Chapter VI: Part II: Classes of Accounts (4)

Subscriptions 3,000.00
Capital stock 3,000.00
Subscriptions of _A_, _B_, & _C_
per subscription book.
--------
Surplus 3,000.00
Subscription 3,000.00
Surplus appropriated to subscriptions
per resolution of the
board of directors
Jan. 25th, 1909.

The above would be a rather unusual proceeding as the stock is fully paid, though such gifts are sometimes made. The tendency of the present times is toward profit sharing for the employes of corporations. The plan of profit sharing takes many forms, and there are some notable examples among very large corporations which have given employes stock in the corporation, or afforded them an opportunity to acquire stock on very favorable terms.

Among smaller corporations it is quite common to enable employes to acquire its stock subject to certain special conditions. Frequently employes are permitted to subscribe for stock with an agreement that they are to pay no money, but that dividends declared are to be applied to the payment of subscriptions. In this way the stock is made to pay for itself out of its own earnings. Sometimes provision is made for the payment of small annual installments on the subscriptions in addition to applying the dividends. When stock is issued to employes under these conditions, the contract sometimes specifies that in the event of the subscriber leaving its employ before the subscription is paid in full, the ownership of the stock shall revert to the company, and in such cases the stock, until it becomes full paid, is usually placed in the hands of a trustee. The principal object in issuing stock to an employe and surrounding the transaction with these restrictions is, of course, to insure his continuous service by making it an object to him to remain in the employ of the company.

When stock is so issued, the entry is--

Subscriptions
Capital stock

Subscriptions to stock
by employes, said stock
to be issued subject to the
conditions named in the resolution
authorizing its issue,
passed by the board of
directors January 25th, 1909.

The subscription account is left open until such time as it is closed by the payments credited. When a dividend is declared the entries are--

Surplus
Dividends payable
Being a dividend of----%
declared by the board of
directors on--------1909
payable--------1909.
--------
Dividends payable
Subscriptions
Dividend applied to the
payment of subscriptions.

Another provision sometimes met with in the issue of stock to an employe is that in lieu of an increase in salary he shall receive, at the end of the year, a certain amount in stock. He is then permitted to subscribe for a stated amount of stock and to apply the bonus, or added salary, as a payment. The bonus is usually a stated per cent of sales or of net profits. When such a contingency arises the entry is--

Salaries
John Jones
----% of sales as
per agreement.
John Jones
Subscriptions
Amt. due applied in
payment of stock subscription.

If he has no account, on the books the transaction may be recorded by one entry--

Salaries $1,500.00
Subscriptions $1,500.00
------------

WHEN STOCK SUBSCRIPTIONS ARE NEVER FULLY PAID

=43.= Corporations are sometimes organized with all capital stock subscribed but only paid for in part, and the balance of subscriptions never called for. T. C. Harris, John Alfred, and M. B. Hatch organize a company to conduct the business of buying, selling, and renting automobiles with a capital stock of $15,000.00, each subscribing for $5,000.00. A cash payment of 25% is made on the stock and the balance is to be paid in when called for. The entries stand on the books as follows--

Subscriptions $15,000.00
Capital stock $15,000.00
Cash 3,750.00
Subscriptions 3,750.00

The business prospers to such an extent that the profits provide sufficient money and it is not likely that the stockholders will be called upon for further payments. It is decided to reduce the stock to $5,000.00 and to declare a dividend to make this stock full paid. The entries for these transactions follow:

Capital stock 10,000.00
Subscriptions 10,000.00
Capital stock reduced in accordance
with resolution of board of directors
passed Jan. 27, 1909.
--------
Surplus 1,250.00
Dividends payable 1,250.00
Dividend declared by board
of directors Jan. 27, 1909,
payable immediately.
--------
Dividends payable 1,250.00
Subscriptions 1,250.00
Dividends applied to the
payment of stock subscriptions.

The original stock certificates are now surrendered and new ones issued in their place. In the stock ledger the stockholders are debited and capital stock credited for the shares surrendered. Then, capital stock is debited and stockholders credited for the new shares issued.

It might happen that a corporation wishes to reduce the capital stock held by stockholders without having it appear that capital stock has been reduced. This has been done by purchasing its stock and placing it in the treasury. Payment for the stock may be made in cash or notes, or it may be taken from surplus. The entries would be--

Treasury stock 10,000.00
Cash 10,000.00

or

Treasury stock 10,000.00
Bills payable 10,000.00

or

Treasury stock 10,000.00
Surplus 10,000.00

If the capital stock is to be reduced on the books, capital stock will take the place of treasury stock in these entries as--

Capital stock 10,000.00
Cash 10,000.00

EXERCISES

1. Parsons, Young, and Searles are partners and decide to form a corporation with capital stock of $40,000.00, which is to be issued as full paid stock in exchange for their present business. Each partner is to receive stock in proportion to his interest in the present business. The balance sheet of the partnership is as follows:

_Assets_
Cash 3,500.00
Bills receivable 6,000.00
Accounts receivable 6,500.00
Merchandise 14,000.00
--------
Total 30,000.00
_Liabilities_
Bills payable 4,000.00
Accounts payable 2,000.00
Parsons 10,000.00
Young 8,000.00
Searles 6,000.00
--------
Total 30,000.00

Make entries on books of the partnership.

Make entries on books of the corporation.

2. Hoadley and Stockton are partners and desire to incorporate a company with a capital of $10,000.00 to take over their business. It being necessary to have three incorporators they agree to give Hopper, an employee, 10 shares--$1,000.00--of the stock of the new company. The stock is to be divided equally between Hoadley and Stockton after giving Hopper $1,000.00. The balance sheet of the partnership is as follows:

_Assets_
Cash $960.00
Accounts receivable 1,570.00
Merchandise 720.00
--------
Total $3,250.00
_Liabilities_
Accounts payable 460.00
Bills payable 500.00
Hoadley 1,145.00
Stockton 1,145.00
--------
Total 3,250.00

Make all necessary entries on the books of the partnership.

Make open entries on the books of the new company.

3. The National Manufacturing Co., has an authorized capital of $100,000.00 of which $60,000.00 is paid up and $40,000.00 unsubscribed. It is decided to permit employes to subscribe for $10,000.00 of the stock by paying 10 per cent in cash, all dividends declared to be applied to the payment of subscriptions.

What entries are made when this stock is subscribed for?

A 10 per cent dividend being declared at the end of the first year what entry is required?

4. The Atlas Novelty Co. has a capital stock of $50,000.00. All of the stock has been subscribed for, but only 40 per cent has been paid. A surplus of $10,000,00 has been accumulated. It is desired to reduce the stock to $25,000.00 full paid. What is the necessary proceeding, and what entries are required?

5. A company has a capital stock of $50,000.00 full paid, and a surplus of $11,172.00. A stockholder who owns $7,000.00 stock in the company wishes to dispose of his stock and, to secure cash, offers to sell it to the company at par. His offer is accepted and the stock purchased, but the company does not wish to reduce its capitalization. What is the entry?

RESERVES AND THEIR TREATMENT

=44.= A reserve is an amount retained from current earnings to meet a future contingency. According to a prominent authority whose recent discussions of this subject have attracted attention, _a reserve is an expression of the judgment of the accountant as to what amount will be necessary to meet a contingency_. Reserves are created for many purposes, among which the following are good examples.

_Reserves for bad debts._ An amount--usually a stated per cent of accounts receivable--annually set aside to cover losses from uncollectable accounts.

_Reserves for depreciation._ The plant--buildings and machinery--will wear out, no matter how substantially built. A charge is made against current earnings to create a reserve which will provide for a renewal of the plant, or any part of it, when worn out. Separate reserves are usually maintained for buildings and machinery.

_Reserves for Patents, Franchise, Goodwill_ and similar fictitious assets. An annual charge of an amount sufficient to extinguish the value at which the fictitious asset has been placed on the books.

_Reserves for permanent improvements on leased property._ Permanent buildings, title to which will revert to the lessor at the expiration of the lease, are sometimes erected on leased property. A reserve is created to absorb the cost of such improvements during the life of the lease.

_Reserves for buildings in hazardous undertakings._ In certain lines of business, manufacturing plants are erected with the expectation of having a permanent supply of raw material. If the supply gives out, the plant may be valueless for other purposes. Examples are oil wells and mines. A reserve is created to absorb the cost.

The reserve is coming into more general use every year, especially by corporations, whose managers see the necessity of providing for these contingencies. When a machine wears out it must be replaced. If no reserve has been created, the money for its replacement must come from current earnings, or be provided by borrowing money or increasing capital. The better plan is to make provision in advance by creating a reserve.

The amount of the reserve should be the value of the asset, and the sum set aside annually should be sufficient to equal the value of the asset at the end of its estimated life. To illustrate, if a machine is estimated to last 10 years, the annual reserve for depreciation should be 10% of its cost. The reserve is carried on the books as a liability and is an off-set to the asset which it is to replace. If we were to prepare a statement of the value of machinery as shown by the books we would state it in this form--

Machinery $20,000
Less reserve for depreciation 2,000
--------
$18,000

This shows the exact amount at which this asset is valued. Taking the illustration referred to--at the end of 10 years the liability _reserve for depreciation_ will equal the asset _machinery_, and the funds which have been reserved from profits during the past 10 years will be available for the purchase of new machinery.

=45. Reserve Funds.= A term frequently used to designate a reserve created for a certain purpose is reserve fund. This term is somewhat confusing for when we speak of a _fund_ we are more likely to think of it as an asset than as a liability. When the principle underlying reserves is thoroughly understood, however, it is readily seen that the use of the term _reserve fund_ is merely a question of the use of English and does not affect the principle. A reserve or _reserve fund_ is a nominal liability artificially created to off-set a decrease in value of an asset. On the principle that an increase of liabilities represents a loss, the amount reserved each year represents a loss, but since the liability created is not a real but a nominal liability it does not affect the real assets of the business.

=46. Sinking Funds.= A sinking fund is an amount set aside out of profits to meet an anticipated liability, or an obligation which is to fall due at some future date. Sinking funds are set aside for such purposes as the payment of bonds at maturity, mortgages, etc. The sinking fund is the amount which, invested at compound interest, will produce the desired amount at the end of the period.

A sinking fund is an asset and may or may not be withdrawn from the business. Frequently a sinking fund is invested in securities, such as government bonds, which are placed in the hands of a trustee, thus insuring against the withdrawal of the funds from actual use in the business.

Unlike a reserve, a sinking fund has no effect on the apparent profits of the period in which it is created. It does, however, tie up or render unavailable for dividends a certain part of those profits. Whether or not it is carried on the books in a separate account, a sinking fund is a part of the surplus of a business.

=47. Computing Sinking Funds.= The amount necessary to set aside at the end of the year to provide a given sum in a stipulated number of years at a stated rate of interest, compounded annually, may be found as follows:

Divide the interest for one year upon the sum to be accumulated by the compound interest upon $1.00 for the stipulated time. The result will be the amount necessary to invest at the end of each year.

If the amount is to be invested at the beginning of the year, divide the result obtained as above by the amount of $1.00 for one year.

_Example._ To provide for payment of $50,000.00 at the end of 15 years, what amount must be put into a sinking fund at the end of each year, if the fund is invested to earn 3% compound interest? Interest on $50,000.00 for 1 year at 3% is $1,500.00. Compound interest on $1.00 for 15 years at 3% is .55797. Dividing $1,500.00 by .55797 gives $2,688.32, the amount necessary to put into the fund annually. If this amount is to be invested at the beginning of each year, divide the above result ($2,688.32) by $1.03 (the amount of $1.00 for one year at 3%) and we obtain $2,610.02 the amount needed.

BONDS

=48.= In the sense here used a _bond_ is the written obligation of a corporation to pay a certain amount at a specified future date. Bonds are usually secured by a mortgage on all or a part of the property of the corporation.

A bond issue is a favorite method of borrowing money with corporations. Bonds can be issued in any denomination, and by reason of this a loan can be distributed among a large number of investors. Being secured by mortgage on the company's property the bonds of a corporation are very frequently more desirable investments than its stocks. Interest on bonds must be paid before dividends can be declared.

Bonds can only be issued with the consent of the holders of a certain per cent of the stock.

=49.= _Classes of Bonds._ The bonds of corporations are of several classes, as follows:

A first mortgage bond is one secured by first mortgage on the company's property.

A second mortgage bond is one secured by second mortgage. Interest cannot be paid on second mortgage bonds until it has been paid on the first mortgage bonds.

General mortgage bonds are those secured by a general mortgage on all of the company's property.

Collateral bonds are secured by the deposit of collateral security.

A debenture is a bond with no other security than the good name of the company.

Refunding bonds are those issued in place of maturing bonds which the company does not wish to pay in cash.

Equipment bonds are those secured by the rolling stock of a railway, and are also known as car trust certificates.

A gold bond is any form of bond, the terms of which specify that it shall be paid in gold.

Registered bonds are those, the names of the owners of which must be registered on the books of the company. Ownership of a registered bond can be transferred only on the books of the company.

=50. Bond Liability.= When bonds are issued by a corporation, either public or private, an account is opened under some such caption as _bond issue_ or _bonds payable_. As fast as bonds are sold the proceeds are credited to this account, which represents a liability. A new account should be opened for each issue of bonds.

The bonds of a given issue will all bear the same date, with interest payable from that date. We will suppose that a corporation issues its bonds for $100,000.00 in denominations of $1,000.00 each. These bonds are dated Feb. 1st, and bear interest at 5 per cent payable annually. They are payable at the end of 10 years from date. The company agrees to maintain a sinking fund of an amount sufficient to pay the bonds at maturity if invested in securities drawing 4 per cent interest, and to invest the fund in such securities which are to be placed in the hands of a trustee.

During the first year bonds are sold in the amounts and under the conditions which follow:

_First._ On the date of issue $10,000.00 of these bonds are sold at par.

_Second._ At the end of three months $10,000.00 of the bonds are sold at 101 and accrued interest, yielding $10,225.00 of which $10,000.00 is principal, $100.00 premium, and $125.00 interest.

_Third._ The next sale is $10,000.00 of the bonds at 98, interest accrued $250.00, yielding $10,050.00 made up of principal $10,000.00, less discount $200.00, and interest $250.00.

=51. Premium on Bonds.= When bonds are sold at a price above par, the premium should be credited to a _premium on bonds_ account. When sold below par, the discount may be charged to the same account.

=52. Interest on Bonds.= The interest paid on bonds may be charged to an _interest on bonds_ account, which keeps it separate from the regular interest account. When bonds are sold with accrued interest, which is paid by the purchaser, the accrued interest is credited to interest on bonds.

=53. Expense of Bond Issue.= All expenses incurred in the issue and sale of bonds should be charged to _expense of bond issue_ account. The account can be closed into profit and loss immediately, or it is proper to spread it over the life of the bonds, charging off the proper amount each year. It is also considered proper to charge discount on bonds to this account.

=54.= Continuing the example in Art. 50, we find that the amount of bonds outstanding is $30,000.00, and a sinking fund must be established which will equal this amount when the bonds mature. Following the rule in Art. 38, we divide the interest on $30,000.00 for one year at 4 per cent ($1,200.00) by the compound interest on $1.00 for 10 years at 4 = (.48024) obtaining as a result $2,498.75, the amount necessary to be invested at the end of each year. This amount must be provided each year for permanent investment to meet the principal and an additional $1,500.00 must be provided each year for interest.

The entries which follow are the ones necessary to record the sales shown in Art. 50.

--Feb. 1--
Cash $10,000.00
Bond issue $10,000.00
--------
--May 1--
Cash 10,225.00
Bond issue 10,000.00
Premium on bonds 100.00
Interest on bonds 125.00
--------
--Aug. 1--
Cash 10,050.00
Expense of bond issue
(discount) 200.00
Bond issue 10,000.00
Interest on bonds 250.00

At the end of the year when the interest is paid and the first installment of the sinking fund is set aside, these entries are made:

--January 31--
Interest on bonds 1,500.00
Cash 1,500.00
--------
Sinking fund 2,498.75
Cash 2,498.75

The illustrations (page 240) show the status of all of these ledger accounts at the end of the year.

MANUFACTURING AND COST ACCOUNTS

=55.= Manufacturing began in this country many years ago and was for a long time confined to the eastern and New England states. Encouraged and fostered by national, state, and local governments, and by discoveries of sources of supplies, it has extended to all parts of the country. Manufacturing has grown to proportions which place it at the very head of our industries, if we except agriculture, the growth of which has been largely influenced by the progress in manufactures. One result is that the business of manufacturing has perhaps more than any other, attracted capital from great numbers of investors, large and small. Owing to its very nature, manufacturing readily lends itself to the corporate form of organization, and it is for manufacturing that a very great number of corporations have been formed. Manufacturing has, therefore, been selected for a more complete exposition of corporation accounting.

The accounts of a manufacturing business are to a certain extent peculiar to itself. Regardless of the nature of the product, there are certain underlying principles which should govern the devising of a system of accounts for a manufacturing business. Perhaps the most important feature to be kept in mind is to so arrange the system that the cost of manufacturing the goods will be shown.

Correct cost accounting methods are of greater importance to the manufacturer than the method of keeping accounts with his customers. He cannot afford to wait until the end of the year for results; he must know what his goods cost him if he is to intelligently make selling prices. There are so many opportunities for fluctuations in manufacturing costs that the accounts must at least show approximate results at all times.

Cost accounting is a profession in itself, and it is not our purpose to discuss, in this paper, all of the details of collecting data in the factory and shop. The purpose of this paper is to show the accounts with which a bookkeeper for a manufacturing business should become familiar. Even when a manufacturer does not maintain a complete cost accounting system the bookkeeper can produce some valuable statistics by a proper arrangement of the accounts.

ACCOUNTS USED

=56.= For the purpose of illustration we have selected a representative schedule of the accounts of a manufacturing business. The following accounts are those which have a direct bearing on the manufacturing branch of a business and do not include the administrative and selling branches.

FACTORY ASSETS

1. _Real Estate._ Includes the cost of land and factory buildings.

2. _Machinery._ Charged with the cost of all machinery including total cost of installation. Freight, cartage, and cost of erecting the machine ready for use should be included.

3. _Patterns and Tools._ Charged through cash and purchase book for all patterns and tools purchased. Charged through cash book and journal--with proper credit to material and labor accounts--if manufactured in the factory.

4. _Material Purchases._ Charged through purchase and cash books for all purchases of material that enters into the product. Cost includes charges for delivery. Credited for all material used in the factory. This may be subdivided into several accounts to represent the different classes of material used--as iron, steel, lumber, leather, hardware, etc.

5. _Supplies Purchases._ Charged through purchase and cash books for all purchases of factory supplies, like oil, waste, belt lacing, and similar items. Credited for all supplies used in the factory.

6. _Finished Goods._ Charged for all goods finished, usually at cost of manufacture. Sometimes a small factory profit is added. This account represents a purchase account to the commercial department, as it represents the cost of goods to them,

FACTORY EXPENSES

7. _Salaries._ Charged for salaries of superintendent, assistant superintendent, and factory clerks.

8. _Labor._ Charged through cash and pay roll books for the amount of all factory pay-rolls.

9. _Experimental._ Charged through cash and pay-roll books and journal for all labor and material used in experimental work carried on for the purpose of improving the product.

10. _General Factory Expense._ Charged through cash and purchase books for cost of miscellaneous factory expense items not otherwise accounted for.

11. _Power, Heat, and Light._ Charged for fuel, oils, water, wages of engineer and firemen, electricity (when purchased), and all other items entering into their cost.

12. _Building Maintenance and Repairs._ Charged through cash and purchase books for materials purchased specially for repairs to buildings. Charged through journal and pay-roll book for labor and materials or supplies consumed in maintenance and repairs to buildings.

13. _Repairs to Machinery._ Treated the same as No. 12.

14. _Repairs to Patterns and Tools._ Treated the same as No. 13.

15. _Insurance._ Charged through cash book for all premiums paid for insurance on buildings and contents.

16. _Taxes._ Charged for all state, county, and city taxes.

17. _Depreciation of Buildings._ An amount charged off each year to cover depreciation.

18. _Depreciation of Machinery._ Treated the same as No. 17. Depreciation based on estimated life of machine.

19. _Depreciation of Patterns and Tools._ Treated the same as No. 18.

SUMMARY ACCOUNTS

20. _Manufacturing Account._ Charged for cost of labor and material consumed in manufacture of goods; charged for proper proportion of all expense accounts; credited with cost of all finished goods. Balance represents cost of all goods in process.

COLLECTING COST STATISTICS

=57. Routine Followed.= The notes following the names of the accounts in the above schedule explain their purpose and show clearly how charges are made direct to the expense accounts. Further explanations are necessary in regard to charges and credits to manufacturing account.

Labor is easily disposed of as the amount standing to the debit of labor account at the end of the month is transferred to the debit of manufacturing account, closing labor account.

Material charges are more difficult to handle. In all well-regulated factories all material is as carefully accounted for as cash. Proper storage rooms are provided in which all material is stored. These rooms are placed in charge of a man known as stockkeeper or stores clerk, and no one is allowed to take material from the storerooms without first presenting a written order, signed by the foreman, showing for what purpose the material is to be used. This order is retained by the stockkeeper and after he has posted the material to his own records he sends it to the bookkeeper. From these orders, the bookkeeper compiles a record of material withdrawn and, at the end of the month, the amount is debited to manufacturing account and credited to material purchases.

The stockkeeper keeps a record of all material received and delivered and the balance of his accounts shows the quantities of the different materials which he should have in stock. His record should agree with the balance of material purchases account.

When a stockkeeper is not employed it is necessary to have reports from the factory. The bookkeeper should arrange to obtain daily reports from the foremen showing all materials taken into their departments which are to be used in the manufacture of the regular product. If any of this material is to be used for the manufacture of tools or patterns for use in the factory, or for repairs to tools, patterns, machinery, or buildings, it should be noted on the report with a statement of the exact purpose for which it is intended. From these reports, the bookkeeper will compile his material records which will be credited to material purchases, and charged to manufacturing account and the different repair accounts at the end of the month.

Supplies are handled the same as materials, except that where this is a small item it is sometimes treated as an expense account. Where a considerable value is involved it is preferable to consider it as a subdivision of the material account.

The expense accounts must be charged on a percentage basis for the reason that the amounts actually expended vary in different months, and an expense item paid in one month may cover that particular expense for an entire year. Such items are insurance premiums and taxes, paid once a year to cover twelve months. Other expense items like experimental, power, and repairs are difficult to determine for a single month. It is customary to base the charge for these items on the records for the previous year. The amount of such expenses for a year is divided by twelve and each month one twelfth of the amount is charged to the manufacturing account and credited to the expense account. If there is any discrepancy at the end of the year it is adjusted by a debit or credit to finished goods.

Reports should be made daily by all foremen showing exactly what partly finished goods are received in their department and the quantity delivered to the next department. A record of these reports should be kept, which will show at all times the quantity of goods in process in each department. Reports of finished goods received in the stock room will show the quantity manufactured, or rather finished, during the month. See report form illustrated on page 53.

If all goods on which work had been started were finished, the charges to manufacturing account would represent their exact cost, but there is always a certain quantity of goods in various stages of manufacture, and the amount already expended on them must be considered. Therefore an inventory is taken of goods in process. Great care must be exercised, in taking this inventory, that too high a value is not placed on partly finished goods, for if the valuation is too high the apparent cost of finished goods will be less than actual cost. It is of utmost importance that the cost of manufacture be not understated, for it is on this cost that selling prices will be based. This is one reason why some manufacturers add a small-factory profit. Unless a complete system of cost accounting is maintained, this inventory of goods in process must be an estimate, but the record of goods in process in each department will be of considerable assistance in making the estimate.

When the inventory is complete the amount should be deducted from the total debits to manufacturing account, which will show the cost of goods manufactured. This cost should then be credited to manufacturing account and charged to finished goods account. Manufacturing account will now show a debit balance representing cost of goods in process.

This method will produce very satisfactory results for factories in which but one line of goods is manufactured, but does not supply the information required where several styles, sizes, or lines are made. For one line of goods it is only necessary to divide the total cost by the quantity produced, as pounds, feet, dozen, or gross to find the cost of a single unit. In the more complicated business a detailed cost system would be required.

PAY-ROLL RECORDS

=58.= In connection with the labor account, the manner of keeping the pay-roll record is of considerable importance. Like most other forms of record, pay-roll books are made to suit the needs of the individual concern. For a manufacturing business a feature to be kept in mind is such an arrangement as will give the most complete record of the cost of labor in each separate department. Where men are never transferred from one department to another during a weekly or monthly pay-roll period, this result would be obtained by a simple grouping of the names by departments. In many manufacturing lines, however, workmen are frequently transferred so that to obtain costs for departments it is necessary to provide special forms for distribution.

But why go to the trouble of distributing the pay-roll by departments? That we may more closely watch expenses and costs. The reports which the bookkeeper receives from foremen show quantities of goods passing through each department. If the pay-roll is sectionalized it will enable the bookkeeper to determine the labor cost per unit of goods manufactured in each department. A comparison of these costs from month to month will be of value in showing changes in cost. The form illustrated provides for a business having four departments and paying employes both on piece work and day wage plans.

EXPENSE INVENTORY

=59.= When the books are closed, it usually happens that certain expense accounts show expenditures for items of expense that are not accrued. Illustrations are insurance and taxes paid yearly in advance. Suppose insurance premiums to the amount of $150.00 are paid on April 1st to cover insurance for one year. If the books are closed July 1st, 9/12 of this amount will have been paid for insurance that we have not received--the premium has not been earned. The inventory will also show unused material which has been charged to such expense accounts as repairs. It is proper to take an inventory of these amounts, treating them as assets in the balance sheet.

To properly record all such unearned expenses and make the books agree with the balance sheet, an account should be opened under the title of _Expense Inventory_, to which these items will be charged, with corresponding credits to the proper expense accounts. After the books have been closed, these items will be changed to the expense accounts, and credited to expense inventory, closing the latter account.

EXPENSE LIABILITY

=60.= Certain expenses will have accrued which have not been paid. Such an item is interest on bills payable, bonds, or mortgages, or taxes due and unpaid. These items should be treated as liabilities in the balance sheet. An account called _Expense Accrued_ should be opened and credited with these items, with corresponding debits to expense accounts. When the books have been closed, this account is closed by crediting the items to the expense accounts from which they were received.

BALANCE LEDGER

61. A form of ledger now in quite common use is known as the _balance ledger_. The form differs from the standard ledger form in being provided with an extra column in the center in which balances are extended. If the bookkeeper when posting, extends the balance after each item is posted, much time is saved in looking up accounts and in taking trial balances. The nature of the account will usually indicate whether there is a debit or credit balance. Accounts in the sales ledger will usually show a debit balance, while one in the purchase ledger will have a credit balance. If the balance is the opposite from what is to be expected it may be indicated by placing the letter _D_ in front of the amount in the balance column for debits, or the letter _C_ after the amount for credits.

SAMPLE TRANSACTIONS

62. The following transactions exhibit the accounts which are special to a manufacturing business without including the commercial accounts which record sales. The manner of keeping those accounts is the same for a manufacturing business as for any other.

Being a business conducted by a corporation these accounts include the stock accounts usually kept in the general books. The auxiliary stock books are omitted, it being felt that the special illustrations of such books will have been sufficient to give the student a thorough understanding of their uses.

The books required in the manufacturing business, omitting sales accounts, are _invoice register_ or _purchase book_, _cash book_, _journal_, _pay-roll distribution book_, _purchase ledger_, and _general ledger_.

A corporation known as the Atlas Manufacturing Co., is organized with an authorized capitalization of $100,000.00, with the provision that business is to begin when $50,000.00 of the stock has been subscribed, and $25,000.00 paid in. The incorporators are Henry Biddle, John Noonan, David Snow, Henry Farwell, and George Dunn. Each incorporator subscribes for $10,000.00 stock payable one-half down and one-half in 30 days. The detailed record follows:

--March 1--

Received subscriptions to the capital stock,
payable one-half down, and one-half in 30
days, from the following. Stock is to be
issued when paid in full.

Henry Biddle $10,000.00
John Noonan 10,000.00
David Snow 10,000.00
Henry Farwell 10,000.00
George Dunn 10,000.00

Received cash in payment of subscriptions
from the following:

Henry Biddle 5,000.00
John Noonan 5,000.00
David Snow 5,000.00
George Dunn 5,000.00

Received from

Henry Farwell

His note at 30 days with 6% interest in payment
of installment on his subscription 5,000.00
--------
Deposited cash in Second National Bank 20,000.00

--2--

Received from

Derby Desk Co.
Invoice #1, terms N/30
Charge to office fixtures 350.00

--3--

Leased for two years from Jacob Newman
a factory building at an annual rental of
$1,800.00, payable quarterly in advance.
Gave him check No. 1 for 3 months' rent.

--4--

The following invoices are entered--

Meyers Engine Co.
Invoice No. 2, terms N/30
Charge to machinery 1,500.00

--4--

Patton Machine Co.
Invoice No. 3, terms N/30
Charge to machinery 3,500.00

--4--

Danforth & Co.
Invoice No. 4, terms N/30
Charge to material 960.00

--5--

The following invoices are entered--

Franklin Printing Co.
Invoice No. 5, terms 2/10, N/30
Charge to office supplies 165.40

--5--

Slade Oil Co.
Invoice No. 6, terms 3/10, N/30
Charge to supplies 54.25

--6--

Norwich Machine Co.
Invoice No. 7, terms N/30
Charge to machinery 8,500.00

--6--

Paid freight by check No. 2 to
T. Fogarty, Agt.
Machinery 216.20
Materials 11.60 227.80
------

--8--

Francis & Co.
Invoice No. 8, terms 3/10, N/30
Charge to materials 640.00

--9--

Stevens & Co.
Invoice No. 9, terms 3/10, N/30
Charge material 225.00

--9--

Gave Danforth & Co.
Check No. 3
To pay bill of March 2 960.00
Less 2% 19.20 940.80
------

--10--

Lackawana Coal Co.
Invoice No. 10, terms N/30
Charge power, heat, & light 185.00

--11--

Gave Franklin Printing Co.
Check No. 4.
To pay bill of March 4 165.40
Less 2% 3.31 162.09
------

--12--

Danforth & Co.
Invoice No. 11, terms 2/10, N/30
Charge material 315.00

--13--

Drew check No. 5.
for 2 weeks' pay-roll 220.50
Charge machinery
for cost of installing 178.50
Building maintenance
for repairs to building
per pay-roll distribution 42.00

--15--

Gave Derby Desk Co.
Check No. 6
To pay bill of March 1 350.00

--15--

Gave Slade Oil Co.
Check No. 7
To pay bill of March 5 54.25
Less 3% 1.63 52.62
------

--17--

Gave Francis & Co.
Check No. 8
To pay bill of March 7 640.00
Less 3% 19.20 620.80
------

--18--

Gave Stevens & Co.
Check No. 9
To pay bill of March 8 225.00
Less 3% 6.75 218.25
------

--19--

Eureka Tool Co.
Invoice No. 12, terms N/30
Charge tools 250.00

--20--

Check No. 10
for 1 week's pay-roll
Charge labor 326.25
Charge tools 27.50 353.75
------
(Making tools for shop per
pay-roll distribution)

--22--

Received from Danforth & Co.
Credit memo
for damaged goods in lot
covered by invoice dated 3/12 63.00
Credit material
Gave them check No. 11
For acct. 252.00
Less 2% 5.04 246.96
------

--27--

Check No. 12
for 1 week's pay-roll $ 342.70
Charge labor per
pay-roll distribution

--30--

Gave Norwich Machine Co.
Note of Henry Farwell 5,000.00
Accrued interest 25.00 5,025.00
------
Gave them check No. 13
to pay their account 3,475.00

--31--

Salaries check No. 14
for salaries of Supt. & Clerks 350.00

=63. Manufacturing Data.= The following data has been collected by the bookkeeper from the reports of superintendent and foremen, and from the inventories taken at the end of the month.

Material issued to factory 1,003.35
Material used for building repairs 50.00

_Inventories_
Supplies 45.00
Rent (unexpired) 300.00
Power, heat, and light (Coal) 150.00
Office supplies 140.40
Goods in process--material 602.00
Labor 400.00 1,002.00
------

We will now close the ledger to ascertain manufacturing results for the month, by making the following adjusting entries in the journal--

Debit Manufacturing Account
for material issued to factory.

Debit Building Maintenance and Repairs
for material used in repairs.

Credit Material Purchases
for both of the above.

Debit Manufacturing Account
for Labor Account
for Supplies used--found by deducting
inventory from supplies purchases.
for Salaries Account
for Rent one month
for Power, Heat, and Light--found as above
for Building Repairs
for Office Supplies--found as above
Credit accounts representing above
for amounts charged.

The manufacturing account will now show, on the debit side the total manufacturing expense for the month. The next step is to find the cost of finished goods to be credited to manufacturing account and charged to finished goods account. Our inventory of goods in process, which includes material and labor only, amounts to $1,002.00. The labor account and reports from foremen show that the amount of these items used in the factory is $1,672.30. In round numbers, the former is 60% of the latter, that is, sixty per cent of the work started is still in process. We will assume, therefore, that this is a fair percentage to be used in determining the expense items invested in goods in process. Taking 60% of the total manufacturing expense gives $1,400.13, which, deducted from the total, leaves $933.42 as the cost of finished goods.

In this case the per cent of goods in process is large for the reason that it is the first month of operation. The results in succeeding months will be more nearly equal. If the factory is running regularly, turning out practically the same quantities each month, the quantity of finished goods will just about equal the work started in any one month.

Should we wish to show a factory profit of 10%, it will be necessary to add 10% to the cost of finished goods which will then represent the cost to be used by the sales end of the business. Since we have no account to which this amount can properly be credited, we will open a new account called _contingent profits_, which will be closed into profit and loss at the end of the year.

Since we are not closing the books for the purpose of making a balance sheet, we do not close the expense accounts into an expense inventory account as explained in article 59. Instead, the balances are allowed to stand until such time as the books are finally closed.

EXERCISE

The transactions given in this exercise are a continuation of the business referred in to the preceding articles. During the month of April the following transactions are recorded.

Material purchases $2,670.00
Supplies purchases 127.50
Patterns and tools purchases 150.00
Cash received on subscriptions 25,000.00
Deposited in Bank 25,000.00
Checks drawn
Purchase accounts 5,500.00
Salaries 375.00
Pay-rolls 1,670.20
distributed as follows:
Labor $1,652.70
Machinery repairs 17.50
David Snow 10,000.00
(Stock purchased at par by Company)

The following data is obtained from the reports of foremen and inventories taken at the end of the month:

Material issued to factory
to be used in manufacturing goods. 2,261.00
Material used in machinery
repairs 16.70
Inventories, April 30
Supplies 147.00
Rent (unexpired) 150.00
Power, heat, and light (Coal) 75.00
Office supplies 118.40
Goods in process--material 615.00
Labor 410.00 1,025.00
------

1. Find value of goods in process, using the same percentages in estimating expense items as shown for material and labor.

2. Make journal entries closing accounts into manufacturing account to show cost of goods completed during the month.

NOTE:--To find total cost of material and labor, used and partly used, add to the amounts shown for one month the inventory of the same items at end of preceding month.

3. Make trial balance of general ledger after books are closed as shown in model set.

THE VOUCHER SYSTEM AND ACCOUNTING CHARTS

VOUCHER SYSTEM OF ACCOUNTING

1. _Voucher._ A document which vouches the truth of accounts.

_Receipt._ An acknowledgment of money paid.

The voucher system is sometimes referred to as a modern system of accounting, but a study of the above standard definitions indicates that it is modern only in respect to forms of records and routine.

In the nomenclature of accounting the term voucher is quite commonly used in the same sense as the term receipt. The only distinction appears to be that a voucher is usually understood to be an acknowledgment of the payment of a particular item on account, while a receipt may be an acknowledgment of the payment of money without reference to the item or items covered.

Since the transaction of business began receipts or vouchers in some form have undoubtedly been used. Some form of acknowledgment of money paid has always occupied a place in business. But at first, receipts were not required--they were incidental; given as a matter of courtesy; a "thank you" in written form.

When the first man, after paying his grocery bill, was forced to pay it a second time because the merchant had failed to mark his account "paid," he _demanded_ a receipt. He learned then and there that accounts, and those who keep them, are not infallible. He told his neighbors, and the custom of demanding receipts for money paid, came into being.

The receipt was demanded as a matter of self-protection, to prevent the possibility of payment of an amount being successfully demanded a second time. But the receipt was not an integral part of the accounting records of a business; it might or might not be demanded without affecting the records. So long as business was conducted by single proprietors or small partnerships, this was satisfactory, since the receipt was not required as a record between partners.

With the advent of joint-stock companies and corporations, came ownership by a large number of investors. Having their capital invested, these owners had a right to know what was being done with their property, and there came a demand for a more strict accounting of money and property entrusted to the care of the managers of the business.

As business expanded and corporations grew in size and power, with wider spheres of activity, it became necessary to divide the operations of business concerns into departments, with corresponding divisions of authority. This meant the creation of a central authority to whom an accounting must be made by the departments or branches.

Audits were introduced. Not only did stockholders want to know that the business was honestly conducted, but the managers demanded proof that property entrusted to subordinates was accounted for and that the accounts were accurate--that is, truthful. Not satisfied with the evidence offered by entries in account books, auditors asked for further proof of the payments recorded; they demanded receipts, _vouchers_.

The voucher as used in modern accounting practice is then something more than a receipt for the payment of money; it is a proof that property has been administered as claimed by the accounting records. "A document which vouches the truth of accounts,"

=2. Use of Vouchers.= The most general use of the voucher still is as an acknowledgment of the payment of money. In fact, when we speak of a voucher it is usually understood to mean a receipt or acknowledgment of the payment of money for a specific purpose.

A voucher states the exact purpose for which the money is paid, the items either being listed or reference made to a specific invoice or account. Then when receipted it becomes a voucher in fact and takes its place as an integral part of the accounting records. The voucher may be said to form a connecting link, furnishing proof that the money was expended as shown in the records and that it was received by the payee. In this respect it acts as a check against a misappropriation of funds.

As the system of vouchers for payment of money came into more general use, many accountants argued that it should be carried still further. Sales records were vouchered by original orders, shipping receipts, and invoice copies, and purchases by the regular vouchers, but there was no voucher for transactions involving transfers of values from one account to another. In making journal entries involving such transfers, many opportunities for fraud were opened. Just such entries have been frequently used to cover up fraudulent transactions.

The logical step to make the voucher system complete in every detail was the introduction of the journal voucher. If a voucher is provided for each journal entry, the bookkeeper can produce authority for every transaction recorded in his books.

The journal voucher is a voucher of authority, that is, it authorizes the entry involved and must be signed by an officer having power to make such authorization. To the bookkeeper, it is in many cases a protection, for if a question arises as to the legality of a transaction, he can produce his authority for the entry, which will place the responsibility where it belongs.

We have come in contact with cases in which the bookkeeper, following the explicit instructions of an officer of a company, has made entries clearly intended to defraud either creditors or stockholders, only to be later made the "scapegoat" and held jointly responsible with his superior officer.

Not all such entries show their clear intent, though their real purpose be fraudulent. Some of them are so ingenuous and supported by such plausible explanations, that the bookkeeper has no suspicion of their real nature. A case in point: a corporation was organized in a small town to engage in a manufacturing enterprise. Like many another corporation of similar character, the benefits which would accrue to the town, were dwelt upon at length by the promoters, and citizens were induced to invest their savings in small blocks of stock. Also, like many another enterprise entered into and managed by men with no technical training, this little factory struggled along for a few years, always operated at a loss. But a change came; an experienced manager was secured and the business began to exhibit symptoms of a healthy growth. The second year showed a profit; almost enough to wipe out the deficit. The third year the business outgrew the capacity of the plant, and $20,000.00 was invested in new machinery. Not an old machine was discarded. The manager instructed the bookkeeper to charge $15,000.00 of the amount to repairs, explaining that it would off-set the amount which should have been charged off as depreciation in former years. Perhaps,--but it made the books show a small loss instead of a substantial profit for the year. And it is significant that several holders of stock, worth face value, and more, sold their holdings to the manager at an average price of .65. If no profit could be made on such a volume of business as had been transacted that year, what hope for the future?

To what extent a bookkeeper is justified in presuming to conserve the morals of his employer, is not a subject for present discussion. Just where the line should be drawn between moral and legal responsibility, is sometimes difficult to determine. But that bookkeeper innocently assisted in robbing unsuspecting stockholders. Had he insisted on the signed authority of the manager--that is, demanded a voucher--the entry might never have been made; he, at least, would have been freed from any possible charge of complicity.

=3. Forms of Vouchers.= The essential feature of a voucher is that it must show clearly the purpose for which it is drawn, and provide a proper form of receipt. There are many forms of vouchers designed to meet the requirements of different businesses.

The most simple form of voucher is a statement of items paid, with a receipt to be signed by the payee. A remittance in the form of cash or a check accompanies the voucher, the receipted voucher being returned by the payee. A form of voucher of this class is shown in Fig. 1.

The items paid can be listed on the voucher, or there may be a reference to certain invoices included in the payment. Some accountants attach the original invoice to the voucher, but for certain reasons we do not advocate this practice. Until the receipted voucher is returned there is no record of the items covered, unless the invoice has been copied.

Some houses are slow in returning receipted invoices, resulting in many annoying delays. If the invoice is kept on file we at least have a record of the transaction, and it may be very necessary to refer to the invoice for prices or other information.

The back of the voucher is usually printed with a form for a distribution of the amount to the account or accounts to which it should be charged. A typical form is shown in Fig. 2. For permanent filing a voucher of this style is folded so that the number appears at the top, followed by the name of the payee, and the distribution record.

=4. Voucher Checks.= A step in advance of the early form of voucher with separate check is the voucher check. This is a form which combines the voucher and check.

Of voucher checks there are many forms, each designed to meet some special condition, or to conform with the ideas of the accountant. While these forms exhibit many variations in detail they may be divided into two general classes: folded voucher checks and single voucher checks.

The folded voucher check is usually twice the width of an ordinary check, making it regular check size when folded. This is intended to provide a receipt for the payment of items listed, by the endorsement of the check. Several such forms are illustrated.

Fig. 3 is a form of combined voucher and check used by the Pennsylvania Railroad Company, The account is transcribed on _A_, this being a sheet twice the width of a check. This form is made in duplicate, _B_ being the carbon copy which is filed as a record of authority for the issuance of the voucher. The check itself, shown in _C_, is written on the back of the original voucher. _A_. When folded, this form is the size of a regular check and goes through the bank in the usual manner. The endorsement of the payee is a receipt in full for the items covered by the voucher.

This is a representative form of the folded voucher check. Naturally the details recorded will vary in different businesses, but the general plan is subject to slight changes. Some objection is raised by banks to the folded form. The claim is made that considerable inconvenience is caused in handling in the bank, by checks slipping between the folds.