuponthe differencebetween
rates,thebondtablescontaincolumns
eachcolumncontainingvaluesatdiffer-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 326/419
nthefirst column.Thefollowingis
sucha bondtable.
ually
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 327/419 P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 328/419
uished.
esarewhollydifferentinnature,
nationtoconfusethem.
etasidefor particularpurposesand
shandsecuritiesheldbythe company
ounts,therefore,always* havedebit
ntassets,andalwaysappearontheasset
d,alwayshavecreditbalances,and
assets.Justwhattheydorepresent
r37. Atpresentitis desiredmerely
mely,fundaccountsalwaysrepresent
rdo.
no well-definedmeaning,anditsuse
ometimesappliedto afundand
ndforthis reasonitsuseis likelytobe
gchapterswithrespecttothevalua-
ld asgeneralinvestmentsapplies
specialfunds.All suchsecurities
xceptthat(1) decreasesinmarket
ationofreserves,and(2) premiums
pecialfunds maybeamortized.
ned,consistsofassetsset asideand
dinterestforthepaymentofaliability
eralindustrialaccountingisconcerned;terminologyis
nstitutionalaccounting.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 329/419
re,afuridcreatedfortheretirement
sinkingfund,becausepreferredstockis
ndfromwhichperiodicalexpendi-
rchaseandcancellationofbondsisnot
eliabilityis paidininstallmentsbefore
at maturity.Suchafundwouldmore
ptionfund.
stockretirementfund,abond
esinkingfundis interestingasamatter
y.However,usagemodifiesmeanings,
astsanctioningtheextensionoftheterm
ndsforthe retirementofstockand
tiesin installmentsbeforematurity.
s.
calcontributionstoasinking
nseveralbases,amongwhicharethe
tcomputedbydividingthetotal
erof yearsofthelifeof the
ndof $200,000.00istobe
nnualaddition tothefund
contributionsalonewill
entireindebtedness,interest
dassetscangointo thegeneral
tcomputedona compound-
e,contributionsof$15,900.92
ftenyearswillcreatea fund
of thetenthyearifcompound
earnedonallfundassets.
ntsperunit ofoutput.This
n thebondsaresecuredbya
tssuchasminesor timber
toincreasethefund asthe
shed.
fits.This methodhasbeenused
withso-calledpreferred-stock-
eingthatthe profitsareused
kinsteadof fordividendson
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 330/419
seemstobeatendencyto
thepaymentofliabilities.
fundconsist ofcontributionsto
ecurities,thecollectionofincome,the
dtheeventualretirementofthebonded
forthesetransactionsareconsidered
.xx
ABBondsxx,xxx.xx
xx
hecostofthebonds
hethertheyarepur-
iumoradiscount.
maybeamortized
xx
spurchasedat par.)
sxx.xx
xx
spurchasedat adis-
sxx.xx
xx
spurchasedat apre-
.xx
from fundcash.)
.xx
from generalcash.)
aturity:
x.xx
ritiesxx.xx
x,xxx.xx
ataloss.)
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 331/419
x.xx
x,xxx.xx
uritiesxx.xx
ataprofit.)
sufficienttopay
mentismadeinto
x.xx
onds.)
shremainsinthefund
eralcash.)
ndSinkingFundExpenseaccounts
dofeachperiodtoProfit andLoss.The
torlosson thefinalsaleofsinking
osedtoSurplus asanextraneous
sinkingfund.
ndtrusteeuses thecashdeposits
y bondsintendedtobepaidoff; what
ondsthusacquiredfromtimetotime?
tus assumethatacompanyborrows
rbondissue,agreeingtoestablisha
entof thebonds:
atedtopaythetrustee$20,000.00
ot dependentuponearning
fund assetstomakeupthe
hetrusteecanuseeachdeposit
.
niscomputedontheassumption
obe earnedonthesinking
eperiodicalcontributions
llproduceafundat the
icienttoretire itatthat date,
periodicalcontributionsin
es.
ownbonds,hemusttreatthemas
r companieswhichhemightbuyfor
"holdthemalive"in thefund.They
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 332/419
nassetandasa liability;theywillbe
don theassetsideofthe balancesheet
iabilityontheothersideof thebalance
ontinuetopaytheintereston thebonds
the amountoftheinterestpayments
dedinthetotalbond interestshownas
ndlossstatement,andwillalsobe
dincomeshownin thatstatement.
paymentofdebt.
trusteeforthepaymentofdebt
h,doesnot constitutepaymentofthe
talfunds ondepositwiththetrustee
et sideofthebalancesheet,andthe
staswellas fortheprincipalshould
deofthebalancesheet.Theliability
nnotbeeliminatedfromthe balance
appliedthefundstothe paymentof
hodhaslongbeenusedfor theretire-
nts,andis becomingapopularmethod
Theprovisionsofthe stockissuemay
untof stockshallberetiredannually,
thisrequirementcouldbeenforced
rofitswereinadequateandcreditors'
orefrequentlytheamountofstock
adedependentupontheprofitsofthe
fixedpercentageoftheprofits,orit
ding scaleofrates.
ontingentliabilitiesareencountered
acontractortoguaranteetheper-
dancewithspecifications,andafund
eswhichmayresultfroman adverse
ntinfringementsuit,areillustrations
contingentliabilities.
liabilitieswhichdo notyetexist
consequenceoftheprovisionsofexisting
e,leasesfrequentlycontainclauses
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 333/419
epositofcashtobe appliedinpayment
(oftenthelast)yearsofthe lease.Ceme-
nderan agreementthatacertain
hallbedepositedwithatrustee asafund
re.
facorporationadoptthepolicy
establishingafundfor theacquisition
und,machineryfund,or similar
pearanceontheasset sideofthebalance
.
yconsistofcashandreadilymarket-
yshouldnotappearin thebalancesheet
aption.Ordinarilytheyshouldappear
ptiondevotedtothemalone orunder
suchasOtherAssets.
eatedforuse forsomecurrentpurpose
ndinterest;such afundcanproperly
rentassetsin thebalancesheet.
rs.
ngparagraphs,somefundsare
onofthecorporatemanagement;others
ewiththetermsofmortgageindentures
respectto anobligatoryfundand
han itshouldbeto conformwiththe
tion,thisfactshouldbe disclosedbythe
sureismadeifa portionofthecash
orfund purposes,thus:
0
tioninarrears5,000.00
$20,000.00
ustee$13,000.00
mcurrentcash5,000.00
0.00
ndedto thebalancesheetstating
tthefollowingwords:"Asinkingfund
etrusteeincashprior toDecember31,
the balancesheet),hadnotbeenmadeat
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 334/419
ENT
rliabilities.
ccountingforliabilitiesaremuch
ichconcernassets.Theproblem
ultinaccountingforassets,doesnot
es,exceptin casesofcontingentand
erminableamount.
obeconsideredin connectionwith
bilitiesinthe balancesheet.
ilitiesinthebalancesheet.
dasfollows:
s.
nion amongaccountantsastoa
rentiatingbetweencurrentandfixed
ntshaveheldthatonlyliabilities
ysfromthebalancesheetdateshould
wever,itgenerallyis heldthatayear
urrentperiod.
assifiedascurrentandnon-current
sheddividingline,becauseliabilities
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 335/419
INGENTLIABILITIES[Chap.53
otheroperatingexpensesusuallyshould
ilities,andliabilities onbondsand
edistantfutureare fixedliabilities.
editarrangements,liabilitiesarising
edonothaveto bepaidwithinevena
etdate.It maynotbeproperto include
urrentLiabilitiescaption;to take
ions,acaption"DeferredLiabilities"
arely)appearsinthebalancesheet
xedliabilities.
esfromthebalancesheet.
soonafterthecloseofthe period
rrentliabilitiesexistingatthebalance
bilitiesfrequentlyomittedare:
oodspurchasedbeforethecloseofthe
missionmayresultfromtwo
chases.Inmostconcerns
orecordofthe liability
dsare received.But
n gettingtherecord
hasesofgoodsreceived
ingperiodmaynot
ningof thefollowing
yseriouserror ifthe
ventory,because
edontheassetside ofthe
eliabilityisnot included
lancesheet.Asa
misstated.Moreover,
thepurchasesresults
profits;and this
esultsinanoverstate-
te,assumethat
sehasbeenincludedin
recordhasbeenmade
bility.The profits
ed$10,000.00andthere
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 336/419
CONTINGENTLIABILITIES387
heetasindicatedbelow:
plus
0$20,000.003Hto1$100,000.00
002Hto190,000.00
sare notincludedinthe
surplusand profits
ebalancesheetdoes
andiseowned,norall
hese omissionsmay
etweenthecurrent
lities.Toil lustrate,
ditions:
plus
00$20,000.003to 1190,000.00
002>$to190,000.00
ngmerchandisepurchases
d,insteadofr ecording
titletothe merchandise
soon astitletothe
aser;and,accordingto
sales,titlemaypassto
oodshavebeenshipped.
hat,ifthe booksare
heetto reflectall
asesshouldbemade
gtothelaw,whether
reshippedorwhen
sforservicesrenderedtothebusiness
ate butnotbilleduntil afterthat
robablysufficetoshowthe
enderedserviceduring
edinsomelegal difficulties;
tilMarch1941, andthe
dwhenthebalancesheet
1940.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 337/419
INGENTLIABILITIES[Chap.35
chexpensesaswages,interest,and
ookedbecausetheaccountant
ethasnothad sufficienttraining
nceoftakingupall such
edin merchandise,arisingfromthe
handisecouponbooks,trading
customtomakenoentry
evidencesofliabilitiesbecause
ey willeverbepresentedfor
ntingrequiresthatthe'liability
^!amountbaseduponthe
tothepercentageofsuch
edemption.
bilitiesinthebalancesheet.
tliabilitieswill bedetailedinthe
b-captionswhichwillbeusedfor classify-
tgroup,willdependsomewhatupon
alancesheetis tobeused.Thepresent
otherprospectivecreditorsareentitled
thanneedbegivengeneral publicity
eet.
ntpracticearesatisfiedifa balance
ainsthefollowingclassificationofcurrent
e,unlessotherwiseindicated,should
abletotradecreditorsformer-
purchased.)
reisnouniformityofpractice
whetherornotany ofthenotes
ers,stockholders,andemployees.
stockholders,andemployees.
amountspayabletotradecreditors
materialpurchasesbeshownseparately
nthe analysisofabalancesheet
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 338/419
ONTINGENTLIABILITIES329
ment,itissignificanttonote theratio
rtheperiod(shownin theprofitandloss
ndaccountspayableliabilityforsuch
ndofthe period(shownbythebalance
meindicationasto whetherliabilities
dwithinthe creditperiodprevailing
companyispurchasingmerchandise
ymentwithinthirtydays.Itsprofit
alancesheetsshowthefollowingfacts:
edDecember31" '$100,000.00$100,000.00
payableatendofyear 10,000.0015,000.00
aidatend ofyear10%15%
ntheassumptionofuniformbusiness
dbe8}.^%ofthetotal purchasesfor
ssmayaccountforthefactthatmore
eyear'spurchaseswasunpaidat theend
ldthe ratiohaveincreasedfrom10%
mthepurchaseofmerchandise
nedinthe balancesheetwithmer-
owillindicatea moreunfavorable
s.
ndicatewhichcurrentliabilitiesare
ecured.Thisinformationmaybegiven
balancesheet,thus:
ypledgeofinventoriesvaluedat
givenon theassetside,thus:
espayableof
00,000.00
ringcurrently.
ficationariseswhenlong-time
aturityandareduewithin,say, ayear.
mongthecurrentliabilitiesin the
precedingbalancesheets,theywere
abilities?Theproximityofthe
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 339/419
INGENTLIABILITIES[Chap.35
oledeterminingfactor.Ifbondsmatur-
e toberetiredwith theproceedsofa
ofthebondsamongthecurrentliabilities
ouldconveythe impressionthatthe
ofcurrentassets,andwouldso distort
nd currentliabilitiesastogive an
heconcern'sworkingcapital.It
factsareshownif thebondsareleft
witha statementastothematurity.
different,however,whenaninstall-
eisshortlyto becomedue.Thenatural
allmentwillbe. paidoutofworking
erto showtheconditionasfollows:
r31,1940
0.00
tallmentdueApril1,194110,000.00
—PayableinEqualAnnualInstall-
94290,000.00
methodisillustratedbelow:
usiveofCurrentInstallmentof
0.00
—MaturinginTenEqualAnnual
pril1,1941100,000.00
enestablishedforthepaymentof
allmentwillpresumablybepaid from
e currentassets;thereforethecurrent
ownamongthecurrentliabilities.
ssible debt.Itisimportantto
encontingentliabilitiesandcontingent
mayclarifythisdistinction:
mayrequirethe paymentof
gement;inthisinstancethere is
nda contingentloss.
cumulativepreferredstock;in
ntingentliability,butnocontingent
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 340/419
CONTINGENTLIABILITIES331
accidentsmaydestroyproperty;
ontingentloss,butnocontingent
beshownbybalancesheetfootnotes,
alancesheetundera Contingent
htheamountsshown"short"—that
eycolumnsincludedin thebalance
encyseemslikelytobecomear eality,
formsofcontingentliabilitiesare:
properprocedureforrecording
eceivablewasdiscussedin
elihoodthatdiscounted
andthatcollectionscannot
ers,provisionforthel oss
serveforBadDebtsorin a
eprocedureforshowingassigned
discussedinChapter24.
dbemadein theReserve
r.Apersonmaybecomeanaccom-
ssorynoteeitheras amaker
tingentliabilitymaybe
ndedtothebalancesheet;
nshortasfollows:
yable$1,000.00
contingentliabilitybutdoes
ongtheliabilities.
oftensoldwithguaranteesregard-
e.Experiencewillshowthe
nggoodonsuchguarantees,
etupbya chargeagainst
pendingandifthereis aproba-
st,a reserveshouldbeset
cy.Ifit isnotdesiredto
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 341/419
INGENTLIABILITIES[Chap.35
eofthe reserve,andthus
tthatthe management
e reservemaybecalleda
s.
es.Ifthereis apossibilitythat
heamountshownby thetax
, theadditionalcontingent
reserve.
narrears.Noentryshouldbe
ndsuntiltheyaredeclared.
earrearsof dividendsinthe
ssedinChapter22.
sofother companies.Onecompany
st,orboththe principaland
f anothercompany,whichmay
y.Ifthereisa probability
be madeundertheguarantee,
mpensationarisingoutofthe
ctibleinfull,a reservemaybe
oss.
ts.Ifgoodsareorderedforfuture
trepresentsacontingent
purchasepriceorforsuchan
theeventofcancellation.
ommitmentsmaybeignored,
ofloss,or,atmost,they
tnote.In afallingmarket,
odofa lossequaltothe
ommitmentpriceandthemarket
ry.Althoughthetotalprice
putonthe books,itwould
abletosetup areserveforany
llingmarketprices.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 342/419
tagesofbonds.
storaiseadditionalfunds,the
erthe fundsshouldbeobtainedbythe
es,bonds,orstock.Short-timepaper
sare requiredforcurrentoperations;
orother permanentinvestmentsshould
oflong-timesecurities.
ssueovera stockissueisthatthe
andthestockholdersthereforedonot
mentwiththem.Anotheradvantage
lybeobtainedata lowermoneycost.
thecontributorsofnew capitalwill
stockholdersinallearnings;if preferred
participating,inwhichcasethenewstock-
withtheold;orit maybenon-participat-
suallybe foundnecessarytogivethe
ratehigherthanthe rateatwhichbonds
bondsareasecuredliabilitywith a
ausethebondinterestispayableuncon-
eddividendsaredependentupon
dissueliein thefactthattheprincipal
dtheinterestis afixedcharge.If
nterestisnotpaid whendue,fore-
dthelosson liquidationmayleavea
ockholders.
t.
eflectallofthe importantfactswith
herfixedliabilities.Itis notsufficient
00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 343/419
ap.36
bondsshouldbe shown,andthe
shouldbe stated.Forinstance,thus:
e,SinkingFund,6%Bonds,Due
000.00
y,the balancesheetshouldcontaina
ementofthefactstoenablethereader
sexactly,thus:
e,SinkingFund,6%Bonds,
0.00Annually,fromDecember
e,andthe RemainderonDecem-
s.
mountofbondswill beauthorized
ately.Toillustrate,assumethat
rporationis ampleinvaluetosecure
first mortgagebonds.Only$300,000.00
but theremaybelaterrequirementsof
ueis madeforonly$300,000.00,a
ecuredonlybya secondmortgage,which
higherinterestrate,and willundoubtedly
difficulties.Byauthorizing$500,000.00
000.00,thecorporationputsitselfin a
aining$200,000.00atafuture date
vantagesincidenttoasecondmortgage
houldbe recordedasfollows:
00
0
he balancesheetshouldreflectthat
wayisillustratedbelow :
state,MortgageBondsPayable,
Authorized,$500,000.00;Issued.$300,000.00
.
par valueof$100,000.00,dueinfive
er annumpayablesemiannually,are
eentrytorecordthe issuanceis:
0
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 344/419
ES335
earonthe balancesheetasadeferred
dditionalinterestcost,paidin advance,
dbysemiannualentriesinwhichthe
countisdebitedandtheBondDiscount
mmediately.
ngwhattheyseemtoregardasa
natethebonddiscountimmediately
writingit offagainstSurplus.
ativetothisextent:it getsthedeferred
et.Buttheoperationsoffuture periods
essityofabsorbingthediscountamortiza-
theinterest costswillbeunderstated
overstated.Mostaccountantsdonot
"cleanthebalancesheet"whentheresult
earningsof subsequentperiods.To
xpensewhichshouldbedeductedfrom
accounting.
ount.
investmentsinbonds,it was
onofdiscountorpremiumon bonds
ngbutwasnotrecognizedforincometax
onofdiscountorpremiumonbonds
purposes.
376.03iswrittenoffinten equal
uringthefive-yearlifeofthebonds,
ddiscountentrieswillbe:
ondinterest.
ofbonddiscount.
nterestexpenseaccountmaybe
ngentry:
0
nterestpaymentanddis-
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 345/419
ap.36
tizedbythescientificeffective
ribedinChapter33.Thebonds men-
mplebeara'nominalrateof 4%;they
discountto placethemonaneffective
or2J %semiannually.Thefollowing
damortizationentrieson theeffective
putethesemiannualchargestoBond
column),theincreasingnetcarrying
bonds minusunamortizeddiscount,
mn)weremultipliedby2^%.
iscountAmortizationEntries
oldtoNet 6%
Minus
BondDiscountDiscount
90.6096,014.57
3696,414.93
3796,825.30
6397,245.93
1597,677.08
9398,119.01
9898,571.99
3099,036.29
9199,512.20
.80100,000.00
4,376.03
.
0parvalueofbondsduein fiveyears,
numpayablesemiannually,areissued
ytorecordtheissuanceis:
0
pearonthe balancesheetunderthe
Sincethepremiumreceivedatthetime
tinterestcost,the premiumshould
mis writtenoffintenequal semi-
ntrieswillbe:
ondinterest.
ofbondpremium.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 346/419
ES337
combined,asfollows:
na 5%effectiveinterestbasis.The
nterestandamortizationentriesonthe
s.ThesemiannualchargestoBond
s2H%of thedecreasingamountsshown
remiumAmortizationEntries
oldtoNet 6%
us
PremiumCashPremium
00.00103,985.43
00103,585.07
00103,174.70
00102,754.07
00102,322.92
00101,880.99
00101,428.01
00100,963.71
00100,487.80
.00100,000,00
0,000.00
ntificmethods.
mortizingbonddiscountandpremium
geconformingtotheeffectiverateat
ed.Forthis reasonitistheoretically
ntmethodisusuallyregarded,however,
elylittleeffort,resultswhicharesuffi-
cticalpurposes.
ordiscountonserialbonds.
0of6%bondsareissued,maturing
mentsbeginningatthe endofthesixth
$490,000.00.Whatamountofdis-
eachyear?
nterestpaidin advance;thecash
reaseafterthesixthyear;thediscount
similarly;boththecashinterestandthe
uldbeproportionatetothebonds
nbytheeffectiveinterestratemethod
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 347/419
fficulttocomputeasto beimpracticable.
fthe"bondsoutstanding"methodof
uchcasesareusuallyhandled:
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 348/419
eaccountantsmightsetupa reserve
nth ofthecostofthe improvements,
ferabletowrite downtheasset.
nsideredpropertosetupa reserve,
easset,eventhoughthe amountofthe
elyascertainable.Areserveforthe
ueofsecuritiesownedis agoodexample.
accountingandincometaxpurposes,
costofthesecurities;thisrecord
setaccountwerecreditedwithmarket
ales;to avoidthisconfusion,areserve
so justifiedinsuchasituationbecause,
easeatagivendateis determinable,the
ain)is notdeterminable.
avecreatedliabilitieswhicharecertain
mount.Liabilitiesbothcertain and
metimesshownasreserves,butit
eserveaccountsforonlythoseliabilities
rable,andtoset upaccruedliability
edefinitein amount.Thus,Accrued
esarebettertitlesthan Reservefor
ages,becausetheamountsofthese
elydeterminable.ButReservefor
eferabletoAccruedTaxes,iftheamount
ntcannotbecloselyestimated.
es.
dforcontingencieswhich,ifthey
ateliabilitiesorreducethevalueof
esfor contingentliabilities,assume
factorydoesnotcarry workmen's
sinceworkmenmaybeinjuredand
ybeincurredthereby,areservefor the
blished.Orassumethatacompany
inapatent infringementsuit;anadverse
abilityfordamages,andthecontingency
creationofareserve.
servesforlossesin assets,assume
tstangibleassetsaredistributedin
nalargenumberof locations,decides
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 349/419
nce.Noinsuranceiscarried,but a
whichfirelossesmaybe chargedifand
serveprovidesfora contingency
reaseinassetvalues.Orassumethat,
yattheend oftheyearatthe lowerof
itappearsdesirabletomakea provision
tdeclinesduringtheensuingyear;
ngencymightbecreated.
tworth.
gardedasrepresentingapartof the
dasfollows:
us.
erve.
onofmanagement.
textension.
ealizedprofitonap-
gatoryappropriationsofsurplus.
edunderthetermsof acontractto
usunderthetitleof areserve.
hata companyborrows$100,000.00
uiredtomakecashdepositsof $10,-
sinkingfundforthepaymentofthe
ermittedto paydividendstothefull
dividendpaymentsplusthesinking
ecashto suchanextentastoimpair
akeitdifficultfor thecompanytoearn
ovideforthe sinkingfunddeposits.The
rovidethataportionof thesurplus
ividends,andthattheportionnotso
areserve.Sucha reserveiscreated
creditto SinkingFundReserve.
oodthatsuch areserveisstill apartof
dbeshownundertheNet Worth
et.
ntaryappropriationsofsurplus.
corporationmayhavethelegal
lto theentireaccumulatedsurplus,
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 350/419
ciallyinexpedienttodoso.They may
stsof thecompanywillbeservedif
forotherpurposes;forexample,theymay
new plant,ortospendconsiderable
plowprofits backintothebusiness"
.Ofcourse,thedirectorscanlimit the
outdividingthesurplusintotwo parts
heymayfeel thatitis desirabletoreduce
usin thebalancesheet,andsetupsuch
Extension,ReserveforAdvertising,
nciesinordertoindicatea restriction
endsandthusavoid theclamorfor
erwisecomefromthestockholders.
efinitelyunderstoodtorepresent
underthe NetWorthcaptionofthe
s,apparentlywiththeintentionof
thenetworth,suchreservesareshown
a specialcaptionofReserves.
psuchsurplus reservesisthedifficulty
eserveforplant extensionisestab-
dwiththe costofanyadditionalplant
ustbechargedto theassetaccounts.
reatedasanappropriationofsurplus,
vertisingexpenditures;thesemust
accounts.Areserveforcontingencies
uchextraneouslossesas mightbedebited
opriatedsurplusreservestoreduce
mountwhichthe directorsfeelmay
,hasits disadvantages.Settingup
porizeswiththesituation,becausethere
gridofthe reservesexceptbyreturning
dividendis awayout;itgives the
withoutgivingthemthecurrentfunds
ndit disposes,onceandforall,ofthe
ncebymerelyconvertingitintoanother
alizedprofitsonappraisals.
dassetsin thebalancesheetatan
excessofcost lessdepreciation,the
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 353/419
nsesorlossesshouldnotbecharged
outofSurplus.Thus,aReservefor
ppropriationofsurplusto showthat
tedforadefinite purpose.Advertising
e,shouldbechargedtooperations.Or
eenvaluedat thelowerofcostor
ovisionforpossiblesubsequentmarket
rplus,lossesincurredbecauseofsuch
absorbedinthe ProfitandLossaccount
estored toSurplus.Ifoperating
hargedagainstreservescreatedoutof
ationswouldbe incorrectlystatedin
t.
eet.
omanydifferentthings,theyshould
ebalancesheetto assistthereaderin
e.Thepropermarshallingofreserves
icatedbythefollowingclassification:
instassets.Reservesforbaddebts,
anddepletion,andothervalua-
ductedfromthegross valuesof
mes,inanattempttoimprove
ncesheet,suchreservesare
ghtside ofthebalancesheet
s,belowtheliabilities.
actualliabilities.Ifareserverepre-
distinguishedfroma con-
ossibleorcontingentliability,
aliabilitycaption.Assuch
tcurrentliabilities,theyshould
thecurrentliabilitycaption.
cies.Suchreservesareoftenvery
lancesheetbecausethe proper
onthedegreeofprobability
ingareality.Threedifferent
probabilitythatthe
arealityresultingina
ecreationofaliability,
ctedfromtheasset
lities.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 354/419
ossible one,butnotdefi-
eshouldappearon
cesheetundera
remoteastobedistinctly
onstitutesavoluntary
obeshownin the
networth:
us.Reservesrepresenting
whetherrequiredby
untarily,shouldbe
aption,thus:
50,000.00
n...75,000.00
s25,000.00
90,000.00
veforcontingencies
onthe assumptionthat
andthatthereserve
sbecauseoftheirinten-
dbecauseoftheir
olderstheimpression
blefordividendsthanis
deception,thedirec-
hereserveshownunder
closeto,the liabilities.
theSurpluscaption,
yobjecttosucha
theverypurposefor
ated.
ves.Someaccountants
nrealizedprofitsplaced
withan appraisal
eservecaption.How-
veactuallyincreasedin
atthe networthhas
herehasbeennoincrease
dends.If thenet
eseemstobeno good
ouldnotbe included
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 355/419
on,providedit is
mrealizedsurplus.This
ollows:
$50,000
s25,000
00
of-
000
00
eneverthenetworthshownin the
ed.Itis,in asense,theexactopposite
cretreservemaybecreatedbyany
assetsoroverstatesliabilities.Capital
gedtorevenue,incomemaybecredited
etwhichproducedthe income,excessive
rovisionsmaybemade,liabilitiesmay
d,assetsmaybewrittenofftoSur-
erablevarietyofotherdevicesmaybe
rvesisnot socommonnowasitwas
deredinexpedientthemisstatementof
rporationsfrequentlywrotedown
eorythat itwasconservative,anddirec-
atedsecretreservesonthetheorythat
sibletoequalize profitsandthustomain-
tywhichwasadvantageoustothe
ofthesecretreserve wassomewhat
year,whenprofits wereabovenormal,
company'sprosperity,partlytoavoid
dpartlytoavoidcreatinginthestock-
tionofsimilarlyabnormalprofitsinthe
forewroteoffexcessivedepreciation
methodof overstatingtheexpenses.In
profitsweresubnormal,andwhenadis-
dverselyaffectthestandingand stabil-
ssetsformerlywrittendownwere
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 356/419
lusorProfitandLosscredit,and an
wastherebymaintained.
enerallyrecognizedtobeimproper.
of thesubject,itmaybesaid thatany
ntheprofitandloss statementorinthe
scouraged.Stockholdershavearight
s,inorderthat theymayjudgeforthem-
etainingordisposingof theirinvest-
adeby stockholdersonthebasisof
sshownbythebalancesheetof acom-
cretreserves,stockholdersmaysuffer
othavesufferedifthey hadknownthe
liberateorunintentional.Provisions
n,baddebts,andotherexpensesmustbe
estimateis excessive,theexpensesare
networthareunderstated,anda secret
.Whenthereservesareestimatedin
ossible,thecreationofthe secretreserve
theoverprovisionisdiscovered,the
iminatedbyatransfer tosurplusof
epreciationorfor baddebtstocorrect
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 357/419
CREDITS;
accounting.
etweenthecashbasisandtheaccrual
he factthat,ontheaccrualbasis,recog-
expensesandincomeandtodeferred
easonthecashbasissuchrecognitionis
fly,letus assumethefactsdiscussed
theendof1941,wageswereaccrued
hesewageswerepaid in1942.
ounting,the$500.00would
sof 1941,andaliabilityof
dinthebalancesheetat the
nting,noliabilitywould be
eetatthe endof1941,and
dedinthe expensesof1942,
id.
heendof1941,interestinthe
ruedonnotesreceivable;this
942.
75.00wouldbei ncludedin
i temwithsomenamesuch
esReceivablewouldappear
lancesheet.
rualwouldbe ignoredatthe
beincludedintheincome
itwascollected.
October1,1941,aone-yearinsurance
premiumcostof$1,200.00.
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 358/419
SANDCREDITS[Chap.38
xpensesshowninthe 1941
ouldincludeonlythree
mber,andDecember)pro-
$300.00.Theremaining
nthebalancesheetat the
charge.
e $1,200.00wouldbeincluded
ctober1,1941,therewascollected
on aportionofthebuilding.
941profit andlossstatement
nlythreemonths'propor-
00.00;theremaining
ninthebalancesheetas a
e $2,400.00wouldbeincluded
useit wascollectedduring
ebasis?
accountingisacceptedbythe
eforpurposesofreportingincomefor
allyregardtheaccrualbasisasmore
heoreticalstandpoint.
oregoingillustrationsthat theyear
tedordisbursedmaynotbethe yearin
earnedorallof theexpenseisincurred.
usthatthe cashbasiscannotreflectthe
gagiven periodonthebasisof income
rredduringthatperiod.
shouldbeawarethattheaccrual
callymoreaccuratethanthecashbasis.
tatementpreparedonthe accrualbasis
ecttheresultsofoperations,becauseof
usestowhichitis subject.Whenever
atesnecessary,thedoorisopenedfor
deliberatemisrepresentationsdefended
donot openthisdooras frequently
dchargesandcredits.Thereforeno
begiventoaccrualsin thischapter,other
ualscanbe accuratelycomputed,others
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 359/419
ARGESANDCREDITS351^
reforearesubjectto innocentmisstate-
ratelymisstatedor entirelyomitted.
onwillbegiventodeferredcharges
msappearingin abalancesheetshould
rutiny.
DeferredChargecaptioninthe
woclasses:
s.Forexample,discountonstock
s.Anyonefindingsuchitemsina
stifiedin immediatelydeducting
statedontheright sideofthe
djustthe networthtoacorrect
tions.Forexample,unexpiredinsur-
dsupplies.Thereaderofa balance
nlessheis wellinformedabout
uchitemsappearingin thestate-
hmakesitpropertodeferthem,
ountdeferredhas beencorrectly
maybe subjecttodefinitecomputa-
dtime;forexample,theportionofinsur-
d,ortheamountofinterestprepaidon a
bedeferredfor someotheritems,
maybe determinedwithvaryingdegrees
timatedinventories.
suchthat adeferringprogramis
rsinthe determinationofamountstobe
gnificant.Thereally seriousmis-
enthemanagementofabusinessdeliber-
theprofitandlossstatementto itsliking
rgepolicywhichwillshowa desired
pportedbyr easons,howeverspecious.
ughaperiodof businessexpansion
merousbranchofficesandtheexpendi-
ntsforradioandother advertising.The
suchthat eachnewbranchofficeusually
onsiderablepromotioncostsandoper-
sanofficewasestablishedona profitable
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 360/419
SANDCREDITSIChap.38
ughnot intended)todisposeofit ata
aprofitorpaymentfor goodwill.
31st,thepresidentofthecompany
ectivesourcesofadditionalcapitalthat
ldbeatleastso manythousanddollars.
year,theauditorssubmittedaprofitand
wedearningssomewhatlessthanthe
esident.Aproposalwasimmediately
efer considerablechargesoftwoclasses:
allofficeswhichwerestill"inthe red";
anagementontheground thatthese
pmentperiod;and(2)portionsof the
thiswasdefendedonthegroundthat
rtisingcampaigniscumulativeandthat
eearlypartof suchacampaigndonot
yeffective.Thetotalof thesetwoclasses
geswassufficienttorestoretheearnings
esidenthad statedwouldbeearned.
eetcannotalwaysdetectsuch
therearecertainthingshecando.He
s,andraise inhisownmindthe question
asonableandpropertopostponecharging
s accesstooneormorepreviously
hecancomparethedeferredcharges
savailableandsee whetheraconsistent
enfollowed.Andhecanread theaudi-
commentsorqualificationshavebeen
edeferreditems.
epresentsanitemof grossincome
ProfitandLossina futureperiod.
othe factthatthecreditrepresentsa
ereaderofabalancesheetshouldunder-
rredcreditcanbe takenintoincome,
probablywillbeincurred.
ouldariseinthe mindofareaderof
cttoeachdeferredcreditincluded
rofitprobablybealargeor asmall
dcredit?
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 361/419
ARGESANDCREDITS353
been setupbecausethereexistsan
orservicesto someother
pmerelyasa conservative
ditcanbe takenintoearnings,will
nsiderableexpendituresfrom
ords,shouldaconsiderable
ditbe regardedasasortof
erredcreditsuchthat thecompany
erciseachoiceasto thepro-
ome,andisitthusenabledto
trarilytheamountshownas
givenperiod?
cussedbelow:
ableprofitcontainedina deferred
timatedwithmuchaccuracybyaperson
withthebusiness,becausetheamounts
o beincurredcannotbeestimated.
been setupbecausethereexists
odsor servicestosomeotherparty,or
asaconservativebookkeepingdevice?
rentconditionsarepresentedbelow:
ortionof itsbuildingandhascollected
obligationtopermitthetenant
ectsayear'ssubscriptioninadvance;
endmagazinestothesubscriber
diseandmakescollectionsonthe
merchandisehasbeendelivered,
bligationtothepurchaser.Never-
grossprofitina deferredcredit
omegraduallyoverthe period
ofthereceivable,asa conservative
rtlytopostponethetakingof
elativelyheavyininstallmentsell-
ture periodswithaportionof
be requiredtostandaccounting,
yingchargesarisingfromthesale.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 362/419
SANDCREDITS[Chap.38
portionofthe deferredcreditbe
ntliability?Thenatureof thedeferred
ationoftheanswer.
ollectedinAdvancepresumably
rementforfutureexpenditures
eofthebuildingexpenses,such
ocurrentexpenditures;othersare
hichwouldbeincurredevenifa
otrented.
iptionsCollectedinAdvancepre-
roportionateelementofrequire-
urestoservicethesubscriptions.
edGrossProfiton InstallmentSales
keexpendituresforthebenefit of
egoodshavebeenmadeand
xpenditureswillariseoutofthe
eferredincometo earnedincome
themanagement,withplausiblesup-
ferredcredits,suchasrentand interest
uldusuallybetakenintoincomeona
riodsforwhichtheadvancecollections
arturefromthisprocedurenormally
fensible.Withrespecttosomeother
wocompanieswithsimilaroperations
edures.Forinstance,onecompany
atemortgagesata discounttakes25%
gsin theperiodwhenthepaperis
emaining75%ofthediscountinto
ringwhichthe paperiscarried;the
sdefendedonthe groundthatitis an
costs.Anothercompanyspreadsthe
ofthepaper.If thereisroomforreason-
astothe properbasisfortransferring
gs,thereaderofthe statementsshould
rningscan bearbitrarilyaffectedbythe
uldseektodeterminewhetherthemethod
leandproper;heshouldbesure thatthe
ainedonaconsistentbasisfromone
e methodhasbeenchanged,heshould
effectupon thestatedprofits.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 363/419
SALES355
stallmentsales involvesaccounting
somespecialconsideration.
sesincidenttoinstallmentsellingare
nperiods subsequenttotheperiodof
tyhasbeenencounteredintakingup
servativeway.Twomethodsmaybe
in theperiodofsale,andset up
ebts, collectionexpenses,and
possessedmerchandise.Such
orrect,butithas twopractical
culttoestimatethe amounts
nd(b) reservesforcollection
sesarenotdeductiblefor
ses.
stallmentsonabasis ofcashcollec-
spermittedfor taxpurposes:
dasincludingprofitand
eproportionthatthesetwo
thetotalselling price.Thus,
ncluded$100.00costofmer-
t,acollectionof$15.00would
$10.00return ofcostanda
theaccountingprocedureappliedin
sisoftheprofitelementincludedin each
hefollowingfacts:
ngprice,33Ji%
00
followingentry:
00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 365/419
ALES357
earas follows:
15,000.00
0,000.00
stallmentSales
0| Totalgrossprofit5,000.00
mentshavebeencollected,thebal-
Profitaccountmaybeclosedto Profit
les.
ntsalesaremade,itis impracticable
rate ofgrossprofitoneach saleandto
ss profittothecollectionsfrom each
ateofgross profitonallinstallment
pliedtothecollectionson receivables
hat year.Toillustrate,assumethe
1939:
00.00
00,000.00
ingprice33J %
05,000.00
%of$105,000.0035,000.00
thinstallmentreceivablesmaybe
ivable
ons105,000.00
fitaccount,after thebooksare
arinthe mannerpreviouslyexplained,
stallmentSales
00| Totalgrossprofit50,000.00
years.
stallmentsalesoperationsarecon-
ars,andthatthetransactionsduringthree
donthefollowingpage.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 366/419
[Chap.38
00$250,000
0120,000125,000
,000$125,000
40%50%
00$30,000$15,000
050,000
0
llections:
9 accounts$35,000$10,000$5,000
0 accounts50,00020,000
accounts87,500
ollectionsapplicabletodifferent
entgrossprofit rates,thecashreceipts
sheaded:
39
40
41
ccountsmaybekeptbyyears,and
untstoProfitandLossmaybe madeon
sshownbytheseveralaccountsreceivable
tsbook.Entriesfortaking upthe
ssprofit, computedonthebasisofcash
foregoingsummaryoffacts,wouldbe:
stallmentSales—193935,000
%ofcollections.
stallmentSales—193910,000
stallmentSales—194050,000
39accounts,and40%ofcollec-
stallmentSales—19395,000
stallmentSales—194020,000
stallmentSales—194187,500
39accounts,40%ofcollections
%ofcollectionson1941accounts.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 367/419
ALES359
ferredgrossprofitaccountswould
stallmentSales—1939
00
00
0
0
stallmentSales—1940
00
0
00
stallmentSales—1941
00|Totalgross profit125,000.00
andinstallmentsalesmaybeshown
mentinthemannerillustratedbelow,
showingthecomputationofthe gross
ntsales.
ber31,1941
mentSales$60,000.00
00.00
tallmentSales(Schedule1):
0
onInstallmentSales112,500.00
0.00
sProfit
ule1
ons
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 368/419
e paymentofinstallmentsandifno
expected,bothhisaccountand.the
totheuncollectibleinstallmentsshould
let usassumethefollowingfacts:
00
ections,33>$%30.00
ountsindicatethatthe$60.00still due
es$20.00ofunrealizedprofitand$40.00
propertysoldcannotbe recoveredor
coveredcost,$40.00,isaloss.In sucha
defaultshouldbe:
stallmentSales20.00
sed,in whichentrieswillbemadeas
ble
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 369/419
SALES361
nrecoveredcosts,tobe chargedto
s.
uallyresults inarepossessionofthe
andtheloss ontheuncollectibleaccount
thevalueoftheproperty.
tingforrepossessedmerchandiseare
ossessedmerchandiseasanassetat
;whenthemerchandiseisresold,
SalesofRepossessedProperty,
g priceasincome.
usedifthe repossessedproperty
lizablevaluecannotbedeter-
egreeofaccuracy.Butit
,ifthis methodisused,andif
alueisnottakeninto the
mentspreparedbeforethedis-
sstatethe profitsorlosseson
erstatethenetassets.
dmerchandiseatthe unrecovered
gainorlossis shownuntil
cation,sinceit placesawholly
ertyandfrequentlyresults
a loss.
dmerchandiseata depreciated
ttodetermine,butexperi-
nytoestablishrepossession
willallowafair profitonresale.
mmended,becauseitshould
orrectstatementofreposses-
lues,andofprofits onresales.
tionin thesectionon
attherepossessedproperty
35.00,the entryforthe
e35.00
stallmentSales20.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 370/419
[Chap.38
yisgiven avalueof$75.00,the
e75.00
stallmentSales20.00
possessions,thedefaultregister
bemodifiedbytheinclusionof acol-
estimatedvalueofrepossessedmerchan-
mnshouldbepostedtothe debitofa
rinventory)accountandshouldbe
debit toDefaults.
ses.
especttoexpenses,namely:
deferredandtakenintoincomeon
ouldexpensesoftheperiod of
ndchargedto incomeonthe
procedurewouldbejustifiable,
ementofinconsistencyindefer-
andnotdeferringtheexpenses
es.Theinconsistencyis
setherealizationoftheprofits
ectionoftheaccounts,but
esnotexistwithrespecttothe
d.
edin periodssubsequenttothe
made.Forexample,collec-
redandsales commissionsmay
famountscollected.Should
chexpenses?
chargesagainsttheprofitsof
esweremadeappearsalittle
wouldmeanthatthesale period
eferredportionof thegross
ess,bechargedwithallpast
sconnectedwiththesale.For
cesanctionschargingthesale
ncurredinthat period,andsub-
xpensesincurredinsuchsub-
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 371/419
SALES363
vesforbaddebtlosses and
eatedbychargesagainstthe
ctisdiscussedlater.
thebalancesheet.
eivableusuallyshouldbeshowninthe
maturity,andthe installmentsthat
omthebalancesheetdateshould be
tAssetssection.Oftenthisisimpracti-
businesscustomsanctionstheinclusion
receivablesunderthecurrentcaption.
estimatedfutureexpensesandfor
etupbychargesto ProfitandLoss,there
hemupbychargesagainsttheDeferred
t,suchaproceduremaybedesirable.
a clearerandmorecompletepictureis
sheet;and,sincethereservesare setup
ther thanbychargestoProfitand Loss,
gardedasrealizedduringthesale period
for subsequentexpenses.
houldbe sufficienttocoverbaddebt
sapplicabletopastsales,and stillleave
erefore,ifestimatescanbemade,the
dbedividedinto threeelementsfor
on.Forexample,assumethatadeferred
,000.00isestimatedtocontainthe follow-
0
letopastsales15,000.00
.00
eclassifiedinthe balancesheetas
,000.00
ccountsreceivable,toreducethe
edrealizablevalueofthe install-
lesExpenses15,000.00
s reserveshouldappearundera
dnotbeincludedamongthe
tiesforthe estimatedsubsequent
ncesheetdate.)
tallmentSales25,000.00
dgross profitshouldbeshownin
ecaptionofDeferredCredits.)
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 372/419
[Chap.38
t,if thedeferredgrossprofitis thus
nmentismadeforbalancesheetpurposes
set upintheledger.The deferredgross
dtoincomewhenthe profitisrealized,
esshouldbe chargedtoincome.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 373/419
ebeendevotedtoa considerationof
erningcorrectstatementsofassets,
andnetworth.Thischaptercontains:
ythecompany'sbookkeeperatthe
atement,andprofitandloss state-
pany'sbookkeeper.
mberofviolationsofaccounting
ebeendisclosedbytheauditor.
theauditor(someof thesewouldbe
kingpapersandnot onthecom-
sstatement,andprofitandlossstate-
tor.
nis toreviewandtoemphasize
ountingprinciplesdiscussedinthepre-
hasisliesinthefactthat thecompany's
manyviolationsofaccountingprinciples,
ncialconditionandgoodoperating
or'sstatements,conformingwithgood
esentafarlessnatteringpicture.
ndstatements.
eand thussimplifytheillustration,
he trialbalancewastaken,thebooks
triesina CostofGoodsSoldaccount,
riesonDecember31,1939,purchases,
turingexpenseswereclosedto
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 374/419
ber31,1940,wereplacedonthe
ntoriesaccountandcredittoCost
GoodsSoldaccountappearsbelow:
,1939$70,000
500
91,467
Allowances$8,500
,194085,000
667
31,1940
150
,194085,000
Bonds103,850
00
t40,000
00
ck7,500
0
ounts3,000
29,000
40,000
60,000
ances9,620
7
,200
7$1,189,687
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 375/419
,125,837$1,189,687
410
310
00
900
bitA
r31,1940
150.00
0.00
Bonds103,850.00
650.00
000.00
t40,000.00
00.00
0.00
.00
ck7,500.00
,500.00
0.00
4,000.00
ounts$3,000.00
29,000.00
140,000.00
60,000.00
00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 376/419
anetworth of$369,510.00andlia-
0,or$2.40ofnet worthperdollaroflia-
ntassets of$306,650.00andcurrent
raworkingcapitalof$212,650.00,or
dollar ofcurrentliabilities.
bitB
ber31,1940
39$ 80,700.00
73,450.00
achinery2,000.00
CommonStock12,00000
40$169,150.00
bitC
ber31,1940
lowances9,620.00
524,667.00
700.00
00.00
0
400.00
00.00
:
0
00
410.00
6,810.00
80,490.00
enses:
600.00
900.00
0
310.005,110.007,040.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 377/419
mattersdiscoveredbytheauditor
t.Eachadjustingjournalentryis
of cross-referencewiththeauditor's
pearonpages379to385.
practicewhenleavingnotesreceiv-
tiontomakeentriesimmediatelydebit-
esReceivable,asifthe noteshadbeen
ever,didnotgivethecompanycredit
tilitreceivedthe collection.Atthe
of$2,500.00leftwiththebank hadnot
ingadjustmentisrequiredtoreverse
panywithrespectto theseuncollected
00
requirementsoftheindenture,the
asinkingfundforthe paymentofthe
mber31,1940,thesinkingfundincluded
ountof$150.00.Thiscashis notavail-
andshouldbe shownaspartofthe sink-
ustmentisrequired:
open attheendof1940, and
ntheamountof$9,000.00,receiveddur-
ordedasofDecember31,1940.Thus
1,1940,was overstatedandtheaccounts
ted.Requiredcorrection:
0.00
stocreditors,totaling$8,000.00,
mber31,1940,bydebitsto AccountsPay-
equiredcorrection:
00
esheetincludesasaccountsreceiv-
nceoftheAccountsReceivablecontrol-
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 378/419
udethefollowingdetailsshownby the
es)$105,150.00
s)2,000.00
ncreasesthereceivablesandsetsup
bility:
0.00
mers'Accounts2,000.00
sfinishedgoodsaredisposedofby
ent outonconsignment.Suchconsign-
dassales,thusincorrectlyreducingthe
ecostofgoodssold,overstatingthe
takingupaprofitbeforethegoodshave
1,1940,therewereunsoldgoodson
10,000.00,whichhadbeenconsignedat
0,andonwhichaprofit of$5,000.00
pated.Requiredcorrectingentries:
00.00
forconsignments.
0
00
f CostofSalesandadd
leincludeaccountswithofficers
Thisamountwasoutstandingthrough-
nd cannotberegardedasacurrent
t ofthecurrentaccountsreceivable
up asaseparateitem.Correction:
icers5,000.00
ent)5,000.00
e balancesheetasaccounts
ommonstocksubscriptionsamountingto
beeliminatedfromthecurrentreceiv-
mon20,000.00
00.00
countsreceivablealsoincludesan
gnedaccountstotaling$10,000.00.
nin thebalancesheetasaseparate
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 379/419
ingadjustingjournalentryis required:
ned—Equity1,500.00
0.00
$8,500.00foradvancesreceivedon
ouldbementionedinabalance-sheet
countsreceivablealsoincludes
8,000.00toasubsidiary.Theseshould
gular receivablesfromtradedebtors.
000.00
0.00
ntingto$200.00,earnedonnotes
ed,wasignored.
ble200.00
inthecompany'sbalancesheetin
ouldbe detailedasindicatedinthe
0
0
eyear,thecompanypurchased
materialswhichwereintransiton Decem-
t (becausethegoodshadnotbeen
detorecordthe purchaseandthe
enoti ncludedintheinventory.The
affected,becausethe$10,000.00was
hasesduringtheyear andfromthe
year.Butthebalancesheetdoesnot
diseowned,norall oftheaccountspay-
.00
$4,000.00werereceivedbeforethe
ncludedintheinventory.Buttheentry
dtheliabilitywasnot made.There-
odssoldwasunderstatedbecausethe
inventorywithoutbeingincludedin
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 380/419
(2)the liabilitiesattheend oftheyear
ction:
00
00
wmaterialson December31,1940,
reforethe rawmaterialinventory
asedtothemarketprice.Moreover,
and thefinishedgoodsincludematerials,
processand finishedgoodsshouldbe
e marketdeclineinthevalueofthe
f.Sincetheclosinginventorieswere
odssoldwasunderstated.Correction:
00
naso-calledmanufacturingprofit
s, thefinishedgoodsarevaluedabove
chthe companyconsidersthatitmakes
ofbuyingitsmerchandise.Thefinished
$8,000.00ofsuchunrealizedandantici-
f goodssoldisunderstatedbya like
00
ninthebalancesheetas Invest-
sshouldbe detailedasindicatedinthe
,850.00
sidiary(whollyowned).50,000.00
11,500.00
adilymarketable)10,000.00
readilymarketable)....8,500.00
Bonds103,850.00
andand Buildingsincludes:
10,000.00
0.00
ntofanaccount(being
de)10,000.00
buildingusedas asales
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 381/419
dasshownbythefollowingentry:
0.00
00.00
s20,000.00
00.00
eserveforDepreciationshouldbe
29,000.00
ings15,000.00
hinery&Equipment8,000.00
eryEquipment4,000.00
—LeaseholdImprove-
eductedfromtherelatedassetbal-
wnonthe rightsideofthe balancesheet.
udedasamanufacturingexpensein
countconsistsofthefollowingdetails:
,500.00
yandEquipment3,750.00
uipment2,000.00
mprovements667.00
nsforbuildingsandformachinery
acturingexpensesandshouldremaina
old;thedepreciationofdeliveryequip-
ofleaseholdimprovementsshouldbe
enses.Correction:
uipment2,000.00
mprovements667.00
00
000.00sixyearsago.One yearago
tenupto $100,000.00bycreditingSur-
ationwassupportedbyanappraisalby
nditisallowedtoremain.But the
dfromSurplusto areserve.
ofitonAppraisal...25,000.00
stimatedlifeof30yearswhennew
yearsaftertheappraisal.Oneyear
aisal;therefore,Hsofthe unrealized
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 382/419
ouldbe writtenoffbytransfertothe
Adjustment:
ofitonAppraisal1,000.00
—Buildings1,000.00
cturedsomeofitsownmachinery
$4,000.00,butputitintothe fixedasset
estimatedcostatwhichitcouldhave
00.00"manufacturingprofit"was
realizedprofitshouldbe eliminated
andthemachineryvaluationshouldbe
omplishedbythefollowingadjusting
t2,000.00
eofits machineryfor$2,000.00,and
bydebitingCashandcreditingthe
taccountforthatamount.Thecom-
:
000.00
dinthereserve1,000.00
hinerysold$4,000.00
parallelcolumns,theentrywhich
eentrywhichit shouldhavemade.
—M.&E1,000.00
t2,000.005,000.00
ncludesthedebitandcreditentries
debutwere not:
—M.&E1,000.00
t3,000.00
edsomemachineryfor$3,000.06,
stallments.UptoDecember31,1940,
0.IthasdebitedtheMachineryand
nlytheinstallmentspaid,andhasnot
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 383/419
unpaidinstallments,allofwhichmature
t2,000.00
gation2,000.00
ccountwiththeremaining
hased,andtosetup the
llments.
ing$3,000.00,whichshouldhave
turingexpenses,havebeenchargedto
otherwords,revenueexpenditures
ecostofgoodssoldis understated
avenotbeenchargedtoit,and thefixed
ndinglyoverstated.
00
t3,000.00
xpenditurescapitalized.
avebeenmadereducingthebalance
pmentaccount,correspondingadjust-
relatedReserveforDepreciation.
sbeenprovided,becausetheassetvalue
edbelow:
value:
nufactureofmachinery..$2,000.00
machinerysold3,000.00
scapitalized3,000.00
value:
purchaseprice2,000.00
0.00
tsreducethebalanceintheMachinery
6,000.00.Weshallassumethatthe
chineryandequipment(providedonthe
nthe balanceintheassetaccount)is
isionoverstatedthereserveandover-
argedtoCostofGoodsSold.
—M.&E500.00
edepreciationprovision.
on thebooksthreeyearsagoby
sno authorityforthevaluation
mate.Whilethevaluationmaybe
easeholdmaybe shownasanasseton
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 384/419
mshouldbe qualifiedtoshowthatitis
rs'estimate.Moreover-thecredit
surplusto areserve.
fitonLeasehold20,000.00
profitfromsurplus toa
00valuationwasplacedonthelease-
arstorun.Threeyearshaveexpired.
thevaluationshouldbewritten off.
fitonLeasehold6,000.00
valuation.
oldimprovementswasprovidedat
erate thatwasappliedtobuildings
uttheleasewasfor tenyears;there-
ementsshouldhavebeenwrittenoffover
shaveexpired;therefore,thecompany
eetenths,or 30%,ofthecostof the
haswrittenoff3>^%for3years,or
ditional20%shouldbeamortized;
amortizationis anadjustmentofprior
echarged toSurplus;theremaining
thecurrentyear'samortizationexpense.
mprovements1,333.00
—LeaseholdImprove-
0%amortizationonthe
oldimprovements.
enontothe booksbycreditto
noff bydebittoSurplus.
dthatthecompanyownsallofthe
ubsidiaryhas lost$10,000.00since
tock($1,000.00duringthe currentyear).
enup.
rations1,000.00
sidiary10,000.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 385/419
edtreasurystock($11,500.00)
0.00.Thispremiumshouldbewritten
500.00
stments,"whichcost$10,000.00,
tvalueofonly$7,000.00.Areserve
creaseinvalue.
ned3,000.00
marketvalue.
60,000.00)wereissuedat90;the
ainsintheaccounts.Thebondswere
ftheirlife hasexpired.Therefore,half
ebeenamortized.Fourfifthsis appli-
ould bechargedtoSurplus,andonefifth
urrentBondI nterestExpenseaccount.
0.00
00
premiumsamountingto$1,200.00
costof goodssoldisoverstatedbythe
rancechargedasamanufacturing
0.00
00
umsasa deferredcharge
expenseshavebeenignored.
n'ssalaries)$1,800.00
Amanufacturingexpense)2,500.00
payable1,000.00
owingentry:
0.00
00
1,000.00
,500.00
Payable1,000.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 386/419
miscellaneousexpensestotaling
dedbecausethebillshadnotbeen received
r.
,100.00
2,100.00
s.
shouldbeaddedto thereservefor
eanadequateprovisionforprobable
ounts1,000.00
00shouldbeprovidedfor freightto
eductedbythemin settlingtheir
educted1,500.00
quiresthe creationofasinkingfund
thebondissue.Anamountequal to
dissue($60,000.00)shouldhavebeen
othereserveannually.Fiveyearsof
expired,andnotransferhasbeen made
000.00
endsinaccordancewith
claredonthe preferredstockprior
yableafterthatdate.Noentry was
ycreatedbythedeclarationofthis
stockis$49,000.00($60,000.00total
tock),anda6%dividend,therefore,
ble2,940.00
kingpapers.
ersshowthebalancesappearingin
e,theadjustments(orpostingsofthe
mentionedontheprecedingpages,and
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 387/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 388/419
Tj
§
?oB™C"!
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 389/419
3
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 390/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 393/419
j
f l?• M. f l io ]
C J" C J. »_ '?jrj
See
2a,j;cat;
»joB5'a(2
2Si-^a
d'"i3ow e'~T3o
«5°
g
"£S^o
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 394/419
ment.
servesasthe basisoftheauditor's
ndbalancesheet.Toavoid further
workingpapers,thefollowingis
50
ned—Equity1,500
ounts$4,000
educted1,500
ble200
icers5,000
,850
0,000
000
10,000
ned3,000
00
00
0
—Buildings16,000
t34,000
—MachineryandEquipment....6,500
00
—DeliveryEquipment4,000
s20,000
—LeaseholdImprovements6,000
0
86.000
gation2,000
,500
Payable1,000
2,100
ers'Accounts2,000
ble2,940
60,000
11,000
40,000
ck7,500
mon20,000
$431.340
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 395/419
608,550$431,340
ofitonLeasehold14,000
ofitonAppraisalofBuildings....24,000
000
ances9,620
0
00
uipment2,000
mprovements2,000
,510
00
1,900
erations1,000
310
tement.
aspreparedfrombalancesshownin
bitC
ber31,1940
lowances9,620
532,300
067
000
uipment2,000
mprovements2,000
700
67
:
510
9,910
orward)$47,457
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 396/419
—Continued
roughtForward)$47,457
ense:
200
1,900
erations1,000
3105,3109,440
nt.
aspreparedfromdatashownbythe
ement,theSurplussectionoftheworking
teradjustments,andtheauditor's
bits
ber31,1040
39:
t$80,700
ferredtoReserves:
dImprovements—PriorYears2,667
ears9,000
ount—PriorYears2,400
Reserve—PriorYears24,00083,067
2,367
bitC)$38,017
$2,000
asuryStock500
einStocks3,000
eserve6,000
,000
ck2,94026,440
40$9,210
assificationofworkingpapers.
ersindicatethecaptionsunderwhich
heauditor'sbalancesheet.Comments
earonpage 391.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 397/419
8888888!
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 398/419
«~ci"
8888
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 399/419
upingorclassificationappearinthe
.Thecompanyincludedthesinkingfund
tock,thepreferredtreasurystock,and
ocksandbondsunder theCurrent
msarenotincludedundertheCurrent
or'sbalancesheet.Thepreferred
fromthecapitalstockinthe NetWorth
ksandbondsare shownunderanInvest-
aption.Themiscellaneousstock
hthavebeenleftin thecurrentasset
ficinformationthattheyhadno ready
sheet,thelandheldfor resalewas
the fixedassetgroup.Sincetheland
noperations,theauditor'sbalancesheet
entsandSundryAssets captionrather
sheetthediscountonstockwas
redcharges;intheauditor'sbalancesheet
pitalstocktoshowthepaid-incapital.
subscriptionsaredeductedintheNet
eingshownasan asset,becausethere
callforcollectionsfromthesubscribers.
sheetthevaluationreserves(for
preciation)areshownontheliability
cesheetthey aredeductedfromthe
ccountsreceivableassigned;the
$1,500.00in$10,000.00ofassigned
beenseparatedfromtheotheraccounts
alancesheet.Itis alsonecessaryto
bilityinafootnote.
ntingentlyliableintheamountof
'notesdiscounted.Thiscontingent
sheetfootnote.
ethesinkingfunddeposit of$6,-
ember31,1940.Thisfact ismentioned
edonpurchasecommitmentsamount-
materialswhichhada marketpurchase
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 400/419
cember31,1940.Alsoonthat date
antinasuitchargingit withapatent
bitA
r31,1940
de(Including$1,500.00
ts)$66,150
ounts$4,000
educted... .1,5005,50060,650
.12,500
ble200
500
850
RYASSETS:
icers$5,000
gageBondsPayable:
estoWholly-ownedSub-
ustedtoAgreewithNet
00
—AtMarketValue7,000
Cost8,500
00
dryAssets102,500
onAppraisalby(nameof
ber31,1939$100,000
tion16,00084,000
t$34,000
tion6,50027,500
000
tion4,0006,000
s—LessAmortization14,000
ation—LessAmortization14,000
0
0
200
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 401/419
r31,1940—Continued
RTH
$86,000
gation2,000
ers'Accounts2,000
ble2,940
,500
Payable1,000
2,100
30,340
gFundBondsPayable—
0,000
arvaluepershare:
00shares;un-
sury,110
hares$49,000
00shares;un-
andoutstand-
0
s$20,000
2,500
,000
dends9,21039,210
ofitonAppraisalofBuild-
ofitonDirectors'Valu-
238,710
gentlyliableonDecember31,1940,intheamountof
'notesdiscounted;intheamountof$8,500.00oncus-
d;andinanundeterminableamountonpending
tion.
untof$75000.00forpurchasesof rawmaterialshaving
.00onDecember31,1940,wereoutstandingatthat
nmadefor thedifferencebetweenthecommitment
eposit,requiredasofDecember31,1940,had notbeen
sandauditor'sbalancesheets.
lowingpageindicatethemajor
ompany'sbalancesheetandtheadjusted
ytheauditor.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 402/419
ets
o
SheetAuditor'sto
PerCentCompany's
5.24%$166,85038.89%J54
ssets— — 102,50023.89—
33155,50036.24.66
2.434,200.98.31
050100.00%
16.93%$130,34030.38%1.39
.8160,00013.981.00
05.76— — —
38,71055.64.65
050100.00%
00$166,850.00
00130,340.00
0.00836,510.00
61.28
Liabilities
0
t100,150.0060,650.00
rest10,000.0012,700.00
0.00
00130,340.00
ssetsOverCurrent
,990.00*
,000.00
,500.00
0
000.00
ofit:
8,710.00
340.00
00
340.00
401.25
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 403/419
RATIVE
ercents.
lpercents"isintendedtodescribe
tofeachbalancesheetitemtothe total,
entitemto thenetsales,andeachele-
sttothetotal.Amountsandanalytical
lowingstatements.
2
0
~"
0.0031%
6
1940
5
%
ndanalyticalpercents.
vebalancesheetasoftwodatesand a
ofitandloss statementfortwoyears,
ntsandanalyticalpercents.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 404/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 405/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 406/419 P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 407/419
DCOMPARATIVESTATEMENTS399
decrease.
estatementswithpercentsofincrease
ets
940
crease*
s...
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 408/419
MPARATIVESTATEMENTS[Chap.40
ProfitandLossStatements
mber31,1941and 1940
ncrease-Decrease*
nt
15,900.008253,240.0035.37%
5,460.00435,640.00179,820.0041.28
680.00$280,260.00$73,420.0026.20
.00162,440.0015,810.009.73
30.00$117,820.00$57,610.0048.90
ve
5.0017,495.0032.88
.$104,720.00$64,605.00$40,115.0062.09
215.0021,600.004,385.00* 20.30*
x$87,505.00$43,005.00$44,500.00103.48
5.005,700.006,365.00111.67
37,305.00$38,135.00102.22
decreases,andpercentsthereof.
arativestatementsandthedeter-
decreases,accountantsarefrequently
veand negativeamountsofarelated
nkbalancemayexistatonedate and
r;thebankbalancemaybe shownon
ncesheet,andtheoverdraftmaybeshown
other;or,theoverdraftmaybe shownon
rin blackinkwithanasterisk.
discountsmaybeshownnet'in a
statement;inonestatementthepurchase
esalesdiscountswhileinanotherstate-
xceedthepurchasediscounts.
gativeamountappearonthesame
edindeterminingwhetherthedifference
reaseorasadecrease.Sometypical
:
0.00*
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 409/419
DCOMPARATIVESTATEMENTS_ 401
slyanincrease,andthe change
se.InC,thechangefrom anexpense
of$200.00is equivalenttoa$1,200.00
the changefromanincomeof$300.00
s equivalenttoa$500.00increasein
increasein incomeisequivalentto
ense.InF, the$300.00decreasein
$300.00increaseinexpense.
ofsomepeculiarproblemswhich
ofper centsofincreaseanddecrease:
se
t
:
0.00$1,000.00$500.0050%
01,000.0050000* 50*
00.001,000.00* 100*
0* 1,000.001,500.00* 150*
0.00— 1,500.00—
00* — 500.00* —
ar:
.00* 1,000.00* 500.00* —
01,000.00* 1,500.00—
.00* 1,000.00—
ercents inA,B,C,and Dareobvious.
utedinthesecondgroup;no baseexists,
howninthe LastYearcolumn.Inthe
reshownbecausetheLastYear amounts
Percentsmightbecomputedandposi-
rminedonan algebraicbasis,thus:
slywouldbemisleading,sincethe+50%
ecrease,andthe—150%andthe—100%
1,500.00and$1,000.00.Forthisreason
henthebaseisa negativequantity.
tto anotherinacomparativestate-
oscomputedby dividingtheamount
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 410/419
MPARATIVESTATEMENTS[Chap.40
dbytheamountforthe earlierdateor
tratedbelow:
.OO.67
1,000.001.09
onlyusedthanper centsofincrease.
ddecimallyhavecertainadvantages,as
efillustration:
ecrease* Ratio
nt1941to 1940
100*%0
1.50
* .50
001,40015.00
entofIncreaseandDecrease
red ink(orasterisks)andblackink,
requiresblackinkonly.
ofthe figuresinthePer Centof
umnshowincreasesandothersshow
ificanceoftheasteriskorthered ink
nized);thefiguresintheRatio column
s,expressingtheratiosofthe1941amounts
ultformanypersons tograsp
largepercents,suchas1,400%;it is
dthatoneitemis 15timesaslargeas the
shownthatpercentsofincrease
dif thebase(ortheamountfor the
waszeroor aminusquantity.The
ossstatementwithcomparisons
sonthe followingpage.
tsimilartothe following,inwhich
easeanddecreasearecomputedontwo
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 411/419
NDCOMPARATIVESTATEMENTS403
ssStatements
mber31,1941,1940,and 1939
39Amount
$727,650.78$932,645
ances13,2601.1311,750.4128,600
715,900.79$904,045
01.41435.640.72608,710
6801.26$280,260.95$295,335
8901.38$36,210.74 $48,645
01.0419,615.7227,095
0,600.8834,780
3,050.8726,645.8232,610
424,8101.4517,065
,700.7520,810
,8601.078,285
8,2501.10$162,440.86$189,290
301.49$117,8201.11$106,045
veExpense:
1.25$20,0001.00$20,000
09,840.7712,810
5,000
6001.462,465.882,800
4,6801.612,9101.012,870
5.6113,650
se6,4101.923,330.913,650
2,375.484,900
trative
3,215.81 $65,680
04,7201.62$64,6051.60 $40,365
1.32$13,640.70$ 19,520
,200.8611,840
150.875,940
990.78$37,300
01.66$4,460.75$ 5,980
432,810.684,160
63120.091,340
90.64$11,480
7,215.80$21,600.84 $25,820
ncomeTax..$87,5052.03 $43,0052.96$14,545
52.125,7003.351,700
$ 37,3052.90$12,845
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 412/419
MPARATIVESTATEMENTS[Chap.40
becontinuallyonguardto avoidmis-
ce,theforegoingstatementshowsthat
ere.78ofthosefor 1939;inotherwords,
Thesalesfor1941 were1.35ofthose
increased35%.
35%increasebear tothe22%
omeconfusionaboutthismatter
ewascomputedonabaseof $727,650.00
ewascomputedona baseof$932,645.00.
usion,someanalystsadvocatecom-
ononebase—thefiguresforthe earliest
ureis illustratedbelow:
ssStatements
nd1939
39Amount
TT05$727,650.00^78"8932,645.00
ances...13,260.00.4611,750.00.4128,600.00
07$715,900.00.79$904,045.00
P u b l i c D o m a i n ,
G o o g l e - d
i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s
_ u s e # p d - g
o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 413/419
APITAL
sinessis theexcessofitscurrent
ities.Theworkingcapitalof The
onedinChapter40)atvariousdatesis
s
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 414/419
NGCAPITAL[Chap.41
andtheinventorieshaveincreased
edecreased.
939
0
10,7402.081.96
195,015259,240.92.75
30037,1501.371.14
4,86017,6501.711.41
05025,2601.321.47
165$320,310$350,0401.07.92
000S 85,000.35.59
51,35064,2101.06.80
enses..25,43522,68020,4901.241.11
$123,650$124,030$169,700.73.73
$196,280$180,3401.391.09
9,140$715,900$904,0451.07.79
esirabletoshowthe changesinnet
ouldhaveabearing onthechangesin
liabilities.Forinstance,wefindthat
y.79ofthosefor1939; thereceivables
5ofthoseat theendof1939.These
ereceivableswereofapproximately
ates.Ontheotherhand,witha con-
ales,allof theinventorieshaveincreased.
41,we findthatthesaleswere slightly
asshownbythesalesratio of1.07;
s.92,there appearstohavebeenan
tionofthereceivables;however,the
odsandgoodsin processhaveincreased
shaveincreased,thussuggesting
tininventories.
o currentliabilitiesisregardedas
easureofcredit position.Theamount
ncerelativetothe sizeofaloanwhich
capitalratiois evidenceastothe
oan.
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 415/419
WORKINGCAPITAL407
kingcapitalratio maybeshownby
ttwocompanieshavethefollowing
iabilities:
000.00$1,000.000.00
,000.00900,000.00
00.00$_JOO,000^00
ngcapitalof $100,000.00,but
talpositionisrelativelymorefavorable
ecauseCompanyAhas$2.00 ofcurrent
liabilitieswhereasCompanyBhasonly
dollarofcurrentliabilities.
ofTheOsborne Companyareshown
edbydividingthecurrentassetsby
165$320^310$350,040$370,100
,650124.030169,700186,310
$196,280$180,340$183,790
llarsof current
liabilities3.032.582.061.99
lratioofat least2to1 isconsidered
sfactorycurrentposition.
OsborneCompany,ortheratioof
kcurrentassets)to currentliabilities,
10,740$21,5OO
able—less
405195,015259,240227,860
$260,765$216,100$269,980$249,360
,650124,030169,700186,310
etsover current
70$100,280$63,050
uick current
liabilities....2.111.741.591.34
elymuchlesscurrentthan the
nventoriesmustbesold beforetheir
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 416/419
NGCAPITAL[Chap.41
hepaymentof currentliabilities;this
toroftheabilityto selltheinventories,
merequiredforthedisposal offinished
ofrawmaterialsandgoodsin process
rthe saleofthefinishedproduct.
alystssupplementtheworking
edacidtest ratio.
st1to 1isusuallyregardedas
ets.
goingdiscussionoftheacidtestratio
a companyisnotentirelydependent
rentassetstototalcurrentliabilities,but
currentassetsowned.Thisfactmay
hefollowingcomparisonofacompany's
ates:
0.00
0,000.00
000.00
00.00$60,000.00
0030,000.00
00$30,000.00
eworkingcapitalratio(2to 1)
,itsworkingcapitalpositionat the
e.Fromone standpointitsposition
ndof 1941thanattheend of1940because
urrentassetofcashto themuchless
s.Ontheotherhand,the amount
omthe currentassetsmayhavebeen
relargerinventoriestobeconvertedat
inventoriescanbedisposedofat
realizablevaluesofthe currentassets
omparedasfollows:
0.00
0,000.00
ost36,000.0012,000.00
alue$66,000.00$62,000.00
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 417/419
ORKINGCAPITAL409
hatthecurrentassetsatthe end
r ultimaterealizablevaluebecauseof
elargerinventories,ashiftfromthe more
receivablestothe lesscurrentassetof
rdedasundesirable.Todetermine
kingplace,a statementsimilartothe
d.Thepercentsarebased onthecur-
Company.
5.81%
e63.55%60.88%74.06%61.57%
3.21%10.61%13.34%
65.047.73
7.2211.55
32.54%22.87%32.62%
00%100.00%100.00%100.00%
pitalratio.
ftsfromtherelativelymorecurrent
current assets,orviceversa,will
ny'sabilitytopayitscurrentdebts
bletobreak downtheworkingcapital
showwhetherthecurrentliabilities
onhand,orwhethertheirpayment
andpartof theproceedsofthereceiva-
ceivablesandpartoftheproceedsof
on. Thefollowingratherextremecase
ustration:
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 418/419
NGCAPITAL[Chap.41
etotal cashandreceivableswereequal
bilities; andsoon.
tionofWorkingCapitalRatio
75
5.750
8751.250
02.000
ingfacts:Atthe endof1939the
dgoods,andgoodsinprocesswererequired
ofthecurrentliabilities;at theendof
vables,andfinishedgoodswererequired;
ythecashand receivableswererequired.
abulationforTheOsborneCompany.
tionof
6
e
ngcapitalisalsodependentupon
hecurrentassetsareconverted.To
workingcapitalmoves,someanalysts
ngcapitalturnoverbydividingthesales
ageworkingcapitalusedduringthe
omputationsoftheworkingcapital
Company:
196,280.00$180,340.00
0.00180,340.00183,790.00
310.00182,065.00
,140.00715,900.00904,045.00
4.333.804.97
alturnover.
easeintheturnoverindicatesan
or'sopinion,however,changesinwork-
P u b l i c D o m a i n , G o o g l e - d i g i t i z e d
/ h t t p : / / w w w . h
a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e
7/27/2019 General Accounting (5)
http://slidepdf.com/reader/full/general-accounting-5 419/419
ORKINGCAPITAL411
practicallynosignificance,sincethey
fferentcauses.
sfigureincludesaprofit;consequently
theamountof thesalesandby theprofit
methefollowingfacts:
000.00
s480,000.00380,000.00
000.00
.00SIOO.OOO.OO
(salesdividedby
verhasincreasedfrom4to 5,but
thisincreaseisanimprovement;the
tagreaterstrain wasputontheworking
ofit asbefore.Itwouldappeardesira-
ecomputationwhichwouldshowthe
andanothercomputationwhichwould
eturnover,thus:
pitalTurnover
s$480,000.00$380,000.00
00100,000.00
8
pitalTurnover
000.00
00100,000.00
apital20%20%
dividetherateof profitbythe
terminetherateof profitperturnover,
apital20%20%
8
4.17%5.26%
bjectiontotheworkingcapitalturn-
asalreadysuggested.Toillustratethe
esamesales,costof sales,expenses,and
eyears;thecompanyincreaseditscur-
thusreducingitsworkingcapitalbythe
arecomputedonthenextpage.
c e s s_ u s e # p d - g o o g l e