B ^ 5D3 S7M Bttrton's Accoimtancy Series No. S5 GIFT or 1^ Fh:nk . /: l)u4/\.nJ '"^fo Australasian Advanced Accountancy AN EXPOSITION FROM AN AUSTRALASIAN STANDPOINT OF THE THEORY AND PRACTICE OF ACCOUNTANCY, TOGETHER WITH THE LAW AFFECTING ACCOUNTS. BY ALBERT E. BARTON Fellow of the Australasian Corporation of Public Accountants. Fellow of the Incorporated Institute of Accountants, Victoria. Fellow of the Incorporated Institute of Accountants, New Zealand. AUTHOR OF "STOREKEEPERS' ACCOUNTS." [COPYRIGHT.] SEVENTH EDITION— REVISED AND ENLARGED. SYDNEY. COLE'S BOOK ARCADE, 346 George-street, AND BOrjRKE STREET. MELBOURNR. Wholly set iip and printed in Australia bv tho i^ydney and Melbourne Publishing: Co., Ltd.. 29 Alberta St.. .~le Entry system--Applica- tions and Allotment Book — Procedure on receipt of applications — Procedure where issue over subscribed — Illustration of Application and Allotment Book — Share Register — Source of entries in — Illus- tration of — Where more than one class of shares issued — Register of Transfers — I'rocedure to secure a transfer of shares — Entry in Register — Illustration of Register — Calls Book — Procedure on mak- ing a call — Dividend Book — Procedure on payment of Dividend — Register of Mortgages — Compulsory book — Particulars to be entered therein — Entries where Mortgage debentures are issued — Particulars to be filed with Registrar in certain States — Illustration of Register of Mortgages — Debenture Register — Nature of entries in — Treat- ment of interest on debentures — Illustration of Debenture Register. CHAPTER XII. COMPANY ACCOUNTS (CONT.) DOUBLE ACCOUNT SYSTEM. Pager, 161—165, Explanation as to nature of Double Account System — Method of setting out a Balance Sheet under this system— The origin of the system — Difference between legal and commercial treatment of de- preciation on fixed and floating assets — Classes of companies to which Double Account system applicable — Application of the system to commercial concerns — Objections to Double Account system — Double and Single account systems compared. CHAPTER XIII. MINING COMPANIES ACCOUNTS. Pages 166-177. No-Liability Companies — Definition of No-Liability — Procedure to obtain registration — Contributing Capital — Percentage to be paid- up before registration — Calls on Shares — Forfeiture of Shares — Opening entries in books — The Mine account — Entries on the lor- AUSTRALASIAN ADVANCED ACCOUNTANCY. feiture of shares — General bookkeeping system — The Revenue ac- counts (a) Working account; (b) Profit and Loss account — Balance Sheet — Statutory requirements as to Balance Sheet in various States —Limited Mining companies — Prepayment companies — Specimen of Balance Sheet under Single and Double Account systems. CHAPTER XIV. FOREIGN EXCHANGES AND BANK RATES OF EXCHANGE. Pages 178—190. Foreign Exchanges— Definition— The basis of exchange — Gold as the medium of settlement — The mode of settlement — The use of bills of exchange — Fhictuations in the' rate — Export and Import Gold Points — The effect of exporting gold — The Discount rate of the Bank of England — How the export of gold is checked — The use of Bank drafts— The means adopted of providing cover for Bank drafts— Example— Bank Rates of Exchange betv^een Australasia and London — Difference between such exchange and foreign ex- changes — Dealings with the banks — Bank rates during ordinary sea- son — Bank rates during wool season — Illustrations of working of rates — Different modes of remitting — Comparison of costs of re- mitting under various rates — Examples. CHAPTER XV. CONSIGNMENT ACCOUNTS— JOINT ACCOUNTS— ACCOUNT SALES— ACCOUNT CURRENT— EQUATION OF PAY- MENTS—GOODS ON SALE OR RETURN. Pages 191—206. Consignment accounts — Definition of Consignment — Treatment in ordinary trader's books — In the case of a consignor — In the case of a consignee — Specimen entries in books of both consignor and consignee — Where consignments are frequent — Entries in books of Consignor — Entries in books of Consignee — Adjustments on balance day — Joint Accounts — Account Sales — Definition and illustratiori of account sales — Account Current — Source of information contained in account current — Illustration of account current — Rebate of in- terest — Equation of Payments — Explanation and illustration of method of arriving at average due date — Goods on Sale or Return- Nature of entries in—Illustration of Sale or Return book. CHAPTER XVI. TABULAR BOOKKEEPING. Pages 207—217. The classes of business to which applicable — Tabulation of books of first record — Day Book with illustrations — Invoice Book — Returns Books — Cash Book with illustration — Petty Cash Book — Tabular Journal with illustration— Books of Classification — Tabular Ledgers — Illustration of General Rate Book and Hotel Ledger. CHAPTER XVII. DEPARTMENTAL ACCOUNTS AND BRANCH ACCOUNTS. Pages 218—241. Departmental accounts — Where Departmental accounts are ad- visable — Check on the different departments — Estimated Stock statements — Departmental Transfers — Departmental Trading ac- AUSTRALASIAN A D \' A .\ C E D ACCOUNTANCY. count with example — Departmental Profit and Loss account with example — Principle of apportionment of overhead expenses — Branch accounts — Where I'ranch acts merely as distributing? agency — Wiierc Branch keeps its own books — Entries in the Branch books — Entries in the Head Ofticc l)ooks — Procedure on Balance day in the Branch books with example — In the Head Office l)ooks with example — Three methods of incorporating Branch figures (a) Adding Branch figures to Head Office figures, (b) Adding Branch profit to Head Office profit, (c) Sliowing Branch Trading and Profit and Loss ac- count in Head Oftice's books — Specimen entries of three methods — Reversing entries after Balance day — Entries where goods sup- plied by Head Office at more than cost price — Treatment under the three methods already explained — Reconciliation of Branch books with Head Oftice books — Treatment of Remittances and Goods in transit — Example. CHAPTER XXTIL STATEMENTS OF AFFAIRS AND DEFICIENCY ACCOUNTS. 242—253. Courses open to debtor in difticulties — Making private arrange- ment with creditors — Transfer of estate to a Trustee for creditors — Filing a petition in bankruptcy — Preparation of Statement of Affairs — Differences between Statement of Affairs and Balance Sheet — Treatment of Secured and Preferential Creditors— Application of rules in bankruptcy — Special provisions in certain States — Form of State- ment of Affairs — Nature of items on Assets side — On Liabilities side — Setting out different classes of Creditors — Preferential Creditors in the various States — Deficiency Account — Referring back to prev- ious Balance Sheet — Nature of items contained in Deficiency ac- count — Example of Statement of Affairs and Deficiency account — Statements prepared for members of a partnership — Separate State- ment required for each partner's estate — Treatment of loans by partners to the firm — Treatment of loans by outsiders to the firm. CHAPTER XIX. TRUSTEES, EXECUTORS AND ADMINISTRATORS. Pages 254—275. Distribution of deceased persons' estates — Appointment, of Ex- ecutor or Administrator — Duties of Executor — Advertising for Cred- itors claims — Preparing Probate Statement — Position of Executor prior to granting of probate — As regards real property — As regards personal property — Different classes of legacies under a will — Order of distribution of the estate — Payment of legacies — Abatement of legacies — Comparison of Demonstrative and Specific legacies — Mar- shalling the assets — Death of a legatee — Lapsing of legacy — Appor- tionment — On death of, testator — Cessation of interest of life tenant — Of interim dividends — Bonus shares received by Trustee — Arrears of dividend on cumulative preference shares — Loss on realisation of security — Apportionment of expenditure in Station accounts — Cases where no apportionment * of expenditure miide — Investments — Authorised investments in various States — Purchase of investments — ]-xecutor's remuneration — lixecutorship expenses — Repairs to prop- erty — Distribution of Intestate estates in various States — Accounts of an Executor. 10 A LI S 1 R A L A S 1 A ^' ADVANCED A C C O U i\ T A X C Y. CHAPTER XX. EXECUTORSHIP ACCOUNTS Pages 276—286. The books required — Use of Journal — Difference in treatment of r.ccruing income and expenditure — Opening of Corpus account— Ex- ample — Opening Journal entries — Illustration of apportionment — Accounts of income producing assets — Final distribution — Accounts showing the distribution — Form of Cash account — Stocks and Shares —Accrued interest, dividends, etc. — Death of life tenant — Example- Abatement of legacies — Example — Annuities. CHAPTER XXI. INSURANCE COMPANIES ACCOUNTS. Pages 287—297. Life Company's office selected as basis — Differences in procedure pointed out — Financial and Statistical books — Treatment of Propo- sals — Premiums — First premiums and renewals — Illustration of New Business Register — Monthly entries in connection with the first premiums and renewals — Treatment of overdue premiums — Agents' accounts — Investments — Loans on Policies — Claims — Reinsurances — Annuities — Surrenders — Bonuses — General Expenses — General Cash Book with illustration — Revenue account — Statutory form — Adjust- ment of premiums — Balance Sheet — Valuation Balance Sheet — Ex- ample of Revenue account and Balance Sheet of A.M. P. Society. CHAPTER XXII. STATION ACCOUNTS. Page? 298 — 308. Summary of procedure — Books of account — Books of record — • Use of the Journal — Stores Purchases book — Stores Day book — Rations book — Bills Receivable book — Cash book — Petty Cash book — Personal Ledger — Stores Ledger — General or Private Ledger — As- sessments — Cattle, Sheep, and Horse accounts — Conditional Purchase — Depreciation — Treatment of plant — Rabbit and \'ermin Destruc- tion account — Repairs — Rents — Shearing expenses — Shearers' de- posits — Procedure in connection with Wool account — Stock book — Wool Press book — Diary — Tally book — Example of Profit and Loss account and Balance Sheet of Station company. CHAPTER XXIII. COMPANY ACCOUNTS— REDUCTION OF CAPITAL. Pages 309—324. Alterations to the Memorandum — Articles must authorise reduc- tion — Alteration to the Articles — Various methods of reduction — Cancelling unissued shares — Writing off lost capital — Returning ex- cess capital to shareholders — Reducing- liability of shareholders— Where consent of the Court necessary — Use of the words "And Re- duced" — Where consent of creditors necessary — Minute of Court tc be filed with Registrar — Protection of interests of minority — Poole V. National Bank of China — Preference shareholders — Entries in the books or '-eduction (a) Cancelling unissued shares, (b) Returning surplus capital to shareholders, (c) Writing off lost paid up capital (d) Reducing Uncalled capital — Reducing capital by indirect means — Trevor v. Whitworth — Returning capital by way of dividends- Example" ALSTRALASIAN ADVANCED ACCOUNTANCY, CHAPTER XXIV. COMPANY ACCOUNTS— LIQUIDATION AND LIQUIDATORS ACCOUNTS. Pages 325—339. Statement of Receipts and Payments— Usual books where basi-' ncss earned on— Three methods by which companies may be wound up— Winding up by the Court— General procedure— Circumstances imder which companies may be wound up by the Court— Circum- stances under which contributors may petition — -'A" and "B" lists of contributories— Distribution of Surplus amongst shareholders- Order of Court when company wound up-rSpecial points to observe m various States— Voluntary Winding up— General procedure— Cir- cumstances under which a company may be wound up voluntarily— Date of commencement of winding up— Appointment of Liquidator- Accounts to be prepared and presented by Liquidator— Liquidator to call meetmg every 12 months— Special points to observe in various States— Winding up under supervision of the Court— General pro- cedure— No-liability Mining- companies— Preferential payments in the various States— Adjustment of rights of contributories— Rights of Preference shareholders in respect of capital and dividends— Example of adjustment— Calls paid in advance— Statement of Afifairs— Liqui- dator s Statement of Receipts and Payments, with example— Ex- amples. CHAPTER XXV. COMPANY ACCOUNTS— RECONSTRUCTION AND AMALGA- MATION OF COMPANIES. Pages 340—351. Reconstruction — Reasons for which a company may require re- construction—Alterations to "Objects" clause— Nature of recon- struction — Reduction of capital without consent of Court — Authoris- ing liquidator to accept shares in another company— Substitution of other rights— Bisgood v. Henderson's Transvaal Estates— Procedure on reconstruction- Treatment of dissenting shareholders— Amalga- mation — Reasons for amalgamation — Comparison with reconstruc- tion—Entries in the books— General procedure— Profit on transfer- Transfer of profit to Reserve— Or to Premium on Shares— Basis of valuation of shares — Examples. CHAPTER XXVI. PERCENTAGE STATEMENTS. Pages 352—356. Necessary adjunct of costing system— Comparison between ..ne financial period and another— Comparison with other l)usinesses— Discovery of errors in costing— Generally laxity in factory manage- ment— 1-raud in Wages sheets— Percentages calculated on sales- Example of percentages in Revenue account of Opera House Com- pany—In Trading and Profit and Loss account of manufacturing con- cern— I- orm of Trading account to facilitate calculations— Perceniage of cost per unit of output — Example. AUSTRALASIAN ADVANCED ACCOUNTANCY. CHAPTER XXVII. COSTING AND COST ACCOUNTS. Pages 357—376. subject presenting difficulty to average student — Difference be- tween Cost accounts and Costing — Terminal Cost accounts — The ob- ject of Cost accounts — General procedure — Direct expenses — Oncost — Factory and office oncost — Balancing Contract ledger — A costing system for Jobbing printer — Illustration of Cost sheet — Treatment of wages — Outside work — Materials — Charging oncost — Net profit on the job — Deficiencies of this system — Cost accounts for Sash and Door Factory — Preparation of Work sheet — Treatment of materials (a) supplied from store, (b) purchased direct — Returns — Stock jobs — Wages — Illustration of Time card and Wages summary card- Dissection of Wages — Illustrations of Wages Dissection sheet — On- cost, with examples — Costing Day book — Cost Ledger — Use of cards — Summary of procedure — Departmental costing — Process cost- ing — Output costing. CHAPTER XXVIIL COST ACCOUNTS (CONT.)— TREATMENT IN THE FINAN- CIAL BOOKS— MANUFACTURING ACCOUNTS. Pages 377—392. Cost accounts — Adjustment account for Cost ledger — Treatment of totals of materials — Totals of productive wages — Oncost and net profit on contracts — Cost Ledger Adjustment account — Example — Trial Balance — Uncompleted Jobs — Simple method of setting out Revenue accounts— Trading and Manufacturing account — Checking Factory oncost — Profit and Loss account — Checking office oncost- Balance Sheet — Cost accounts of Building contractors, etc. — Profit on Uncompleted contracts — Manufactaring accounts — Where ware- house has its own factory — Advantages of keeping results distinct- Manufacturing account — Trading account — Profit and Loss account — Example. CHAPTER XXi: STORE AND STOCK ACCOUNTS. Pages 393—398. Store accounts — Usually kept in quantities — Not necessarily part of costing system — Difference between Stores and Stock — Treat- ment where different classes of stores not numerous — Where classes are numerous — Stores Ledger — Posting of Stores Ledger — Stock ac- counts — Class of business to which applicable — Jeweller's Stock book with example — Merchant's Stock book with exmple — Card records. CHAPTER XXX. OFFICE SYSTEMS AND TIME-SAVING DEVICES. Pages 399—415. Work to which Public Accountant adapted — Time-saving devices appreciated by clients — System designed to suit particular business — Difticulties in the case of a new business — Scope of the work — Books of first record — Devices for recording sales — Billing system — Useful book for storekeepers — Other books of first record — Card Ledgers — Advantages and disadvantages of Card Ledgers — Card Ledger diary for magazine subscribers — Contract Advertisements-^ A li S T R A L A S I A N A D \' A N C E D ACCOUNTANCY. Time payment accounts, etc., with examples — Loose leaf Ledojer with example — Uniscript system — Example — Tabular Ledgers — Combina- tion of Tabular Ledger and Ledger Balances book, with e.xample — Cjxsh Register, etc. CHAPTER XXXL RESUMPTION OF BUSINESS PREMISES UNDER STATUTORY POWERS. Pages 416—423. Claim for compensaticn — Headin,!.is under which it may usually he divided — Services of Valuers and of Public Accountant — Preparation of Statement of Claim — Value of lease — X'alue of freehold — Loss on fixtures — Cost of removal — Loss of business due to disturbance- Ascertainment of profits — Adjustments to be made — Example of pro- cedure where proper books not kept — Basis of compensation — Ascer- taining damage to goodwill — Damage in case of wholesale or manu- facturing business — Damage where goodwill attaches to situation— Where premises cannot be secured in same locality — Likelihood ci renewal of lease — Adjustment of profits where valu**- of lease claimed, with example — Example of Statement of Claim. CHAPTER XXXn. MISCELLANEOUS. Pages 424—436. Hire Purchase Accounts and Payment by Instalments— Nature of Hire Purchase agreement — Protection to the vendor — Difference between hire-purchase and ordinary purchase — Price includes prin- cipal and interest — Principal and interest should be kept distinct — Treatment in the books — Where transactions not numerous, with ex- ample — Where transactions are numerous — Adjustment of interest — Example of Sales book — Redeemable Dead Rents — Minimum rent payable— Where dead rent merges into royalty— Treatment of Royalty account — Recouping for dead rent paid out of subsequent royalties— Example— Fixtures erected on leasehold premises- In ab- sence of agreement form part of premises — Question of providing for depreciation — Where no improvements clause in the leasc^ Wliere improvements clause in the lease — Contingent Liabilities — Method of statement in Balance Sheet — Bills Discounted — Letters of credit — Treatment where possible liability becomes probable one Shares held as Assets — Shares received as consideration for prop- erty sold — Basis of valuation where shares held as fixed assets— Where shares held as floating assets — Memorandum where any amount uncalled on shares — Foreign Branches — Basis upon vhicli iten>s in Branch books should be converted— Valuation of Stock— In manufacturing concern (a) Where proper costing system in vogue. (1)) Where no Costing system in use — Arriving at cost price — In retail estal)lishments — Danger of adopting selling price as basis — Fire Losses — Average Clause — Where average clause applies — Method of averaging loss — Example. CHAPTER XXXin. THE CRITICISM OF ACCOUNTS. Pages 437— 4G3. Qualifications of critic — Primary oljject of criticism — Te=ting ac- curacy and reliability of accounts— Ascertaining their meaning and 14 AUSTRALASIAN ADVANCED ACCOUNTANCY. <.ffcct— Discovering data for purposes of comparison— Encouraging :a;e\n compilation-Performing useful __exerc,ses m Accou^^ Srn'oraccoums-Method^orp"roceclure, with examples-Accounts of Building Society-Percentage calculations-Stab.hty of concern- 'Vhere to look for evi^lcnce of stability. CHAPTER XXXIV. FORM OF PUBLISHED STATEMENTS. Pages 454—472. Statements submitted as illustrations-General paucity of in^ formatfon supplied-No attempt made to criticise financial standing P^b?hed statements of (a) Bank, (b) Insurance company. c) Insurance company. CHAPTER XXXV. FEDERAL INCOME TAX. Pages 473—513. Financial vear— Scope of the Act— Income, Personal Exertion and Propert}- — Exceptions to the general definition of Income from Property —Meaning of word "Income"— Definition of "Business" in relation to Income— Stock valuation— Method of Valuing Live Stocks— example- Departmental valuations prescribed for Natural Increases— Place of derivation of Income— Departmental rules regarding place of derivation of ■ Income— Exemptions from Federal Income Tax— Allowable Deduc- tions—Losses of Capital when not deductible— Statutory Deduction- Companies and Shareholders— Taxed on undistributed Income— Rebate to Shareholders on already taxed income represented in Dividends— and in respect of non-taxable income received by Company— Taxation of absentee shareholders, etc.— Other cases where Company pays the tax for Shareholders— Visiting Ships— Fire and Marine Insurance Com- panies—Life Assurance Companies-^Mining Companies— Co-operative Companies— ReHef on account of Double Taxation— Taxation of non- residents where loss of tax is suspected— Rates of Tax— Personal Exer- tion Income rate— Property Income rate— Rate in respect of mixed incomes from Personal Exertion and Property— Companies— Primary production— Examples of averaging the amounts of Primary producers Taxable Income— Partnerships and Trustees— Reserve for tax where a business is being wound up— Penalties— Recovery of Tax due by em- plovees through emplovers— Death of Taxpayer— Objections and Appeals— Relief from Tax on account of hardship— Administration and Return^Schedule showing the effect of amendments of Income Tax ■Assessment Act and Income Tax Act in their relation to assessments for each year from the commencement of Federal Income Tax to date. 15 . ■ CHAP'I'l'.k 1. GENERAL REVIEW OF BOOKKEEPING. Whilst, as pointed out in the I'relace. it is not the inten- tion of the writer to encroacli upon the proxince of a work on double-entry Bookkeeping", it might be as well, before com- mencing- to discuss the more advanced stages of Accountancy, to come to an understanding. relating to the principles under- lying the preparation of the final accounts from a set of books, and "to touch common ground with regard to the use and ap- plication of the various bookkeeping terms and of the nomen- clature and classification of accounts. A satisfactory basis is then established from which to commence the discussion of the more advanced work. Classification of Ledger Accounts. Ledger Accounts are divided primarily into two classes. Personal and Impersonal. Personal Accounts are those repre- senting the accounts of persons with whom a business has financial dealings, and these may again I)e divided into the accounts of Debtors and Creditors. The accounts of the former are usually kept in one or more Sales or Customers Ledgers, and the latter in a Bought or Merchants Ledger. The Impersonal Accounts are those kept by a business in order to enable it to record and classify suitably its own side of every transaction arising out of commencing or conduct- ing the business. These accounts, which are usually kept separate from the Personal Accounts in a Private or General Ledger, may again be divided into Real Accounts and Nominal Accounts. The former represent the assets ac(|uire(l and liabilities incurred in commencing and conducting the business, and the latter show under their respective headings the profits earned and losses incurred'as a result of the opera- tions of the btisiness. A proper understanding of this classification of the ledger accounts is of great importance, as with the aid of a few simple rules detailed later on no one with a knt)wledge of double-entry Bookkeeping should have any difficulty in pre- paring, and in gras'ping the principles of the preparation of. a Profit and Loss Account and Balance Sheet. Perha])s if this classification is set out in a form with which all are presumably familiar from l)itter juxenile exi)erience, it will assist in making matters clearer: — A L' S 1 K A L A S I A X A D \' .\ N (,' E D A C C O U X T A X C V , LEDGER ACCCJUNTS i'ersonal A/cs. Impersonal A/cs. ! : i I Del)tors. Creditors. Real A/cs. Nominal A/cs. I.I I I Assets. Liabilities. Losses. Profits. This hard-and-fast classification may be objected to by some on the grounds that the "Personal" element cannot altogether be elimmated from a number of the "Real"' accounts, nor the "Real" element from the "Personal" accounts. That such is the case is readily admitted ; but it need hardly be pointed out that the introduction of a discussion on such points which are, after all, purely theoretical, would tend to confusion when there need be none. On the other hand, it is submitted that thel above diagram represents matters correctly from a prac- tical point of view ; it is com])letc and. al)ovc all. easilv under- standal)le. Rules to Facilitate Preparation of Profit and Loss Account and Balance Sheet. It may 'be taken for granted that no difiiculty will be experienced in determining the personal accounts, seeing that such accounts will, on the face of things, make their nature perfectly clear. In setting about the preparation of the Profit and Loss Account and Balance Sheet such accounts can therefore be ignored (except that it must be remembered that the total of the debtors' balances will be shown in the Balance Sheet as an asset, and the total of the creditors' balances as a liability) and attention confined to the Impersonal' or Private Ledger Accounts. Referring again to the diagram, it will be seen that each Impersonal Account represents one of the following: An asset, a liability, a loss or a profit. The accounts repre- senting assets and liabilities will ajjpear in the Balance Slicet. and will remain open in the ledger. Those representing losses and profits will l)e closed by having their balances transferred to Profit and Loss Account. .Ml that is now re- quired is some means of distinguishing between these dif- ferent classes of accounts, and it is thought that a careful study of the fo]l,)\ving will eiial)le this to be done without difficulty: — 1 . Every debit balance represents either an asset or a loss. G E X E R A L R E \' I E W OF BOOKKEEPING. 2. E\ery credit balance represents either a lial)ility or a profit. o. In order to ascertain whether any debit balance re- presents an asset or a loss, apply this test. Does this balance represent an account owing- to the business, or something' tor which the business could obtain cash if realised upon? If such is the case, the balance represents an asset — if not. then it rei^'csents a loss. 4. In order to ascertain whether any credit balance re- presents an asset or a loss, apply this test. Does this balance represent an account owing: by the business either to an outsider or to the proprietors? If so. the balance represents a liability — if not. a profit. Of course, as one gets fiu'ther into the subject of Ac- countancy, involving the introduction of more intricate points, these rules have to bear some expansion, but so far as con- cerns the bookkeeping necessary for the average business their application will enable the required result to be achieved. Having now ascertained the rules for guidance in dis- tinguishing between assets and losses on the one hand, and liabilities and profits on the other, and remembering that all profits and losses are transferred to Profit and Loss Account no difficulty should be experienced in the preparation of this account. In trading concerns it is the practice to divide Profit and Loss Account into two parts. The first portion, Trading- Account, is designed to show the gross profit earned by the business (i.e., the excess of the selling price over the cost price or, in other words, the profit made before deducting the cost of selling and managenient), and if this account is prepared on proper lines it serves, as will be seen, a number of useful purposes. Trading Account. — In a trading concern this account is debited with the value of stock as at the previous balance- day, all purchases (less returns) of new stock, and all ex- penses incurred in landing the goods at the warehouse. These expenses would include cartage inwards, duty, wharf- age, etc. Trading Account is credited with sales (less re- turns) for the period, and with the value of the stock on hand at the present balance-day. It is important that no items other than those of the class indicated should be included in 15 A U S -r R A L A S 1 A X A D \- A X C E D A C C O U X T A X C \ . this account, otherwi.-c the chief \alue atUichin- lu the pre- paration of tlie account is sacrificed. A trader in arri\■in.^ at the sellinij-price of his goods generally adds to the total cost of such goods a certain percentage for gross profit. W liere this is done and the Trading Account is properly pre- l)are(l. the amount of gross j)rofit as disclosed by that account will supply him with information of vital importance. The gross profit shcmld ecjual a certain i)ercentage of the Sales. What this percentage should he will depend, of course, upon the percentage added to the cost price in arriving at the sell- ing price. If. say .'>() per cent, is added to cost ])rice. the gross profit should be -V-i l/:> i)er cent, of the .^ales ; if ;5;! ]/:] per cent, is added, the gross prt)ht should be K j ^ ■' Q ^ O- G O C c ... H • - - • 3 O I ^ S3 2 -2 0, O Q o o o o o o O o »o o 'o >c l^ -H ,o o, CO -H — . s:^ r ^ JJ u o i< c o -^ .^i O Q Cti X o o P C - cc C 21 A.USTRAL ASIAN ADVANCED ACCOUNTANCY MO C- O — ' 8i: o ^ oi r::^ 3 aj O M i"S r -r o o o rt O^^ CD a, (fl c "n iH^ >. o C8 T3 < a ray-j J "_) 'J2 CHAPTER II. SELF-BALANCING LEDGERS.— BALANCING BOOKS KEPT BY SINGLE ENTRY. SELF-BALANCING LEDGERS.— This term does not niean, as mi^ht l)e >uppuse(l, that certain kinds of ledgers are bv some magical process capable of balancing themselves, bijt that where more than one ledger is kept they can be so ar- ranged that the bookkeeper is enabled to balance each ledger independently. Whilst the necessary treatment of the books to effect this desirable state of affairs can hardly be included under the heading of Advanced Accountancy, experience shows that even in these days there are numbers of book- keepers who are quite capable of keeping books by double- entry and of preparing the final accounts and balance-sheet, but who know little or nothing of this system. As in the majority of businesses it is found necessary to keep at least two ledgers, the advantages of being able to balance these separately hardly require pointing out. It is evident that if an error is made the balancing of the books is greatlv facili- tated if it can l^e localised without difficultv. In order to enable the explanation t(^ Ix- simjDlihed as much as possible let it be assumed that a trader keeping three ledgers, viz.. Private or General ledger. Sales or Customers' ledger, and a Bought or Merchants' ledger, desires to ha\e these ledgers made self-balancing. The procedure to give effect to this desire in the first place is simplicity itself. A trial balance is extracted from the books, the balances of the accounts in the three ledgers being included in order to enable an agreement of the two sides to be arrived at. It is more usual to make separate lists of the balances in the Sales and Bought ledgers respectively, and assuming that this has been done the total of the balances in the Sales ledger will appear on the debit side of the trial balance in one amount as "Sundry Debtors." Similarly the total of the balances in the Bought ledger will appear on the credit side as "Sundry Creditors." If the posting, &c.. has been carried out correctly the two sides of the trial balance should now agree. From the above it is clear that the list of balances (debit and credit) extracted from the Private ledger only requires the addition of the total balances in the Sales and Bought 23 A ,U S T R A L A ^ I A X A D \- A X C E D A C C O U X T A X C \- . ledi^ers in order to enable a trial balance to be obtained. If. therefore, an account is opened in the Private ledger called, say. Sundry Debtors Account, and the total of the balances in the Sales ledger debited to that account, and another ac- count opened, called Sundry Creditors Account, and credited with the total of the balances in the Bought ledger the follow- ing results are achie\"ed : — (a) The I'ri\ate ledger will be self-balancing, i.e.. a list of the (lel)it and credit balances in that ledger will agree. (b) The tntal of the Sales ledger balances will agree with tile balances of Sundr}- Delators Account. (cj The total of the Bought ledger balances will agree with the balance of Sundry Creditors Account. It should be noted that if any of the accounts in the Sales ledger ha\e credit balances (as sometimes occurs), the total of such credit balances must be deducted from the total of the debit balances, and not added to the Bought ledger balances. Similarly debit balances in the Bought ledger will be deducted from the total credit balances in that ledger, and nut added to the Sales ledger l)alances. It should also be noted that where more than one Sales ledger is used and it is desired to balance each of these independently, a separate Sundry Debtors Account should be opened for each ledger. llaxing thus dealt lu'iefl}- with the procedure necessarv to start the ledgers off on the self-balancing system it re- mains now to explain the means of enabling the system to be carried out as regards future transactions. It is obvious that if the Trivate ledger is to continue to be self-balancing, it is necessary that the double-entry should be completed in that ledger in every case. The reason why. under the old system, it was necessary to include the balances of all the ledgers in the trial balance is that in most cases the debit entry would be in one ledger and the credit entry in another. To gi\e an illustration : When a sale was effected the amount of the inxincc would l)e debited to an account in the Sales ledger. l)ut the credit entry (the amount of the in- voice being included in the total of the Day-oook) would be made in the Private ledger, the total Sales being credited to Sales Account. Now that there is an adjustment account (Sundry Debtors .\ccount) to represent the Sales ledger in the Private ledger the double entry can be completed in the 24 S E L F - r. A L A X C 1 N G L E D (j E R S . latter. 'I'hc total sales are debited to Sundry ])el)tcjrs .\c- coiint and cretlited to Sales Account. In the same way. all entries which have been jxjsted into the Sales ledger durinj^- the month (assuming;- that the business takes out a trial balance monthly) are also posted to Sundry Debtors Account. It would, of course, involve an immense amount of labor if each item posted to the Sales ledger during the month had also to be i)osted to the adjustment account, Init the necessity for this is o])viated by arranging the books so that the montlilv totals of these entries can readily be ascertained and the i^osting to the .Adjustment Accounts is done in totals. The ])osition is then, that by posting the totals of the indi- vidual items which have passed through the Sales and Bought ledgers during the month to their respective adjustment ac- counts in the Private ledger, the double-entry is completed in that ledger each month, thus enabling the Private ledger to be balanced by itself. The total of the balances in the Sales ledger will also agree with the balance of Sundry Debtors Account, and the total of the Bought ledger balances with Sundr_\- Creditors .\ccount. It will no douI)t make matters clearer if the procedure in connection with the totals of the various books affecting the adjustment accounts referred to above is explained briefly. Day Book or Sales Journal. — l^^ach item in this book is posted during llie month to the debit of an account in the Sales ledger. Under the old method of l)alancing the double- entry was completed l)y posting the total sales to the credit of Sales .Account. Now. however, the double-entry is com- pleted in the Private ledger at the end of each month. l)y debiting .Sundrv Debtors Account and crediting Sales .Ac- count with this total. Returns Inward Book. — lndi\idual items posted to the credit iA Sales ledger Accounts. The luonthly total is debited to Sales Account and creflited to Sundry Delators .Account. Returns Outward Book. — Individual items posted to debit of Bought ledger accounts. The niontlily total is credited to Purchases Account and debited to Sundry Credit- ors Account. Invoice Book or Purchase Journal. — l^ach item in this hook having been posted to the credit of an accoimt in the Bought ledger, the total is posted to the credit of the I'lu-- chases Account. The double-entry is comjilcted in the Private ledger by crediting this total to Sundrv Creditt)rs Accoimt. 25 A I S T R A L A S I A \ A D \' A X C E U A C C O U N T A X C Y . Bills Receivable Book. — individual iien>i pusted iu the credit of Sales ledger accounts. The munlhly total is posted to the debit of Bills Receivable Account and to the credit of Sundry Debtors Account. Bills Payable Book. — lndi\ idual it'enis posted to debit of Bought ledger accounts. The monthly total is deljited to Sundry Creditors Account and credited to Bills i^ayable Account. Cash Book. — This book should be so arranged that the total cash received from debtors, i.e., persons havnig accounts in the Sales ledger, can be ascertained with a minimum ot trouble. This can be effected by introducing an additional money column on the debit side in which all amounts to be posted to the Sales ledger are inserted. The total of the columns will, at the end of the month, be posted to the credit of Sundr}- Debtors Account. It is perhaps hardly necessary to point out that this total does not require to be posted to the debit of any account in the Private ledger as the Cash Book itself is in reality a Private ledger account, and the debit entry has alread}- been made therein. By a similar arrangement of the credit side of the Cash Book the total amount paid during the month to creditors, i.e., persons having accounts in the Bought ledger, can readily be ascertained. This total is posted to the debit of Sundry Creditors Account, thus completing the double-entry in the Private ledger. Any amounts of discount allowed to cus- tomers during the month and posted to the credit of their respective accounts will appear in the "Discount" column on the debit side of the Cash Book. The total of the column \\\U at the end of the month be posted to the debit of Discount -Vccount and to the credit of Sundry De])tors Account. The total discomit receixed from creditors as shown l)y the "Disci mnt"' cohuun on the credit side of the Cash Book will be debited to Sundry Creditors Account and credited to Dis- count Account. Having now explained the procedure by which all the items ])osted to the Sales and Bought ledgers during the month (except odd Journal entries aflfecting personal accounts which are dealt with below) are passed through the adiust- nient accounts for these ledgers at the end of the month it remains to set out specimen adjustment accounts showing- how these accounts will appear in the Private ledger after these entries have been made. rhe\ should also make per- fectly clear the leason wh\ the balances of these accounts agree respcctiveh with the totals of the lialances in the Sales and Bought ledgers. It -iK.nld bt- n-.ted that imaginarv 20 S E L F - B A L A X C I X G LEDGERS. figures are used, and it is assumed that the commencing bal- ances have been ol)tained as mentioned at the beginning of this chapter l)y ascertaining the total I)alances in the Sales and Bought ledgers. SUNDRY DEBTORS A/C. (In Private Ledger). 1920. Dr. 1920. Cr. Tan. 1 To Balance .. £486 19 3 l.in. 31 Bv Returns In- 31 .. Sales .. .. 563 15 S ward .... £14 3 6 „ Bills Rec'vable 286 19 4 „ Cash 219 10 5 ,, Discount . . 7 8 4 .. Balance .. 522 13 4 £1,050 14 11 £1.050 14 11 Tan. 31 To Balance .. £522 13 4 SUNDRY CREDITORS A/C (In Private Ledger). 192U. Dr. 1920. Cr. Jan. 31— ' Ian. 1 By Balance . . ..£236 13 4 To Returns Outward .. £7 2 9 Tan. 31 ,. Purchases .. 198 17 2 „ Bills Payable .. .. 57 10 „ Cash 130 15 6 „ Discount 4 10 6 .. Balance .. 235 11 9 £435 10 6 £435 10 6 Jan. 31 Bv Balance ..£235 11 9 Journalising Monthly Totals. — Following on the explana- tion as to the results achieved by completing the double-entry in the Private ledger in every case, it should be noted that it is advisable to pass monthly totals through the Journal, instead of posting direct from the subsidiary books to the debit and credit of the accounts affected. The advantages gained by journalising these totals are — (1) a complete sum- marised record of the whole month's transactions is contained on one page of one book; (2) the skeleton entries can be copied forward each month, the danger of overlooking a total being thus minimised: (3) as the Private ledger is generally kept bv the manager (or some other senior officer) the Journal will supply him with the whole of the information he requires to enable him to keep this ledger. Seeing that the passing of the monthly entries through the Journal could not possibly take more than from ten to fifteen minutes' addi- tional work, no reasonable objection can be urged againsl this practice. A specimen of the monthly entries necessary to eftect the result shcnvn above is sunplied herewith. A l' S T R A L A S 1 A X A 1) \' A X C E I) ACCOUX TAXC Y. JOURNAL. Jan. 31 Sundry Debtors Account Dr. To S:iles Account Puichasi's Account Dr. To SiuKlry Cn-ditors Account Sales Accduut (Returns) Dr. To Siiinhv Debtors Account Sundry Credit urn Account Dr. To Purchases Account (Returns)... Bills Receivable Account Dr. To Sundry Debtors Account Sundry Creditors Account Dr. To Bills Payable Account Cash Account Dr. To Sundry Debtors Account Sundry Creditors Account i>r. To Cash Account Discount Account Dr. To Sundry Debtors Account Sundry Creditors Account Dr. To Discount Account .£563; 198 14 7 286 57 15 8 17 2 2 9 19 4 10 10 5 15 6 8 4 10 1 6 198 14 7 286 57 219 130 7 4 A matter which should receive the careful attention of anvone commencing to keep self-balancing ledgers who is not already thoroughly conversant with the system, is that relat- ing to odd Journal entries affecting personal accounts passed during the month. Care should be taken to .^ee that any such entries are also posted to the Adjustment Account in the Private ledger, otherwise the trial balance will not agree. To give an illustration: — .Suppose a Journal entry has been passed during the month debiting John Williams (a Sales ledger account) with £3 14s. 8d. for interest on an overdue promissory note, and crediting Interest Account. The debit entry has been made in the Sales ledger and the credit entry in the Private ledger, so that unless some means of completing the double-entry in the Private ledger is adopted any efforts at obtaining a trial balance will be strenuous but misdirected. It is clear that a corresponding debit entry must be made in Sundry Debtors Account, other- wise the Sales ledger will not lialancc with that account, seeing that a debit entr\- lias Ix'cu made in the Sales ledger, which has not been iiiadr in Sundry I)cl>tors Account. ( )ther entries made in the .Sales ledger during the month (e.g. Sales) are posted in monthly totals to Sundry Debtors .Ac- count, but odd entries affecting i)ersonal accounts passed through the Journrd ha\-e to be jxistcd seixirately to either Sundry Debtors or Sundrx ("redit> its adjustment account in the Pri\ate ledger S E L F - B A L A N C 1 N G LEDGERS. is not out uf the way. Where, howexer, such transactions are numerous it is advisable to arrange the Journal ruling so that the monthl}' totals of the Journal entries affecting the Sales and Bought ledgers can be ascertained, thus saving the neces- sity of a separate posting for each entry. For example, wliere only one Sales ledger and a Bought and Private ledger are in use the Journal could be tabulated in the following way. and the transaction mentioned above would then appear as under: — TABULAR JOURNAL. Sales Ledger. 3141 8 Bought Ledger. Private Ledger. Fol. Date. 34H P.L. 4 Jan. 14 John Williams Dr. To Interest A/c. Sales Ledger. Bought Ledger. Private Ledger. 14 Subdivision of the Ledgers. — In most businesses it is found necessar}- to split the Sales ledger up into several sections, owing to the fact that the customers' accounts are too numerous to be conveniently handled in one ledger. This subdivision ma}- be made on an alphabetical basis, e.g. A to K, L to Z ledgers, or upon a geographical basis, e.g., town and country. Whatever system of subdivison is adopted, and whatever the extent of such subdivision mav be — whether into two or twenty ledgers — the books can be arranged so as to enable each ledger to be balanced separately. A separate adjustment account must be opened in the Private ledger for each division of the Sales ledger, and the transactions relating to the various ledgers must be kept distinct by some means in order to enable the monthly totals to l)e ascertained and posted to the respective adjustment accounts. Where there are not more than two or three Sales ledgers this information can be arrived at by introducing two or three (as the case may be) money columns into the Day Book, in this way keeping the sales aft'ecting each ledger in separate columns. A similar arrangement of the "Debtors" and "Discount" columns on the debit side of the Cash Book would be necessary. With reference to Bills Receivable and Re- turns (unless these are numerous) the necessary totals could be arrived at by dissection. 'Where, however, the subdivisions of the ledger arc greater it is advisable to have a separate set of sul)-iournals 29 A U S T R A L A S 1 A X A D \' A X C ED AC C O L' X T A X C Y . for each division, otherwise great inconvenience will he ex- perienced hv the ledi^er keepers in keeping; their pustin.n up to date, a' suhsidiary Cash Book should also be kept for each division, the daily total of each book beings carried into the general Cash Book. Before leaving this subject it might be as well to note that it is a common practice for a Sales ledger-keeper to post in a reversed form the monthly totals of the transactions affect- ing his particular ledger to an account at the back of his ledger called "Private Ledger Adjustment account." As these totals are reversed in posting, this account will neces- sarily have a credit balance equalling the debit balance in the adjitstment account in the Private ledger. The ol)ject of keeping this account in the Sales ledgers api)ears to be that it has the effect of making them self-balancing in the truest sence of the word. i.e.. the debit balances in the ledger will equal the credit balances (or l^alance). The keeping of these additional accounts is unnecessary, seeing that the balances in the Sales ledger can be agreed with their respective adjust- ment accounts. PREPARING STATEMENTS FROM BOOKS KEPT BY SINGLE-ENTRY. — Single-entry l)ookkeeping is an un- satisfactory sul)ject to deal with from the standpouU of a text-l)ook writer as) well as from that of an accountant. To begin with, the bookkeeping described as "single-entry" is an unknown quantity, and can only be defined in a negative way, as, for example, that it co\-ers all kinds of bookkeeping which cannot be classed under the heading of double-entry. The term includes alike the fearful and wonderful devices of many small shopkeepers and most professional men. and the almost complete systems of many merchants, which with a little knowledge and a few minutes' work each month C(nild be converted into doul)le-entry. Tlie term covers also the wide range of more or less, ingenious methods which lie (often in more senses than one) in between these two ex- tremes. In order, therefore, to atteni])! any explanation as to pro- cedure it is necessary in the first place to make some assuni])- tion as to the amount of information a\ailable from the books from which it is desired to prepare comi)lete accounts for a certain periofl. say twelve months. It may be taken tor granted that the business has kept a Sales ledger and a Cash Book, these two books representing in the large majt^rity i^\ cases the extent of the accounting of concerns which ke])t their records on the single-entry principle. It might l)e point- ed out at the outset that, unless it is possible to ascertam 30 S E L F - H A L A X C 1 N ( i LED ( i E R S . exactly or estimate \ er\ closely the \alue of the stock on hand at the beginning of the perind, it is hopeless to attempt to proceed further, as it is a matter of imposeibility to supi)ly any reliable estimate of the profit if this information is not a\"ailable. Assuming- that the amount of the stock at the beginning can be ascertained, the procedure to be adopted to arrive at the required result would be along the following lines : — It should first be ascertained that the Sales ledger has been posted to date, and that no transactions of any descrip- tion alTecting accounts in that ledger have been overlooked. The accounts in that ledger should then be tabulated, i.e., the transactions for the past twelve months disclosed b^^ the various accounts in the ledger should be dissected on sheets ruled with such a number of columns as the circumstances may require. The accounts should be taken in the order in which they appear in the ledger, so as to ensure that none is overlooked. Great care should be exercised in taking out and tabulating the figures, as no check, or ver}- little, can be obtained on their accuracy when the list i? completed. A careful study of the accompanying illustrations of the tabulation of a few of the accounts should make the method of procedure (|uite clear. Having completed the dissection of the Sales ledger on the lines indicated, the various columns should be totalled and the information thus made available should be dealt with as below\ The various columns have been nmnbered to facilitate reference. No. 1. — This total will represent the amount owing by debtors at the beginning of the year. This information will be required in opening up the accounts for th«^ various assets and liabilities as at the beginning of the year, a procedure w^hich is dealt with a little later. No. 2. — To comi)lete the double entry it will be necessary to credit this total to 'Sales account. It is, how^ever, advis- able to open up an adjustment' account in the Private ledger for the Sales ledger, so that the double-entry in respect of this total' would be debit Sundry Debtors account and credit Sales account. No. 3. — Debit Sundry Debtors account. The credit entry will already have been made in the Cash Book. No. 1. — Debit Sundrv Debtors account and credit In- terest account. A U S T R A L A ^^ I A X A 1 ) \- A X C E D AC C O U X T A N C Y Q OJ Od »-H « « N w O DQ Q ^ W U hJ o CO w W Q hJ < lA m CO fe O U H 2 m O E 1— 1 r ) H 2 W U C/2 ^ 00 t— 1 Cvi Q Cl^ o h 1 :: ■» \ ' « \ \ it\ 1 '•■'^ ^ !j "> 5 J (Sv. 0- •* 2| IS t > K 5 ^ 'i «> i;!! ^ 5 - ? ^^ wi \ i \ , v\ J •^ •>«.»,-, V "• 4 ^ .- « s ^ ^ ' 1" 1 % 1 'rvS\ ,, V '\ h\ 1 ^\ III !K ■* k', % 1 1 1 - ?^J_>_4l^__ 111 vl^ h\ W> ^ ^ ^ •< ^^^\1 tt-144 SELF BALANCING LEDGERS. W PQ u w p o t-H Q w < o O O PQ CO < o o 2; o h o w en i/^ 2 U .' ^ < s 33 A U S T R A L A .^1 A X A D \' A N LED A C (' O U X T A X C Y. Xo. ."). — This column should l)e dissected, the total being debited to Sundry Debtors account, and the amounts ob- tained by the dissection credited to tlie respective nominal accounts in the Private ledger. No. f). — This supplies information as to the nature of the items included in No. ."i. No. :. — Credit Sundry Debtors account. The debit entry has already been made in the Cash Book. No. S. — Debit Discount and Allowances account and credit Sundry" Debtors account. No. 0. — Debit Bills Receivable account and credit Sundr}' Debtors acc(~iunt. No. 10.. — Debit Sales account and credit Sundry Debtors account. No. n. — The total credited to Sundry Debtors account and the various classes of items making up this total debited to suitable accounts in the Private ledger. No. 12. — Similar to Column (i. Xo. I.S. — This total will represent the amount owing by debtors at the end of the xenr. and shoidd agree with the balance of Sundrv Debtors account in the Private ledger. The totals of the various columns referred to above, and also those obtained from the dissection of the Cash Book must not, of course, be posted until the books have been opened up with the balances of the various assets and liabilities as at the beginning of the year, otherwise the entries wmII not appear in the Private led.ger in chronological order. It is not advis- able. ho\vf'\er. to i)ass the opening entries until the .Sales ledger and Cash Book have been dissected, as information may be obtained in going through these books which will be useful in enabling a correct statement of the position as at the begiiming f)f the \-ear to be arri\ed at. If a Bought ledger has been used (although this is not common in cases where books are ke])t by single-entry) a tabulation similar to that already explained will supply the totals of the various transactions which have passed through that led.ger, and these totals will be dealt with as required. If this ledger is lackin.g. the necessary information must be obtained b\- other mean-. SELF I^ A LANCING LEDGP:RS. Cuniiui;- iiDW to the Cash Book, a somewliat elaborate tabuhition will he necessary — more especially with regard to the amounts appearing on the credit side. It is thought that a careful inspection of the accompanying specimen ruling will be all that is necessary to make ai)parent Ix^th the method of preparation of the dissection of this book, and the dis])osal of the various totals. As many additional columns may be added to each side as are required. Before commencing this dissec- tion it is of course essential that the Cash Book be checked carefully with the bank pass-book and reconciled therewith. In connection with the Discount column on the debit side it will probably be found that particulars of discounts allowed are not always recorded in the Cash Book. In such cases there is nothing for it but to rely solely upon the total of the "Discounts'" column in the Sales ledger dissection for informa- tion as to the total of this item. Some little trouble may be experienced in ascertaining the amount of purchases applicable to the year for which the accounts are being prepared. The total of the "Purchases" column in the Cash Book dissection will not necessarily show this, and. indeed, it is extremely unlikely that this will be the correct amount. The proper amount can be arrived at l)y finding the amount owing to creditors at the beginning of the year. This will in most cases necessitate the turning up of the statements rendered by creditors during the first two months or so of the year, from which can be extracted a list of the amounts owing for goods supplied prior to the beginning of the A^ear. A list of the amounts owing to creditors on the last da}^ of the year should be ascertained without much diffi- culty, and the actual purchases during the year can be cal- culated. Add the amounts now outstanding to the total of the "Purchases" column already referred to and deduct the amounts owing at the beginning of the year. The amount so ascertained should be debited to Pur- chases account, and credited to Sundry Creditors account. The total of the "Purchases" column in the "credit side" dissection can then be posted to the debit of Sundry Creditors account. The Bills Payable account will require to be built up in a somewhat similar way. Having now ascertained the totals of the various columns in the Sales ledger and Cash Book dissection sheets, it is necessary before posting them to the respective ledger ac- counts to prepare lists of the assets and liabilities as they stood at the beginning of the year. Of course the collecting of this information may be done at any time, but it is not ad- visable to pass the opening entries until the dissection of the Cash Book is completed, seeing that the information disclosed 3.5 A U STRALAS.l AX A D \- A X C ED A C e O U X T A N L' V. therein may be useful in enabling the correct position at the beginning of the year to be arrived at. The totals of tlie various assets and liabilities having l)een ascertained, journal entries, such as are illustrated below, will, when posted, have the effect of opening up the books by double-entry as from the beginning of the year. The posting of the totals obtained by the various dissections should then be proceeded with, and this will complete the double-entry in respect of trans- actions which Iiave taken place during the year. JOURNAL. 192 Jan. OPENING JOUENAL ENTRIES. Stock-iu-trade Account Dr. Horses, Carts and Harness ... Dr. FittintJ^s and Fixtures Account Dr. Bills Receivable Account Dr. Sundry Debtors Account ... Dr. (as per list) To Capital Account Being value of various assets stated above as at this date, after eliminat- ing Bad Debts. Capital Account Dr. To Sundry Creditors Account (as per list) Bills Payable Account Reserve for Doubtful Debts Being liabilities of the business as at this date, including a Reserve against Doubtful Debts, as per list. ^2,. 500 475 220 10 38(5 18 6 ()87 19 3 4,270 7 749 9 587 129 32 10 15 Having posted these entries and also the totals disclosed by the dissection sheets, the preparation of a Profit and Loss account can then be proceeded with in thq usual way. It is apparent, however, that any Profit and Loss account pre- pared on the lines indicated in the foregoing explanation will depend for its accuracy upon the fact that the Sales ledger and Cash Rook have been kept correctly during the year. Seeing that the bookkeeper has had no check upon his work, it is hardly likely that the Sales ledger could have been kept for a whole twelve months without any mistakes having been made. It is possible to obtain a check on some of the ''.ems by a comparison of the results obtained in tlie dissections already referred to. For instance, the Cash column in the Sales ledger dissection sheet should agree with the Sales ledger column in the dissection of the debit side of the Cash Rook. Also if a Dav P.ook has been kept by the proprietor this book should be added and the amount compared with the total of the .^ales column in the Sales ledger dissection. Enough has been said to indicate that too much reliance can- not be placed u]V'U the absolute accuracv of the results show n. 36 CHAPTER TTI BALANCE DAY ADJUSTMENTS— DEPRECIATION, FLUCTUATION. APPRECIATION. BALANCE DAY ADJUSTMENTS.— When the trial balance has been e-xtracted from the books on the last day of the financial period, there still remains a number of points to which it is necessary that attention should be qiven before the accounts are ready to be finally closed off. The Profit and Loss account is designed to show the net profit for the period, and it can do this only after account has been taken of all income earned irrespective of whether it has been received or not, all expenditure incurred whether it has been paid or not, and also losses which ha\"e been made within the business itself. In very few businesses is it possible to receive all outstandin.sf income and to square up all outstanding ex- penses on balance day, and it is proposed to deal first of all with this class of adjustment and the necessary treatment in the books. Book Debts. —The Sales led.^er or ledgers should be gone through carefully by someone having a knowledge of the accounts and a list extracted of all accounts which are deemed to be bad or doubtful. It is perhaps advisable to have two money columns in this list headed respectively "bad" and "doubtful" and each balance should be placed in one or oilier of these columns. In takinc out the list it "is useful also tn mark alongside the name of each customer the date of the last payment made by the customer — as in all probability the list will have to be referred to some senior oflficer before the necessary adjusting entries are made. These dates assist in determining whether the amounts are to be vs^itten ofT as bad or treated as doubtful. A U S T R A L A S 1 A X A D \- A X C E D A C C O U X T A X C Y. A balance should not be finally written off as bad until it is certain that there is no jiossibility of the amount beini^- re- covered, as, for example, if the debt comes within the opera- tion of the Statute of Limitations, or a final dividend has been received in the ])ankruptc}- of the estate of the person whose account is in questitm. After the necessary autliority has been .qiven a list should l)e ])repared of the l)ad debts and a Journal entry passed, debiting- Bad Debts account and credit- in,c: Sundry Debtors account with the total, the individual items makins;- up the total beins; posted to the credit of the respective accounts in the Sales ledger. These postings f-.hould be made in tlie personal accounts in red ink in order to make it apparent at any time that the balance has been written off and not ckjsed by a payment. With reference to the accounts which are doul)tful it is advisable to transfer such accounts into a separate ledg^er or into a S;eparate portion of the Sales ledger, as they require to be watched closely and the efforts made to secure payment will be facilitated by having- them grouped together instead of ha\ ing them scattered through various jiortions of the Sales ledger. llie \arious steps taken in endeavoring to obtain recovery should be marked* in a conspicuous way at the foot of each account. A^ery often business concerns despatch form letters which grow more peremptory in tone, first requesting and finally demanding payment, before the accounts are placed in the hands of a solicitor fir of a Trade Protection Society to be finally dealt with. The fact of the various letters having been sent and also of the lianding o\er of the accmmt^ for cut will be transferred to a special reserve account, usually called "Reserve for Df)ul)tful Debts accomit." together with the per- centage which it has been decided to reser\ e in connection with the ordinary Sales ledger balances. In setting out the 3S B A L A X C E D A \- AD j L" STM EX TS. balance-sheet tins Reserve accuint may either Ite shown as a deduction l"ri)iii the balance uf Sundry Debtors acc(-)unt or it may be sJiown as a reserve on the liabilities side, but if the latter course be adopted the item should be distinctly stated as a "Doul)tful Debts'" Reserve account. Whilst on the suljject of book debts it may be as well to point out that in some businesses the discottnt which is to be received and allowed on the debtors' and creditors' balances as they appear on balance day is provided for. Strictly speak- ing, this provision should always be made when re,^■ular set- tlingi days for both debtors and creditors are fi.xed. but the necessity for making such provision is not by any means universally recognised. It should, liowever, be c]uite clear that if the Sales ledger l^alances total, sa}^ £3000. on balance (lay. and a discount is allowed to customers at the rate of 2^ per cent, there will only be received in cash £2925, if the debtors pay in time to secure their discounts, and similarl}^ if there is owing- to creditoi% £2000 upon which will be received 3 per cent, discount, only £194:0 will have to be paid in cash . This provision is made by putting through Discount account the discount to be received and allowed on the total balances in the creditors' and debtors' accounts as they stand on balance day. It should be noted that all ])ro\isions and adjustments of this nature should be made through the nominal accounts before they are closed ofif and transferred to Profit and Loss account, and not through Profit and Loss account direct, otherwise that account is apt to 1)e made ver}- confusing by having included anything up to half-a-dozen items for dis- count. Losing the above figm-es as an illustration, the journal entries required would be as follow : — Dec. 31 Discount A/c Dr. To Discount Suspense A/c. Being 2i p.c. Discount on Debtors' balance at this date. Discount Suspense A/c Dr To Discount A/c Being 3 p.c. discount on Creditors' balances at this date. 75 75 60 60 1 The Discount .Suspense account would in the above case appear in the balance-sheet as a liability for £1."). and the balance of this account would be transferred to the credit of Discount account on the first day in the new financial period. Accrued Income. — Care should be taken to ensure that all income which the business lias earned, whether it is due or only accrued, has been taken into account. For example, if 39 A U S T R A L A S I A X A D \' A X LED A C C O U X T A X C Y. part of the premises owned by the business is sub-let, the rent being' payable quarterly, and the balance day falls in between two quarter days, an entr} must ])q passed debiting the lessee and creditino- Rent account with the amount accrued up to balance day. Considerable diHiculty is experienced in most concerns which do the bulk of their business on a cominission basis, e.,c:., indent ai^ents. in arriving- at the amount of commission earned up to balance day. The credits to Commission account during- the year will be made from the statements received from their principals, but as these principals are usually foreign firms some time must elapse in between the date when the commission is earned and the date when advice is recei\ed of the credits for commission in the books of the principals. In those cases where the agents receive commission only upon the actual orders sent home by them the difficulty is not so marked, as by listing the orders sent a fairly accurate estimate of the amount of commission due ciin be obtained but where they are entitled to commission on all orders sent from their territory, whether the orders go through the agents or are sent direct, it is impossible to obtain any accurate estimate, and it is usual to ignore such commissions until advice is re- ceived from the principals. Where an estimate can be made of commission earned a journal entry is passed debiting Com- mission Accrued account and crediting Commission account, this entry lieing reversed on the first day of the next financial period. Accruing Expenses.— These re(|uire to be watched closely, and it is advisable for the accountant of the business to take a note of any expenses incurred during the month prior to balance day. in order to ensure that all such are taken into account. Regular expenses, such as wages, are not in so much danger of being overlooked, and it is. of course, necessarv where the balance day occurs in between two pay davs to calculate the accrued wages up to balance day and pass an entry debiting Wages account and crediting Sundrv Creditors for Outstanding Expenses. All accrued expenses' should be treated similarly, and it is not thought necessarx- to go into this matter in fnrtlicr detail, as sufficient has been said to indicate the points to which attentif the assets now in the business equals only £11,000. .Suppose, hi)\ve\er. that the directors of this compan\- are alive to the neceen utilised for other purposes in the business, and will so be represented l)y an in- crease in any one or more oi tiie assets, or, it may be, ])y a reduction of the liabilities ; but the fact nevertheless remains that where provision is made for depreciation out of profits it results in the retention in the business of assets of some kind or other to make good the diminution in value of those assets which have depreciated. As a corollary of the a])ove, if depreciation is not made good out of profits, when the worn-out assets require to be renewed it wmU in most cases necessitate the introduction of further capital into the business. Using again the illustration previously given, it is clear that if no provision has been made there will still be a balance of £10.000 in machinery account, even when the machiner}- is worn out and to all intents and purposes valueless. As the whole of the increase in cash each vear has been returned to the shareholders by way of divi- dend there will not be sufficient cash in the business to pur- chase new machinery, and if the proprietors require to con- tinue their business thev will have to bring in additional capital to make the purchase. 43 A U S T R A L A S 1 A X A D \- A N C E D A C C O l' X T A X C Y. tare should be taken to distinguish between depreciation and llie cost of repairs. It will not be disputed that revenue must bear the cost of maintaining an asset in a working con- dition, and repairs must be effected in order to enable the machinery to be run at all. Ihe eft'ect of repairing an asset, h()we\er. i.>^ merely to put the asset back to the condition it was in before the necessity for the rejiairs arose, and no matter how thoroughl}" these repairs ma}- be carried out they will not prevent the gradual deterioration of the asset as a whole, and the time must e\entually arrive when the asset will be, practically speaking-, valueless. As already explained, it is this general deterioration in \alue to wliich is gi\en the name of depreciation. De])reciation of assets may be caused l)y — (aj Wear and Tear. — This is the (le])reciation occasioned by the active working of an asset in the endea\'or to earn profits; the most familiar illustration being wear and tear occasioned by the use of machinery or office furniture. {])) l^ft'lu.xion of Time. — E.g.. the regular dimmution in value of a leasehold property from year to year. (c) Obsolescence. — In the case of machinery, in addition to providing for depreciation arising from wear and tear, the risk of the machinery becoming obsolete before it is worn out must be taken into account in calculating the percentage to be written off each year. That this is a very real factor, which must not be overlooked in arriving at the amount of the an- nual charge, cannot be disputed, but it must be admitted that it is very difficult to estimate in any way accurately. Some classes of machinery are more liable to this risk than others, and practical experience in the particular class oi machinery may be of assistance in enabling a satisfactory estimate of the ])rovision re(|Uired under this lu-ading. There is apt to be some confusion !)c't\\ecn depreciati(^n and fluctuation. The latter is, a variation in tlie value t)f an asset due to circumstances outside the business altogether, which may in tlie case of a fixed asset be ignored from a book- keeping point of view. For example, a manufacturer instals machinery which costs him £1000. .\ little later the duty is taken off that ])articular class of machinery, and he can now get the same machinery for £000. Tt is nc^t necessary for him to take any notice in his books of the diminutic^n in the market value of this machinery; so long as lie does not bring the asset into his books at more than cost price, and makes such provision for depreciation that the asset will be written out of his books by the time it is worn out this is all that is 44 BALANCE DAY A D J l" S T M E N T S. re(|uiic(l. Similarly any increase or decrease in the value of freehold premises occasioned by a fluctuation in the market value of the land on which premises are erected should be ignored. It mi,L;lit be advisable, however, if it is thought that a fluctuation downwards is likely to be permanent, to make some provision for this (although there is apparently no legal necessity to do so in the case of fixed assets), but it would be totally incorrect from an accountancy point t)f \iew to write up the book value of fixed assets in the event ut' a favoral^le fluctuation. Having now seen liow inijiortant it is that i)rovision for depreciation should l)e made, it is now necessary to consider, firstly, the extent of the provision, and. secondly the dififerent methods of niaking the provision. In the first place it is ob- vious that all assets are not required to be written completely out of the books by the time they cease to be of real use to the business. Such assets as machiner}-, furniture, &c.. will have some residual ^alue, and it is only necessary to write them down to their estimated residual values during their time of usefulness. In arriving at the amount to be provided for each year in respect of any asset, the' following elements should 1h' taken into consideration : — (a) The cost of the asset. (b) The lifetime of the asset. (cj Its break-up value. In the second i)lace, the method of providing for deprecia- tion which it is advisable to adopt in any particular case will, of course, depend upon the class of the asset, but it is thought that a careful perusal of the various svstems described below, together with the illustrations attached, will enable the reader to decide witliout difficulty the proper method to l)e adopted. 1. Fixed Instalment System. — Under this method a fixed proportion of the original cost of the asset is written off each y^ear. This method is conmionly adopted in the^case of assets which require very little in the nature of repairs, and which do not necessitate the locking up of much capital, the most familiar illustration being office furniture. Suppose that fur- niture cost £220, and was estimated to last f(Tr ten years, the break-up value being reckoned at £20. Under this method Profit and Loss account would be debited witli £20 each year and the furniture account credited, thus writing the account down to the residual value of tlie furniture in ten years' time. 2. The Reducing Instalment System. — A^^^ere this method is adopted, a fixed percentage is written off the reducing A I' S T R A L A S 1 A \ A I) \' A X C ED AC C O U X T A X C Y . balance each year, and it is clear that the charge against profits for depreciation will reduce gradually. As an illustration: Suppose it has been decided to write down machinery costing £ 1000 at the rate of 20 per cent, on the reducing balance each year. In the first year Profit and Loss account will be debited with £200 for depreciation. In the second year the charge against profits will equal only £160, and so on. This system of ])ro\iding for (lei)reciation is almost invariably used in the case of machinery, and there is a good reason why this should be so. The profit-earning capacity of the machinery will decrease to a certain extent as the machinery gets more worn, and it is onlv reasonable that in the years when the machinery is doing the greatest work the heaviest charges for deprecia- tion should be made. Again, as the machinery gets older, the charges against profits for repairs will increase, and the decreased charge for dej^rcciation will roughly compensate for this. The general effect of this system is to apportion as evenly as possible the total charges for repairs and depreciation over the periodical accounts prepared during the lifetime of the asset. 3. Equation of Cost and Repairs. — If. as mentioned in describing the reducing instalment system, it is advisable in providing for depreciation to endeavor to make the total charges against profits in respect of the asset in question as even as possible, the present method will give the desired result, but as it depends for its accuracy on the question as to whether it is possible to calculate accurately beforehand the total cost of repairs throughout the lifetime of the asset, it is not often that this system will be found workable in actual practice. Under this method, in arriving at the charge to be made against each year's profits in respect of the asset, the estimated total cost of repairs is added to the original cost of the asset and a fixed amount is debited to Profit and Loss account each year throughout the lifetime of the asset to cover both depreciation and repairs. To give an illustration: Suppose that certain machinery cost £100 and the proprietor was able to ascertain from previous experience with that class of machinery that the total cost of the repairs during its life- time would be about £M). the life nf the niachint-ry JH-iug reckoned at ten years. Tlic sum of £ I.') (Ie;i\ing out ^^\ con- sideration an\' l)r('ak-ui) \alue) would be debited to Profit and Loss account each \car. ;md of this amount £10 would be credited to Machinery account by wriv n\ depreciation, and £5 would be credited to a Rejiairs l\e>er\e account. The cost of the rei)airs as they became necessary would be debited to the last mentioned account. At the end of ten years the Machinery accf)tnu would be written out of the book-^. and 4G BALANCE DAY ADJUSTMENTS. £50 would have been credited in all to the Repairs Reserve account. If the original calculation of the repairs happened to be in any way correct, the total debits to the Repairs Reserve account during- the ten years would be just about £50, and this account would thus also be closed off, any small balance one way or the other being transferred to Profit and Loss account at the end of ten years. As already men- tioned, the efficiency of this system depends entirely upon the accuracy of the preliminary estimate for repairs and such being the case this system could not be applied in actual practice excejJt under very special circumstances. 4. Valuation Method. — 'i'his method necessitates a valua- tion of the assets each year, the idea being to find how much the assets have decreased in value during the year, the differ- ence being written oft' to Profit and Loss account. An argu- ment which is put forward in favor of this method is that the assets are 'Stated in the books at their actual realisable values, and that the business will thus have an accurate statement of its position. It might be pointed out. however, that no balance-sheet purports to set out the assets of the business at their market valuations, but merely at the value of those assets to the business as a going concern and, provided suffi- cient depreciation is written oft', this is all that can be reason- ably required. The chief objections to this system are, firstly, that it makes the charges against profits for depreciation very une\en. and, secondly, it is impossible to eliminate fluctuation from the calculations, seeing that the basis of the valuation in each year w^ill be the market value of the assets. x\s a method of providing for depreciation this system cannot, therefore, be recommended, but an occasional valuation may, under certain circumstances, be valuable as a check upon anv other method of depreciation which has been adopted. If a manufacturer instals a certain class of machinery with wliich he has had no previous experience, the proper rate of depre- ciation on this machinery will be a matter of estimate, and it will be advisable in such a case to obtain the services of an expert occasionally to re-value the asset in order to ensure that the provision made is sufficient. 5. Annuity System. — This method of providing for de- preciation is used almost exclusively in relation to leasehold property, and its ol)ject is to bring interest into account. Theoretically the value of leasehold property is the total amount of the annual rental for the number of years which the lease has to run. less interest on the rent which has been paid in advahce. The second year's rent is paid, for instance, one year in advance, the third year's rent two years in advance, and so on. Seeing that the business has paid the rent in advance for a number of vears ahead and that it has been AUSTRALASIAN AD V AX C ED ACCOUNTANCY. allowed as a deduction tin- inti-rest on these payments in advance, it is only reasonable to bring such interest nito account in the books. Again, tin- matter may l)e looked at- in another light. As the amount i)aid for leasehold premises is, in most cases, a fairly large sum, it necessitates the witb.drawal of that amount from the ordinary channels of the business; the trad- ing portion of the business is therefore handicapped to the extent of the amount so withdrawn, and the profits which it can earn are decreased proportionately. It is only proper to recoup that portion of the business for this withdrawal of assets, and the idea of the annuity system is to charge the lease with interest on the lialance of the account from year to year and credit Profit and Loss account. As the lease- hold property account will rc(|uire to be written out of the books by the time the lease has ex])ired. it is necessary seeini^ that the account will debited each year with the interest on its reducing balance, to ascertain what sum must be debited to Profit and Loss account each year and credited to the Leasehold Property account so that the original cost of the lease plus the interest on the reducing balance will be written ofif during the currency of the lease. This is obviously a fairly comi)licated calculation, and reference would have to be made to (lei)reciation tables to enable the amount to be arrived at. The annual charge against profits for depreciation remains a fixed sum and the debit, to Leasehold Property account for interest will gradu- ally get less, seeing that the balance of the account will re- duce each year. The following illustration should make the procedure perfectly clear ; — A merchant ])urchases a lease of premi>es for six }ears for an amount of -£l.")(M). money being worth, say '> ])er cent, to him. The amount paid for the lease will be debited to Leasehold Propert\- account. .\t the end of the first \ear this account will be (lel)ite(l with interest at •") i>er cent.. \-iz.. £1~), and Interest account credited. Profit and Loss account will tlu-n ])e .") lUs. for dejireciation. and tlie amount written ofi' Leasehold I'roperty account. In the seeond yt-ar similar jirocedure is followed, the amount of tlie interest being reduced to £(!;? Pis. (id, the amount of depri'ciation remaining the same as in the first year. B A L A N C E D A \' A D J U S T M E X T S LEASEHOLD ACCOLXT. 1919. 1919. Dec. 31 P/L A/c. Jan. 1 To Cash .... £l,.:00 Depreciation £29.j 10 Dec. 31 „ Interest .. 75 Balance 1,279 10 £1,575 £1,575 1920. 1920. Jan. 1 To Balance . . £1.279 10 Dec. 31 By P/L A/c. Dec. 31 „ Interest .. 63 19 6 Depreciation £295 10 Balance 1,047 19 6 £1,343 9 6 £1,343 9 6 1921. Jan. 1 To Balance . . £1,047 19 6 6. Sinking Fund System. — It has already been e.xplained that where depreciation is provided for out of profits, assets are left in the business to uiake gor.d the decrease in the assets which have depreciated, and this enables such assets to be replaced without necessitating the introduction of fresh capital into the business. Where the cost of replacing the worn-out assets is not excessive the withdrawal of sufficient cash from the' business for this purpose is not a serious matter, and no special provision is required ; but where a large sum of money is required for the replacement of one of these assets it is clear that the sudden withdrawal of such a sum from the float- ing assets would seriously affect the resources of the business, and it is therefore necessary that some means should be adopted of providing the necessary cash without causing the trading portion of the business to be crippled in the manner in- dicated. Again, the assets which have been left in the busi- ness to make good the depreciation of the fixed assets may not be of a readily realisable nature, and a forced sale of these to provide the necessary cash would almost invariably result in a loss being sustained. The system usually ado])ted to enable the required amount of cash to be forthcoming without the serious effects referred to above is that known as the Sinking Fund System. The method of setting up a Sinking Fund and the necessary entries in the books are dealt with fully in a later chapter, to which reference ma}- be made. It might be mentioned here, however, that the system provides for the investment outside the business in liquid securities of the amount written oft' each year for depreciation in respect of the asset. Interest on the amount from time to time invested is credited to the Sinking Fimd account, so that the annual charge for depreciation would be somewhat less than that ordinarily required. 49 A I S T R A L A S 1 A X A D \' A N C E D ACCOUNTANCY. 7. Maintenance out o£ Revenue. — Strictly speaking this can hardly be classed as a method of providing for deprecia- tion, although, as will be seen, the etYect is much the same. There are certain assets which, although they depreciate in value, by their nature render it practically impossible to esti- mate the amount of depreciation which has occurred. An illustration of this class would be the loose tools used in a manufacturing business. It is usual, therefore, to treat the cost of the original equipment as capital expenditure and to maintain the loose tools in the same state of efficiency out of revenue. In other words, the original cost will be debited to a Loose 'J'ools account and the cost of replacing any of these tools will be charged to Profit and Loss account. It might be mentioned here that in some cases the re-valuation method is used with regard to this class of asset, and this method certainly has the advantage of enabling a valuable check to be obtained periodically on the quantity of loose tools in hand. Depreciation in Case of Companies Formed to Work Wasting Assets. In the light of the foregoing it would seem almost a paradox to state that in certain concerns it is not necessary nor even advisable to make provision for depreciation. As has already been ex])lained. tlie chief reason why it is necessary that the provision should be made is that the con- cern should be enabled to conduct its business permanently without requiring further capital to be brought in to replace the w-asting assets as and when such replacements become necessary. The same position does not arise in the case of those concerns which have no intention of conducting a busi- ness of a permanent nature. A company may be formed f(~ir the purpose of conducting a single venture, which, by its nature, cannot possibly last for more than a few years, and when the objects for which the company was formed ha\e been finally achieved the companv must of necessity be wound up and any surplus monev returned to the share- holders. Take the case of a company formed to work a timber right; the bulk of the original ca]:)ital subscribed by the shareholders will be used for the purchase of th^s right, and it is apparent that as the timber is cut and sold the right will become less valuable each \ear. Applying accotmtancy principles as in ordinar\- commercial accounts it will clearly be wrong for the companv to distribute as dividend amongst its shareholders the excess <">f its inc»^me over expenditiue. without first i)roviding for the depreciation in the value of tlie 50 BALAXCE DAY A D J U S T M E X T S. timber right due to the fact that a certain proportion of the timber has been cut and sold. Unless the company charges to Proht and Loss account each year the cost of the timber sold and so retains an ecjual amount out of the profits in order to make good this depreciation in value, it will be seen that, by the time the timber is exhausted, the company will have returned the whole of it* capital to its shareholders, less, of course, the cost of any plant, &c.. which it has found necessary to purchase. But, could it be stated that the company was, from a financial standpoint, making a mistake in doing this? It does not require any capital to replace the asset which is now exhausted, seeing that the object for which the company was originally formed no longer exists. What it has done, in effect, amounts to this : It has returned the capital to the shareholders from year to year along with its actual profits, by way of dividends in- stead of keeping back out of each xear's profits a due pro- portion of the original capital, and returning it in a lump sum to the shareholders when the timber is exhausted. Again, it is apparent that if depreciation had been provided for each year a considerable sum of money would have been left in the hands of the directors, and this money must have either remained idle or have been invested in outside securities. Now. a person investing money in a venture of this kind, whilst perhaps being satisfied with the ability of the directors to conduct a timber business on sound lines, mighf not have an equally high opinion of the directors as financiers, and such being the case it is no doubt better that the directors should return the capital to the shareholders in the way in- dicated, allowing them to apportion each dividend received between capital and revenue and to do their own investing. It is clear, therefore, that, from a commercial point of view. the best course to adopt in a concern of this particular nature is that indicated in the illustration supplied, but the next question which arises is whether a company registered under the Companies Acts can legally return capital to its share- holders in this way. seeing that the Companies Acts in the various States provide that a Company cannot reduce its capital by returning cash to shareholders without first obtain- ing the consent" of the court. This point was decided in an English case, Lee v. IMie Neuchatel Asphalte Co.. Ltd. This company was formed for the purpose of extracting bituminous rock from the mine acquired by the company, and. briefly, the point which gave rise to the action was as to whether the directors could dis- tribute as a dividend the excess of income over expenditure without first providing for depreciation in the value of the mine occasioned by the extraction and sale of the products of AUSTRALASIAN- ADVANCED ACCOUNTANCY. the mine. Ihe following- extracts from the judgment de- livered by Lord justice Lindley in the Court of Appeal, will it is thought, suffice to make the legal position of a company of this class clear. Lord Justice Lindley said: — The actual point to be decided i's an easy one, but the rlithculty arises from the fact that the court is urged to lay down general principles of law, which, if adopted, would paralyse the whole trade of the country. The respondent company was formed for the purpose of working certain asphalte mines of which it had got a lease. It was quite obvious that with respect to such a property every ton of stuff got out of that which was bought with capital represented a portion of capital. It was said that a division of the profit arising from the sale of such was a return of capital. If that was so, it is not, at all event's, such a return of capital as is prohibited by the Company Acts. There is nothing in any of the Company Acts prohibiting anything of the kind. The onlv provisions in those Acts relating to capital were sections 8, 12, 26, 28, and 34 in the Act of 1862; sections 9-20 in the Act of 1867; and sections 3-5 in the amending Act of 1877 (English Acts). There was nothing in any of tho'se sections as to the mode of payment of profits or dividends. It has been very judiciously and properly left to the commercial world to settle how the accounts were to be kept. The Acts do not say what expenses are to be charged to capital account and what to revenue account. Such matters were left to the shareholders: they may or may not have a 'sinking fund or a deterioration fund ; the articles of association may or may not contain regulations on these matters; if they do, the regulations must be ob- served; if they do not, the shareholders can do as they like so long aS they do not misapply their capital. In this case one of the articles provides that the directors shall not be bound to reserve moneys for the rene .val or replacing of any lease or of the company'-s interest in any property or concession. Mr. Rigby says that that provision in the articles is contrary to law. Now, the Companies Act. 1862, does not require the capital to be made up, if lost, and it does not prohibit payment of dividends so long as the assets are ' of less value than the capital called up, nor does it make loss of capital a ground for winding-up. The argument seems to be founded on the notion that the company is somehow a debtor to its capital; that may be a convenient notion from an accountant's point of view, but has nothing to do with law. Though the Acts do not say so. there are general principles of law which prohibit the capital of a com- pany being applied for purposes other than those mentioned in the memorandum of association, and, further, if any of the purposes men- tioned in the memorandum of a.ssociation are expressly or impliedly forbidden bv the statutes, then the capital of the company cannot be applied for those purposes (see Trevor v. Whitworth. 12 App. Cas., 409) . But if a company is formed to acquire or work property of a wasting nature, e.g., a mine, quarry, or patent, the capital expended in acquiring the property may be regarded as 'sunk and gone, and if the company retains assets .sufficient to pay its debts, an^ e.xcess of money obtained by working the property over the cost of working it may be divided among the shareholders ;' and this is true, although some portion of the property itself is sold, and in one sense the capital is thereby dimni- i.shed. If it is .said that such a cour.se involves payment of dividends out of capital, the answer is that the Acts nowhere pre on evidence whether the particular company ought, or ought not, to have such a fund. rt will be seen, therefore, that it would not be sate for a company to rely on the tjeneral statement that a company is under no necessity to make irood out of profits a loss on fixed assets. The present leg^al position is unsatisfactory. and it is certain that the last word on the subject has yet to be said. The position as it appears to the writer mi^^ht be 'summarised as folows: — (a) The Court will not concern itself with matters affect- inj? the internal manag^ement of a company. (b) The Court will, however, see that the company makes no direct return «'f cajiital to its share- holders except a.N provided for in the Companies .\cts. and will see also that the rip^hts of creditors are not prejudiced. (c) .Subject to any provision to the contrary in thr c.nn- l)any's articles of association a company is under no obli.qation before distributins^- profits to make jTfood any loss on fixed assets. Tt must. ho\vc\er. provide for any loss on fli-atinu; assets. ((\) Tt is for the Court to determine whether an\ jiar- ticular company ouL'-ht to have provided a fund to meet depreciation nr lns< on wasting assets. 54 BALANCE DAY A D J U S T M E X T S. (e) \\ lierc a company is formed for the purpose of work- ing- a wasting asset it is not necessary for the com- ])any to make good out of the excess of its income <»\er cx])enditure the loss of capital occasioned by working that asset before the distribution of pro- lits. It might be mentioned tliat in the New Zealand Com- ])anies Act. 1!»0)S. the ])rinciple laid down in Lee \. The Neuchatel Asphalte Co. has received legislative recognition. This Act pro\i(]es that where a company is formed to work a mine, patent, timber right, etc., or other wasting asset, it is not necessary for the company to make good a loss of capital caused by working such asset before distributing profits, provided the auditor of the company certifies in a Balance Sheet made up to a date not more than three months prior to the date of his certificate that the company has suffi- cient assets to pav its creditors. APPRECIATION — WRITING UP ASSETS.— The -juestion sometimes arises as to whether a C()in]xuiy can legally write up the value of a fixed asset and utilise the amount by which the asset is written up for the purpose of paying dividends. To put the matter in a concrete form : Suppose a company has its business premises standing in the books at £10,000. A conservative valuation sets down the present value, owing to an increase in the market value of the land, at £35,000. Can the company legally write up the book value of the asset to £25.000. crediting £15.000 to Profit and Loss account and pay a dividend out of this amount? Setting on one side for the time being the point as to whether such a procedure is or is not legal it will hardly be disputed that such a course would be totally opposed to all principles of sound finance for the following reasons : — (a) The profit would be purely an estimated one. (b) The working capital of the concern would be depleted to the extent of the dividend so paid and such dividend would amount practically to a return of capital to the shareholders. Take now another case which may seem at first sight to be on all foi:rs with that cited above. A company has created a secret reserve by writing down its business premises each year out of profits to an extent greatly in excess of the actual depreciation which has occurred. Can it write up the value of the buildings by the amount of tlie depreciation over- provided, and use such amoimt for di\idend jmrposes? 55 A U S T R A L A S 1 A X A D \' A X C E D A C C O U N T A N C Y. The positi(Mi is entirely different from that cited in the first case. An over-provision for depreciation results in the retention in the business of ascertained profits which miL^ht quite properly have been distributed amongst the share- holders from year to year. The proposal above mentioned would really amount to a distribution in the current year of profits which the company was justly entitled to distribute in previous years. IMie legal position, as is commonly the case where the law has anything- to do with questions of account, is brimful of difficulty. The following summary, however, sets out what appears, in the opinion of the writer, to be the resiilt of the decisions in the leading cases : — (a) A company cannot write up the value of a fixed asset and distribute the estimated profit by way of divi- dend amongst its shareholders. (b) Even where a fixed asset is sold at a price in excess of the amount at which it stands in the books such a profit cannot be distributed amongst its share- holders in the form of a dividend unless : — {1) Such a course is authorised 1)y the articles and (2) The company takes into account any other losses which ma}' have occurred, and for this purpose it will be necessary to obtain a revaluation of all the other assets. See Lubbock v. British Bank of South America 181)^, 2 Ch. 198; V^erner v. Gene- ral and Commercial Trust 1891^, 2 Ch. 368; Foster V. The New Trinidad Lake Asphalt Co.. Ltd., 1901, 1 Ch. 308. It should be noted that the abo\'e ])osition only applies to the case of a company writing up or realising fixed assets where the estimated or realised profit is due to market fluc- tuations in value. There is nothing legally or economically to prevent a company which has over-depreciated an\- or all of its fixed assets and so created a secret reserve from writing up the value of such assets to the extent of the excess depre- ciation provided and distributing such amount by way of dividend. See Mills v. Northern Railway of Buenos Avres Co.. 1870. .-, Ch. (521. and Bishop v. Sn'iwna and Cas.^aba Railway Co.. 189r,, 2 Ch. :)f)r,. RESERVES AND SINKING FUNDS. Whilst pnn vision> of this nature projierly come midcr the heading of adjustments to 1)c made on balance ilay, this subject is thought to be of sufficient importance to be dealt with se])arately in a later chapter. 56 CHAPTER 1\". PARTNERSHIP. Definition. — Partnership is the relation existing Ijetween persons carr_\ ing on a l)usiness in common with a \ie\v of profit. 1 he law go\erning this relationship is set out in the Partnership Acts of the varions States. All associations of persons together to carry on a business with a view of earn- ing" profits do not come under the provisions of these Acts, as the term "partnership'" does not cover, for instance, the relation which exists between members of companies regis- tered under the Companies Acts or of registered societies. Considerable differences exist between a partnership and a company. Each member of a partnership is entitled to take part in -the management of the business, and every act done or contract entered into by one partner within the scop€ of the business is binding on the remaining partners. In the case of a company the management of the business is vested in the directors, and individual shareholders are not entitled to an}- voice in the management other than b}- voting at general meetings. A partnership depends for its existence upon the mutual confidence and trust of its members, ])ut this relation need not necessarily exist between the members of a limited company. The Companies Acts of the various States provide that in the case of a trading partnership not more than twent}- persons (in New Zealand ten persons), or in the case of a banking concern not more than ten persons, shall carry on business together unless registered under the Com- panies Act. Xumerous other dififerences exist, but it will suffice ])er- hai^s if two of tb.e princijial ones are mentioned. In the first i>lace each niemlier of a jiartnershi]! may be made liable for tlie whole of the debts of the firm, whereas a member of a limited company cannot be made lia1)lc in the case of a joint stock coiupany, for any amount exceeding the amount unpaid on the shares held I)\- him. or, in the case of a guarantee company, for more than the amount which he undertakes to contribute towards the assets of the company in the e^■ent of winding u]). 57 A U S T R A L A S I A X A D V A N C E D A C C O U X T A X C Y . Secondly, upmi the deatli of a inemlx-r of a partnership, in the absence of any aj^reenient to the contrary, the partner- ship is dissolved; but the death of a member of a company has no effect on the company. It merely results in the substitution of a new shareholder for the old. In each State (with the exception of >,ew Zealand), a Firms Act provides that every firm carrying-- on business in such State under a firm name which does not consist of the full or the usual names of all the partners without any ad- dition, and every person carrying on business or having any place of business in such State under any firm name consisting of or containing any name or addition other than the full and •usual name of that person, shall register in the manner directed by the Act. This registration consists of filing a statement at the office of the Registrar-General. C( ntaining the following information : — (a) The firm name ; (b) The nature of the business; (c) The place or places where the business is carried on. or is intended to be carried on ; (d) The full names, usual residence, and usual occupation (if any), of the person or persons carrying on or intending to carry on the business : (e) If the business is commenced after the commencing of the Act the date of the commencement of tlie business. In addition, when an\- change occurs in <-he constitution of a registered firm, the memljers of the firm as reconstructed shall notify the Registrar-Cleneral within one month there- after. The terms upon which a partnership is enterctl into by the members are determined by agreement between the part- ners. This agreement may be by deed, in writing not under seal, verbal, or even implied from the conduct of the partners, and in some cases persons who had no intention of incurring liability as partners may find themselves liable as such to creditors of a firm. Although numbers lA partnerships are entered into merely under a verbal agrecnunt. it is of tin- greatest importance that the agreement should be in writing as. where tkere is no ascertainable agreement between the partners, the provisions of the rartnt-rshi]) Act api^ly. and persons entering into this im|iortant relationship sh(Mil(l make 58 PARTNERSHIP. themselves aware of the contents of the Act, so that its pro- visions, where unsuitable, may be excluded by a definite ag-reement between tliemsehes. The preparation of the partnership agreement should be entrusted to a solicitor, as it is important that its provisions should be so drawn up as to leave no loophole for dispute at a later date. It is also advisable that a competent public accountant should consult with the solicitor with regard to provisions relating to the accounts and the mode of settlement between the partners. The various matters which require attention in such an agreement will, of course, depend a good deal upon the arrangements between the partners, but the following points should always be brought up for considera- tion before the actual provisions of the agreement are decided upon : — ■ (1 ) The Names of the Partners and the Firm Name. As already pointed out. where the firm name does not include the whole of the names of the partners, or includes any name or addition to the names of the partners, the firm, if carrying on business in any State except New Zealand, will require regis- tration under the Firms Act. (2) The Nature of the Business. It is inq)ortant that the exact scope of the operations of the business should be agreed upon beforehand between the partners and included in the agreement, as no change in the nature of the business can be made without the approval of the whole of the partners. (;}) Term of the Partnership. Where no fixed term is mentioned in the agreement for the duration of the partner- ship, this constitutes what is known as a "partnership at will," and any partner can, l)y giving notice to the remaining partners, retire when it pleases him. It will, therefore, be generally found advisable to state some fixed period in the agreement, say, three to five years, and when the term has expired the partnership if desired can be renewed for a furtlier fixed period. If, at the expiration of the fixed period, no new agreement is entered into, and the partners continue to carry on business together, the terms of the old agreement will apply, but the partnership becomes a partnership at will, and a partner can. l)v giving notice, retire at any time. (4) Capital. The agreement should state the amount of capital to be introduced by each partner. Legally a part- ner's capital is the amount which he introduces into the business at its commencement, or upon his joining the firm ; but the capital niav be altered from time to time if partners A U S T R A L A S 1 A X A D \- A X L E D A C C O L' X T A X C \". so ai^ree. It is the practice in must linn> iu carry any ex- cess of a partner's share of profits over liis drawings to the credit of his Capital account each year. 'J'his practice is found to be convenient, and it is advisable, therefore, to in- clude a provision in the agreement that the amount of each partner's capital shall be the amount standing at the credit of his Capital account at the beginning of each financial year. (.')) Accounts. l'r(-)vision should be made that the ac- counts are to be kept by double-entry, and that once at least in every vear a Profit and Loss account and Balance Sheet must be j)repared in order to show the position of the firm ; the accounts to be audited and certified to ijy a competent public accountant. (ti ) Authority of Partners. In ilic absence of any agree- ment to the contrary each partner is entitled to take an ecjual share in the management of the business. It is usual to ha\ e some provision in the agreement modifying this arrangement. In man}' cases the general management of the business is vested in the senior partner, and the duties of the remaining partners are defined in general terms in the agreement. A clause to this efYect would operate to prevent disputes on the every-day matters which call for immediate decision. Matters afifecting the policy of the l)usiness should, of course, be re- ferred to all the partners. ( i ) Division of Profits. 1'he Partnerslii]) Act jirovides that, in the absence of otlier agreement. ])rofits are t(j be divided equally between the partners, and this is so even where the amounts of capital, sul)scribed by the partners are unecjual. If. therefore, it is desired that i^rofits are to be shared other than equally, express i)ro\isii'u -liquid he made in the agreemeTit to that effect. (8) Partners' Drawings. In the al)sencc of an agreement to the contrary partners are not entitled to draw in anticipa- tion of their profits, and provision should be made by a clause in the agreement if it is desired tliat tlie partners should have the power to do this. ff)) Partners' Salaries. I'artuers are n( t entitUd to rc- mimcration for their serxices. and an\- decision that salaries are to l)e ])aid to the partners should Ite included in the agree- ment. ( It)) Interest on Capital, in tlie absence of an agreement to the contrarw partners arc \u<{ entitled to interest on their capital before the ascertaimnent of ])riifits. The words "be- fore the ascertainiuent of profit>^" apparently do not carry PARTNERSHIP. their obvious meaniiii; in this connection. They do not mean, as mii^ht be supposed, that a partner is not entitled to interest on his capital before it is ascertained that there are profits, but that a partner is not entitled to have interest on his capital chart^ed a.^ainst the Profit and Loss account before the ascertainment of his share of the profits. If. after the ascertainment of hiS profits, he chooses to call so much of his share interest and so much profit (suiting himself as to the exact proportion) he is doing" no injustice to anyone. The intention of the Act in this connection would have been much clearer if it had simply stated that a partner is not entitled to interest on his capital in the absence of any agreement to the contrary, as that exactly defines the position. (11) Interest on Advances. Where a partner brings into the firm any amount in addition to the capital which he agreed to introduce, he is entitled, in the absence of any agreement to the contrar}-. to interest on this advance at the rate of I ])er cent, per annum ( in New Zealand. 5 per cent. ; \\'^est Australia. Tasmania, and Queensland. O per cent.). (r^j Interest on Drawings. W here a clause is inserted in the agreement that i)artners are to receive interest on their capital, it is( sometimes provided in addition that they shall he charged with interest on their draw^ings. I'his is not usual, and it is difficult to see the reason why such a charge should be made where the business is running at a profit and it is clear that the ])artner is not over-drawing liis sliare of the profits. (\o) Death or Bankruptcy of Partner, It is highly important that provision sliould be made in the agreement as to the course to be followed upon the death or bankruptcy of any one or more of the partners. The Partnership Act pro- vides, that, subject to an agreement to the contrary between the partners, the partnership is dissolved by the death or bank- ruptcy of any partner. The representative of the deceased partner, or the trustee or assignee of the bankrupt partner, can, therefore, require the l)usiness to l^e sold in order to en- able him to withdraw such partner's interest in the business. As it is not always desirable that events of this nature should determine the i)artnership altogether, ])rovision should be made in the agreement that, in the e\ent of the death or bankruptcy of a i)artner. the remaining partners shall have the right to take over the business upon paying to the representa- tives of the deceased or bankrupt partner the amount of his interest in the business at date of deatli or l)ankruptcy. as the case may be. A U S T R A L A S I A X A 1) \' A N C E D A C C O U X T A X C Y. (li) Retirement of Partner. The Partnership Act simi- larly provides that, in the case of a partnership at will, any partner may, by giving notice to the other or others of his intention to retire, dissolve the partnership and such retiring partner can. in the absence of an agreement to the contrary, require the business to be sold. A clause similar to the one mentioned in the last preceding paragraph should therefore be included, setting out the course to be followed upon the retirement of a partner. (15) Amount to be Paid to an Outgoing Partner. If the remaining partners are to continue the business upon the death, bankruptcy, or retirement of a i)artner, provision should be made in the agreement as to how the amount of such partner's interest in the business is to be arrived at. His' interest in the business will, generally speaking, be com- posed of : — (a) His capi-tal . (b) His share of the profits u]) to date of death, etc. (c) His share of the goodwill. Provisions such as are hinted at briefl}- below would, in most cases, be found suitable. (a) In Respect of Capital.. The representative of a de- ceased i)artner or a retiring partner (retiring part- ner including bankrupt partner) is to receive the amount standing at the credit of such partner's Capital account at the beginning of the financial period in which he ceased to be a member, less anv drawings made b\- him in that period. (b) In Respect of Profits. It will generally be found that the most equitable method of settling the out- going partner's share of the profits for the year in which he dies or retires, is to provide" for the pay- ment of a proportion of his average profits for the last three conrpleted years calculated according to the nimibcr of davs over which his menil)ership extends during the year in (juestion. (c) Goodwill. A deceased partner's rei)resentative or a retiring partner is entitled to a share of the value of the goodwill at date of death or retirement and. as. this valuation is a most fruitful source of dis- l)ute. provision should be contained in the agree- ment as to the basis upon which the goodwill is to be estimated. The agreement might provide PART X E RSM IP. for example, that the goodwill of the firm shall upon the death or retirement of a partner be reckoned as worth two years' purchase of the average profits for the last three preceding years, and the outgoing partner shall be entitled to his share, of the total value of the goodwill according to the projiortion in which he shared profits. (10.) Restrictions on Retiring Partner. — It is often found advisable to include in the agreement a provision that a part- ner retiring from the firm must not compete in business with his late firm within a given time or area. (17.)« Arbitration. — It is also usual to provide that any disputes on important matters afl:ecting the policy of the firm are to be referred to an arbitrator for settlement. It might be noted that disputes on ordinary matters arising out of the conduct of the business are to be decided by a majority of the partners. WHO ARE PARTNERS.— Seeing that a partner has such wide powers within the scope of the partnership busi- ness, and that each partner may be made liable for the whole of the debts of the firm, it is often important to know exactly who are the partners of a business, and this point is not always easy to decide. It might be thought that a sure test is to ascertain if the person in question has capital invested in the business, but, seeing that it is quite possible, and not uncommon, for a person to be a partner in a business and yet have no capital in that business, this test will not of itself enable a dec'sion to be arrived at. Perhaps the best test is to ascertain whether the person in question takes a share of the profits, as the Partnership Act provides that the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business. But the Act provides further that the mere fact that a person takes a share of the profits does not of itself create him a partner in the business, and it mentions certain specific in- stances in which persons may take a share of the profits without making themselves liable as partners. (a) A person may receive payment of a debt out of accruing profits of a business. (b) An employee or agent may l)e remunerated by a share of the profits. (c) A widow or child of a deceased partner may receive a poition of the profits by way of annuit\'. (d) A person may make a loan to a firm and receive a rate of interest varying witli the profits, provided 63 A U S T R A L A S 1 A X A I) X' A X C ED A C C O U X T A X C Y. the contract is in writing- and signed by all the parties thereto. (e) A person nia_\- receive a portion of the pruhts of a business as payment for the goodwill of the busi- ness sold by him to the firm. And in each case the mere fact that the i)erson receives such share of the ])rofits will not of itself render him or her liable as a partner. It might be mentioned in passing that, in the cases men- tit)ned in (d) and (e) above, if the person or firm to whom the loan is made or who has purchased the goodwill in con- sideration of a share of the profits. l)e adjudged bankrupt or enter into an arrangement to pay creditors less than 20/ in the £. the person making the loan or selling the goodwill, as the case may be. \\\\\ rank as a deferred creditor — that is, 'ne will not be entitled to receive anything until all other creditors have been paid in full. The word "profits" as stated under this heading means net profits. The sharing of gross returns does not of itself create a partnership. In deciding whether a partnership does or does not exist in any i)articuiar case, the court will take into consideration the whole of the circumstances. The fact that a person re- ceives a share of the profits is evidence of i^artnership : but it will not be \iewed as conclusive evidence unless there are other facts to sui)port it. Partnership by Estoppel. A i)erson may render himself liable to the creditors of a firm as a partner without, in fact, being a partner of the firm, under the doctrine of "holding- out. '" .Anyone representing himself as being the partner of a firm and so inducing persons to give credit to the firm on the strength of such representation, will be liable to such persons as if he actually were a i)artner of the firm. He is what is known as a i)artner by estoi)pel : i.e.. he is stopped by his conduct from denying tliat he is a member of the firm. The Relation of Partners, (a) To ..ne another. Tliis ma\ be g(.\erned almo-t wholly by the terms of the ])artner.->hip agreement: e.g.. one partner may agree to do the whole of the work in consideration of another partner finding all the ca])ital : or the managenient of the business may V»c vested, so far as the partners are concerned, in one partnei onlv. There, is howe\er. an imi)lied term in everv jiartner- ^liip agreement that p;irtners must act as between themselves 64 PARTNERSHIP. with the utmost good faith. I'.ach partner is entitled to be informed of anything- of importance taking place and must, in turn, inform the other partners of anything they ought to know. With regard to accounts, the Partnership Act pro- vides that partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives. Every partner must account to the firm for any benefit derived by him from, any transaction concerning the partnership, or for any use by him of the partnership property, name or business connection. Also, if a partner, without the consent of the' other partners, carries on a business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made in that business. (b) 'J\> ( )utsiders. As already pointed out, each partner is the agent of the firm and of his other partners for the purposes of the business of the partnership, and every contract entered into by him w^ithin the scope of the business of the firm is binding on the firm and partners. Other persons doing business with the firm are entitled to rely on this fact, unless they have had express notice to the contrary. The partners may agree be- tween themselves to vary this general rule. They may agree, for instance, that one of the partners is not to have the power to order goods valued at more than £20 without authority in writing from the other partners; but this agreement, al- though good as between the partners themselves, is not binding upon any person outside the firm who has not had notice of it. So that if the partner in question ordered goods in the ordinary course of business valued at, say, £100, the firm would be compelled to ])ay for them unless the person from whom the goods were ordered was aware of the re- striction referred to . Liability of Incoming Partner. — An incoming i)artner is not liable tor any of the debts of the firm contracted prior to the date of his entering into partnership. He may. of course, agree with the other partners to accept his share of the liability; but this agreement, while good as between the partners, will not make him liable to the creditors unless the}' were parties to the agreement. Liability of a Retiring Partner. — A person retiring from a firm does not cease to be liable for the debts of the firm contracted prior to the date of his retirement. He may enter into an agreement with the remaining partners whereby the remaining partners undertake to take over the lial:)ilities of the late firm, but this will not release the retiring partner insofar as the creditors are concerned. They are entitled to look to 65 AUSTRALASIAN ADVANCED ACCOUNTANCY. him for payment of debts incurred prior to retirement in the same way as if he were still a partner, and the retiring- part- ner's remedy is then against the remaining partners. The position, of course, would be different if the creditors agreed, either expressly or implicitly, to release the retiring partner from liability — and to accept the new firm as their debtor in place of the old. A retiring partner may. however, render himself liable for debts incurred by the, firm after his retirement unless he gives the required notice that he is no longer a member of the firm. In order to protect himself he should publish an advertisement in the Gazette and in at least one newspaper circulating in the capital of the State, and in one newspaper circulating in the district in which the firm carries on busi- ness. This is deemed to be sufficient notice to persons who had no dealings with the firm before the date of dissolution. In order to protect himself against the possibility of further claims by the creditors of the. business and persons with whom the firm has had dealings he must, in addition, send express notice of his retirement to such persons. In the event of the death of a partner his estate becomes severally liable (suljject to the prior payment of his private debts) for the whole of the debts of the firm owing at the date of death ; but the estate is not liable for any debts con- tracted by the firm after the date of death, and it is not necessary to announce the death in the Gazette or newspapers referred to above, nor is it necessary to send express aotice to the creditors of the firm, as death is deemed to be notice to everyone. LIMITED PARTNERSHIP.— In Tasmania and West Australia provision is made fur limited partnership, tollow- ing the English Limited Partnership Act of 1907. Limited partnerships are governed generally by the law relating to partnership, but the Limited Partnership Act makes special provision, enabling partners to have limited liability in connection with the firm's dealings provided there is at least one general partner in the firm. As in the case of an ordinary partnership, there must not be more than ten members in a banking business, or twenty niemb;is in a trading concern. The firm must consist of oue or more per- sons, called general partners, who shall be liable for all the debts and obligations of the firm and one or more persons called limited partners, who shall on entering the partnei- ship contribute an amount as capital, but who shall not be liable for the (lc'l)ts l>evond the amount contributed. P ARTN ERSH I P. A limited partner must not withdraw the amount con- tributed by him to the firm during" the continuance of the partnershij). The j^artnership must be registered. A limited partner must not take part in the management of the busi- ness and shall not have power to bind the firm in any con- tracts. If he does take part in the management of the busi- ness he will be liable as a g-eneral partner. A limited part- ner has, ht)wever. the right to inspect the books at any time. The registration of a limited partnership is effected by forwarding to the Registrar a statement signed by all the partners setting out the following information : — (1) llie firm name. (2) The general nature of the business. (3) The jn-incipal place of business. (4) The full name and address of each of the partners. (5) The term for which the partnership is entered into and the date of its commencement (6) A statement that the partnership is limited, and the description of every partner as such. (7) The sum contributed by each limited partner, and whether paid in cash or how otherwise. Any alteration of the above must be notified to the Registrar within seven days. Subject to an agreement, express or implied, between the partners — (a) Any differences on ordinary matters are to be decided by a majority of the general partners. (b) A limited partner may. with the consent of the general partners, assign his share in the part- nership. (c) The other partners are not entitled to dissolve the partnership by reason of any limited partner suft'er- ing- his share to be charged for his separate debts. (d) A person may be introduced as a partner without the consent of the existing limited partners. (e) \ limited partner is not entitled to dissolve the part- nership l)y notice. 67 A U S 1 K A L A - I A X A D \' A X C ED A C C O U X T A X C V. SPECIAL PARTNERSHIPS.— In New Zealand. Part 11. of rartnershii) Act. I Imi.s. makes provision for special i)art- nerships which are very similar to the limited partnerships described above. The j^eneral provisions of the Partnership Act relate to special partnershi])s with the followin"- excep- tions : — Special jjartnerships may consist of any number of i)er- sons. and can carry i)n any business except banking- and in- surance. Such i)artnershi])s may consist of ireneral partners, wdio shall be liable as ordinary partners, ad special partners who shall not be liable beyond the amount of capital con- tributed by them. Such partnerships must be registered, and registration is secured by filing a certificate signed by all the partners, both general and special, with the Registrar of the Supreme Court. Such certificate must contain the following infor- mation : — (a) The firm name. (b) Names and addresses of partners, distinguishing- general from special partners. (c) Amount of capital which each s]>ecial partner contri- buted and the amount contril)uted by general partners. (d) General nature of the busines-. (e) Principal place of business. (f) Date of commencement and termination of jiartner- ship. A special partnership must not be entered into for mtn-e than seven years, but may be renewed at the end of that period. The firm name must not include the name of any special partners and must have as the last two words of the name "and Company." Business must be transacted only by general partners. Tf in any business transaction the name of any special i)artner is used with his privity and consent he shall ha\e the liabilitv of a general partner in connection with such transaction. During the continuance of the jiartnershiii none of the certified capital is to be withdrawn. CllAi''i'l':R v. PARTNERSHIP ACCOUNTS. OPENING ENTRIKS— ADJUSriNC; I'ROFI TS. .Vs compared with the accounts of a sole trader the only dift'erence in the actual bookkeeping required to record the transactions of a partnership is that the bookkee]>er has, in addition to keeping the usual record of transactions of the business as a whole, to keep a strict record of the position as between the business and each of the partners, and to enable him to do this he must always make himself thoroughly con- versant with the terms of the partnership agreement, if any. The opening entries in a ])artnershi|) concern are very similar to those in the books of a sole trader. Separate Capital accounts will be opened for the partners, and these will be credited with the value of the assets brought in by them respectively. In the case of a totally new business the prob- ability is that cash will be the only asset introduced by the partners, and Cash account will be debited and each partner's Capital account credited with the amount brought in by him. In other cases the proprietor or prorietors of a bus,iness al- ready in existence may recpiire to take in a partner, or an additional partner, as the case may be. It is usual under these circumstances to continue the books of the old concern, and it will be necessary to adjust the accounts to the date on which tlie fresh agreement comes into force b\- preparing a I'rofit and Loss account and Balance Sheet in order to as- certain the exact amount of capital which the old ])ro|)rietor or proprietors have in the business. It is more than likely that the incoming partner will recpn're a more conservative valuation to be placed upon the assets disclosed in the books of the old concern than is usual when a business is closing off the accounts on an ordinarv balance day. The new partner will probably require that the w^hole of the assets be written down as near as possible to their actual value, seeing that, if these assets are subse- quently realised at a loss, hei will 'have to stand his share of such loss. On the other 'hand, the then proprietor or pro- prietors of the business will almost invariably require a pay- ment by the- incoming partner as a bonus for goodwill, as he is being admitted into a concern which is already estab- lished and has a certain business connection. This is a point, however, which is dealt with fully in Cha])ter VII.. under the heading of "(kxKlwill." AUSTRALASIAN ADVANCED ACCOUNTANCY. Assumiiii^ that an agreement as to the valuation of the assets and the amount of the old proprietor's capital has been arrived at, the only entry necessary upon the introduction of the new partner will be a debit to Cash account and a credit to his Capital account, if he is bringing in cash, or, if he is l)ringing in other assets, a debit to accounts representing such assets and a credit to his Capital account. As an ilhistration: Suppose that John Smith, a merchant, decides to take in a partner. The amount standing at the credit of his Capital account is £10,000, and an arrangement is made whereby the new i)artner, William Jones, is to bring in a similar amount in assets. If Jones is to pay in this amount in cash the entry in the books will be as follows: — Cash A/c Dr. £10,000 To W.Jones Capital A/c £U).0(J() Tones, on the other hand, may at the time have been in busi- ness himself, and it may l)e arranged that assets totalling £10.000. to be introduced by him. are to be made up as fol- lows:— Book Debts. £5000; Stock, £3000; and the balance in Cash. In such a case the entry necessary on the intro- duction of this partner would be : — Sundry Drs. A/c Dr. £5,000 Stock-in-trade A/c Dr. 3,000 Cash A/c Dr. 2,000 To W.Jones Capital A/c £10,000 It is advisable, in this class of accounts, to divide the Profit and Loss account into two portions, the second portion being called Appropriation account. The first portion. Profit and Loss account, will show the actual net profit earned by the business in trading, and the Appropriation account how this net profit is appropriated between the partners. Where an Appro])riation account is not used it will, in most cases, require some calculation in order to enable the actual trading profits to be ascertained and. as the accounts should show the position as clearly as possible without necessitating lead pen- cil calculations, an Appropriation account should invariably be ripened. The Profit and Loss account is prepared upon exactly the same lines as in the case of a sole trader, and the net profit when ascertained is carried to the credit of Appropriation account. If provision is made in the agreement that partners are entitled to interest on their capital, the charge for in- terest will be made in the Appropriation account, the partners' Capital accounts being credited with the amounts respectively due to them. .\ny reserves for general purposes, such as arc properh- treated as an appropriation of profits rather /O PARTNERSHIP A C C O l' X T S. than as a charge against profits, and any amounts written off goodwill, will require alsQ to be charged to this account, the balance of the account, representing the final profit avail- able for distribution between the partners, being transferred to the partners' capital account in the agreed proportions. It is urgfed in some quarters that interest on the partners' capital should be treated as a charge against profits as the business should fairly be charged with the interest before the actual net profit can be ascertained. It is submitted, on the other hand, that partners do not put their money into a busi- ness in order to earn interest. A reasonable rate of interest on the amount could be earned upon a far less risk}' invest- ment. The capital is there as a necessary portion of the equipment of a trading venture, and it is introduced for the purpose of enabling profits to be earned rather than for the purpose of earning interest. It might also be pointed out that, where interest on capital is agreed upon between the partners, it is solely for the purpose of adjusting an^- in- equality in the amount of capital paid in by the partners and such an adjustment should, it is thought, be made after the actual result of the trading has been ascertained. The following points, mentioned in the previous chapter, should be kept in mind : — (a) Partners are not entitled to interest on their capital in the absence of an agreement to the contrary. (b) In the absence of an agreement to the contrarv partners are entitled to interest at the rate given on Page Gl on any advances, as distinct from capital, made by them to the firm. (c) In the absence of agreement to the contrary partners are not entitled to remuneration, but if salaries are agreed upon these salaries will be debited to Profit and Loss account, being treated in the same wav as salaries paid to employees. (d) Partners are not entitled to draw in anticipation of profits in the absence of an agreement enabling them to do so, express or implied. Where it is agreed that drawings may be made, a separate Drawings account should be opened for each part- ner, and the drawings of each partner charged to that account, the object being to keep details out of Capital accounts. The balance of each partner's Drawings account should be transferred to the debit of his Capital account at the end of the vear. and not to Profit and Loss account. No interest A U S T R A L A S [ A X A I) \' A X C E D A C C O L' X T A X C V. sliould l)e charged on the drawings unless agreed upon, and this is so even where partners are to be allowed interest on their capital. In the fnllowing exanii)lcs the Drawings accounts are not shown, but it should be remembered that these would be required in actual practice EXAMPLE No. 2. jiiliu Smith. l)cing desirous of extending his business, agrees with W. |ones to form a partnership Sniitli brings in the following assets : — Bills Re- ceivable. £ll()<>; Stock-in-trade. £-^: Fixtures and Fittings, £327. The goodwill of Smith's business is valued at £1000, and it is agreed that this amount is to be written off out of profits at the rate of £200 per annum. Jones pays in £10.000 in cash. It is agreed that interest is to l)e allowed on the partners' capital at the rate of •") i)er cent, per annum. During the year. Smith draws out £;JoO. and Jones £750. The profit at the end of the year is shown to be £3HTo, against which is still to be charged interest on capital. Make up the accounts shi:>w- ing the position of the partners at the end of the year. OPENING JOURNAL ENTRIES. Bills Receivable A/c Dr. il.UMI Stock-in-trade A/e Dr. L'.'i.iO Bank A/c Dr. 1.918 Sundry Debtors A/c Dr. 2.S7.-) Fixtures and Fittings A/c . . . . Dr. 327 Goodwill A/c Dr. 1.000 To John Smith Capital A/c i'O.oOO Bank A/c Dr. £10.000 To W. Jones Capital A/c flO.OOO APPROPRIATION ACCOUNT. Dec. 31— Dec. 31.— To Goodwill A/c £200 By Net profit transferred „ Interest on Capital— from P. c'i- L. A^c £3.87.5 J. Smith Capital A/c. 47.') W. Jones Capital A/c. oOO „ Profit transferred t<> Capital A/cs — W. Tones, half .share.. l.S.'iO V Smith, half share.. 1,350 £3.875 £3.875 72 PARTNERSHIP A C C O U X T S. JOHN SMITH CAPITAL ACCOUNT. Dec. 31. To Drawings .. .. 050 Jan. 1. Uy Sundry Assets.. £9,.")00 „ Balance .. .. 10.975 Dec. 31. „ Interest on Capl. 475 „ Half share of profit.s 1,3.50 £11,325 £11.325 W. JONES CAPITAL ACCOUNT. Dec. 31. To Drawings .. .. £750 Jan. 1. By Cash £10,000 „ Balance .. .. 11,100 Dec. 31. „ Interest on Capl. .500 „ Half share of profits 1,3.50 £11,850 £11,850 EXAMPLE No. 3. A. B. and C. are in partnership, .-sharing profits in the following- proportions : — A, three-fifths ; B, one- fifth ; C, one-fifth. The Capital accounts stood at the commencement of the year as follow ; A £4000; B, £2500; C, £1000. £100 each month w^as to be charged as salary and paid to the part- ners in the proportions in which they shared pro- fits. During the year A. drew over and above his salary the following amounts: 31st March, £80; 30th' June, £40; B. drew £90 on the 30th April, and C. drew £80 on 30th September. The gross profits for the year amounted to £';tock and prepare a I'rotit and Loss account in tlie usual wa\- in order to enabK- the amount (»t the retiring ])artner"s sliare of the ])rotits nj) U> tin- date ol his retirement to be arrived at. The items to be included in the I'rolit and I.. ^s> account lor the period in (piestion ma\ be the cause of a considerable amount of arg-ument between the i).irtn( r-. The amount to be charged against the prorit> in order to reduce the assets 76 DISSOLUTIOX OF P A R T X E R S II I P. to the figure at which the remaining i)artners are prepared to take them over is a matter lor agreement between them and the retiring jjartner: Ordinary valuations will do for ordinary l)alancing purposes. Init the remaining partners will be more careful than usual to see that none of the assets are over-stated in the books, seeing that any subsequent loss on these assets will fall upon them. They will naturally be anxious to ha\e the assets written down as much as possible and the retiring partner will be just as anxious to keep such writing-off down to a minimum seeing that any deductions will reduce his share of the profits. Special care should also be exercised to ensure that aii accruing income and expenses are brought into account, ♦^hat all bad debts are written off, provision made for doubtful debts, and it is advisable, even although it has not been the custom to do so in the past, to make provisJion for discounts to be allowed and received on debtors' and creditors' balances. Enough has been said to show the nature of the adjustments to be made and to indicate how important it is to have some provision in the agreement such as that already referred to, as in such a case no dispute about the necessary adjustments Avould be possible. (See Example 4.) It should be noted that a retiring partner is entitled to his share of any general reserve consisting of undivided pro- fits. It is not often that such reserves are created in partner- ship accounts as the profits are generally placed to the credit of the capital accounts. A retiring partner could not, of course, claim a share of any special reserves created to meet future losses, such as a reserve for doubtful debts, but if a reserve has been created out of profits to provide, say. for the acquisition of business premises at some future date, the re- tiring partner is entitled to his share of such reserve, as he could hardly be expected to contribute towards the purchase of an asset from which he would obtain no benefit and which would belong solely to the remaining partners. When an\- general reser\'es exist an entry will be passed debiting Reserve account and crediting the retiring partner's Capital account with a proportion of the balance of such account cccording to the ratio in which he shared ])rofits. One Partner Purchasing the Business. — Xssuniing. again that there isc no provision in the agreement as'' to the course to be followed, the position, as compared with that mentioned under the previous heading, is exactlv reversed, for in this case one partner will be extremely anxious to ha\e tlie assets written down to the lowest possible amount and the other partners equally anxious to maintain them at as high a figure as possible. 77 AUSTRALASIAN ADVANCED A C C O L' N T A N C Y. Wliere the i)urchasing partner takes over the books of the old firm the procedure so far as the l)ookkeeping- entries are concerned will be similar to that mentioned above. After the amount of profit or loss for the period has been ascer- tained and the partners' Capital account adjusted the out- g'oing partners will be paid the amount due to them, leaving open the Capital account of the purchasing- partner. W'liere, however, it is desired to treat the transaction in the books of tiie firm as a complete winding-up of the old partnership by a sale to the purchasing partner, the procedure after the usual adjustments have been made and the profits or losses transferred to the partners' Capital accounts, will be somewhat dififerent. The whole of the assets and liabilities will be transferred to the purchasing- partner's Capital ac- count and this will naturally result in his account having- a debit balance equalling the total of the credit balances in the lemaining partners' Capital accounts. It will then be neces^ sary for the purchasing partner to ])ay into the business the amount of his debit lialance. thus pro\iding the necessarv cash to pay oft" the other partners. (See Example 5.) Dissolution by Sale of the Business. — Here, again, it will be necessary to ascertain the amount of profit or loss up to the date of dissolution and adjust the partners' Capital accounts in the usual way. This l)eing completed it is then usual to open an account called a Realisation account, to which will be transferred the balances of all the accounts representing- assets. Realisation account will be credited with the amount received upon sale of these assets and de- bited with the cos/ts of realisation, the corresponding entry in each case being made in the Cash account (where cash is received as consideration). The balance of Realisation account, which then shows the net profit or loss on realisation, will be transferred to Appropriation account and a])])orti(^ne(l to the partners' Capital accounts in the usual ratio. If the ])usiness is sold as a going concern the probability is that the purchaser will take over the liabilities. In such a case this will form part of the consideration granted by the purchaser for the transfer of the assets and the balances of the accounts: re])resenting such liabilities must therefore be transferred to the credit of Realisation account. If, however, the i)artners have to discharge their own liabilities, the next stej) will be to pay off the creditors. Cash account being credited and the accounts representing the various liabilities debited. It then remains to distribute the balance of cash between the partners, and the various Capital and Loan accounts, if any, will show the amount due to each partner. It will be remembered that advances must be re- 78 DISSOLUTION OF PARTNERSHIP. paid in full before anything is returned to the partners in re- spect of capital, and if any partner has made a loan to the business this must next be paid off, Cash account being credited and the Loan account debited. The same effect (assuming there is sufficient cash to pay in full) is obtained by transferring the balance of the Loan account to the partner's Capital account, as this will natur- ally increase the amount due to him in respect of capital, or, if his Capital account is in debit, decrease the amount due from him on adjustment. The balance of cash in hand will then just suffice to pay to each partner the anmunt standing" at the credit of his Capital account. If the loss on realisation causes an\' partner's Capital account to be in debit, he must, if he can, pay this amount into the business, as otherwise there will not be sufficient cash to pay off the remaining partners. It might be men- tioned that, where a partnership business is selling out to a company, a portion of thq consideration will very often con- sist of shares in the company. In such a case the Shares account will be debited and Realisation account credited with the value of the shares and the only difference in the pro- cedure on a final adjustment between the partners is that the partners will receive shares or shares and cash, instead of cash only. The procedure on dissolution bv sale, ex- plained above, might be summarised as under: — (a) Transfer the l)alance of all accounts representing" assets to the debit of Realisation account. (b) Debit Cash account (or other account representing the assets received in consideration) and credit Realisation account with the amount received on sale of the assets. (c) Debit Realisation account and credit Cash account with costs of realisation (if any). (d) If the liabilities are taken over by the purchaser the credit balances representing such liabilities in the books of the firm will be transferred to the credit of Realisation account, as this represents part of the consideration which the firm receives for the assets. (e) Transfer the balance of Realisation account repre- senting" the net profit or loss, to Appropriation account. (f) Divide the balance of Appropriation account l)etween the partners in the proportion in which tliey share profits. (g) Pay off the creditors (if such acci units are not taken o\er b\- purchaser). A l' S T R A L A S I A X A D \' A \ C ED A C C O U X T A N C Y. (li) Ke])ay to ])artiu'rs any loans made by them to the firm, (i) Pay to llu- partners the amount standing at credit of their e apital account or collect (if possible) the amount standing at debit of any partner's Capital account. (See Example 6.) Amounts Due by Partners on Adjustment. — li. on dissolution, a i)artner's Capital account i> in debit, and it is impossible for the other partners to obtain payment froiu him, it is obvious tliat the loss must be borne by the remain- ing partners, and the question arises as to the proportion in which it is to be borne by them. Until the decision given on this point by Mr. Justice Joyce in Garner \-. Murray it was the practice to treat this in the same way as any other loss and di\ide it between the remaining partners in the propo."- lion in which they had been sharing trading profits and losses. In the case mentioned, however, it was decided that there is a ditlerence l)etween a loss to the firm as a whole, e.g., a loss on trading or on realisation, and a loss to the remaining part- ners occasioned by the default of one partner, and that any agreement as to the sharing of trading losses does not, in the event of such default. appl\-. The decision in Garner v. Murray pro\ided that such a loss was to be borne h\ the remaining ])artners in proportion to their capital in the firm. 'J'lie abo\e explanation gi\es the practical effect of the decision, although the matter was dealt with by the judge from a dift'erent standpoint, i.e.. on a cash basis. In the al)ove case the solvent partners were recpiired to ])a}- into the firm in cash their shares of the total deficiency and the amount of casli thus made available was divided lietween the solvent jiartners in i)roportion to their capital. If the' method of ad- justment prescribed by Mr. Justice Jo3ce were to be followed to the letter, the result would be that the capital accounts cf all the partners would remain o])en indefinitely and as, from an Accountant's standpoint, this would hardly be desir- able the following method of giving eff'ect to the decision would probably be adopted. In the first ])lace the utility of re(|uiring the sohent jiartners to ])ay in ca>]i their ])ro]X)rtions of the loss as dis- closed by the Deticiency account is (piestioned ; the account- ant's metliod (,f charging to each i)artner's Capital account liis ]>ro])ortioii of the deficiency giving the same practical result. If tlie amount standing at debit of the insolvent partner's account be then transferred to the remaining part- ners' Capital accounts the cash balance — assuming that all assets have been realised and all 1ial)i1ities discharged — will then be just sufiicient to repay to eacli jiartner the amount (\uc tr. him. ('See l^xamplc 7.) 80 DISSOLUTION OF P A R T X E R S III P. Vvom a i)ractiral standiioiiit. tlicrcfdrc. any loss occasion- ed 1)\ the default of one ])artiKM- imist. in the absence of any ?greement to the contrary, he home hy the remaining- part- ners in proportion to their capital, and, in order to enable the loss to he di\ided correctlw it is necessary to ascertain what is the amount of each ])artner's capital. This is not always so easy to decide, as mig-ht at first sight api)ear. it is not safe to rely on the fact that the balance of a partner's Capital acconnt represents what is, legally, his capital. The a.monnt of a partner's capital is a matter for agreement be- tween the partners and such capital may be varied from time to time. Prima facie, it is the amount which he agrees to contribute on joining the firm and, if it is desired to prove that his capital is some amount other than this, it musft be shown that there was an agreement either express or im- plied between the partners to the alteration. In most busi- nesses the Capital accounts fluctuate, as it is the custom to credit profit and interest and debit drawings and losses to these accounts, but this does not of itself cause the actual capital of each partner to be altered and, if at any time a part- ner's Capital account shows a balance in excess of his agreed capital, he is entitled to withdraw this excess, or. conversely if his Capital account shows a shortage he can be called upon to pay up the deficiency. It is submitted, however, that, if the .partners have been in the habit of preparing a periodical Balance Sheet and of signing such Balance Sheet, thus indicating that they accept the position disclosed therein, this will be sufficient to prove that the partners have agreed to an alteration of the actual capital to the amount shown in such Balance Sheet, and in such a case a loss caused by the default of one partner would be borne by the remaining ipartners in proportion to their last agreed capital : i.e., the balance of the respective Caju'tal ac- counts as shown in the last signed Balance Sheet. It nmst be borne in mind that the rule laid down in Garner v. A^urrav onlv applies under the following circum- stances : — (^) Where there are at least three partners. (2) Where one partner's Capital account is in debit, and it is impossible to obtain payment from him. (3) Where there is no agreement between the i)artners to the contrary. This rule could be excluded by inserting a provision in the partnership agreement that any loss occasioned by the default of one partner is to borne by the remaining partners in the proportion in which they share profits. 81 AUSTRALASIAN ADVANCED ACCOUNTANCY. EXAMPLE No. 4.~-Illnstratin,o- the entries to be passed npon tlic retii-cnieiit of one ))artner. A.. K. and C. are partners sharinjx profits and losses equally. Their joint capital on the 1st January was £1500 in equal shares. On the 1st July A. brou.Qht in an additional £500 capital, and on the 1st October A. drew £80, B. drew £(30. and C. drew £40. The partners' agreement having^ ex- pired at the beginning of the year. C. gave notice of his in- tention to retire on the 31st December, at which date the net profit was shown to be £650. against which had still to be charged interest on Capital and Drawings at 5 per cent. It was agreed between the partners on the 31st December that the goodwill of the business was worth £450. Show the position of the partners as at 31st December. Dec. 31.— Goodwill A/c Dr. £1.>0 To C. Capital A/c £l,"iO Being one-third share of goodwill as agreed upon between the part- ner*s. APPROPRIATION ACCOUNT. Dec. 31.— Dec. 31.— To Interest on Capital— By Net Profit £650 A. Capital A/c .... £37 10 ., Interest on Drawings— B 25 A. Capital A/c .. 1 C. ., 25 B 15 Profits— C. „ „ .. 10 A. Capital A/c .. ..188 .5 B 188 5 C 188 5 £652 5 £652 5 A. CAPITAL ACCOUNT. Dec. 31.— Jan. 1. Bv Balance .. £500 To Drawmgs £80 lulv 1. „ Cash .... .500 ., Int. on Drawings .. 10 Dec. 31. .. Int. on Capl. 37 10 „ Balance 1114 15 ., Profits .... ISS 5 £1225 15 £1225 15 Jan. 1. Bv Balance .. £1144 15 B. CAPITAL ACCOUNT. Dec. 31.— Jan. 1. Bv Balance.. ..£.500 To Drawings £60 Dec. 31. .. Int. on Capl. 25 ,. Int. on Drawings . . 15 „ one-third share „ Balance 652 10 of profits . . 188 5 £713 5 £713 5 Jan. 1. Bv Balance .. £652 10 82 DISSOLUTIOX OF PARTNERSHIP. C. CAPITAL ACCOUNT. Dec 31 To Drawings .. £40 Ian. 1. By Balance ..£500 „ Interest on Dec. 31. „ Goodwill .. 150 10 „ Int. on Capl. 25 Drawings Balance 822 15 £863 5 One-third share of profits 18 £863 Jan. 1. „ Balance .. ..£822 15 EXAMPLE No. 5.— Illustrating the entries where one ];artner takes ever, tlic l)ooksl remaining the property of the old firm. Archer. Smith and Jimes are in partnership, and at the end of seven vears. when their agreement had expired by effluxion of time, it was arranged that Archer was to take over the business from the firm, upon his undertaking to pay the other partners off in cash. After the necessary adjust- ments had been made, and the profits credited to the part- ners' Capital accounts, the Balance Sheet showed the position to be as under : — BALANCE SHEET as at Dec. 31st. Liabilities. Assets. Bank Overdraft £1,500 Bills Receivable £1.7o0 Sundry Creditors 7,500 Sundry Debtors o.»UU Bills Payable 1,000 Stock 'J.oOO Archer Capital A/c 5,500 Horses, Vans, &c. . . Smith Capital A/c 2,750 Plant and Machinery Jones' Capital A/c 500 Leasehold Prei £18.7.50 700 3,400 1,500 £18,750 CLOSING ENTRIES. Dec . 31. Archer Capital A/c To Bills Receivable A/c . . Sundry Debtors' A/c. Stock-in-trade A/c .... Horses. \'ans. etc., A/c. Plant and Machinery . . Leasehold Premises, etc. Being Assets taken over by Archer as at this date. Dr. £18,7.50 Bank A/c Dr. £1.500 Sundrv Creditors A/c . . . . Dr. 7.500 Billv^ Pavable A/c Dr. 1,000 To Archer Capital A/c . . Being Liabilities taken over. £1.750 5.800 5.60(1 700 3,400 1.500 £10.000 Cash A/c To Archer Capital A/c. .. Being amount due by Archer on adjustment paid by him. Dr. Smith Capital A/c Dr. Tones Capital A/c Dr. To Cash A/c Being Pavment to Smith and Jones of amounts standing at credit of their Capital Accounts. 83 £3.2.50 £2.7.50 506 3,250 £3.2.50 AUSTRALASIAN' ADVANCED ACCOUNTANCY. ARCHER CAPITAL ACCOUNT. Dec. 31. [an. 1. To Bilb Rec £l.7oO By Balance £.-,.500 Sundry Debtors . . . . 5,800 Dec. 31. Stock-in-trade 5,600 Bv Bank A/c 1,500 Horses, Vans, etc. . . 700 ..' Sundrv Crs 7..'500 Plant and Machinery .. 3.400 „ Bills Payable 1.000 Leasehold Premises . . 1,500 „ Cash 3.2.50 £18.750 £18,750 SMITH CAPITAL ACCOUNT. Dec. 31.— To Cash £2.7.-)0 Dec. 31.- Bv Balance .. ..£2.7.50 JONES' CAPITAL ACCOUNT. Dec. 31.— To Ca.'^h £500 Dec. 31.— Bv Balance .. ..£500 EXAMPLE No. 6.— Two partners, A. and B.. who share profits in the proportion respectively of two-thirds and one- third, had, at the credit of their capital accounts on the 1st /anuary. 1020: A.. £!o,r.")n; B.. £9fi42. They decide to sell their business on the 31st December, 1920, to the Excelsior Tradino- Co.. Ltd.. and agree to accept as consideration therefore £25.000 in shares of £1 each, issued as fully paid up. and £18,206 in cash, the partners paying- off the creditors. The partners agree that the cash balance is to be divided ccpially (to the nearest £) between them, and to take the balance due to them in shares. The partners' withdrawals during the vear ha\e been : A., £657; and B., £43-i. The assets of the firm' consist of Premises, Plant. Stock. Book Debts, etc.. valued in the books on 31st December, 1920, at £40,390. The Creditors, whose claims amount to £15.2K. are to be paid off. A. is entitled to be credited with £197 for interest on his capital, and B. with £48S. Show the Capital accounts and Realisation account as they would finally appear in the books ( Jtnirnal entries omit- ted ) . TRIAL BALANCE. Sundry A.ssets £10,3!W) Sundry Creditors £1.").217 Drawings- A 657 Capital A/cs.— A 15.750 B 434 B 0,642 Balance representing net profit for year 872 £41,481 £41.481 84 DISSOLUTTOX OF P A R T X E R S H T P. REALISATION ACCOUNT. Dec. 31, 1920— Dec- ;^1 1920 - To Sundry Assets £40.390 By Cash £18,266 .. Profit on Realn. carried „ Shares in Company . . 25,000 to Appropriation A/c. 2,876 £43,266 £43,266 APPROPRIATION ACCOUNT. Dec. 31, 1920— Dec 31, 1920— To Int. on Capital— A £797 Rv Net Profit on Trading for R 488 year £872 .. A Capital A/c. (2/3rdst 1.642 „ Net Profit on Realn. ..2.876 „ R Capital A/c. (l/3rdi 821 £3,748 £3,748 SHARES IN EXCELSIOR CO. ACCOUNT. Dec. 31, 1920— Dec. 31, 1920— To Realisation A/c £2ri.000 Ry A Capital A/c £16,007 „ R Capital A/c 8,993 £25,000 £25,000 CASH ACCOUNT. Dec. 31, 1920— Dec. 31, 1920— To Realisation A/c £18,266 Ry Sundry Ci^ £15,217 ,, A Capital A/c 1,525 .. R Capital A/c 1,.524 £18,266 £18.266 A. CAPITAL ACCOUNT. Dec. 31, 1920— Jan. 1, 1920— To Drawings £657 Ry Ralance £15,7.50 ,. Cash 1,525 Dec. 31, 1920— „ Shares in Excelsior Cov. 16,007 Ry Interest on Capital .... 797 „ Profits (2/3rds share) . . 1.642 £18,189 £18,189 B. CAPITAL ACCOUNT. Dec. 31, 1920— Jan. 1. 1920 To Drawings £434 "Ry Ralance £9,642 .. Cash 1,524 Dec. 31, 1920— .. Shares 8,993 Ry Interest on Capital .... 488 „ Profits (l/3rd share) .. 821 £10,951 £10.951 EXAMPLE No. 7.— Illustratin^s: the method of adjust- ment between partners upon dis(Polution, where one partner is unable to pay in the amount of his deficiency. AUSTRALASIAN' A D \' A X C E D A C C O U N T A N C Y. Hlack. \\ hitc and Brown arc in partnership, sharing pro- fits and losses ec|ual]\ . and as it is apparent that the business can only be conducted at a loss, it is decided to dissolve' the partnership by realising the whole of the assets. At the date upon which this decision was come to the Balance Sheet of the firm appeared as under : — BALANCE SHEET. Liabilities. Assets. Sundry Creditors £4,700 Sundry Assets £10,000 Black Capital A/c 4,000 Brown (overdrawn) 700 White Capital A/c 2,000 £10,700 £10.700 The assets subsequentl}- realise £.S,r)00, and as it is found impossible for Brown to make any payment to the firm in re- spect of the amount due by him. it is desired to show how the cash receixed upon dissolution is to he distributed. SOLUTION A., following the method of adjustment laid down by Mr. Justice Joyce. REALISATION ACCOUNT. To Sundry Af^ets £10.000 By Cash £8..500 ,. Loss on Realisation transferred to De- fiiciency Account . . 1,500 i" 10 000 £10.000 DEFICIENCY ACCOUNT. To Loss on Realisation .. . .£l.oOO Bv Loss on Reahi. paid in by Black £500 ., Loss on Realn. paid in by White 500 ., I^alance (owlnj,' to Brown) 500 £l.-'>00 £1,500 BLACK CAPITAL ACCOUNT. To Cash £3,200 Bv Balance k:4.000 „ Balance 800 £4.000 £4,000 , H.ilanie £S00 WHITE CAPITAL ACCOUNT. To Cash n.OOO Bv Balance £2.000 ., Balance 100 £2,000 £2,000 „ Balance £400 86 DISSOLUTJON OF F A R T X E R S II 1 P. BROWN CAPITAL ACCOUNT. To Balance ^700 CASH ACCOUNT. To Proceds of Realn £8,500 By Sundry Creditors .. ..£4,700 „ Deficiency A/c. Payment „ Balance 4,800 by Black oOO ,, Deficiency A/c. Payment by White oOO £9,500 £9,500 Balance 4,800 By Black Capital A/c— 4,000/6,000ths of £4,800 £3,200 .. White Capital A/c. — 2,000/6.000ths of £4,800 1,600 £4.800 £4,800 NOTE. — It will be seen that four accounts will remain open indefinitely in the hooks. SOLUTION B. Suog;este(l solution, showino- that the charging to each partner of his share of the loss on realisa- tion, and the sharing by the remaining partners of the bal- ance standing at debit of the defaulting partner's Capital account in the ^proportion of their agreed capital, gives the sjame ultimate result, i.e.. Black and White will lose £S00 and £4(X) respectively, but causes the whole of the accounts in the books to be closed ofif. REALISATION ACCOUNT. To Sundry Assets £10,000 By Cash £8,500 ,-, Loss in Realn. trans- ferred to Capl. A/cs. : Black 500 White 500 Brown 500 1,500 £10,000 £10,000 JOURNAL. Black Capital A/c Dr. White Capital A/c Dr. To Brown Capital A/c Being loss owing to Brown's failure to contribute the amount due by him apportioned between the remaining partners in the proportion of their last agreed capital. 87 £800 400 £1200 AUSTR ALAS FAX AD VAX (ED AC C O U X T A N C Y. BLACK CAPITAL ACCOUNT. To Los^^ on Realn £500 By Balance £4.000 ,. Brown Capital A/c. .. 800 ,. Cash 2.700 £4.000 £4.000 WHITE CAPITAL ACCOUNT. To Loss on Realn £.')00 Bv Balance £2.000 .. Brown Capl. A/c 400 ., Cash LlOO £2,000 £2.000 BROWN CAPITAL ACCOUNT. To Balance £700 Bv Black^4.000/6,000ths . . fcSOO „ Loss on Realn 500 .. White-2.000/6.000ths .. 400 £L200 £1.200 CASH ACCOUNT. To Realisation A/c £8..500 Bv Sundry Creditors .. ..£4,700 „' Black 2.700 ., White 1.100 £8.500 £8,500 8^ CHAPTER VII. GOODWILL. Nature of Goodwill. — (joudwill may be descril)ed as the advantage attaching to the situation, or the good name, of . the connection, or the reputation of the proprietors of a busi- ness, or any two or more of these qualities. Viewed as an asset in a business it is obvious that good- will is an asset of an intangible nature, but this intangil)ility does not alTect its reality. Take the case of a trader who has been in business for a number of years and desires to stell out. He has had to stand the initial risk and expense of commencing the business. He has had to conduct the busi- ness through good times and bad and carry it on in sUich a way that the business has gained the confidence of his creditors and customers. It could not be expected that this trader would sell his business at the bare value of the assets utilised by him in carrying it on. It is certain that he would require some payment in addition for the connection he has established which is admittedly valuable. This additional I^ayment is for what is known as goodwill and the fact that the purchaser of such a business would be willing to pay any amount in reason under this heading indicates that it has a very real value. The circumstances which give rise to goodwill vary ac- cording to 'the nature of the business. In some concerns the goodwill will consist of the right to carry on business in a certain position, as in the case of an hotel. In a professional business, e.g., a solicitors', the goodwill attaches to the personality of the proprietors, as the connection has been established by the personal attention given by the proprietors to the afifairs of their clients and by the confidence which the clients have in their personal skill. In trading concerns the goodwill generally attaches to the right to use tlie name under which the business has been trading, which name has become favorably known to the general public. In a retail business, however, the goodwill often attaches to the situa- tion of the business as a considera])le portion of the business done may be "catch" trade. In a general work of this nature it is not necessary to go into this portion of the subject fully, but it is thought that sufficient has been said to indicate the nature of this asset and the qualities which may give rise to goodwill in different classes of business. AUSTRALASIAN ADVANCED ACCOUNTANCY. Valuation of Goodwill. — It is hardly necessary to point out that it is impossible to lay down any fixed rules for ascer- taining the value of the goodwill of a business. In a pro- fessional business, for example, where the goodwill attaches more to the personality of the proprietors, it may. in the event of a sale of the business, have little value seeing that the persons whose connection with the firm has resulted mi the establishment of the goodwill are going out. On the other hand the goodwill of a professional business may be particu- larly valuable where a new partner is buying in and the old partners retain their connection with the firm. The pur- chaser of an hotel business, or of any business where the goodwill attaches to the position, w^ill require to make certain that he can obtain a reasonable lease of the premises before paying any considerable amount for goodwill. In every case the whole of the circumstances must be gone into thor- oughly in order to ascertain whether the purchaser of the business will secure similar advantages to those enjoyed by his predecessor. Coming now to ordinary trading concerns, where good- will is perhaps capable of more satisfactory valuation, the usual method of ascertaining the value of the goodwill, as laid down by most text books, is that it is worth, according to circumstances, from one to five years' purchase of the average profits ascertained over a period of, say, three years. Against such profits must be charged interest on capital at the current rate (say 5 per cent.) and all the necessary ex- penses of carrying on the business, including reasonal:)1e sal- aries for the proprietors. To give a simple illustration of the above: A oarrncrship business which shows an average annual profit over the past three years of £3000 is being acquired by a limited company, formed to take it over. No salaries had been taken by the two partners, whose services are estimated as worth £7 and £6 iper week respectively. The capital employed in the busi- ness was £10,000. Assuming that a reasonable tenure of the old premises could be obtained (if such premises were essential or specially advantageous to the business, the value of the goodwill w^ould. generally speaking, be ascertained as rnder : .Average annual profits i!3.000 Less Partners' salaries £676 „ Interest on Capital at 5 per cent. .. 500 1,176 Annual profits for goodwill purposes £1,824 Calculated on a three years' basis the goodwill, according to this method of showing, would be worth £r)172. In numbers 90 GOODWILL. of cases the method supplied al)()ve would give just about the value of the goodwill of the husiuess. the risk of loss of capital, loss of premises, etc.. heiug taken into account in assessing the number of years' i)urcliase that the goodwill may be considered to be worth. Some check ma\- be obtained on the results shown by ascertaining what return will be received by the purchasers ; f the business on the capital which they will be required to invest therein. For example, in the illustration supplied, assuming that the company is taking over the assets and liabilities at their book values, the capital required by the company will be about £15,500. Assuming also that the company will earn the average annual profits shown above, £;J000. and that the business can be efficiently managed at a. cost of sa}' £800 per annum, this will leave £3300 per annum net profit or a return of about 14.2 per cent, on the capital invested. Allowing for the necessary reserves and the writ- nig down of goodwill this should enable a dividend of about 10 per cent, to be (paid to shareholders and this would prob- ably, under the circumstances, be viewed as a satisfactory return. This indicates that the amount to be paid for the goodwill of this business would be just about its full value. From a practical point of view the promoters of a com- pany formed to take over a business would test whether the amount asked for the goodwill of such business were reason- able or not more by the anticipated return on the capital re- quired in the business than by the number of years' purchase of the profits asked for. Cases might be quoted where an amount equivalent to S or 9 years' profits has been ,paid for concerns showing a large return on a comparatively small capital. It is clear therefore that, whilst the value of the goodwill of a trading concern is almost invariably expressed as being worth so many years" purchase of the average an- nual profits, it is more often ascertained by capitalising at a reasonable percentage the average annual return which it would show to the purchaser, taking the difference between the amount ascertained and the net value of the tangible assets transferred as the value of the goodwill. It will be readily understood that the goodwill of a busi- ness will be of greater value to the purchaser if he is able to secure the services of the late proprietor to conduct the business for him. This does not apply, of course, where the goodwill attaches solely to the situation of the business but. in most cases, it is fairly certain that, where the assistance of the vendors is secured, the purchaser will have a greater assur- ance that he will receive the whole of the benefits enjoyed by his predecessors. It is for this reason that a company, which generally arranges that the vendors will act as managers of 91 A U S T R A L A S 1 A N A D X' A X C E D A C C O U N T A \ C \' . Ihe company, can pay with safet}- more lor the goodwill of a business than a private purchaser who intends to fulfil him- self the duties of his i)re(leccssors. Restrictions on the Vendor of Goodwill. — W here the iiiMxlwill of a business has been sold it is usual to require the \endor to enter into an agreement not to compete with the purchaser in the way of business; and. if the restrictions in- cluded in the agreement are reasonable and necessary tor the protection of the purchaser, this agreement will hold good and the vendor will be restrained from breaking the contract en- tered into. Where, however, there has been no such agTeement. although the value of the goodwill will depend in most cases upon the absence of competition on the part of the vendor, there is nothing to prevent the latter from setting up in busi- ness of a similar nature for himself, when and where it may please him. He must not, of course, use the name under which he previously traded, seeing that the rig-ht to use that name in most cases goes to the purchaser of the goodwill. There is nothing to prevent him from dealing with the cus- tomers of the business previously owned by him, provided such customers seek him, but he must not circularise or in other ways actively solicit l)usiness from these customers. Treatment in the Books. — U may be taken as a general rule that goodwill should not be brought into account until it becomes necessary owing to the fact that some monetary or other consideration has been given or received therefor. Such being the case it will be seen that the question of the book entries required to bring goodwill into account will only arise on the sale or purchase of a business or on the admission or retirement of a jxirtner. and it is only necessary therefore to deal with this ])()rtion, of the subject from these standpoints. The Purchaiser. — In tlie books oi the purchaser the amount paid for goiKlwill will appear as an asset, being- treated in the same way as any other asset taken over from the vendor. Goodwill account will be debited and the vendor credited witli the amount ])ai(l for tliat asset. The Vendor. — In the l)ooks ol" the vendor it is neither usual nttr necessary to o])en an account for goodwill where consideration is receixed for this asset. .Ml the assets ap- ])earing in the books will be transferred in the usual way to the debit of Realisation account and the total amount re- ceived as consideration for the l)usin('ss credited to that account. The amount receixed for goodxxill will thus tend to increase the inoTit or decri'asi' the loss on realisation of 92 GOODWILL ihe assets apiJcaiin^- in tin- hooks, the profit ur loss thus shown beini^- treated in the usual way ])y transfer to the Cai)ital account or accounts of the ])roprietor or pro])rietors. The al)o\e procedure presents no ditticulties and it has been included merely for the sake of completeness. The chief difficulty in connection with the recording of transac- tions relating- to L;oo(lwill >eems to be in the case of adjust- ments between i)artners in the e\ ent of the retirement of one or more partners or the introducticjn of a new partner. There is nothing inherently difficult in these adjustments and it isi thought that a careful study of the folhjwing should make the: entries in the books under such circumstances (|uite clear. Retirement of a Partner. — Where a partner is retiring ■from a firm his Capital account will show, assuming that profits have been adjusted and that the books are properly kept, what is his share of such assets as are inckided in the hooks. But it is cjuite possible that the firm may possess an asset, such as goodwill, which is not show'n in the books, and the retiring partner can quite legitimately claim his share of any such asset or assets. Where the business is an old established one it is clear that, if the busines^s as a whole were scjld. something would be received for the goodwill and it therefore follows that the firm possesses' an asset wdiich has. perhaps, not yet been brought into account. This asset belongs to the partners in the proportion in which they have been sharing profits, and, assuming that the value of the goodwill has been agreed upon between them, the retiring partner can claim to have this amount paid to him in addition to his share of the remaining assets, repre- sented, in most cases, by the balance standing at credit of his Capital account after adjusting profits, etc. The entries to be made can best be explained 1)}' illustration. Black. White and Brown are in partnership, sharing profits in the proportion of one-half, one-third, and one-sixth. Brown is retiring and claims to be ;paid his share of the good- will, which is agreed by the partners to be worth £1200. The following entrv shows how the goodwill would hv brought into, the books and its division Ijetween the ])artners : Goodwill Account Dr. £1,200 To Black Capital A/c £600 „ White 400 ., Brown ,, 200 Brown would be paid the balance of his Capital account, which then includes his share of the goodwill. A L' S l R A L A S 1 A X A D \' A N C E D A C C O U N T A N C Y. it should !)(.• noted. lio\\e\er. that under such circum- stances it is not usual to bring' the full value of the goodwill into account, as the remaining partners do not usually desire to have goodwill appearing in the l)o(jks at a larger amount than is necessary. The probability is that, in the above ca^e, the onl}- entry ni.ulc would be a debit t(j (ioodwill account and a credit to lirown's Capital account for his share of the goodwill, £-^UU. Introduction of a New Partner. — A person desiring to be taken into iJartncrshii) in an established firm naturally ex- pects to pay, in addition to the amount of actual capital re- quired from him. some l^onus for admission, seeing that he is seeking introduction into a successful concern and the element of risk which would exist in buying into a new business is to all intents and purposes eliminated. The amount of the bonus to be paid will be a matter for negotia- tion between the firm and the incoming partner, but. assum- ing that an agreement has been arrived at, it is necessary then to consider the entries to be made in the books in con- nection therewith. These entries require, perhaps, a little more explanation than those to be made on the retirement of a partner, as there are several different ways in which the amount paid for goodwill can be treated, the particular method to be adopted in each case depending upon the arrangement made between the parties. The goodwill of a l)usiness as at the date of the introduction of a new partner is, of course, the property of the old proprietors and they are entitled to share in its value in the ;proportion in which they have taken profits up to the date when the new i)artner is admitted. The incoming partner will only be required to i)ay as a bonus a proportion of the total value of the goodwill, and this proportion will be the ratio in which he is to share profits ; e.g., if the goodwill is estimated as being worth £G000 and he is entitled to one-third share of the profits after being admitted, the amount of his bonus will be £2000. In other words, if he is to take one-third share of the profits he will have to pay as a l)onus for admission one-third share of the \alue of the goodwill. An illustration will perhaps be the simplest and shortest way to ex])lain the various ways in which goodwill may be treated where an incoming ])artner is recpiired to pay a bonus for admission : — Simpson and Morris are in partnership, their capital being £3000 and £2000 res])ecti\ ely. and they share profits 94 GOODWILL. in proportion to their capital. Tliey decide to take Johnson into partnership upon his introducing £;5()00 as capital and paying- £1000 as a bonus for goodwill, the arrangement beuig that the three partners are to share profits eciually. The various methods of treating this transaction in the books are a> folloNV :- (a) Johnson may pay £1000 to Simpson and Morris out- side the business altogether. This £1000 will be divided between Simipson and Morris in the pro- portion in which they have been sharing profits, viz.. three-fifths and two-fifths. This method can hardly be recommended as no reccrd of the trans- action will be made in the books of the firm, and it can only be used in the V^sence of an agreement that the amount paid by Johnson for goodwill is to be left in the business. The capital introduced by Johnson will, of course, be credited in the usual way to his Capital account. (bj If it is arranged, as is usually the case, that the amount paid" for goodwill by Johnson is to be left in the business, the amount of £1000 could be paid to the firm's banking account and credited to the Capital accounts of Simpson and Morris in the pro- portion of three-fifths and two-fifths, Simpson be- ing credited with £600 and Morris with £400. This is the most common and perhaps the best method of dealing with the transaction, seeing that it does not involve the necessity of raising a Goodwill account in the books of the firm. (c) If it is desired that the Goodwill account should be opened and shown in the books at its full valuation the following method should be adopted. It will be seen that, if Johnson has to pay £1000 in pur- chase of one-third share of the goodwill (as he is taking one-third share of the profits), the total value of the goodwill must be £3000. This good- will belongs of course to Simpson and Morris and. if the present method of treatment is desired, the following entries should be passed : — Goodwill A./c- Dr. £3.000 To Simpson Capital A/c i'l.SCO „ Morris .. .• 1.200 The £1000 paid in by Johnson for goodwill will then be credited to his capital account and the partners' Capital accounts will appear as follows: —Simpson. £4.800; Morris. £3,200; Johnson. £4,000. 95 A U ST R ALAS I AX ADVANCED ACCOUNTANCY. An important i)i)int arises in connection with the amount to be ])aicl l)y an incominj^ ])artner wliere i^oodwill ah-eady appears in the books either at its full, value or at something- less than this amount. It is obvious that, if the goodwill alread\- a])pears in the books of the firm at its full value, the incoming ))artner, upon jiayment of the amount of capital required ?.()()() and D.'s Capital account. £4000, wdll ap- pear on the other side of the Balance Sheet. Assuming that goodwill is stated in the books at its full value. D will then have accjuired a one-fourth share of the whole of the assets of the business, including" goodwill. ."^ujjpose, luA\e\-er, that in tlie case illustrated abo\e. the goodwill is now worth £(;n(iii and the ])artners recfuire D in addition to contrilniting ca])ital equal to their own. to make an additional ])ayment on account of goodwill. Assuming that 1) is to receive one-fourth of the ])rofits. it is clear that it will be necessary for him to ])nrchase one-fourth share of the increased value of the goodwill, viz., £t?tKi(». If A. B and C have been sharing profits equally they will be entitled to the £.")()()^ paid by 1) in equal pro])ortions. or. if they desire this ]jayment to remain in the business, the goodwill should be written uj) to its i)resent value by the following entry: Goodwill Account Dr. £2,(i(IO To A. Capital A/c £006 13 4 .. B 666 13 4 .. C 666 13 4 D will tlien Ik cntillcd to lia\e the £ :)(I0 paid in by him on account of the goodwill, credited to his Cajjital account and he should pay in ;in additional £l()(;/13/l to make his ca])ital e(pial to tiiat "t the remaining jiartners. 96 G O D W I L L. A similar point arises in conncclion witii the adjustment of i;ood'\vill on the retirement of a ])artiier where the item of goodwill already stands in the l)ooks. A retirini; ])artner would, under such circumstances, onl_\- ho entitled to he credited with his share of any increase in the \alue »of the good will, as his Capital accotmt alread}- shows hi< share of those assets (including goodwill) already ai)i)earing in the hooks. Depreciation of Goodwill. — Assuming that goodwill has heen ])rought in the hooks at a proper valuation, and that the business is being conducted along sound lines, it is not neces- sary that any provision should be made for depreciation of (.he asset, as, under such circumstances, it would tend to a])- preciate rather than depreciate in value. As. howexer, this item in the Balance Sheet of a comi)any is viewed by in- vestors with a certain amount of susi)icion, it is often decided to reduce from time to time, out of profits, the amount at which goodwill appears in the books, with the object of ulti- mately writing it ofT altogether. Any amount so written off should be treated as an appropriation of profits and not as a charge against ]irofits. From the point of view of policy it is perhaps better to ] rovide a Depreciation Reserve for goodwill than to write the item out of the books altogether. This reserve might be shown as a deducticjn from goodwill on the .\ssets side and, even when the rcser\-e account ecpials the annjunt of the Goodwill account, the items should be stated short on the Assets side. If this course is followed the fact that the com- pany has»adopted the commendable course of writing off the whole of its goodwill out of profits cannot be lost sight of. as might be the case if the item disappeared from the Balance Sheet altogether. 97 AUSTRALASIAN ADVANCED ACCOUNTANCY. cHAP'ri<:R \-Tii. RESERVES, RESERVE FUNDS AND SINKING FUNDS. It was shown in Chapter 111., dealin-' with balance-day adjustments, that. Ijefore a concern can arrive at the amount of its actual profits, it must make provision for such losses as have been occasioned by a deterioration in the values of the assets used in earnings the profits; also that, if sufficient of the profits are not retained in the business to make good this deterioration in value, the concern is not keeping its capital intact. Provisions of this nature represent the bare minimum, where everything goes well, of what is necessary in order to enable the undertaking to be conducted permanently with- out requiring fresh capital to be introduced for the purpose of replacing that which has been lost. It is now proposed to consider those additional provisions which are commonly made for prudential reasons by those concerns which the proprietors or directors desire to be con- ducted on sound lines. These additional provisions are what are known as "Reserves." As the creation of reserves of this nature is confined practically to limited companies, seeing that in the case of businesses conducted by sole traders or partner- ships surplus profits are transferred to the credit of the capital accounts of the proprietors, it is thought desirable to deal with this subject in connection with the accounts of companies only. It has already been iwinted out that, where a company has made a i)nifit during a financial year, this naturally re- sults in an increase in the net assets of the business and, assuming that, before the net profits have been arrived at, ample provision has been made for depreciation and other charges, there is no reason why the company should not dis- tribute this accretion to the assets amongst its shareholders by wav of dividend. In many cases it is deemed prudent that the whole of the profits so ascertained should not be distri- buted in this wav, but that a portion of them should be re- tained in the business, either for the purpose of supplying the conipanv with additional trading funds, thus strengthen- ing the financial position of the business, or for some other specific reason. R E S E R \' E S AND SINKING FUNDS. It should be clear that, if it is desired to retain a portion of the increase in assets, represented by the balance of Appro" priation account, in the business, such proportion should not ]3e left in that account, as this would lead to the impression that the amount is likely to be distributed amongst the share- holders at any time. It is usual and desirable, therefore, to transfer so much of the credit balance in Appropriation ac- count as represents the assets which it is desired to reserve to a Reserve account, which account will l)e ranked in the Balance Sheet amongst the liabilities. Any transfers to Re- serve account should be made from the Appropriation account, £s the transfer is of the nature of an Appropriation of profits rather than a charge against profits. The distinction between such a transfer and a transfer to an account such as Doubtful Debts Reserve account is clear, as the latter is a provision out of the profits for an anticipated loss on book debts, and the credit balance may be viewed as an offset against the estimated over-statement of Sundry Debtors. An asset of the nature of Book i:)ebts cannot be accurately valued, and it is a matter of impossibility to state this asset, at the exact value to the business. It is usual, therefore, to include this item in the Balance Sheet at the full amount at which it appears in the books, and, so that the position of the business will not be overstated, to build up a special reserve as an offset against the assets in question. Indeed, it is quite common to see a Doubtfuf Debts Reserve deducted from the amount of Sundry Debtors in the Balance Sheet, instead of being stated separately on the liabilities side. Returning to the subject of general reserves it should be noted that the transfer from Appropriation account is merely the indication that the business possesses a reserve of that amount. The assets themselves which make up the reserve were in the business before the transfer was made and the balance standing at credit of the Reserve account is the measure of the assets which might have been distributed amongst the shareholders by way of dividend, but which have been left in the l)usiness. Where the object of creating a reserve is merely for the purpose of adding to the available trading assets of the busi- ness, and in this way strengthening the resources, nothing further than the book transfer already referred to is necessary, but where the object in creating a reserve is to provide the business with additional cash resources, which can be readily availed of. something further is necessary. An amount in cash equivalent to the amount of the transfer to the Reserve ac- count should be withdrawn from the business and invested 99 AUSTRALASIAN ADVANCED A C C O U X T A X C V . in some securities of a readily realisable nature, this transac- tion, of course, resultini; in a credit to Cash account and a debit to some account representin"- the securities. This in- vestment becomes a Reserve Fund, using- the word "lund" in its generallv accepted sense; i.e.. as an invested sum of money which mav he - ])reciated by the general puldic. Professor Dicksee's view is that the term "Reserve" should be applied only to those pro- visions which are properly charges against profits, such as doubtful debts reserves, whilst a "Reserves Fund" designates true net i)rofits. which might have been divided as such, but which ha\e been reserved or capitalised ])ro tem.. whether such reserves are used in the business or invested outside. The writer submits that neither of these authors presents the exact state <>f affairs. I'rofessor Dicksee's contention that no distinction should be made in the nomenclature of the ac- count api)earing on the liabilities side of the Balance Sheet 100 R E S E R \' E S AND S I X K [ \ (; F C X D S. whetluM- the reserve is used within tlie business or invested outside must be taken as correct, seeing that this account is nierelx- the measure of the addition to the assets of the busi- ness and cannot naturally be expected to indicate the nature of the assets comi)risiii;4' tlie reserves. It is considered, however, that both of the authors quoted sre. wrong- in applying the term "Fund" to any credit balance appearing in the books, as a "fund"' must necessarily be an asset. It is tliought that the mistake has arisen through con- fusing the credit balance in the Reserve account with the actual reserve itself. It should not be overlooked that it is the accretion to the assets which is the actual reserve, the balance of the Reserve account merely serving to indicate the extent of the accretion Reference to any dictionary will disclose the fact that the meaning of the word "fund" is such that it can only be applied to an asset, and, this being the case, it is clearly in- correct to api)ly tliis term to a credit balance in the books, or to show the item "Reserve Fund" amongst the accounts appearing on the liabilities side of a Balance Sheet. The Re- serve is comi)osed of the asset or assets which are withheM from the shareholders and retained in the business ; it may be spread over a number of the assets, for example, represented by an increase in book debts, stock, etc., or it may be specially invested ; but it is obvious that it cannot be labelled a reserv:i "Fund" unless it has been specifically set aside and is coin- posed of outside securities. The position is. therefore, that the item on the liabilities side of the Balance Sheet should always be shown as "Re- serve," whether the assets of which the reserve is composed are used in the business or invested outside, \\niere, how- ever, the reserve is invested in outside securities the item "Reserve Fund" may be shown amongst the assets. Where a reserve has been created for a special purpose, e.g., to meet an anticipated loss, this should be clearly indicated in the Balance Sheet. The following example should make the posi- tion clear : Tlie Balance Slieet of the X.Y.Z. Co. Ltd., on the 1st January appears as under: — LIABILITIES. ASSETS. Capital £.50,000 Sundrv Assets £.50,000 £50.000 £50.000 101 AUSTRALASIAN A D \- A N C E D ACCOUNTANCY. On the 31st December, in the same year, after due i)ro- vision had been made for depreciation and doubtful debts, the position was shown to ])e as follows: — - LIABILITIES. ASSETS. Capital ioO.OOO Sundrv Assefe £60,100 Doubtful Debts Reserve . . 100 Profit and Loss A/c 10,000 £60,100 £60,100 It was decided by the directors that only £8.000 of the profits disclosed should be distributed amongst the share- holders, the balance being transferred to form the nucleus of a reserve. Assuming that the dividend of £8,000 has been paid, the Balance Sheet would then appear as under: — LIABILITIES. ASSETS. Capital £50,000 Sundrv A.s.sets £52 100 Doubtful Debts Reserve . . 100 Reserve 2,000 £52,100 £52,100 If the directors had decided that the reserve was to be invested outside the business, cash to that amount would be withdrawn from the business and securities purchased. The Balance Sheet would then appear as under:-- LIABILITIES. ASSETS. Capital £50,000 Sundrv Assets £50.100 Doubtful Debts Reserve .. 100 Reserve Fund: N.S.W. Gov- Reserve 2,000 ernment 3i per cent. Debs. 2,000 £52,100 £52,100 The method of treatment indicated above illustrates in a practical manner the view a]:)parently adopted by Mr. Justice Nevill. in Gilbert v. Measures Bros. (Acct. L.R., June ]9th 1909). In that case the company undertook in one of the clauses of the Debenture Trust Deed that the aggregate value of the stock-in-trade, the reserve fund, book debts, and cash sliduld nc\cr l)e less than £100,000. The company had reser\c fund in\estments amounting to £40,000, but half or these investments were subsequently realised and the pro- ceeds sunk in fi.xed assets in connection with a branch ope-.u d up by the company. The plaintiff was of opinion that the realisation of these investments and the use of the proceeds in the bwsiness reduced tlic rescr\c fund to .£20,000, and as this in\-o]\ed a rerhiction in the aggregate value of the ass-n- mentioned al)o\e to Ics^ tlian £1()0,00(). he api-)lied for the 102 R E S E R \' E S AND S I X K I X G FUNDS. appointment ni' a receiver and manager, on the gronnds thai the company liad committed a l^reach of the Debenture Trust Deed. Counsel on behalf of the company argued that the investment of £20,000 in the branch property remained as much a portion of the reserve fund as ever it was. Mr, Justice Nevill, however, apparently suj)ported the view that a reserve fund consisted of investments outside the business, as he granted the appointment of a receiver and manager on l)eha]i of the debenture holders as sought by the plaintiff. \A'here profits are reserved for a special ]:)urpose, e.g.. for the purpose of equalising dividends, it is advisable that the item appearing on the liabilities side of the Balance Sheet should indicate that such is the case. It might be noted in passing that, where a company makes a transfer to the Re- serve account, it may at any time bring this amount back into Appropriation account and distribute it amongst the share- holders by way of dividend. If such reserve has been invested outside the business it will be necessary to realise invest- ments equalling the amount of the re-transfer to Appropria- tion account in order to enable the dividend to be paid with- out depleting the company's ordinary floating assets. The item ''Reserve for Depreciation."' may be found figuring on the liabilities side of the Balance Sheet of some companies. Transfers to a Reserve account of this nature would, of course, be a charge against profits, and w^ould be debited to Profit and Loss account before the actual net profit was ascertained. A reserve for depreciation is raised by crediting that account with the usual charge for depreciation instead of crediting the account of the asset or assets and reducing them in the books of the company. Such a reserve is. of course, merely an offset against a corresponding over- statement of the value of the assets on the other side of the Balance, Sheet. It is always advisable, where practicable, to actually write the charge for depreciation oft' the assets, but it may be found in some cases that it is inconvenient to adopt this method (e.g., where there are constant and frequent ad- ditions to plant and it is considered advisable to calculate depreciation on the original amount in each case), and the best course is to open a Reserve account of the nature re- ferred to. SECRET RESERVE.— This i? a term applied to a re- serve whicli is not disclosed in the company's Balance Sheet. It is clear that, if a company possesses a reserve, it can only remain undisclosed b}- an over-statement of the liabilities or by an under-statement of the assets. The company may have a credit balance in the Reserve account which the directors are desirous of not disclosing in the Balance Sheet. This can A l' S T R A L A S I A X A D \' A X C E D A C C O U X T A X C Y. only be done 1)_\- includino- the annnint of the Reserve account aniont^st the outside Hal)ilities. or ]yy deducting the l)alance of that account from one or more of tlie assets, otherwise the totals of the two sides of the liahmce Sheet will not agree. The same result can ])e obtained. e\en where the com- I)any has not an actual Reser\e account in its books, by writ- ing down tlie as-ets out of ])rotits to con-id*^rably less than their real \ alue. The (juotion of the propriety of a co'upany having a reserve which is not (bsclosed in the Balance Sheet has been nuich disctissed. and it is (jue which naturallv gives rise to considerable differences of opinion. It is urged, (ui the one hand, that it is essential that there should be secret reserves in some companies, more esi)ecially financial concerns, whose i;rolits are liable to considerable fluctuation. Such reserves will enable them to stand exceptional losses and. perhaps, to ]Kiy the usual dividends in times of financial stress without the fact that the companies have suft'ered losses appearing in the published statements. The fact that such reserves might iie necessary in some cases was recognised in th.e Birmin- ham Small Arms case. ( )n the other liaud. it is pointed out that the fact tliat the position of the company may be considerably understated under such circumstances, leaves an opening for dishonest directors to profit at the expense of the other shareholders, vrho arc ignorant fif the existence of the reserves. Instances mighl; be (putted where directors ha\e catised large ammuUs to be written off' the value of the assets, thus causing the actual profits of a company to be considerably understated. This has had the effect of causing the shares to remain at a low figure on the market and the directors have quietly ac(|uir- ed the shares at considerably less than their real' \aliu". \\'hen they have thus obtained sufficient of the shares to satisfy themselves they have then ])ermitted the profits of the company to suffer a recovery, which has in turn resulted in a cf)nsidcrable increase in the market \alue of the shares. It will be seen that there is a good deal which can be legitimately said on both sides of the (piestion, and the safety of creating secret reserves will depen which are repayable at tlie end of a ,yiven term, it is usual to provide for their repayment out of prohts; but, as has al- ready been shown, the mere book entry making a transfer from profits to a .Reserve account does not result in the crea- tion of a "Fund" to meet requirements under circumstances such as are now being- considered. The same remarks a])])ly where a considerable sum of money will be required at a future date to replace wasting assets. The creation of a re- serve does, of course, result in an increase in the assets of a business, but this increase may be spread o\"er a number ol assets and the sudden withdrawal of a reserve used in this wav would, in most cases, seriously handicap the business. When, therefore, it is desired to have the amount <)f the reserve in such a form that it can be withdrawn from the business when required, without the serious effect referred to, the profits kept back from the shareholders must be invested outside the business and, under such circumstances, would take the form of a Smking I'und. The method of creating such a fund follows very closely the procedure indicated in the formation of a Reserve Fund. A transfer is made from Appropriation account to the credit of a special Rese,rve account, usually called Sinking Fund Reserve account, and a corresponding amount of cash is in- vested outside the business. A difference exists, however, in the treatment of the interest on the investments in the two cases. Interest on reserve fund investments is usually credit- ed to Profit and Loss account, while the interest on the sink- ing fund investments must be credited to the Sinking Fund Reserve account, and the amount received in cash re-invested with the next instalment, b^ach year during the currency of the term a transfer is made from Appropriation account to the Sinking Fund Reserve account, and a corresponding amount withdrawn and invested, together with the interest received on the investments previously made. A reference to interest and annuity tables will be necessary to enable the required amount of the annual instalment to be arrived at, as it is clear that, as these instalments are accumulating at compound- interest the amount of the instalment will be considerably less than it would l)e if the interest were credited to_ Profit and Loss account. In arriving at the amount of these instalments some allowance should be made inv the fact that time may be 105 AUSTRALASIAN' ADVANCED ACCOUNTANCY lost in makinj^- the iii\ estnieiit and also lor the fact that tin value of the investments may have decreased somewhat !)\ the time thev re(iuire to be realised. Dealing tirst uf all with the procedure in connection with the repayment of debentures, investments should be held equalling the amount of the loan to be repaid by the time they fall due. These investments will be realised and an ent'rv passed debiting Lash and crediting the Investments account, any dehciency occasioned by a fall in value m the investments being transferred to the debit of Profit and Loss account. On the other hand if the investments are realised at a profit, this may be transferred to Profit and Loss account, although the wiser course is to transfer the account tu Ke- serve account. With the money made available by the re- alisation of the investments the debentures will then be paid off, involving a credit to Cash account and a debit to Deben- ture account. The credit balance in Sinking Fund Reserve account, which will, of course, equal the debit balance in the Sinking Fund Investments account all along and which shows the extent of the profits withheld from the shareholders in the creation of the Sinking Fund, will then be transferred to the credit of a Reserve account. The repayment of a liability out of profits must always result in the creation of a reserve, seeing that the del)entures have been repaid out of the increase in assets resulting from the making of profits, the amount originally borrowed thus being retained in the business. During the term of the crea- tion of the Sinking Fund the transfer should always be made to a special Reserve account, termed Sinking Fund Reserve account, in order to indicate that profits have been set aside for a specific purpose, but when the debentures have been paid off the balance of the Sinking Fund Reserve can then be transferred to the general Reserve account. Any transfers to Sinking Fund Reserve account in connection with the repayment of a loan should, of course, be treated as an ap- l)ropriation of profits and so be charged to Approi;riation ac- count. EXAMPLE No. 8.— The foUowmg will illustrate the working of a Sinking Inind set up to repay in five years a sum of £20.000 borrowed on debentures. It is assumed that the investments bear interest at the rate of :U per cent, per oiiiuim. and that the money was borrowed on the 1st January, l!)](i. the first appropriation of protits being made on the :Ust December in that year. lOG RESERVES AND SINKING FUNDS. -d^ o o c o O CI wO O — ' O CO o o gi gj gi ft ^1^ o P ?J 5io ^oo ^rC cSi ?S e^ CI C ^ o ^ I" 1^ .5 ° O \- A X C E I) A r ( " CJ f X T A X C Y . DEBENTURE ACCOUNT. Dec. 31, 1920.— To Cash ...tl'U.UOO Jan. 1, 1916. By Sundrv Debenture Holders £20,000 X()'l"h^ — riie aiiiounl of the instalincnt for l!'-.^(t. to- lictluT will] interest recci\c(l on the in\ cstments on the hist day ni that year must not ha invested, as the nione)- will be required on that date to be a]:)i)lied towards repay ni;-nt ol the debentures. 'I'he amount of cash received on realisation of the investments ])lus the ]!»•()() due to the Debentm-e liolders. TASMANIA. SPECIAL. NOTE. Since this and the next succeeding chapters were set up a new Companies Act has come into opera- tion in Tasmania. The new Act (1920), is almost an exact copy of the Victorian Companies Act re- lating to limited companies. In chapters IX. and X. Tasmanian practitioners and students should, so far as these chapters are concerned, read the law set down under the heading of Victoria as be- ing applicable to their State with the following exceptions : — Procedure to obtain registration; ])age 111. In Tasmania 7 persons are required to sign the Memorandum of Association. Published statements; j^age 125. In Tasmania there is no necessity for a sc-aled copy of the private balance sheet to be filed with the Registrar, nor apparently need this private balance sheet be signed by two directors or mana- gers. See Sec. 122 (T) . 108 CHAPTER IX. JOINT STOCK COMPANIES. Followin.y the procedure adopted in connection with Partnership Accounts, it is thought advisable, before deaHng witii the actual accounts of companies, to devote some space to treating as briefly as possible with certain portions of Company law, of which some knowledge is essential if the accounts peculiar to companies are to be properly under- stood. It may l)e both interesting and instructive to consider briefly, in the first place, the origin and nature of companies. During the seventeenth century, in which a marked advance was made in British trading, the advantages accruing to traders and others by combining together for the purpose of conducting business ventures were first really appreciated. At that time the only methods by which persons associated together for the purpose of trading could be incorporated were (a) By Royal Charter, and (b) by special Act of Parliament. The expense and delay occasioned under both of these me- thods rendered them, in most cases, impracticable, and the great bulk of associations were formed under deeds of settle- ment, which contained the rules under which the associations were governed, each member undertaking to adhere to these rules. Trustees were appointed under a deed and the pro- pert}^ belonging to an association was vested in such trustees, who carried on the business of the association in much the same wa}- as the directors of present-day companies now do. Provision was also contained in the deed enabling members to transfer their interests in the association. For a long time, the law apparently viewed these asso- ciations with a considerable amount of disfavour, and insisted on treating them as nothing more or less than huge part- nerships, each member being held liable to the extent of his resources for the whole of the debts of the association. This was without doubt a considerable hardship upon the members seeing that, although they had practically no voice in the management of the association and nothing- to do with incur- ring the debts, they were vet held liable as ordinary partners. In spite of this the numl)er of such associations rapidly in- creased, and it was clear that some sort of legal recognition canies are ])rartic;il1y restricted to those which rec|uire to be endowed witli compulsory ])o\vers. as. for iiislance, rail wax- companies which iii;iy have to resume i)roperties from private owners. There are also companies incori>orated by Royal Charter still existing (e.g.. Hank of Australasia), but this me- thod of incorporation has. to cpiote Palmer, "always been sparingly exercised by the Crown, and the delay and expense in the ])roceedings for obtaining a charter— concurring with the reluctance of the Crown to grant — has for m;uiy years 110 JOINT STOCK CO M P A X I E S. past made a charter a \ery exceptional mode of incorpora- tion." The diti'erences which exist in the c'Mni)any leg-islation of the varions States and New Zealand render this snhject rather a difificult one to deal with in a text-hook intended to he applicahle throughout Australasia. The main principles cf the law. are. of course, the same, but there are considerable differences in procedure, and in no two States is the law exactly the same. It is proposed, however, to deal with those general matters which are applicable to all the States, where necessary noting any variations in procedure. Procedure to Obtain Registration. — ^This is simplicity itself. An\- seven or more persons (in X'ictoria. South .Vus- tralia, and Western Australia, five or more persons) associat- ed together for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise com- plying with the requirements of the Act with regard to re- gistration, form an incorporated compan}- with or without limited liability. The minimum unml)er of persons mentioned above will require to prepare and sign a document called a Memorandum of Association setting out certain particulars, which are enu- merated below, and file such document with the Registrar who, if he is satisfied that the requirements of the Act with regard to registration have been complied with will issue to the subscribers a certificate of incorporation. This Memorandum of Association is usually accompanied by Articles of Association. These articles are the rules and regulations governing the internal management of the company, and. in the case of certain classes of company articles must be prepared and filed with the Memorandum of Association. In the case of a company limited by shares, however, if the Memorandum is not accompanied by Articles of Association the company is deemed to have adopted a model set of articles given in Table A of the Companies Act. The fees payable upon registration vary in the dift"erent States, being fixed on a sliding scale according to the amount of the Nominal Capital of the company registered. The Memorandum of Association must be signed by the number of persons mentioned above or by their duly author- ised agents, and these signatures must be witnessed. Each subscriber to the Memorandum undertakes to take the number of shares stated after his signature on the Memorandum, and he cannot take less than one share. The Act provides for the formation and registration of different classes of companies, 111 AUSTRALASIAN' A D \' A X C E D ACCOUNTANCY. and these (omitting for the time l)eing any reference to Min- ing Companies, which are dealt with in a later chapter) are as under : — (a) Unlimited Companies. The pro\isions of the Act re- lating to this class of company are very rarely availed of, as such companies are merely of the nature of registered partnerships, each member being liable for the debts of the company to the extent of his resources, as in the case of a partnership. Practically the only occasion when such a company is registered is when it is desired to form a trading partnership of more than twenty persons, or a banking partnership of more than ten persons. The Memorandum of Association of an unlimited company must contain the following information ; — (aj The name of the company. {h) The objects for which the company is formed. (c) The situation of the registered office of the company. (b) Comjianies Limited l:)y (iuarantee. 'iliis class of com- pany is fairly common, but. for the most part, consists of societies which desire to be registered under the Act but which do not require any capital. Each member of sucii a ccjiupanv undertakes to contribute in the event of the company being wound up, for the purpose of dis- charging the liabilities of the company, such amount as may be required of him exceeding the amount speci- fied in the Memorandum of Association. The Memor- andum of Association of this class of company must con- tain the following ])articulars: — I a) Name of the company with addition of the word "Limited" as the last word of such name. (b) The situation of the registered ottice of the comi)an3'. (c) ll^c ol)jects for which tlie company is to be established. (d) A declaration that each meml)er undertakes to contribute to the assets of the com])any in the (•\ent i)f the same l)eing wound u\) during the time lie is a lucniluT. or within out' yiv'ir after- ward-, for ])ayment of the del)ts and liabilities of the company contracted liefore the time at which he ceases to be a member, and the costs, 112 JOINT STOCK C O M P A X 1 E S. charges, and expenses of winding up, and for the adjustment of the rights of the contributoriea amongst themselves such amount as may be re- quired not exceeding a specified amount. (c) Companies Limited by Shares. The large majority of companies registered are of this class, and it is this class of company which we will deal with almost exclusively in this and subsequent chapters relating to companies. The liability of a member of such a company is limited to the amount unpaid on the shares held by him, so that if his shares are fully paid he has no further liability. The Memorandum of Association must contain the fol- lowing particulars : — (a) The name of the company, with the addition of the word "Limited" as the last word of its name. (b) The situation of the registered ofHce ot the company. (c) The objects for which the company is to be established. (d) A declaration that the liability of members is limited. (e) The amount of capital with which the company proposes to be registered, divided inti> shares of a certain fixed amount. Note. — In \'ictoria, South Australia, Western Australia and New Zealand, it is not necessary to state the proposed situation of the registered office of the company in the Memor- andum of Association, but this information must be supplied to the Registrar, and in all cases any alteration of the situation of the registered office must be" notified. The Nature of a Company.— It is perhaps advisal)le to explain concisely the exact nature of a company, and the effect of incorporation, as one frequently hears remarks which serve to indicate that these matters are not as fully understood as they might be. Upon the registration of the Memorandum and the granting 'of the certificate of incorporation the com- pany comes into existence, and it must be remembered that it has an existence entirely apart from the persons comprising the company. In other words, a new legal person is brought into existence, certainly an artificial person, but none the less a person from a legal standpoint. It can sue and be sued in its own name. It can even be sued by one of its own mem- 113 A U S T R A L A S 1 A X A D \' A X C E D A C C O U X T A X C V. bers for say. hrcafh of contract. In this respect it is entirely dififerent from an ordinary partnership. A firm as a firm has no Ic.ual existence, and any action bron.^lit against it is in reality an action against the individual partners who comprise the firm. The members of a company might on one day sell their shares to other persons, so that the shareholders would then he an entirely different set of persons, but the company itself remains the same. Another distinctive feature of a company is the fact that the shares are transferal)le. In an ordinary i)artnership this is not the case, as no partner can dis]>ose of his share or an> portion of it without the consent of the whole of the remain- ing partners. In some companies certain restrictions may be placed upon the transfer of shares, but any provision in the Memorandum or .Vrticles of a company which would abso- lutely ])revent a siiareholder from disposing of his shares to anybody, would l)e totally opposed to the idea of company legislation, and wonUl l)e held in^•alid. Memorandum and Articles of Association. — When the?e documents are registered, they l)ecome binding upon th-; subscribers to the Memorandum, and also upon every person who subsequently becomes a member of the company. Every person who acquires shares in a company is as much bound bv the provisions of the Memorandum and Articles as if he had subscribed his name and affixed his seal thereto. The Memorandum of Association, Avhen once registered, is prac- tically unalterable. There are certain provisions in the Com- panies Acts which enable a company, after registration, to modify the provisions of its Memorandum so as to vary its capital, or to alter wnthin certain prescribed limitations its "Objects Clause." Apart from these special exceptions no alteration can be made to the Memorandum of Association. The Articles of Association- may. however, be altered at an\- time by a special resolution of the members and a copy of anv special resolution passed must be forwarded to the Regis- trar of Companies within fifteen days therefater. .■\nother and jierliaps more important matter in connec- ti(m with these documents is tliat e\ery jiersou having deal- ings with a company is fixed witli notice of their contents. i.e.. every person dealing with a company is deemed to know the contents of its Memorandmn and Articles of .Association. A companv is an artificial jierson. created by law. and its power to enter int.i contrat-ts is restricted by the powers given to it tmder its .Memorandum and Articles of Association. If it agrees to do anything (.utside that wliich it is authorised to do uufler its Memorandum and Vrticlt'^ of X^sociation it is not JOINT STOCK C O M P A X J E S. ])i)uik1 therel)}-. aiul persons havini;- dealings with a company, more especially in connection with contracts outside the ordinary course of business, should satisfy themselves, first of all, that it is authorised to enter into such contracts. Capital of a Company. — 'i'he capital of a comi)any of the class now ])eing considered is divided into shares. .\ re- ference to the information which must be contained in the Memorandum of a company limited by shares will show that every such company must state in its Memorandum the amount of capital with which it proposes to be registered, divided into shares of a certain fixed amount. What the amount of capital is to be and the number of shares into which it is to be divided will, of course, be decided by th.- promoters of the company. The value of the shares can be set down at any proportion of the total capital, e.g.. a com- jiany registered with a capital of £100.000;' may have it divided into 100.000 shares of £1 each, or 10.000 shares of £10 each, or 2,000.000 shares of 1/ each; Imt the amount of each share must be fixed before the company is registered in order that it may be stated in the Memorandum. The mem- bers of the company are the holders of these shares. Provision is C(»ntained in the Companies Act whereby a company can. if authorised so to do by its Articles of Asso- ciation, increase its capital by the issue of new shares, con- solidate and divide its capital into shares of a larger am-ount and, bv passing a special resolution, sub-divide its existing •shares into shares of a smaller amount ; but in making this subdivision the proportion between the amount paid and the amount unpaid on each share must remain the same as it was prior to the subdivision. Notification of any of the altera- tions mentioned above must be given to the Registrar of Com- panies within fifteen days. Provision is also made whereby a company may. with the authority of the Court, reduce it< capital. ' This matter is dealt witli fully in a later chapter. Shares. — A company may Iiave its shares divided into different classes and the rights of the holders of the various classes of shares may dififer considerably. Although it is not necessary to state in the Memorandum of Association the dififerent' classes into which the shares are to be divided and the number of shares of each class to be issued, as these may be defined in the Articles of Association, it is advisable, in order to render the rights of the various holders unalterable to specifv the different classes of shares and the respective rights of the holders in the Memorandum. As already men- tioned, a company can alter any or all of its Articles of As- sociation by special resolution and. if the rights attaching to the various classes of shares are merely in the Articles, 115 AUSTRALASIAN' A D \' A X C E D ACCOUXTAXCY. the holders of shares carryin^^- special privileges might find these nullified by an alteration of the Articles. The classes of shares most commonly issued are: Trefercnce, Ordinary, and Deferred. Preference Shares. — 1 licse confer up' mi the holders some si)ccial rights or i)rivileges. They carry, almost invariably, a preferential claim for dividends, i.e.. Preference Shareholders receive their full dividend before any distribution of profits is made amongst holders of other classes of shares. Prima facie, this preferential claim for dividend is cumulative, i.e., if the profits in any year are insufficient to pay the holders of such shares a full dividend, they are entitled to have this de- ficiency made good out of subsequent profits before share- holders of any other class participate, but the Memorandum or Articles may provide thai: the dividend is non-cumulative, i.e.. payable as regards each year out of the profits of that vcar only. It should be noted carefully, therefore, that the dividends on Preference Shares are cumulative, unless it is stated in the Memorandum or Articles that they are to be non-cumulati\e. Preference Shares may carry other rights. They may, in the event of the company being wound up, give the holders a preferential claim over the assets of the company after the creditors have been paid oflf; but they do not carry this right unless it is specially provided for in the Memorandum or Articles of Association. Ordinary Shares, — These do not confer any special rights or privileges upon the holders. The holders of these shares receive a dividend if there are any profits available after pay- .mg the amount due to the holders of Preference Shares. It will be seen that, if a company issues Preference and Ordin- arv Shares, there must be some fixed rate of dividend pay- able to the Preference Shareholders and. provided this per- centage is duly paid, the remainder of the profits are then usually available for distribution amongst the holders of other classes of shares. Deferred Shares. — The claims of the holders of these shares to dividend are deferred until those of Preference and Ordinary Sharehdlders are satisfied. Where Deferred Shares are issued the Ordinary Shares must also have the rate of dividend payable thereon fi.xed. and it sometimes happens that if a company is earning an exceptionally high rate of p-rofits. the Deferrt-d Shareholders are in a' better position as regards dividend than either the Preference or Ordinary Shareholders. 116 JOINT STOCK COMPANIES. Share Certificate or Scrip. — IMiis is a document issued h\ a company to a shareholder certifying- that he is the holder of the shares stated in the Certificate. Each share must be numbered, and the numbers of the shares held by each mem- ber are stated in his Certificate, which also has endorsed thereon the amount paid up on the shares included therein. Stock. — The Act provides that a company may. if it so desires, and is authorised so to do by its regulations, issue Stock in the place, of fully-paid up shares. Where the com- pany decides to do this any holder of shares which are fully paid can, upon the surrender of his share certificate, have a Stock Certificate issued to him, which certifies, not that he is the holder of so many shares, but that he is the holder'of the nominal value of the shares in Stock. For example, the pos- sessor of 10 shares of £10 each, fully paid, would have issued to him a certificate stating that he was the holder of £100 of Stock. The chief difference between Stock and Shares is that any proportion of the stock may be transferred, whereas, in the case of shares, each share must be preserved intact. The holder referred to above could, whilst he held a share certi- ficate, transfer the shares in multiples of ten only, whereas, now that he possesses Stock, he can sell, say, £45 worth. Members of a Company.— In the case of a company limited by shares, the members are composed of the share- holders. The signatories to the Memorandum of Association, who must, as already stated, undertake to accept at least one share each in the company when signing their names, ipso facto become members of the company. The remaining mem- bers of the company are composed of those persons who have agreed to become members, and whose names are entered on the Register of Members. The different methods by which a person mav become a member of a company might be set out as follow:— Firstly, by signing the Memorandum of As- sociation prior to registration ; secondly, by agreeing to take shares, and being placed on the Register of Members, thirdly, by accepting a transfer of shares and being placed on the Re- gister of Members ; fourthlv. bv estoppel, i.e., by allowing his name to remain on the Register of Members after he has knowledge that it has been entered thereon or in other ways holding himself out to be a member of a company. Who May be Members.— Practically any person may be accepted as a member of a company. An infant is, however, rather an unsatisfact(M-y persou to have on the Register of Members, as he cannot be compelled to pay his calls, and he can, upon attaining his majority, repudiate his shares. 117 A U S T R A L A S I A X A D \' A X C ED AC C O U X T A X C V. Liability of Members. — It sliould be noted that the lia- bility of a holder of shares which are not fully paid up does not cease immediately upon his disposing of his shares. To summarise the pro\isions of the Act, e\ery present and pasi member of a company is liable to contribute towards the assets of the company such sum as may be required of him, in order to pay the debts of the company, the expenses of winding-up, and to adjust the rights of the shareholders amongst themsel\-es, provided that: — (a) No past member who has ceased to be a member for one year or upwards prior to the commencement of winding-up shall ])e liable to contribute. (b) No past member shall be liable to contribute in re- spect of any debt contracted by the company after the time at which he ceased to be a member. (c) No past member shall be liable to contribute unless it appears to the Court or other authority that the present members are unable to pay the amounts required of them. (d) In the case of a company limited by shares no con- tribution shall be recpiired from any member ex- ceeding the amount (if any) unpaid on the shares in respect of which he is liable as a present or past member. Compulsory Books. — E\ery cnmpany limited by shares is recpiired by tlie Companies Act to keen the following- books : — (aj A Minute llook to record the i)roceedings at direc- tors' meetings and general meetings of the com- pany. (b) Register of Mortgages. This iHJok nuist contain a record of ever_v mortgage or charge given by the company i)\er an\- of its assets, and must contain the follow ing information : — (i) A short descri])tion of the proj^erty or rights mortgaged or cliarged. (ii.) '['he amount oi charge created. (iii.) The names of the mi>rtgagees or persons etititlcd to charge. If any mortgages or charges are gi\en o\er any of the property or rights of the company, without an\ en1r\ record - lis JOINT STOCK C O M P A X 1 ?: S. ing that fact being made in the Register ut director, manager, w other dllicer of the company who authorises or permits the omission incurs a heavy penalty. This Register of Mortgages is open to the inspection ot any creditor or member of the company, and the refusal to allow this inspection will render the officer of tlie company permit- ting the refusal liable to a penalty, and the Court may com- pel an immediate inspection of the Register to be granted. (c) Register of Members. Every limited company must keep in one or more books a register of the mem- bers, which must contain the following particu- lars : — (i) The names and addresses of the members of the company, stating the numljer of shares held by each and the distinguishing numbers of such shares, together with particulars of the amount paid or agreed to be considered as paid on the shares of each member. (ii) The date at which the name of any person was entered in the Register as a member. (iii) The date at \vliich any ])erson ceased to be a member. This Register is open to the inspection of any member or any other person upon payment of one shilling. Every company not having a capital divided into shares, e.g., a company liiuited by guarantee, must keep at the regis- tered office of the company a Register containing the names and occupations of its directors or managers and shall send to the Registrar a copA^ of such Register and shall notify him from time to time of any changes which take place. The Prospectus. — The promotors of companies frequently arrange for the necessary shares to be subscribed for pri- vately, e.g.. a partnership which promotes a company to ac- quire its business will arrange, in most cases, to distril)ute practically the whole of the shares amongst the members of the firm, merely getting sufficient additional members to make up the statutor}- number. These companies are of a private nature, and the necessit}- for tlie issue of a prospectus or for advertising to induce persons to subscribe for shares does not exist. It often liappens. liowever. that the. promotors intend to invite the public to subscribe for shares in the company in 119 AUSTRALASIAN ADVANCED ACCOUNTANCY. order to supply the required working: capital and, where this is the case, it is necessary to notify the public of the nature and objects of the company and of the fact that the company is invitinj^: subscriptions for shares. This is usually done by means of a prospectus and by publishing- a summary of the information contained in the prospectus in the newspapers. Copies of the prospectus are distributed amongst the invest- ing' public who are by this means supplied with such informa- tion as they may require to enable them to judge whether or not the company will provide a sound investment for tlieir capital. The natural tendency amongst promotors is not to err on the side of pessimism when stating what they consider to be the prospects of the company, and it was found necessary to legislate in order to prevent any untrue statements being included in a prospectus and to ensure that the investing public would be supplied with all information which it could reasonably expect. In every State in Australasia, with the exception of New South Wales, special provision has been included in the Com- panies Act detailing the information which must be contained in every prospectus issued. These provisions follow, to a greater or lesser extent, the provisions of the English Com- panies Act 1900. Seeing that the public has, in most cases to judge of the suitability of the jiroposed company for in- vestment purposes solely by means of the information con- tained in the prospectus, it will be obvious that every care should be exercised by the promotors to ensure that the in- formation contained therein is absolutel}- reliable. In New Brunswick Co. v. Muggeridge. the following rule was laid down for the guidance of those issuing prospectuses mviting applications for shares. "Those who issue prospectuses holding out to the public the great advantages which will accrue to persons who will take shares in a proposed under- taking and inviting them to take shares on the faith of the representations therein contained, are bound to state every- thing with strict and scrupulous accuracy and, not only to abstain from stating as fact that which is not so, but to omit no one fact within their knowledge the existence of which might in any degree affect the nature or extent or quality of the privileges and advantages which the prospectus holds out as inducement to take shares." In New .'^outli Wales the only information re(|uircd by statute to be included in the prospectus is the disclosurt- of any contract entered into by the company, nr on behalf of the proposed company, before the issue of the prospectus, to- 120 JOINT STOCK COMPANIES. getlier with the names of the parties to the contract and tlie date the contract was entered into. Any prospectus not specifying" this information is fraudulent as regards any i)er- son taking shares on the faith of the prospectus. In the case of a company formed to take over a trading concern it is usual for the promotors to instruct a profes- sional accountant to investigate the books of the concern in order to ascertain the prohts which have been niade over a period of, say three to five years. This certificate is then usually published in the prospectus, llie investigating ac- countant should confine his certificate to past results, and should refrain from ofifering any opinion as to what he antici- pates are the future prospects of the company. He sliould also be particularly careful to see that he states clearly the profits for each year and not merely the average profits o\er the period covered by his investigation. Within the last feu- years the Council of' the Institute of Chartered Accountants in England has found it necessary to suspend several members for allowing themselves to be persuaded into an infringe- ment of these professional rules. Ouite frecjuently promotors do not register the company nntil'^after the prospectus has been issued and they have had an opportunity of judging whether the flotation is likely to be successful or otherwise. In this way the registration fees and fees for the preparation of the Memorandum and Articles are saved. Seeing, however, that no contracts can be entered into by the company until it is registered, this delay is often found inconvenient, and the most usual procedure is to re- gister the company before flotation. Assuming that the company has been registered by com- plying with the requirements of the Act as to the filing of a duly signed and attested Memorandum of Association and, where necessary. Articles of x\ssociation, it is now proposed to consider the further matters requiring attention on the part of the directors and other ofticers of a company. Restriction on Allotment of Shares- -In \ictoria no shares are to be alloted to applicants by the company unless the amount fixed in the Memorandum or Articles or named in the prospectus as the minimum subscription upon whicli the directors may proceed to allotment, or, if no amount is so fixed and named, then the whole amount of the share capital has been subscribed for and the amount payable on application has been paid to and received by or on behalf of the; company. The amount payable on application must not be less than .") per cent, of the nominal value of the sliares applied for. In New Zealand the same provisions exist, but 121 A U S T R A L A S I A X A D \' A N C E D A C C O U N f A X C V. the amount payable on application must not be less than 10 per cent, of the nominal value of each share. In \ ictoria and Xew Zealand, it the conditions relating to minimum subscriptions are not complied with within three months (X.Z.. !)•) days) after the first issue of the prospectus, all application money is to be returned to the applicants and, if it is not returned within four months (N.Z., 98 days) from the date of issue of the prospectus, the directors are jointly and severally liable to repay the money, with interest at o ■per cent, per annum from the expiration of the time men- tioned. The provisions relating to the minimum subscription (except as to the proportion payable on application) only applv to the first issues of shares of the company to the public, and they do not apply to private companies registered under the New Zealand Act. Any allotment of shares in contravention of the above-mentioned provisions is voidable at the instance of any applicant within one month after the statutory meeting. In South Australia and Western Australia the Act pro- vides that in the case of any allotment made in pursuance of any prospectus no allotment shall be binding on the applic- ant, unless (a) The minimum number of shares u])on which the directors may proceed to allotment has been sub- scribed for, or. if no minimum subscription is named, all the shares (3fl:ered have been subscribed for. (1)) 'llie minimum auiounl payal)le on each share stated as a condition of allotment has been paid at the time of allotment, or. if no amount named. 10 per cent, of the amount payable in cash. (c) The alUjtment is made within three months from the date of the application was lodged with the com- pany. In New South Wales and Queensland no restriction is placed u])on the allotment of shares. Restrictions on Commencement of Business. — In New South Wales. Queensland. Western .\ustralia. South Aus- tralia, and Tasmania directly a company is registered and receives its Certificate of Incorporation it is entitled to com- mence business, but such is not the case in New Zealand and Victoria with regard t(^ a coni|)any limited by shares (not being a "private" company in New Zealand nor a '"proprie- 122 j U 1 X 1 STOCK CO M P A X 1 E S. tary" company in X'ictoria). In these two States a company limited l)y shares before it can commence business must obtain a further certificate from the Registrar, entitling it to do so, and this certificate will not be issued until the follow- ing conditions have been complied with : — (a) Shares held subject to payment in cash have been allotted to the full amount of the minimum sulj- scription. (b) Every director has paid on the shares taken by him a proportion equal to the application and allotment money on the shares issued to other applicants. (c) There has been filed with the Registrar a statutory declaration signed by the secretary (in N.Z.. the manager), or one of the directors, that the foregoing has been complied with. In addition to the al)Ove. provision is made under the Victorian Act that, in the case of a company which does not issue a prospectus inviting the public to subscribe for the shares, there must be filed wath the Registrar a statement in lieu bf a prospectus. Any contracts entered into by a company before it is en- titled to commence business are provisional only, and not binding on the company until it is so entitled, but then shall become binding. Other Classes of Company. — In Xew Zealand provision is made under the Comi)anies Act for the formation of "i)ri- vate" companies wdiich may consist of any number of mem- bers being not less than two and not more than twenty- five. Sucii a company must in its Memorandum of Associa- tion include a statement to the efifect that the company is a private company. The whole of the shares with which a pri- vate companv is registered must be subscribed for in the Memorandum of Association. It need not file a copy of its Articles of Association, nor send in to the Registrar a copy of its Annual List and Summary. It must, however, notify the Registrar whenever any alteration is made in the Register of Members. As already mentioned, such a company is also exempted from the restrictions placed on public companies in connection with the commencement of business. In \'ictoria provision is made under the Cc^npanies .\ct for "proprietary'' companies. "Proprietary" company under the 1896 Act means one wdiich fulfils all the follow^ing require- ments, viz. : — 123 AUSTRALASIAN ADVANCED ACCOUNTANCY. (a; Ijas not more than 10 nieml)crs or shareholders. (b; lias not rt'Cei\ed deposits except I'roni its members or shareholders for tixed periods or payable at call, whether bearing- or not bearini; interest. (cj Does not nse its title without the addition thereto immediately before the word "■limited"" of the word "proprieta^3^" {(]) lias hied with the Registrar-General a written notice of tlie fact of such addition to its name. (ej Has received from the Registrar-CJeneral a certifi- cate that in his opinion the company has duly com- plied with the foregoing requirements up to the date of the certificate, and (f) Has published .'i copy of sUch certificate in the "Government Gazette."' Under the \'ictorian Companies Act, 1910, the term "pro- prietary company"' also applies to any company which (Ij By its Memorandum of Association (a) restricts the right to transfer its shares ; and (b) limits the number of its members (^exclusive of persons who are in the employment of the com- pany) to fifty, and (c) prohibits the company from receiving deposits except from its members or shareholders for fixed periods or payable at call, whether bearing- interest or not bearing interest; and (2) Has received a certificate of incorporation in which the Registrar-General certifies that the company is a proprietary company. Proprietary companies are exempt from a number" of pro- visions relating to public companies, e.g.. the restrictions on commencement of business already referred to. do not apply to this class of company. Returns. — The Crmipanies Act. which confers upon the members of companies the immense advantage of liniitcd liability, in turn imposes certain duties on the comjianies. Amf)ngst these duties is the i.ecessity of filing returns with the Registrar setting out information which it is only reason- able that persons lia\ing dealings with the company should 124 JOINT STOCK COMPANIES. be able to obtain. Directors and other officers of com[)anies should acquaint themselves with' the nature of these returns, and see that the statutory requirements necessary in this re- spect are complied with. These returns vary as to number in the different States, but in all the States every company limited by shares must file with the Registrar once in every year a copy of the Annual List and Summary . As to the details to be contained in this return, see the Acts of the various States. Return of Allotments. — in Victoria and New Zealand, when a company makes any allotment of shares, it must file with the Registrar a return of allotments stating: — (a) The number and the nominal amount of the shares allotted ; the names, addresses, and occupations of the persons to whom the shares have been allotted, and the amount paid or due and payable on each share ; and (bj In the case of shares allotted as fully or partly paid up otherwise than in cash, a contract in writing constituting the title of the allottee to the allot- ment, together with any contract of sale, or for services or other consideration in respect of which that allotment' was made, and a return stating the number and nominal amount of shares so allotted, the extent to which they are to be treated as paid, and the consideration for which they have been allotted. The return referred to must be filed with the Registrar within one month after allotment has been made. Published Statements.— In X'ictoria the Act imposes upon directors and managers the necessity of keeping proper books and of having the accounts audited at intervals of not more than fifteen months. After the Balance Sheet has been audited, a copy must be sent to the Registrar-General and to every member of the company at least seven days before the general meeting. A copy must also be posted up in the registered office of the company and in every branch office until the next balance day. Every creditor and share- holder is entitled to a copy on payment of a sum not exceed- ing sixpence. A private Balance Sheet, containing full de- tails of the information upon which the Balance Sheet issued to shareholders is based, must be prepared by the directors, and must be signed by the manager and at least two directors. A duplicate of such Balance Sheet, signed in the same way, 125 AUSTRALASIAN ADVANCED ACCOUNTANCY. must, within seven days after the meeting of the company, be deposited in a sealed envelope with the Registrar, endorsed with the name of the company and certified to by the auditors, and such envelope is only to be opened by order of the Court on the application of the Attorney-General or the liquidators on the winding-up of the company. In Victoria no person can act as auditor to any company unless he is licensed by the Company Auditors' Board. Foreign Companies. — Where a company is registered in one State and carries on the whole or any portion of its business in another State it is viewed in the latter State as a foreign company and is compelled to register as such in that State also, e.g., a company registered in Victoria but carrying on business in New South Wales must register under the New South Wales Act as a foreign company. The provisions as to the registration of foreign companies vary in the different States, but, generally speaking, it is necessary for the company to have an agent appointed and to file with the Registrar a copy of its Memorandum and Articles certi- fied to by a statutory declaration of such agent. 126. CHAPTER X, COMPANY ACCOUNTS. Coming now to the entries required in the hnancial books of a company, it is hardly necessary to point out that no variation of the usual procedure is required in connection with the bookkeeping relating to the trading portion of the busi- ness. The only difference will be with regard to the ac- counts representing the capital of the company. The English method of recording the opening entries has the merit of being exceedingly simple, but, as compared with that commonly used by accountants in the Common- wealth, and known as the "Australian" method, it is un- scientific and, to those who have experienced the advantages of the last-mentioned system, unsatisfactory in actual prac- tice. English accountants make no actual entries in the financial books until a call is made, when an entry is passed debiting a Call account and crediting Share Capital account with the amount of the call. As calls are paid Cash account is debited and the Call account credited. It is usual to keep some record of the amount of the company's authorised capital, its unissued shares and the uncalled capital in the form of memoranda in the books, but the private ledger of a company is hardly the place to make memoranda and, if it is found that this information is necessary and of value to the company, it is undoubtedly the better course to record the information in such a way that it will form part of the double en.try system of bookkeeping. The Australian method provides in ledger accounts all the information relating to capital which it is essential the directors should be able to ascertain without difficulty, and each item in the Balance Sheet is. in this way, represented by some actual ledger account, whereas, under the English method, some of the items included in the Balance Sheet are represented merely by memos. It is proposed, therefore, to explain in detail the opening entries in connection with the capital of a company, using the Australian method as being the better of the two. This explanation will perhaps be more easily followed if an imaginary company is dealt with and the entries traced through in their natural sequence. 127. AUSTRALASIAN ADVANCED ACCOUNTANCY. The X.Y.Z.: Co., Ltd., was registered with a capital of £50,000, divided into 50.000 shares of £1 each. The directors decide to offer 35,000 shares for sub- scription l)y the public, the sum of 4/ per share being payable on application, and 4/ per share on allotment. The whole of these shares are applied for by and allotted to various shareholders, and two months later a call of 2/ per share is made. It is tirst of all necessary to bring into the books the full authorised capital of the company, this capital being repre- sented by a credit balance in Authorised (or Nominal ) Capital account. The contra to this credit entry is an entry in Unallotted Shares account, as, at this stage, the authorised capital is represented merely by shares which have not been subscribed for by the public, but which the company has the right to issue. Set out in Journal entry form the opening entry would therefore appear as follows: — Unallotted Shares A/c, Dr £50,000 To authorised Capital A/c i:r)0.000 Being Registered Capital of the Company in 50,000 shares of £1 each, as set out in the Memorandum of Association. The directors having decided to issue and the public having subscribed for 35,000 of these shares, another asset is substituted for a portion of that represented by Unallotted Shares account, as the subscribers for these shares have made themselves liable to pay to the company the sum of £35,000. An account called Uncalled Capital account is therefore opened to represent this asset, and the amount of £35,000 is debited to that account. As 35,000 of the company's shares have now been allotted, the result is that the unallotted shares have been reduced by a similar number, and Un- allotted Shares account is therefore credited with £35,000, being the value of the shares issued to the public, in order to reduce the balance of that account to its correct amount. the Journal entry being as under: — Uncalled Capital A/c, Dr £2ri.,000 To Unallotted Share.; A/c 125,000 Ik'ing 25,000 shares of £1 each, Nos. 1-2.5,000, issued as per Directors' Minute Book, folio 3. It will l)e seen that the l)alaiK-e .if rncalled Capital ac- count must at any time represent the total amount owing by shareholders on the shares held by them, and it is also clear that every time a call is made on the shareholders the balance in Uncalled Capital account will decrease. As it has been decided by the directors that the sum of 1/ per share is pay- 128 COMPANY ACCOUNTS. able on application by the public and a further sum of 4/ on the shares being allotted to the public, an entry is passed debiting accounts representing the amounts so due and re- ducing the balance in Uncalled Capital account. Application A/c, Dr £5,000 Allotment A/c, Dr 5,000 To Uncalled Capital A/c HO.OOO Being the sum of 4/ per share payable on application and 4/ per share payable on allotment as per Directors' Minute Book, folio 4 The balance of Uncalled Capital account will now re- present the amount still uncalled on the shares held by the various shareholders. When payment of the application and allotment moneys has been received in cash from the shareholders the totals will be posted to the credit of Application account and Allot- ment account respectively, and, assuming that the whole of the allotment money has been received, these two accounts will then be closed off. The Cash Book of a newly-formed company should have the first few pages ruled so as to pro- vide separate columns for application and allotment money in order to enable the total amount received from share- holders in respect thereof to be ascertained without diffi- culty. In large companies, where there is any likelihood of the issue decided upon by the directors being oversubscribed, the procedure here mentioned will be slightly varied, but this is a matter* dealt with more fully in the next chapter. Two months later the directors decide to make a call of 2/ per share. This call will still further reduce the amount of Uncalled Capital so that this amount will have to be credited with the total amount of the call, the debit entry being rnade in an account opened to represent the amount owing by the shareholders in respect of the call. viz.. Fir.st Call account. First Call A/c, Dr £2,500 To Uncalled Capital A/c £2,500 Being Call of 2/ per share, on 25,000 shares as per Director.s' Minute Book, page 20. The total amount received in respect of this call will be posted from the Cash Book to the credit of First Call ac- count, and, assuming that all the shareholders meet their ol)ligations, the account will be closed oft'. The Balance Sheet of the company prepared at this stage would appear as under, and it is advisable to note carefully the form in wliich the Capital accounts are set out : — 129 AUSTRALASIAN A D \' A X C ED A C C O U N T A \ C Y. X.Y.Z. COMPANY, LIMITED. BALANCE SHEET AS AT 30th JUNE, 1920. LIABILITIES. ASSETS. Nominal Capital in Cash 12 500 50,000 ordinary Shares of £1 each .. £50.000 Le^s Unallotted shares 25,000 Subscribed Capital . . 25,000 Less Uncalled Capital 12.500 Paid-up Capital £12,500 £12,500 £12,500 Where a company has issued more than one class of shares, e.g., Preference and Ordinary shares, it is essential that these should be kept separate in the books, seeing that the rights of the respective classes of shareholders will in most cases vary considerably. This may be effected either by opening up a separate set of Capital accounts altogether or, preferably, by tabulating the various Capital accounts and supplying separate columns for the different classes of shares. The method of tabulating these accounts is illustrated in the example supplied at the end of this chapter. It will be noted that, even in the Journal entries, the distinction between the classes of shares should be made. Forfeited Shares. — Where a shareholder has failed to pay the calls on him in respect of the shares he holds the directors may, if authorised by the articles of association, forfeit such shares. It should be noted, however, that this power of forfeiture can only be exercised if specific provision enabling the directors to do so is included in the articles of association, and then only after due notice as prescribed by the articles has been given to the shareholder. This right of forfeiture can only be exercised by way of penalty on the shareholder and not for the purpose of relieving him from his liability to pay future calls on the shares. Even when shares have been forfeited the defaulting shareholder still re- mains liable to pay any calls made on his shares whilst he was a member. The effect of the forfeiture is that the shares revert to the companv and can be re-issucd and the company also retains any amounts which have already been paid on the shares. The amoimts so paid on the shares must be carried to a special Reserve account and left there, in any case, so long as the shares remain unissued. The shares may at 130 COMPANY ACCOUNTS. any time be issued at a discount not exceeding the amount g.lready paid on them, represented by the balance standing at the credit of the special Reserve account referred to. Where a discount of this nature is allowed, it will be necessary to transfer so much of the balance in the special Reserve account as equals the amount of the discount to the credit of Uncalled Capital account. Assuming that the shares have been re-issued either at par or at a discount less than the amount previously paid on the shares, the question arises as to the disposal of the bal- ance of the amount standing to the credit of Forfeited Shares Reserve account. The general opinion appears to be that, assuming there is nothing to the contrary in the company's Articles, the amount may be transferred to Profit and Loss account. Where the company's Articles provide, as is often the case, that no dividend shall be paid otherwise than out of the profits of the business, it is submitted that the profit on these shares could not be used in this way, as it can hardly be said that the making of profits on shares is part of the business of the company. Even although the transfer to Profit and Loss account may be neither contrary to the Articles nor illegal, it is advisable to allow the amount to remain standing at credit of the Forfeited Shares Reserve account. The entries in connection with the forfeiture of shares can best be explained by supplying an illustration. Let it be assumed in the first place that the directors of the X.Y.Z. Co., Ltd., have made a second call of 2/ per share, the Journal entry necessary to record this being: — Second Call A/c. Dr £2,-500 To Uncalled Capital A/c Jt2,500 After the time for the payment of this call has expired it is reported to the directors that the holders of 1000 of these shares have not paid the amounts due by them. On going into the matter the directors consider that one of the share- holders — the holder of 500 shares — will not be able to pay the amount required of him, and, after having given the notice required by the articles and exhausted all means of trying to obtain payment from him. they decide to forfeit the shares. The first entry required to record this forfeiture will be a debit to Unalloted Shares account for the full nominal value of the shares, £500, as these shares have now reverted to the company, and the directors have the right to reissue them. The next step is to take out of any other of the Capital ac- 131 A U S T R A L A S I A X A D \' A \ C E D A C C O U N T A N C Y. counts any amounts still outstanding on these shares. When they were issued, Uncalled Capital account was debited with £1 per share in respect thereof, but since then the sum of 12/ per share has been called up on the shares, and Uncalled Capital account has been credited with that amount. There still remains in Uncalled Capital account an amount equi- valent to 8/ per share on 500 shares. Second Call account will also require to be credited with 2/ per share, as it is not likely that the company will receive payment of this amount, and by this entry the amount which was originally debited to that account in re.'^pect of the shares is taken out. The two credit entries referred to represent 10/ per share, and the remaining 10/ has already been paid in cash, viz., 4/ on application, 4/ on allotment, and 3/ in respect of the first call. This 10/ per share already paid represents a profit to the company, as it has received this amount in cash and has noAv taken back the shares. The amount of £250 is therefore credited to a special Reserve account, viz.. Forfeited Re- serve account and the treatment of the balance of this account has already been dealt with. The following illustration sets out the above procedure in Journal entry form : — Unallotted Shares A/c. Dr £500 To Uncalled Capital A/c £200 Second Call A/c 50 Forfeited Shares Reserve A/c 250 Being 500 shares, Nos. 1251 — 1750 forfeited as per Directors' Minute Rook, folio 35. A Balance Sheet of the X.Y.Z. Co.. Ltd., prepared from the books after the additional Journal entries given above had been posted would appear as under. It will be remem- bered that the holders of 500 shares are still in arrears with their second call and that the amounts owing by them will be shown by the balance of Second Call account in the ledger. X.Y.Z. COMPANY LIMITED. BALANCE SHEET AS AT 30th SEPTEMBER, 1920. Nominal Capital . . . £50,000 Sundrv Assets £14,900 Less Unallotted Shares^ 25,000 Subscribed Capital . . 24,500 Less Uncalled Capital 9,800 Calledup ( apital . . 14,700 Less Calls in Arrears 50 Being .second call on .500 shares unpaid. £14.6.-)0 Forfeited Shares Reserve 2.50 £14,900 £14,900 132 C O .M F A X Y A C C O U N T S. Calls Paid in Advance. — The directors of a company may, if authorised to do so by the Articles of Association, re- ceive from any sliareholder payment in advance of the whole or any portion of the amount still uncalled on his shares. The Articles usually provide that interest is to be paid to such a shareholder on the amount su advanced, and this interest is payable whether the com])any is making profits or not. Upon the winding up of a company any shareholder who has paid calls in advance of those made by the directors is entitled to receive back the amount so paid before anything- is returned to shareholder.-^ in respect of Called-up Capital. Calls paid in advance should be credited to a separate account and shown as such clearlv in the Balance Sheet. Premiums on Shares. — In the case of a company which is in a flourishing condition, or which it is evident will pro- vide an investment better than ordinary, it is generally pos- sible for the directors to obtain a premium for the shares, or. in other words, to issue the shares at more than their face value. The amount of the premium is, in most cases, payable with the allotment money and the total amount so payable should therefore be debited to Allotment account. It is apparent that this premium must be dealt with in a dififerent manner from the actual allotment money, which will of course be credited to Uncalled Capital account, as the premium does not form part' of the nominal value of the shares. Such portion of the allotment money as represents the premium must be credited to a separate account, "Pre- mium on Shares account." and the question arises as to the ultimate disposal of the l)a!ance of this account. There can be no doubt that the safest course to follow is to allow the amount so received to remain at the credit of the Premium on Shares account and treat it as a special reserve, although the general opinion is that it is not illegal, subject to any provision to the contrary in the Articles of Association, to distribute the amount so received as a dividend amongst the shareholders at any time. It is thought that, seeing that the amount received by way of premium on the shares is. strictly speaking, a capital receipt, there might be some doubt as to the legality of so treating the premium, and from a director's point of view the wisest course to adopt is to allow the amount to stand as a special reserve in the books. In A'ictoria the Companies Act provides that no com- pany shall issue shares at a premium until it has been in existence at least twelve months and that all premiums on shares must be carried to a Special Reserve account. Neither A .U S T R A L A S,l A N ADVANCED A C C O U N T A N C Y . preiiiiunis on shares nor the amounts paid on forteited shares should be transferred to general Reserve account, as the bal- ance of this account may at any time be re-transferred to Appropriation account and the amount of the reserve distri- buted among-st the shareholders by way of dividend. Discount on Shares. — It should he remembered that shares cannot be issued at a discount. ICvery person who takes up shares in a company undertakes that he will pay the full nominal value of those shares in cash to the com- pany unless a contract has been filed with the Registrar of Companies at or before the issue of the shares, showing that the shares are issued for a consideration other than cash . Shares cannot therefore be issued without consideration either as fully or partly paid up. Many attempts have been made to get behind the rule that shares must not be issued at less than their full nominal value. There is nothing to prevent debentures being issued at a discount. One com- pany hit upon the brilliant idea of issuing debentures repay- able on demand at less than their normal value and inserted a provision in the debenture deed that the debenture holder should have the option of accepting repayment of the face value of the debentures in shares. This clause in the debenture deed was, however, held to be ultra vires, being looked upon as an attempt to issue shares at a discount by indirect means. If the company is authorised to do so by its Articles there is nothing to debar it from paying the usual comniission to a broker for placing its shares. This commission should not, generally speaking, exceed 2^ per cent. In Victoria and New Zealand the Act authorises the payment of any rate of commission for under- writing, taking or placing shares, provided the rate paid is authorised by the Articles and disclosed in the prospectus. There is, of course, nothing to prevent a company in any State from paying whatever rate of commission it pleases out of profits. It should be noted, kowever, that in Queensland a com- pany which has been in existence for more than twelve months may issue shares for less than their face value pro- vided there is an agreement in writing to support the con- tract. Watering Capital. — This is the ])roccdurc which has not been uncommon during the present run of good seasons. •Some companies, more particularly those which have mono- polies, have been so prosperous that the directors have had great difficulty in deciding how to dispose of the profits, as 134 COMPANY A C C O U N T S. it is not considered desirable to make it appear that a divi- dend of more than, say, 10 per cent, or 12 per cent, on the issued shares has been earned. Assets have been written down, in some cases, to about one-fourth their actual value, so creating secret reserves, and other reserves have been accumulated to an extent greater than the most conservative investor would deem necessary. When a company reaches this stage the directors may decide to adopt the course com- monly known as "watering the capital," i.e., they provide for the issue of further shares pro rata to the present shareholders g.nd at the same time declare, oi* call a meeting of the com- pany to declare, a dividend payable out of the reserve. This dividend is applied in payment of the shares so issued, so that the watering has a twofold efTect. Firstly, it reduces the amount of the reserve to more reasonable pro- portions, and, secondly, it increases the paid-up capital of the company, so that in future, even if the amount of profits remains the same, the percentage of profits on the paid u]) capital will be considerably lower. The shareholders will tliereafter receive a larger amount in dividends, although ap- parently the rate of profits earned by the company has de- creased. Instances might be quoted where the original share- holders of companies, although only receiving a dividend of, say, 10 per cent, on their present holdings, are actually re- ceiving about 50 per cent on the cash paid by them for their shares. The bookkeeping in connection with the procedure illus- trated above is very simple. An entry will be passed debit- ing Uncalled Capital account and crediting Unallotted Shares account with the face value of the shares to be issued. A transfer will then be made from Reserve account to the credit of Bonus Dividend account and, when the shares are issued to the shareholders, another entry will be passed debiting Bonus Dividend account and crediting Uncalled Capital account. Dividends. — The Articles of a company usually provide that the dividends are to be declared by the company in general meeting. The amount of the dividends is generally recommended by the directors, but the actual declaration of the dividends will be made by resolution of the shareholders themselves. In some cases the Articles provide that the power of declaring dividends rests with the directors : but, even although this is not the case, the directors generally have the right under the Articles to make such reserves as they think necessary out of the profits before the amount available for dividend is shown . 135 A U S T R A L A S I A N ADVANCED A C C O U N T A N C Y. Table "A" of the Companies Act in each State, except Victoria, provides that dividends are to be paid to share- holders in proportion to the nnml)er of shares held by them respectively, i.e., irrespective of the amounts paid on the shares, but it is more usual for the articles of a company to make provision that the dividends arc to l)e paid to the shareholders by way of percentage on the amount paid up on their shares. Where a dividend has been declared the amount should be transferred from Appropriation account (not Profit and Loss account, seeins4- that this is an appro- priation of profits) to Dividend account. In many cases a separate Bank account is kept for dividend purposes and, where this is so, a correspondins^' amount will be witlulrawn from the ordinary Bank account and paid into the "Dividend account." As the warrants issued to the shareholders are paid the amounts will be posted to the debit of Dividend account in the Private ledger, the balance of that account figreeing always with the balance of the special Dividend account at the bank. The procedure in connection with the payment of dividends is dealt with in detail in the next chapter. Increase of Capital. — Where the whole of the shares making up a company's registered capital has been taken up by shareholders, provision is contained in the Companies Act to enable a company desirous of issuing further shares to increase its capital. Any such increase must be notified to the Registrar of Joint Stock Companies and the alteration of the authorised capital included in every copy of the Memorandum issued thereafter. Where it is desired to "water" the capital by issuing bonus shares, in the manner indicated under a previous heading, it may be found that the company has not sufficient shares available, and this will necessitate an increase in the capital of the company. When capital has been increased it will be necessary to pass an entry debiting Unallotted Shares account and crediting Authorised Capital account with the nominal value of the shares. Debentures. — Where a company desires to borrow money the usual procedure is to provide for an issue of debentures, as this forms a convenient means of raising and securing the loan. In order to enable the directors of a company to borrow money in this or any other way. it is necessary that they should have authority to do so by the Articles of Association, although it has been held that, in the case of a trading company, the directors have the implied authority to borrow money for the purposes of the company, even where no express provision to that effect is contained in the 136 C O M P A X Y A C C O U N T S. Articles. A debenture is an acknowledj^ment by deed of the leceipt of money and generally, but not necessarily, gives the holder some security over^ an\- one or more of the assets of the compau}-. A debenture usually contains provisions as to the date of repayment, the rate of interest payable, and sets out generally the conditions under which it is issued. Where a debenture gi\es no charge o\er any of the assets of a compan}" it is known as a "naked debenture," but in most cases debentures issued give a mortgage over the Avhole or part of the assets of a company. In some cases de- bentures are issued under a trust deed wherein a trustee for the debenture holders is appointed. This trustee looks after the interests of the debenture holders and, should the com- pany commit a breach of any of the provisions contained in the deed, action will be taken against the company l)y the trustee on behalf of the debenture holders. The holders of the debentures are generally registered in the company's books and, in the event of a debenture being sold, the change of ownership must be registered in the books of the compau}- before the company will recognise the new holder. Debentures may, however, be issued pay- able "to bearer," and these are transferable by delivery. It has been held in an English case that debentures payable "to bearer" are negotiable instruments, so that any person who has received such a document in good faith and for value and without notice of any defect in the title of the person from whom he received it, acquires a good title thereto and may, on the maturity of the debenture, demand payment of the amount from the company. Debentures may be issued at par. at a discount, or at a premium, there being no restriction as in the case of shares on issuing debentures at a discount, as they do not form part of the capital of the company. The amount received from debenture holders, while it is sometimes called working capital, is, of course, a loan by the debenture holders to the company and is not, strictly speaking, capital . Debentures payable to bearer will not require any detailed record in the books of the company, but where registered debentures are issued it is necessary to keep a Debenture Register in which full descriptions of the various holders and the number of debentures held by them are recorded. This portion of the procedure is explained fullv in the next chapter, but it is pro- posed to deal here with the entries required in the company's Private ledger. Upon receipt of the applications and deposits from the persons desiring to acquire the debentures of a company an 137 AUSTRALASIAN ADVANCED ACCUUNTANCV. entry will be passed debiting Sundry Debenture-holders' ac- count and crediting Debentures account, or Mortgage De- bentures account, as the case may be, the an-cunt of the deposit being credited to Sundry Debenture-holders" account. Upon repayment of the debentures cash will be credited, and Debentures account del)ited, closing the latter account olY. Debentures Issued at a Discount. — It is cica; that a company must repay to the debenture holders the full nominal value of the debentures irrespective of the amount it agrees to accept in the first place as payment therefor, and it is therefore necessary that the Debentures account should, from the time of issue of the debentures, show the full liability of the company in respect thereof. The amount of the dis- count allowed on the debentures should be debited to Dis- count on Debentures account, which account must be trans- ferred to Profit and Loss account. It is neither usual nor advisable to charge this amount against the profits of the year in which the debentures are issued, but a proportionate amount of this discount should be written olT to the debit of Profit and Loss account each year during the currency of the debentures. The following will show the entries to be pass- ed by a company which has issued 100 debentures of £100 each at !)8 :— Sundry Debenture-holders A/c, Dr £9,800 Discount on Debentures A/c 200 To Debentures A/c £10,000 Being issue of 100 Debentures of £100 each to Sundry Debenture-holders at a discount of 2 per cent. Assuming that the above debentures have a currency of ten years, the sum of £20 will be written off the balance of Discount on Debentures account against the profits of each year. Debentures Issued at a Premium. — The premium re- ceived on debentures may be credited to Profit and Loss account, and where it is desired to adopt this course the amount of the premiums should be spread by crediting a pro- portionate amount of the premium to each year's Profit and Loss account during the currency of the debentures. It is more desirable, however, to transfer the amount of the pre- mium to Reserve account, or to utilise it for the purpose of writing down items such as Goodwill or Preliminary Ex- penses in the books. Assuming that, in the illustration al- ready supplied, the debentures, instead of having been issued at J)S, are issued at 102, the Journal entry would be as fol- lows : 138 COMPANY ACCOUNTS. Sundry Debenture-holders A/c, Dr £10,200 To Debentures A/c ' £10,000 „ Premium on Debentures A/c 200 The annual interest payable on the debentures must, of course, be charged against each year's profits, and, where balance-day occurs in between two payments, accrued interest must be brought into account. The method of providing for the repayment of debentures out of profits by means of a sinking fund has already been dealt with under the heading of "Sinking Funds" in Chapter VIII. "CONVERSION" OF PRIVATE TRADING CONCERN INTO A LIMITED COMPANY. The term "conversion," although commonly used in this connection, does not correctly describe the procedure. What actually occurs is that a limited company is registered and an arrangement is entered into whereby the proprietor of the business agrees to sell to the company and the company agrees to purchase from the proprietor, so that strictly speaking, the transaction is not a conversion, but an out-and- out sale on the part of the proprietor and a purchase on the part of the company. In Example 6, the entries in the books of a partnership which has decided to sell to a limited company are shown, and it is now proposed to deal with the procedure from the point of view of the company. The terms under which the transfer of a business to a company takes place will be included in an agreement which may set out in full the assets, and liabilities to be taken over by the company, or it may merely refer to a Balance Sheet attached to the agreement upon which the transfer is based. The agreement will also state the considera- tion to be paid to the vendors and the nature of the considera- tion, whether cash, shares or debentures. This contract when signed by the vendors and the directors or trustees on behalf of the company, will constitute the title of the vendors to the shares agreed to be issued to them, and it will not be ne- cessary for them to make formal application for those shares, nor will any resolution by the directors to allot the shares to the vendors be required. Where a detailed list of the assets and the price to be paid for each is set out in the agreement the entries in the ^ooks of the company will be based upon these figures, but very often the agreement provides that the business will be taken over from the vendor on the basis of a Balance Sheet attached to the agreement and the consideration will be set out in a lump sum in the agreement. 139 A U S T R A L A Si 1 A N ADVANCED ACCOUNTANCY. AVhere the former course is adopted the assets will be brought into the books of the company at the values named in tlie agreement, but if the latter course is followed the book- keeper will have no option but to bring the assets into the company's books at the amounts at which they appeared in the Balance Sheet referred to. An entry will be passed debit- ing accounts representing the various assets and crediting the Vendor's account. If the company assumes the liabilities of the business the \'endor's account will be debited with the total and accounts representing the sundry liabilities credited. The balance remaining in the Vendor's account will then re- present the amount to be paid in shares, cash or debentures. In some cases it will appear that the company is paying to the vendor an amount exceeding the difference between the li- abilities and assets taken over and, although the item Good- will is not specially mentioned, it is obvious that any addi- tional payment must be for goodwill, as a company cannot issue shares without consideration. (See Example 9.) It sometimes happens that a company apparently pays less than the amount of the assets as valued in the Balance Sheet attached to the agreement. Where such is the case it will be necessary to look closely into the assets disclosed therein and see whether this is caused by the fact that the assets are not actually worth the values stated in the Balance Sheet, or whether the company has made a particularly good bargain on the purchase. In either case the result will be that, after the vendor has been paid the agreed amount in cash, shares, etc., there will be a credit balance in his account and, if the assets are not worth the amount at which they have been included in the books, this credit balance should cither be applied towards reducing th^m, or, if this be not practicable, transferred to a Reserve for Depreciation account. On the other hand, if the credit balance in the Vendor's ac- count is of the nature of a profit on the purchase, the amount should be transferred to Reserve account. (See Example 10.) Where the shares allotted to the M'tidors are issued as fully paid up the credit entry will be made direct to I'nallotted Shares account, as it is not necessary to put such shares through the Uncalled Capital account, but where the shares are issued as only partly paid up the latter course will be adopted, i.e., the full value of the shares issued will be debited to Uncalled Capital account, and credited to Unallotted Shares account. The vendor will then be debited with an amount equalling the pairl up proportion of these shares and Uncalled Capital account will be credited. The balance still remaining uncalled on these shares will then show in the last-mentioned account. 140 C O M P A N Y A C C O U N T S. As shares issued to a \eii(li>r umler circumstances such as are indicated above are issued iur a consideration other than cash, it is necessary thai the agreement be filed with the Registrar of Companies, at ur l)efore the issue of the shares m Victoria and New Zealand within one month after al- lotment) otherwise the vendor may find himself liable upon the winding up of the company to pay up the amount ot these shares in cash. it frequently happens, more especially in companies oi a private nature, for whose shares the public is not invited to subscribe, that the vendor of the business and the principal shareholder in the company are one and the same person. in such a case, it is advisable to have the company registered before the date on which the transfer takes place, as the agree- ment can then be executed by the vendor and by the company prior to the date of the actual transfer. Where this is done, It will not involve the necessity for making an adjustment in connection with profits earned prior to incorporation, a matter dealt with under the next heading. When a company is being floated, either for the purpose of taking over a business already in existence or for starting a new concern altogether, and it is desired to invite subscrip- tions from the public, it is often not advisable to register the company until it is fairly certain that sufficient shares will be taken up to make the flotation a success. This will save re- gistration fees in the event of the flotation proving a failure, but it has a corresponding disadvantage in that the proposed company cannot enter into any contracts until it is registered, seeing that a body which is not legally in existence cannot bind itself by an agreement. It is, however, necessary tnat the promoters should have some agreement binding on the vendors, so that, after ap- plications for sufficient shares have been received and the company is ready to commence business, they >vill have no opportunity of repudiating their part of the arrangement. It is necessary, in such a case, to appoint a trustee for the com- pany who will enter into the contract with the vendors on be- half of the company and provision will be made in the Me- morandum for the company, upon registration, to execute an agreement adopting that entered into by the trustee on its be- half. Profits Prior to Incorporation. — It often happens that the agreement l)etwecn the vendor and the company provides that the company has to take over the business as from a date prior to that on which the company is registered. The company may in the agreement undertake to pay the vendor a fixed sum for 141 AUSTRALASIAN ADVANCED ACCOUNTANCY. the assets as on the date from which the company takes over and the question arises as to the proper disposal of any profits earned in between the date of takin.t,^ over and the date of registration of the company. It is clear that the company has purchased, in addition to the ascertained assets, the benefit of the unknown profits and the assets representing such profits form part of those pur- chased with the capital of the company. Should such profits be divided amongst the shareholders it would amount to a distribution of capital. Sometimes the agreement may pro- vide that the company is to hand over an estimated amount for the profits made during the period mentioned and, where such is the case, the amount so paid will be transferred to the debit of the company's Profit and Loss account at the end of the year, the result being that the net profit then disclosed by the Profit and Loss account will be available for dividend pur- poses. Where, on the other hand, no such arrangement has been made, the profits for the intervening period must be esti- mated as closely as possible, usually by calculating the gross j.rofit in proportion to the turnover for such period and de- ducting a proportion of the expenses for the whole year ac- cording to the length of the period. The amount so estimated should" be charged to the Profit and Loss account at the end of the year and either carried to a Special Reserve account, or written ofT the account representing the goodwill, if any, paid to the vendor. EXAMPLE No. 9. — A limited company was formed to take over the business of a private firm whose balance-sheet the date of transfer appeared as under: LIABILITIES. ASSETS. Trade Creditors £52,500 Cash Balance £500 Capital 640,000 Bank Balance 26.500 Book Debts 90,000 Works in Progress 132,000 Materials and Stores 23,500 . Land, Buildings, and Plant 420,000 £692,500 £692,500 'I'lu' i)urcliase ])rice agreed upon was £800,000. payable as follows: — £200,000 in fully paid preference shares, £100,000 in fully paid ordinary shares. £200,000 in deben- tures, and the balance in cash. The capital of the company was 300,000 preference shares of £1 each, 200,000 ordinary shares of £1 each, and it was decided to issue in all 4 per cent, debentures amounting to £400,000. The capital, other than that issued in part ])aynicnt of the pnrchase money, was 142 COMPANY ACCOUNTS. payable 4/ per share on application, 4/ per share on allotment, and 4/ per share two months after allotment. The deben- tures, other than those issued to the vendors, were payable 10 per cent, on application, and the balance on issue of the de- bentures a few days later. Make the necessary entries in the company's books. JOURNAL ENTRIES. Unallotted Preference Shares A/c Dr. £300,000 Ordinary Shares A/c Dr. 200,000 To Nominal Capital A/c Dr. £500,000 Being the Capital of the Company as per Memorandum of Association. Sundry Assets — Land, Buildings, and Plant Dr. £420,000 Materials and Stores •. Dr. 23,500 Works in Progress Dr. 132,000 Book Debts Dr. 90,000 Bank Balance •• •■ Dr. 26,500 Cash Dr. 500 To Vendors' A/c £692,500 Being Assets taken over as per Contract dated Vendors' A/c Dr. £52,500 To Trade Creditors £52,o00 Being Liabilities taken over, as per Contract dated Goodwill A/c l^r- i^lOO.OOO To Vendors' A/c £160,000 Being Value of the Goodwill of business taken over from Vendor. Vendors' A/c i^i-- i;50O,0O0 To Unallotted Preference Shares A/e .. .. £200,000 Unallotted Ordinary Shares A/c lOD.OOO Debentures A/c 200,000 Being Amount Payable to Vendor in Share's and Debentures as per Contract dated.. Uncalled Preference Capital A/e Dr. £100,000 Ordinary Capital A/c Dr. 100,000 To Unallotted Shares A/c £200,000 Being shares issued as per Directors' Minute Book folio Application A/c (Preference) D"'- £20,000 „ (Ordinary) Dr. 20,000 To Uncalled Capital A/e W0,000 Being 4/ per share payable on application as. per Directors' Minute Book folio 143 A U S T R A L A S I A X A D \' A X C ED A C C O U N T A X C Y. Allotment A/c (Preference) Dr. £20,000 „ (Ordinary) Dr. 20,000 To Uncalled Capital A/c £40,000 Being 4/ per share payable on allotment, as per Directors' Minute Book folio Sundrv Debenture Holders Dr. £200,000 To Debenture A/c £200,000 Being amount of Debentures issued, as per Direc- tors' Minute Book folio, and applied for by Sundrv Debenture Holders. Cash A/c Dr. £100,000 To Application A/c £40,000 „ Allotment A/c , 40,000 ., Sundry Debentures Holders' A/c . . . . 20,000 Being cash recei^"ed as above. Cash A/c Dr. £180.000 To Sundry Debenture Holders' A/c £1S0,000 Being Cash received on issue of debentures to De- benture Holders. First Call A/c (Preference) Dr. £20,000 „ (Ordinarv) Dr. 20.000 To Uncalled Capital A/c .. .. .. £40,000 Being 4/ per share, payable as per Directors' Minute Book folio Cash A/c Dr. £40.000 To First Call A/c £40.000 Being cash received as above. Vendors' A/c Dr. €300,000 To Cash A/c £300,000 Being amount of cash paid to Vendors. 144 C O M P A \ \' A (■ C O U X o o 88 8 8 CO (M 88 o o o o c o o o o o rt< -rf -^ QC 88 [8 C 3 O O § I 8888 8 ( o o o o I c 1 o o o o" ! o I (M 5 ' .< < > O jOO Being Profit on Purchase of Business. Or. if the apparent profit is due to the fact that the as- sets are estimated not to be worth the amounts at which they appear in Buckley's balance-sheet, the final entry would be as under : — J.Buckley Dr. £500 To Reserye for Depreciation .A/c . . . . £500 CHAPTER XL COMPANY ACCOUNTS.— (Continued). STATISTICAL RECORDS AND THE BOOKKEEPING RELATING THERETO. The keepini; of the statistical records of a company forms a very important part of the work necessary to the proper conduct of the company's affairs. Some of the 1)or)ks described in this chapter must be kept in order to comply with the re- quirements of the Companies Act and the omission to keep these books may render the company and its officers liable to pay heavy fines. In practice it is found necessary to keep statistical records other than those prescril^ed by statute, and a description of these books will also be found herein. This class of work is usually performed by or under the super- vision of the secretary of the company, as he is in most cases made responsible for their correctness. Except in very large companies, the duties of accountant and secretary are often combined, and it is necessary, therefore, that anyone desirous of qualifyino; for a position of accountant to a company should have a thorou.y-h knowled,s:e of such work. It should be remembered that, generally speaking, the statistical books do not form part of the double entry system under which all financial liooks are included, and, this being the case, additional care must l)e exercised to see that these books are kept correctly, as the same degree of check cannot be obtained as in the case of the ordinary tinaiicial l)iH)ks. The l)fH)ks referred to will in most cases consist of the following:— Application and Allotment Rooks, Share Register. Register of Transfers, Call Rook. Dividend Rook. Rc-ister of Mortgages and Debenture Register, and it is proposed to d^al witli these in the order named. Application and Allotment Book.--Refore or uj^on the registration of the c<«mi)any the promoters or directors will, nnlcss the companv is t.. 1)e ..I ;i i)rivate nature, invite appli- cations for shares from tlie pnl)lic by the issue of a prosjiectus and (itlier advertisements. The .ipplicatii )ns for shares, which 148 (■ OMP .\ X \- S T A T 1 S T 1 C A L BOOKS. 149 A U STR ALAvSIAX ADVANCED ACCOUNTANCY. must in each case he accompanied hy a deposit equaHinj^- the amount payable on application, are numbered consecutively as received and entered in that order in the Application and Allotment Book, a specimen page of which is supplied here- with. In some cases it is provided that the deposit on ap- plication is to be lodged with the company's bankers and not sent to the company and, where this is so, the application forms forwarded to the company must be accompanied hy the banker's receipt for tlic amount of the deposit. The Cash Book should be provided with a special column headed "Application Money." in order to enable the total amounts so received to be readily ascertained and the de- ' posits received will be entered in the Cash Book in that column and lodged with the bank, if the amounts have not been handed to the bankers by the applicants themselves. The total of the Application column in the Cash Book should, if the issue has been oversubscribed, be posted to an account in the Private Ledger called "Deposit on Application Account," but in other cases may be posted direct to the credit of Ap- plication account. It is thought that a perusal of the follow- ing explanation, together with a study of the accompanying illustration, will make the keeping of this book perfectly clear. The amounts of the deposits accompanying the a]:)plic.?- tion forms will be entered alongside the names of the appli- cants in the column provided therefor. When sufficient ap- plications are received the directors will then meet in order to deal with such applications and to allot shares to the various applicants. Where the issue is oversubscribed (i.e., where applications are received for more shares than the directors desire to issue), it is desirable to draw up a proposed allot- ment beforehand in order to save time at the directors' meet- ing. For this purpose the column headed "Proposed .\llot- ment" will be found useful. As the treatment of an over- subscription is a little more complicated than where the exact number of shares which it is desired to issue are applied for. it is proposed to deal with the procedure on the assumption that there has been an over-subscription. The decision of the directors as to the number of shares to be allotted to each applicant should be entered in the Minute Book and also in the "Shares Allotted" column, the distinctive numbers of the shares allotted to each shareholder being inserted alongside in the columns set apart for that purpose. When tlie iiunil)cr of shares to be allotted to the respec- tive shareholders is known, the actual application money (as distinct from the deposit on application) due from each share- holder can then be ascertained. In those cases where ap- 160 COMPANY STATISTICAL BOOKS. plicants arc allotted the exact luimher of shares a])plied lor the application money will be the same amount as the deposit paid. Where they have been allotted a lesser number the application money will, of course, be the amount payable in respect of the actual nimibcr of shares allotted to them. At this sta_G:e a Share account will be opened for each shareholder in the Share Register and the necessary particu- lars inserted therein as illustrated in the specimen of that Register supplied in this chapter. The amount payable by each shareholder on application will be entered in the Apj^li- cation and Allotments Book in the column headed "Applica- tion Money," and the amount will be posted to the debit of his "Call Account" in the Share Register as explained later. A Journal entry will then be passed transferring the total of the "Application Money" column from the Deposit on A])- plication account to the credit of Application account in the Private ledger. Each shareholder will now be credited in his Call account in the Share Register with the amount of the application money on his shares. This credit entry should be posted from the Application money column in the Application and Allotment Book in preference to being posted from the Cash Book, seeing that the amount entered in the Cash Book is the deposit on application which, as already explained, may not be the same amount as the actual Application monev. To those applicants to whom shares have been allotted, notices must be sent. It is important that this notice should be given to the allottees seeing that these letters form the ac- ceptance of the offer made by the applicants to take shares in the company and. until their applications have been accepted and they have been notified of this acceptance, their applica- tions can be withdrawn. These letters, exact copies of which should be kept, are numbered consecutively, and the num- bers inserted in the Allotment T.etter No. colunui. The full amount payable on allotment b^- each shareholder is then in- serted in the column lieaded "Allotment money." and the amount posted to the debit of the respective shareholders in their Call accounts in the Share Register. Letters of Regret will be sent to those applicants whose applications have been refused, and the numbers of such letters should be entered in the Letter of Regret No. column. Where shareholders are allotted less than the number of shares for which they applied the surplus amount paid by them on application \\\U usually l:>e applied towards pa^•mcnt 151 A I- S T R A L A S : A X A D \' A \ C E D A C C O I' X T A X C >' . of the allotment money and the amonnt so applied in o:ich case will be entered in the special column set apart for that purpose. The amounts in tliis column will then be i)osted to the credit of the Call accounts of the shareholders affected and a Journal entry will be passed for the total of this column. debitin.G: Deposit on Application account and crcdit- \n<^ Allotment account. Where applications have been refused the applicants will have the amount of the deposit paid by them refunded. Any such payments will be posted from the credit side of the Cash Book to the debit of Deposits on Application account and, assuminjj that the above mentioned Journal entry has already been passed, this account will then be closed off. Where more than one class of shares is issued, separate Application and Allotment Books, or separate portions of the same book, should be used for the purpose of recordin.^- the applications received and the procedure, mutatis mutandis, will be tlie same as that described abo\e. As each issue of shares is completed the Application and Allotment Book should be totalled. The total of the three columns headed "Application Money," "Surplus Deposit. &c.," and "Deposit Returned" must ecpial the total of the "Deposit on Application column." In this way scmie check is ol)tained on the accuracy of the entries in the book. W'here shares are to be issued to \cndors it will not be necessary, nor is it usual, for the vendors to make formal ap- l)lication for the shares, but it is advisable to make an entry for the shares issued in the Application and Allotment Book. Similarly the subscribers to the memorandum do not require to make application for the shares set opposite their signa- tures therein, but. here again, it is advisable to enter the shares taken in this way in the Application and .\llotment Book in order to keep a complete record therein of the whole of the shares issued. Share Register. — As mentioned in Chapter TX., the Coni- ]janies .\ct i)rescribes that every company must keep a Regis- ter of Members, and the information which must be containcil in this book has alread\' been supplied. It is essential that e\ery C()mi)any should keep accounts showing the position of the members with regard to the num- ber of shares held by them respectively and the amounts i^aid on those shares. For this ])urpose a Sh;u-e Register is usually 152 C O .M P A X \' S T A T 1 S T I l' A L B () O K S. kept, and, as most of the information to be contained in the Register of Members would be duplicated in the Share Regis- ter, it is the practice to combine these two books and to in- clude in the Share Register all the particulars required by the Companies Act to be set out in the Register of Members. This renders the keeping of a separate Register of Meml)ers unnecessary. A specimen page of a Share Register is supplied herewith and the method of keeping this book will, it is thought, be understood without difficulty. The Share account will be written up either from the Application and Allotment Book or from the Register of Transfers. The first two items in the debit column of the Call account wall be entered up from the Application and Allotments Book, as already explained, and subsequent entries will be made from the Call Book. Items in the credit column will be posted from the Application and Allotment Book, or from the Cash Book as the case may be. Where a compan}- has issued more than one class of shares a separate register should be kept for each class. Where one person is the holder of more than one class of shares reference should be made in his account in each re- gister to the fact that he is entered also in the other register or registers. If the shares held by a shareholder have been forfeited for non-payment of calls, a memo, to this effect should be made in a conspicuous manner in red ink on the page set apart for that shareholder in the register. This memo, should be made both under the Share account and the Call account and particulars given as to the reason for the forfeiture, together with a reference to the folio in the Directors' Minute Book containing the resolution. A number of pages at the end of each register should be supplied with a different ruling in order to record the An- nual List and Summary required by the Companies Act to be kept in the same book as the Register of Members. This annual list and summary is very often confused with the in- formation w^hich has to be supplied to the Registrar of Com- panies, but it should be remembered that this annual list, etc., is the record kept in the Share Register and that it is only a copy which lias to be supplied to the Registrar. Register of Transfers. — I'ro\isions as to the transfer of shares and the right of shareholders to dispose of their shares either by sale or otherwise are contained in the Articles of Association of all companies. The form of transfer to l)e .153 AUSTRAbA^lAX ADVANCED ACCOUNTANCY. H (/> I— I o Pi CO Q < CO m w o (^ w H CO l-H o w ^ '^ i^ I V $ ^ ^TT ^^ -^ k4 ^ lo 'i '>! ^O :? ^ -^^ 14 5 I 154 COMPANY STATISTICAL BOOKS. executed usually follows very closely that provided in Table "A" of the Companies Act. Every transfer of shares must be passed by the directors of the company and in most pub- lic companies no difficulty will be found in effecting a trans- fer provided the transferee is a reputable person. In com- panies of a private nature it is common to have more restric- tive provisions contained in the articles and very often share- holders in such companies are prohibited from transferring their shares unless they first ofifer to sell them to the present shareholders in the company. The extent of the restrictions will, of course, depend in every case upon the provisions con- tained in the articles. The transfer form must be signed by both the transferror and the transferee and should be left at the office of the com- pany in order to enable it to be brought before the next meet- ing of directors. It should be accompanied by the share cer- tificate of the transferror as, should the transfer be passed' by the directors, this certificate must be cancelled and, if only part of the shares contained in the certificate are transferred, a new certificate will be issued to the transferror. When a transfer has been authorised by the directors it should be entered in the Register of Transfers, a specimen ruling of w^hich is given herewith, and this will form the basis of the entry in the transferror's account, reducing the balance of the shares shown in his Shares account, and of that open- ing up an account for the transferee. It might be noted here that the Companies Act provides that a transfer may be re- gistered at the request of either the transferror or the trans- feree, but it is, of course, essential that the transfer should be signed bv both parties before it is lodged at the office of the company. Calls Book. — Where a resolution has been passed by the directors making a call it w^ill be necessary to prepare a list of the shareholders w-hose shares are not fully paid up in the Calls Book. This book should show the Share ledger folio, names and addresses of the shareholders, the numbers of shares held by them respectively, the amount of the call, the number of notice sent, and a column for the date on which the calls are paid. Notices as prescribed by the Articles must be sent to the various shareholders. These notices will state the amount of the call per share, the date when the call is payable, and the place where payable. From this book each shareho'der wll be debited in his Call account with the amount of the call, entries being made in the Private ledger, debiting First, 155 A U S T R A L A S 1 A X ADVANCED ACCOUNTANCY. n,. ^I";? IJ ^ < l£fl C O M P A N Y vS T A T I S T I C A L HOO K S. Second or Third Call account, etc.. as the case may be, with the full amount of the call and creditin.^" Uncalled Cai)ital account. A special column for the call should be provided in the Cash Book and as the amounts are received from the share- holders they should be entered in this column and posted to the credit of the respective shareholders' accounts in the Sliare Res^ister. The total of the Call column will be posted to the credit of the Call account in the Private lcd,<;er. Dividend Book. — Where a company lias issued only one class of shares the Dividend Book may be ruled in a manner very similar to the ordinary Day Book. Columns should be provided for the names and addresses of shareholders, the number of shares held, the amount paid up, the amount of dividend payable and the number of the dividend warrant issued. It is also advisable to provide a column showing the date when the dividend warrant was paid by the Bank and this column should be marked ofif from the Bank pass book. This will prove useful in enabling the company to ascertain without difficulty the lioldcrs of any warrants outstanding. The total of the "Amount Paid" column should agree with the paid-up capital of the company, and that of the "Dividend" column with the total amount of the dividend ])ayabk'. Where, however, the company has two or more classes of shares, say Ordinary and Preference, it is usual to include the dividends on both classes of shares to those shareholders who hold both Ordinary and Preference Shares, nn the one dividend warrant, and it is necessary to duplicate "The Number of Shares held" and the "Amount paid up on Shares" columns, the first set being utilised for Ordinary Shares and the second for Preference Shares. Register of Mortgages. — As mentioned in Chapter IX.. every company is required to keep a register containing par- ticulars of all mortgages or charges o^•er any of the property of the company. This book must set out the date when the mortgage was given, the amount secured by the mortgage or charge, and the names, addresses and occupations of the mort- gagees or persons entitled to the charge. It is open to the inspection of any member of the company and of any creditor. The failure to enter a mortgage in this register does not make the mortgage void, but any director, manager or other officer of the company who wilfully authorises or permits the omis- sion incurs a heavy penalty. It should be noted that an entry in the Register of Mortgages is required even where the com- 157 K AUSTRALASIAN ADVANCED ACCOUNTANCY. pany has ijiven no actual iiisininient creatinj^^ tlie char.ue. Particulars must be entered in the Ret^ister of Morts;a,!.;es even where the mort^a.^e is created by merely lod.^inj:^ se- curity with the mort.G:ai;ee. e.g.. tlie lod£;ino- of bond war- rants with a Hank as security for an o\erdraft. \\ here debentures are issued which create any mort.^a.^e or char^^e over any one or more of the assets of the company these also must be entered in the reg^ister, but it is not ne- cessary to enter each debenture separately. It will be sui- ficient to note the number of debentures issued and the total amount of the char.ye created. 1'he accompanying- illustrati(jn sets out how an issue ot debentures might be entered in the Reg:ister of Mortgages. It should be noted that in New Zealand, Queensland, and \'ictoria. particulars of every mortgage or charge created by a compan\- which if given by an individual would require registration as a bill of sale or created for the purpose of securing an issue of debentures, must be filed with the Re- gistrar of Companies within 30 days (N.Z. 21 days) after execution, otherwise it is void against the liquidator and cre- ditors upon the winding up of the company. Debenture Register. — In addition to the account in the Private ledger showing the total amount due to del)enture holders it is necessary to keep a register setting out the par- ticulars of the debentures held l\v the individual debenture holders, and this book is also utilised to sliow the interest due and paid to such holders. In most cases arrangements are made by the directors of a company for placing the debentures without necessitat- ing the .solicitation of applications from the general public. WHiere, however, the latter course is followed a book should be used on the lines of the Application and .Mlotment Re- gister, and no difficulty should l)e experienced in altering the ruling supjilied to suit the circumstances. When debentures are issued to a debenture holder an account is opened for him in the Debenture Register and he is charged with the total amount due on the debentures in the debit money column. As he makes payment he will be credited from the Cash Book and when the debentures are fully paid the debit and credit columns will agree. The amount in the "X'alue of Debentures Held" column as shown by the illustration supplied will set out the total nominal value of the debentures held by him. 158 C O M P A X \- S T A T I S T I C A L BOOKS. ) 1"^ 1 < 1 1 ' u s - ^ " ^ t ^ 1 vi ^ ^j " ^ ? ill 1 1 .3 v5 S'.ws'i ^1 IH 1 1 1 159 AUSTRAL AS I AX ADVANCED ACCOUNTANCY. in New South Wales, by the Companies (Registration of Securities) Act, 1918, every mortgage or charge created bv a company, to secure an issue of Debentures or over the uncalled or uni)aid capital or book debts of the company, or which if executed by an individual would require registra- tion as a bill of sale, or which gives a floating charge on the terest due on Debentures account. An entry will also oe undertaking or property of the company must be registered within 30 days of its creation, otherwise such mortgage or charge will be void as security against the liquidator and any creditor of the company. When interest falls due an entry will be passed in the Private ledger del)iting Interest account and crediting In- terest due on Debentures account. An entry will also i)c made in the credit Interest column in each debenture holder's account in the register and when payment is made an entry in the debit Interest column will be posted from the Cash Book. The total interest shown to have been paid by the Cash Book will be debited to Interest due on Debentures account in the Private ledger. 100 CHAPTER XII. COMPANY ACCOUNTS— (Continued).— DOUBLE ACCOUNT SYSTEM. The Double Account System is the term applied to the method of settin.s: out a Balance Sheet of a company in two portions as distinct from the more familiar method of show- ing- this statement in one part only. This system does not in- volve any change in the style of bookkeeping and it is quite possible for a company to keep its accounts in the ordinary wav during a financial period and leave the decision as to which method of setting- out tlie Balance Sheet is to be adopted until the accounts are finally prepared. Stated briefly, this system involves the division of the Balance Sheet into two parts. The first part shows, on the one side, all receipts on capital account, including monies received from shareholders and also fixed loans and, on the other side, the capital expenditure. The dififercnce between these two sides is then carried down to the second portion, which is shown in the form of an ordinary Balance Sheet, in- cluding the remaining assets and liabilities of the concern. See example at end of Chapter XIII. The Double Account System, as it is used in Australasia, is a commercial adaptation of the statutory form of accounts provided for certain companies formed in England under special Acts of Parliament. These statutory forms reflect in a practical way the legal idea as to the manner in which ex- penditure on fixed assets should be treated, and it may be as well, before proceeding further, to consider what the legal idea in this connection is, in order to enable the Double Ac- count System to be properly understood. Suppose, for example, a company expends £10,000 upon a certain fixed asset. The law views that amount as being sunk and g^one. This being the case there is no need to write oft' anything for depreciation, but if this asset requires re- newal then the law requires that the cost of replacing tnat 161 AUSTRAL AS I AX ADVANCED ACCOUNTANCY. asset iiuist be charsccl a,(JU expenditure as the exchan.^e of that much money for an equivalent in value and this equiva- lent is shown ori.^inally in the books at its full cost. As this value deteriorates the amount of the actual deterioration is charged against revenue, so that, by the time the asset has become useless, it will have been written out of the books by a series of periodical charges against the profits. The fnial result in each case is the same, but the legal method of treatment results in charging the whole of the loss against one year's profits, w-hilst the commercial treatment charges an equitable proportion against each year. The lat- ter method also results in a statement of the asset in the accounts at something approaching its actual value, whereas the former shows the asset at its original cost throughout. Under ordinary circumstances it is evident that the commer- cial treatment of a fixed asset in the books is by far the more sensible and accurate. It will be clear from the above that in a Balance Sheet ])repared from the legal standpoint the fixed assets will be stated at their original cost, \vhilst in one prepared from a commercial standpoint the fixed assets will be stated as close- Iv as possible to their actual value. No such difference of opinion exists with regard to the valuation of floating assets, which should never be stated at more than their realisable \ alues. Keeping in view the above explanation and the distinc- tion which the law makes between exi)enditure on fixed and floating assets, the reason for the division of the Balance Sheet into two portions, in the statutory forms already re- ferred to, becomes intelligible. The first portion deals with capital items only, shoAving capital receipts and capital ex- ])enditure. In this portion no pretence is made of showing what are known as fixed assets at their actual values, the expenditure side of the statement being designed to show how the capital monies have been expended and the extent of such expenditure. The second portion, showing the float- ing assets and liabilities as in an ordinary Balance Sheet, re- fpn'res. of course, no explanation, seeing that the legal view here corresj^oufls with the commercial \ iew. By what can only be described as a fortuitous concur- rence of circumstances, the statutory form of statements pre- scribed for those companies which were registered under the special .Acts referred to. turned out to be those most suitable for their re(|uirenients. Tlu-sc cttuccrns cousislcd mosth of railwaw water .'ind oilier ciin .init's of :i like nature, and it is DOL'HLE ACCOUNT SYSTEM. clear that llie l)ulk ol" tiic capital c.\])ciuliture of concerns of this class could liardly result in the accjuisition of anything which could l)e accurately described as an asset. Take, for instance, a water company, which expends a considerable ])or- tion of its cajjital in dig'ginj;- uj) the roads, lading down water mains and in tilling the holes u]) again. 1'he money so ex- pended could hardly be said to ha\e resulted in the acquisi- tion of what would be \iewed commercially as an asset, as the wages paid to the workmen performing this work could not be realised upon. Strictly speaking, therefore, it would not be accurate to state expenditure of this nature in the Balance Sheet as an asset, seeing that, in most cases, its realisable value wotild be far below the amount spent, and the method prescribed by the statutory form of showing the amounts so paid as the expenditure of so much of the capital appears to be the better one under the circumstances. Prac- tically, the same i)oint arises in connection with a consider- al)le portion of the capital expenditure of a gas company and, perhaps to a lesser extent, nf a railway company. The statutory statements already referred to are. of course, only compulsory with those comi)anics which are re- gistered in England tuider the special Acts, but this form of accounts has been adopted somewdiat widely in recent years amongst other companies of a similar nature which recognise that the Double Accotuit System is suitable for their require- ments. This form of presenting the i)ublished accounts is particularly adapted to companies such as railway, tramway, gas, water, and mining companies. An objection frequently urged against the Double Ac- count System is that it is impossible to write ofif deprecia- tion from the fixed assets, and that these assets are therefore overstated in the Balance Sheet. This objection, however, is not a legitimate one, as no ]M-etence is made of stating the fixed assets at their actual values, and no one is therefore de- ceived. As the first portion of the published accounts is de- signed to show merely the extent of the ca])ital expenditure, it is clearly impossible to write off depreciation in the usual way. It would create an absurd position to attempt to write off depreciation from what is simply a statement of cash ex- penditure. If it is desired to provide for depreciation in connection with any of the items in the first part of the Balance Sheet this can be done by setting up a Depreciation Reserve. This will prevent the profits being overstated and the necessary renewal of any of the fixed assets can be charged against this reserve instead of against one year's pnjfits. 163 AUSTRALASIAN ADVANCED ACCOUNTANCY. The Double and Single Account Systems.— From time to time there has been a consideral)le amount of discussion as to which of these two S3-stems i)r()vides the better metbod of setting out the accounts of companies. From tlie explana- tion already supplied it will be seen that the Double Account System cannot be used indiscriminately and that, whilst it is suitable for concerns of the nature indicated, it could hardly be utilised in connection with ordinary trading concerns. This being the case, any general discussion as to the relative ad- vantages of the two systems would be out of the question. From the commercial point of view the Uoul)le Account System is applicable only to those ventures which sink the bulk of their capital in the con.struction or acquisition of works of a permanent nature, where such expenditure, or a considerable portion of it, cannot be said to result in the ac- quisition of what might be termed realisable assets. On tbe other hand, this sys'tem is not at all suitable for ordinary trading concerns where the bulk of the capital consists of floating assets and capital expenditure results in the acquisi- tion of realisable assets. Tn such companies it is evident that it is quite correct to state all the capital expenditure in the Balance Sheet under the heading of "Assets." Numbers of objections have been raised against the use of the Double Account System under any circumstances whatever. Most of the opponents of the system apparently ignore the underlying principles and confine their attention to details which prove on investigation not to be inherent por- tions thereof. Allowing that there are objectionable features in the statutory forms from which the idea was originally taken, it might' be j^ointed out that commercial concerns de- sirous of adopting the Double Account System are under no obligations to perpetuate such features whilst applying to their own use the main principles. In fact, every feature in tlie original forms against which an objection has been urged could be eliminated without destroying the utility of the sys- tem for commercial purposes. The majority of the objections urged are the outcome of the supposition that it is impossible to provide for depreci- ation under the Double Account System. It has already been shown that this is a mistaken notion, as depreciation can readily be provided f( r by means of a depreciation reserve. Another objection is that the first portion of the Balance Sheet will show the fixed assets at more than their actual value, as nothing can be written off for depreciation. Seeing that the first portion of the account is in reality nothing more or less than a summary of the Cash Receipts and Fxpenditure 164 n O I- B L E A C C O L- N T S \' S T E M. on account of capital, and as such makes no pretence of show- ing the amount paid as assets, this objection can hardly be taken seriously. Again, the statutory forms already referred to provide for the permanent capitalisation of T'reliminary Expenses, and this is seized upon as another ol)jectionable feature of the Double Account System. There is no reason why Prelimin- ary Expenses should not be shown in the second portion of the published statements and written off by periodical charges against profits in the usual way. The examjdes at the end of the next chapter show the Balance Sheet of a Mining company set out in the first place on the Single Account System and, secondly, as it would ap- pear if set out under the Double Account System. It will be noticed that all monies received from shareholders are shown on the one side of the first portion of the statement and all capital expenditure on the other side. The excess of the capital receipts over capital expenditure is then carried to the second portion of the statement, which is set out in the form of an ordinary Balance Sheet. The difference in the treat- ment of depreciation should also be noted. It is thought that a careful study of these examples will make the idea of the Double Account System perfectly clear. 165 CHAPTER XIII. MINING COMPANIES' ACCOUNTS. No-Liability Companies. — In each of the States* in Aus- tralasia jjrc)\isicjn is made \vheieb\- ci)m])anies formed for the I)ur])oses of minin.^- may l)e rei^istered under the various Com- panies Acts, on the no-liability principle. 'J'his system can l)est lie described l)y quoting the defmition supplied in the Xew South A\'ales Comi^anies Act. Section 194, which says: — ■ "The acceptance of a share in any com])any registered under this part of this Act (the part relating to no-liability com- j)anies), wliether by subscription to the memorandum for re- •gistration or b\- original allotment, or liv tiansFer or otlier- wise. shall not l)e deemed a contract on the ]^art of tlie ])er- son accei^ting the same tc^ i)ay any calls in respect therei>f or to pay any contribution to the debts and liabilities of the compan\-. and such person shall not be liable for any such calls or contributions, but he shall not be entitled to recei\e a di\iclenfl ii])on any share u])on which a call is due and unpaid." Tlie law as to no-liability com])anies is \"ery similar in all the States, but some differences exist in matters of detail which will be noted through this cha])ter. The provisions as to registration arc somewhat similar to those relating to com- ]!anies limited by shares, in all the States, except A^ictoria and Tasmania, the memorandum nuist be signed by the same number of persons required in the case of a company with limited liability. In the two States named the memorandum requires to be signed only by the manager of the compan\-. Every compau}- registered on this principle must add the Avords "No-Liability," as the last words of the name of such com])any. The memorandum nnist contain the particulars sit out in the schedules to the .\cts in the \arious States, but ii is not considered necessary to set out siu'h jiarticulars in de- tail here, as these \ary. and ma\- be easily ascertaincfl b\- i-e- fcrence to the schedules mentioned. Notice of iutenliou to register such a compau}' must be ad\'ertised in the (lazette. and in at least one newspaper circulating in the town or dis- *.\()te. — To sa\{' reiH'titiou the word "State" or "States" will, for the pui-poses of this t-liapler. be read so as to cover the Pominiou of Xew Zealand. M I N' I X (i C () M P A X I E S' AC C O T X T S. trict in whicli the company's rc.Ciistered ofificc is to be situ- ated. A copy of tlie (iazette and all the ne\vspai)crs referred to must be supjilied t(j the Reg'istrar of Companies. In most of the States the reciuirements ui)on re.i^istratinn are slightly more stringent than in the case of companies re- o-istere^l with limited liability. In. Western Australia and Queensland a mining company cannc^t be registered under the no-lialMlity principle unless ."") per cent, of the nominal capital is paid' up in cash. In X'ictoria at least 5 per cent, of the subscribed capital must be paid, and in New! South Wales 10 per cent, of the contril)uting capital must be paid in cash. "C(jntril)uting Capital"" means the full nominal capital with which a company is registered, less so much of the capital as is represented by shares issued for a consideration other than cash as fully paid up, and less also the paicl-up portion of any shares issued as partly paid-up for a consider- ation other than cash. This may be made clearer by an il- lustration. Suppose a company were formed with a nominal capital of 20,000 shares of £l''each. 5,000 of which were is- sued as fully paid up to the vendors of the mine. The con- tributing capital in this case would be £15,000. Suppose, how- ever, it were agreed to issue to the vendors in payment for the mine. o.OOO shares fully paid up, and 6.000 shares paid up to 10/-, the contributing capital would be £14.000. i.e.. £20,000 less £3,000. being 3.000 shares of £1 each, fully paid up and less £3.000 representing the paid-up portion of fi.OOO shares issued as paid up to 10/- per share. Calls on Shares. — In all the States except AYestern Aus- tralia, Queensland, and N.Z., it is provided that the calls ujwn shares in No-Liability Companies must be made in such time and manner that they shall become due on the second AA'ednesday in a month, and on that day only. If, however. such AA'ednesday is a public holiday they shall become due on the next succeeding business day. which is not a public holiday. A notice must be printed on the face of the Com- pany's Share Certificate, stating that the day abo\c mentioned is the day on which calls fall due. At least seven days (in U'est. Aust. 14 daA's) notice must be given to each memlier of the date on A\hich the call is payable. Forfeiture of Shares. — As persons holding shares arc un- der no compulsion to pay the calls made upon them it is clear that more stringent ])rovisions as to forfeiture of shares must be made than in the case of limited liability companies, where members can he sued and compelled to pay the calls 167 MS T K A L A S I A X A D \' A X C E D A C C O L' N T A X C Y. levied. The various Acts provide that, where a call remains unpaid, at the expiration of fourteen days (Queensland. 26 days; N.Z., 21 days) after the day upon which it was pay- able, any shares upon which the call is unpaid shall there- upon be absolutely forfeited without any resolution of the directors or other .procee(lin,^. Such shares when forfeited are to be sold by public auc- tion after due notice of intention to sell has been advertised as required. The proceeds of the sale are to be applied in payment of the overdue calls and any expenses necessarily incurred in respect of the forfeiture, and the balance, if any, must be paid over to the person whose shares have been for- feited, upon his deliverino- to the company the certificate re- presenting- the forfeited shares. In New South Wales, if the amount bid for such shares is not sufficient to pay overdue calls and expenses, the directors may refuse to sell them by auction and in such a case they may sell the shares in such manner as they think fit. Tn the other States (except Queens- land) if an insufficien.t amount is ofifered at auction the directors may acquire the shares on l)elialf of the company. In all States (except Queensland) provision is made whereby the directors may, at any time before the forfeited shares have been sold, annul the forfeiture upon payment by the shareholder of the amount of the overdue calls, too-ether with any expenses incurred in connection with the shares. A No-Liability Company must keep a Re.e:ister of Members in the same form a? that required to be kept by companies w^ith limited lia1)ility. Opening Entries in Books. — The openings: entries in the books of a No-TJability Company are similar to those re- quired in the case of a company registered with limited lia- bilitv. Unallotted Shares account is debited with the nominal value of the shares with which the company is registered and Nominal Capital account is credited. Uncalled Ca])ital ac- count is then debited with the number of shares and Un- allotted Shares account credited. Accounts wdll be opened for Application and Allotment monies, and a separate ac- count for each of the calls made. In most cases a mining- c()nii)any is formed to take oxer a mining- property from a private in(li\ idual. or a syndicate, so that the opening" up of the books of the company will usually involve a record of the purchase of a mine and the issue of shares as fully or i)artly paid up l)y the vendor in payment therefor. These entries present no difiiculty, Min- ing- Property account being debited, and the \'endor"s ac- count credited with the amount of the consideration for the 168 MIXING C O M P A X I E S' ACCOUNTS. purchase of the mine. The vendors will then be debited with the value of the shares issued to them. If the shares are issued as fully paid up, the correspond- ing entry will be in Unallotted Shares account, but if shares are issued as only partly paid up it) will be necessary to bring the full nominal value of the shares into Uncalled Capi- tal account, the vendor being debited with the proportion considered as paid up and Uncalled Capital account credited. The last-mentioned account will then contain an amount equalling the proportion still uncalled on these shares. It is thought that an illustration will help to make this procedure clearer. The Waratah Gold Mining Company, No-Liability, was formed to take over a mining property from a syndicate. The company was registered with a capital of 50,000 shares of £1 each, and the price to be paid to the syndicate was agreed upon at £7,500, to be paid in 5,000 shares issued as fully paid up, and 5,000 shares issued as paid up to 10/- per share. The remainder of the shares had been subscribed for by the public, and the sum of 8/6 was paid on application and 2/6 on allotment. The Journal entries in connection with the above would appear as follow : — Unallotted Shares A/c Dr. £50,000 To Nominal Capital A/c £50,000 Being Registered Capital of the Company divided into 50,000 shares of £1 each as per Memorandum of Association. Uncalled Capital A/c Dr. 45,000 Vendor's A/c Dr. 5,000 To Unallotted Shares A/c 50,000 Being 45,000 ^shares subscribed for and 5,000 shares issued as fully paid up to the Vendor in part consideration for the Mine as per agreement dated Vendor's A/c Dr. 2,500 To Uncalled Capital A/c 2,.500 Being 5,000 shares is-sued to the Vendor as paid up to 10/ per share for balance of the purchase money for Mine as per agreement dated Application A/c Dr. 5,000 Allotment A/c Dr. 5,000 To Uncalled Capital A/c 10.000 Being 2/6 per share payable on Application and 2/6 per share payable on Allotment on 40 000 shares as per Directors' Minute Book, Fol Mining Property A/c Dr. 7,500 ^ _ To Vendor's A/c '■•■'00 Being purchase price of Mine taken over from Syndicate in terms of the agreement dated . . . . It might be noted here that, where a No-Liability Com- pany decides to issue any Unallotted Shares, these are fre^ quently issued as paid up to the same amount per share as 169 A U S T R A L A S 1 A X A D \' A X ( E 1 ) A C C O U X T A X C Y. are those shares ah-eady heUl l)y shareholders. Suppose, for example, that the shares already taken u]) were paid to 10/- per share, any new shares subscrihcd for thereafter would usually he issued as paid up to that amount per share. In order to adjust Uncalled Capital accunt. so that it will show the actual amount liable to he called uj) on the shares so is- sued, this account will he credited with li>/- per share of the new issue, the corres])on(lini;- (lel)it entry l)ein£;: made in Mine account. The items making- u]) the balance of Mine account are often of a nondescript nature. In addition to the purchase price ui the mine, this account is, in most cases, charged with cost of preliminary and development expenses and any ex- penses of working the mine up to the stage where it can be run on a prohtable footing, such expenses being treated as capital expenditure. The effect of this is, of course, to enable any profits subsequently earned to be distributed by way t^f dividend, without the necessity of hrst wiping out an adverse balance in Profit and Loss account. The procedure indicated in the previous paragraph would be anything l)Ut a ])roper one in the case of an ordinary trading concern, but it must l>e remembered that the circumstances under which mining- companies of this class are run are totally dififerent and it is not necessary to observe the same strictness in principle. This matter is, however, dealt with a little later in this chapter. Entries on Forfeiture of Shares. — The general procedure upon the forfeiture of shares lias already been dealt with. but. as the bookkeeping in connection with the forfeiture is some- what different from that in the case of a limited company, it is necessary to describe briefly the entries which will reciuire to be made in the books of a No-Liability Company. As has already been seen, any shares forfeited must be offered for sale by public auction by the directors and the amounts re- ceived on sale of the shares must be applied, firstly, in pay- ment of the call in respect of which the shares have been for- feited and. secondly, in ])ayment of any expenses incurred in the sale of the shares, an}- surplus being refunded to the shareholder upon the surrender of the share certificate. Tf the ])rice offered for the shares at auction is not satisfactory tile directors can either accpiire these shares on behalf of the company, or sell them ];rivately. as already mentioned. It will be seen, therefore, that when shares in a No- Liability Company are forfeited they do not necessarily he- come unallotted shares caj)able of being reissued l)\- the com- pany at their nominal \alne as in the case of shares forfeited by a limited com])any. These shares m;iy or may not realise M I X 1 X G C O M P A X 1 E S' A C C O U X T S. the amount necessary to cover the unpaid call and the ex- penses incurred. If they realise more than this amount the surplus must be handed' over to the old shareholder, hut if thev rcali:^e less, the loss must he borne by the com])any. The hrst entry re(iuired when shares are forfeited is ;i transfer of the amount of the unpaid call to the debit of For- feited Shares account, and the amount received on sale of the shares, if they are sold, is credited to this account. If the amount realised equals or exceeds the amount of the unpaid calls, plus the expenses of selling, a Journal entry is passed transferring" such expenses from the nominal accounts to which they are originally charged, to the debit of Forfeited Shares account. The balance of this account, if any. will then be transferred to the credit of the shareholder's personal ac- count, and the amount paid over to him in cash. If the amount received on sale of the shares exceeds the amount of the unpaid call, but is not sufficient to cover also the whole of the expense of selling, only so much of such expenses will be transferred to the debit of Forfeited Shares account as will suffice to close that account off. the balance of these expenses being left in the nominal accounts. If the amount realised on sale of the shares is less than the amount of the unpaid call, or, if the shares prove to be unsaleable altogether, none of the expenses paid will be transferred to Forfeited Shares account and the debit balance in that account will be brought down. In setting out the Capital accounts in the Balance Sheet of a company under the circumstances now being considered, the balance of the For- feited Shares account will be deducted from the called-up capital — the treatment being the same as in the case of unpaid calls ini a limited company — in order to enable the actual paid-up capital to be shown. The following illustration shows how the Forfeited Shares account would appear in each of the three sets of cir- cumstances indicated above. (Xo. 1.) FORFEITED SHARES ACCOUNT. To Unpaid Call (Xo. 3) £2 10 By Cash £5 1.3 Expenses, Advertis- ing, etc 2 „ Shareholders Personal Account 15 £.5 1.5 £5 15 171 A U S T R A L A S I A X A D \' A N C ED A C C O U X T A N C Y (No. 2.) FORFEITED SHARES ACCOUNT. To Unpaid Call iXo. 3) O 10 Hy Cash „ Part Exs. Advertising, etc 10 £3 £3 £3 (Xo. 3.) FORFEITED SHARES ACCOUNT. To Cnpaid Call (Xo . 3i . i-2 10 By Ca.sh . „ Balante Down . . ..£2 .. 10 £2 10 £2 10 General Bookkeeping.— In most cases the office of a min- ing company is situated at some distance from the mine, and the major portion of the bookkeeping work is, of course, carried out at the office. The amount of clerical work to be jierformed at the mine should, therefore, be reduced to a minimum, and in most cases this will resolve itself into the keeping of what would, in an ordinary trading company, be described as Cost Accounts. It will be necessary to have a Stores Book, showing stores, such as explosives, (!vc., pur- chased and issued, together with a Wages Book, setting out full details of the wages paid. A statement should be sup- plied to the office at least fortnightly showing stores issued, wages and other expenses paid, dissected under proper head- ings. These headings should be designed so as to show the cost of the various processes to which the ore is subjected and also other expenditure, such as reports and maintenance of machinery, cost of further development ^^\ mine. il-c. It is usual, more especially in those cases where the mine is situated in an outlying part, to provide the mine manager with funds to meet current expenses and to give him author- ity to pay the necessary expenses out of these funds as occa- sion may arise. Of course any extraordinary payments, such as the requisition of additional machinery, c'tc. would require to be first passed l)v the directors in tlie usual way. Where such authorit\- is given to the mine manager it is adxisable that any advance made to him should be conducted upon the Imprest System. This system provides for an ad- vance of as much as will be usually required to cover the fortnight's expenses. .After each ])ay day he should supply the returns indicated above showing how the amomits ha\-e been expended and the various headings under which the expenditure is chargeable, to the general office. The office will then reimburse him the exact amount of the expenditure 172 •MINING C O M P A N I E S' ACCOUNTS. which will bring his funds up to the amount of the orii^inal advance. Revenue Account. — The first portion of the Revenue account of a mining company, usually called Working ac- count, is prepared on somewhat similar lines to the Trading .account of an ordinary business. The chief income of a ;mining company is of course the proceeds of the sale of its ore, or metal, and the total proceeds will be credited to the Working account! All expenses of working the mine, in- cluding wages (divided under its various headings), royal- ties, rents, &c., are charged against the Working account, the balance, representing the gross profit, being carried down to Profit and Loss account. This account is charged with all office expenses and the balance represents the net profit. It is the custom in the average mining company (and the reference at present is more particularly to metal-mining companies) to ignore altogether the question of depreciation and to treat as available for dividend the excess of current income over current expenses. Such companies ^re not formed for the purpose of being conducted permanently, but may be viewed more correctly as speculations. This being the case the necessity for keeping the capital intact is lack- ing, and it is considered advisable to return the whole of the surplus receipts over expenditure to the shareholders each year and allow them to divide these dividends between capi- tal and revenue. As it is unusual for a company formed on the Xo-Liability principle to get credit it will be seen that no injustice can be done to third parties by the adoption of such a course, and, as is fully explained in Chapter III. dealing wath Depreciation, this method of treatment is under the circumstances to be recommended. Of course, if it is evident that certain of the assets will require renewal be- fore the mine is worked out, it will be advisable to provide for their renewal and, in such a case, a Depreciation Reserve should be instituted. Balance Sheet. — In view of the above it is evident that the best method of setting out the Balance Sheet of a mining company is the Double Account System described in Chap- ter Xll.", and illustrated at the end of this chapter. The first portion of the statement will show the capital contributed by the shareholders and how this capital has been expended in the development of the mine, the erection of the mining plant, &c. Nothing will be written off this expenditure for depreciation and it will appear in the first portion of the Balance Sheet at the original cost plus the additions neces- sary from time to time. All preliminary and development 173 AUSTRALASIAN ADVANCED ACCOUNTANCY. expenses, up to the time when the mine is at the stag-e where it can be run on a profitable basis, are treated as capital ex- penditure, and this enables the whole of any profits earned tliereafter to be distributed by way of dividend. It might be mentioned that, in New South Wales, the Companies xA.ct prescribes that a No-Liability Mining Com- pany must prepare its Balance Sheet in the form attached to Table "A" of the Act, so that the Double Account System could not be adopted in that State. A copy of such Bal- ance Sheet must be filed with the Registrar within one month after the date of the general meeting of the comi:)anv. In \'ictoria and Tasmania half-yearly statements must be prepared and filed. In New Zealand, the directors of every mining com- pany must, in the month of January in each year, prepare and publish in the "Gazette" a Balance Sheet made up on the 31.st December of the preceding year. LIMITED MINING COMPANIES.— Provision is made under the Ctjmpanies Acts in \'ictoria, Tasmania, and N Z. for the formation of Limited Mining Companies. These pro- visions are very similar to those relating to No-Liability Companies except that the word "Limited" must be used as the last word of the name in the place of "No-Liability." and every shareholder is liable to contribute to the assets of the company, in the event of winding up, in the same manner as a shareholder in a limited trading company. \\'here share- holders do not pay calls within fourteen days (N.Z. twenty- one days) after they are due, the shares are absolutely for- feited and sold bv auction. In Victoria provision is made for the formation of Pre- payment Mining Companies to be registered in the same way as other mining companies and using the words "Limited with Prepayment" as the last w^ords of their names. In these companies no part of the expenditure incurred at or previous to the time of making a call shall be paid out of such call, but an estimate shall be made of the sum prol)ably required for working expenses during the month anrl a call shall be made to meet same and such call shall be a debt due to the company. The following illustrations show the Balance Sheet of a No-Liability Mining Company set out under l)oth the Single yVccount and Double Account Svstems. MINING COMPANIES' ACCOUNTS. 55 -r S ' xn » » H P O 09 » •-9 o A U-t n o % VI w C3 ^ .(j W i « H A < xn H o C/D ■§ E rn t— 1 Oi CO od'-'' CO O C8 O ^^1 •^15.S -ca ^fc.at c -O O ^ o - (U 0) r- •« c t; ■^ a o c OJ -a,^. m cM .« 1 H j Debtors Transit- bourne immerci nd .. I b^S lo^ c5"^^^ P O 0! ^ " tno o •73 O <0(N O I^ o la t^ (M 00 O O 00 Crt to M (33 00 o — CO (M •o 1— 1 .— ( I— ( 1-" ert •O ^ CO M O o 03 CO Crt JO o" ^ : oto t^ CO 0) T-; o 6 OJ O'.O .Q E r^ co" 03 •^ , ^ ■^ !« t/i 't< is 3 O ad ^ o *-> r-l ^ G (- O tn *-• 6 ^ '^< ° rt 4i g i^.^ ^ e > 5« o.> «c^ Q : a lance of epreciatio andry Cre nclaimed rofit and Profit foi 6 F^ 1 1 CQQ 'J) l-> IX, 1 176 MINING COMPANIES' ACCOUNTS. ly of drafts on London will be in excess of the requirements of purchasers of such drafts. The drawers will naturally be ISO FOREIGN AND BANK RATES OF EXCHANGE. anxious to find purchasers for their drafts, but the ordinary rule of supply and demand will apply and they will be com- peting- against one another, lowering- the prices in order to induce sales. It has already been shown that where a drawer can get payment for goods sold to London without any de- duction, i.e., get 35.22 francs for every £l drawn for, he has obtained a satisfactory settlement, as he has not been re- quired to stand any cost of remittance, and it will be seen, further, that it will pay him to accept any price for his draft which will prove cheaper than getting the London dealer to remit gold. It is the cost of remitting gold to him which determines the lowest price he will accept. The cost of forwarding gold from London to Paris is generally reckoned at 10 centimes (about one penny) to the £1, so that if the rate of exchange gets below 25.12 francs to the £1 it will pay a drawer better to instruct his London customer to forward gold in settlement of the debt than to draw a bill of exchange on his customer. When the rate of exchange between Paris and London gets below 25.12 francs it is said to have reached "export gold point," and the ex- change is said to be against London, because the tendency is to cause gold to be sent away from London. The export of gold from London to foreign countries has to be guarded against, as the prosperity of any country depends largely upon the amount of gold circulating in that country, and if money is "tight" trade immediately slackens. The banks must for their own safety keep certain gold re- serves against the amount owing by them to their customers — most of the banks in England lodge a considerable pro- portion of their reserves with the Bank of England, so that the duty of keeping the gold reserves of the English banks intact devolves to all intents and purposes upon the Bank of England. These reserves must necessarily be kept up, and if any gold is being exported from England it must, in eflfect, be withdrawn from the gold circulating amongst the various business concerns throughout the country. It would be impossible to go fully into this phase of the subject here, and it will be sufficient to note that any diminu- tion in the amount of gold circulating is bad for trade. It is, of course, in the interests of the banks that trade should be in a flourishing condition and, where the Bank of England can see that the exchange rate with any country has reached a point where the tendency will be to cause gold to be ex- ported, it takes steps, where possible, to remedy that state of affairs. 181 AUSTRALASIAN ADVANCED ACCOUNTANCY. It has been seen that the reason why the exchange rate between Paris and London falls is that the supply of drafts on London is in excess of the demand, and it is obvious that, if the demand for these drafts can be stimulated sufficiently, the rate will rise above "export gold point" and this will result in a cessation of the export of gold from London. The Bank of England can stimulate artificially the demand for drafts u])()n London by putting up its discount rate. Why an increase in the rate at which the Bank of Eng- land will discount bills should result in an increased demand for drafts on London may require some explanation. As- sume that the rate of exchange quoted between Paris and London is that for demand drafts. If a draft is drawn by a Paris merchant on London at thirty days' sight the amount he will receive for that draft will be calculated at the de- mand rate less interest for thirty days. The rate of interest charged is the rate at which the bill could be discounted in London. Ordinarily the only persons requiring drafts on London will be those wdio have to remit drafts in settlement of their debts, but. if the Bank of England increases its discount rate to any considerable extent, it will mean that another class of persons will desire to purchase these drafts, viz., investors. It will pay the latter to buy the drafts available at the current demand rate (which is, for the time being, low) less interest for the term of the drafts, the rate of interest being the discount rate in London, and to hold them until they are due, as they will liave earned a good rate of interest during the currencv of the drafts. The ordinary discount rate of the Bank of England is about 3 per cent., and this rate of interest offers no attraction to investors unless local rates of interest are less, but if the discount rate in London is increased to (5 per cent., the result will be that investors will be anxious to secure time drafts on London in order to receive this rate of interest until they mature. As drafts on London will then l)ecome a desiral)le investment, there will naturally l)c an increased demand therefor, and this, in turn, will result in the rate of exchange between Paris and London being increased to something above "export gold point," thus achieving the aim of the Bank of England. Directly the rate gets above 25.12 it will pay the drawers better to sell their drafts on London tlian to import gold. If the foregoing explanatit)ns are followed, no ditficulty should be experienced in understanding the circumstances under which the rate of exchange between Paris and London will go above par. Where Lonclon has been selling consider- 1S2 FOREIGN AND BANK RATES OF EXCHANGE. ably more to Paris than it has been purchasing therefrom, it will mean that the demand for drafts on London will be in excess of the amount of drafts available. As the demand exceeds the supply the result will be that the rate will go up and (leaving out of consideration, for the time being, l)ills other than trade bills) the persons desiring to remit will be willing to pay any premium above par rate, which will be cheaper than forwarding gold to London. It will be re- membered that the cost of freight on gold between Paris and London is ten centimes to the £1, so that the "import gold point" is about 25.32. If the rate of exchange goes higher than 25.32 it will pay remitters better to forward gold than to buy trade bills from drawers, so that it is practically im- possible for the rate between Paris and London to go much higher than that mentioned. It might be pointed out, however, that the rate very seldom reaches this point, as persons desiring to remit have at their disposal practically an inexhaustible supply ot bills other than trade bills, viz., Bank drafts. Generally speak- ing, the remitters will prefer to obtain trade bills, because they are, except on rare occasions, cheaper than Bank drafts. But when the cost of trade bills gets above, say, 25.26, it becomes cheaper for the remitters to purchase Bank drafts in London, i.e., the banks in Paris will draw upon their London houses for the required amounts and will sell those drafts to the remitters at about 25.26 francs to the £1. The bank rate of exchange between Paris and London does not, however, alwayjs remain at this figure, as it must always depend, to a large extent, upon the cost to the Paris bankers of providing the funds to meet these drafts on London. Sometimes the Paris banks have on hand a number of trade bills on London which they have previously purchased at a fairly low rate of exchange. If they can sell these drafts to the remitters at 25.26 they make a good profit, but, if they have no London bills available, they will have to find some means of meeting their own drafts and the rate of exchange charged by them will depend upon the cost of covering these drafts. One method adopted of providing this cover is by the purchase of bills on other Continental cities, these bills being sent to London for collection or sale, with instructions to place the proceeds to the credit of the Paris bank in London. At certain periods of the year it is quite possible that_ the cost of covering Bank drafts will reach "import gold point," from the London standpoint, and the natural result will be the despatch of gold from Paris to London. 183 AUSTRALASIAN ADVANCED ACCOUNTANCY. Up to this stage the exchange as between London and Paris has been dealt with exclusively, but it will be under- stood that the same principles apply between London and any other capital. For example, the mint par of exchange between London and New York is 4.86 (about), i.e., there is the same amount of fine gold in 4.86 dollars as in a sovereign, and if the rate of exchange between London and New York were always at par 480 dollars would always buy a draft on London for £100. The "import gold point" between New York and London is about 4.90, and when the exchange rate between those two cities reaches about this figure there is always the tendency for gold to flow into England from the United State-. The "export gold point" is 4.83. At certain periods of the year, chiefly in the autumn when the United States is exporting a lot of grain to Eng- land and drafts on London are plentiful, the exchange rate tends to get below this point and a considerable amount of gold is shipped from London to New York. The Bank of England by increasing its discount rate checks this uutflow as much as possible. It is hoped that the foregoing explanation will enable some idea of this important subject to l)e obtained. It hardly requires pointing out that in the amount of space available, onl3r the fringe of the subject could be touched upon, but all side issues have purposely been omitted in order that the main points might not be obscured. There are, for example, numerous factors other than the settling of trade debts between two countries which affect, more or less directly, the rate of exchange between those countries, but, speaking generally, any fluctuations in the rates may l)e set down to the causes mentioned herein. In connection with the explanation already given, it should be specially noted that the rate quoted always in- cludes exchange or commission. The following example will perhaps serve to illustrate the foregoing points: — A Sydney firm instructed its New York agents to pur- chase 5000 cases of kerosene on which freight was paid in New York and the total amount of the pur- chase was 10,000 dollars. In order to obtain a set- tlement the New York agents draw on the London 1S4 FOREIGN AND BANK RATES OF EXCHANGE. house of the Australian firm at sight at 4.89. The London house has then to negotiate its draft on Sydney at 60 days at 2J per cent, in order to reim- burse itself. Show the amount of the draft which will be presented to the Sydney firm for acceptance. Xo attention need l)e paid to stamp duty. The position is that the New York agents will have to draw^ on the London house for such an amount in £ s. d. as will, negotiated at 4.89, produce to them 10,000 dollars, i.e., for each 489 dollars they must draw for £]00. This draft will amount to £2044 ]9s. 9d., and will be met by the London house of the Australian firm. The London agents will, in order to reimburse themselves, require to draw on the Australian firm for such an amount as, discounted at 2| per cent., will give them £3044 19s. 9d. To state the pro- position in a familiar form: If they have to draw for £100 to produce £97 5s., for what amount must they draw to produce £2045? Working this out it is found that the amount of the draft drawn by the London agents on the Australian firm will be £2102 16s. 7d. BANK RATES OF EXCHANGE BETWEEN AUS- TRALASIA AND LONDON.— It might ])e noted at the outset that the rates between the different Australasian capi- tals and London often vary, and in order to enable practical illustrations to be given the actual rates as between Sydney and London will be supplied. There are some points of similarity between foreign ex- changes and the rates of exchange between the two centres above mentioned, but seeing that the Australian currency is the same as the English, there are also considerable differ- ences. For instance, in dealing with the exchange rate be- tween Paris and London any variation in the rate is denoted by a fluctuation in the value of the franc but^ as between London and Australia, the sovereign has always the same value and the rate of exchange must therefore be stated apart from the intrinsic value of this coin in the two coun- tries. Another dift'erence is that, in Australia, practically all dealings in bills of exchange are with the banks, whereas in foreign countries most of the dealings in trade bills are with persons known as bill brokers. When an Australian bank buys a trade bill it does not do so for the purpose of selling it again, as it is an understood thing that the banks 185 AUSTRALASIAN ADVANCED ACCOUNTANCY. are not to "hawk" trade bills. In other words, if they buy such l)ills, they or their London agents must hold them for presentation to the drawers. A Sydney trader desiring to remit money to London will usually purchase a bank draft on London ; if he draws on London he will generally sell the draft to a bank. Tlie rates of exchange between Sydney and London are therefore fixed by the banks, and under normal trading conditions arc ap- proximately as under : — ORDINARY RATES. Banks' Selling Rates. Buying Rates. Telegraphic- Demand Drafts 10/ p c. Transfers . . . 17/6 p.c. premium 30 d/s 17/6 p.c. Demand Drafts . 15/ p.c. 60 d/s 25/ p.c. 30 d/s „ 10/ p.c. „ 90 d/s 32/6 p.c. 60 d/s „ 5/ p.c. „ 120 d/s 40/ p.c 90 d/s „ par. discount NOTE.— It should be noted that the buying and sailing rates are quoted from the standpoint of the bank, i.e., the "buying" rate is the rate at which the bank will buy drafts from the drawers in Sydney, and the "seUing" rate is the rate at which the bank will sell its own drafts on its. London agent. If a merchant in Sydney w^ishes to remit money to Lon- don he will buy a draft from the bank, the bank drawing up- on its agents in London and selling the draft to him at a premium. If, for example, the merchant wishes to send a demand draft, he must pay £100 15s. for every £100, or if he desires to send a draft payable at ;}0 days' sight he can purchase the bank's draft on London for £100 10s., and so on. If he wishes the bank to cable £100 to London, i.e., to pay the amount in London on the day on which he lodges the money with the bank in Sydney, he must pav £100 Hs. Gd. plus the cost of cabling. On the other hand, an exporter in Sydney who is ship- ping, say, butter to London, wall draw upon the consignee. He will require to obtain cash for his draft, and he can find a purchaser in one of the banks. A bank will buy a demanci draft on London at 2s. (id. per cent, discount, i.e.. it will give the customer £i)!) lis. fid. -ior a draft of £100. If the cus- tomer draws at 30 days the bank will charge Ts. fid. discount, as it will have to wait 30 days longer to collect the money in London. During the wool season, when large shipments of wool are sent to l^ngland and the Continent, the bank rates alter very considerably. For the wool season of a normal trading period the bank rates are approximately as under: — 186 FOREIGN AND BANK RATES OFEX CHANGE. WOOL SEASON RATES. Selling Rates. Banks' Buying Rates. Telegraphic On demand . . . 2/6 p.c. discount Transfers . . . 15/ p.c. premium 30 d/s 7/6 p.c. Demand Drafts . 7/6 p.c. „ 60 d/s 12/6 p.c. 30 d/s „ par. 90 d/s 20/ p.c 60 d/s „ 7/6 p.c. discount 120 d/s 27/6 p.c. 90 d/s „ 10/ p.c. Taking the buying rates, it will be seen that they have increased considerably. A customer desiring to sell a draft of £100 to the bank will receive only £99 10s., as against £99 ITs. 6d. in the off season, and a similar difference will be noted in the 30 days and longer dated bills. The reason why the banks charge a higher rate of discount during th*" wool season is that the purchasing of such drafts causes a heavy drain on their gold resources. It is not uncommon for Sydney banks to find it necessary to bring large sums in gold from the other capitals in order to provide funds to purchase these drafts, and the expense of procuring this gold is, of course, thrown upon those who desire to obtain it. It will also be noted that during the wool season there is a corresponding decrease in the bank selling rates. Dur- ing this season a demand draft on London can be obtained at 7s. 6d. per cent, as against 15s. per cent, in the off season, and it will be noticed that a 60 days' draft on London can be purchased at Ts. 6d. per cent, discount. This means that the bank will issue a 60 days' draft on London for £100 7s. 6d. on receipt of £100. The banks lower their selling rates during the wool season so as to encourage the purchase of bank drafts on London. By doing so they are provided with gold to purchase wool drafts. An illustration of two single transactions of a bank in one day wall supply a fair idea of what makes up a consider- able portion of a bank's business, and will also serve to illus- trate the above explanation. During the wool season A wishes to remit £1000 to London. He buys a demand draft on London from the bank, paying for the draft £1003 15s., the rate being Ts. 6d. per cent, premium. On the same day B, who has sent wool valued at £1000 to London, draws on his London agent on demand for this amount, and sells the draft to the bank. The bank will give him £995 for this draft, the rate being 10s. per cent, discount. The position of the bank over this transaction will then be as follow'S. It has sold and bought on the same day a demand draft on London for £1000. In the books of its London agent it will be debited with the draft sold and credited wnth the draft purchased, as the bank 187 A;U STRALASI AN ADVANCED ACCOUNTANCY. \vill send the latter draft home for collection. So tar as tlie bank is concerned therefore its account in the Lnndon agent's books in connection with these two transactions will be squared. It makes a profit of £3 los. on the draft it sold, and a profit of £5 on the draft it purchased, so that it ob- tained in all a profit of £8 15s. The remitter has settled his debt, the exporter has obtained payment for his wool, and tlie bank has made £8 15s. gross profit over the trans- action. Coming now to the rates of exchange in London tor drafts on Sydney, it is interesting to note that a London bank will (under ordinary peace-time conditions) sell its draft on Sydney at par. The reason for this seems to be that the balance of account between banks in England and their Australian agents or branches is greatly in favor of England, so that every draft sold by a London bank on Sydney acts as a partial settlement of this balance. It is, in effect, as good as a remittance in gold from Sydney to London, but without the cost of remittance. The London buying rates are, on the other hand, high. The i)re-war rates were as follow: — BUYING RATES. On Demand li p.c. 30 d/s 2] p.c. 60 d/s 22 PC. 90 d/s 3.i p.c. Modes of Remitting. — The question of the relative costs of settling for goods purchased in England under the various rates already shown, does not perhaps receive as much at- tention as it might on the part of business men, and the ex- ample supplied below will serve to indicate that it is a mat- ter which deserves full consideration by Australian ihi- porters. The method of remitting by Telegraph Transfer, although more common now than it was some years back, is not adopted as often as it might be. This mode of settle- ment will often prove to be the cheapest, especially where the local merchant is working on a bank overdraft. It is always advisable to keep in view the fact that where a draft is sent to meet a payment on a due date there is always at least one month's interest lost during the time the draft is in transit. For instance, a merchant desiring to pay an amount by demand draft in London on July :>lst nuist ]n:r- chase a draft in Sydney not later than, say, the •"ioth June. The following illustrations will, it is thought, make the relative cost (|uite clear :^ FOREIGN' AND BANK RATES OF EXCHANGE. William Johnson, who works on a bank overdraft upon which he pays interest at the rate of G per cent, per annum, owes a London merchant the sum of £1000, due on the 30th September, and he desires to know the mode of re- mittance which will prove to be the cheapest to him. The total cost to him under each of the various rates is shown hereunder : — ORDINARY RATES. Remittances by Demand Drafts- Amount of draft purchased on the 31st August E.Kchange at 15/ per cent On; month's interest on, say, £1008, at 6 p.c. . . Stamp Draft at 30 d/s— Amount of draft purchased on the 31st July £1,000 Stamp (say) Exchange at 5/ per cent. .. . Interest for two months on £100(5 Total Cost Draft at 60 d/s— Amount of draft purchased on the 30th June . . Stamp Duty (say) Exchange at 5/ per cent . . Interest on £1003 at 6 p c. for three months .. .. Total Cost Telegraphic Transfer- Amount of cable transfer on the 30th September Exchange at 17/6 per cent Cost of cabling (say) .. Total Cost £1,000 7 10 5 9 2 £1,012 10 11 £1,000 1 5 10 1 2 £1,016 1 2 £1,000 1 2 10 15 1 £1,01S 11 £1,000 8 15 15 £1.009 10 WOOL SEASON RATES. Remittance by Demand Draft — Amount of draft purchased £1,000 Stamp ••■■ ^ ^. I Exchange at 7/6 per cent 3 15 Intere'st on £1004 at 6 per cent., for one month .... 505 Total Cost £1,008 15 Draft at 30 d/s — Amount of draft purchased £1,000 Exchange at par Stamp (sav) ^ ^ o Interest on £1001 at 6 per cent, for two months .... 10 2 Total Cost £1,011 2 AUSTRALASIAN ADVANCED ACCOUXTANCY. Draft at 60 d/s— Amount of draft purchased ■• .. £1,000 Less exchange, at 7/6 per cent, discount 3 15 £996 .-) Plus Stamp (say) 10 Interest on £997, at 6 per cent, for three months .... 14 19 1 £1,012 4 1 Telegraphic Transfer- Amount of Cable Remittance £1,000 Exchange, at 15/ per cent, premium 7 10 Cost of Cabling (say) 15 £1008 5 NOTE.— At time of writing there is no Stamp Duty in Victoria on Bills such as the above, and the results would, in that State, be varied to the extent of the duty shown. It will be seen from the above that both at Ordinary and AN'ool Season Rates the cheapest mode of settling a debt due in London, for an Australian merchant working on an over- draft upon which he pays at least 6 per cent., is by Tele- graphic Transfer. It is possible of course that the merchant may be able to make better use of the money here and the whole of the circumstances in each particular case require looking into before a proper decision as to the most profit- able course can be arrived at. The above examples will show, in any case, that the matter is well wortli considera- tion. 190 CHAPTER XV. CONSIGNMENT ACCOUNTS— JOINT ACCOUNTS- ACCOUNT SALES— ACCOUNT CURRENT— EQUA- TION OF PAYMENTS— GOODS ON SALE OR RETURN. A Consignment is a parcel of goods sent by a merchant to his agent, usually in some other town or ccnintry, for sale on the merchant's behalf. The merchant despatching the goods is known as the Consignor and the agent who receives the goods as the Consignee. The ownership of the goods remains with the consignor, the consignee selling the goods on his behalf and accounting to him for the proceeds less the authorised deductions for expenses and commission. It will be seen, therefore, that this class of transaction requires somewhat different treatment in the books from an ordinary sale or purchase, seeing that the consignor cannot treat the goods as sold until he receives advice from the consignee that he has disposed of them, and on the other hand the con- signee cannot treat the transaction as a purchase in his books, seeing that the ownership remains with the con- signor. It is proposed to deal with the entries and accounts necessary to record consignment transactions under two sets of circumstances. Firstly, the treatment in the books of the consignor or of consignee who despatches or receives the goods on consignment occasionally; and, secondly, with the treatment of such transactions in the books of those con- signors and consignees who make a regular practice of deal- ing with consignments. ENTRIES IN ORDINARY TRADER'S BOOKS.— The entries in the books of an ordinary trader in connection with consignments will, of course, depend upon whether the trader is acting as consignor or as consignee. It is proposed to describe first of all the procedure in the books of the former. Consignor's Entries. — When goods are despatched on consignment, the consignor will require to know the result 191 -\ A U S T R A L A S I A X A D \' A N C E D ACCOUNTANCY. of the consignment, and in order to enable this information to be ascertained he must make the entries in his books in such a way that this result can be arrived at. It might be mentioned that consignment entries are usually the cause of a good deal of trouble and confusion in the books of the or- dinary trader, although there is nothing inherently difficult in connection with such accounts, provided a proper system of recording the transactions is adopted. The confusion caused by transactions of this nature can mostly be put down to an attempt on the part of the book- keeper to achieve the necessary results without taking proper trouble to ensure that the method he adopts is an adequate one. It should be understood at the commencement that a proper record of such transactions entails a little more work than is experienced with the ordinary transactions in a trader's books, seeing that the books are specially designed to record these everyday transactions with a mmimuni of work. Where consignments are apart from the ordinary course of business it is clear that the entries relating to them will require special treatment, keeping in view the fact that the trader will desire to know the net result of each separate consignment. In some cases it is the custom to make no entries in the financial books in connection with the despatch of a coi>- signment until advice is received from the agent that the goods have been sold, accompanied by a statement showing the net proceeds. The amount of the net proceeds is then put through the Day Book and treated as an ordinary sale, being posted to the^ debit of the agent's account. It nerd hardly be pointed out that this is a totally incorrect method of treatment. In the first place it is distinctly inadvisable that anv goods should be despatched without some record being made in the financial books; and, sect)ndly, the fact thatgoods disposed of in this way will not realise the usual percentage of profit will introduce a disturbing element into the "sales and will render useless any comparison of the gross i)rofitf from year to year. W lien sending goods out on consignment it is necessary t(j (ipcn a Consignment account in the Private Ledger. This account is a miniature Profit and Loss account which is de- signed to show the profit or loss on the consignment. .\ journal entrv will be passed debiting Consignment account "with the cost price of the goods, a pro-forma invoice being sent to the agent for this amount. The credit entry will be made in (ioods Sent on Consignment account (not Sales ac- count), the latter account being transferred to the credit of Trading account at tin- close of the financial p^nod. Any expenses incurred by the consignor in despaicbmg the goods 192 C O X S 1 G X M E X T A C C O U X T S. will be debited to Consignment account and when an Ac- count Sales is received from the agent showing the net pro- ceeds from the sale of the goods, a Journal entry will be passed debiting the agent and crediting Consignment ac- count. This account will then show the net profit or loss on the consignment and the balance will be transferred to the credit or debit of Profit and Loss account on balance day. it will be noted that no entry is made in the personal account of the agent until an Account Sales is received from him showing the net amount for which he is accountable to the consignor. In some cases, however, an arrangement is made for the merchant to issue a bill of exchange drawn on the agent for a portion of the value of the consignment in advance. Where this is done the agent's account will be credited with the amount of the draft and, when his account is debited with the net proceeds, the difference between the debit and credit items will show the balance due by him to the consignor. Where several consignments are sent out during _ any financial period it is usual to indicate at the heading of the Consignment account, in the manner shown in the illustra- tion supplied hereunder, the particular agent to whom goods have been despatched. Reference has been made above to an Account Sales. This, as its name implies, is a statement of sales rendered by the consignee to the consignor, setting out the amount realised on sale of the goods and showing as deductions therefrom the expenses incurred in selling and the agent's agreed commission. This Account Sales is fre- quently accompanied by an Account Current, more especi- ally where there is a provision that interest is to be charged and allowed upon the amounts received and paid by the con- signee on behalf of the consignor. An Account Current is a statement setting out the transactions between two persons as they occur from day to day and showing, where agreed upon, interest calculated on the various items coin|)ri>ed therein. A careful study of the following example should make the procedure in the consignor's books clear: — On 10th January, Messrs. John Paxton & Co., Mel- bourne, forwarded for sale on consignment per S.S. "Gran- tala" to Mr. William Addison, of Sydney, 600 bags potatoes, 15 bags to the ton, pro-forma invoice at £3 10s. per ton, £140. They pay freight £33 10s., and insurance 14s. Wil- liam Addison on 11th January accepts a draft of £100 at 60 days drawn on him by the consignors. He pays the following charges : — 193 AUSTRALASIAN AD \- A X C E D A C C O U X T A X C Y. Ian. 14 Inspection Fee at 3d. per ton 15 15 Wharfage at 2/6 per ton 5 20 Loading 10 25 Weighing 12 And makes sales as follows: — Jan. 20 150 bags at £5 per ton. 24 100 ., at 5 „ Feb. 10 150 „ at 5 10 „ 25 200 „ at 5 15 „ He receives payment for all the above except 150 bags sold on 10th February, for which he receives a 80 days' P.N. Show entries in books of the consignors, Messrs. John Pax- ton & Co. Specimen Account Sales and Account Current received from A\'illiam Addison are shown over page. ENTRIES IN JOHN PAXTON & CO.'s (CONSIGNOR'S) BOOKS. (In Private Ledger.) CONSIGNMENT ACCOUNT (WM. ADDISON) 19 .- 19 .— Jan. 10— To Goods on .Mar.2— Bv Wm Addison Const. A/c £140 0.. Net proceeds £184 4 8 „ Cash Freight 22 10 „ Insur- ance .... 14 Mar. 2— „ Net Profit . 210 8 £184 4 8 £184 4 8 (In Sales Ledger.) WILLIAM ADDISON. 19 .- 19 •-- Mar. 2— To Net Proceeds Jan. 14— By P.N. due 15th per Account March .... £100 Sales .... £184 4 8 „ Cheque ... 84 15 2 „ Interest ... 10 6 £184 15 2 £184 15 2 194 CONSIGNMENT ACCOUNTS. Hccount Sales „/ ^<^ -^a^ o^^f^sMZo . B.^^. X.W^4^ , .oU on AccouM ,, Jl>A<^/Lc.t^ Y^a. . .=<^;Sl(tZ^«>i>tA-t-a„ by WILLIAM A DDISON. Exchange Buildtngs. Sydniy. Less Charge, y C ip A ■-«4lw 7"/- '/- '/- o/- 9^- Syil'iey ^? :^ X JDlSON 195 AUSTRALASIAN ADVANCED ACCOUNTANCY. V ^ ^ 4 -s 2 i\ V^^ ^!? C^ ^ •^ «^ ^ ■^ -^ <^ «^ U W ■* Ck lo s > * -S ^ -^ 3 Vj O > Or S '^ f^ AJ <^ ^ 196 CONSIGNMENT ACCOUNTS. Consignee's Entries. — In the books of tlie agent receiv- ing the j^c^ods on consii;nnient a Consignment account should bc°opened in the Private Ledger in order to enable the net result of the consignment so far as the agent is concerned to be ascertained. Upon the receipt of the goods a Journal en- try should be passed debiting the Consignment account and crediting the Personal account of the consignor with the pro forma invoice price of the goods. Care should be taken to distinguish the account of the consignor from the accounts of ordinary creditors in the agent's Bought Ledger, and this is usually done by writing after the name of the consignor's account in that ledger the words "Consignment Suspense Account." in order to ensure that no remittance will be made for the balance showing in this account until the goods are finally disposed of. Oi course, if the agent receives numerous consignments, he will have a separate Consignor Ledger, but under the circum- stances now being considered a Personal account will be opened for the consignor in the ordinary I'ought Ledger and distinguished in the manner alreadv indicated. Anv expenses paid by the agent in connection with the consignment vrill be debited to the Consignment account and any amounts received on sale of the goods will be credited to that account. Where goods are sold for cash the items will be posted direct from the Cash Book to the credit of the Consignment account and care should be taken to ensure that any moneys received in this way are not included in the agent's' own cash sales. If the Consignment goods are sold on credit it will be of course incorrect to charge the amount to the purchaser through the agent's Day Book, seeing that this does not form part of the agent's own sales. For sales of this nature a Journal entry should be passed debiting the Personal account of the purchaser and crediting Consign- ment account. When all the goods are disposed of the agent wall pass a Journal entrv debiting Consignment account and crediting his Commission account with the agreed rate of commission, and the balance of the former account will then represent the net result of the consignment. This balance will be trans- ferred to the debit or credit of the Personal account of the consignor, which account will then show the amount due by the consignee to his principal. Any_ draft drawn in ad- vance by the consignor on the agent will of course be de- bited to the consignor's Personal account, not to the Con- signment account, and this amount will tend to reduce the amount to be remitted to close the consignor's account. 197 AUSTRALASIAN ADVANCED ACCOUNTAXCV. 'J"hc aj^eiit will then prepare an Account Sales and, where necessary, an Account Current and will forward these documents to the consignor. For the i)urpose of giving an illustration of the entries in the books of the consignee the example already supplied will be continued and the entries in connection with that consignment shown from the stand- point of the consignee. ENTRIES IN W. ADDISON'S (CONSIGNEES) BOOKS. ( 1 n Private Ledj^er. i CONSIGNMENT ACCOUNT (J. PAXTON & CO.). 19 .— 19 - Jan. 14— To J. Paxton Tan. 20— Bv Sales .. . . £.J0 & Co £140 Jan. 24— „' Sales . . . . 33 6 S ., Cash Inspec Feb. 10 — ,, Sales due ftion Fees 15 12th .March 55 15— „ Cash Wharfage 5 Feb. 25— „ Sales ..... 63 6 7 20— ., Cash Loading 1 24-- .. Cash Weighing 12 Feb. 28— ., Commission 10 1 7 „ T. Paxton & Co 44 4 8 £201 13 3 £201 13 3 (In Bought Ledger.) JOHN PAXTON & CO. CONSIGNMENT SUSPENSE ACCOUNT. 19 .— 19 .— Jan. 14 — To P.N. due Jan. 24 — By Consign- 15th March £100 men't Account .. i'140 Feb. 28— ,. Cash .... 84 15 2 Feb. 28— „ Interest .. 10 6 Feb. 28 — ,, Consignment Account . . 44 4 8 £184 15 2 £184 15 2 Adjustments on Balance Day. — if the consignor has goods out on consignment at the close of a financial period he will require to know the position of the consignment in order to enable him to show his true profits for that period. Under such circumstances the agent should lie rc(|uired to i)repare and forward to the consignor an .Vccount Sales showing the position u]) to a date as near to balance day as I)ossible. This statement will show the sales to date and expenses incurred, including the agent's commission, and should also set out at the foot the pro-forma invoice value or the quantities of the goods which lie still holds. It is not necessary for the agent to make any entries in his books in connection with this statement, but in the consignor's l)ooks the folhnving entries must be i)assed if it is desired to 198 CONSIGNMENT ACCOUNTS. make the Coiisii^nment account show the profit or loss to date. (a) Debit the Consij^nee and credit Consiii^nnient ac- count with the net proceeds as sliown by tlie Ac- count Sales. (b) Ascertain tlie cost price to date of the goods which the agent still has on hand, and pass a Journal entry debiting "(ioods out on Consignment ac- count," and crediting Consignment account. The former account will appear in the books as an as- set over balance day, and the latter account will then show the net profit or loss to date, the bal- ance being transferred to Profit and Loss account. Some calculation will be required to enable the "cost price to date" of the goods held by the agent to be ascer- tained. To the original pro-forma invoice price of the goods must be added a proportion of the expenses paid by the consignor in despatching the goods, together with a pro- portion of the expenses paid by the agent to date. In ar- riving at this latter amount care should be taken to eliminate any expenses shown on the Account Sales rendered by the agent which are applicable only to those goods which have been sold. Such expenses as freight on goods sold, agent's commission. &c.. will not increase the cost price of the goods which he now has on hand. On the day following balance day a reversing entry must be passed debiting Consignment account and crediting Goods out on Consignment account with the cost price to date of the goods in the hands of the agent. Joint Accounts. — It sometimes happens that two or more persons join together for the purpose of entering into a venture. These ventures are often somewhat similar to a consignment, although generally speaking they are of a more speculative nature. An arrangement is made between the parties as to the amounts to be contributed by them respectively, on the understanding that the profit or loss on the venture is to be shared. The accounts necessary under such circumstances are as follow. A separate Capital account is opened for each party, to which is credited the amount contributed by him towards the venture. A Joint Adventure account or Joint Speculation account will then be opened, and this account will be debited with the cost of any goods, &c., purchased during the course of the trading and also with all expenses 199 A U S T R A LA a I A \ ADVANCED ACCOUNTANCY. incurred. Any amounts received on realisation of the goods, &c., will be credited to this account and the balance, which will represent the net profit or loss on the adventure, will then be transferred to the Capital accounts of the parties in the ag^reed proportions. The balance of cash on hand should be just sufftcient to repay to the parties the amount standing- at the credit of their Capital accounts after the l^rofit or loss has been adjusted. Where an arrangement is made that the i)arties are to receive interest on the capital contributed by them the amount of interest will be calculated before the Joint Ad- venture account is closed ofif, being charged against that account and credited to the respective Capital accounts. ENTRIES WHERE CONSIGNMENTS ARE FRE- QUENT. — As already mentioned, where the despatch of consignments is of frequent occurrence, special books should be designed in order to enaljle a proper record of these transactions to be made with a minimum of trouble. Where the despatch or receipt of consignments is apart from the ordinary course of business the additional work involved in recording the entries in the manner previously indicated is not serious, and no alteration in the ordinary st3de of book- keeping is found necessary. This system would, however, prove far too unwieldy where consignment transactions are numerous and it is thought that the system outlined below which is in use in a number of businesses, will be found satisfactory under such circumstances. Consignor's Books. — The consignor will require to keep a book somewhat in the form of an ordinary Day Book, called a Consignment Day Book, in which will be entered in chronological order the names of the consignees and par- ticulars of the goods despatched to them. This book usu- ally contains more particulars with regard to the goods than would be inserted in an ordinary Day Book, the quan- tities or weights, numbers of cases and marks on the cases, &c., being recorded fully for future reference. Another dif- ference is that the goods will be put through this book at cost ]:)ricc' instead of ordinary selling prices. The items recorded in the Consignment Day Book will be posted to the debit of accounts in the Consignment Led- ger, a separate account being opened in that ledger for each consignment despatched and the heading of the accounts indicating the names of the consignees. This ledger will be run on the self-balancing principle already described and an adjustment account will ])c kept therefor in the Private 200 C O X S I G \ M E X T A C C O U X T S. Led.uer. At the end of the month, the total of the Con- signment Day Book will be posted to the debit of the Con- signment Ledger Adjustment account and to the credit of Goods sent on Consignment account. The Personal accounts of ihc consignees will be kept in a Debtors' Ledger. As the Account Sales are received from the consignees these will be entered in an Account Sales Book which will show the names of the consignees and brief particulars of the Account Sales, the amounts oi the net proceeds being posted from there to the debit of the con- signees' accounts in the Debtors' Ledger. It might be men- tioned that provision should be made in the Account Sales Book for two folio columns, as each amount must be posted twice ; in the first place, as already indicated, to the debit of Ihe proper consignee's account in the Debtors' Ledger; and, secondly, to the credit of the particular Consignment account in the Consignment Ledger. At the end of the month the total of this book will be posted to the debit of Sundry Debtors account and to the credit of Consignment Ledger Adjustment account. At regular intervals, usually at the end of each month, the Consignment Ledger should be gone through and a Journal entry passed transferring the balances of those ac- counts in respect of which a final Account Sales has been received to the credit or debit of Profits and Losses on Con- signment account, at the same time making a corresponding debit entry in the Consignment Ledger Adjustment account. The balance of this last mentioned account should then agree with the total of tlie balances in the Consignment Ledger. With regard to remittances received from consignees these will be treated on exactly the same lines as payments received from debtors. The amounts received will be posted from the Cash Book to the credit of the Personal accounts of the consignees in the Debtors" Ledger and the total of such remittances will be credited at the end of each month to Sundry Debtors account. Consignee's Books. — .\ system very similar to that de- scribed above, except that the entries will be in a reversed form, will be suital)le for a consignee who receives consign- ments from numerous principals. The amounts and details of pro-forma invoices received will be recorded in the first place in the Consignments Inward Book. This book should be provided with two ledger folio columns, as each item en- tered therein must be posted twice, firstly to the debit of a Consignment account in the Consignment Ledger and, secondly, to the credit of the Personal account of the prin- 201 AUSTRALASIAN ADVANCED ACCOUNTANCY. cipal in the Consii^iiors' Led.ucr. At the end of the month the total of this book will be posted to the debit of Con- sis^nments Received account and to the credit of the Con- signors' Ledg^er Adjustment account, both of which accounts will appear in the Trivatt Led.L^er. A separate column should be set aside im the credit side of the Cash Book to record expenses paid in connection with the various consignments. These items of expenses should be posted from the Cash Book to the debit of the respective Consignment accounts in the Consignment Ledger and, at the end of the month, the total of this column in the Cash Book will be posted to tlie dcl)it of Consignments Received account. In connection with the sale of consigjnment goods by the agent a Consignment Day Book will be required. If the number of consignments on hand at any one time is not likely to exceed from fifteen to twenty, a tabular Day Book might be used, a separate column being set aside to record the amounts of the sales in connection with each consign- ment, thd items in this book being posted to the debit of the Personal accounts of the purchasers in the Debtors' Ledger. At the end of each month the totals of the various columns will be posted to the credit of the respective Con- signment accounts in the Consignment Ledger and the grand total of the book debited to Sundry Debtors account and credited to Consignments Received account. As each parcel of consignment goods is cleared ofi, an entrv should be passed through the Commission Book and posted to the debit of the account in the Consignment Led- ger, the total of the Commission Book being posted at the end of the month to the debit of Consignments Received account and to the credit of Commission account. At the same time an entry should be passed through the Journal transferring the balance of the particular consignment ac- count to the credit of the consignor's Personal account in the Consignors' Ledger, this entry being also posted in the Private Ledger to debit of Consignments Received account and to the credit of Consignors' Ledger Adjustment account. The Account Sales and Account Current must next be pre- pared, and a reference made in the above Journal entry to the copy of these statements retained by the agent. A se])arate column should be provided on the credit side of the Cash Book to show remittances to the consignors. The individual items entered therein will of course be posted to the debit of the Personal accounts in the Consignors' Ledger and, at the end of the month, the total of this column in the Cash Book should be posted to the debit of Con- 202 C O \ S 1 G N iM EXT A C C O U N T S. signers' Ledger Adjustnient account. llie balance of the account last mentioned should agree with the total ol the balances contained in the Consignors' Ledger and the bal- ance of the Consignments Received account should agree witli the total of the balances in the Consignment Ledger. It is thought that an)one understanding the principles of self-balancing Ledgers, described in Chapter IL, should have no difficulty in following the system set out above. ACCOUNT SALES.— A defmition of Account Sales has already been supplied and the illustration given will make the nature of the items to be included in such a statement and also the method of preparation perfectly clear. ACCOUNT CURRENT.— A dehnition and illustration of an Account Current has also been supplied. With refer- ence to the items shown on the credit side of the statement these will be obtained from the credit side of the Consign- ment account in the books of the consignee. The items on the debit side will be obtained from the amounts shown on the debit side of this Consignment account, but .reference should also be made to the Personal account of the con- signor in order to see if any draft has been drawn aganist the shipment. In the case illustrated it will be seen tliat a draft for A^lOO was drawn, and this must be shown on the debit side of the Account Current. Stated briefly, the A.c- count Current shows on the credit side any amounts the consignee receives on behalf of the consignor, and on the debit side any payments made by him on the consignor's account. With regard to interest, this is calculated on each item for the number of days between the date when the amoi'.nt was received or paid and the date of settlement. Taklrg, for instance, the first item on the credit side, it will be seen that this amount was received on the 30th January, the date of settlement being the 28th February. The consignee therefore, had the use of this amount for thirty-nine days, and interest is calculated on £50 for that period. On the debit side the consignee charges interest on the vanou? amounts paid by him for the number of days in bet\ve«pn the dates of payment and the date of settlement. The dif- ference betw^een the total of the debit and credit columns Avill represent the amount of int'irest due by or to the con- signee. Li the illustration supplied, an amount of 10/6 is due to the consignor for interest, as this amount represent-^ the balance of the two interest columns. The consignee will therefore pass a Journal entry in his books debiting Interest account and crediting the consignor's Personal account, 203 AUSTRALASIAN' ADVANCED ACCOUNTANCY. showiii.u the amount also on the credit side of the Account Current. The items of interest shown in brackets on tlie two sides may perhaps require explanation. Takini; first of all the amount of 1/10 on the credit side, it will be seen on refer- ence to the "particulars' column that these i^oods were paid for by a P.N. which is not due until the 12th March. Al- though the consignee will not receive payment in cash of this amount of £55 uv.til the 12th March, he is treating the amount as a credit to the amount of the consignor on the 28th February, i.e., he is in reality paying the consignor the amount twelve days before he will receive it himself. He is therefore entitled to receive twehe days' interest on this amount and this rebate is shown in the debit Inte- rest column in the manner indicated. It is also shown in the credit Interest column in red ink, in order to indicate the item upon which it is charged, but this amount is not included in the total of such column. Taking now the item -J /I in the interest column on the debit side a somewhat similar position arises. The con- signee does not have to pay this £100 in cash until the 15th March, but he is treating it as a debit to the consignor's ac- count and as a deduction from the amount of the remit- tance as on th'i 28th February, and he must therefore allow the consignor fifteen days' interest. This interest is in- cluded on the credit side, and is stated in red ink on the debit side in order to show on which amount it is calcu- lated. Upon receipt of the Account Sales and Accounc Cur- rent from the consignee the consignor will pass an t-ntry for interest corresponding with that shown in the Account Current. In the present case he will debit the Personal account of the consignee with the interest and credit Interest account, as shown in the specimen accounts. EQUATION OF PAYMENTS.— It is very often useful to be able to find the average date upon which the tt)tal of a number of varying amounts due on different days would be payable. This method of calculation is often utilised in the case of shipments of goods which are made on varying dates, where it is desired to draw one bill to coxcr the total amouiit of the shi])ments. The method of arriving at the average due date is very shnple. (;•; h"ix upon a certain date, preferably tiie hr>t date ui)on which an amount is due. 204 CONSIGNMENT ACCOUNTS. (b) Calculate the number of days between that date and the other dates upon which amounts are due. (c) Multiply each amount by the numljcr of days be- tween the date when it is due and the date fixed upon. (d) Find the total of the amounts due. (e) Find the total of the products. (f) Divide the total products by the total pounds and the result will give the number of days after the date fixed upon, upon which the whole amount will be due. The example supplied below will enable the above pro- cedure to be followed without difficulty. A. & Co. in London ship goods to B. & Co., in Mel- bourne, payments being due as under : — March 15 . . £1()0 .31 . 21 S April 7 . 346 23 . . 133 It is desired by the home firm to draw a l)ill at three months to cover the total of the shipments. Show the date from which this bill must be drawn. March 15 . . £160 — 31 . 218 X 16 £3.488 April 7 . 346 X 23 7,958 22 . 133 X 38 5,054 £857 £16,500 16,500 divided by 8.-i7 equals 19fi|, say, 20 days from the 15th March, giving the average date at the ^th April. The bill would therefore be drawn for £857 under date of 4th April, and would be due on the 7th July. GOODS ON SALE OR RETURN.— it is the custom in a number of retail houses to send goods out to customers on approval, i.e., the goods are sent to the customer for inspec- tion in order to enable him to ascertain whether they are suitable before he actually purchases them. He is not ac- tually chargeable with these goods unless he notifies the supplier either expressly or impliedly that he intends to keep them or retains them beyond a rca?onal)le time. 205 !\USTRAL ASIAN ADVANCED ACCOUNTANCY. A careful record should be kept of all such goods, and a Sale or Return Book should be kept in which should be entered all goods sent out which are not at the time charge- able against the customer. Provision should he made there- in to show that the goods have been returned, if such is the case, and also to show, in the event of the goods being re- tained by the customer, that the transfer has been made into the ordinary Day Book. The Sale or Return Book should be referred to daily in order to ensure that no transactions of this nature are over- looked. It is advisable where possible to fix a period within which the goods must be returned by the customer if he does not desire to keep them, and under these circumstances it is a simple matter to ensure that no goods are retained by customers without being charged up against their ac- counts in the Customers Ledger. The following ruling will indicate the style of book required. Where there is a numl:)er oi departments in the business it is advisable that a separate Sale or Return Book should be kept for each department, and that this book should be kept in the department itself and not in the office. Where the goods are retained by the customer the department will prepare a Sale Note in the usual way for the office, and this will ensure that the transactions will be put through the office books and charged against the customer's account. SALE OR RETURN BOOK. Su^pli^tL Heturrts^ D»^cruf>tkJorL. e^ Gooti^ 206 CHAPTER XVI. TABULAR BOOKKEEPING. BOOKS OF FIRST RECORD— TABULAR LEDGERS. Although the prhiciples of Double Entry- Bookkeeping remain the same throughout, it is clear that, in different classes of business, some variations in procedure will be found necessary if the books are to supply the required amount of information. The books of a business which con- tains a number of different departments must necessarily be more elaborate than those of a small shop, and the sys- tem to be adopted in each case must depend upon the re- quirements of the particular business. A business running a number of dift'erent departments will in most cases require to have the result of each depart- ment shown separately and it will of course be necessary for the totals of the various transactions relating to each department to be ascertained at the end of each month. This may be done by dissecting the entries shown in the books every month, but a better plan is to tabulate the books or. in other words, to provide additional columns therein in order to enable this dissection to be performed as the work proceeds. This will obviate throwing the whole r,f the additional work on to the end of the month. In certain businesses the Ledger itself may be kept in tabular form and, where such a form of Ledger is suitable it will result in a considerable saving of time and labor on the part of the bookkeepers. It is proposed to deal in the first place with the tabulation of the various books of first record. Day Book. — In a business with a number of depart- ments the proprietors will generally require to know the result of each department and. where such is the case, it will, of course, be necessary to arrange the Day Book so that the total sales for each department can be ascertained without difficulty. In a large business where the depart- ments are numerous and the office staff' fairly large it is 207 AUSTRALASIAN ADVANCED ACCOUNTANCY. 208 TABULAR BOOKKEEPING. advisable to have a separate Sales Book for each depart- ment, as more than one clerk will be employed upon writ- ing- up and posting- the sales. In smaller businesses where only one Day Book is kept the sales relating to each de- partment are kept distinct by providing separate columns in the Day Book in the manner shown in the accompanying illustration. A tabulated Day Book will also prove useful where there are several sales ledgers kept on the self- balancing principle. At the end of the month the total of the first column will be posted to the debit of Sundry Debtors account and the total of the remaining columns to the credit of the re- spective Sales accounts of the various departments. Invoice Book. — The purchases will require to be dis- sected in the same way. The ruling will be similar to that shown herewith and a separate Purchases account will be kept for each department. A dissection of the sales and purchases under the headings of the various departments will enable the gross profit for each department to be as- certained without difficulty, as the stocks can easily be kept apart. Returns Books. — The Returns Inward and Outward Books are sometimes tabulated in the same manner as the Sales and Purchases Books in order to enable the monthly totals of the returns for each department to be ascertained. This will, however, only be necessary where returns are numerous, as, if such transactions are not frequent, the separate totals can be arrived at by dissection at the end of each month. Cash Book. — This book provides greater scope for tabu- lation than any of the other books of first entry. By the simple method of providing additional money columns in the Cash Book a considerable amount of time can be saved in posting to the Ledger and the accompanying illustraticn shows how the Cash Book of an ordinary trading concern might be tabulated with this object in view. Referring to the debit side, the Sales Ledger column will supply the monthly total to be posted to Sundry Deb- tors account and the Cash Sales column the monthly total of such sales to be posted to the credit of Sales account. Where transactions in bills receivable are numerous it is advisable to introduce an additional column on this side, so that the monthly total of bills matured or discounted during the month can be readily ascertained, and this will save the necessity of posting each bill separately from the Cash Book to Bills Receivable account. 209 AUSTRALASIAN ADVANCED ACCOUNTANCY. -iTT 210 TABULAR R O O K K E E P I N" G. -I :;^: 1^^ — ^— T I, ^ :? -* - ^ '^ ^ i ^ ■? ?^ > 4 ^ — ?- u -f -^■- > > n 4—1^^ 1 -^ r-5 ^ 1 -? T^ (K c It ? t 1 8 -H ? t > . ^ s s ^ ^ ^ .n ^s; ^> §.s.^ ^ ^ i 1 ^ . . . - • 1 ;j ^ s -j^ 1 4. 211 A/USTRALASiIAN ADVANCED ACCOUNTANCY. On the credit side of tlie Cash Book it will be noticed that a number of additional columns has been introduced in order to enable the monthly totals of the various expenses to be ascertained without difficulty. In this way a dissection of the various expenses is made as the Cash Book is being- entered during the month, and these expenses can then be posted to the Ledger in totals. It is not practicable to provide a separate column for each expense which is likely to arise, but a Sundries column is inserted in order to con- tain items which cannot properly be included in any of the special columns and the items of this column must be posted separately to the respective accounts in the Private Ledger. In some businesses the Cash Book rulings are more elaborate than those supplied here. An illustration of ? Cash Book such as would be used by an Insurance Company will be found in Chapter XXI. dealing with Insurance Com- panies' Accounts. Petty Cash Book. — The credit side of the Petty Cash Book might also be tabulated with advantage, provision be- ing made for each class of expense which occurs with suf- ficient frequently to warrant a special column being utilised. These columns should be shown to the right of the "Pay- ments" column and the total of the dissection columns should agree with the total payments. Tabular Journal. — A s])ecimen of a Tabular Journal has already been supplied in Chapter II. when dealing with Self- balancing Ledgers, this form of journal enabling the monthly totals of entries affecting personal accounts, for posting to INDENT DEBITS '?^< M^ ■^ 212 T A H U L A R B O ( ) K K P: E F 1 N (}. the respective adjustment accounts, to l)c ascertained with- out difficulty. A specimen of a 'rabuhir Journal which could be utilised to advantage by an Indent Agent is supplied here- with, this book containing a record of the amounts to be credited to the consignors and the charges to be made against the local merchants for whom the goods are in- dented. Each page of this book can be balanced across as the total of the items in the credit columns should always agree with the total of those in the debit columns. When an invoice for goods indented is received from the con- signors the amounts charged on the invoice will be entered in the debit money columns, the total of the invoice being carried to the "Personal Credits" column on the credit side and from there posted to the credit of the Consignors' ac- count in the Ledger. The price of the goods and the charges on this invoice are then dissected and entered against the various local merchants for whom the goods have l)een indented. The details of the charges against each merchant are shown in the columns on the credit side and the totals of such charges are included in the "Personal Debits" column. being posted from there to the debit of the respective mer- chants' accounts in the Personal Ledger. After each ship- ment is dealt with the debit and credit "Merchandise" columns should be squared ofif. but the totals of the other charges columns should be carried forward until the end of the month or quarter, the items on the debit side beins; posted to the debit of the respective nominal accounts, those on the credit side being posted to the credit of such ac- counts. /J/ ■fgfiT. 7 JOURNAL. CREDITS TsvV^PT ■zrr Ch»r|M C I 9 i 213 AUSTRALASIAN A D \' A N C E D ACCOUNTANCY. Such a ruling will enable full details of the arrival and despatch of each shipment to be kept within the covers of one book, and will also enable the profit made by the a^ent under the respective headin^rs to be arrived at with a mini- nium of trouble. Tabular Ledger. — A "Tabular" Ledger should not be confused with a "tabulated"" ledger. The latter term is used to describe one in which the ordinary debit and credit col- umns of certain accounts are divided under various headings for the ])urpose of dissecting the items posted to such ac- counts. .\ "Tabular"' Ledger is a special form of book which can only be used suitably in certain classes of business. It can best be described as a combination of Day Book and Ledger, or, in other words, as a Day Book which, by the provision of additional columns, is capable of being used as a Personal Ledger. Such a book can only be used to a 1- vantage wdiere there is a considerable number of persor al accounts and the entries to be made in such accounts ^re few and regular, or where the personal accounts are few but the charges are to be made frequently and regularly. This being the case, it will be seen that a Tabular Ledger could not. as a general rule, be used in the case of an ordinary trading concern, but it could be utilised to great advantage in a concern such as a water company which has numerous personal accounts against which it makes regular quarterly or half-yearly charges, or by a municipality or shire which charges rates yearly or half-yearly against the ratepayers. A specimen of the Rates Book provided for under the regulations of the New South Wales Local Government Act of 1906 is supplied herewith. The portions of this book re- lating to valuations have been omitted, as space will not permit of their being included, but the essential portion to illustrate the use of the Tabular Ledger is shown. It will be noted that a separate line is set apart for each ratepayer, any arrears owing by him for the previous period or periods being carried forward in the first money column. The next column shows the amount of the general rate chargeable against him for the current year and the "total"" column supplies the addition of these two amounts. .\s payment is made, the amount is shown on the same line in the columns to the right and provision is also made for charging interest on arrears or for the writing off of any rates abandoned. The last column shows the balance owing by each ratepayer at the end of each year, and this amount is carried forward to the set of ])agcs utilised for the rate book for the following year. 214 TABULAR I^ O O K K E E P I N G. ■Jtiqianfj j.nuisSDMV 5 iTi ■ • 1 ^ i! 1 <« •9i«p ana S "^1 •■(U8iuuopu*q» s.iiouuoo )0 o%va 5 lunooiv 3 ^ - M ■ •(}8ai*ju! auipnioxj) ioi pred junouiB i»»ox 'O =. - M 1 ltd » IV leajsiui ^ « ^ ,-._.. M 1 1' M « « 1 c s -ii s 2 s ii < ■1U33 ■d 1 1 = <3 M 5 ^■ m X M S5 4i s S 1 ■o ?! • 1 'i 1 < 1 41 uo anp 7 61 "».» JOj al ?i < 1 < ^ 111 s •jaqamM luaiuesaesy a i 1 •OTSjppY linsoj JO op«j. aj •wEBvj l^^•^o - •acreojns o 1 •MiMppV |V»90J o •oonwinooo io^ptuj. • •BaowN j9qK) n •,ai,u.ns - laqmr NlH.t BS8»S8V " 215 AUSTRALASIAN ADVANCED ACCOUNTANCY. 'IMie second money column already referred to acts as the General Rate Book for the year, and the total is posted to the debit an Adjustment account equivalent to the Sundry Debtors account in an ordinary trading concern, and to the credit of General Rates account. The total cash received from the ratepayers is posted monthly to the credit of the Adjustment account, as are also any amounts written of¥ for rates abandoned and the balance of the Adjustment account will agree with the total of the arrears carried for- ward, as shown in the last money column. A careful study of the ruling supplied should make the method of keeping this book quite clear. Tabular Ledgers may also be used to advantage by newspapers and other periodicals which have regular sub- scribers ; by educational establishnients which make regu- lar quarterly or half-yearly charges against students, and by practically any concern which makes regular but infrequent charges against the personal accounts. This form of Ledger is also used by hotels, which must necessarily make the book of first record perform the office of a personal ledger for their guests, as these accounts must he kept written up to date. In a Hotel Ledger a separate page is set apart for each day, the numbers of the rooms and, if necessary, the names of the occupants being shown in the Particulars column on the left-hand side. A number of money columns is then included headed with the various charges which may be made against the personal accounts during the day and these columns are added downwards and across. The cross totals show the total amount due by each guest for each day, any cash received in settlement or part settlement of the accounts being entered in the money column to the right of these totals. The balances of the personal accounts are shown in the "Balance" column and are carried forward on the same lines on the page for the next day's transactions. The downward totals of the various charges columns are also carried forward and are, at the end of the month, posted to the credit side of the respective nominal accounts. A specimen of a page from a Hotel Ledger is supplied here- with. 216 TABULAR BOOKKEEPING. I' ■H 217 CHAPTER XVII. DEPARTMENTAL ACCOUNTS AND BRANCH ACCOUNTS. DEPARTMENTAL ACCOUNTS.— As explained in Chapter XVI.. tiie tabulation of the Day Book, Invoice Book, &c., under the heading of the various departments of a busi- ness will enable the monthly totals of the transactions relat- ing to the respective departments to be ascertained without difficulty, and this, in turn, will enable the amount of gross profit earned by each department to be arrived at. In busi- nesses with a large number of departments it is more usual to provide a separate Day Book, Invoice Book, &c., for each department, instead of tabulating the one book, and this, of course, enables the same information to be ascertained. The importance of keeping proper departmental ac- counts cannot be over-estimated, as it is just as important that the proprietor of a business containing a number of departments should be able to ascertain the separate result of the trading of each, as it is that a proprietor of a small business should be able to find the result of the transactions for the business as a whole. By preparing a separate ac- count for each department the proprietor can ascertain with- out difficulty those which are being conducted satisfactorily and those which are not, and can set about remedying any defects which exist. If, however, only one account is pre- pared for the whole business, it is clear that any such de- fects will remain undisclosed. CAvcn the Stock, Sales, Purchases, &c., for each depart- ment, it is, of course, a simple matter to prepare separate 'leading accounts, and in this way the amount of gross pro- fit earned by each department is disclosed, and it can readily be seen whether or not each department is earning the an- ticipated percentage of profit on sales, 'i'hc prei^aration of such accounts along proper lines provides an almost e(|ually important check in that it enables it to be ascertained whether the stock has been taken accurately. It is some- times possible to work a department on a fixed percentage of gross profit and, where this percentage is adhered to, the 2 IS DEPARTMENTAL ACCOUNTS. amount of stock-on-hand at any time can be readily ascer- tained and the periodical stocktaking acts mainly as a check upon whether this percentage has been strictly adhered to. If, for example, a department regularly adds, say, 33 i per cent, to the landed cost of goods in order to enable the selling price to be ascertained, the gross profit should be 25 per cent, of the sales. With this information and the amount of stock on hand at the previous balance day avail- able, the present stock on hand can be ascertained without difficulty, being the excess of the stock at the beginning, plus landed cost of stock purchased, plus gross profit over the sales. These estimated Stock accounts are, in many cases, prepared each month and they prove very useful in enabling the manager of each department to see whether he is maintaining his stock at a normal level. If, however, it is not possible for a department to work on a fixed percentage of gross profit, a similar result can be arrived at by taking the average percentage earned in pre- vious years. Assuming, therefore, that a department adds invariably 33 i per cent, to cost price in order to ascer- tain the selling price, or that the percentage of gross profit disclosed in previous years equals 25 per cent, on sales, an estimated Stock account could be prepared each month without difficulty on the following lines: — Stock on hand at beginning of period £5,000 Plu's Purchases (including charges incurred in land- ing goods at warehouse) 8,000 Plus Gross Profit, equalling 25 per cent, on Sales . . 2,500 15,500 Less Sales 10,000 Stock on hand at end of month £5,500 Departmental Transfers. — Care should be taken to en- sure that a proper record is kept of transfers of goods from one department to another, otherwise the amount of gross profit .shown to be earned by each department will be incor- rect, and a disturbing element will be introduced into the estimates of the value of stock which should ))e on hand in each department. Any such transfers should be made at cost price, i.e., the price at which the goods were landed in the warehouse. Where such transfers are frequent it is advisable to keep a special Transfer Journal, for recording such transactions. It is important also 4o see that, in connection with the accounts of the department .supplying the goods, the cost 219 AUSTRALASIAN ADVANCED ACCOUNTANCY. lOO J£? ■^ a ^ VO >* p3 r^ as, R N c u->0 !C £ 00 fH ON C I §i 2 vO N ?^ Q H i ^ D ^.M n sa ( ) C«Cfl < P3 ' o CO CJ 2 5 < Q ooo r^ ITi jt tcs^;^ 8 H H ^rOC5 N J >, ^ < e?-, ssa 8 o E N 00 w ^ o <;:; u-iior-^ N o O <-, t^HH 0^ « < t: ooo N O ^0 W t t--,'^-"^ r^ ON N ^« ■* o >*1 ; ■: i <««3 SiS ^Pu 4^ J=l ^ cr>CL,0 o . . H • • rO ^^" ,^.Q I It E s >> I ! 1 8 < in in O 1 PQ '^ Q :z; < 1 O O tN. ir^ (S OnoO r^ fS "^ o ►J < H S H < W Q >> O O i/%"^rOO >-^N O e 00 >> o §|s^"'*?"S ^2 1 S§a8S^5>8^ <:3 e o 1 1 ^:ir"^ ;5 220 n R A X C H A C C O U X T S. value ut such goods is credited to I'urchases account and not to Sales account, as, if the latter course is followed, the percentage of gross profit will ],e disturbed. Trading Account. — Where the number of departments is not too numerous., the Trading" account could he j)repared in tabular form. This would facilitate a comparison of the various items in the Trading account for each department, as well as show the totals for the whole business in a con- venient form. A specimen of the Trading account of a business with three departments is supplied. Profit and Loss Account. — In most cases, the prepara- tion of separate accounts for each department is confined to the Trading account, seeing that the results disclosed therein can be shown accurately. It sometimes happens that the proprietor requires the net profit for each depart- ment to be ascertained, and this will entail the preparation of separate Profit and Loss accounts. The latter cannot be prepared with the same degree of accuracy as a depart- mental Trading account, seeing that there will have to be mcluded in these accounts expenses which are applicable to the whole of the departments, and the proportion of such expenses to be charged to each department can only be estimated. Some Profit and Loss charges, such as Bad Debts. De- partment Salaries. Commissions, etc.. are capable of being apportioned accurately, the nature of the charges being de- termined to a great extent by the class of the business, but other expenses, such as Office Salaries. Depreciation. Rent, Discounts, will have to be apportioned between the depart- ments on an estimated basis. Discounts received, for in- stance, could be apportioned according to the purchases, and Discounts allowed according to the turnover. Rent might be apportioned according to the value of the space occupied by each department, and the other expenses along similar lines. ]f common sense is exercised in apportioning such items, the net profit shown for each department will prove to be fairly reliable, but it cannot be looked upon as being strictly accurate. An illustration of a departmental Profit and Loss account is supplied. BRANCH ACCOUNTS. — This class of accounts seems to present a considerable amount of difficulty, both to stu- dents and to those who have to deal with them in actual prac- tice. It is proposed, therefore, to deal with this subject hilly, and explain as clearly as possible the method of treatment 221 AUSTRAL*-\^I AX ADVANCED ACCOUNTANCY. in the books under the various conditions upon which the JJranches may be conducted. The amount of bookkeeinng work to be performed at a JJranch will depend to a great extent upon the arrangement under which the Branch is to be run. In some cases, a Branch merely acts as a kind of selling and distributing agency, orders being booked at the Branch which are executed by the Head Office upon receipt of advice as to the goods sold. In such cases the whole of the bookkeeping work will be per- formed at the Head Office, which will keep the accounts of the customers and collect the moneys owing, either direct or with the aid of the Branch staff. Where this arrangement is made, the Branch accounts in the Head Office books will probably be run upon the same lines as the accounts of a department already described in this chapter. SuCh a method of dealing with the Branch transactions has the advantage of enabling the Head Office to keep direct control of the whole of the Branch's affairs, and also saves the necessity of keep- ing a bookkeeper at the Branch.. On the other hand, it is clear that this method will not pro\e quite so satisfactory to the Branch, in that it has no record of past transactions and the delay and inconvenience caused in obtaining information, \N'here necessary, for cus- tomers will militate against the best interests of the liranch. A more usual method is to provide for the keeping of a com- plete set of books at the Branch itself. In most cases, all goods required at the Branch will be supplied by the Head Office at cost price. All cash received by the Branch is either remitted intact to the Head Office at regular intervals. Head Office forwarding cheques to cover expenses, or the Branch will pay its own expenses and remit any surplus cash periodic- ally to the Head Office. Entries in the Branch Books. — fhe keeping of the Branch books, where such an arrangement is entered into, does not present any difficulties. The customers' ledger and books of first entry will, of course, be kept upon exactly the same lines as similar books at the Head Office, except that all pur- chases will, generally speaking, be made from Head Office, and it will not therefore be necessar}^ to keep a Bought ledger. With regard to the keeping of the Private ledger, an account will be opened therein called Head Office account, and this account will be credited with all goods, cash, etc., received from the Head Office and debited with all returns, remit- tances, etc., sent to Head ( )ffice. The Head Office account may be viewed as the Capilal account of the l>ranch. Any 222 BRANCH A C C O U N T S. expenses paid will be posted in the usual wa} to suitable Nominal accounts in the Private ledi^cr. In the Head Office Books. — in the books at iiead Office an account will be opened called Branch account and this ac- count will be debited with all goods, cash, etc., forwarded to the Branch and credited with any returns, remittances, etc., received from the Branch. It will be seen therefore, that this account will be a copy, in a reversed form, of the Head Office account kept in the Branch books. A Nominal account will be kept in the Head Office books, to which the value of all goods supplied to the Branch will be credited and all re- turns debited. The credit balance in this account should always equal the debit balance in the Goods Received from Head Office account (taking the place of Purchases account) in the Branch's Private ledger. Procedure on Balance Day in the Branch Books. — The procedure at the Branch on balance day v/ill, up to a certain stage, be precisely similar to that in the books of an ordinary trading concern. Stock will be taken, and the necessary en- tries made through the Journal for any items of accruing in- come or expenditure. A Trading account and Profit and Loss account will then be prepared upon the usual lines, and the amount of net profit will be transferred to the credit of Head Office account. The Branch is not always required, however, to prepare a Trading and Profit and Loss account, although there is no reason why this should not be done on all occasions. Where it is not required to prepare these accounts, the Trading and Profit and Loss items, including the Stock on hand at be- ginning and end of the period, will be transferred direct to the debit or credit of Head Office account, the result, of course, being the same as if the net profit only were trans- ferred to that account. In either case, the balance of Head Office account wall be increased by the amount of net profit earned by the Branch during the period, and the Head Office account will then represent the excess of the assets over the liabilities at the Branch. It might be mentioned here that very often an account called Remittance account is opened in the Branch books, and any remittances of cash made by the Branch to Head Office will be debited to Remittance account instead of to Head Office. The object of opening this account is to enable the amount of remittances made by the Branch to Head Office to be ascertained readily at any time, but the account is merely an interim account, and must be transferred to the debit of 223 AUSTRALASIAN ADVANCED ACCOUNTANCY. Head Office account at the end of the financial period, the efifect beinii- the same as if the amounts remitted had been oriL^inally debited seiJarately to the Head ( )ftice account. When the final entries have been passed at the Branch, it will send a copy of the Trial Balance, Trading account. Profit and Loss account and Balance Sheet to the Head Office. Althoui^h the keeping of the accounts in the Branch books jtresents no difficulty, the following example will enable the exact ]:)rocedure to be followed, and will, perhaps, make the entries to be passed in the Head (Office books clearer: — The following is the frial balance oi the doulburn liranch of the Sydney Trading Co., Ltd.. on the 31st Decem- ber, 1920:— Head Office Account £1,.500 Sales Account . . 4,.350 Commission Account 2.5 Discount Account £12 Office Furniture 200 Goods Received from Head Office .... 3..500 Salaries 200 Rent 150 Sundry Debtors 1.243 Stock' 350 Bank Account 220 £5,875 £.5.875 The Stock Sheets show the \alue of the stock on hand at £500. Show the closing Journal entries in the Branch books prc])arc [branch Balance Sheet. Dr. Cr Trading A/c £3,8.50 To Stock A/c £350 „ Good'.^ received from Head Office A/c 3,500 Sales A/c 4,350 To Trading A/c .. .. 4,350 Stock on Hand A/c 500 To Trading A/c 500 Trading A/c 1.000 To Profit and Loss A/c 1.000 Commission A/c . . 25 To Profit and Loss A/c 25 Profit and Loss A/c 362 To Discount A/c 12 „ Salaries A/c 200 „ Rent A/c .. .. 150 Profit and Lo.ss A/c 663 Head Office A/c 663 224 B R A X C H A C C O U X T S. BRANCH BALANCE SHEET. LIABILITIES ASSETS. Head Office Account ..itl.oOO Hank Account £220 Plus Net Profit for the Sundry Debtors 1.2i:i rear 663 Stock oOO £2,163 Office Furniture 200 £2,163 £2,163 Entries in the Head Office Books. — Tlic entries to be made in the Head Ofiice books will depend tipon the exact nature of the information which it is desired to disclose there- in. There are three recognised methods of bringing the J'.ranch figures into the Head Office books, but it should be noted carefully that whatever system is utilised the Uranch account must be closed ofif in the Head Office books over Bal- ance Day. The Branch account has throughout the period been used as a current account, for the purpose of charging and crediting the Branch with goods, cash, etc., supplied to and received from the Branch, but on Balance Day this ac- count is used as the medium through which the entries in- corporating the figures disclosed in the Branch's Trial Bal- ance or Balance Sheet in the Head Office books are made, the result being that the Branch account will be closed off. That this is so will be seen from the examples supi)lied in the illus- tration of the three methods alreadv referred to. First Method. — Where it is not desired to show the result of the trading at the l^ranch separately in the Head Office accounts, but merely to combine the Branch's figures with the Head Office figures, and show one general Trading account and Profit and Loss account, a Journal entry will be passed crediting Branch account with the total of the debit balances disclosed in its Trial Balance, and debiting the corresponding accounts in the Head Office books with the individual amounts. Similarly the Branch account will be debited with its credit l)alances (omitting, of course, the credit balance in Head Office account), and corresponding credit entries will be made in the same accounts in the Head Office books Unless there are outstanding items, the debit balance in Branch account in the Head Office books on Balance Day will equal the credit balance in Head Office accounts in the Branch books, and it will therefore be seen that, if an entry is passed credit- ing Branch account with all its debit balances, and debiting Branch account with all its credit balances Comitting Head Office account), that account will.be closed off. 22.5 AUSTRALASIAN ADVANCED ACCOUNTANCY. Rcferrini;- auain to the Trial Balance already sui)i)lied. and utilisin.i; this aj^ain for the pur])oses of illustration, the follow- ing Journal entries passed in the Head Office books would have the effect of incorporating the whoh of the Branch figures with the Head Office figures, the items shown in the Trial T'alance being added on to the corresponding accounts in the Head Office books and the Branch account closed off. Discount A/c Dr. £12 Office Furniture A/c Dr. 200 Goods sent to Branch Dr. 3,500 Salaries A/c Dr. 200 Rent A/c Dr. 150 Sundry Debtors A/c Dr. 1,243 Stock A/c Dr. 350 Bank A/c Dr. 220 To Branch Account £5,875 Being entries incorporating the Branch debit balances as per Trial Balance on the 31st De- cember, 191 Branch A/c Dr. 4.375 To Sales A/c -. .. 4,350 „ Commission A/c 25 Being entries, etc. Stock on hand A/c Dr. 500 To Trading A/c 500 It will be noticed that the Goods received from Head Office account, shown in the Branch Trial Balance, is trans- lerred to the debit of the corresponding account (Goods sent CO Branch account) in the Head Office books, the result be- ing to close the latter account off. Where this method of treating the Branch figures is adopted these accounts are merely interim accounts, which are opened for the purpose of enabling the double-entry to be completed in each set of books, and. on balance-day. they are both eliminated in the manner indicated. Tin- t'-eatnicnt of the Stock on hand at the end of the year should be noted carefully, the Branch's Stock being treated in the same way as Stock on hand at Head Office, but it should be shown separately in the Head Office books. See- ing that the Stock on hand at the end is not included in the Branch's Trial Balance, it is clearly incorrect to put this amount through the Branch account, as. if this is done, the effect will be that the Branch account will not be closed off. After the above Journal entries have been posted, the Branch, account in the Head Office books will appear as under:— 226 BRANCH ACCOUNTS. BRANCH ACCOUNT (in Head Office Books). Dec. 31.— \)vc. 31 — To Balance £1,500 By Discount £12 (on balance da V morning I ,, Office Furniture .. .. 200 „ Sales A/c. . . .'. 4,350 „ Goods sent to Branch ., Commission A/c 25 A/c 3,500 „ Salaries A/c 200 „ Rent A/c 150 ,. Sundry Debtors A/c. 1,243 „ Stock A/c 350 ,, Bank A/c 229 £5,875 £5,875 A general Trading account. Profit and Loss account and Balance Sheet will then be prepared from the Head Office books, and the results shown will represent the position of the business as a whole. The above method of bringing the Branch figures into the Head Office books has the merit of simplicity, but on the other hand, it does not provide for any permanent record in the Head Office books of the amount of profit earned or loss incurred at the Branch, and in most cases this information will be desirable. In order to enable this information to be shown, the method next described is often used. Second Method. — Where it is the custom for the Branch to prepare its own Trading account. Profit and Loss account and Balance Sheet, the course is sometimes followed of bring- ing merely the final result as shown by the Profit and Loss account into the Head Office books, the amount of the net profit being- debited to Branch account and credited to the Profit and Loss Aj^propriation account at Head Office. The various assets and liabilities as shown by the Balance Sheet are then credited and debited to the Branch account, in the manner indicated in describing- the first method, correspond- ing entries being made in the various Asset and Liability accounts at Head Office. The result obtained will naturally be the same as that shown under the first method, the only difiference being that, instead of the whole of the Branch's nominal accounts being added to the corresponding nominal accounts in the Head Office books, the net difference betw^een these Nominal ac- counts has been ascertained from the Branch Profit and Loss account and included in the Head Office figures by debiting the Branch account and crediting the Appropriation account. This method certainly provides for a permanent record in the Head Office books of the amount of net profit earned by the Branch, but it does not. of course, make any provision for showing in the Head Office books the details of how this net 227 AUSTRALASIAN ADVANCED ACCOUNTANCY. profit has been arrixcd at. and this may be in some instances, a disadvanta.ii^c. The third method, described below, provides for sliowing full details of the Branch's tradinj:^-. in addition to the amount of the Branch's net profit, in the main 1)()oks. and. for that reason, is perhaps the most satisfactory method of treatment. Before conimcncino- to describe the third method, it may he useful to compare the difference in the treatment c^ the Branch's Stock on hand at the end of the year under tne second method with that under the first method. Under the second method the Stock on hand at the end of the year is passed through the Branch account, as it has already been included in the Branch figures, and is shown in the Branch Balance Sheet. The value of the Branch's Stock on iiand at the end of the }car is. of course, included in the amount of net profit shown to have been made by the Branch, and. see- inor that the Branch has been debited with the amount of its net profit, it is clearly entitled to be credited with the amount of Stock nominally taken over by the Head f )fiice on P>a!ance Day. That this is the correct treatment of the l>ranch's Stock will be seen from the fact that it is necessary to put this Stock through the Branch account, in order to enable that ac- cotmt to be closed off. The folhnving Journal entries, working from the figures already supjilied. will show the second method of treating- the Branch figures. Branch Account Dr. £663 To Profit and Loss Appro- priation A/c £663 Being amount of net profit as shown by the Branch's Profit and Loss Account. Bank A/c Dr. 220 Sundry Drs. A/;- Dr 1.243 Stock A/c Dr .500 Office Furniture A/c Dr. 200 To Branch Account .... 2,163 Being the ass-^ts of the Branch as shown bv it's Balance Sheet on the 31st December. 1920. in- corporated in the Head Oificc books as on this date. BRANCH ACCOUNT. Dec 31— lU- n-ink A/c £220 To Balance .. £1,^)00 „ Sundry Debtors A/c .. 1.213 ,. Appropriation A/c. (net „ Stock A/c nOO profit! 663 „ Office Furniture A/ 200 £2,163 £2.163 228 R R A \ C' H A C C O U X T S. It shtnild also be noted rliat, as the result of the Branch's trading- is shown separately in the Head Office Books, the two Goods accounts receive dififerent treatment. The Branch will treat the balance of Goods Received from Head Office account as purchases, and will transfer the amount to the debit of Trading account. In the Head Office books the Goods Sent to Branch account will be transferred to the credit of Trading account, as the Head Office is entitled to take credit for the goods which it has supplied to the Branch. Third Method.— This method, whicli provides for the in- corporation of the Branch figures in the Head Office books in such a way as to show separately a Branch Trading ac- count and Branch Profit and Loss account in those books, seems to present some difficulty to those who have not had experience of this system in actual practice. There is, in reality, nothing inherently difficult in this method, and it is thought that a careful perusal of the following explanation will enable it to ])e grasped without difficult}-. The chief difi'erence between this method and the first one described is that, instead of transferring the llranch Nominal accounts to the corresponding Nominal accounts in the Head Office books, these accounts are transferred to Branch 1^-ading and Branch Profit and Loss accounts, which are shown separately in the Head Office books. For ex- ample, the amount of the sales as shown by the Branch's Trial Balance, instead of being credited to Head Office Sales account, will be transferred to the credit of Branch Trading account, and Branch rent will be transferred to the debit of Branch Profit and Loss account instead of to the debit of Rent account. The net profit as shown by the Branch Profit and Loss account will be carried to the credit of Appropria- tion account. After the nominal accounts have been treated as indicated above, the Branch Assets and Liabilities will receive the usual treatment, being carried to the debit or credit of the corresponding accounts in the Head Office books — not to separate accounts, seeing that it is not usually necessary to prepare a separate Balance Sheet for the liranch. It should be clear, therefore, that the only difference from the first method is in connection with tlie treatment of the Nominal accounts. Utilising- again the figures supplied in the Branch Trial Balance, the following Journal entries will have the effect of incorporating the Branch figures in the Head Office books, so as to show a separate Trading account and Profit and Loss account for the Branch therein : — 229 AUSTRALASIAN' A D \' A N C E D A C C U N T A \ C Y. Branch Trading A/c Dr. £3,850 Stock A/c £3.50 Goods received from H/0. A/c 3,500 To Branch A/c . . . . £3,850 Branch A/c Dr. 4,350 To Branch Trading A/c (Salesi 4,350 Stock on Hand A/c ........ Dr. 500 To Branch Trading A/c .. 500 Branch Trading A/c Dr. 1,000 To Branch Profit and Loss A/c 1,000 Being amount of gross profit at Branch transferred. Branch A/c Dr. 25 To Branch Profit and Loss A/c Commission 26 Branch Profit and Loss A/c .. Dr. 362 Discount £12 Salaries • . . . • 200 Rent loO To Branch A/c . . . Branch Profit and Loss A/c .. Dr. 663 To Profit and Loss Ap- propriation A/c . . . . • . 663 Bank A/c Dr. 220 Sundry Drs. A/c Dr. 1,243 Office Furniture A/c Dr. 200 To Branch A/c .. .. .. .. 1.663 Incorporating Branch figures in Head Office books. Jt will he noted that the (".(jods received Iroui Head Office account, a.s .shown in the Branch'.^ Trial Jlalance. is transferred to the debit of the Branch 'J'radins;- account, as this item represents the amount of the Branch's purchases from Head Office. The Goods Sent to r>ranch account in the TIead Office books Avill. of course, be credited to the Head Office Tradinp;' account in the manner indicated under Method No. 2. 1'he following- is a eopx- of the liranch ac- count as it would appear in the Head ( )nice books after the above entries had been posted : — 230 BRANCH ACCOUNTS. BRANCH ACCOUNT. Dec. 31 — I>v Branch Trading A/c: — To Balance £1,500 „ Stock £350 „ Branch Trading A/c „ Goods Received from Head (Sales) 4,350 Office A/c 3,500 „ Profit and Loss A/c „ Branch Profit & Loss A/c. : — (Commission) 25 „ Discount 12 „ Salaries 200 „ Rent 150 ., Bank 220 .. Sundry Debtors 1,213 „ Office Furniture 200 £5,875 £5.875 Reversing Entries After Balance Day. — It will be seen from the procedure described in connection with all three methods dealt with, that the Assets and Liabilities at the Branch are treated in the Head Office books as though these were actually taken over by the Head Office from the Branch on balance day. In any case, the entries are made in the Head Offi.ce books as though this were actually done and, pn balance night, the whole of the Branch's Assets and Liabili- ties are shown added on to the Head Office figures, the re- sult being, of course, that the Branch account in the Head Office books is closed ofif. On the morning after balance day, it is necessary to pass reversing entries in the Head Office books, taking these figures out of the various Asset and Liability accounts and passing corresponding debit and credit entries in the Branch account. Continuing the illustration already supplied, the following reversing entries will be passed on the 1st fanuarv, 1921 :— ' Branch Account Dr. £2,163 To Bank A/c .. .. .. .. £220 „ Sundry Debtors A/c. 1,243 „ Stock-on-hand A/c .. 500 . „ Office Furniture A/c .. 200 After these entries are passed, it will be seen that the balance in Branch account will be: Dr. £2,163. and, referring back to the closing entries in the Branch books and to the Branch Balance Sheet, it will be seen that this agrees with the credit balance in Head Office account in the books of the Branch. Entries Where Goods Supplied by Head Office at More Than Cost Price. — The specimen entries given in connection with the three methods already mentioned have been sup- plied on the understanding that the goods have been sent from Head Office to the Branch at cost price, but. although 231 A U S T R A L A S 1 A X A D \' A X C E D A C C O U X T A X C V . tliis is the usual custom, it sometimes happens that the Head Office invoices the goods to its brandies at more than cost price — in some cases, at the selling price. No variation of the procedure will ])e necessary in the liranch Ijooks, which- ever system is adopted, although, where goods are invoiced to the Branch at selling price, i.e., at the price at which the Branch must sell to its customers, no advantage is gained by the Branch preparing its own Profit and Lf)ss account, seeing that the Branch must, on the figures shown in its own books, run at a loss e(|ualling the amount of its ex- penses. This method of invoicing is often adopted where the goods are of a valuable nature, as it supplies a good check on the Branch's stock. The Stock on hand must al- ways equal the excess of Stock at the beginning of the ])erio(l. plus goods received from Head Office over the sales. \\'here goods are invoiced from the Head Office to the Branch at more than cost price a somewhat different pro- cedure will be necessary in the Head Office books upon re- ceij^t of the final figures from the Branch, and it will be ad- visable to explain the entries recpiired under each of the three methods already dealt with. The only difYerence is in con- nection with the treatment of the Stock, and great care must be exercised in order to ensure that the Stock, which will naturally be included in the Branch l)ooks at the price at which it is invoiced by the Head Office, is not included in the Head Office books at more than cost price, otherwise the Head Office will be taking credit for profit which is not yet earned. First Method. — Suppose, for instance, that the I '.ranch, in forwarding the Trial Balance supplied, sent a statement showing that the value of the Stock on hand was. say. £550, and that the Head Office had invoiced the Stock to the Branch at 10 .per cent, above cost price, l^he actual cost of this Stock to the Head Office was therefore £500. and. in preparing the Trading account, the Stock must be shown at this amount. Stock on hand account being debited £500 and Tradinu account credited a similar amount. On passing the re\ersing" entries, however, at tlie lie- ginning of the new financial period, the r>ranch must be de- bited with £550. as tliis is the figure at which it has the Stock included in its own books. It would not be correct for Head Office to credit the whole of this £550 to Stock on hand account^ as this would reduce the balance of that account to £50 less than the correct amount. The extra £50, represent- ing the additional 10 per cent, charged against the Branch, 2.12 B R A X C H A C C O U N T S. r.iust be credited in the meanthne to a Brancli Stock Sus- pense account, tlie c(jnii)letc journal entry bcint;' as under: — Jan. 1, 1921— Branch A/c Dr. £550 To Stock-on-hand A/c £500 „ Branch Stock Su.spense A/c 50 At the end of 1921, when the Branch's final Trial Balance is received, the Stock at the beginning of the year must again he lirought into the Head Office books, the Branch being credited with the full £550, Stock account debited with £500, and Branch Stock Suspense account with £50, thus closing the last-mentioned account off. Branch Stock Suspense ac- count will require to be re-opened on the first day in the new 3-ear, and it will be credited with the 10 per cent, added to the Stock on hand at the end of li)21. Any goods supplied to the Branch during the year will, of course, have the usual 10 per cent, added, the invoice 'price being credited to Goods Sent to Branch account. As. how- ever, the Goods Received from Head Office account, which will show in the Branch's Trial Balance at the end of the year, will be transferred to the debit of Goods Sent to Branch account, closing that account off, no adjustment of the last- mentioned account will be necessary where the method above referred to is used. Second Method. — \\ here the Branch prepares its own Profit and Loss account and Balance Sheet and the Head Office merely passes entries to bring into its books the Branch's net profit and Liabilities and Assets, the entries in the Head Office books in connection with the stock are a little more involved. As the Branch Stock will, of course, be taken at the value at which the goods are supplied by Head Office, and it is only reasonable that the Branch should include the Stock on hand at this price, seeing that the goods, as received, have been charged against the Goods Received from Head Office account oil the same basis and the Branch's Trading account has to bear the full charge. Coming now to the Head Office books, it is evident that the Branch must be credited with the Stock at the value at which it is stated in the Branch Balance Sheet, otherwise it will be impossible to close the Branch account off. The only difficulty arises in connection with the debit entry or entries to be made in connection therewith. It is clear that the Head 233 AUSTRALASIAN ADVANCED ACCOUNTANCY. Office cannot state this Stock in its own books at the valua- tion placed on it by the Branch, as, by doing so. it would be including this Stock at more than cost price. Stock on hand account is therefore debited with the cost price of the Stock at the Branch. The balance, representing the percentage added by Head Office in forwarding this Stock to the Branch, must be del^ited to Goods Sent to Branch account, reducing that account to its proper figure. The Head Office has throughout the year credited Goods Sent to Branch account with the value of the goods sent to the Branch, plus the prescribed percentage — in this case 10 per cent. In connection with the goods which the Branch has sold, the Branch has made its profit over and aljove this 10 per cent., and the Head Office is therefore entitled to take credit in its own books for the 10 per cent, addition on those goods actually sold. The Goods Sent to Branch account, however, includes not only the goods actually sold, but also fhe Stock remain- ing on hand at the Branch, and it is evident that the Head Office must not take credit for the 10 per cent, addition on the Branch's final Stock. By debiting Goods Sent to Branch account with the proportion of the Branch's Stock on hand, as indicated above, the necessary adjustment is made, and that account can then be transferred to the Head Office Trad- ing account. Continuing the illustration supplied under the last head- ing, assuming that the Stock is stated in the Branch Balance Sheet at £550, ten-elevenths of this amount will be debited to Stock on hand account, and the remaining one-eleventh to Goods Sent to Branch account, by the following Journal entry : — Dec. 31, 1920-^ Stock on hand Account Dr. £.)00 Goods sent to Branch A/c .... Dr. 50 To Branch Account . . . . £-""'^0 Being entry incorporating the Branch's Stock on hand at the 31st December. 1920, and adjusting the Goods Sent to Branch A/c, so that no profit will be ';^hown on goods not yet sold. In passing the reversing entries at the beginning of H)vM, it is clear that the Branch must be again debited with £550. In connection with the credit entries, however, the procedure is .somewhat different from that explained in dealing with the first method. A credit entrv for £500 will be made in Stock on hand account, and the iKilanoe ( £50) will be credited to 234 BRANCH ACCOUNTS. Goods Sent to Branch account. This hein^- the case, the Branch's Goods Received from Head Office account will not agree with the (^loods Sent to Branch account in the Head Office books by this amount, but the result at the end of the year in the Head Office books will show the position correct- ly- Third Method. — Under this method the liranch sends its complete Trial Balance and a special Trading account and Profit and Loss account are prepared for the Branch in the Head Office books. The Branch's Stock at the beginning of the year, as shown by its Trial Balance, will, of course, in- clude the 10 per cent, addition, but this must be .put through at the amount shown in the Trial Balance referred to. Branch account being credited with this amount and Branch Trad- ing account debited. The treatment of the Branch's Stock on hand at the end of the year is similar to that explained under the second method above, the only difference being that the credit entry is made in the Branch Trading account instead of in the Branch account. The complete Journal entry would appear as follows : — ■ Dec. 31, 1920— Stock on hand A/c Dr. £500 Stock sent to Branch A/c .... Dr. 50 To Branch Trading A/c .. £550 Being the value of the Branch's Stock on hand as shown by the Trial Balance, etc. The following reversing entry would be made on the 1st day in the new year : — Jan. 1, 1921— Branch Account Dr. £550 To Stock on hand A/c . . £500 „ Godds sent to Branch A/c 50 The whole of the above explanations have, for the sake of simplicity, been based on the supposition, firstly, that only one Branch of the business is in existence, and, secondly, that on balance day there are no outstanding items between the Branch and the Head Office! With regard to the former, if the entries in connection with one Branch can be passed without difficulty, the mere fact that there is a number of Branches wall not cause any trouble, the procedure being the same. A separate account for each Branch will be required, and the entries for each will be passed in the manner already indicated. With regard to the second matter, i.e., outstand- ing items, some explanation may be necessary. Reconciliation of Branch Books With Head Office Books. —It will not often be found in practice that the Head Olhce 235 A U S T R A L A S 1 A X A D \' A N C E D A C C O U N T A X C V . account, as shown by the Branch Trial Ualance, will agree with the Branch account in the Head Office books, more es- ])ecially if the Branch is situated at some distance from the main office, and it will be found necessary in most cases to make adjustments in the Head C^ffice books upon receipt of the Trial Balance referred to. Suppose, for example, tliat the day before balance day the Head Office forwarded goods to the Branch, and passed the entry in the usual way. These goods were not received by the Branch at the time when its books were closed off and were not, therefore, included in the Trial Balance or the closing figures forwarded to the Head Office. Or, perhaps, the Branch, on balance day, made a remittance of money to the Head Office, which the Head Office will not receive unt'l after the Cash Book has been closed. It will be seen that, in both cases, there is the necessity for some adjustment on the part of the bookkeeper at the Head Office. With the final pa})ers the Branch should ahvays send a detailed copy of the Head Oliice account in its books, and. before incorporating the Branch figures, the bookkeeper at the Head Office should carefully tick ofif this statement with the Branch account in his ledger. In this way any outstand- ing items Avill be discovered, and it will be readily seen what adjustments are necessary before the closing entries are made. Whilst on this point, it might he mentioned that tlie Branch should forward to the Head Office at least once a month a copy of the Head Office account in its l)oc)ks. and tliis should be ticked off at the Head Office. Another mat- ter of importance is that strict instructions should be issued at both the Branch and Head Ofiicc. that no entry should be made in either the Head Office account or the Branch ac- count, as the case may be, without advice being immediately forwarded by the office in which the entry originated to the other end. in order to ensure that a corresponding entry will be passed. Experience shows that, wdiere this course is fol- lowed, a considerable amount of trouble and inconvenience will be saved later on. Assume then that the Head ( )ffice lias received the Branch's statement of Head Office r.ccount and finds that the T.ranch has made an entry debiting Head Office with a re- mittance which has not been received in time to j)ay it into the bank before balance night. It is evident that, if the Branch account is to be closed off in the Head Office books, an entry must be made in that acconnt in the same way as if the Head 2Hr) BRANCH A C C O U N T S. Office had actually received the amount in time to include it in the Cash Book, but it is equally evident that the amount cannot be included in the Bank or Cash balance on balance day. A Journal entry as under will therefore be passed : — Remittances in Transit Account . . . Dr. To Branch Account. When the cash is received after balance day, the amount will be ^posted to the credit of Remittances in Transit ac- count, closin"- that account off. If the Branch's statement to Head Office show.s that goods have been returned to Head Office, but such were not received prior to balance night, the entry to be passed is pre- cisely the same whichever method of incorporating the Branch figures is adopted. The Head Office must pass the entry as if the goods had actually been received, and must include the Stock, wdiich was actually in transit on balance day, in its Stock Sheets at cost price. The Journal entry passed would be as under : — Goods sent to Branch A/c Dr. To Branch Account. Being goods returned by the Branch in transit on Balance Xight. With regard to entries made at the Head Office in con- nection with transactions which occur too late to be included in the Branch's final papers, any such entries must be re- versed in the Branch account in the Head Office books. For example, any entries in connection with goods forwarded to the iiranch l)y the Head Office, and not received by the Branch in time for inclusion in its final figures must be re- versed in the Branch account. Whichever method of in- corporating the Branch figures is adopted, the corresponding debit entry must be made in the Goods Sent to Branch ac- count, and the value of the goods must be included in the Head Office Stock Sheets at cost price. On the day after balance day the above entry would be reversed, the Branch being debited, and Goods Sent to Branch account credited with the amount of the goods at the usual price. \ In the case of charges against the Branch account which would affect the Branch's profits, but which have not been responded to by the Branch prior to balance day, these must be reversed in the Branch account, the corresponding entry being made in such a way as to ensure that the profits are not overstated. AUSTRALASIAN ADVANCED ACCOUNTANCY. If, for instance, Head OlHce has debited the IJranch with a proportion of Advertising- expenses and this entry has not been responded to by the l)rancli, the Branch account must be credited, but the debit entry will depend on the method of incorporating the Branch fignres which is adopted. If the first method already explained is used the whole original is merely reversed, the debit entry being made in Advertising" account. If the second method is used the debit entry will be made in the account to which the Branch's net profit is carried as an olTset against what is, in reality, an overstate- ment of the Branch's profits. If the third method is used the debit entry will be made in Branch Profit and Loss account. EXAMPLE.— The A. Co., Ltd., carries on business in Sydney and Newcastle, the former being its head-quarters. On December 31st, 19au. the Newcastle Branch submits the following Trial Balance to Head Office:— NEWCASTLE TRIAL BALANCE, 31st Deer., 1920. Head Office A/c . . .. ^"^-^^ Goods Received from Head Office .. . .i.il.yoU Sundry Debtors 2,000 Stock, December 3M, 1919 •• 2,.500 Sales •• ,., ^^-^ Rent -'^' General Expenses 500 Cash at Bank ^f^ Office Furniture '^^ Commission Bad Debts 1.50 50 £18,830 £18,830 The Branch's Stock Sheets show the Stock on liand at £3,000. In the Head Oflficc books the Trial Balance extracted on the same date showed the following position :— 238 BRANCH ACCOUNTS. HEAD OFFICE TRIAL BALANCE, 31st Deer., 1920. Branch A/c i^^VO'JO Goods sent to Branch £12,090 Sales 15.000 Stock, 31st Dec, 1919 9.0OO Wages I'-^.SOO Materials ^■■'>00 General Expenses (including depreciation i l.oOO Commission -100 Sundry Debtors 2,000 Business Premises 1.400 Plant and Machinery 3,800 Cash at Bank 500 Reserve 1.^00 Authorised Capital Account 10,000 Bad Debts 100 Sundry Debtors 1-200 £39,790 £39,790 Stock on hand at the Head Office at that date was £3,600, but to this amount must be added the value of the Goods in Transit to and from the Branch. On checking the Statement of Head Office account supplied by the Branch, it was found that the followins;- items were outstanding: — (a) The Branch had debited Head Office with a re- mittance of £100 not received until after the 31st December. (b) The Branch had returned goods valued at £50, which were not received by Head Office until after Ixilance night. (c) The Branch had debited Head Office with £20, being an amount advanced for commission to one of the Head Office travellers. (d) The Head Office had forwarded goods valued at £90, but these were not received by the Branch until after the Trial Balance had been prepared. Make the necessary adjustments, and show the Journal entries necessary to incorporate the Branch figures _ in the Head Office books, so as to show a separate Trading ac- count, and Profit and Loss account for the Branch. Show- also the Head Office Trading and Profit and Loss account and the combined Balance Sheet. 239 AUSTRALASIAN ADVANCED ACCOUNTANCY. JOURNAL ENTRIES. Dec. 31, 1930— Remittance in Transit A/c . . . . Goods sent to Branch A/c . . . . Commission Advanced A/c . . . . To Branch A/c Being entries necessary to adjust the Branch A/c with the Head Office books at this date, in con- nection with outstanding items. Dr. Dr. Dr. £100 50 £170 Goods Sent to Branch A/c . . . . To Branch A/c Being entry passed for goods not received by the Branch by Bal- ance Day. Dr. 90 90 Branch Trading A/c Dr. 14,4.50 Stock A/c £2,500 Goods Reed, from H/0 11,9.50 To Branch A/c 14,450 Branch A/c Dr. 14,000 To Branch Trading A/c Sales 14,000 Stock on Hand A/c . . Dr. 3,000 To Branch Trading A/c .. 3,000 Branch Trading A/c Dr. 2,550 To Bran.h Profit and Loss A/c 2.550 Branch Profit and Loss A/c . . Dr. 950 Rent £250 General Expense.^ . . 500 Commission 150 Bad Debts .50 To Branch A/c 950 Sundry Debtors A/c Dr. 2,000 Bank A/c Dr. l.OSO Office Furniture A/c Dr. 3.50 To Branch Account 3,430 240 BRANCH ACCOUNTS. ._• o o o 2 O S r^ iC O O 05 lO >0 Hs 5E o o ■r o SO o o 00 o 25:8: r-~ ec TT I to ^'fC o o o lO lO O) >0 ^ (M ll§i cod. w c c c nj « 2 O '2 ^ « 2 II (xO a.5 c W 2i -s: :d ^ _, a « „ 5 o rt «J Oi O O PQ /^. a tr! . -1^ o ID 'C ^ •- ^ o C C +^ +J CO C Q 3 (U 3 2 < Di 'X d. 241 ciiAi'ri':R xviii. STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNTS. Up to this stage any explanations as to the procedure to be adopted in preparing the accounts of a business have been based on the assumption that the business is progressing favorably, but it is now necessary to explain what is the usual course to pursue where matters are not so satisfactory from the standpoint of the proprietor. A business which can only be conducted at a loss must sooner or later reach the stage where it will be unable to continue b}- reason of the demands for payment on the part of the creditors, if the proprietor of the business is unable to satisfy the claims of the creditors he has several courses open to him which, generally speaking, resolve themselves under three head- ings :— (a) Make a private arrangement with his creditors, usually involving an extension of time for pay- ment. (b) Transfer his estate to a trustee for the creditors who will proceed to get in and realise the assets and distribute the amount realised in the agreed proportions between the creditors. (c) File a petition in l:)ankruptcy. The wisest course for the proprietor of a Inisiness to follow under such circumstances is to place himself unre- servedly in the hands of his creditors and make a full dis- closure of his exact position to them. They will then be in a position to decide what can best ]>e done uufler the cir- cumstances. If the position is not a hoi)eless one, and it is fairly evident that with ]:)ro])er and efficient management, a recovery can be made, itis not often that the creditors will •prove to be imreasonabfe and require the business to be wound uj). If they can see a reasonable cliance of obtaining full payment of their claims they will prefer, in most cases, to adopt the first method mentioned above and enter into an arrangement whereby the business is to be continued either under the old or new management, the drbtor undertaking to settle the claims of the creditors within a staled ])eriod. 242 STATE M E N T S O F A F F AIRS. If the position of the business is not so satisfactory, and the creditors are satisfied that it cannot be carried on except at the risk of increasing- the loss which it is ahnost certain they will have to bear, they will require the debtor either to effect a transfer of his estate to a trustee on their behalf, or to present a petition in bankruptcy against himself and so have his estate wound up according to the provisions of the Bankruptc}^ (or Insolvency) Acts. AVhere the unsatisfactory position has been caused more by misfortune than by an attempt on the .part of the debtor to exploit his creditors, it is more usual to follow the former of these two methods, as it proxides a less expensive way of realising and distributing the assets than the latter. 1'he creditors may, in some cases, require the debtor to present a bankruptcy petition against himself or may take steps to present a creditors' petition themselves, particularly if the debtor has been guilty of fraud and. in their o]iinion, deserves punishment. Whatever course is decided upon, the preparation of a Statement of Affairs will be necessary ; in the first two cases for presentation to the meetings of creditors and, in the last case, the debtor is required to supply a statement of his affairs to the Official Assignee or Trustee in Bankruptcy (or Insolvency). It is proposed to deal in this chapter with the preparation of such statements. A Statement of Affairs has a good deal in common with an ordinary Balance Sheet. In the first place it consists of a list of the assets and liabilities of a business and, secondly, it is designed to show the position of that business as on a given date. In a Balance Sheet the assets are stated at their value to the business as a going concern, but in a State- ment of Affairs the assets are stated at the amount which they might be expected to bring on a forced realisation. In a Balance Sheet the liabilities are treated as being upon an equal footing', seeing that there is qo anticipation tliat the business A\ill be unable to discharge them all in full. In a Statement of Affairs the secured creditors are kept distinct from those who are unsecured, and the value of the security held by the former class of creditors is stated in conjunction with the amount of debt owing to them, the difference be- tween the amount of the del)t and the amount of security held being sho\vn if there is a deficiency, as a liability, or, if a surjilus, as an asset. Again, in bankruptcy certain credit- ors have preferential claims o\er unsectired creditors, and these are shown separately and must be paid in full before other unsecured creditors receive an\'thing from the estate. It might be mentioned that, where a private arrange- ment is made between the debtor and his creditors, there is, 243 AUSTRALASIAN ADVANCED ACCOUXTANCY. speaking generally, no legal necessity to follow the provi- sions of the Bankruptcy (or Insolvency) Act with regard to prior payment of debts which under that Act rank as pre- ferential. It is. however, usual for the creditors to follow the procedure prescribed under the Act. and to treat the debts made preferential therein as prior claims. In South Australia and West Australia, the Act contains special provisions governing private assignments, and, in connection with arrangements made thereunder, the creditors have the same rights as to priority. &c.. as in insolvency. Any deed of assignment in those States must be signed by at least one half in number and three-fourths in value of the creditors. The trustee under the deed must notify credi- tors of the place where the deed is open for inspection, and must file a copy with the Registrar of the Court within four- teen days after completion. He must file every four months a statement showing receipts and payments and property outstanding and, when the estate is finally wound u\\ a full statement showing his total receipts and the manner in which the moneys have l)een disposed of. In \ictoria. a copy of every deed of arrangement to which the Act applies must be filed with the Registrar-General within ten days after execution. The trustee under the deed must not dispose of any of the property until ten days after such registration. The provisions of the Insolvency Acts as to preferential claims, proofs of debts, and rights of secured and unsecured creditors apply. Where the books kept by the debtor are in reasonable order, no great difficulty should be experienced in preparing a proper Statement of Affairs, but. unfortunately, the class of person who is likely to get into difficulties with his creditors is one which cannot be relied upon to keep proper books of account and, in numbers of cases, the failure of a trader is attributable more or less directly to his omission to keep proper records of his transactions. Where the records are not satisfactory, or cannot be relied upon, an ordinary Ba- lance Sheet must be prepared from such sources of informa- tion as are available. This is a matter whicli has already received attention, and it is not ])r()poscd to go into this por- tion of the subject again. .Assuming that a Balance Sheet or a trial balance is obtainable, it will then be necessary to get a valuation placed on the assets, .showing the aniounts they are expected to realise and. when this information is available, a Statement of Affairs can tlu-n be prepared with very little trouble. 244 S T A T E M E N T S O F A F FAIR S. The form of a Statement of Afifairs, such as would be pre- pared in the case of a private arrang^ement with creditors, is supplied at the end of this chapter. This form of statement has been given in preference to the official form, as the latter varies somewhat in the different States and, if that of one State were included, it would i)erhaps be misleading. It might, however, be noted that the specimen supplied follows the official form very closely, the chief difference being that, in the latter, not so much detailed information is required in the statement itself, as each asset and liability must be sup- ported by a schedule, which gives details of how the amount is made up. Assets Side. — Dealing first of all with the assets side, two columns will be used, the inner one being headed "Book Value," and the outer column "Estimated to Produce." The various assets are then detailed as in a Balance Sheet, the values according to the Balance Sheet being stated in the inner column, and the amount which each asset is expected to produce on realisation in the outer column. The item, Book Debts, should be subdivided and given under three headings, "Good." "Doubtful," and "Bad," and the same classification is often used in connection with Bills Receiv- able. Where an asset is held by a creditor as security, this will not be shown on the assets side unless it is expected that it will realise more than the amount owing to such creditor, in which case the surplus only will be shown on the assets side. This, however, is a matter which will be explained when deal- ing with the liabilities. When the assets side is complete the total of the outer column, less the amount payable to pre- ferential creditors, will supply the gross estimated amount which will be available for the payment of unsecured credi- tors' claims. Liabilities Side. — Here again two columns will be re- quired. The column to show the "Gross Liability" is usually stated to the left of the "Particulars" column, and the column to the right of the "Particulars" column shows the amount at which these liabilities are expected to rank for dividend. In a Statement of Affairs all liabilities, whether in the books or not, must be brought into account. With regard to con- tingent liabilities, such as Bills Discounted, an estimate will be made of the amount which it is expected will be claimed on the estate under this heading, and such an estimated amount must be included amongst the liabilities in the "Ex- pected to Rank" column. An anticipated loss on accommo- 245 AUSTRALASIAN ADVANCED ACCOUNTANCY. datiuii hills, which arc iiuL UMially ciUcred in ihe books of account, must be treated in the same wa}-. Unsecured Creditors. — These include all trade creditors on open acccnmt, and also an) creditors lor unsecured loans. Any bills payable which have been accepted by the debtor in the ordinary course of business will be shown under this headiuir. Fully Secured Creditors. — in an (Jtiicial Statement of Affairs provision is made for showing merel}' the total ot the fully secured creditors. In the case of a private state- ment the fully secured creditors will, in all probability, be shown separatel}-, as will also the value of the security held by each. The amount of the loan will be deducted from the estimated value of the securities held, and the total of the surplus will be transferred to the assets side, in the manner shown in the accompanying statement, under the heading of "Surplus from Securities in the hands of Creditors fully secured." Partly Secured Creditors. — The estimated value of the securities held will be deducted from the amounts due to such creditors, and the shortage will be extended to the "Ex- pected to Rank" column. Other Liabilities. — Under this heading will be stated any claims against the estate, stich as claims under guarantees, and other liabilities which cannot be prt)perly included under the other headings provided. Liability on Bills, &c. — Included under this heading will be the amount of the anticipated lial)ility on Accommodation Bills, and any bills which the debtor had discounted at the bank, and for wdiich he, of course, remains liable to the i)ank in the event of their being dishonored when due. Preferential Creditors. — As already mentioned. i)ro\ ision will be made in the Statement of Affairs to show the amounts due to those creditors who are entitled to payment before anything is available for the settlement of other claims. These creditors vary in the different States, and it is there- fore necessary to set out the nreferential claims in each State separately. In every State any debts due to the Crown, and the ex- penses and remuneration df the Assignee or Trustee have priority over other debts, and must first be jiaid in full. 246 S T A T E M E N T S OF A F F AIRS. New South Wales.— The Bankruptcy Act makes the following debts preferential: — (a) Any amount due to any clerk, servant or workman for salary or wages for a period of not more than six months prior to the date of the order adjudging the debtor a bankrtipt and for an amount not exceeding £50 in each case. It should be noted that the amount of £50 i^ the maximum amount for each clerk or workman, and that no claim for more than six months' salary or wages will rank as preferential. Any salaries or wages due in excess of the preferential claim will rank as ordinary debts. (b) Provision is also made for a refund of the unexpired proportion of an apprentice's premium where a satisfactory transfer of the apprentice'ship cannot be arranged. The amount to be repaid will be fixed by the Court after bankruptcy occurs. (c) Rent. The landlord has a preferential claim for any rent due not exceeding three months. Any amount due in excess of three months' rent will rank as an ordinary debt. (d) Rates. — Under the Local Government Act, 1906, the amount of rates due to a Local Authority is made a preferential claim. ■Victoria : — (a* Local rates due at the date of the order of sequestration (if they fall due within twelve months before that time). (b) The salary or wages of any clerk or servant for not more than four months and not exceeding £50. (c) Wages of any workman for not more than four months up to any amount. (di Rent. — The landlord has a preferential claim for three months' rent if at the date of sequestration there were goods to the value of the amount claimed on the premises and liable to distress for rent. The preferential claim is limited to the value nf such goods as were liable to distress for rent. (e) A proportion of apprentice's' premiums. Queensland :— (a) All rent due and accrued up to the date of adjudication, but not exceeding in all three months' rent. (b) (1) Local rates due at the date of the Adjudication Order. (If they fall due within twelve months before that time.) (2) All rates and assessments up to the 1st January or the 1st July next before the date of adjudication, but not ex- ceeding altogether 12 months' assessment. (3) The salary or wages of any clerk, servant, or workman for not more than three months, and not exceeding £50. (c) Proportion of apprentices' premiums. South Australia:— (a) AH rates due but not exceeding 12 months' assessment. (b) Salary due to any clerk or servant for not more than three months and not exceeding £30 (with the consent of the Court). (c) Wages due to labor or workman not exceeding £6 (with the consent of the Court). (d) Proportion of apprentices' premiums (with the consent of the Court). (e) Landlord's claim. — The landlord can distrain on any goods liable to distress, but if the distress has been levied after the 247 AUSTRALASIAN' A D \' A N C E D ACCOUNTANCY. date of the filing of the bankruptcy petition, the amount which he can retain out of the proceeds is hmited as under: — In the case of a weekly tenancy, not more than four weeks" rent. If the tenement is let for less than one year, not more than the amount of rent accruing due in two terms of payment. If for one year or upwards not more than one year's rent. If he levies di'stress prior to the filing of the bankruptcy peti- tion he can retain the benefit of the proceeds of realisation to the extent of the full amount owing. Landlord may prove as an ordinary creditor for any balance owing. Western Australia: — (a) All municipal and local rates and all public taxes due during the twelve months before the date of the receiving order. (b) The wages or salary of any clerk or any servant for not more than four months, and not exceeding £50. (c) The wages of any laborer or workman for not more than four months and not exceeding £50. (d^ A proportion of apprentices' premiums. (e) Rent. — Landlord may distrain at any time before or after the commencement of the bankruptcy, provided that, in the case of distress levied after the commencement of bankruptcy, it shall be available only to the extent of six months' rent due prior to the date of adjudication. He may, however, prove for any balance owing as an ordinary creditor. Tasmania : — (a) All rates and taxes due at the date of Order of Adjudication within twelve months before such order, (bl The wages or salary of any clerk or any servant for not more than four months and not exceeding £50. (c) The wages of any laborer or workman for not more than four months and not exceeding £50. (d) Proportion of apprentices' premiums. (e) Rent. — The landlord can distrain at any time, but if the dis- tress is levied after the commencement of the bankruptcy it is onlv available for twelve months' rent accrued due prior to the date of the Adjudication Order. The landlord can prove as an ordinary creditor for any balance owing. New Zealand : — (a) In payment of costs in connection with winding up the estate, including costs of procuring the Adjudication Order. (b) Official Assignee's commission and supervisors' remimeration. (c) Rent not exceeding six months actually due at the date of adjudication, provided there were, at the date of adjudication, goods on the premi.ses liable, but for the bankruptcy, to distress for rent. The landlord is not entitled to any preferential claim exceeding the value of the goods so distrainable. He can. how- ever, prove as an ordinary creditor for any balance owing. (d^ (1) The salary due to any clerk for not more than four months and not exceeding £100. (2) Wages to any workman for not more than four months and not exceeding £50. (3) A proportion of apprentices' i)remiums. (e) In payment pari passu of all debts proved in the bankruptcy. (f) In payment of interest at 6 per cent, per annum from the date of adjudication to the date of payment on all debts proved. (g) Any surplus to be refunded to the bankrupt. 248 STATEMENTS OF AFFAIRS. DEFICIENCY ACCOUNT. Included in the forms which must be filed with the of- ficial Statement of Affairs is one which requires the prepara- tion of a Deficiency Account, and such an account should be supplied with pri\ate statements. The object oi a Deficiency Account is to show how insolvency has been brought about, the various profits and losses made by the debtor being clearly shown, and it can then be seen what have been the chief causes of his insolvent position. It is usual to make the account relate l)ack to the last known Balance Sheet which showed the debtor in a solvent position, the Deficiency Account being credited in the first place with his surplus on that date. To this surplus will be added all profits earned by him up to the date on which the Statement of Afifairs is prepared, and there will be deducted all drawings made by him and losses incurred (including the anticipated losses on realisation as disclosed by the State- ment of Afl:'airs). The balance of this account should then agree with the deficiency, as disclosed by the Statement of Afifairs. Special care should be taken to charge against the De- ficiency Account any liability disclosed in the Statement of Affairs but not shown in the books; for example, an esti- mated liability on Bills Discounted or on Accommodation Bills. Again, any extraordinary losses should be shown separately therein, such losses as those caused by specula- tion being set out clearly and not included with the net pro- fits or losses on trading. If the debtor's books have been kept in decent order no difficulty should be experienced in making the balance of the Deficiency Account agree with the deficiency disclosed by the Statement of Affairs. If to the capital as on a prior date is added the total profit earned, the result will show the nett assets with which the debtor has had to deal in the period. If there are set against this total the amounts which the debtor has withdrawn from his business and all the losses incurred within the business, it is evident that the balance of the Deficiency Account must represent his shortage at the present date. It is thought that a careful study of the following ex- ample will make the method of preparing a Statement of Affairs and Deficiency Account clear. It is again mentioned that these statements are prepared along the lines of those which would be required in the case of a private arrangement with creditors, but that thev follow very closely the official forms required to be supplied in the case of bankruptcy. 249 AUSTRALASIAN ADVANCED ACCOUNTANCY. EXAMPLE :— Sanuicl Ilobforth, a merchant, find's hnnself in financial difttculties. He calls a meeting of his creditors, and requests you to prepare from his books and papers a Statement of Affairs and a Deficiency Account for submission at the meeting. These statements are to be prepared as on the 31st December, 1921. From his books and papers you obtain the following information: — Sundry Debtors — Good .. £1,280 Doubtful (estimated to produce £10001 2,800 Bad 700 £4,780 Stock on hand (estimated to reahse £2000).. 4,000 Freehold Property (estimated to realise £2000) 3,300 1,000 shares in the Austral Motor Co., valued at par 1,000 Mining and Railway Shares (Shares to the value £4500 are held as security by Parth' Secured Creditors and the balance by Fully Secured Creditors) valued at 9,450 Loss in connection with Law Suit 4,380 Loss on speculation in Wheat 1,800 Creditors : — Unsecured : Creditors on open a/c £12,000 Bills Payable 4,340 16,340 Partly Secured: WiUiam Johnson 5,420 Fully Secured: Mercantile Bank of Australia 3,110 Preferential Claim for Salaries 200 Rent 50 Rates and Taxes 10 Private Drawings 1,200 Balance of Capital A/c on 31st December, 1918 3,800 Cash on Hand 20 Offite Furniture (estimated to produce £85) .. 200 l^ills Receivable (all good) 800 Sundry Profits on Trading 2,000 Bills Discounted to the amount of £600 are current, and it is estimated that £100 will rank for dividend. §2-5 ■M O H OS « W (X! H u H n oo o (M O. 00 t^ IS I E : «S 3 : .5 t. -5^ :s.^ pqffi fa o H § . Is < o PIH tX P- n o 3 -d ^ o o rt 2 fi §S c -c O i< ^« o J2 ^ r ^ <- u- M (u o .r: flH C rt rt 5S W (T.P^ >.j:; o ft O. g o ft o B ^ o .i; .J Pi ^•2 ^ o CO ■— 1 ■ t-, (U (U ^^ B a <;oj 2 « c *- >i ^ c^ C). •c (U '3 +-> c c ^ re o _o rt a; J j:: M _^ b ■-5 a _c o Pi jf r;::; i c PQ c V C c 8 .2 3 § c 1 (L > c c lA rt Pn M •o 1- efore. however, the Executor commences to distribute any of the property of the Testator amongst the legatees or devisees he should, for his own protection, make sure that all the creditors of the estate have been paid off. and to do this he should give due notice to the creditors by advertisement to send in their claims against the estate. If he pays or hands over lecacies or devises before doing this and it is subsequently found that there is insufficient to pay all the creditors in full, the Executor will, in all probability, be required to make up the shortage out of his own pocket. 255 AUSTRALASIAN ADVANCED ACCOUNTANCY. Legacies. — Legacies are four kinds : — (a) Pecuniary or General.- — -W here it is left so as not to amount to a gift of a particular thing, distin- guished from all others of the same kind, as for examijle, "1 give a diamond ring" Ihis may be fulfilled by the delivery of any ring answering to that description. An ordinary cash legacy is general. (b) Specific. — A legacy of a specific part of the Tes- tator's personal estate, which can be distinguished from all other things of the same kind. For e.v- ami)le, "I give my gold watch." or "1 give my diamond ring presented to me 1)_\- A."' (c) Demonstratixe.^ — ^A general legacy with a particu- lar fund named out of which it is to be paid, as for example, "£;500 out of my fixed deposit in the Bank of New South Wales." (d) Residuary. — A legacy of all that remains after payment of creditors and a'll other legacies. Distribution of Estate. — The Executor cannot l>e com- pelled to pay legacies until twelve months after the date of the death of the Testator, unless the will directs otherwise, and, as already stated, he should not pay any legacies until all creditors have been paid in full. If he is of opinion that the estate will not realise sufficient to pay off the creditors, his safest course is to apply to have the estate wound up under the provisions of the Bankruptcy (or Insolvency) Act, or the creditors themselves may, under similar circum- stances, petition to have the estate administered in bank- ruptcy (or insolvency). In paying off the delfts of the es- tate the Executor should apply the assets in the following order : — (1) In paying the funeral and testamentary expenses and the necessary expenses of the Ivxecutor in connection with the estate. (2) Debts due to the Crown, including i)robatc duly. (3) Debts given priority by Statute, e.g., subscriptiouM due to a Friendly Society. (4) All other debts (which rank c(|ually among them- selves). (T)) Legacies (called voluntary del)ts). The effect of paying any of the above out of their pro- per order amounts to an admission by the Executor that he 2-)6 TRUSTEES AND EXECUTORS has sufficient assets to satisfy all antecedent debts. As al- ready pointed out, if he paid all of the legacies first he would, in the event of the remaining assets of the estate being in- sufficient, be personally liable to pay all debts. Payment of Legacies. — If, after payment of the outside creditors, the estate proves sufficient to pay all the legacies provided for in the will, no difficulty will be experienced, as the Executor will merely hand to each legatee or devisee the particular legacy or property left to him and obtain a discharge from each. But if the estate proves insufficient to pay all legacies in full he must proceed carefully. Under such circumstances 'the shortage must be borne first of all by the general lega- tees. In other words, the specific legacies must first of all be paid in full. The demonstrative legacies are in a some- what peculiar position. If the funds out of which they are to be paid still remain, the demonstrative legacies rank with the specific, and must be paid in full before the general lega- tees receive anything. If, however, the funds out of which the demo,nstrative legacies have to be paid have been adeemed, i.e., used up by the Testator before his death, the demonstrative legacies become general legacies for the same amount and, in the event of any abatement being necessary, they will abate proportionately with the general legacies. It might be noted here that if the subject matter of a specific legacy is adeemed by the Testator the specific legatee gets nothing, so that under certain circumstances a demonstrative legacy is more desirable than a specific legacy. Marshalling the Assets. — If the amount of cash left by a Testator is not sufficient to pay all the debts, it becomes necessary for the Executor to realise part of the estate, and the assets must be realised in a prescribed order ; a process known as "marshalling the assets." The order in which the assets are to be realised under such circumstances is as fol- lows : — (a) The general personal estate not l^equeathed or be- queathed by way of residue only. (b) Real estate left for the payment of debts. (c) Real estate forming part of the residue. (d ) Real or personal property, devised or bequeathed subject to the payment of debts. (e) General legacies and annuities. 257 AUSTRALASIAN ADVANCED ACCOUNTANCY. (f) Specific legacies and specific and residuary devises (demonstrative le.^acies are included with specific legacies if the fund remains; if not, they are treated as general legacies). (g) Property over which the Testator had a general power of appointment and he has appointed by will. (h) Paraphernalia of the widow. Death of a Legatee. — \\ here a legatee dies after the date of the Testator's deatli the legacy forms part of the legatee's estate and the Mxecutor of the original Testator will hand the amount of the legacy over to the l^Lxecutor of the lega- tee. But where the legatee (if not a child or other issue of the Testator) dies during the Testator's lifetime the legacy lapses, i.e., it falls into the residue. If, however, the legatee is a child or other issue of the Testator and he dies leaving issue, his children will take his share. APPORTIONMENT.— This term, as applied to Execu- torship accounts, is the division of Income and Expenditure between the interests entitled thereto or subject to be charged therewith. Unly Income and Expenditure which can be taken as accruing from day to day is subject to this division and the Apportionment Acts of the various States provide that such income as dividends, interest, rent, and other perio- dical payments are to be considered as accruing from day to day, and are to be apportioned accordingly. One of the chief duties of an Executor or Trustee is to see that the ap- portionment of Income and Expenditure is correctly carried out in order to enable him to protect the interests of the various parties entitled to benefit under the will. An apportionment of Income and Expenditure is made as on the date of death of the Testator. 1"he Executor must include amongst the assets of the estate not only the nominal or capital value of those assets, but also the income accrued upon such assets up to the date of death. Although, as al- ready mentioned, an Executor must, in New South 'Wales, value the assets for probate duty purposes as at the date when probate is granted, this does not afifect the actual ap- portionment between Corpus and Income in the books, such apportionment being made in the manner abovementioned. All assets and income of the nature indicated accrued on those assets up to the date of death, form part of the cor])Us or the capital value of the estate and reference to the 2fi8 TRUSTEES AND EXECUTORS. specimen account shown in the next chapter will indicate the method of showini^- such accrued income in the Corpus ac- count. Similarly all expenditure incurred or accrued up to the date of death will be included amongst the liabilities, and the result is that the Corpus account will show the true net value of the estate. An apportionment of income is also made upon tiie ces- sation of the interest of any life-tenant or other person en- titled to income out of the estate. Such person or his repre- sentative is entitled to the income accrued up to the date when his interest ceased. He or his estate will not be en- titled to payment of this accrued income until it has actually been received in cash by the Executor or Trustee of the ori- ginal Testator, but upon receipt of such income the Executor or Trustee must hand over to him or to his estate the portion accrued up to the date when his interest in the estate was determined. Interim Dividends. — Where an interim dividend on shares possessed l^y a Testator has been declared during the year in which he died an apportionment should, it is thought, be made in respect of the full year's dividend and the amount of the interim dividend should be deducted, after apportion- ment has been made, from the portion of the estate which has actuallv received it. Suppose, for example, a Testator died on the 30th Sep- tember. An interim dividend on 1000 shares paid up to £l per share had been paid on the 30th June at the rate of 5 per cent, per annum, and on the 31st December a further divi- dend of 7^ per cent, was declared, making the full dividend for the year 12^ per cent. The full dividend for the year, £125, would be apportioned 9/12ths — £93 15s. to Corpus; and 3/12ths — £31/5/ to Income. Corpus has already re- ceived £50, so that, of the £75 received on the 31st Decem- ber, Corpus would receive £43 15s. and Income £31/5/. If, however, the interim dividend received by a Testator during his lifetime exceeds the pro])ortion due to Corpus under the method of apportionment shown above. Corpus cannot be made to disgorge, and Income will onlv be entitled to re- ceive the balance. For the purpose of simplifying the illustration the above apportionment has been made in months, although it should be noted that, in actual practice, any apportionments must be made in davs. AUSTRALASIAN ADVANCED ACCOUNTANCY. Bonus Shares Received by Trust Estates.— \\ here any portion of the trust funds is inxested in the shares of pubHc companies the question often arises as tti whether shares is- sued by a company to its shareliolders and paid for, either fully or partly, by a bonus dividend declared out of divisible profits form part of the Corpus of the estate or belong to the life tenant. On numerous occasions applications have been made to the Courts for decisions upon this point and, as the matter is of great importance, and as the facts in the various cases have varied, it is thought advisable to supply a brief summary of some of the decisions given. The chief case is Bouch v. Sprtnile (1"^ A.C.. ;}85), in which the following principle of law was laid down in the Court of Appeal and later approved by the House of Lords : — Where a company has the power either of distributing it's pro- fits as dividends or converting them into capital, and the com- pany validly exercises this power, such exercise of power is binding on all persons interested under the testator or settlor in the shares and, consequently, what is paid by the company as dividend, goes to the tenant for hfe, and what is paid by the company as capital, or appropriated as increase of the capital stock in the concern enures to the benefit of all who are interested in the capital. From the above it would appear that the true test in such cases is the intention of the company in making the dis- tribution, i.e., if the company's intention in applying profits in payment of shares is to increase its capital, then a Trus- tee must treat any such shares received by him as part of the Corpus of the estate he is administering, but if the inten- tion is to pay a dividend then the amount of any such divi- dend, whether paid in cash or in shares (but not necessarily the shares themselves), forms part of the income of the trust estate. It is thought that the test named is one which will fre- quently prove extremely dititicult to apply. A company does not always clearly express what are its intentions as. from a practical point of view, they are immaterial seeing that the issue of bonus shares does, in every case, result in a capital- isation of profits with a corresponding increase in the com- pany's issued share capital. In all decisions given since Bouch v. Sproule the prin- ciple laid down in that case has been recognised, and the Courts have confined themselves to ascertaining rind decid- ing upon the facts in accordance therewith. In I '.ouch \. Spi<'ule the facts were as follow: — T R U ST E' E S AN D' EXE C"U TORS. The Company had in August, 1880, the sum of £100,000 at credit of Reserve account and it43,316,/6/l at credit of Profit and Loss account. The directors' report stated: "Your directors feel that the time has come when they may safely recommend some per- manent appropriation of the £100,000 standing to credit of reserve fund and a considerable portion of the undivided profit fund. They therefore propose that the reserve fund £100,000 and £38,000 out of the £43.316/6/1 shall be distributed as a bonus dividend of £2/10/ per share, equalling £7/10/ in respect of every three existing shares; but as the company's operations render it desirable to raise an equal amount as capital account, your directors propose that there be created 18,400 new shares of £10 each, with £7/10/ per share pay- able concurrently with the payment of the bonus dividend. ..." A resolution was subsequently passed sanctioning payment of the bonus. A circular was sent out to each shareholder enclosing a dividend warrant, and asking that the warrant be signed and re- turned to the company, together with a form accepting the shares allotted, subject to the conditions under which they were issued. The Trustee of Bouch's estate complied. Held (reversing the decision of the Court of Appeal) that, as the company did not intend to pay any sum as dividend, but intended • to, and did, appropriate the undivided profits dealt with as an increase of the capital stock, the Trustee was bound thereby, and must treat the shares as part of the Corpus of the estate. In re Malam ; Malam v. Kitchens (1894. 3 Ch. D., 578) : The Company passed resolutions declaring a dividend payable out of the available profits. The directors sent a circular to the share- holders ofTering, in payment of one-half of the dividend, shares paid up to £2/10/ per share, and stating that the remaining half would be paid in cash. Shareholders could, however, take the whole divi- dend in cash if they so desired. The Company had sufficient liquid assets to enable it to pay the full dividend in cash. The shares, issued as paid up to £2/10/, wrre at a premium of £17. Held (a) That the company by its resolutions did intend to distribute its accumulated profits as dividend, and that the tenant-for-life was, on the principle laid down in Bouch v. Sproule, entitled to the dividend declared by the resoltuions. (b) That the proceeds of the realisation of the shares be applied in payment first of the dividend, and the balance ought to be applied as capital. It will be noted that the life-tenant was not held to be entitled to the shares (paid up to £2 10s. but worth on the market £19 10s.). but only to the portion of the dividend utilised in payment for such shares, i.e., £2 10s. per share. In the above case it will be seen that the shareholders had the option of taking- the amount of the dividend either in cash or in shares, and the Courts appear now to have adopted the principle that, where a real option of this kind is given to the shareholders, this is evidence that the com- pany's intention in issuing- the shares is not to capitalise profits. AUSTRALASIAN ADVANCED ACCOUNTANCY. Coming now to some Australian cases, the decisions given in a number of these make a])i)arent the difficulty of apply- ing, in all cases, the principle already mentioned. In re VValford ; W'alford v. Reed, N.:S.\V., W.N. Vol. 27, p. r)2, the facts were as follow: — The Colonial Sugar Refining Co., Ltd., in 1907, passed resolution-^ that there be issued out of the authori'sed capital 15,000 shares of £20 each, bringing the paid up capital to £2,500,000. Such shares were to be offered to the proprietors in the proportion of three new shares to every 22 held by each proprietor. The ?um of £5 per share was to be paid by a transfer of £75,000 from Profit and Loss account, and the remaining £15 per share was to be paid up in cash. Any shares left unallotted as not being divisible by 3-22 were to be disposed of by the Board, and the premiums on such shares were to be divided proportionately amongst the proprietors entitled thereto. His Honor, Mr. Justice Simpson, stated that the general rule was laid down in Bouch v. Sproule, but he had great difficulty in de- ciding, in the present case, as to whether the company intended to treat the profits as capital or as income. He considered, however, that the £5 per ?hare, to be applied in payment of n?w shares, was prima facie profit divisible as dividend. He thought that it was the duty of the Trustees to hold the shares as capital, but that the tenants-for-life were entitled to a charge thereon equal to the pro- portionate part of the £75,000 which was taken from the balance of Profit and Loss account and applied in part payment of the shares. In the same case the question arose as to wdiether shares issued by the Colonial Sugar Co. in accordance with the re- solutions passed in the next year (1!)08) were to be appor- tioned between Corpus and Income. The resolutions passed in 1908 were in the same form as those quoted above, with the following important e.xceptions — (a) the 17,500 shares of £20 each were to be issued as fully paid up; (b* the amount standing at the credit of Equalisation of Dividends Re- serve, £165.000, Guarantee and Insurance Reserve £64,136/4/4, and a further sum of £20.863, /15/S from Profit and x^oss account were to be transferred to the Reserve account, bringing the balance of that account up to £350,000; (c) this £350,000 was to be divided amongst the shareholders in proportion to their holdings and the amount payable to the shareholders was to be applied in payment of the new shares issued, provided no direction wa-- given to the company to the contrary. His Honor decided that the shares issued to the Trustees in accordance with the 1908 resolutions were to be treated as part of the Corpus of the estate. It is difficult to see the reason why the £75,000 trans- ferred from Trofit and Loss in 1907 must be treated as In- come and the £20,8<).'5 I'ts. tees are empowered to manage and carry on a station It has been held that the following expenditure may be charged against Corpus (see re Walker, 1 S.R., Eq. 23:) :— {!) Sums expended in l)uyin8- additional land for the more convenient working of the station. (2) In sinking artesian bores. (3) Such part of the Crown payments in Conditional Purchases as is attributable to the capital pur- chase mone3\ (4) Exceptional losses of stock by reason of flood, fire, or drought, but the income should be charged \vith mterest at the rate of 5 per cent, on such ^amounts to form a sinking fund to replace the capital so used m restoring the s^ock to its normal level, i.e., the average number of stock which such station would carry under prudent management. I con- fess I should have thought 10 per cent, a safer amount. (5) The erection of new fences to be charged to the Corpus and recouped by twenty annual instal- ments out of income. (6) Other permanent improvements necessary for the management should be defrayed out of Corpus in the first instance, and recouped out of income by annual instalments, extending over such period as the Trustees may think proper. On the other hand, the Income account should be charged : — (1) With such portion of the annual instalments to the Crown as represents interest. (2) W^ith annual payments transferred to the Capital account to recoup it for the amounts expended under 4, 5. and 6 of what I have previouslv spoken of as charged to Corpus. (3) W^ith the ordinary repairs to existing fences. (4) With the annual Trustees' commission. *The above summary is extracted from a lecture delivered by J. T. Lingen, Esq., M.A , Barrister-at-Law. to the Australasian Corporation of Public Accountants, and i^ inserted with hi»^ kind permission. 26.5 AUSTRALASIAN ADVANCED ACCOUNTANCY. Unless there are special directions empowering the Trus- tees to create a Reserve fund, then tliey should treat each year on its own basis, and distribute as income the cash sur- plus coming to their hands, and arising from the carrying on of the station. Cases Where No Apportionment Made. — Before leaving this important subject it might be noted lliat all Income and Expenditure is not apportionable. For exampl-e, Rent paid in advance is deemed to be due on the date when it is paid, and no apportionment is made. The same applies to Life Insurance premiums. The profits of a Partnership business are also not apportionable, as the profits in such a business cannot be said to accrue evenly from day to day. The part- nership agreement will probably make provision as to the course to be followed upon the death of a partner, or, if no provision is made, the partnership must be wound up as on the date of his death. If such is the case the whole of the profits accrued up to date of death will belong to Corpus. Where, however, a partnership agreement provides that, in the event of the death of a partner, the business is to be con- tinued on till next balance-day without any account being taken of the profits as at the date of death, and no provision is made in the deceased partner's will as to the disposal of the profits, the whole of his share of the profits when ascertained will belong to Income. No apportionment is made between Corpus and Income upon the change of an investment, the whole of the proceeds of the sale being treated as capital, although the investment is sold cum div. and the price realised includes the value of the income accrued to date. Nor, on the other hand, is any apportionment made when investments are purchased cum div., the whole of the cost of such investments being treated as capital expenditure. To illustrate the above, suppose a portion of a deceased person's estate consisted of 10,000 ordinary shares of £ I each in a banking company, the ex dividend value of the shares being par. The Bank had for the previous five years paid a dividend of 5 per cent. p.a. on these shares, and it was anticipated that a similar dividend would be paid for the year ending the 30th June following. These shares are sold by the Trustees, cum dividend, on the ;U.st March. The l)roceeds therefore include nine months' accrued dividend. The whole of the i^roceeds of the sale of this investment lie- longs to Corpus and the life-tenant receives no interest in respect thereof for that year. On the other hand, if the Trustees of this estate had been purchasing these shares on 2GC TRUSTEES AND EXECUT^ORS. the 31st March, the full cost would be borne by Corpus and the life-tenant would be entitled to the full year's dividend received thereon on the 30th June, although the shares had onlv been held for three months. It might be pointed out, however, that the purchase or the sale of an investment must be made in due course of ad- ministration, and it is quite possible, as in the case of Bulke- ley v. Stevens, that under exceptional circumstances the Court will order an apportionment to be made between Corpus and Income. " In the case mentioned the life-tenant died just prior to date when the income on certain investments would be received, and, as this is one of the occasions upon which an apportionment must be made, the life-tenant's estate was entitled to the income accrued up to date of his death. The Trustees of the original estate, however, sold the investments before the income was actually received and, under these cir- cumstances the Court ordered an apportionment of the pro- ceeds of the sale between the life-tenant and the remainder- man. Investments. — It was decided in Howe v. Lord Dart- mouth that, where portion of the residuary personal estate consists of assets of a wasting nature and such residuary estate has been left by the Testator to two or more persons in succession, there is an implied instruction to the Executors or Trustees to convert such property and invest.- the proceeds in permanent assets in order to protect the interests of such persons as will be subsequently entitled thereto. Suppose, for example, a Testator left the residue of his estate to his son subject to a life interest in favor of his widow and a por- tion of this residue consisted of a lease having ten years to run. It is quite possible that the wndow might live during the whole of this period, and that the son would not gain any benefit from such property. The Trustees should under these circumstances realise the leasehold property and invest the proceeds in permanent assets. It should be noted, however, that this rule does not ap- ply to a specific legacy the subject matter of which is to be enjoyed by several persons in succession. In such a case it is obvious that the Testator intended the property to be en- joyed in its existing form. If, in the case mentioned in the previous paragraph, the Trustees were not able to effect im- mediately an advantageous realisation of the wasting asset, the whole of the income received pending the sale should not be handed over to the life-tenant. The life-tenant will only be entitled to receive out of the income a sum equal to 4 per cent, on the capital value of the property at the date of the Testator's death, the balance being re-invested. 267 'VUSTRALASIAN ADVANCED ACCOUNTANCY. If the Trustees retain such ])r()perty for mure than the period necessary to enable a satisfactory realisation to be efifected the amount to which the life-tenant would be entitled as his share of the income must be ascertained in the follow- ing way : — Ascertain the amount which, if in\ested in (ioxernment securities at one year from date of death, would at com- pound interest have produced the amount which the pro- perty realised. The amount so ascertained will belong to Corpus, and the balance will go to the life-tenant. The will generally names the class cjf securities in which the estate is to be invested by the Trustee and, where it is not possible for him in his capacity as Execvitor to distribute the whole of the estate at once, and it becomes necessary to invest the trust moneys for the benefit of the life-tenants, no time should be lost in carrying out the provisions of the will with regard to such investments. Where the will does not name the securities in which the Trustee is to invest he must invest only in authorised securi- ties, i.e., securities authorised by law. These securities in the various States are as under* : — New South Wales. — A trustee may invest as permitted by the trust instrument and, unless forbidden by the instrument creating the trust, it is lawful for a trustee to — (a) Invest trust funds in: — (1) Any public funds or Government stock or Government securities. (2) Real securities in any part of New South Wales. (This means upon mortgage of freehold estate. It does not con- fer a power to purchase real estate.) (3) Any of the stocks, funds, or securities in or upon which by any general order, cash under the control of the court may from time to time be invested. (b) Call in any trust funds invested in any other security and invest them in any of the above securities. (c) Vary from time to time any such investment for others of a like nature. Queensland. — The trustees may, unles?.^ expressly forbidden by the instrument creating the trust, invest trust funds in the following manner: — (a) In Parliamentary stocks or Public funds or Government securi- ties of the United Kingdom. (bl On real or heritable .securities in Great Britain or Ireland. (c) In s'.ock of the Bank of England or the Bank of Ireland. (dl In securities the interest of which is guaranteed by the Par- liament of the United Kingdom or of any of the Australian Colonies or New Zealand. *In any State within th.- Commonwealth a trurte'. mav invest Trust Funds in Commonwealth War Loan. TRUSTEES AND EXECUTORS. (e) In the debentures or securities of the Government of any- Australian Colony or New Zealand. (ft On real securities in Queensland. (g) In any stocks, funds, or securities for the time being author- ised for the investment of cash under the control or subject to the order of the Court. (h) In debentures or other securities charged on the funds or pro- perty of any local authority in Queensland. (i) On deposit in any Government Savings Bank in Queensland. The trustee may at any time vary such investments. Victoria. — Unless expressly forbidden by the instrument creating the trust, a trustee may invest in any of the following: — • (a) On first mortgage or real property in Victoria, but the loan must not exceed three fifths of the value as stated in the re- port of a competent valuer. (b) In Treasury bonds of the Government of Victoria. (c) In debentures issued by the ^Melbourne and Metropolitan Board of Works or the Geelong Harbour Trust Commissioners. (d) In debentures issued by any city, town, shire, or borough in the Colony of Victoria. It shall also be lawful for a trustee, authorised by any Act of Par- liament or by the instrument creating the trust or by this section to invest in stock (whether inscribed or not), debentures or Treasury bonds of the Government of Victoria or any debentures issued by the Melbourne Harbour Trust Commissioners or the Melbourne and Metro- politan Board of Works, or by any city, town, shire, or borough in Vic- toria, or by the Geelong Harbour Trust Commissioners or any mortgage bonds or debentures of the Commissioners of Savings Banks, or in any other Victorian Government stock or public securities, to invest in such stock, debentures, or bonds, notwithstanding that tha same may be redeemable and that the price paid therefor by such trustee exceed? the redemption value, or if such stock, debentures, or bonds are not redeemable, exceeds the value at par of such stock, debenture, or bonds. South Australia.^The trustee may, unless expressly forbidden by the instrument creating the trust, invest trust funds in the following manner: — (a) In South Australian Government securities.. (b) On real securities in the said province. (c) In any securities guaranteed by the Government or Parliament of the said province. (d) In the bond's, debentures, or other securities of any municipal corporation in the said province. (e) On deposit in the Savings Bank of South Australia. (f) On deposit in any incorporated bank carrying on business in the said province and proclaimed by the Governor in the Gov- ernment Gazette as a bank in which deposits may be made by trustees. (gl In any of the Parliamentary stocks or pubhc funds or Govern- ment securities of the United Kingdom of Great Britain or Ireland (but see under). (h) In the Government securities of any British colony or possss- sion (but see under). [In any State within the Commonwealth a trustee may invest Trust Funds in Commonwealth War Loan.] AUSTRALASIAN ADVANCED ACCOUNTANCY. The Governor may by proclamation declare that satisfactory ar- rangements have been made in the United Kingdom or any British Colony or possession to enable trustees in such places to invest in the public securities of South Australia and may r:?voke such proclamation at any time. No investment shall be made in (g) above save while a proclamation r?lating to the United Kingdom remains in force. No investment shall be made in (h) above save while a proclamation relating to the British colony or possession remains in force. Western Australia. — A trustee may invest any trust funds in his hands, whether at the time in a state of investment or not, in the manner following, that is to say: — (a) In any of the Parliamentary 'stocks or public funds or Govern- ment securities of the United Kingdom or of the Common- wealth or any of the Australasian Colonies, (b^ On mortgage of real estate in Westren Australia. (c) In debentures or other securities charged on the funds or pro- perty of any municipality in Westren Australia. (d) On fixed deposit in any incorporated or joint stock bank carrying on business in Western Australia. (e) In any security or manner authorised by any Act heretofore in force and not hereby repealed. (f) In the debenture or preference stock of any company now or hereafter carrying on business in Western Australia, and cer- tified by notice in the Gazette, signed by the Colonial Trea- surer, as a company in the stock of which trustees may invesY. (g) In any of the stocks, funds or securities for the time being authorised for the investment of cash under the control or subject to the order of the Court, and may also from time to time vary such investment. The powers conferred above shall be exercised according to the discretion of the trustees, but subject to any consent required by the instrument creating the trust. Tasmania. — The trustees may, unless expressly forbidden by the instriiment Creating the trust, invest trust funds in the following man- ner: — (a) In Parliamentary stocks or public funds or Government securi- ties of the United Kingdom. (b) On real or heritable securities in Great Britain or Ireland. (c) In stock of the Bank of England or the Bank or Ireland. (d) In any securities, the interest of which is for the time being guaranteed by the Parliament of the United Kingdom or Ta'> mania or any of the other Australian Colonies or New Zealand. (e) In debentures, stock or securities of the Government of Tas- mania or of any of the other Australian Colonies or New Zea- land. (f) On first mortgage or real estate in Tasmania. (g) In any of stock, funds, or securities for the time being author- ised for the investment of cash under the control or subject to the order of the Court. (h) On fixed deposit at interest in any incorporated bank carrying on business in Tasmania at the commencement of the Act, or if hereafter proclaimed by the Governor in the Gazette as a bank in which deposits may be made by trustee's. [In any State within the Commonwealth a trustee may invest Trust Funds in Commonwealth War Loan.l 270 TRUSTEES AND EXECUTORS. (i) On deposit iii any State or other Savings Bank carrying on business in Tasmania. (jl In the d:bentures or other securities charged on the funds or property of the Hobart Corporation or the Launceston Cor- poration or of the body corporate of any municipality in Tas- mania. New Zealand. — The trustees may, unless expressly forbidden by the instrument creating the trust, invest trust funds in the following man- ner: — (a) In the stocks, funds, or other Government securities of Nev? Zealand or of the Commonwealth of Australia or of any State thereof, or of Fiji. (b) On real securities in New Zealand. (c) In the bonds, debentures or other securities, or any municipal corporation or county council or Water Supply Board or River Board in New Zealand having authority to borrow money. (d) On deposit in any bank carrying on business in New Zealand under authority of any Act of the General Assembly or in the Post Office Savings Bank, established under the Post and Telegraph Act, 1908. The tru-stees may also, subject as mentioned above, invest trust funds in advance by way of mortgage on securitv of — (a) Crown land held on perpetual lease under the Land Act, 1885. (b) Crown land held on lease in perpetuity under the Land Act 1892. (c) Crown land held on renewable lease under the Land Act. 1908. (d) Native land held on perpetual lease under the West Coast Settlement Reserves Act, 1892. But not unless — ( 1 ) All conditions as to improvements are complied with, nor (2) Unless the lessee is entitled to compensation for improvements, nor (3) For a greater amount than one-third of the estimated value of the lessee's interest in the lease. Purchase of Investments. — Any expenses incurred in the purchase of an investment, such as brokerage, stamps, trans- fer fees, &c., are treated as a part of the cost of the invest- ment and will be debited to the account of the asset acquired. Carrying on a Business. — It may not be out of place to deal briefly w^ith an Executor's position in carrying on the business of a Testator. It should be remembered in the first place, that a business is not an investment authorised by the law, so that, unless the Executor is instructed by the will to carry it on, he should realise as speedily as possible, other- wise he may find himself liable for any losses incurred in trading, &c. He may quite safely carry on the business for a reasonable period awaiting some suitable chance of realisa- tion, but, apart from this, he must realise and withdraw the capital invested therein as soon as possible. A\'here, however, the Executor is instructed to carry on the business by the Testator he ma^^ do so, but it should not be forgotten that in so doing he must exercise the same 271 AUSTRALASIAN ADVANCED ACCOUNTANCY. amount of discretion and judgment as the average prudent business man would show in carrying on his own busin<;ss. If it is apparent that the business can only be carried on at a loss there is no doubt that it is the Executor's duty to rea- lise it as soon as possil)le, and he should apply to the Court in order to ascertain the proportion in which any loss incurred should be borne by Corpus and Income. If, however, he continues to carry on the business in spite of the fact that it is a losing concern, he may be liable for any losses incur- red, although the will authorises him to continue the busi- ness. An Executor should not overlook the fact that even in carrying out the terms of the will he must exercise dis- cretion. Again, in the absence of instructions to the contrary in the will he must not employ more capital in the business than was there at the date of the death of the Testator. Jf he does and the additional capital is lost he will be liable to make it good. The New Zealand Trustee Act provides, how- ever, that an Executor may bring additional capital into the business provided lie first obtains the consent of the Court. In carrying on the l)usiness the J-lxecutor is personally liable for all debts whicli the lousiness incurs wdiether he is authorised to carry on the business or not, but he has a right of indemnity against the assets utilised in the business. Executor's or Trustee's Remuneration.- — Unless provision is contained in the will for the i)ayment of remuneration to an Executor or Trustee, either by way of a fixed sum or by way of commission on the amount realised and distributed, he is not entitled to anything for his services, but the bene- ficiaries may agree to allow him remuneration, or the Court may allow to the Executor or 'trustee, upon passing his ac- counts, such commission as it thinks just and reasonable. The Court will not, however, allow him commission if he has already received a legacv under the will as remuneration for his services. Executorship Expenses. — These will be apportioned be- tween Corpus and Income according to their nature. Those expenses incurred in realising and getting in the i)roi>erty will, of course, be charged to Corpus, and th(^se incurred in collecting the income will be charged against Income. Repairs to Property. — In the absence of instructions to the contrary in the will, repairs will, generally speaking, be charged against Income, but, where portion of the property is in a dilapidated condition and it is necessary to exjiend a considerable amount in repairs in order to make it lettable, it is advisable to apply to the Coiu't for instructions as to how the amount expended should be ai)portioned between Corpus and Income. TRUSTEES AND EXECUTORS. INTESTATE ESTATES.— Up to the present very little has been said about the method of dealing with the estate of a person who has died intestate. Under such cir- cumstances the creditors must, of course, be first paid off and the balance of the estate will be distributed according- to law. The law as to the distribution of intestate estates amongst the next-of-kin of the deceased varies, and the pro- visions of the various States are supplied hereunder: — New South Wales.— In the following the word "husband" can be substituted for "wife," and "widower" for "widow." Where a person dies intestate, leaving a widow, but no issue, his widow is entitled to the first £500, plus interest at the rate of 4 per cent, per annum from the date of death until the date of payment. If the net value of the estate does not amount to £500, the widow receives the whole but if it exceeds £500, the balance, after making the payment above mentioned to the widow, will be divided amongst the next-of-kin as under. Ill will be noted that where a man leaves children or other issue sur\'iving him, the payment of the first £500 to the widow does not apply, nor does it apply in the case of partial intestacy, thei widow only being entitled to the first £500 in the event of total intestacy: — (1) If a husband dies leaving a wife but no children — the widow receives one-half, and the other half is divided equally amongst the next of kin. (2) Wife and children— one-third of the whole estate to the widow and two-thirds to the children in equal shares. (3) Wife and father, but no children— one-half to the widow and one-half to the father. (4) A wife and mother, but no father, children, brothers or sisters — one-half to the widow and one-half to the mother. (5) A wife, mother, brothers and sisters, but no children or father — one-half to the widow, and one-half to be divided equally be- tween the mother, brothers and sisters. (6) A wife, brothers and sisters, but no children, father or mother — one-half to the widow and the remaining half divided equally between the brothers and sisters. (7) No wife, no children, but a father and mother— the whole of the estate goes to the father. Queensland. — The word "widower" can be substituted for "widow'* and the word "woman" for "man." Where a man dies intestate, leaving a widow, but no issue, his widow is entitled to the first £500, plus interest at the rate of 4 per cent, per annum from the date of death until the date of payment. If the net value of the estate does not amount to £500, the widow receives the whole, but if it exceeds £500, the balance, after making the pay- ment above mentioned to the widow, will be divided amongst the next- of-kin, as under. It will be noted that, where a man leaves children or other issue surviving him, payment of the first £500 to the widow does not apply:— When a man dies leaving a widow and no issue and no widowed mother, his estate, if not exceeding £500, goes to the widow absolutely. Where the estate exceeds £500 the widow takes the first £500 plus her share of the residue, and the residue of the estate will be distributed as under: — If a man dies leaving a wife and children — one-third of the whole estate to the wife and two-thirds to the children. If no wife, but children — all to the children. If a wife but no children — one-half to the wife, and the other half to the next-of-kin. 273 AU^IWALASIAN ADVANCED ACCOUNTANCY. Victoria. — The estate of every man who shall die intestate after the 31st March, 1896, leaving a widow, but no issue, shall in all cases where the net value does not exceed £1000 belong to the wido.v absolutely and exclusively. If the estate exceeds £1000, the widow 'shall have a charge on the assets of the estate to £1000 and interest at 4 per cent, from the date of death to the date of payment. The above provisions are made without prejudice to her interest and share in the residue of the estate, and any residue after payment of the £1000 is to be divided as under. It will be noted that where a man leaves children surviving him the payment of the first £1000 to the widow does not apply. If he leaves a wife and children — one-third of the whole estate to the widow and two-thirds to be divided equally amongst the children, or their legal representatives. If a wife and no children or no legal representatives of such children— one-half to the widow and the balance to be distributed equally to every of the next-of-kin, who are in equal degree or those who legally represent them. If no widow, but children— the whole will be divided equally amongst the children. If no widow or children— the whole to the next-of-kin in equal degree . Xote. — An intestate married woman's estate iv; distributable in the same manner and proportion as an intestate married man's estate with the exception that the husband does not take the first £1000. South Atistralia.— The word "widower" can be substituted for "widow" and "woman" for "man." Where a man dies intestate leaving no issue, and hi's estate does not exceed £500 in value, the whole goes to the widow absolutely. If his estate exceeds £500, the widow receives the first £500, plus interest at 8 per cent, per annum from the date of death to the date of pay- ment. If he dies leaving widow and children, one-third of the whole estate goes to the widow, and to the children two-thirds. If he leaves a wife, but no children, one-third goe.s to the wife and the balance will be distributed amongst the next-of-kin. West Australia— The husband or wife shall be entitled on the death erf the other as to the property as to which he 'or "she die<'; intestate to the following shares only: — (a) Where the net value of the property of the deceased does not exceed £500, to the whole of such property. (b) Where the net value of the property exceeds £500, to the Sum of £500 absolutely, and also to one-half of the residue, where there is no issue surviving, or, where .'^uch issue sur\'ives, to one-third share of the residue and such issue to the remaining two-thirds, the division among the issue being per stirpes. Subject to the above the property of such deceased husband or wife shall be divided amongst the next-of-kin- Tasmania. — The word "widower" can be substituted for "widow" and "wife" for "husband." In the case of total intestacy, the first £1000 plus 4 per cent, from date of death to the date of pavment goes to the widow, and if there are children, one-third of the balance to the widow, and two-thirds to the children, or if no children all to the widow. In the ca.se of p.irtial intestacy the provision as to the payment of the first £1000 is eliminated, and the estate is then distributed as above with that exception. 274 TRUSTEES AND EXECUTORS, New Zealand. — The word "woman" can be substituted for "man" and "widower" for "widow." If a man dies intestate, leaving a widow but no children, the widow is entitled to receive the first £500, together with interest at the rate of 4 per cent- per annum from date of death to the date of payment, in addition to her share of the residue as provided below: — (a) If he leaves a wife, but no children, father, mother, brother or sister — the whole to the wife. (b) If a wife and children — one-third to the widow, and two-third? to the children. (In this case the widow does not receive the first £500 out of the estate, as there are children.) (c) If a wife and father, but no children — two-thirds to the wife and one-third to the father. (d) If a wife and mother, but no children — two-thirds to the wife and one-third to the mother. (e) If a wife and brothers, sisters, but no children, father or mother — two-thirds to the wife, and one-third to the brothers and sisters. Accounts of an Executor. — One of an Executor's chief duties is to keep proper accounts, and he must always be ready with these accounts in order to show clearly his ad- ministration of the estate. He must in the first place pre- pare lists of the assets and liabilities of the estate for Pro- bate purposes, and it is necessary fur him thereafter to keep a strict and accurate account of his dealings with the assets and show that he has distributed the estate in accordance with the terms of the will. As he is in reality appointed by the Court he must account to it for his dealings, and should file accoimts periodically in order to obtain a discharge by the Court. In New South Wales he must file accounts and a plan of distribution within twelve months after the date when Pro- bate was granted. The accotmts for filing- at the Court con- sist of the usual Cash Statement, but the items of Corpus and Income should be shown separately. Where the Exe- cutor is carrying- on a btisiness for the estate a separate Pro- fit and Loss account should be shown therefor and separate books should be kept in order to show the results of the trading. A description and illustration of the style of ac- counts w^hich should be kept by an Executor in order to show clearly his dealings with an estate are supplied in the next chapter. 275 CHAPTER XX. EXECUTORSHIP ACCOUNTS. The actual accounts to be kept by an Executor present no difficulties, and do not, as a rule, involve the use of more than three books— Ledger, Cash Book, and Journal. There is some difference of opinion as to whether it is necessary for an Executor to use a Journal. It is stated that as an Executor is only accountable for the proceeds of the realisation of the estate, a Journal is not necessary, as no entries will be made unless cash is received or paid away. The advocates of this method consider that it is not neces- sary for an Executor to make any entries in financial books until he either receives or pays away cash, and the various assets possessed by the testator at date of death should be shown only by way of memorandum. No sufficient reason has yet been put forward why there should be any distinction between the method of keeping the accounts of an Executor and the method of keeping- the ac- counts of an ordinary business. If a business merely kept a record of its cash transactions, it would speedily find itself in difficulties, and, although it is true that an Executor should not make any entries for income or expenditure until he has actually received or paid away the cash, it is clear that there will be numerous transfers from one account to another, and unless a Journal is used, such transfers will involve the ne- cessity of making direct entries in the Ledger, which is a breach of one of the fundamental rules of double-entry book- keeping. With the exce])ti()n that no entries should be niade for income until it is received there is no reason why l*'xecutor- ship accounts should not be conducted along commercial lines, and it is proposed to deal with the accounts upon that basis. The opening entries in the books will be made through the Journal. A "journal entry will be passed, debiting ac- counts representing the various assets possessed by the es- tate at death, and crediting Corpus (or Capital) account. Another entry will be i)assed debiting the Corpus account with all liabilities at date of death, the corresponding etitries being made in accounts representing tlie various liabilities. 27G EXECUTORSHIP ACCOUNTS. As mentioned in the last chapter, the Corpus account must be credited, not only with the capital value of the assets, but also with any income of an apportionable nature accrued thereon up to date of death, in order to enable the true value of the estate as at date of death to be shown. Similarly, any accrued expenses of an apportionable nature will be debited to Corpus account. As in the nature of things the corpus of the estate will be distributed by way of legacies and devises the Corpus ac- count will be deb-'ted whenever a legacy is paid in cash, Cash account must be credited, or, in the case of a specific legacy, the account of the particular asset handed over will be cre- dited. The effect is to diminish the balance of Corpus ac- count, and this goes on until the wdiole estate is distributed. If all the legacies are to be paid in cash, it is the Executor's duty to realise the various assets, any profits or losses on realisation of the assets being carried to Corpus account, thus increasing or decreasing its l)alance. Perhaps the simplest way to explain the method of keeping the accounts for an estate is by means of an illus- tration showing the various entries to be passed, and the nature of the accounts to be kept. EXAMPLE. Alpha Beta died on the Tth July, 1920, his estate con- sisting of the following assets : — Leasehold property, valued at £1000; freehold property, valued at £2000; invested in his business, £18,000; furniture, plant, and household effects, £600; cash in house, £20; balance at bank, £350. The liabilities of his private estate amounted to £1000; sundry funeral expenses and the cost of memorial stone, £80; testa- mentary expenses. £100. Provision was contained in the will for the following legacies and bequests : — To his wife: £10.000 cash and the residue, if any. To his son: The freehold property and £3000 in cash. To his daughter: £3500 in cash. To his two executors: £100 each in cash. His leasehold property was let at £100 per annum, the rent being payable on the'uh March and the Tlh September in each year. His freehold property was let at £200 per annum, the rent being payable on the same dates. In each case, there- fore, four" months' rent had accrued up to date of death. A ground rent of £40 per annum was payable by him in con- 277 A.USTRALASIAN ADVANCED ACCOUNTANCY. nection with his leasehold property, rent being payable for six months on the 7th March and 7th September. The lease- hold, upon realisation, broug^ht £1200; the business pro- perty £19,300, and the furniture, etc., £650; the costs of realisation being: Leasehold property, £10; business pro- perty, £82; furniture, etc., £1 10s. Note. — Any apportionment of income may be made in months. OPENING JOURNAL ENTRIES. Leasehold Property Account . . . . Dr. £1,000 accrued rent thereon for 4 months Dr. 33 6 8 Freehold Property Account Dr. 2,000 accrued rent Dr. 66 13 4 Business Property Account Dr. 18,000 Furniture, Plant, and Household Effects Account Dr. 600 Cash at House Dr- 20 at Bank Dr. 350 To Corpus Account Dr. £22.070 Corpus Account Dr. £1,193 6 8 To Sundry Creditors Account . . 1,000 „ Ground Rent accrued Account 13 6 S „ Funeral Expenses, &c.. Account 80 „ Testamentary Expenses Ac- count 100 On posting the above Journal entries the Corpus ac- count would appear as under: — CORPUS ACCOUNT. 1920. 1920. July 7. To Funeral Ex- lulv 7. Bv Leasehold penses, &c. £80 " Property .. £1,000 ■; ,. Sundry Cre- „ Accrued ditors 1,000 Rent .... 33 6 S ,, Testamentary ,, PVeehold Expenses . . ' 100 Property . . 2,000 J Ground Rent ,, Accrued accrued .. 13 6 8 Rent .... 66 13 4 „ Balance . . 20,876 13 4 ,. Business Estate .. 18,000 „ Household Effecto .. 600 .J „ Cash in house .... 20 „ Cash at Bank .... S.IO .; £22,070 £22.070 July 7 „ Balance ..£20.876 13 i At the above stage the Corpus account should bo ruled oflf and the balance brought down, in order to show the value of the property whicli is a\ailal)]c for distribution bv way of legacies. 278 EXECUTORSHIP ACCOUNTS. Apportionment.^! t will be noted that, in connection with the leasehold and freehold properties, the Corpus ac- count is credited not only with the values of these asset?, but with the rent accrued to date of death of the testator. Apart from the fact that the accrued income must be taken into account in valuing- the estate for probate purposes, it must be remembered that the Income and the Corpus of a deceased person's estate often belong- to different persons. A testator's will may provide, for instance, that the whole of his estate shall be left to his son. subject to a life interest in favor of his widow — i.e., the capital value of the estate will go to the son, but as long as the widow lives the estate must be preserved and the income paid to her. The son will not enjoy possession of his property until after the death of his mother; until that date he is said to have an interest in remainder, and is known as the remainder-man. whilst his motlier is known as the life-tenant. It will also be noticed that the ground-rent accrued up to date of death in connection with the leasehold propertv has been debited to Corpus account. Income does not begin to accrue until after the date of death, nor are any expenses of a periodical nature chargeable against Income until after date of death. Accounts of Income-Producing Assets. — In numbers of cases the accounts will have to be kept open during the life- time of the life-tenant and it is necessary, therefore, to keep these accounts in such a way as to show the income received on the various assets. This is best achieved by providing the Asset accounts with two money columns on each side, headed respectively "Income" and "Corpus." In order to illustrate this, the' accounts of the leasehold property and freehold property are shown on the assumption that the es- tate w^as not realised until the 30th September, and that the freehold property was handed over to the son on that date. It is also assunied that the rents were received and the ground-rent paid on the due dates. FREEHOLD PROPERTY ACCOUNT. 1920. Income. Corpus. 1920. Income. Corpus. July 7 To Corpus Sep. 7. By Cash £33 6 8 £66 13 4 A/c. £2,000 Rent do. 66 13 4 LEASEHOLD PROPERTY ACCOUNT. July 7. To Corpus Sep. 7. By Cavsh £16 13 4 £33 6 8 A/c. £1,000 do. 33 6 8 AUSTRALASIAN ADVANCED ACCOUNTANCY. It will be seen that Freehold Property account is de- bited, in the Corpus column, with the capital value of the asset at date of death, and also with the rent accrued. When the rent (£lOO) is received on the Tth September the amount will be apportioned and credited in the proper proportions in the two money columns. The effect will be a reduction in the balance of "the Corpus column to £-3000, and this will show the true position, for the Executor will then be hold- ing on account of corpus a property worth £2000 and £66 13s. 4d. in cash. The Income column will show a credit balance of £33 6s. 8d., and. as the income accrued on a specific legacy or devise after the date of death goes to the legatee or devisee, this amount will, after it has been transferred to the Income account, be handed over to the son. In connection with the leasehold property, the propor- tion of the rent accrued after death will be transferred to the Income account, and in this case, as there is no life ten- ant and the widow is residuary legatee, she will receive this amount, less the ground-rent accrued since death, which wdl, of course, be debited to Income account. Final Distribution.— Assuming that all the debts have been paid, and the whole of the property (except the free- hold) realised by the 30th September, the various legacies will be paid over to the legatees, and the freehold property handed over to the son. When this is completed, the Cor- ■pus account, carried on from the point at which it was last shown, would appear as under: — CORPUS ACCOUNT (Continued,. 1920. 1920 Sep. 30. July 1"- To Devise of Freehold By Balance £20,876 13 4 property to son.. £2,000 „ Profit on Realn. of Legacy to son . . 3,000 Leasehold 190 widow 10,000 „ Profit on Realn. of " ][ " daughter 3,.500 Business property 1,218 Legacy to 1st ex- „ Profit on Realn. of " cutor 100 Household Effects 40 10 „ Legacy to 2nd ex- cutor 100 „ Residuary legacy to widow 3,633 3 4 £22,333 3 4 £22..333 3 4 After the transfer of the freehold property had been made to the son. the assets accounts would appear a.^ under: — FREEHOLD PROPERTY ACCOUNT. July 7. Income. Corpus. Sep. 7. Income. Corpus. To Corpus A/c. £2.000 By Ca.sh . . ...£33 6 8 £66 13 4 „ do. rent Sep. 30. accrued £66 13 4 By Corpus A/c. Sep. 30. t'fer to To Income A/c. £33 6 8 son.. 2,000 £33 6 8 £2,006 13 4 £33 6 8 £2.066 13 4 280 EXECUTORSHIP ACCOUNTS. LEASEHOLD PROPERTY ACCOUNT. Tulv 7. Sep. 7. To Corpus A/c. " £1000 By Cash .. ..£16 13 4 £33 „ do. rent Sep. 30. accrued .. 33 6 S By Cash (pro- Sep:30. feeds of To Income A/c.£16 13 4 realn.) 1,200 „ Cash, Ex- penses of realn 10 „ Corpus A/c. profit on realn 190 £16 13 4 £1.233 6 S £16 13 4 £1,233 6 8 BUSINESS PROPERTY ACCOUNT. Julv 7. To Corpus A/c... £18,000 Sep. 30. By Cash Sep. 30. To Cash, Expenses of Realn.) .. 82 „ Corpus A/c. Pro- fit on Realn. 1,218 £19,300 £19,300 £19,300 FURNITURE, PLATE, AND HOUSEHOLD EFFECTS ACCOUNT. Tuly 7. To Corpus A/c. £600 Sep. 30. By Cash .... £650 SeplSO. ,, Cash Expenses of Realn. . . 1 10 „ Corpus A/c. (Profit on ReaJn.) .. 48 10 £650 £650 INCOME ACCOUNT. Sep 7 To Ground Rent. .£6 13 4 Sep. 30. By Freehold Pro- Sep.aO. „ Sondncomeon perty A/c. . .£33 6 8 property devis- „ Leasehold Pro- ed to him) . . 33 6 8 perty A/c. . . 16 13 4 „ Widow (residu- ary legatee) 10 £50 £50 Cash Account.— Special care should be taken in keep- ing the Cash account of the estate, as a copy of this account, together with the vouchers supporting the items, has to be filed by the Executor on passing his accounts. Care should be taken to distinguish Corpus and Income, and this is done by providing money columns for the dissection of receipts and payments under those headings. The Cash account in 'connection with the estate of Alpha Beta would appear as shown in the example herewith. 281 AUSTRALASIAN ADVANCED ACCOUNTANCV. o o o o o c o o o o o o c o o o o o o o O pQ O 0(M— ' OOOOO CO OO M -^00 OQQOO o o o o o o o o ; OOOOO OOOOO iii§§ ^w .0 Ipi 2 a =« b. •.^o WJ O O ' 1 ^ 4) -300 000 00 ^> O o o 000 O o o t^ O lO O o ^^ CO ^ C-l CO CO O o o O o o O o o o o 'O 00 T}< CO CO M CO CO r-* CTJ OJ ^ c C 8 rt rt (u 0) t; -■ EXECUTORSHIP ACCOUNTS. In addition to the accounts shown above, it would be necessary to open accounts in connection with the various liabilities, but as these will take the ordinary form it has not been thought necessary to include them. Probate duty has been omitted, and the apportionment as between Cori)us and Income has been made in months. Stocks and Shares. — Where a portion of the testator's estate consists of stocks or shares, it is usual to send a list ot these to a broker to fill in the valuations. These valuations will be given at the market quotation of the stock or shares at the date of death, and unless otherwise stated, the quota- tion will be cum div. Where two quotations are given, the shares, etc., must be valued at the lower, plus one-fourth of the difference between the lower and the higher rates. Where the quotation includes accrued dividend on the stock or shares the Corpus account must not be credited separately with accrued income on the investments, as, in such a case, the income would be included in that account twice. If, for example, a testator's estate included :500 shares in the Australian Insurance Co., quoted at 110s. at date of death (the 31st March), these shares would be stated in Corpus account at £1650, representing- the capital value of such shares plus the income accrued to that date. On the 1st October a dividend of 5s. per share was paid on the shares for the year ending the 31st August. The dividend, when received, must be apportioned, and, making the apportion- ment in months for the sake of simplicity, it will be found that £43 15s. had accrued prior to the date of decease, and £31 5s. after that date. The shares account would appear in the books as under :— ^ SHARES IN AUSTRALIAN INSU RANCE COMPAN V ACCOUNT. Income. Corpus. Income. Corpus. Mar. .-^1 To Corpus A/c. £1,650 Oct. 1 By Cash ££31 5 £43 15 The effect of the above entries is to reduce the balance in the Corpus column of the Shares account to the real capi- tal value of the shares as at date of death (exclusive of the accrued income), and the Executor will now hold the shares at that value, plus £-13 15s. in cash, which represents the amount of the dividend accrued to date of death. Accrued Interest, Dividends, etc. — When an Executor or Trustee is balancing off his accounts for purposes of making up a statement, he should not take into account any accrued income. It is true tliat accrued income must be taken into account in preparing the accounts as at date of death, but this is necessary in order to enable a true valuation of the estate to be arrived at for probate purposes. On all other occasions, however, he should only include in his accounts such income as he has actually received in cash. 283 AUSTRALASIAN ADVANCED ACCOUNTANCY. Death of a Life-Tenant. — It was ])ointc(l out in the pre- ceding chapter that an api)ortionnient of income is made upon the cessation of the interest of a life-tenant, by death or otherwise. Where a life-tenant dies, such income as had accrued up to the date of his death belongs to his estate, and must be paid o\'er to his Executors, whilst that portion which has accrued after his death will be dealt with according to the terms of the will of the original testator. The Executor of the original testator will not. however, make any entries in his books in connection with this accrued income until the full income has actually been received by him, when he will hand over the portion accrued tip to the death of the life- tenant to his representatives. The following example sets out the method of treating such payments: — EXAMPLE. — The income of the estate of J. X. con- sisted of interest on £lG.(i()0 of 4 per cent. Government stock, due January 1st, April 1st. July 1st, and October 1st, and interest on loan of £5,000 on mortgage at 4 per cent, pay- able February 1st, May 1st, August 1st, and November 1st. Testator's wife, who was entitled to the income during her life, died on June 1st, 1919. The interest, etc., due 1st May, 1919. and prior to that date had been received and j^aid to the testator's wife. The income after her death was divisible between three children equally. Make up the Income account for the year ended January 31st, 1920, and show how the income w-as dis- posed of, assuming that all income had been received as it fell due, and that a division was made on that date. INCOME ACCOUNT. FOR YEAR ENDED 31st JANUARY. 1920. Dr. Cr. 1919. 1919. June 1. To Ca'sh (Widow )£260 !) I'cb. 1. By Interest on Loan £50 April 1 ., ^lav 1 ,. ;tock 160 Loan 50 £26(1 £260 n Julv 1. To Widow's Estate;— July 1 By Interest on Stock £160 2 months' In- Aug. 1 ,. „ Loan .50 terestonStock £106 13 4 Oct. 1 ., ., Stock 160 Aug. 1. ,. 1 month's In- Nov. 1 ,. .. Loan 50 0-1 terest on Loan 16 13 4 1920. !9':0. Jan. 31 ., Balance down 456 13 4 Jan. 1 ., ., Stock 160 £580 1920. Jan. 31 To Cash (Child 1)£152 .. „ (Child 2) 152 .. ,. (Child 3) 152 4 6 1920 Tan. 31 Bv Balance £580 .£4.56 13 t £456 13 1 £456 13 4 2,S4 EX ECl- TO R SH I P ACCOUNTS. Abatement of Legacies. — The following cxamijle shows the al)alemeiU anioiii^st the general legatees where there is not sufficient in the estate to pay all the general legacies in full. It will be noted that the two demonstrative legacies to the testator's two sons have been paid in full, as demonstra- tive legatees are entitled, w^here the fund remains, to be paid in full before the general legatees receixc anylliing. EXAMPLE. — Flackman, by will, api)oints Gledall and Haines his Executors. He leaves no real estate. His per- sonal estate realises £T350. The funeral expenses were £45; executorship expenses £45; and his debts amounted to £850. He leaves bequests of £50 each to his Executors for services. To his two sons, his deposits of £2000 each in the National Discount Co. and General Credit and Dis- count Co. To his three daughters £1000 each. To his three brothers £100 each. Make up a statement showing how the estate should l:>e distributed. CASH ACCOUNT. Dr. Or. To Realisation of By Funeral Expenses .... £45 Assets £7 3o0 ., Executors' Expenses . . 45 ,. Sundry Creditors . . . . 850 ,, Balance down .. .. .. 6,410 £7,350 £7,350 ^v Demonstrative Legacies — To Balance £6,410 ' Son "A" £2,000 Son "B" 2,000 ., Balance down 2,410 £6,410 £6 410 To Balance £2,410 By General Amt. of Legacies — Legacy. Rate. Executors — s. d. Gledall .. .. £50 14/2 £35 9 Haines .. .. 50 „ 35 9 Daughters: "A" 1,000 „ 708 16 4 "B" 1,000 „ 708 16 4 "C" 1,000 „ 708 16 4 Brothers: "A" 100 „ 70 17 8 "B" 100 „ 70 17 8 ••€" 100 „ 70 17 8 £2.410 £3,400 £2.410 Annuities. — Where a testator has settled a regular in- come on a person for life, this annuity may be paid out of the regular income of the estate, or the Executors may pur- chase an annuity from an insurance or other company. If the annuity is to be paid out of the income of the estate it will, of course, be necessarv to retain sufficient income-bear- 285 AUSTRALASIAN ADVANCED ACCOUNTANCY. ing assets in the estate to produce the required amount, and this will result in the Executors' or Trustees' duties running on until the death of the annuitant. It is more usual under such circumstances, especially if the annuitant is a young man likely to live for a number of years, to purchase an an- nuity by paying a lump sum therefor. Jn such case the cost of the annuity would be treated in all respects as a general legacy and will be charged against C()r])us account. Commonwealth Estate Duties. Under the Commonwealth Instate Duties Assessment Act, 1914, provision is made for the imposition of estate duty on the real and personal property forming part of the estate of deceased persons. The estate of a deceased person comprises : — (a) Hi's real property in Australia (including real property over which he had a general power of appointment, exercised by his will) ; (b) His personal property, wherever situate (including personal property over which he had a general power of appointment, exercised by his will I, if the deceased was, at the time of his death, domiciled in Australia; and (c) His personal property in Austraha (including personal property over which he had a general power of appointment, exercised by his will), including all debt's, money, and choses in action receivable or recoverable by the administrator in Australia, if the deceased had, at the time of his death, a foreign domicile. Property : — (a) Which passed from the deceased person by any gift inter vivos or settlement made before or after the commencement of the Act within one year before his decease, or, being property com- prised in a settlement under which he was tenant for life, the interest of which was surrendered by him to the remaindermen within one year before his decease; or (b) In which he had a beneficial interest at the time of his decease, which beneficial interest, by virtue of a settlement or agreement made by him, passed or accrued on or after his decease to, or devolved oh or after his decease upon, any other person, shall, for the purposes of the Act, be deemed to be part of the estate of the person so deceased. Every administrator (this term includes Executor), is required to make a return to the Eederal Taxation Depart^ ment on a i)rescribcd form setting out a full and couiplete statement of the estate of the deceased in Australia. This statement must provide full descriptions and values of items included in the estate, and the administrator must also pro- vide a statement in detail of all the debts and other charges upon the estate, distinguishing between the secured and un- secured debts, and describing the value of any security for such debts. 'J'he administrator must include as one of these debts or charges against the estate the amount of probate duty payable to the State in which the pro])atc' duty is charge- al)le. 2SG E X E C I' T U R S II 1 1' A C C O U N T S. No estate duty is payable in respect of so much ui tlie estate as is devised or bequeathed or as passes by gift inter vivos, or settlement for religious, scientihc. charitable or public educational purposes. Further, if the deceased was, al the time of his death, not domiciled in Australia, the debts which may be deducted from the gross value of the assessable estate shall be debts due and owing to persons resident in Australia or contracted to be paid in Australia or charged on property situate in Australia. From the point of view ol" an executor or administrator, the chief distinction between the procedure in relation to the duty payable under the Commonwealth and the State laws is that in the case of the former (^which we are now con- sidering), the estate duty payable has, in the absence of any instructions to the contrary by the Testator, to be appor- tioned between the various legatees under the will in pro- portion to the value of their interests. It should be noted, however, that this does not apply to any beneficiary whose bequest or devise does not exceed £200 in value, and that in the case of the interests of the widow or children or grand- children of the deceased, their share of the duty shall be reckoned at two thirds of their assessed value. In the case of State probate duty this is payable pri- marily out of the residuary estate, and should this be in- sufficient to provide the amount necessary for probate duty, the legacies must abate in the order already explained. Subject to the abovementioned provisions (as for ex- ample where a testator specifically excludes the operation of that section of the Act which requires the estate duty to be borne by the beneficiaries) the duty as assessed under the Act shall be payable out of the personal estate. If there is not sufficient personal estate to pay the duty the administra- tor may raise the deficiency by way of nK)rtgage secured upon the real estate, or may apply to the High Court or the Supreme Court for the sale of the whole or any portion of the estate for the purpose of enabling him to pay the duty. 287 chapti<:r XXI. INSURANCE COMPANIES' ACCOUNTS. It is not i)()ssible in a general work of this nature to give more than a very general outline of the accounts re- quired to be kept by an Insurance Company, especially in view of the fact that in no two offices will the system be identical, although it will be found that the underlying prm- ciples remain the same. The vast variety of risks wdiich may now be made the subject of insurance necessarily in- volves corresponding variations in the details required by the accounts, but it "is proposed to adopt as the basis of the explanations supplied the accounts of a Life Insurance com- pany, noting from time to time where alterations might be met" witli in accounts relating to other classes of insurance. A number of the books kept by Insurance offices might be classed under the heading of statistical books, but as these have a more or less direct relation to the financial books it is advisable to deal with these also. Proposals. — The basis of tlie entries in connection with each policy issued is the proposal form received from the person desirous of insuring his life or property. A record is kept of each proposal received by means of a Card Register, a card showing the name, policy number (when issued), premium, etc., etc., being prepared for each proposal as it is received. The cards are arranged in alphabetical order, and serve in this way as an alphabetical index to all i)roposals made to the office, whether completed or otherwise. Premiums.— The main income of an Insurance company is from the premiums received on the policies issued or risks undertaken bv the company. For statistical purposes the comi)anv reciuires to keep a separate record of the f^rst pre- miums "received on new policies issued and such premiums arc shown separately in the Revenue account referred to later. V record of all new policies issued, together with the amounts of the ])remium payable, is made in the New Busi- ness Register, which is ruled in the following form :— In most companies a considerable proportion of the ])usiness is obtained through agents, and the company must, therefore, kcej) an accurate and full record of the business as between itself and its agents, in order to enable a proper check to be obtained upon the amount of commission payable and to ensure lliat anv future communications with .such I N S U RANGE COMPANMES- ACCOUNTS. AUSTRALASIAN ADVANCED ACCOUNTANCY. policy liolders will be made through such agents. In those companies which run a number of different departments, such as fire, accident, burglary, etc., the columns in the New Husiness Register illustrated herein, to contain particulars of the sums assured under the various tables, could be utilised for the diflFerent departments. Where a policy is issued a card will be made out for the policy holder containing the particulars shown in the illus- tration supplied herewMth. If his premium is payable yearly, all the tabs along the top of the card, save the one showing the month in which his premium is to be paid, will be clipped off. If the premium is payable, say quarterly, four tabs will be left standing on the card. ITT ««• e^ MMturlty Li OtH.r PollolM ■otiu- TW>r I R B WUrr^ Date Each month "the Card Register of policy holders will be gone through and renewal notices and receipts prepared therefrom, the tabs on the cards enabling the premiums due during the month to be ascertained without difificulty. The total of the premiums due. as ascertained from this Card Register, will be passed through tbe Journal as under: Head Office Premiums Account Agency Premiums Account To Fir.st Premiums Account „ Renewal Premiums Account Provision is made in the Cash Rook for a dissection of the amounts received, and. at the end of each month, the ITead Office Premiums account, or Agency Premiums ac- count, will be credited with the cash received either direct or through the agencies, as the case may be. Dr. £ Dr. £ £ £ 290 INSURANCE COMPANIES' ACCOUNTS. Wliere premiums remain unpaid for a certain period after the expiration of the da3's of urace provided for, the follow- ing- entry will be passed : — Overdue Premiums Account Dr. £ To Head Office Premiums Account Si, „ Agency Premiums Account £ Any cash received during the month on account of over- due premiums will be credited to Overdue Premiums ac- count at the end of the month, or. if the policies lapse alto- gether, the following Journal entry will be i)assed : — First Premiums Account Dr. £ Renewal Prcmivims Accottnt Dr. £ To Overdue Premiums Account £ At the end of each financial period the First Premiums and Renewal Premiums accounts will be transferred to Re- venue account. Agents' Accounts. — A separate Ledger or set of Ledgers will l)e required to record the accounts of the agents through whom business is transacted. For the Agents' Ledger an adjustment account will be kept in the General Ledger, and conducted along the same lines as a Sales Ledger Adjust- ment account in an ordinary trading concern. It will be noticed in the specimen Cash Book, supplied herewith, that a column is introduced on the debit side, in order to enable the total cash received from agents during the month to be ascertained, and the total so arrived at will be posted to the credit of Agency Premiums account. Investments. — A considerable proportion of the assets of an Insurance company will consist of investments in some form or other. These investments are numerous, and a separate Investment Ledger or Ledgers will be used to re- cord these assets, an Adjustment account being kept in the General Ledger therefor. In this connection the use of the investment columns on both sides of the Cash Book will be readily understood. With regard to the interest on invest- ments it is usual to keep a separate Interest Journal, in which an entry is passed for interest on the various investments as they become due, the total being credited to Interest ac- count. Loans on Policies. — This class of business applies ex- clusively to Life Insurance companies, which frequently ar- range to advance money to policy holders against the sur- render value of their policies. A, separate Ledger or set of Ledgers is kept to record such accounts, and the usual ad- justment account will be kept in the General Ledger there- for. Interest will be charged on these loans through the Interest Journal periodically. Claims. — Up to the present consideration has been con- fined to the income of an Insurance company, and it re- 291 AUSTRALASIAN ADVANCED ACCOUNTANCY. mains nuw to deal with the procedure where it becomes ne- cessary for the company to meet claims made by policy holders under the insurance effected by them. Where the circumstances under whicli a payment under the policy be- comes due have arisen, it is necessary for the assured to make a claim on tlie prescribed form a<;ainst the company, and these claims are entered as received in a Claims Regis- ter, full particulars beiny shown of the policy, etc., and the amount claimed. Columns are also provided to show the "fate" of the claim when dealt with by the company. It is from this Register that particulars of the item. "Claims Ad- mitted but not Paid." shown amongst the Lial)ilities of an Insurance company are obtained. Re-insurances. — It is not advisable that an Insurance company — and Fire Insurance companies are referred to here more particularly — should carry too much risk in any one locality, or in any particular premises, and arrangements are therefore made with other companies to accept part of the risk taken, a portion of the premiums received being paid over to such companies in consideration therefor. This is known as re-insurance. Annuities. — Life Insurance companies frequently under- take, upon receipt of a fixed sum, the payment of an annual amount to a specified person. The working of an annuity is exactly opposite to that of a life policy payable to a person upon his attaining a certain age. In the latter case an an- nual payment is made by the assured to the compan}-, which will, on attainment of the specified age, pay him a lump sum. In the case of an annuity, however, a lump sum is paid to the Insurance company, and the company undertakes to pay the person, on whose behalf the payment is being made, an an- nual amount for the remainder of his life. Included amongst the income of an Insurance company will be seen the item "Consideration received for annuities," and amongst the ex- l)enditure the item. "Annuities paid."" Surrenders. — In most companies, where a policy lias been in force for several years, it is possible for the person whose life is insured and who is unable to keep up the pay- ment of his premiums, to obtain from the company in cash the surrender value of his policy. The surrender value of any particular policy is ascertained by the company's actuary. Bonuses. — One of the great inducements to a person to take up a life policy is the fact that the profits, or a portion of the profits, are divided amongst the policy holders each year by way of bonus. Most i)olicy holders prefer to have the bonuses added to the amount of their policies, as, in this wav. a higher rate of bonus is received. .V i)olic)- holder's l)<)nus nia\- be withdrawn in cash if he so desires. General Expenses. — It is not thought necessary to ex- l)lain the treatment of these, as such expenses would receive 292 INSURANCE COMPANIES' ACCOUNTS. similar treatnienl to those of any other large business con- cern. General Cash Book. — The accompanying illustration shows a form of Cash Book suitable for the Ordinary depart- ment of a Life Insurance company. In companies which undertake a number of different classes of risks it is usual to have subsidiary Cash Books, the totals of which arc carried into the general Cash Book daily, as it would hardly be pos- sible to obtain a sufificient dissection of the items of receipts and payments if only one book were used. A perusal of the headings of the various columns shown in the illustration will enable the foregoing explanations to be follo\ved to greater advantage, and will indicate the nature of the transactions likely to arise in the class of company dealt with. Revenue Account. — In all of the States of the Common- wealth (with the exception of New South W'^ales), and in New Zealand, Life Insurance companies are required by legis- lation to supply certain information in the form supplied in the schedules attached to the Acts. Although no particular form of accounts is necessary in New South Wales, the com- panies in that State follow the forms required by the other States, so that, for all practical purposes, the same method of showing the accounts of such companies is in vogue throughout Australasia. In preparing the Revenue accounts of an Insurance com- pany the same adjustments for accruing income and expen- diture are made as in the case of a commercial concern, but an exception must be made (and Life Insurance companies are referred to here especially) with regard to the premiums received by the company from policy holders. Although these premiums are paid in advance, no adjustment of the amounts received throughout the year is made, as payments are considered to be due when they are payable. In the same w^ay no adjustment is made of the amounts received as consideration for annuities. In an ordinary commercial concern the proportion of the premiums received, relating to the period after the close of the financial year, would be car- ried forw-ard to the new period, appearing in the Balance- Sheet under a heading such as "Premiums paid in advance." This, as already explained, is not done in tlie case of a Life Insurance compan\ . The Revenue account of such a company does not pur- port to show the net revenue for the year nor the net profit of the company on its year's transactions. It is best viewed as a kind of "pool," the net result of the transactions for the year being added to the accumulated funds. This will be seen by reference to the specimen statements shown at the 293 AUSTRALASIAN ADVANCED ACCOUNTANCY, Ml 1 0} j «D •i ■1 4 i Jl 3? ^^• •291 INSURANCE COMPANIES' ACCOUNTS. end of this chapter. It will also be noticed that in the Re- venue account the income and expenditure are shown on the reverse sides from those on which they usually appear, this being" due to the fact that the companies follow the statu- tory form prescril)ed. The Revenue account is opened by a transfer of the accumulated funds as they stood at the begin- ning of the year. To these funds arc added the items of in- come during the year and, on the other side, the expenses are deducted, the balance of the account then showing the accumulated funds at the end of the year. In the case of Fire, Accident and other companies ac- cepting risks of a like nature, some attempt is made at carry- ing forward a proportion of the premiums. It would not, of course, be practicable to calculate the proportion of each premium to be carried to the next year, but the companies know from experience that, if they carry forward a certain percentage of the total premium income for the year, this will adjust the premiums closely enough for all practical pur- poses. This percentage usually ranges from about 33 to 40 per cent, of the premium income. Balance-sheet. — A careful study of the attached state- ments, representing the general Revenue account and Bal- ance-Sheet of the A.M. P. Society, will make clear the nature of the transactions of the Ordinary department of a Life In- surance company. It should be noted that, generally speaking, the annual accounts of a Life Insurance company are merely temporary statements, and do not show much more than the details of the accretions to the accumulated funds during the year. The real Balance-Sheet, showing the company's exact posi- tion (called a "Valuation" Balance-Sheet), is prepared peri- odically at intervals from three to five years, and from these statements the profit is found, practically on a single entry basis. Where a Valuation Balance-Sheet is to be prepared on a given date an estimate is made by the company's actuary of the amount of the company's policy liabilities at that date, due allowance being made for the fact that each policy is re- newed to a date ahead in the next financial year. Such lia- bilities are reduced to their present valuations, the basis be- ing the expectancy of life in each case. The difference be- tween the total liabilities, so ascertained, and the amount of the accumulated funds is the company's surplus or profit, and it is this surplus w^hich is divided amongst the j^olicy holders by way of bonus. Tt might be mentioned in pass- ing that whilst most companies ])repare Valuation Balance- Sheets at intervals of from three to five years, the A.M. P. Societv prepares such a statement at the close of each finan- cial period. 295 AUSTRALASIAN ADVANCED ACCOUNTANCY. REVENUE ACCOUNT Australian Mutual Jrow'^fn^ ^oriply (ORDINARY DEPARTMENT) J«au»f7. 1911 cncwal Prcmiumi ■! HOD oi Rc'Auur;incc Pr< miumsl oo 21.183 Nco Poliac5u»unnfi £6.2I0.07^', uid yicldiof; an Annual Revenue o( ^197.809 I7i Surplus on Sales u 7li.«76 It • Allonai '"•Vmeolsl T.) repay / rH Policies) 1 ""poliaM' paid in Cash — on No* Premium* Bruich Dtrec- Ugal Expeni Office Rent PrintinK and Postage StBii Stamp Huty k Public Tni»t««' P«« Stamp Duty T^N.i.aiu. Income Tm Property Tax Stamp Duty vy Autrflia Government ' loqat Reserve loT poMlbIc depreciatirtn ••( I SprcaJ Actuan to Oflicers and > n off Office PreiT Wntti Wrinen off Porecloard Plopenies. ele Antounl ol Puudl OS liar Un^iaUr. ■M.yA.Zil INSURANCE C O M P A N 1 E S- ACCOUNTS. BALANCE SHEET Australian Mutual ^routJipnt ^'orirtij he 3 1 at December, LIABILITIES. £ B. d. A&surancc Funds, parttci- patmg 27,500,12- 9 1 Nonpartiapatrng F^"* ■ 812,118 11 8 Claims Investment Fund .. I2.U7 8 118 2 8 1 Department Funds Total Funds as ptt Revenue .\ccounU . . 28,490,567 12 6 Fidelity Guarantee Fund, Ordinao' Department 400 Reserve (or possible Depreciation ol Securities 36,030 19 10 i,848,335 8 10 Loans on Mortgage- £ s. d. '■ " Principal Suras . . . . 1 1,621,336 ' Interest in arrear 9 days ot grace ,. 6.319 1,628.655 4,037,021 Loans on the Security of Municipal and ot " Loans on Reversionary and Lite Interests 89,403 7 Loans on the Society's Polici s with accrued lums ad> anc ed to keep Policies in lorcel render Value . . Loans on Covemmenl Securit e« 2.060 Bntish Consols . . 86.191 12 New South Wales 1,807.707 7 .066.396 7 New Zealand . . 1,212,787 11 Queensland 896.370 I'J South Austraha . , 1,077.176 6 Tasmania 364.973 7 West Australia .. 4»9.446 U Canada 28,359 8 8,696.408 ^ Ofice Premises- New South Wale. 163.313 19 84.000 • New Zealand 104.000 Queenslnnd 48.030 South Australia . . 28.000 Tasmania 31.391 6 West AustiaUa , . 37,600 PropertiM acquired by Porecl Mure .. 162.876 Office Pumilure. Head Office les Sundry Debtors 26.301 18 8 Reversionary Interests 1 Premiums in the days of grace 267,818 17 Overdue Premiums 27,914 •^ 286,730 19 AcCTued Interest 282,660 i Cash on Deposit with Banks Mid Balance of Current Account with the Society's Bankets (Head Office and Branches 637,902 Cash m hand 697 7 RICHARD TEECE, Oenerai Manager. H. W, APPERLY. Sfcrdary. We, the undersigned, hereby cerlily that we have e%am>ned the Books. Vouchers. AccounU. Mortgage Deeds. Public and other Securities of the AtrentAUAN MtrrCAi. Phovtdent Socibty, in accordance with ByLaie XXJX.. and compared them with the Balance Sheet, and find them aU to be correct. IJ;^:,}!^^^B\ Auditors. WILLIAM H. PERRY 5 Sydney, 3rd April. 1912. 297 CHAPTICK XXII. STATION ACCOUNTS. The suggestion has been received from several quarters that a chapter on Station accounts should be included here- in and, although the bookkeeping possesses no inherent diffi- culties, it is thought that a brief description of the outstand- ing features of such accounts may be of benefit to the ac- countant who is called upon to keep or supervise the keep- ing" of station books. Anyone who has followed intelligently the general principles of accountancy up to this stage of the book should have no difficulty in grasping the requirements of such accounts from the following summary. Generally speaking, the following books will be neces- sary to enable a proper record to be kept of the transactions most usual upon a station : — BOOKS OF ACCOUNT.— Journal, Stores Purchases Book, Stores Day Book, Ration Book, Bills Receivable Book, Cash Book, Petty Cash Book, Personal Ledger, Stores Led- ger, General or Private Ledger. BOOKS OF RECORD.— Stock Book, Wool Press Book, Diary and Tally Book. Journal. — The Journal is used, as in the case of an or- dinary business, to contain a record of any transactions which cannot properly be put through any of the sub-jour- nals, and it is not thought necessary to give any description of its uses lu-re. Stores Purchases Book. — On some stations the use of a Purchases Hook is dispensed with altogether, all purchases being recorded through the Journal. This will often be found a rather laborious method of recording such trans- actions and, on a station of any size, more especially where a dissection of purchases is necessary, a Purchases Book for the stores will be found almost indispensable. It is often desired to keep separate stores accounts for various classes of material, such as fencing material, shearing material, etc.. and the book should be tabulated in order to enable the ne- cessary dissection of the various invoices to be effected at the time each entry is made. STATION ACCOUNTS. The items in this hook will he posted to the credit of the respective personal acconnts of the vendors in the Per- sonal Ledger and the monthly totals of the dissection columns will he dehited respectively to the General Stores account, Fencini^- Material account, etc., etc. It is usual to record any purchases of sheep, cattle, and horses through the Journal, as such transactions are infre- quent and it is not necessary to make special provision there- for in the Purchases Book. Stores Day Book. — This book contains a daily record of all goods issued from the store. An exception to this will be made in the case of stores issued as rations, v^hich matter is dealt with under the next heading. All goods issued to employees, contractors and others should be initialled for by the recipients, unless paid for at the time of the sale. A small book should be used for the purpose of entering goods sold for cash, the daily total of such book being carried to the debit side of the Cash Book under the heading of cash sales of stores. The various items in the Stores Day Book will be posted regularly to the debit of the personal accounts of the recipients in the Personal Ledger (or the Stores Led- ger, where such is kept) and the monthly total of the Day Book will be posted to the credit of the Stores account. In cases where subsidiary Stores accounts are kept, such as Fencing Material account, etc., it will be found necessary to provide columns therefor in the Stores Day Book, in order to enable a progressive dissection of the stores issued to be made without difficulty. Save under exceptional circum- stances it will prove simpler, and just as ettective, to keep the one Stores account for all stores received and issued. It might be mentioned that all stores supplied to employees, ex- cept in those cases where the stores are issued as rations, will be sold at a profit to cover the cost of handling, etc. Ration Book. — It is advisable to have this book specially ruled, so as to allow the quantity, not the value, of each commodity issued for rations to be recorded at the time of issue. Stores supplied to employees who ration themselves are not, of course, recorded in the Ration Book, but are dealt with as sales and charged through the Stores Day Book in the manner mentioned under the previous heading. All stores issued as rations to station employees, the expense of which must be borne by the station, should be put through the Ration Book. Each page is designed to contain a record of a complete month's issue, separate columns being provided for such AUSTRALASIAN ADVANCED ACCOUNTANCY. Stores as are must frequently handled, and, on the last day of the month, each column is added and the total quantity of the particular commodity can be then ascertained. A "Sun- dries" column will be included to cover stores for which a special column is not supplied. The cost price per cwt., lb., etc., including the cost of carriage, should be entered at the foot of each column and the total value computed and re- corded in the same column, the "Sundries" column being dis- sected and treated similarly. In this way the necessity for calculating the cost price of each item of stores issued, often of very trivial value, is eliminated, as is also the danger of inadvertently putting through individual items at selling price. The totals so ascertained will then be charged through the Journal to the various Expenses accounts affected, the grand total being credited to Stores account. The important point to note in connection with the record of rations issued is that these must not be charged at more than cost, this in- cluding the invoice price, plus the cost of landing the goods on the station. Bills Receivable Book. — This book will be entered up in the usual manner, and no special mention of its uses is, there- fore, necessar\ . Cash Book and Petty Cash Book. — ihese books will, of course, follow the lines of the ordinary books of a similar nature, and it is not necessary to deal with them specially here. The Cash Book should be tabulated so as to facilitate the ascertainment of the totals of the various classes of ex- penses. « Personal Ledger. — In this Ledger will be opei)ed an ac- count for each person with whom business is transacted, and there will be included therein the names of practically the whole of the employees on the station. It is quite usual for employees to allow the greater portion of their wages to ac- cumulate from month to month, and to obtain from the sta- tion bookkeeper just so much money as they may require for current expenses. Their accounts will, therefore, be cre- dited periodically with the amount of wages due to them re- spectively, and the drawings against these wages will, of course, be debited from the Cash Book. In cases where the employees are re(|uircd to ration themselves, any goods supplied will be debited to the respec- tive accounts through the Stores Day I'.ook. The same posi- tion arises where any iicrsons are performing work on the 300 STATION ACCOUNTS. station under contract. Any advances to the contractors will be charged to their personal accounts and, when the work is completed, the various Expenses accounts will be de- bited and the contractor credited with the agreed amount. Accounts will also be opened herein (preferably in a separate portion of the Ledger) for persons to whom stock of any description is sold or from whom stock, etc., is purchased. Stores Ledger. — It is the practice, on some stations, to keep a Stores Ledger, which is usually nothing more than an mterim Ledger to receive the debit entries of the personal accounts kept for employees. This saves the necess'ty of posting a tremendous number of details to the accounts in the Personal Ledger. It is quite possible that many of the employees will be applying to the store for goods of small value several times during each day and, if these items had to be posted separately to the accounts in the Personal Led- ger, this book would require to be of unwieldy dimensions. Accounts for the employees are, therefore, opened in the Stores Ledger, details entered therein, and a transfer of the totals of the debit entries in such accounts are made each month to the corresponding accounts in the Personal Ledger. General or Private Ledger. — This book will also be con- ducted upon ordinary lines, but the following list of accounts will, perhaps, enable a fair idea to be formed of the headhigs under which the transactions on an average station might be classified : — Assessment Account Plant Account Adjustment Account Rations Account Agistment Account Rabbit and Vermin Destruction Ac- Bills Receivable Account count Bills Payable Account Repairs to Plant Account Carriage of Stored Account „ „ Buildings Account Cattle Account „ „ Fences Account Cash Account ., >. Dams & Tanks Account Capital Account ., - Wells Account Conditional Purchase Account Rent Account C P. Instalments Account Stores Account Dairying Account Shearing Expenses Account Depreciation Account Shearers' Deposits Account Droving Account Sheep Account Farming Account Station Cultivation Account Horse Account. Salt Account Korse-feed Account Wages Account Insurance Account Wheat Account Improvements Account Wool Account Land Account Wool Carriage Account Miscellaneous Expenses Account Wool Scouring Account Owner's Private Account The nature of the entries to be made in the above ac- counts is. in most cases, fairly obvious, but a brief explana- 301 AUSTRALASIAN ADVANCED ACCOUNTANCY. tiou may be desiral)le in connection with those mentioned hereunder: — Assessment. — This account will include all rates ana taxes payable by the station, and also special assessments, such as might be levied by the Pastures Board. Cattle, Sheep, and Horses. — A separate account will he opened for each of these, the account being debited in the first place with the value of the stock on hand at a certain rate. The market value of stock is, of course, subject to considerable fluctuation, but it is the practice amongst the majority of stations to value the stock on a fixed basis, the basis depending upon the particular ideas of each station as to the average value of the stock. In any case it is advis- able to be on the safe side and fix the valuation, if anything, on the low side. The Stock account will be debited with any purchases of stock and the cost of droving to the sta- tion. Sales of stock will be credited to the respective Stock accounts, any expenses incurred in connection wath the sale being charged against such accounts. At the end of the financial period, upon the ascertain- ment of the numbers of the various classes of stock, the Stock accounts will be credited and the balance carried to Profit and Loss account. The value of the stock on hand will be brought dow^n in the Stock accounts. To state the matter briefly, these Stock accounts are conducted along the lines of the old-fashioned Goods account of a merchant's business. Conditional Purchase. — This is the term used to denote the tenure upon which certain lands are held from the Crow^n, the arrangement being that when the holder has paid, by an- nual instalments, the agreed amount, the land becomes vest- ed in him. In the event of the lessee failing to keep up his payments, these instalments will be treated purely as rent, and the property will revert to the Crowai. It is understood that land is obtainable in each of the States under somewhat similar conditions, although the name applied to the tenure varies. The instalments as paid should be debited to Conditional Purchase Instalments account. It is clear that such pay- ments are partlv capital and partly revenue, and the annual payment should', therefore, be separated, the portion applic- able to capital being transferred to Conditional Purchase ac- count and the balance, representing interest, to the debit of Interest account. 'When the payment of instalments i^com- l)leted the balance of Conditional Purrliase account will be transferred to Land account. 302 STATION ACCOUNTS. Depreciation. — This should be provided at ample rates upon the whole of the assets of a wasting nature. Machinery should be depreciated on the reducing instalment system at the rate of at least 10 per cent, per annum. With regard to plant, the larger items such as carts, drays, and agricultural implements, could be treated on the same basis as machinery, but smaller items might be grouped under a Loose Plant ac- count, the original cost being cai)itali.sed and the cost or maintaining them charged to revenue, no depreciation being provided for. The cost of dams and wells, which will in- clude overhead gear, should be written off over, say, ten years, and fencing should be provided for on the same lines. Plant. — It is advisable to divide this under various head- ings, so as to show, for example. Shearing Plant, Rabbit Des- truction Plant, etc. In this way the amount of depreciatiori to be charged against the respective Expenses accounts can be more readily ascertained, and, as the rate of depreciation on the various classes of plant may vary, this method will prove advantageous. Rabbit and Vermin Destruction. — This account should be charged with all wages or bonuses earned by and rations (if found by the station) issued to rabbiters, and also with any stores issued, such as poison, pollard, etc. The cost ol rabbit-proof netting should not, however, be charged to this account, but to Fencing account, and the upkeep of fencing should be charged to repairs. Plant purchased for the purposes of rabbit destruction will be charged to Plant account, and the depreciation of such plant will, at the end of the financial period, be charged against Rabbit Destruction account. Repairs. — The cost of repairs to plant, buildings, fences, etc., will be ascertained partly from the Stores Day Book, which will show the materials issued in connection with the repairs, and, further, by a dissection of the Wages Book showing the work upon which the various employees have been engaged. Such accounts will be transferred to the de- bit of Profit and Loss account at the end of the financial period. On some stations it is the practice to charge the cost of all repairs and renewals to the asset accounts, an amount being written off at the end of the financial period to cover the cost of depreciation and a proportion of the repairs. This is, of course, wrong in principle. If it is desired to spread the cost of repairs so as to charge, as closely as possible, an 303 AUSTRALASIAN ADVANCED ACCOUNTANCY. even amount against each year, a Repairs Reserve account should be opened and conducted along the lines explained in Chapter TIL, dealing with ''Depreciation." Rent. — This account will be charged with all rents paid, whether for Crown or private leases, but any instalment paid to the Crown on conditional purchases leases should be charged to a separate account, as already explained. It is advisable to carry agistment fees (receivable or pay- able) to a separate account, and not include such items with the rent. Shearing Expenses. — These include all expenses incurr- ed in connection with shearing, such as the earnings of shearers, musterers, rouseabouts. wool-classer, wool-presser, etc.. and also rations provided by the station for any of these employees. They will also include any materials supplied by the stores, such as wool-packs, tar, twine, firewood, etc. The cost of supplying parts for the replenishment or the repair of shearing machinery or other plant used in connec- tion with shearing will be debited to this account, and it is quite common, also, to charge as shearing expenses depre- ciation on the shearing plant, instead of debiting the amount to General Depreciation acccnuit. Shearers' Deposits. — The deposits paid by the shearers as a guarantee that they will keep their engagements will be credited to this account. Any deposit which has been for- feited by reason of the failure of the depositor to fultil his engagement may be transferred to Doubtful Debts Reserve, or," if thought fi't. to the credit of Profit and Loss account. Upon the due fulfilment of engagements transfers will be made from the Deposit account to the personal accounts of the shearers. Wool.— I'his account will be credited with the net pro- ceeds as shown by the account sales received from the brokers in the cilv' the balance l^eing transferred to Profit and Loss account 'at the end of the financial period. When wool is sent tn a city broker lor sale on behalf of the station it is hot customary to make any entry in the financial books in respect of such despatch until the account sales is received from the broker showing the net proceeds realised. On the despatch of a consignment of wool, full particulars of the wool. sh..wing the class, quantities, weight, 20\ STATION ACCOUNTS. etc., are entered in the Way-bill Book. The slips from this book are prepared in triplicate, one being handed to the car- rier, another despatched to the broker, and the third copy retained in the book. As returns are received from brokers showing the sales of the various consignments despatched, the triplicate way-bills retained in the book are marked off in order to ensure that none of the consignment is over- looked. It will be necessary, where balance day occurs before complete returns are received from the broker for the wool despatched to him, to make an estimate of the value of such wool, in order to enable it to be brought into the financial books. This estimate should be made on a conservative basis. Stock Book. — Some stations keep an elaborate record of the stock running on the station, the stock being divided up under numerous headings. For example, sheep will be divi- ded into the various classes, such as Merinos, Lincolns. etc., subdivided into rams, ewes, wethers, etc., and further sub- divided into the various ages in each class. A separate page will be kept for each division. A more usual course is to keep a Stock Book in which is entered the tally of the sheep as ascertained at shearing time, the sheep in this case being divided imder various headings, such as rams, ewes, Avethers, etc., and, after lambing, the number of lambs will be ascertained at the time of lamb- marking. Additions of the number of lambs and of any purchases of sheep will be made to the stock as ascertained at shearing time, and a deduction made for any sales. From the result so ascertained there will be deducted the sheep killed for rations, and, also, a percentage, based on previous experience and the state of the season, for deaths. The re- sult will give a very close estimate of the sheep on the station at balancing period. More care should be exercised in the stock records of cattle and horses, as these are not tallied with the same regu- larity as sheep. Periodically cattle and horses are rounded up and a tally made of the numbers and classes. For stock- taking purposes, additions mu.st be made to these tallies for purchases, and deductions made for rations, sales, and a per- centage for losses by death. As alreadv indicated, it is the custom to include tlie stock in the financial books at a fixed valuation per head. 305 AUSTRALASIAN ADVANCED ACCOUNTANCY. Wool Press Book. — As the wool is cut from tlie sheeps' backs it is classed by the wool-classer. Each class of wool is kept separate, baled up and marked accordingly. The Wool Press Book is used for the pur]3ose of keeping a record of the number of l^ales filled, and tlie class of the wool con- tained therein. Diary. — This is, of course, necessary in most business concerns, and a diary is particularly useful on a station to keep a record of the dates wlien the \arious rents fall due, etc. Tally Book. — This is a record kept in the sheds of the number of sheep shorn by each shearer during the day. From this book is ascertained the amount earned by him, and he is credited periodically with the amount so ascertained, Shearing. Expenses account being debited. The following is the Balance Sheet and Profit and Loss account of a Station company carrying on business in several States : — STATION ACCOUNTS. O O ?D o CO O ^ o (^^ p w H o S 2 J i-T ^ >^" g ^; 5 < a a. '^ o ^ o i a:; OJ o H H a < W X Cfi ■Ji 2: < <; w ra K H ■^ 00 '^ M C JJ M _ Oi (U rt w > a ^ 0) P .3 CijO m o aw 307 AUSTRALASIAN ADVANCED ACCOUNTANCY. CO Cf O CO ■^ o :count: — of surplus over in re 1919 cHp . . 920 clip, totalling ;s (partly esti- after deducting hearing, carriage, ol Clip A( Amount estimate ceeds of 1 365 bale mated) cost of s bh C o o O ^ ^ ^. E pin -P 05 a C O rtM ooQ o^ o ft 2i il cT lo c^ o lO cr. C-. M c ■«r -f (M t^ S !!■ s: S s 1 (N i cr. 12 C= o lO c: O lO o O 'O o O M 'C co"^' O 05 O "* o -^ : O "5 O e|, C 3 0ic^ CHAPTER XXIII. COMPANY ACCOUNTS.— (Continued.) REDUCTION OF CAPITAL. Speaking generally, when a company has once registered its Memorandum of Association this is unalterable, but the Companies Acts provide for certain specific exceptions to this general rule, and included in the exceptions are provi- sions enabling a company to alter the amount of its capital upon the fulfilment of certain conditionis. A company may, for example, increase its capital provided it is authorised to do so by its Articles of Association. If the Articles as ori- ginally framed do not enable the company to do this they can be altered by passing a special resolution, and, as already mentioned, a copy of any special resolution must be filed with the Registrar of' Companies within fifteen days after the re- solution has been confirmed, and must be included in every copy of the Articles issued thereafter. Similarl}- the Companies Acts of the various States now provide that a company may, if authorised to do so by its Articles of Association, reduce its capital by passing a special resolution. If the Articles as originally framed do not give the company authority to reduce its capital it will be neces- sary in the first place to pass a special resolution making the required alteration in the Articles and. when this has been done, the company must then pass another special resolution authorising the reduction. A special resolution is one passed by a three-fourths majority of those members present personally or by proxy at a meeting duly convened, notice of intention to propose the resolution having been given, and confirmed at a subsequent meeting held not sooner than fourteen days and not later than one month after the date of the first meeting. The capital of a company may be reduced in various ways, and the method adopted will depend upon the reasons whv the reduction is desired. The capital may be reduced merely for the purpose of cancelling unissued shares. The reason for such reduction is not so apparent in New South 309 AUSTRALASIAN ADVANCED ACCOUNTANCY. Wales as it is in. say. New Zealand, wher*^. companies must pay an annual license fee of 1/- per cent, on the registered capital. A\'here the company has unissued shares which are ajjparently i^reatly in excess of its actual requirements it is advisable to reduce the capital in order to cancel these shares for the purpose of saving a proportion of the tax. Such re- duction merely requires the passing of a special resolution. Any reduction of capital other than the cancellation of unissued shares must, before it is put into effect by the com- pany, be confirmed by the Court. A company may reduce its capital for the following purposes: — (a) To cancel any capital which has been lost or which is not represented by assets. (b) To return to the shareholders any capital in ex- cess of the wants of the company. (c) To reduce the liability of the members on their shares. Where a cumpan\- has passed a special resolution to re- duce its capital for the purposes mentioned in (b) or (c) above, it must thereupon add the words "and reduced" to its name, and these words will in reality form part of the name of the company until such time as the Court thinks fit. 1'he reason for the addition of these words to the name of the company is that notice may be given to all creditors and other persons having dealings with the companv of the fact that the company is applying to the Court to authorise a re- duction of ca])ital. Any reduction which involves either the return of cash to shareholders or the reduction of the liability of members on their shares will diminish the funds to which the creditors have a right to look for satisfaction of their claims. It is only reasonable therefore that creditors and other persons having dealings with the company should be given every op- portunity of finding out that the company proposes to re- duce its ca])ital in the manner mentioned. Tn the case of (a) the company need not add the words "and reduced" to its name prior to its application to the Court to confirm the resolution, and the Court may dispense with the use of the words altogether. It will be seen t'lat a reduction of this nature will not affect the rights of creditor?, as the capital has alreadv been lost and the reduction is merelv for the purpose of recognising this fact in a practical .110 R EDICT I ON OF CAPITAL. way by reducing the book values of the assets, or by writing off an adverse balance in i'rofit and Loss account. It does not, in any way, diminish the funds to which the creditors have the right to look for payment of their claims. The reason for a reduction of the class now being con- sidered will be apparent. A company may have suffered a large loss upon realisation of some fixed assets, or the value of such fixed assets as freehold property may have reduced to considerably less than the figures at which they are stated in the books, and it may be desired to have them written down to something approaching their real value. Again, a company may have l>een running for a number of years at a heavy loss, and, having turned the corner, it would probably take a considerable time to wipe out the deb- it balance in Profit and Loss account by subsequent profits. As capital equalling this amount has actually been lost it is apparent that any profits subsequently made will be earned by the diminished capital and, in order that shareholders will not be required to wait an unreasonable time before a divi- dend is received, these losses may be written off against capital. It is. of course, apparent that in order to do this the nominal value of the shares must also be reduced. When an application is made to the Court to confirm the reduction, if such reduction is for the purpose mentioned in either (b) or (c) above, the Court will settle a list of creditors and will require due notice of the application to be sent to these creditors. It will also fix a date before which the creditors, if they object to the reduction, must state their objections to the Court. If any creditors object the Court may require the company either to pay the claims of such creditors or secure the payment of the amount to its satis- faction. The Court ma}^ also require the company to pub- lish its reasons for the reduction. Where practicable it is always desirable for a company desiring to reduce its capital in the manner mentioned in (b) or (c) above, to discharge all outside liabilities before mak- ing the application to the Court as this will greatly simplify the proceedings. In the case of (a) above, the creditors are not, of course, entitled to object to the reduction and the discharge of outside liabilities will not affect the application one wav or the other. When the Court has sanctioned the reduction, the order of the Court, together with a minute approved by the Court 311 AUSTRALASIAN ADVANCED ACCOUNTANCY. showing- the particulars of the capital as it is reduced, must be filed with the Registrar of Companies and a copy of the minute must be included in every copy of the Memorandum of Association issued thereafter in lieu of the original state- ment of the capital of the company. It is now fairly settled that, subject to the right of cre- ditors to object to any reduction which will afifect their rights, the Court has jurisdiction to sanction any reduction of capital which is fair as between the various classes of shareholders. If the Court is satisfied that, with regard to the interests of those members o{ the public who may be in- duced to take shares in the company such interests are duly protected and that, with regard to the different classes of shareholders, the reduction is fair and equitable, there wnll be no difficulty in obtaining its consent (Poole v. National Bank of China). If, however, the reduction involves any injustice to creditors or to a minority of the members of. the cornpany the Court will, of course, refuse to confirm the resolution. If the companv has preference as well as ordinary share- holders the preference shares are not exempt from the lia- bility to be reduced even although the reduction will cause the preference shareholders to receive a lower rate of divi- dend than was payable on the capital originally paid in by them, but where, however, the preference shares have a pre- ferential claim on the capital of the company in the event of winding up the reduction should fall only upon the ordinary and deferred shares. The exact effect of the reduction as be- tween the various classes of shareholders is. of course, a matter for arrangement and compromise between themselves, but it should be remembered that the Court will not assent to a reduction which will inflict an injustice upon a minority. Entries in the Books on Reduction.— The exact entries to be passed in the books of a company, after the procedure already referred to has been gone through, will depend upon the nature of the reduction, and it is thought that the most effective way to make the entries to be passed under the various forms of reduction clear, is to supply examples. The following figures will be used to illustrate the entries given hereunder : — Nominal Capital in Shares of £1 each £30.000 Less Unallotted Shares lO.OOU Subscribed Capital 20.000 Less Uncalled Capital (10/ per share* .. . . 10,000 Paid-up Capital (10/ per share) £10,000 312 REDUCTION OF CAPITAL. (a) Cancelling Unissued Shares. — Assumint^ that the directors of the above company are satisfied that they will never require to issue the unallotted shares shown and that the company has passed the necessary resolution to cancel these shares, the only entry lequired is a reversal of the original opening entry in so far as it affects these 10.000 shares. Nominal Capital A/c Dr. £10,000 To Unallotted Shares A/c £10,000 The Capital accounts in the Balance Sheet would then appear as under : — Nominal Capital (fully subscribed) £20,000 Less Uncalled Capital 10,000 Paid-up Capital £10,000 (b) Returning Surplus Capital to Shareholders. — Where the amount of capital received from the shareholders proves to be in excess of the company's actual requirements, the most sensible course is to return such surplus to the share- holders in cash in order to enable them to utilise it to ad- vantage. As has already been shown, such a reduction of capital will require the consent of the creditors and of the Court. Assuming, therefore, that the company finds it cannot operate on so large a scale as w^as originally intended, and that it decides to return one-'half of the paid-up capital, equalling 5s. per share, to the shareholders, the effect will be that the sihares which were originally of the nominal value of £1 each will be reduced to 15s. per share. As the amounts of unallotted shares and uncalled capital are deducted from nominal capital it is clear that, if the amount of the nominal capital is reduced, this will involve a reduction in the final amount shown above, which is, of course, the paid-up capital. The reduction will in this case only afifect the shares which have been subscribed for, but it is usual and advisable, when reducing the subscribed shares, to reduce also the nominal value of any unallotted shares in order to keep them on an equal footing. Assuming that it has been decided to do this, the whole of the shares wath wdiich the company Avas registered will be reduced by 5/- per share. The proportion written off the unissued shares must of course be taken out of Unallotted Shares account, reducing the balance of that account to its proper figure, and the proportion written off the 20,000 issued shares will be returned in cash to the share- holders. 3t3 AUSTRALASIAN ADVANCED ACCOUNTANCY. The following- journal entries would be required to give etlect to the decision of the shareholders: — Nominal Capital Account Dr. £2,500 To Unallotted Shares A/c £2,500 Being 5/ per share written off the un- issued shares reducing them to the nominal value of 15/ per share in accordance with Resolution of shareholders, etc. Nominal Capital A/c Dr. £5,000 To Distribution A/c £5,000 Being 5/ per share written oit" the issued shares, reducing the paid-up capital, to be returned in cash to the shareholders in accordance with Resolution, etc. Distribution A/c Dr. £5,000 To Cash A/c £».000 Being distribution of cash amongst the shareholders entitled thereto. After this reduction had taken place the Capital accounts of the company would appear as under: — Nominal Capital 30,000 shares of 15/ each £22,500 Less Unallotted Shares, 10,000 of 15/ each .. 7,500 Subscribed Capital 15,000 Less Uncalled Capital, 10/ per share 10,000 Paid-up Capital, 5/ per share £5,000 (c) Writing Off Lost Paid-Up Capital.— Assume now that the capital is as originally stated and that, instead of the paid-up capital being represented by assets amounting to £10,000, tliese assets total only £8.000, whilst £2,000 ap- pears on the assets side as a debit balance in Profit and Loss account. It is evident that the company has lost the sum of £2,000 which has been entrusted to it for the purposes of trading and that the actual capital now in the business amounts to only £8,000. In the case of a sole trader this loss of £2.000 would be transferred to the debit of his Capital account and his capital reduced to that extent, but in the case of a limited company tlie capital cannot be written down in this manner without first obtaining the consent of the Court. The company now being considered has. however, obtained this consent and has passed a special resolution that the capital be written down so as to wipe out the debit balance in Profit and Loss account. • It is clear that the loss which has been incurred has been a loss of the paid-up capital and. in order to enable this loss 314 REDUCTION OF CAPITAL. to be written off, it is the paid-up capital which must be rechiced. It is advisable, however, where a company is writ- insj;" down its paid-up capital, if such a company has also un- issued shares, to reduce the nominal value of such shares in the books in order to keep the whole of the shares uniform. It is, of course, not necessary that this should be done, and it is a matter for the company to decide when passing the resolution authorising the reduction. The entries to be passed under both methods will be shown. Assuming, in the first place, that it has been decided to reduce only the paid-up capital, i.e., to write down only the subscribed shares, it will be necessary to write 2s. per share oft' the 20,000 issued shares, thus reducing the nominal capi- tal to £28,000, made up of 10,000 shares of £1 each and 20,000 shares of 18s. each. In order to effect this the follow- ing Journal entry would be passed : — Nominal Capital A/c Dr. £2,000 To Profit and Loss A/c. £2,000 Being the amount equalling 2/ per share written off the paid-up portion of the 20,000 issued shares in accordance with Resolution. A statement of the capital after the above entry had been passed would then apjjear as under: — Nominal Capital (10,000 shares of £1 each and 20,000 shares of 18/ each i £28,009 Less Unallotted Shares (10,000 shares of £1 each) 10>000 Subscribed Capital (20,000 shares of 18/ each) .. 18.000. Less Uncalled Capital (10/ per share) 10,000 Paid-up Capital (8/ per share on 20,000 shares) .. £8,000 It will be seen from the above that the capital is now reduced to the value of the assets which the company _ at present possesses. It will also be noted that any reduction of the amount of nominal capital which does not also reduce the unissued and the uncalled capital must result in a diminu- tion of the paid-up capital, as the unissued shares and the uncalled capital are deducted from the amount of the nominal capital. Where only the paid-up capital is reduced all that is required is a debit to Nominal Capital account and a cre- dit to Profit and Loss account, and this automatically reduces the amount of paid-up capital shown in the Balance Sheet. Assumino- now that the company had decided, for the sake' of uniformity, to reduce the whole of the shares both A L S T R A L A S 1 A N A D V A X C E D A C C O U N T A X C Y . issued and unissued to 18s. per share, the Journal entry to give effect thereto would have appeared as under : — Nominal Capital A/c Dr. £3,000 To Unallotted Shares A/c i'1.000 „ Profit and Loss A/c 2,000 Reducing the value of the whole of the shares from £1 to 18/ per share by writing off 2/ per share from the nominal capital. If this were stated in the same manner as the capital above the i)aid-np capital would still show at £8000 because although the nominal capital is reduced to £37,000, the un- allotted shares are also reduced by £1000, and this leaves the subscribed and paid-up capitals at the same figures. (d) Reducing the Uncalled Capital. — Assume now that in addition to writing down the paid-up capital and the un- issued shares, it has been decided to reduce the liability of the shareholders on their shares as a kind of compensation for the reduction of the paid-up capital. Such a proposal is sometimes included in the resolution by the directors in order to get the shareholders to agree more readily to the reduction of the paid-up capital. Any of the creditors will, of course, be entitled to object to this portion of the pro- posal, and this is a matter which should not be overlooked in passing the resolution where it is impracticable to pay off all creditors before applying to the Court for its approval of the reductions. Assume again that the capital of the com- pany is as it was originally stated and that the resolution passed was to the following effect : — (a) That the i)ai(l-ui) capital lie reduced by 2s. per share. (b) That the uncalled capital l)e reduced l)y 2s. per share (these reductions amounting in all to Is. per share on the subscribed ca])ital). (c) That the unissued shares be reduced by Is. per share to keep them uniform with I he issued shares. niie lournal entry necessary to effect the above reduc- tion would be as under: — Nominal Capital A/c Dr. £6,000 To Unallotted Shares A/c £2,000 „ Uncalled Capital A/c 2,000 „ Profit and Loss A/c 2.000 Reducing the 10,000 unissued shares of f 1 each to shares of 16/ each ; and also 20,000 issued shares to shares of 16/ each bv writing off 2/ per share from *hf: paid-up capital and 2/ per share from the uncalled capital 316 REDUCTION OF CAPITAL. After passing the above entries a statement of the capi- tal would then appear as under : — Nominal Capital (30,000 shares of 16/ each) .. .. £24,000 Less Unallotted Shares (10,000 shares at 16/ each) 8,000 Subscribed Capital (20,000 shares at 16/ each) .. .. 16,000 Less Uncalled Capital (8/ per share) 8,000 Paid-up Capital 8,000 It will have been noticed that the only class of reduction which will help to reduce a balance in Profit and Loss ac- count is a reduction of the paid-up capital. Uncalled capital is only reduced to benefit the shareholders and the unissued shares are reduced for the purpose of keeping the nominal value of the shares uniform throughout. The Companies Act provides that the paid-up capital of a company may be reduced either with or without extinguish- ing or reducing the liability, if any, remaining on the shares of the company and to the extent to which such liability is not extinguished or reduced it shall be deemed to be pre- served. This means, in other words, that if a company passes a resolution merely to reduce its paid-up capital this does not mean that a corresponding amount is to be written off the uncalled capital. This must not be done unless the resolution specifically provides therefor and the consent of the creditors and the (jourt is obtained thereto. A company cannot legally reduce its capital by either direct or indirect means without obtaining the consent of the Court. For example, it has been decided in Trevor v. Whit- worth that a company cannot purchase its own shares, as this in reality involves a reduction of its capital, and this is so even although the company's articles authorise such a purchase. It has already been seen, when dealing with de- preciation, that a company may in effect, by ignoring depre- ciation, be returning its capital to shareholders by way of dividends, but, apparently, in the words of Lord Justice Lindley: "This is not such a return as is prohibited by the Companies Acts." Exactly why such a sharp distinction is made betw^een, say, a return of surplus capital to shareholders in a lump sum and a return of capital by way of dividends, due to the omission to provide for depreciation, it is difficult to fathom. 317 W AUSTRALASIAN ADVANCED ACCOUNTANCY. EXAMPLE: The following was the Balance Sheet of the Herculean Manufacturing Company on 31/13/20: — BALANCE-SHEET. LIABILITIES. ASSETS. Nominal Capital Freehold Premises £15,000 100,000 shares of (at cost) £1 each £100,000 Plant & Machinery .. .. 20,000 Less Unallotted (at cost) Shares 20,000 Sundry Debtors . 10,000 shares of £1 each.. 20,000 Profit & Loss Balance •• 14,000 Subscribed Capital.. 80,000 Less Uncalled Capi- tal 40,000 Capital Called Up . . 40,000 Less Calls in ar- rears 200 ' —£39,800 Debentures 10,000 Sundry Liabihties 9,200 £59,000 £59,000 The freehold property, although standing in the books at £15,000, was really worth £13,500, while the present value of the plant, etc., was £18,000. At this date the Company in General Meeting passed the following Special Resolutions: — (1) To write down the Freehold Property and Plant and Machinery to their real values respectively. (3) To write ofT £1600 of the debts as bad. (3) To write off 5/- per share from the Paid-up Capital. (4) To reduce the liability of the shareholders in re- spect of Uncalled Capital by 5/- per share. (5) To cancel the whole of the shares which have not been allotted. The necessary consent of the Court was duly obtained. Show the Journal entries necessary to effect the .above mentioned transactions, and set out the Balance Sheet m full after the reduction. 318 REDUCTION OF CAPITAL. 1920. Dec. 31— Profit and Loss A/c Dr. JtG.lOO To Freehold Premises A/c. £2,500 „ Plant and Machinery A/c. 2,000 „ Sundry Debtors A/c. .. 1,600 Nominal Capital A/c Dr. £20,000 To Unallotted Shares A/c. .. 20,000 Cancelling Unissued Shares. Nominal Capital A/c Dr. £40,000 To Uncalled Capital A/c. .. £20,000 „ Profit and Loss A/c. .. 20,000 Writing off 5/ per share from Paid-up Capital and 5/ per share from Uncalled Capital. BALANCE SHEET (after reduction). LIABILITIES. ASSETS. Nominal Capital .. £40,000 Premises £15,000 Less Uncalled Less written off .. 2,500 Capital 20,000 ^£12,500 Plant & Machinery 20,000 Called-up 20.000 Less written off . . 2,000 Less Calls in 18,000 Arrears 200 Sundry Debtors .. 10.000 — £19,800 Less written off . . 1,600 Debentures .. 10,000 8,400 Sundry LiabiUties 9,200 Profit & Loss A/c 100 £39,000 £39,009 EXAMPLE: The New South Wales Soap and Candle Coy., Ltd., whose trial Balance on 31/12/20 appears below, had been carrying on at a loss for some time. At last the tide turned, and the Company passed a Special Resolution to wipe off the loss accumulated by reducing the Capital as follows: — (a) The share denomination of the Ordinary share- holders to be reduced from £5 to £3, the shares to be treated as paid up to £2 per share. (b) The sum of 5/- per share to be written off the 6 per cent. Preference shares. (c) The whole of the 4 per cent. Preference shares both issued and unallotted to be reduced to shares of £3 each. The consent of the Court was duly obtained. The Nominal Capital of the Company was £100,000, made up as follows : — (a) 10,000 Ordinary shares at £5 each paid up to £3 per share. 319 AUSTRALASIAN ADVANCED ACCOUNTANCY. (b) 30,000 G per cent. Preference shares of £1 each fully paid. (c) 5000 4 per cent. Preference shares of £4 each. Of these 3000 have been issued and are paid up to £3 per share. After drawing- up the Annual Profit and Loss account and Balance Sheet, show the Journal entries necessary to effect the above reduction in the books of the Company and the Balance Sheet as it would appear after these entries had been posted. In writing down the Capital, any surplus, after the debit balance in Profit and Loss A/c has been written off, is to be applied towards the reduction of the item "Preliminary Ex- penses." TRIAL BALANCE OF THE N.S.W. SOAP AND CANDLE CO. As on 31/12/20 Paid-up Capital £69,000 Freehold Premises (purchased on 30th June, 1920) £16,000 Leasehold Premises 8,400 Plant and Machinery 9,300 Sundry Debtors 15,600 Sundry Creditors 14,900 Bills Payable 6,700 Bills Receivable 19,600 Bank Balance 11,200 Discount 500 Soap A/c 12,600 Candles A/c 9,680 Bad Debts 400 Wages 930 Materials Purchased 16,470' Stock 31/12/19 8,000 Salaries 470 Cartage, Railage, etc. (outward) 250 Insurance Premiums A/c 200 Preliminary Expenses 2,500 Ordinary Shares, 4th Call A/c 200 Profit and Loss A/c 22,000 Transfer Fees 340 5 per cent. Debenture Stock 20,000 Interest on Debentures 800 General Expenses 400 £133,220 £133,220 Stock 31/12/20, £9,200. — Provide for depreciation of Leasehold Property at 10 p.c. per annum Plant & Machinery at 10 p.c. per annum Freehold Premises at 2i p.c. per annum The whole amount of the Insurance Premiums as shown above had been paid on a 12 months' policy on 30th Sep- tember, 1920. 320 REDUCTION OF CAPITAL. Nominal Ordinary Capital A/c Dr. £20,000 To Uncalled Ordinary Capital A/c. . . £10,000 „ Profit and Loss A/c 10.000 Being £1 from paid-up and £1 from Uncalled Ordinary Shares. Nominal 6 p.c. Pref. Capital A/c. .. Dr. £7.500 To Profit and Loss A/c £7.500 Being 5/ per share written off Paid-up Capital. Nominal 4 p.c. Pref. Capital A/c. .. Dr. £5,000 To Unall. 4 p.c. Pref. Capital A/c. .. £2,000 „ Profit and Loss A/c 3,000 Being £1 per share written off 2000 Unall. Shares and 3000 Issued Shares. TRADING ACCOUNT. To Stock .. .. £8,000 By Soap Sales .. ..£12,600 Materials Purchased . . 16,470 „ Candle Sales .... 9,680 ' Wages 930 £22,280 '. Gross Profit 6,080 .. Stock 9,200 £31,480 £31,480 PROFIT AND LOSS ACCOUNT. To Discount £500 By Gross Profit £6,080 jBad Debts 400 ., Transfer Fees 340 '' Salaries 470 ., Cartage 250 „ Insurance Premiums £200 Le^ forward 150 50 ,. General Expenses . . . . 400 „ Interest on Debentures . . 800 „ Depreciation : Leasehold Property . . 840 „ Plant and Machinery . . 930 „ Freehold Premises .... 200 (6 months only) , Net Profit to Appropria- tion ^'c 1,580 £6,420 £6,420 APPROPRIATION ACCOUNT. To Balance Forward £22,000 By Net Profit £1,580 , Preliminary Expenses „ Nominal Capital A/c. . . 10,000 A/c 80 „ „ 7,500 3,000 £22,080 £22,080 321 AUSTRALASIAN ADVANCED ACCOUNTANCY. BALANCE SHEET (after Reduction of Capital). LIABILITIES. ASSETS. Nominal Ord. Capital £30,000 Freehold Premises . .£16,000 Less Uncalled .. 10,000 Less Depreciation.. 200 £15,800 Called- up Capital . . 20,000 Leasehold Premises . . 8.400 Less Calls in Arrear 200 Less Depreciation.. 840 -£19,800 — 7,560 Nominal 6 p.c. Pref. Plant & Machinery .. 9,300 fuUv paid 22,50"! Less Depreciation.. 930 30,000 shares of 15/ 8,370 each Sundry Debtors . . . . 15,600 Nominal 4 p.c. Pref. 15,000 Bills Receivable .. 19,600 Less Unallotted 2000 Preliminary Ex- shares of £3 eadh . . 6,000 penses 2,50^^ ■ Less written off . 80 Subscribed Capital . . 9,000 • 2.420 Less Uncalled . . 3,00C Insurance Premiums 6,000 in advance .... 150 5 p.c. Debenture Stock 20,000 Stock 9,200 Sundrv Creditors .. 14,900 Bank 11.200 Bills Payable . . . . . . 6,700 £89,900 £89.900 EXAMPLE: The Balance Sheet of the Excelda Company stood as follows : — LIABILITIES. Authorised Capital 50,000 shares of £1 each £50,000 Subscribed Capital 30,000 shares of £1 each 30,000 Less Uncalled 4/ ps £6000 Unpaid Calls on 1500 shares that have been forfeited .... 150 6,150 £23,850 Overdraft at Bank 1.785 3 9 Sundry Creditors 1.914 16 8 £27,550 5 ASSETS. Freehold Propertv, Plant and Fittings .. .. £9,155 Stock on hand 2.945 Amount due by Customers 1.262 10 Profit and Loss A/c. previous balance £14,322 1 10 Less Profit for Half Year 134 11 5 14,187 10 5 £27.550 5 323 REDUCTION OF CAPITAL. It passed the following special resolution, — "That the Capital of the Company be reduced from £50,000 divided in- to 50,000 shares of £1 each to £24,350, divided into 48,500 shares of 10/- each ; that such reduction be effected by can- celling 1500 forfeited shares on which the sum of £1050 has been paid by writing down the Capital paid on the 28,500 shares issued and now current to the extent of 10/- per share and by reducing the nominal value of all shares in the Com- pany from £1 to 10/- each." The amount gained by writing down the Capital is to be applied to the extinction of the accumulated loss. Show Journal entries necessitated by the reduction and prepare new Balance Sheet. Unallotted Shares A/c Dr. £1,500 To Uncalled Capital A/c £300 „ Call A/c 150 „ Forfeited Shares Reserve A/c. . . 1,050 (Profit and Loss A/c.) Nominal Capital A/c Dr. £1,500 To Unallotted Shares A/c 1,500 Cancelling 1500 shares forfeited. Nominal Capital A/c Dr. £24,250 To Unallotted Shares A/c 10,000 „ Profit and Loss A/c 14,250 NOMINAL CAPITAL ACCOUNT. To Unallotted Shares A/c. By Balance ..£50,000 (cancelled) £1,500 „ Reduction of Capital .. 24,250 . Balance 24,250 £50,000 £50,000 UNALLOTTED SHARES ACCOUNT. To Balance £20,000 By Nominal Capital A/c. .. £1,500 Forfeited Shares .... 1,500 .. „ (Reduction) 10,000 „ Balance 10,000 £21,500 £21,500 UNCALLED CAPITAL ACCOUNT. To Balance £6,000 Bv Forfeited Shares £300 „ Balance .. .. 5,700 £6,000 £6,000 CALL ACCOUNT. To Balance £150 By Forfeited Shares £150 323 AUSTRALASIAN ADVANCED ACCOUNTANCY. PROFIT AND LOSS ACCOUNT. To Balance £14,187 10 5 By Forfeited Shares £1,050 ., Balance . . . . . . 1,112 9 7 Nominal Capital . . . . . . 14,250 £15.300 £15,300 BALANCE-SHEET. Nominal Capital £24,250 Freehold Property ..£9.155 Less Unallotted Stock 2,945 Shares .... 10,000 Sundry Debtors .. .. 1.262 10 Subscribed .... 14,250 Less Uncalled 5,700 ^£8,550 Sundry Creditors .... 1,914 16 S Bank 1,785 3 9 Profit and Loss A/c. .. 1,112 9 7 £13,362 10 £13.362 10 324 CHAPTER XXIV. COMPANY ACCOUNTS— (Continued) .—LIQUIDATION AND LIQUIDATOR'S ACCOUNTS. In so far as the actual bookkeeping is concerned the accounts to be kept by a liquidator are of an exceedingly simple nature. All that is necessary is an account of Re- ceipts and Payments, or a Cash account, showing the amounts received as proceeds of the realisation of the assets of the company and the manner in which these proceeds have been expended. It may, of course, be advisable for the liquidator, in order to wind up the business of the company beneficially, to carry on the business for a short period and, where such is the case, it will be necessary for him to keep, in addition, such books as are usual in that class of company. This subject is rendered somewhat difficult owing to the fact that the law with regard to the winding up of limited companies varies considerably in the different States. It is proposed, however, to deal first of all with those matters which apply generally and then to point out where the pro- cedure in the various States differs. A company may be wound up in any one of three ways: (a) By order of the Court. (b) Voluntarily. (c) Voluntarily, but under the supervision of the Court. (In South Australia and Western Australia no provision is made for winding up a company under the supervision of the Court). WINDING UP BY THE COURT. General Procedure. — The Court, upon a petition made by the company or by any creditor or contributory of the com- pany, may order that the company be wound up by the Court under the following circumstances: — 325 AUSTRALASIAN ADVANCED ACCOUNTANCY. (a) Where the company has passed a special resolu- tion requiring the company to be wound up by the Court. (b) Where the company does not commence business within one year from incorporation or suspends business for the space of one year. (c) W'here the number of members is reduced to less than the minimum number required upon regis- tration. (d) When the company is unable to pay its debts. (e) When tlie Court is of opinion that it is just and equitable that the company should be wound up. (f) (In Victoria only). If default is made in filing statutory report or in holding statutory meeting. A contributory is any person liable to contribute to the assets of the company in the event of the same being wound up, and, until the list of contributories is settled, the term includes any person deemed to be a contributory. A con- tributory is not entitled to present a petition for winding up by the Court unless (a) The number of persons is reduced to less than the minimum number required upon registration, or (b) The shares in respect of which he is a contribu- tory, or some of them, were either originally al- lotted to him or have been held by him and regis- tered in his name for a period of at least six months during the eighteen months prior to the commencing of the winding up, or have devolved upon him throug'h the death of a former owner. A copy of any order made by the Court for the winding up of a company must be filed by the company with the Registrar. The Court will appoint an official liquidator to carry on the winding up, and will fix his remuneration, and the official liquidator acts under the control of the Court. The winding up of a companv is deemed to commence at the time of the' presentation of the petition for windmg up and. where such petition is before the Court, the Court may grant an injunction restraining any proceedings against the com- pany. The Court will settle a list of the contributories. This list is prepared in two sections, the "A" and "B" lists. On 326 LIQUIDATiO'R''S ACCOUNTS. the "A" list will appear the names of all persons who are at present shareholders and liable to contribute to the assets, and on "B" list will be shown the names of all past mem- bers of the company who are liable tO' contribute to the as- sets on winding- up. The Court will make such calls as are necessary upon the contributories and, in so doing, can take into consideration the fact that some of the contributories may not be able to satisfy the calls made on them. The official liquidator will realise the assets, pay ofif the creditors of the company, and. when the Court has adjusted the rights of the contributories amongst themselves, will dis- tribute any surplus that may remain amongst the parties entitled thereto. Reference will, of course, be made to the memorandum and articles of association of the company, in order to ascertain whether there are any provisions as to the mode of distribution amongst the shareholders and whe- ther any class of shareholders has any special rights or pri- vileges, and due regard will be had to such provisions. When the afifairs of the company have been completely wound up the Court will make an order that the company be dissolved from the date of such order and the company will be dissolved accordingly. Any order so made must be re- ported by the official liquidator to the Registrar, who will make a minute in his books of the dissolution of the com- pany. The above supplies, in a general way, the procedure necessary upon the compulsory winding up of a company, but, in certain of the States, special provisions, in addition to those given above, are included in the Acts and these pro- visions are briefly stated Ihereunder : — Queensland. — In the case of a winding up by the Court the Court appoints a provisional official liquidator and, where the order is made on the petition of a creditor, or in any other case if the Court thinks fit, the Court will appoint a time and place for the holding of a meeting of creditors for the purpose of electing a liquidator. The official liquidator "holds office until anofher liquidator is appointed by the cre- ditors or the Court. In order to vote at the meeting re- ferred to a creditor must first of all prove his debt. The creditors then appoint their own liquidator and fix his re- muneration, and, if they think fit. may also appoint a com- mittee of inspection to superintend the performance by the liquidator of his duties. The appointment of the liquidator by the creditors must be notified to the Court and. if the Court thinks him to be a 327 AUSTRALASIAN ADVANCED ACCOUNTANCY. fit person it may confirm his appointment, and his appoint- ment dates from the date of the confirmation by the Court. 'Whilst the official liquidator is acting he receives 5 per cent, on the money coming to his hands, any such commis- sion being paid into consolidated revenue. Victoria. — On the winding up order being made by the Court the Court will appoint an official liquidator, whose first duty is to call separate meetings of the creditors and of the contributories to ascertain whether they desire to appoint a liquidator in place of the official liquidator, and whether they want a committee of inspection. If these meetings differ the Court decides what course must be followed. If a liqui- dator other than the official liquidator be appointed the of- ficial liquidator must be repaid any expenses incurred by him in connection with the winding up and, in addition, a sum not exceeding £10 for his services. The liquidator ap- pointed must file a notice of his appointment with the Re- gistrar-General and make the necessary arrangements with regard to security. The remuneration of the liquidator will be fixed by the Court. Within 14 days after the appointment of a liquidator a Statement of Affairs must be supplied to him by one or more of the directors and the secretary of the company. At least twice in every year during the continuance of the winding up, the liquidator must file a statement of Re- ceipts and Payments in the prescribed form with the Regis- trar-General. This statement must be duly audited by an auditor appointed by the Court and a copy must be sent to each creditor and contributory. When the winding up is fully completed the liquidator applies to the Court for a re- lease and such release, when granted, frees him from all lia- bility for any acts done by him in administering the affairs of the company. South Australia. — This follows very closely the general procedure already described, the chief difference being that the making of calls and the settling of the list of contribu- tories are left in the hands of the official liquidator. The official liquidator is also required once in every six months during the currency of the winding up to file a Balance Sheet and a statement in writing, signed by him, with the Registrar, showing his dealings under and acts done in wind- ing up the estate. Western Australia. — This also follows the general pro- cedure indicated above, save that, as in the case of South LIQUIDATOR'S ACCOUNTS. Australia, the making of calls and settling of the list of con- tributories are left in the hands of the official liquidator. Tasmania. — Within fourteen days after the date of the order of the Court for the winding up of a company a State- ment of Affairs must be prepared by one or more of the directors and the secretary of the company and handed to the official liquidator. New South Wales and New Zealand. — These follow the general procedure above-mentioned. VOLUNTARY WINDING UP. General Procedure. — A limited company registered under the Act may be wound up voluntarily whenever (a) The period (if any) fixed for the duration of the company by the articles of association expires, or the event (if any) occurs upon the occurrence of which it is provided by the articles that the com- pany is to be dissolved, and the company in gene- ral meeting has passed a resolution requiring the company to be wound up voluntarily. (b) The company has passed a special resolutign re- quiring the company to be wound up voluntarily. (c) The company has passed an extraordinary resolu- tion to the effect that it has been proved to its satisfaction that the company cannot, by reason of its liabilities, continue its business, and that it is advisable to wind up the same. In South Australia and Western Australia paragraph (c) above does not apply. A copy of every resolution for the voluntary winding up of a company must be forthwith forwarded by the company to the Registrar. The voluntary winding up commences on the date of the resolution passed by the company requiring it to be wound up voluntarily. The liquidator or liquidators will be ap- pointed by the company, which will fix his or their remunera- tion. A company in the course of being wound up volun- tarily, may delegate to the creditors or to any committee of its creditors the power of appointing the liquidators or any of them. This delegation of power must be authorised by an extraordinary resolution. (In S.A. and W.A., special re- solution). 329 AUSTRALASIAN ADVANCED ACCOUNTANCY. Upon the appointment of liquidators all the powers of the directors cease, except in so far as the company in general meeting, or the liquidators, may sanction the con- tinuance of such powers. The liquidators will also settle a list of contributories and make the necessary calls on those contributories, and they have the right at any time to apply to the Court for the enforcement of such calls. As soon as the afYairs of the company are fully wound up the liquidators must prepare an account showing the man- ner in which the winding up has been conducted and how the property has been disposed of. They then call a general meeting of the company to have the account referred to laid before the members and to hear any explanation that may be given by the liquidators. When this meeting has been held, notice of the fact must be given to the Registrar, and, upon the expiration of three months from the date of the notice, the company shall be deemed to be dissolved. In all States (with the exception of Tasmania) if the voluntary winding up continues for more than 13 months the liquidators must summon a general meeting of the com- pany at the end of the first and of each succeeding year dur- ing the continuance of the winding up, and shall lay before such meetings an account showing their acts and dealings. In Victoria the liquidator, when appointed, must file a notice of his appointment with the Registrar-General within 21 days. He must call a meeting of the creditors, which meeting may determine to apply to the Court for the ap- pointment of some person to act in place of, or to act jointly with, the liquidator appointed by the company, or for the appointment of a committee of inspection. In Victoria and Tasmania if the winding up is not com- pleted within one year after the date of commencement of winding up the liquidator must, at such intervals as may be prescribed during the winding up, send to the Registrar a statement in the prescribed form and containing the prescribed particulars. Any creditor or contriliutory of the company may inspect this statement. WINDING UP UNDER SUPERVISION OF THE COURT. General Procedure. — Where a resolution has been passed by a comi)an\' to wind up voluntarily, the Court may make an order directing that the voluntary winding x\p shall continue, but subject to such supervision of the Court and with such 330 LIQUIDATOR'S ACCOUNTS. liberty for creditors, contributories or others to apply to the Court, and generally upon such terms and subject to such conditions as the Court thinks just. The Court may, in determining whether a company is to be wound up altogether by the Court or under the super- vision of the Court, have regard to the wishes of the credi- tors or contributories as proved to it by any sufficient evi- dence, and may direct meetings to be called for the purpose of ascertaining their wishes. Where an order is made for a winding-up under the supervision of the Court the liquidators appointed to conduct the winding up may, subject to any restrictions imposed by the Court, exercise all their powers with the sanction of the Court, in the same manner as if the company were being wound up altogether voluntarily. Except as mentioned above a winding up under supervision is deemed to be a winding up by the Court, and confers full authority on the Court to make and enforce calls, and to exercise all other powers which it might have exercised if the company were being wound up by the Court. In South Australia and Western Australia no provision is contained in the Act for the winding up of a company under the supervision of the Court. No-Liability Mining Companies. — In New Zealand, South Australia, Western Australia, and Queensland the pro- visions as to a resolution for the voluntary winding up of a No-Liability Mining Company are similar to those relating to the voluntary winding up of a limited company. In Vic- toria, a resolution for the voluntary winding up of such a company must be passed at an extraordinary meeting by a two-thirds majority in number and value of all the share- holders, and the company must have previously discharged all its liabilities. In Tasmania and New South Wales, the resolution requires only a two-thirds majority of those pre- sent at a general meeting of a company which has discharged all its liabilities, and, in the latter State, provision is made for the appointment of a liquidator by such meeting. Preferential Payments in Winding up. — These vary in the different States, and it is, therefore, necessary to set them out under separate headings : — New South Wales. — The costs, charges and expenses of winding tip, including the remuneration of the liquidators, have priority over all other claims. No other provision is made under the New South Wales Act with regard to preferential payments. Note.— In New South Wales the position with regard to preference claims in winding up is very unsatisfactory. Section 264 of the Com- 331 AUSTRALASIAN ADVANCED ACCOUNTANCY. panics Act, 1899, sets out what provisions of the Bankruptcy Act apply in the winding up of companies, and these are as follow: — (a) The respective rights of secured and unsecured creditors. (b) The declaration and distribution of dividends. (c) The proof and allowance of debts or claims against the assets of the company. Whilst it must be admitted that it is the general practice in the above-mentioned State to treat salaries, wages and rent as preferential claims in the winding-up of a company to the same extent as m Bank- ruptcy, it is submitted that the authority for such a course is doubtful if the 'section referred to and quoted be strictly interpreted. Clause (a), which is generally relied upon, apparently refers to the rights of secured creditors in relation to those of unsecured creditors. If the intention were to make apply all the Bankruptcy provisions relating to secured creditors and all the provisions relating to unsecured creditors, why was the word "respective" included? On the other hand, the opinion is expressed that the general ten- dency is for the Courts to enlarge rather than restrict the appHcation of Bankruptcy procedure to the winding up of hmited companies. Until, however, the matter is definitely settled by the Courts, a liquidator should, for his own protection^ obtain the consent of the creditors before treating as preferential claims of the nature already mentioned. Queensland.— The Winding Up Act, 1892, Section 21, gives those debts which rank as preferential in Bankruptcy, a priority in the wind- ing up of a company. For such preferential claims, reference should be made to Chapter XVIII., dealing with Statements of Affairs- An Amending Act, 1909, gives such claims a priority over a floating charge on the assets of a company secured by an issue of debentures. Liquidators' expenses and remuneration have, of course, priority over all other claims. Victoria.— (a) Costs and charges of winding up and liquidator's re- muneration. (b) 1. The wages or salary of any clerk or servant in respect or services rendered to the company during four months before the commencement of winding up, and not ex- ceeding £50- 2. The wages of any workman or laborer in respect of services rendered to the company during four month? before the above mentioned date. The wages and salaries above mentioned rank equally amongst themselves and are a first charge on all the property of the company, notwithstanding such pro- perty be mortgaged or charged to j-cure payment of any moneys, or that there be any lien on the same. Such debts also have priority over the claims of the holders of debentures under any floating charge. (c) In the eve^t of a landlord or other person disti-aining or having distrained on any goods or eff'ects of the companv within three months before the date of a winding up order, the debts to which priority is given, as stated above, shall be a first charge on the goods or effects so distrained or on the proceeds of the sale thereof. Provided that in respect of any money paid under any such charge, the landlord or other person shall have the same rights of priority as the person to whom the payment is made. 332 LIQUIDATOR'S ACCOUNTS. South and Western Australia. — The costs, charges and expenses of winding up, together with the Hquidator's remuneration, are a first charge on the estate. The Acts of these States provide for the following preferential payments; — (a) The wages or salary of any ckrk or servant in respect of services rendered to the company during four months be- fore the commencement of winding up, but not exceeding £50. (b) The wages due to any workman or laborer in respect of services rendered during two months before commencement of winding up, but not exceeding £25. Provided that where any laborer in husbandry has entered into a contract for the payment of a portion of his wages in a lump sum at the end of the year he shall have priority for the whole of such sum, or such part thereof in proportion to the period expired as the Court may decide to be due. It should be noted that in the event of there being any surplus after payment of the amounts due to the creditors of a company, such creditors are to receive interest at the rates undermentioned on the amounts due to them before any such surplus is divided amongst the shareholders. In South Australia, if interest had been arranged for between the company and the creditor, he is entitled to receive 5 % . If not arranged for, the creditor is entitled to receive 4 % . In Western Australia the rates are respectively 6 % and 5 %. Tasmania.— (1) Costs and expenses of winding up. (2) (a) The wages or Salary of any clerk or servant in respect of ser\-ices rendered to the Company during four months before the commencement of the winding up, but not exceedmg £100. (b) The wages of any workman or labourer, whether for time or piecework, in respect of services rendered to thi; Company during four months before the commencement of the winding up. (c) Amounts not exceeding in any one case £100 due in respect of compensation under the Workmen's Com- pensation Act, 1918, except in those cases where the Company is being wound up voluntarily for the purpose of reconstruction or amalgamation. The debts in paragraph (2i above rank ecjually among themselves, and have priority over the claims of Debenture holders under any floating charge in those cases where the assets available for the payment of general creditors are insufficient to meet th&m. New Zealand. — (a) Costs, expenses of winding up, and the liquidator's remun- eration. (b) (1) The wages or salaries due to any clerk or servant for services rendered during the four months prior to the date of commencement of winding up, but not exceed- ing £50. (2) The wages due to any laborer or workman during two months prior to the date of commencement of winding up. The wages and salaries in paragraphs (1) and (2) above rank equally amongst themselves. 333 W AUSTRALASIAN ADVANCED ACCOUNTANCY. Adjustment of Rights of Contributories.— Where there is any surphis alter tlie payment of the amounts due to credi- tors the memorandum and articles of association of the com- pany will require to be looked into to see whecher any provi- sion is made as to the distribution of such surplus and whether any class of shareholders has any special rights or privileges. The preference shareholders may have a preferential claim for repayment of capital but not necessarily so. Unless there is special provision to that effect in the memorandum or articles, preference shareholders have no p|riority over ordin- ary shareholders in the distribution. Where they have a prior claim on winding-up, any loss on realisation will have to be borne, in the first place, by the other shareholders, but pre- ference shareholders will not be entitled to any arrears of dividend even if there is a profit on realisation, unless the articles provide that they are entitled to be paid out of profits whether dividends are declared or not. Subject to any .provision in the articles governing the aistribution of any surplus after the payment of creditors, and subject also to any clause giving preference shareholders a preference as to capital, all losses must be borne by the dif- ferent classes of shareholders in proportion to the nominal capital represented by the shares held by each class, and not in proportion to the amount ipaid on those shares. Thus, if a company has two classes of shares— 10.000 "A" ordinary shares of the nominal value of £1 each, fully paid up. and 10,000 "B" ordinary shares of £1 each, paid up to 10s. per share, any loss on realisation would fall equally on the two classes of shareholders. In some cases it may be found necessary to make a call on one class of shareholders in order to enable the amount due to another class to be paid off. Suppose, for example, the nominal capital of a company is 40,000 shares of £l each, divided into two classes of ordinary shares, "A" and "B," of 20,000 shares each. The "A" shares are paid up to 15s. per share, and the "B" shares to 5s. per share. There is a loss on realisation of £15,000, and this has to be borne equally by the two classes of shareholders^. e., the "A" shareholders lose £7500 and the "B" shareholders an equal amount Under such circumstances, the "B" shareholders will have to rjav a call of 2s. Gd. per share to make their loss equal to the ''A" shareholders', and to provide the necessary cash to pay the "A" shareholders the amount due to them. If the shares in the different classes are not of the same nominal values, the loss must be borne by the different classes in proportion to the total nominal vahie of the shares in each class. Suppose a company has issued shares as follows: — U4 LIQUIDATOR'S ACCOUNTS. 20 000 Preference Shares (not pref. as to Capital) of £10 each fully paid £200.000 20,000 "A" Ordinary Shares of £5 each, paid up to £3 per share 60,000 20,000 "B" Ordinary Shares of £5 each, paid up to £2 per share 40,000 Total Paid-up Capital £300,000 After paying all creditors and the costs of liquidation, the liquidator has £360,000 available for distribution. It is clear, therefore, that there must have been a loss of £40,000, and this loss must be borne by the shareholders. The nominal values of the different classes of shares issued are: — Prefer- ence, £200,000; "A" ordinary, £100,000; "B" ordinary, £100,000; and the above loss must be borne in those pro- portions. The credit side of the Cash Book, showing the distribution, would appear as under: — tJy Pref. Shareholders; — 20,000 Shares of £10, fully paid £200,000 Less i loss on realisation 20,000 , £180,000 , "A" Ordinary Shareholders: — 20,000 Shares paid to £3 60,000 Less i loss on realisation 10,000 50,000 „ "B" Ordinary Shareholders 20,000 Shares paid to £2 40,000 Less 4 loss on realisation 10,000 30,000 £260,000 Summarising the above information, the following points ;-,hould be noted : — (a) Preference shareholders have no preference claim as regards capital unless there is provision in the memorandum or articles to that effect. (b) Subject to any provision in the articles to the con- trary all shareholders have to stand any loss on realisation in proportion to the amount of the nominal value of the shares held by them respectively — i.e., if the shares are of the same nominal amount each shareholder must lose the same amount per share. Before making any distribution amongst the shareholders the liquidator must take every care to ensure that all creditors' claims have been discharged, and he should retain and hold available any amounts due by the company for income-ta.x for the previous or current year. Where there is a surplus after paying off creditors and repaying the "amount due to shareholders in respect of capital, 335 AUSTRALASIAN ADVANCED ACCOUNTANCY. or, in other words, where there is a proht on realisation, this amount is, subject to any provision in the articles to the con- trary, divisible amongst the shareholders m proportion to the nominal value of the shares held by them respectively and not in proportion to the amount paid up on such shares. Calls Paid in Advance. — Where certain of the share- holders have made payments in advance of calls, any such advances, together with interest due thereon, are repayable before ordinary capital is paid to the shareholders. They do not, however, rank in competition with the claims of outside creditors. Statement of Affairs. — In the case of a compulsory wind- mg-up in Tasmania and Victoria the Act requires that the directors and secretary of the company shall supply to the liquidator a statement of affairs of the company within 14 days after the date of the order. This statement is to be in the prescribed form, but as this follows very closely the form of Statement of Affairs illustrated at the end of Chapter 18, it is not thought necessary to duplicate it here. The only 'jifTerence is that any calls in arrears will be shown on the assets side, and there will be stated at the foot of the state- ment the amount of uncalled capital which is available to meet the deficiency as showm in the statement. Statement of Receipts and Payments. — The liquidator is required to present to the shareholders a statement showing his dealings with the estate and the statement presented by him will usually take the form shown herew^ith. LIQUIDATOR'S ACCOUNTS. ■g CO CO lO H W < § i cc 1 H i, s o W • OS CO S:::2 o , . - - CQ " - " t 8; p:^ wo T3oO ftr-H S So 05 coo .1- T3 -d.S -am o o O to ° O Q n!«rt O 5- . i»^ t^' en 2^ o « o J:s2^ ^ o< 3 - StfS'J ii CO ^^ 4) >i 337 AUSTRALASIAN ADVANCED ACCOUNTANCY. EXAMPLE. — The Papuan Company, Ltd., went into voluntary liquidation, with liabilities amounting to £30,000, and assets which eventually realised £178,000. The capital of the company consisted of 10,000 preference shares of £10 each, of which £7 per share was called and paid up. The holders of 8000 shares had, however, paid up the full amount in advance of calls. There were also 10,000 ordinary shares of £10 each, on which £9 per share had been called. Holders of 2000 shares had only paid £8 per share, whilst holders of 4000 shares had paid up the full amount in advance of calls. Interest on calls paid in advance was due. but not included in the above liabilities: — Preference shareholders. £6.30; ordin- ary, £70. Assuming that the preference shares have no prior rights as to capital,' show in the form of a liquidator's account of receipts and payments how you would divide the available balance among- the shareholders, assuming that the costs ot winding-u!p amounted to £2000, liquidator's remuneration £900, and that the calls in arrears are duly collected. THE PAPUAN COMPANY, LIMITED. LIQUIDATOR'S STATEMENT OF RECEIPTS AND PAYMENTS, From 4th June, 1920, to 8th March, 1921. RECEIPTS PAYMENTS. To Realisation of Assets. .£178,000 By Expenses of Winding-up £2.000 Calls in arrears collected 2,000 „ Liquidator s remunera- tion ypointed for the ipurpose The Companies Act provides that a com- pany being wound up can. by special resolution, authorise the liquidator to accept as full or part payment for the assets of the company shares, debentures, etc.. in some other com- pany. The selling company can arrange any terms it pleases with the purchasing company. 340 RECONSTRUCTION AND AMALGAMATION. As an illustration, smpposc a company, having' a capit..l of. say, 1000 shares, paid up to £10 each, desires to reduce its capital without obtaining- the consent of the Court. It could pass a special resolution requiring- the company to be wound up voluntarily, appoint a liquidator, and authorise such liqui- dator to accept 1000 shares, paid up to £5 each, in +he nev/ comipany (having as its members the members of the old company) as payment for the assets taken over. Similar pro- cedure could be adopted if a company wished to conduct some business totally different from that in which it was engaged. A new company could be formed, with a suitable "Objects" clause in its memorandum, and the winding-up and sale of the old to the new company arranged. Where a company, in course of winding-up, passes a special resolution authorising the liquidator to acceipt the shares, etc., of another company as full or part consideration for its assets, this resolution is binding on all the members of the company. It is provided, however, that any member of such company, who has not voted in favor of the special reso- lution at either meeting, can, by giving notice in writing to the liquidator within seven days after the second meeting, ex- pressing his dissent from the resolution, require the liquidator either to purchase his shares in the company or refrain from carrying the resolution into effect. If the shareholder and liquidator cannot agree as to the value of the shares, the matter must be referred to arbitration in order to have the price fixed. It is not uncommon to see included in the articles of association of companies a clause purporting to take away from the members of such companies the rights given to them by the Act as above-mentioned, and substituting other rights therefor. It has been decided that such a clause is ultra vires as the provisions of the Act cannot be over-ridden by a com- pany's articles. (Bisgood v. Henderson's Transvaal Estates (1908), 1 Ch. at page 758.) The agreement for sale between the old and the new company usually provides that the new company is to take over all the property of the old company. Where such is the case the new company will have to (provide the money neces- sary to pay dissenting shareholders in the old company. The exact position with regard to such shareholders will naturally depend upon the terms of the agreement between the two companies. If any shareholders of the old company who have failed to give the required notice of dissent to the liquidator do not take up the shares in the new company to which they are en- 341 AUSTRALASIAN ADVANCED ACCOUNTANCY. titled within the time prescribed (and this may often haippen where the shares are issued as only partly paid up), they cannot be compelled to accept them, but any such shares will then, in the absence of a contrary provision, be at the disposal of the old company or its liquidator. The scheme of recon- struction or amalgamation may, however, provide that such shares are to be at the disposal of the new company, or that they shall be sold and the iproceeds divided amongst the members who refused them. Amalgamations. — This is the procedure by which two or more companies combine their businesses for the purpose of enabling them to be conducted under the one management. The amalgamation may be effected either by one of the com- panies taking over the other, or others, or by the formation of a new company to take over all the companies. In either case the procedure will be the same. The companies being taken over must be wound up and a special resolution paL.>sed authorising the liquidator to accept the shares, etc., of another company as consideration for the sale. The whole procedure will be similar to that adopted in the case of a reconstruction, and the explanation supplied under that heading applies here. It should be noted, however, that, in the case of a reconstruc- tion or amalgamation the creditors of the company or com- panies winding-up should either be ipaid off or their agree- ment to accept the new company as a debtor in place of the old obtained. Entries in the Books. — As the entries in the books are practically tlie same in the case of either a reconstruction or an amalgamation there is no necessity to deal with this por- tion of the subject separately. The company or companies in course of winding-up will treat the transaction as a sale, and the company taking over the other comipany or companies as a purchase. Taking, first of all, the selling company, the entries will be the same as in an ordinary realisation. The procedure may be briefly summarised as under: — (1) Transfer all assets to the debit of Realisation account. (2) Credit Realisation account and debit appropriate accounts to represent the cash, shares, etc., received in full payment for the assets. (3) Where the purchasing company takes over the ha- bilities of the company this will form part of the con- sideration for the purchase and the accounts repre- senting the liabilities will, therefore, bo transferred to the credit of Realisation account. 342 RECONSTRUCTION AND AMALGAMATION. (4) Transfer the balance of Realisation account to Distri- bution account. (5) Transfer the balances of all accounts representing moneys due to shareholders to Distribution account. These accounts will include Capital, Reserves, Profit and Loss account, etc. (6) Pay off the creditors. Where the purchasing com- pany does not take over the liabilities, these will, of course, have to be discharged by the company wmd- ing-up. (7) It will then be found that there will be just sufficient cash, shares, etc., to pay to the shareholders the amount due to them as shown by the Distribution account. This balance will be distributed by the liquidator according to the regulations of the -om- pany. In the books of the purchasing comipany the entries are of a comparatively simple nature. The vendor company will be credited and the various asset accounts debited with the values of the assets taken over. Any liabilities taken over will be debited to the vendor, and suitable accounts credited. Payment will then be made to the vendor of the agreed amount in shares, cash, etc. Where the payment exceeds the difference between the assets and liabilities taken over the ad- ditional payment will be for goodwill, and an entry debiting Goodwill account and crediting the vendor will be required to adjust. Where the payment is less than the difference be- tween the assets and liabilities, the amount of the credit bal- ance in the Vendor's account will be in the nature of a profit to the purchasing company. The exact nature ot this profit will depend uipon circumstances. If there is any indi- cation that the assets taken over from the vendor arc not worth the values stated the credit balance in the Vendor's account will be applied towards writing these down. If the assets are worth book values the credit balance in the Ven- dor's account will be transferred to Reserve account. In some cases the profit to the -purchasing company may arise from the fact that its shares are at a premium and the vendors have accepted such at more than face value. In such a case any credit balance in the Vendor's account will repre- sent, in reality, a premium on the shares issued to them, and the amount should be transferred to Premium on Shares account. It should be noted carefully that, in the books of the verdor company, any shares received as consideration for the sale of the concern will be entered at their market value, in AUSTRALASIAN ADVANCED ACCOUNTANCY. order to show the actual financial result of the transaction. The purchasing company will, of course, put the shares through at their nominal value and any profit disclosed over the transaction will be dealt with in the manner already cxiplained. Where, in the case of an amalgamation, the purchasing company is taking over two or more other .companies, sepa- rate accounts will be opened for the respective companies, but otherwise the procedure is the same. The following examples and specimen solutions should make the necessary book entries clear : — EXAMPLE. — The following are Balance Sheets, on 31st December, 1921, of the "O" and "P" companies respec- tively : — •'O" COMPANY, LTD. LIABILITIES. ASSETS. Nominal Capital: 200,000 shares Freehold Premises £80,000 of £1 each £200,000 Machinery, etc 40,000 Less Unallotted ^0,000 Sundry Debtors 20,000 £150,000 Stock 43,000 Debentures 16,000 Cash 3,000 Creditors 20,000 £1S6,'JOO £186,000 "P" COMPANY, LTD. LIABILITIES. ASSETS Nominal Capital: 10,000 shares Property £13,000 of £2 each fully paid . . £20,000 Plant and Machinery .... 10,000 Debentures 20,000 Debtors 11,000 Sundry Creditors 12,000 Stock 9,000 Bank 9,000 £52,000 £52,000 It is agreed on this date that the companies shall amal- gamate on the following basis — the creditors of the "P" com- pany having agreed to the proposal. The "O" company to take over the business of the "P" company as a going concern on the basis of the above Balance Sheet, the former company to pay the cost of the amalgamation and to issue to the holder of each share in the "P" company four shares of £1 each, credited as paid up to IHs. per share. The costs of amalgamation amoimtcd to £1300. Raise accounts showing the closing of the "P" company's books, and set out the necessary Journal entries in the books ot the "O" comipany to record the transaction. 344 RECONSTRUCTION AND AMALGAMATION, "P" COMPANY'S BOOKS. REALISATION ACCOUNT. To Sundry Assets:— By Debentures Account Property £13,000 (taken over by "O" Plant and Machinery .. 10,000 Company) £20,000 Debtors 11,000 „ Sundry Creditors (ditto) 12,000 Stock 9,000 ,, Shares in "O" Company Bank 9,000 (40,000 shares paid up „ Profit on Realisation to to 15/) 30,000 Distribution Account . . 10,000 £62,000 £62,000 SHARES IN "O" CO.'S ACCOUNT. To Realisation Account ..£30,000 By Distribution Account ..£30,000 DISTRIBUTION ACCOUNT. To Shares in "O" Co. dis- By Profit on Realisation ..£10,000 tributed among Sharehold- Nominal Capital Account ers. 4 shares, paid up to (fully paid) 20,0(X) 15s. per share issued for each share in this Co. ..£30,000 £30,000 £30,000 "O" COMPANY'S BOOKS. JOURNAL ENTRIES. Sundry Assets: — Dr. Cr. Property Account Dr. Plant and Machinery Sundry Debtors Account Stock-in-trade Account Bank Account Goodwill Account To "P" Co. (Vendor's) Account £62,000 (Being Assets of above Co. taken over as per contract.) Dr. Dr. £13,000 Dr. 10,000 Dr. 11.000 Dr. 9,000 Dr. 9,000 Dr. 10,000 "P" Co. (Vendor's) Account Dr. 32,000 To Sundry Liabilities: — Debentures Account 20,000 Sundry Creditors Account 12,000 (Being Liabilities of the above Co. taken over as per contract.) Uncalled Capital Account Dr. 40,000 To Unallotted Shares Account 40,000 (Being 40,000 shares of £1 each taken bv Share- holders of "P" Co.) •P" Co. (Vendor's) Account Dr. 30,000 To Uncalled Capital Account 30,000 (Being above shares issued as paid up to 15s. per share as consideration for transfer of business. Amalgamation Costs Account Dr. 1,300 To Cash Account 1,300 345 AUSTRALASIAN ADVANCED ACCOUNTANCY. EXAMPLE.— The liquidator of the A.B. Company, Ltd., prepared a scheme of reconstruction, based on the book values as at 31st December, 11)19 (particulars of which are set out at the foot), which was submitted to and approved by share- holders and creditors. Dates may be disregarded. The following is an outline of the reconstruction scheme adopted : — (a) New company to be formed under the style oi the A.B. Company (1920), Limited, and to acquire the assets and goodwill of the old company, on the 1 asis of the book values. (b) Nominal capital, £50,000 — viz., ordinary shares, 33.333 shares at 10s., £16,666; (preference shares, 33^334 at £1, £33,334. (c) For each share in the old company the holders to apply for £1 preference share in the new com- pany, and to receive also (as nearly as possible) one ordinary share, credited as fully paid. N.B — 33,334 preference shares were allotted and paid for, and 33,332 ordinary shares were dis- tributed. (d) Unsecured creditors of the old company have offered to them by the new company a composition of 10s in the £, ipayable on the formation of the new company, or a debenture for the full amount of their debts, bearing interest at 5 per cent., and repayable in ten years. One half in value accepted the cash composition and the other half agreed to take debentures. (c) The lease of the premises to be taken over by the new comi)any with the consent of the landlord. (f) The liquidation and other charges amountinLT to £500 and all preferential claims to be satii,fied by the new company, to whom the liquidator will iianci over all assets, none of which, with the exception of the calls in arrears (which have been paid), liave been realised. You are requested to draft the Journal entries necessary to open the books of the new com/pany, recording the allot- ment of capital, and to compile a Balance Sheet, setting forth the i)Ositir)n as at the date of the allotnient of the shaies 346 RECONSTRUCTION AND AMALGAMATION. PARTICULARS OF ASSETS AND LIABILITIES. Furniture and Plant £6,174 Capital Stock 14,305 Creditors- fas ,334 Debtors 3,384 for Rent 28 Calls in Arrears 216 Cash 340 Goodwill 9,642 Preliminary Expenses . . . . 2,296 Leasehold Premises 4,224 Profit and Loss 18,523 £59.132 Unsecured 24.082 Preferential — For Wages. Rates, and Taxes '. . .. 1.716 £59,132 SOLUTION. JOURNAL ENTRIES. Lnallotted Ordinary Shares A/c .. .. Dr. , Preference „ „ .... Dr. , To Nominal Capital A/c £16.666 33,334 £50,000 Furniture and Plant A/c Dr. Stock Dr. Debtors Dr. for Rent Dr. Cash (Incl. Calls realised) Dr. Goodwill Dr. Leasehold Premises Dr. To Vendor Co.'s A/c 6,174 14,305 3,384 28 556 9,642 4,224 ,313 Vendor Co. A/c Dr. .. 25,798 To Creditors unsecured 24,082 Preferential Crs. Unsecured Creditors A/c . . To Debentures A/c Cash Reserve A/c . . . Dr. 24,082 1,716 12,041 6,020 10 6,020 10 V^'endors' A/c To Unallotted Ord. Shares A/c Cash A/c Dr. 16,667 Reserve A/c To Vendors' A/c Dr. ,152 Preliminary E.xpenses A/c Dr. Preferential Creditors A/c To Cash 500 1,716 Cash A/c To Unallotted Pref. Shares A/c. Dr. 33,334 16,666 1 4,152 2,216 33,334 To Vendors' Balance Pref. Share Calls CASH ACCOUNT. , .. £556 By Vendors (2 shares .. 33,334 short issued) .. £1 Unsecured Crs. . . 6,020 10 Preliminary Expenses 500 Preferential Crs. . . 1,716 Balance 25,652 lO £33,890 347 AU«^TR ALASIAN ADVANCED ACCOUNTANCY. BALANCE SHEET. LIABILITIES. ASSETS. Preference Capital ..£33,334 Leasehold £4,224 Ordinary Capital ... 16,666 Goodwill 9,642 Debentures 12,041 Furniture and Plant. . 6,174 Reserve A/c 1,868 10 Sundry Debtors .. .. 3,412 Preliminary Expenses 500 Cash 2.5,6.52 10 Stock 14.305 £63,909 10 £63.909 10 ]sjote, — The preliminary expenses should be written otr against the reserve, as it creates rather an absurd position to include such an item as an asset when a reserve appears on the other side exceeding the amount. The balance of Reserve account should then be applied towards writing down the goodwill. EXAMPLE: (a) The following shows the Assets and Liabilities ot the Bank of the Isles as disclosed on the 31st August, l!)-^0: Capital £1,000,000 Notes in circulation 323.781 Bills in circulation 286,890 11 Notes and Bills of other banks 91,929 18 Deposits and other liabilities 10.540,679 12 Coin and bullion in hand 1,426,400 5 Reserve 45,000 Government securities 581,122 19 Bills discounted and all debts due to the Bank (after making provision for bad and doubtful debts) .... 9.808,194 6 Bank premises 312.772 Liability of customers on letters of credit, as per contra 156,244 5 Draw Balance Sheet, supplying Profit and Loss account, balance of which is not given. (b) There was subsequently a run on the Bank, and on the 24th September, 1920. the assets and liabilities are taken over by another bank, as at that datr, payment to be made in cash on completion of \ alu;i- tion of assets. A fresh balance shows the assets to have been reduced by the following figures between 31st August and 21th September: Coin C327.491 9 9 Government securities 241,326 6 10 Bills discounted and all debts due to bank. . 82,505 11 6 The net profits on current business for the 21 davs had been £3,271 Is. 8d. 348 LIQUIDATOR'S ACCOUNTS. The Government securities were valued, and showed a surplus of £2.104 10s. lOd. An allowance was made by the Bank of the Isles, in lieu of valuations, of 10 per cent, on the amount of "Bills dis- counted and all debts due to bank" and of "Bank premises." The internal reserve for bad and doubtful debts was £700,000. Draw up a statement showing the amount returnable to the shareholders of the Bank of the Isles, after paying costs extending to £5271 4s. 5d. SOLUTION (A). BANK OF THE ISLES. BALANCE SHEET AS AT 31st AUGUST, 1920. LIABILITIES. ASSETS. Capital £1,000,000 Coin and Bullion. .£1,426,400 5 Reserve 45,000 Notes and Bills of Notes in Circulation 323,781 other Banks.. .. 91,929 18 Bills in Circulation 286,890 11 Government Securi- Deposits and other ties 581,122 19 Liabilities 10,540,679 12 Bills Discounted, etc. 9,808,194 6 Outstanding Letters Bank Premises . . 312,772 of Credit as per Liability of Custom- contra 156,244 5 ers on Letters of Surplus, representing Credit as per balance of Profit contra 156,244 5 and Loss Account 24,068 5 £12,376,663 13 £12,376,663 13 SOLUTION (B). The following statement shows the movements in the assets and liabilities between the 31st August and the 24th September. These entries would De shown in the accounts representing the various assets and liabilities, but for the pur- pose of saving space these are not given and the statement referred to shows the balances of such assets and liabilities as have been altered by the transactions referred to. Coin £1.426,400 5 less £327,491 9 9 = £1,098,908 15 3 Government Secur- ities 581,122 19 less 241,326 6 10 = 339,796 12 2 Bills Discounted 9,808,194 6 Add Secret Reserve Tess 82,505 11 6=10,425,688 14 6 for doubtful debts 700,000 Reduction in Assets 651,323 8 1 Plus Profits 3,271 1 8 which now = 27,339 6 8 Total reduction in Liabilities 6.54,.594 9 9 which now = 9.8S6.085 2 3 AUSTRALASIAN ADVANCED ACCOUNTANCY. It will be noted from the above that the secret reserve has been added to Hills Discounted and Other Debts. As this is a reserve for bad and doubtful debts, in all probability, the £700,000 has been deducted from this asset in the Bal- ance Sheet. The making- of profits amounting to £3371 Is. 8d. will cause either an increase of the assets or a decrease in the liabilities. Taken either way, the result will be the same. In this particular case, it is more convenient to assume that the profits have been utilised in a further reduction of the liabilities. The Balance Sheet of the Bank of the Isles, after the above transactions have been recorded, will appear as under : BALANCE SHEET AS AT 24th SEPTEMBER, 1920. LIABILITIES. ASSETS. Capital £1,000,000 Coin and Bullion . .£1,098,908 15 3 Reserve 45,000 Notes and Bills of Reserve for Bad & other Banks .... 91,929 18 Doubtful Debts 700,000 Government S^curi- Notes in Circulation 323,781 ties 339.796 12 2 Bills in Circulation 286,890 11 Bills Discounted, Deposits and other etc 10,425,688 14 5 Liabilities 9,886,085 2 3 Bank Premises .. 312,772 Profit and Loss Ac- count 27,339 6 8 £12,269,095 19 11 £12,269,095 19 11 The contin.G:ent liability under Letters of Credit and the corresponding asset have been omitted from the Balance Sheet, as these items would not aippear in the P)ank's ledger. Accounts Showing Closing Entries in the Books of the Bank of the Isles. REALISATION ACCOUNT To Notes and Bills of other Banks £91,929 18 „ Government Se- curities .... 339,796 12 2 „ Bills Discounted and other debts 10,425,688 14 6 „ Bank Premises 312,772 „ Cash a/c — Costs of Realisation . . 5,271 4 5 By Pvirchasing Bank:-- ., Notes and Bills. etc £91,929 IS 'J „ Governm.ent Se- curities at re- valuation .... 341.901 3 , Bills Discounted less 10 ^r-. •• 9,383,119 17 „ Bank Premises, less 10 % .... 281,494 16 ,, Loss on Realis- ation 1.077,012 15 1 £11.175.458 9 1 £11,175.458 9 1 350 LIQUIDATOR'S ACCOUNTS. Tile above account is credited with the valuations at which the purchasiui;' bank takes over these assets, the cor- responding debit entry being made in the purchasing bank's account The purchasing bank also takes over the liabilities and the balances of those accounts will be transferred to the credit of the purchasing bank. It will be noticed that Coin and Bullion account has not been transferred to the debit ot Realisation account. If this asset were taken over ijy the purchasing bank it would involve a repayment to the Bank of the Isles, and the more common-sense course is for the Bank of the Isles to pa}- to the purchasing bank in cash the amount by which the liabilities it takes over exceed the agreed \alue of the assets. DISTRIBUTION ACCOUNT. To Realisation A/c, being loss on Realisation of Assets £1,077,012 15 „ Cash distributed amongst share- holders .... 695,326 11 By Capital A/c ..£1,000,000 „ Reserve A/c . . 45,000 ,, Reser\-e for Doubt ful Debts .... 700,000 Profit and Loss A/c 27,339 6 8 £1,772,339 6 8 £1,772,339 6 8 To Balance CASH ACCOUNT. £1,098,908 15 3 By Costs of Realisation £5,271 4 „ Purchasing Bank 398,310 19 „ Cash distributed amongst share- holders 695,326 11 £1,098,908 15 3 £1,098,908 15 3 PURCHASING BANK ACCOUNT. To Sundry Assets taken over — Notes, etc £91,929 18 Government Se- curities .... 341,901 3 Bills Discounted, etc 9,383,119 17 Bank Premises 281.494 16 Cpsh 398,310 19 3 By Sundry Liabilities taken over — Notes in Circula- tion £323,781 Bills in Circula- tion 286,890 11 Deposits, etc. . . 9,886,085 2 3 £10,496,756 13 3 £10,496,756 13 3 351 CHAPTER XXVI. PERCENTAGE STATEMENTS. The preparation of Percentage Statements is a compara- tively modern feature of Accountancy ; in fact, it may be said to date from the adoption of present-day methods of costing and is a necessary adjunct of a good costing system. The value of Percentage Statements is that it allows of a useful comparison being made l)et\veen one financial period and another, not only as regards the net result of a period, but also in respect of the relative costs under the various headings of expenditure. It is also useful in a lesser degree as ailord- ing a basis upon which the results of one business may be compared with those of another. The advantage of the first of these applications is, for example, that a manufacturer may see whether or not the cost of output under the heading of wages, or any other expenditure, is increasing or decreasing. If he sees that in 1919 the percentage of his wages to the factory output was 34.18 per cent., whilst in 1920 it is -41.23 per cent., he is put on inquiry as to the reason for this in- crease. The importance of the matter will be seen when it is pointed out that this increase may be caused by — (1) Errors in costing. (2) General laxity in factory management. (3) h^aud in the wages sheets. One of the most practical features of the Percentage sys- tem is that it will often reveal frauds that defy every other practical means of checking, ])rovided, of course, the fraud is extensive enough to reveal itself in an increase in the per- centage of cost. Taking, for example, the i)ayinent of wages, a smart cashier or foreman, wlio makes himself familiar with the method adopted of checking the payments, both v\ the office and by the Auditor, might successfully put some fraudu- lent scheme into operation for his own benefit. This is not by any means an unheard-of proceeding. No system of check yet devised has proved successful in preventing fraud, the most tliat can \.v dnne is to I'usure that tlie fraud will be dis- 352 PERCENTAGE STATEMENTS. covered before it reaches serious dimensions. The actual scheme of fraud may be ingenious enough to defeat every ordinary system of checking, but if a good system of per- centage calculations is in vogue it is almost certain to be dis- covered thereby if it becomes really serious. The second advantage claimed for the Percentage system, viz., that of enabling one trader to compare his business with other businesses of a similar nature, is one which is perhaps not so likely to be availed of, seeing that it is difficult for one manufacturer to obtain the trading accounts of other busi- nesses. Where, however, such information can be obtained he can very usefully compare his percentage of cost with those of the businesses in question. Tt has already been pointed out that, in commerce, it is an invariable rule to calculate (percentages of profit on the basis of sales — e.g., 25 per cent, gross profit means that there is £25 profit on the sale of £100, not on a sale of £125. It will be understood, therefore, that in the proportion of state- ments such as are described herein the sales will always re- present 100 per cent. The showing of percentages appears to greatest advan- tage in the Revenue account of a non-trading con?ern es- pecially where the whole of the Revenue account is shown in one division, not in two or more, and the items on the debit side account for the whole of the credit entry, which repre- sents 100 iper cent. This will be seen by reference to the Revenue account of an Opera House company, such as is shown in the following statement : — REVENUE ACCOUNT OF THE OPERA HOUSE COMPANY. LTD For Year ending 3lst March, 1920. Dr. % £ s. d. Hv Rents .. .. 100 3310 9 8 % £ s. d. To Interest . . . . 3.50 115 16 3 Insurance 8.46 280 General Charges 6.77 223 13 4 Directors' Fees 3.17 105 City Rates . . 5.82 192 14 10 Alterations and Improvements, Opera House 9.70 321 Secy's Salary 2.53 84 10 Custodian's Sal. 3.92 130 Balance of Net Revenue 56.13 1857 15 3 100% £3310 9 8 100% £3310 9 8 In showing the percentage in the ordinary accounts of a manufacttu'ing concern, comprising Trading account and Pro- fit and Toss account a difficulty arises in that one of the con- 353 AUSTRALASIAN ADVANCED ACCOUNTANCY. stituent elements of the sales is the stock used up. This does not appear in one sum on the debit side, but is the difference between the stock at the beginning and the stock at the end of the period. If the stock at the end is greater than at the beginning, the position is that the whole of the purchases, as shown by the debit side of the Trading account, have not entered into sales. This is often ignored, and ^he purchases, wages, and other costs of production only are dealt with, the percentages in connection with materials utilised being omitted. The percentage of gross profit is then carried down to the Profit and Loss account on the credit side, and the various items en the debit side show the distribution of the gross profit and. consequently, the ratio of each item in the Profit and Loss account to sales. The following examj)le will make this ])rocedure clear: — TRADING ACCOUNT. %on Sales. £ % on Sales. £ To Stock at 1/1/20 . Purchases . . . . Wages Cartage Inward . Gross Profit .. . 9,450 By Saks 18.22 3.080 Stock at . 12.25 2.070 . .25 40 . 47.69 8.060 31/ 12/20 .. 100 16.900 5.800 £22,700 £22,700 Tt will be noticed that tlic percentages in the Trading account are not totalled, seeing that it is impossible to make them total 100 per cent., as they are not all stated on the debit side. The sales (100 per cent.) are made up. not only of the wages, purchases, etc., but also of £3050 of stock used up, this being the decrease in stock for the iperiod. In the alter- native method shown later this amount of stock has been brought into account and the percentage columns on both sides of the Trading account can therefi^re be totalled. PROFIT AND LOSS ACCOUNT. % f % £ To Rent Rates and Taxes. . Salaries Trade Expen.ses . . B;id Debts Discounts . . . . Cartage Net Profit .92 1.56 1.20 204 3.55 600 2.66 4.50 .83 140 . 1.18 200 .35 60 37 . 00 62.50 Rv Gross Prf .fit . .. 47.69 S060 47.69 £8060 47.69 £8060 354 PERCENTAGE STATEMENTS. By setting out the Trading account in a slightly different form from that commonly in use, the complete percentages can be shown in the Trading account, and, where it is desired to supply accounts showing such percentages, this form ot presenting the Trading account is recommended: — FORM OF TRADING A/C TO FACILITATE PERCENTAGE CALCULATIONS. To vStock. 1/1/20 9.450 By Sales 100 16,900 Purcha.se.<^ 3.080 12,530 Less Stock at 31/12/20 5,800 Materials used 39.83 6,730 Wages 12.25 2,070 Cartage Inwards 23 40 Gross Profit 47.69 8,060 100.00 £16.900 100 £16,900 Percentage of Cost per Unit of Output. — In most busi- nesses the percentages are calculated on the amount of sales, that amount being the unit of calculation. In some under- takings, however, the percentages are most useful if the basis adopted is the unit of production. In a bacon factory, for example, the percentage of cost "per pig" is usually adopted as being the most convenient unit of calculation. In a gas company the unit adopted is usually a given number of cubic feet of gas sold, whilst in the case of an electric lighting company, the charge for the sale of current is made on the basis of what such company terms a "unit." This point is perhaps sufficiently dealt with by the foregoing explanations and the following example of the Revenue account ^i an electric lighting company, showing percentage calculations in parallel' columns, those in one column being the percentage of cost, based on the amount of sales, and, in the othei. the percentage of cost based on the number of units sold. 355 AUSTRALASIAN ADVANCED ACCOUNTANCY. aS -g 00 •^ o. J^ u 1^ 3^.5 ^' ^ t! .S'S ;=; D 0) '^ . ^ %on Sales . 100' >* 'Z < * Oh • § 8 is 9, G O I ^ g 3 o H w O S O 'O t^ ,-1 — < CO 00 o •- o >sJ^ ° 2 2 "^ "^ ^ ^ P a, rt ^ •^ -e c a> ^ Q ^ CHAPTER XXVII, COSTING AND COSTS ACCOUNTS. This is a subject which is receiving more attention each year and the recognition by manufacturers of the practical utility of costing systems makes it necessary that the Public Accountant should acquaint himself with the principles of costing, as he may be called upon to instal such systems in manufacturing and other businesses. Although there are numbers of excellent text books which prove of use to the ^practitioner, dealing with cost ac- counts, the average student seems to get the impression that the subject is one "compassed about with a cloud" of mys- tery. The trouble is apparently due to the fact that, in the text books referred to, the writers have selected as the basis of their explanations the costing systems connected with large businesses, and, in order to ensure that the systems de- scribed will be complete, they have had to explain the detail- ed working of such systems, with the result that the principles have necessarily become more or less obscured. To a student endeavoring to master the ^principles of such accounts ti^ere- from the effect is much the same as it would be if he essoyed to learn the principles of double-entry by studying the book- keeping system of a large banking institution. Another pitfall to the average student is the practice of describing the various methods of ascertaining costs in such a way as to give the impression that each of these methods entails the necessity of keeping a distinct set of accounts. References are frequently made to Terminal Cost accounts. Multiple Cost accounts. Process Cost accounts. Departmental Cost accounts. Output Cost accounts. Single Cost accounts, etc., but, as a matter of fact, with the exception of the first- named, none of the above methods of costing requires any separate s}stem of accounts, and to this extent the terms applied thereto are apt to be misleading. Where it is desired to keep Terminal Cost accounts so as to enable such accounts to be balanced, this necessitates the keeping of a separate Cost Ledger, but, with this exception, the whole of the information required for costing purposes can. b}' a proper arrangement of the accounts, be ascertained from the ordinary financial books in the manner explained later. It will be understood, therefore, that where the term 357 AUSTRALASIAN ADVANCED ACCOUNTANCY. "Cost Accounts" is used herein it will refer to what are com- monly known as Terminal Cost accounts. The term "cost- ini^" will he used in connection witii the ()ther methods named, as this more accurately describes their nature. To anyone possessing a working knowledge of double- entry the principles of Cost accounts should present no diffi- culty — the difficulties will arise when it is sought to apply the principles in a i)ractical manner by installing a costing system in some particular business. In addition to a know- ledge of the iprinciples this will call for the exercise of a good deal of originality on the part of the designer, as the system in no two businesses will correspond. It is hoj^ed that the method of explanation adopted, together with the examples supplied, will enable anyone who has had i\o ex- perience with this class of accounts to understand the prin- ciples. The necessary originality must, of course, be supplied by the reader as occasion demands. Object of Cost Accounts — A proper system of Cost ac- counts is a vcM-y necessary adjunct of any business where goods are manufactured or work is performed under contract and any reasonable expense incurred in connection with the keeping of such accounts will be amply repaid by the valu- able information derivable therefrom. The object of keeping these accounts is to enable the proprietor to ascertain the expenses incurred and the profits or losses made by him on the various contracts entered into. This information will serve as a guide to him when tendering or quoting for work of a similar nature in the future. Such accounts are useful in businesses of the nature of Shipbuilders, Engineers, Building Contractors. Printers, and in manufacturing concerns where goods are manufactured under contract. General Procedure. — As the object of keeping Cost ac- counts is to enable the cost of profit or loss on each con- tract to be ascertained, it is necessary that provision sliould be made for apportioning the expenses of the business over tlic \arious contracts undertaken. For this purpose a separ- ate ledger is used, called either "Contract Ledger" or "C(^st Ledger," and there will be opened therein a separate account for each contract. Against such account will be charged all ex])enses directly incurred in connection with the contract in question, such as materials and wages, and it will be credited •A'ith the contract price. At this stage the balance of the account will represent the gross profit, but, if it is desired to arrive at the amount of the net profit, it will be necessary to charge also against the account a due proportion of the whole of tiie remaining ex- 358 COSTING AND COST ACCOUNTS. penses of conducting the l)usiness. This chari^c (known as Oncost) must be made to cover every expense, with the ex- ceiption of those which are known to have been incurred on the contract itself, and which are. therefore, capable of being debited direct to the Contract account. Some trouble is usually experienced in arrivin.u'. firstly, at the most satisfactory basis upon which to charge Oncost against each contract and. secondly, in ascertaining the exact percentage to be charged when such basis is decided upon. In some" cases Oncost is charged by way of percentage on the total direct expenses already debited to the Contract ac- count. In other cases the Oncost is charged on a time basis, i.e., the remaining expenses of the business are reduced to a cost of running per hour and the Contract account is debited with a proportion of such expenses, according to the number of hours the work has taken . As a rule it will be found that the most satisfactory method is to divide the expenses under two headings, viz., Factory and Office, and to charge Factory Oncost by way of a percentage on the amount of direct wages charged against the contract. Office Oncost, which will cover the adminis- trative expenses of the business, including Office Rent. Sal- aries. Advertising. Commission, etc., will then be provided for by a percentage on the Factory Cost, i.e., the prime cost plus Factory Oncost. It will be clear, however, that no general rule can be laid down as to the basis upon which Oncost should be calculated, as, in the different classes of business, the circumstances vary. In some concerns a combination of the three methods given above is adopted, some overhead charges, such as de- preciation, being based on the wages, others, such as rent and unproductive wages, which are actually paid on a time basis, being charged according to the time occupied on the job and others, again, are charged as a percentage on the total prime cost. The object in every case is the same, viz., to arrive as accurately as possible at the correct amount to lie charged against each job for indirect expenses. Having charged the Oncost to a Contract account the balance of the account will then show the amount of net profit made or net loss incurred thereon. This result may not be strictly accurate as the wages and general expenses of a business fluctuate from time to time. The percentage of Oncost should be tested frequently and any variation prn- vided for without loss of time. From the above it will l)e seen that it is possible to keep the Contract Ledger distinct altogether from the financial 359 AUSTRALASIAN ADVANCED ACCOUNTANCY. „„,^.. COST SHEET. Date /^^UM^ »9 Ho.6/,/Z<$ Quantity <^W Size iz-e-TTix^ Nar.e^«^^ ^C^^^^-^C^.^ Q^(fP^^S(^ J Proofwanted / ^^0 U>o^ Job Wanted 2. / ■ ^ (^^ca^C^ Description ^^^reTi i' Job No. Naiurf of Work, OVERTIME Ljl^ Time Time Total Com'ced Ended. Time. 9.^^ /O.^Q '^/'^ ro. , ^A ^^ <^6 ^ -s> S" i. A TIME bs on which he is enj^aged during the day and the time spent on each. It is important that the whole of each workman's time should be accounted for and chary;ed against some particular work, and the card should be carefully inspected in order to ensure that this has been done. When leaving in the evening the workmen will hand their Daily Time Cards to the foreman of the department, who will initial them as being correct, and hand them in at the office. A drawer will be kept for these cards showing projecting guide cards inserted in the drawer in numerical order, these 36S COSTING AND COST ACCOUNTS. numbers corresponding with the check numbers of the various workmen. Each workman's card for the day will be filed in front of the corresponding guide card, and, at the end of the week, the whole of his cards can be extracted from Ihe drawer and a summary of wages prepared on another card in the manner shown below. When a large number of workmen is engaged it is advis- able, in order to save throwing too much work on to the end of the week, to transfer each workman's time daily on to Iiis Wages Summary Card, which will be filed with his Daily Time Cards in the card drawer. Job A/o J^tA Jxy jzi S^<^ JJO J24 JSk TolaZ f^ri ^/^ ^A ^A X s> ScJi X Jt ^ Mon. 3/^ <-A p nu. i,y^ ^J^A ^i s-^/ Wed, S p TXu,, •^A ^A 9 TStKxl ^ 7 V^ /6 /.^ ^o/i. 'A / ^A <^t/ -i^/ /imotunZ' y 'V- ^/L sy^ ^- ^- y- / ^-/^ The above summary illustrates how the time of each workman for the week is apportioned over <-he various jobs upon which he has been engaged, and shows also the value of that time which has to be charged against the various Job accounts in the Cost Ledger. This summary contains the total time worked and the amount payable to him for wages. The necessary particulars can be copied from these Wages Summar}^ Cards into the Wages book, and this greatly facili- tates the preparation of that book in so far as productive wages are concerned. It will be noted that where overtime 360 AUSTRALASIAN ADVANCED ACCOUNTANCY. IS worked a special memo, should be made on the card, as such time must be charged at a higher rate than ordinary. Wages Dissection Sheet. — As a general rule, it will be found too cumbersome to debit the various Job accounts in the Cost Ledger direct from the respective workmen's Wages Summary Cards, and this can be obviated by pre- paring a ruled sheet so as to provide a separate column for each job upon which work has been done during the week. The total time spent by each workman on each job can be ascertained from the Wages Summary Cards and the cost of such time can be transferred to the corresponding columns on the Wages Dissection Sheet. This enables the charge for direct wages to be made against the respective jobs in weekly totals. Stock Jobs. — Job. No. S. 964. shown on the specimen Daily Time Card and Wages Summary, is an internal order for a supply of window sashes to be manufactured for ordin- ary stock purposes. If complete Stock accounts are kept, an account will be opened for each stock job in the Cost Ledger in the usual way. If, however. Stock accounts are not kept, it will be necessary to include a column for stock jobs on the Wages Dissection Sheet, in order to enable the total wages shown thereon to be agreed with the productive wages in the Wages book. Under such circumstances it will not, of course, be necessary to post the totals of the various stock job columns to the Cost Ledger. Employees may also be frequently engaged on repair work about the premises, and, in such case, a distinctive letter and number should be given to work of this class as already explained. These would appear on the Time Cards, Wages Summary and Wages Dissection Sheet. The cost of such work in wages can be transferred by Journal entry from Wages account to Repairs account. A specimen of a Wages Dissection Sheet is shown here- with. A summary of the various columns should be pre- pared on any portion of the sheet where sufficient space is available. The various totals are posted from the summary to the debit of the various Job accounts, the folios being shown in the manner illustrated. The treatment of the total wages in the financial books will be explained later. Oncost. — The explanation up to this stage has been con- fined to the treatment of those expenses which are capable of being accurately apportioned over the various jobs, and 370 COSTING AND COST ACCOUNTS. mI \ ^ »J S l" <^ ^ -< ,t^ .i S V -( ^ > • -? J 1 V ."^t . X > -1 > Ov . ' 5j ^ ^ i hJ ; ^ s .!5 *l <<^vv in 3^-Sv-i?^r?^^^u -^ « ^ 1 L 1 t ^ "^ ^ \l 4L * "V^^ '^ '^.° S» 0.\ N ^. w Ov ^ 5J -? i CK.o ^ ? ? ^'' .« ^ K« > •< ^;^ ^ ^ ■» \ ^ . ^ W^^^ -v ». I, -vv " Mi " ^^^^^^^^ r.' ii??j?''i;?ij,? *?. ^ "■ ^ ^ 4t > t ^ -^ ^ Ov % > ..... T- ^ ^ "" C) (X V* * Jv :: ^ "^ ^ —r — 5—^:3 — ;; vT — J N* cx^ (X ■ N .'■ V .-i; I==z— -— ^ w s» ^ i_ ^ ^ -4-^ ^^ X 5a. — ■ -TT-^ "^ ^"^U^:5^ ■" — N ^ "-It! 7 . ^ J"S(N I 3J ^^ M i 1 v?; (X V~T Os VQ o :j. "^ W^ •H :^ Ov t _^ 374 COSTING AND COST ACCOUNTS. Conclusion. — In the foregoing explanation no attempt has been made to show the relation between the entries in the Cost Ledger and the financial books, and this method has been adopted for the purpose of enabling the reader to con- fine his attention to the nature and source of the various entries which must be made in the Job accounts in the Cost Ledger. The necessary procedure to enable the Cost Ledger to be balanced and reconciled with the financial books will be explained in the next chapter. Before leaving this portion of the subject, it might be useful if a summary of the pro- cedure already explained were given : — (a) In order to enable Terminal Cost accounts to be kept it is necessary that a separate account be opened for each job in the Cost Ledger. (b) Against this account must be charged the amount of wages actually paid to the workmen engaged on the job, the materials used thereon, and a charge, known as oncost, to cover the whole of the remaining ex- penses of the business. (c) The Job account will be credited with the agreed price from the Day Book. (d) The bal.ince of the account will then represent the net profit or loss and on debiting or crediting the account with this amount it will be closed ofif. (e) The amount of direct wages to be charged against each job will be ascertained by summarising and then dissecting the wages shown on the various workmen's time cards over the various jobs. (f) The cost of materials to be charged will be ascer- tained (1) from the Materials Summary, which is prepared along the same lines as the Wages Dis- section Sheet, and (2) from the Direct Purchases column of the Purchase Journal. Any returns of materials from a job will be shown in red ink on the Materials Summary, and such returns will be credited to the Job account. (g) Oncost is a charge to be made against each job to cover a proportion of all the expenses of the busi- ness, with the exception of productive wages and materials. If the factory office expenses can be kept distinct factory oncost will generally be charged by way of percentage on the direct wages charged against the job and office oncost at a percentage on 375 AUSTRALASIAN ADVANCED ACCOUNTANCY. the factory cost. If factory and office expenses can- not be kept distinct the one charge for oncost, usually based on direct wages, will be made. DEPARTMENTAL COSTING.— The object of this class of costing is to enable the cost of running and the amount of net profit earned, or net loss incurred in each department of the business to be ascertained. For this pur- pose it will be necessary to group the sales, purchases, stock, and all the running expenses of each department in a distinct set of accounts, or, if the departments are not numerous, the same information may be obtained l)y tabulating the various nominal accounts of the Ledger. This matter has already been dealt with in Chapter X\TI. on Departmental accounts, and reference may be made thereto. PROCESS COSTING.— In businesses where the com- modity manufactured is required to go through a number of distinct processes in course of manufacture it is often de- sired to ascertain the exact cost of each process. For this purpose it is necessary to treat each process as a separate department, the direct expenses incurred in connection there- with being charged against such process accounts and the general overhead expenses apportioned along the same lines as in departmental costing. It is usual also to keep a record of the number of articles dealt with, and it then becomes possible to establish a unit of production, the percentages of the various expenses being shown in the statements prepared for each process in relation to the unit of production. This matter has already been dealt with in Chapter XXVI. on Percentage Statements, and reference should be made thereto. OUTPUT COSTING.— This method is applicable more I)articularly to mining concerns, e.g.. a coal mine, where the expenses in connection with each stage of handling are kept distinct, and the percentage of cost in relation to each ton of coal raised, which is adopted as the unit of production, is shown in the periodical statements. Interim statements are frequently prepared from the books with the object of ascer- taining whether the cost at any stage is increasing or de- creasing. As this method of costing does not require any separate system of accounts it is not proposed to go further into the subject here; it is thought that anyone who has read carefully through Chapter XXVI.. dealing with Percent- age iStatemcnts, and the previous portion of this chapter will have no difficult}- in following the abo\-c explinntion. 37fi CHAPTER XXVlll. COSTS ACCOUNTS (Continued).— TREATMENT IN THE FINANCIAL BOOKS— MANUFACTURING. ACCOUNTS. JVIention has already been made of the fact that the Cost Ledger can be made to balance with an Adjustment account kept in the Private Ledger. This Adjustment account is con- ducted on exactly the same lines as a Sales Ledger Adjust- ment account, any entries passed through the Cost Ledger during the week being posted in totals to the debit or credit of the Cost Ledger Adjustment account, as the case may be. It will be as well to explain the various sources from which the necessary weekly totals are obtainable. Materials. — Direct .Purchases. — As already mentioned, any materials purchased specially for contracts will be entered through the Purchases Book and posted from there to the debit of the various Job accounts in the Cost Ledger. At the end of the v/eek the following Journal entry will be passed for the total of this column: — Cost Ledger Adjustment Account . . Dr. £ To Sundry Creditors Account £ For Goods purchased direct for Surdry Jobs for week ending — Other Materials. — In connection with materials supplied from the stores kept by the manufacturer, the total of such materials will be ascertained from the Materials Summary prepared at the end of each week. Any returns of materials from the various jobs will be shown on this summary, in, red ink, and the following Journal entries will, therefore, be necessary in connection with the totals shown thereon : — 377 AfUSTRALAS.IAN ADVANCED ACCOUNTANCY. Cost Ledger Adjustment Account . . Dr. £ To Materials Account £ For timber and materials supplied to various jobs for week ending- Materials Account Dr. £ To Cost Ledger Adjustment Account £ For timber and materials returned from various jobs for week end- ing— Wages. — The amount of wages to be debited to the respective Job accounts in the Cost Ledger will be ascer- tained from the Wages Dissection Sheet. It will be remem- bered that, in some cases, the wages shown on the Dissection Sheet are in connection with repairs, and, in other cases, with ordinary stock jobs. For reasons which will be apparent later, it is necessary to keep the productive wages distinct from unproductive. The following Journal entries will be passed in connection with the totals shown by the Wages Summary. Cost Ledger Adjustment Account . . Dr. £ Productive Wages Account Dr. £ Repairs and Maintenance Account . . Dr. £ To Factory Wages and Salaries Account .... £ For amount of wages on contracts, stock jobs and repair work for week ending — Oncost and Net Profit on Contracts.— Factory and office oncost and the net profit on contracts will be posted to the debit of the various accounts in the Cost Ledger from the Costing Day Book. At the end of the month the totals of the three columns in this Day Book will be posted as under : — Cost Ledger Adjustment Account . . Dr. £ To Factory Oncost Account £ „ Office Oncost Account £ „ Net Profit on Contracts Account £ Being Factory and Office Oncost and net profit on jobs completed during the week ending- Cost Ledger Adjustment Account. — This account should r)e tabulated, a separate column being set apart for each class of entry made therein, a total column showing the balance of the account as a whole. If it is not practicable to have this dissection in the ordinary Private Ledger the Cost Ledger Adjustment account could be kept in totals in the Ledger and the dissection made in a separate book. The object of tabu- 378 COST ACCOUNTS. latinj^- the account is to enable the totals of the various ex- penses charged agavnst the respective jobs completed during the year to be ascertained, with a view of facilitating the pre- paration of the Trading and Manufacturing account and Profit and Loss account. From the above explanation it will be seen that the bal- ance of Cost Ledger Adjustment account will always equal the total of the balances of the various Job accounts in the Cost Ledger, and in this way the Cost Ledger can be balanced each week without difficulty. As will be made clear later, the Adjustment account also acts as a combination of Trading, Manufacturing, and Profit and Loss account (in totals) for the various contracts under- taken, and the dissection of this account supplies the informa- tion required in the preparation of the annual statements. Having explained the procedure in a general way, it is 'thought that the reconciliation of Terminal Cost accounts v^ith the financial books can best be made clear by means of an illustration. For this purpose it is proposed to con- tinue with the class of business dealt with in the previous chapter, viz, a Sash and Door Factory, manufacturing goods both for ordinary stock purposes and under contract. Below are set out the Trial Balance and a summary for the year of the Cost Ledger Adjustment account of the Australian Sash and Door Co. This company keeps Cost Tccounts in connection with the various articles manufac- tured by it under contract. In arriving at the total cost it adds, for Factory Oncost, 33 1-3 per cent on the wages, and for Office Oncost 10 per cent, on factory cost. The stock on hand at the end of the year was as under:— Completed Stock. £4000; Uncompleted Stock. £500; Mate- rials on hand, £6600; whilst, in connection with the con- tracts, the Factory cost of the uncompleted jobs was £1200, 2S shown by the trial Balance and Cost Ledger Adjustment account below. Draw up Trading and Manufacturing account, Profit and Loss account and Balance Sheet from the information dis- closed, in such a way as to supply to the proprietor the fullest information as to the percentages of profit on sales and as to the correctness of his percentages of oncost. 370 AUSTRALASIAN ADVANCED ACCOUNTANCY. AUSTRALIAN SASH AND DOOR COMPANY. TRIAL BALANCE, 31/12/20. Stock on 31st December, 1919:— Dr. Cr. Finished Stock £4,300 Uncompleted Stock 1,000 £5,300 Materials and Timber Account (including Duty, etc.) .. 15,000 Productive Wages 6,000 Factory Overhead Expenses: — Unproductive Wages and Salaries .. .. 1,300 Sundry Mill Expenses 130 Fuel ' 40 Rent and Taxes 450 Repairs and Maintenance 200 Horse and Cart Expenses 400 Insurance on Plant and Stock 350 Depreciation on Plant, Carts, Horses, etc. 800 General Factory Expenses 160 3,830 Office Expenses:— Salaries 1,800 Rent 200 Discounts 170 Travelling Expenses 220 Printing and Stationery, etc 70 Insurance 10 Commission 250 Bad Debts 100 Depreciation on Furniture 20 General Expenses 260 3,100 Assets: — Plant, Machinery, and Loose Tools 1,0! A) Horses, Carts, etc 450 Office Furniture 380 Uncompleted Jobs , 1200 Sundry Debtors 4,500 Bills Receivalbki 750 Bank 820 Sales £20,200 Factory Oncost 1,900 Office Oncost 1,570 Net Profit on Contracts 1.300 Bills Payable 1.600 Sundry Creditors 2,200 Capital Account 20,110 £48,880 £48,880 SUMMARY OF COST LEDGER ADJUSTMENT ACCOUNT. 1920. Dr. 1920. Cr. Jan. 1 To Uncompleted Jobs £1,300 Dec. 31 By Contract Sales £18,570 Dec. 31 „ Materials 8,150 „ Returns of Ma- „ Wages 5,700 terials 150 „ Factory Onco.-^t .. 1,900 „ Uncompleted Jobs 1,200 „ Office Oncost .... 1,570 „ Net Profit .. .. 1,300 £19.920 £'9.920 1921. Jan. 1 To Uncompleted Jobs £1,200 COST ACCOUNTS. It may be as well, before proceeding with the preparation of the required accounts, to explain briefly one or two matters m connection with the above Trial Balance and Adjustment account . Uncompleted Jobs. — It will be noticed that the Adjust- ment account is credited with £1:^UU, being the value of uncompleted jobs at the end of the year. A corresponding debit balance will be found in the Trial Balance under the iieading of "xA-ssets." On closing the books at the end of each financial period it is necessary, in order to enable the exact position to be shown, to arrive at the cost of any jobs which are uncompleted. The balances of the various ac- counts in the Cost Ledger will show the wages and materials chargeable against such jobs, but it is obvious that, in arriv- mg at their total cost as on balance-day, it will be necessary to charge against each job its proportion of the factory over- head expenses. Entries will, therefore, be passed through the Costing Day Book and from there each of the Uncom- pleted Job accounts will be debited with factory oncost, based in the present case on the amount of wages already charged against the account. The total of such factory oncost will be debited to the Adjustment account and credited to the Factory Oncost account. After posting these entries from the Costing Day Book, the balances of the various accounts in the Cost Leager will be brought down, and the total of such balances will, by Journal entry, be debited to Uncompleted Jobs account and credited to Cost Ledger Adjustment account in the Private Ledger. This entry will close off the Cost Ledger Adjust- ment account, and on the first day in the new period the debit balance in Uncompleted Jobs account will be transferred to the Adjustment account. This explains how the first item on the debit side of the Adjustment account arises. The cost value of the uncompleted jobs at tlie end of the previous year amounted to £1300. Wages. — The balance of the Productive Wages account represents the wages paid to workmen in connection with stock jobs. Ihe amount of wages paid in connection with contracts has already been transferred to the debit of Cost Ledger Adjustment account. Unproductive wages are shown separately. Factory and Office Oncost — The credit balances in these accounts, as shown by the Trial Balance, represent the esti- mated proportion of the factory and ofiice expenses charge- able against contracts. In preparing an ordinary Trading and Profit and Loss account for the business these amounts could be transferred, as shown below,' to Profit and Loss 381 AUSTRALASIAN ADVANCED ACCOUNTANCY. account as contras to the total factory and office expenses appearing on the debit side. This would enable the net profit in connection with ordinary stock lines to be ascertained. Form of Trial Balance — It will be noticed that the Trial Balance is set out so as to enable the totals of the factory and office expenses to be ascertained without difficulty. The advantage of this method will be found in preparing the annual accounts. It has already been seen that the Cost Ledger Adjust- ment account is, in effect, a combination of a Manufacturing and Profit and Loss account in totals, so that the Revenue recount of this concern, set out in a very simple form, would appear as under — TRADING ACCOUNT. 1919. 1920. Dec. 31 To Stock £5,300 Dec. 31 By Sales £20,200 1920. „ Stock on hand 4,500 Dec. 31 „ Materials used . . S,400 „ Wages 6,000 „ Gross Profit .... 5,000 £24,700 PROFIT AND LOSS AC £24,700 XOUNT. 1920. 1920. Dec. 31 To Sundry Factory Dec. 31 Bv Gross Profit .. ..£5,000 Expenses, includ- , Factory Oncost ing Wages, Rent, chargeable against Depreciation, etc. £3,830 Contracts 1,900 „ Sundry Office Ex- „ Office Oncost i^enses 3,100 chargeable against „ Net Profit on Contracts .... 1,570 Trading 1,540 £3,470 £8 470 APPROPRIATION ACCOUNT. 1920. 1920. Dec. 31 To Balance £2,840 Dec. 31 By Profit on Con- tracts £1,300 „ Profit on Trading 1,540 £2,840 £2,840 Note. — The factory and office expenses have been stated in totals in order to save space. Assuming that the percentage of Factory and Office Oncost chargeable against the contracts is exactly correct, the above Revenue accounts would show accurately the net results of the two ]M)rtions of the business. This is a matter which, however, cannot be taken for granted and the Revenue accounts will prove far more useful if drawn up so as to prove the correctness or otherwise of the oncost, and also to show 382 COST ACCOUNTS. n p c o a UL> a 55 en ^ ■^ § <= § " '^^ S ■' CO ^ o M^ i i ^ s^ § R S «c ^ ■M : 1' cc e'^ ^^ 2 ° cc3 CD O ! CO to e<5 o I -* «i ■* S 00 C<1 lO • CO «o o a; d 'o — Ol ] (M i I lO - P2 s C -in ■JH M " ^ -e S c i? £2 " ~ O) CL C c - AUSTRALASIAN ADVANCED A C C O (J N T A N C V'. the percentages of profit and expenses on sales for compari- son with previous years. The proper method of setting out the Revenue accounts, to comply with the requirements stated previously, is shown herewith, and reference should be made thereto. The amounts of income and expenditure m connection w^ith the stock lines and contracts are shown side by side, and this, as will be seen, supplies very useful information. The items in the Revenue accounts in connection with contracts are obtained by a dissection of the Cost Ledger Adjustment account. The source of the amounts in the first portion of the Trading and Manufacturing account is, of course, perfectly clear, but those in the second portion and in the Profit and Loss account may require some explanation. Trading and Manufacturing Account. — In the first por- tion of the account the only difference between this and the usual form is in the method of setting out stock and materials, the stock and materials on hand at the end of the year being treated as a deduction from the stock at the beginning plus purchases. This system is fully explained in Chapter XX VL, on Percentage Statements, and the reasons for this form of statement wdiere it is desired to show percentages are dealt vxith fully. Coming now to the second portion of the Trading and Manufacturing account, it will be noticed that the factory overhead expenses, as shown by the Trial Balance, have been apportioned between the two departments of the business. In the Job accounts factory oncost (to cover factory over- head expenses) was provided for by charging against each job an amount equalling 33 1-3 per cent, on the w^ages. In arriving at the cost of ordinary stock, the same basis would, of course, be adopted, and it is clear, therefore, that the proper apportionment of factory overhead expenses between the two departments is in the ratio of the wages paid in connection with ordinary stock and contracts respectively. From the first portion of the account it will be seen that the total wages paid amount to £11,700, and the factory overhead expenses should be divided between the two departments in the i)ro- ,,ortions of ^000 ^^^ ^700 ' 11,700 11,700 The percentage of wages to cover factory oncost w^as arrived at by estimate at the beginning of the year, but now that the year is completed the business is in a position to know what actual oncost should have been ])rovided for. It has already been seen that the contracts have been charged with £li)00 as their proportion of the factory expenses, but from the second portion of the Trading and Manufacturing 3S4 COST A ceo U:\TS. ei5 CO t~ CO -2 .S s^^ o -^ Oi >o eo «o X3 t e<5 to eo U3. m o oo 00 t-^ S " S 5 3! = : o 5 cB 2 ® 'S *^ '*" O 03 ss account. The following are the Journal entries in connection with the above: — COST ACCOUNTS. Factory Oncost Account Dr. £1,864 To Unproductive Wages and Salaries Account .. £633 „ Sundry Mill Expenses 63 ,, Fuel Account 19 ., Rent and Taxes Account 219 „ Repairs and Maintenance Account 97 „ Horse and Cart Expenses 195 „ Insurance Account 170 „ Depreciation Account 390 „ General Factory Expenses Account 78 Being proportion of Factory overhead expenses trans- ferred against Factory Oncost Account. Office Oncost Account Dr. £1,473 To Salaries Account 851 „ Rent Account 96 ,, Discount Account 81 ,, Travelling expenses 105 „ Printing and Stationery 34 „ Insurance 5 ,, Commission 119 „ Bad Debts 48 ,, Depreciation 10 „ General Expenses 124 Bemg proportion of Office expenses transferred against Office Oncost Account. The above entries will leave balances of £36 in Factory- Oncost account and £97 in Office Oncost account. These balances, which represent the over-estimates of such ex- penses, should be transferred to the credit of Net Profit on Contracts account, bringing- the balance of that account to £1433, to correspond with the net profit on contracts as shown by the Profit and Loss account. Cost Accounts of Building Contractors, Shipbuilders, etc. — The principles already explained apply to concerns of this class, although, as will be understood, some slight variations in the procedure will be caused by the different circum- stances. In such businesses, for example, the value of the plant used on a job is charged against the Job account and, when the work is completed, such plant is valued and an entry passed crediting the Job account and debiting Plant account. In this way the item of depreciation becomes one of the direct charges against the jobs. Another point at which such Cost accounts differ from those already explained is that, as all the work is done under contract, the whole of the general expenses must be apportioned over the various jobs, and the oncost added should, therefore, equal the total of such expenses. Profits on Uncompleted Contracts. — This is a matter about which there is some difference of opinion and one in connection with which no general rule can be laid down, seeing that conditions vary in the different classes of busi- ness. 387 AUSTRALASIAN ADVANCED ACCOUNTANCY. £ E a S a g I § 500 MANUFACTURING ACCOUNTS. Taking by way of example the business of a shipbuilder, it is quite possible that a concern of this nature might be en- gaged in l)uilding the one ship during the whole of a financial period, and the work may not be completed at balancing date. If the general rule that no profit should be taken credit for until it is realised were applied literally here it would mean that such concerns would, under such circumstances, run at a large loss in one year and at a large profit in the next. It is usual, therefore, to make an estimate of the cost of com- pleting the contract, taking into consideration the likelihood of an increase in wages and making due provision for con- tingencies, and in this way to arrive at the proportion of profit made on the contract at balancing date. Progress payments are usually received by the ship- builder during the currency of the work, and in stating the value of the uncompleted contracts in the Balance-Sheet such progress payments should be deducted therefrom, only the net amount appearing amongst tlie assets. Practically the same point arises with building contractors, although, as there will, in all probability, be a greater number of contracts of a smaller amount each in hand at the same time, the necessity for a similar adjustment is not so pro- nounced . Coming now to ordinary manufacturing concerns, manu- facturing either partly or wholly under contract, the safer course is to value the uncompleted contracts at cost price at balancing date. In this connection cost price means the prime cost plus factory oncost, and the necessary adjust- ments will be made in the manner already indicated in this Chapter. MANUFACTURING ACCOUNTS.— An illustration has already been given in this Chapter of the method of drawing up the annual accounts where a manufacturing business sup- plies the goods direct from the factory to the customers. A manufacturer's Trading account should contain on the debit side only those expenses which form part of the prime cost of manufacturing. Where, however, the business is divided into two portions, i.e.. factory and warehouse, and the factory supplies the whole of its output to the warehouse for sale, it is advisable to present the accounts in such a way as to enable the separate results of the two portions of the business to be arrived ?t. In some cases the factory supplies goods to the ware- house at actual cost, and the knowledge as to whether the AUSTRALASIAN ADVANCED ACCOUNTANCY. factory is being efficiently run can only be ascertained by reference to the amount of profit made by the warehouse. If the factory has been turning out goods at a low rate, then the warehouse profits will be higher than they would be if 't were under the necessity of purchasing its goods elsewhere. If, on the other hand, the factory is not obtaining good results end the cost of manufacturing is higher, the profits of the warehouse will be proportionately lower than they should be. It is clear that this method of arriving at results is far from satisfactory. The factory may be turning out its goods at a reasonable rate, but the warehouse expenses may, owing to mismanagement, be higher than they should be, and in such a case the amount of net profit may be smaller through no fault of the factory, although it would probably have to bear the blame. It will prove more satisfactory in practice to make pro- vision for the ascertainment of the results of the factory and the warehouse separately. The two departments of th'?; business should be conducted as separate ventures, the fac- tory supplying the goods to the warehouse at the prices which the warehouse would have to pay outside factories. In this way the profit which the factor}^ makes, at current manu- facturing prices, is readily ascertainable, and the warehouse is also put in the same position as one having to buy from outside sources. It is thus under the necessity of making its own profit. One objection which has been urged against this method is that the goods in the warehouse at stock-taking will lie valued at more than actual cost, seeing that these carrv 'i percentage for factory profit. Assuming that the goods are of a saleable quality, there can be no objection to this course being followed, because, if the warehouse were under the necessity of buying the goods elsewhere, it would have to pay the same prices as those charged by its own factory. Under such circumstances the stock could hardly be considered to be overvalued. In order to enable the results to be shown separately, it is, of course, necessary that the factory and warehouse ex- penses should be kept entirely distinct. .\t the end of the year a Manufacturing account will be prepared to show the profit made by the factory. This account is credited with the factory value of the goods supplied to the warehouse and debited with all expenses, such as materials used, wages, freight, rent, depreciation, factory salaries, etc. The balance will show the net profit earned by the factory, and this profit, tailed "Profit on Manufacture." is transferred to Profit and Lr)ss account. MANUFACTURING ACCOUNTS. A Trading: account is prepared for the warehouse upon the usual lines. In place of the usual purchases this account will be debited with the value of the g-oods obtained from the factory, the amount agreeino^ with the credit to the Manufac- turing account. The following example will show the nature of the items to be included in such accounts :— EXAMPLE. The Directors of the Stock Food Co., Ltd., require Manu- facturing, Trading, and General Profit and Loss accounts pre- pared. The warehouse treats the factory as a supplier, credit- ing it with goods delivered to it at a price which should show a profit. The following were the Ledger balances on 31st December, 1920:— Unmanufactured Stock £500 Purchases bv Factory 2,500 Wages . . . . ' 2,300 factory Rent 250 Rent of Plant 100 Electric Power and Light 50 Factory Manager's Salary 300 Goods Received from Factory 7,500 Factory Account £7,500 <^tock-in-Trade Account 1.000 Sales 11,000 Advertising 810 Carriage and Freight 214 Samples 186 Travellers' Expenses and Commission .. .. 1,120 Warehouse Rent 400 General Expenses 118 Salaries 852 Discount and Interest 180 Nominal Capital (fully paid) 2,000 Sundrv Debtors 2,274 Rank Account 416 Sundry Creditors 210 Bad Debts were £270. Unmanufactured Stock, £670. Manufactured Stock £1,120. Prepare Manufacturing, Trading and Profit and Loss Accounts. SOLUTION. MANUFACTURING ACCOUNT. To Unmanufactured Stock .. £500 By Goods to Warehouse .. £7,500 Purchases by Factory . . 2,500 ,, Unmanufactured Stock 670 Manufacturing Wages' . . 2,300 Factory Rent 250 Rent of Plant 100 Electric Power and Light 50 Factory Manager's Salary 300 Manufacturing Profit to Profit and Loss A/c £8,:'70 £8.170 391 AUSTRALASIAN ADVANCED ACCOUNTANCY. TRADING ACCOUNT. To Stock £1,000 By Sales £11,000 „ Goods from Factory .. 7,500 .. Stock 1,120 ,, Gross Profit to Profit and Loss Account 3,d20 £12.120 £12.120 PROFIT AND LOSS ACCOUNT. To Salaries £852 Bv Manfacturing Profit . . 2,170 Rent 400 „ Gross Profit 3.620 ., Travellers' Expenses and „ Discount and Interest . . 180 Commission 1,120 ,, Advertising 810 „ Carriage and Freight . . 214 „ Samples 186 „ General Expenses . . . . 118 „ Bad Debts 270 „ Net Profit 2,000 £5,970 £5,970 CHAPTER XXIX, STORE AND STOCK ACCOUNTS. STORE ACCOUNTS.— These are accounts kept to re- cord the quantities or values of stores received, stores issued, and the balance on hand at any given date. The question as to whether such accounts should be kept in quantities or in values is one which will depend upon the class of stores used, but as a general rule it will be found simpler to keep such accounts in quantities. Store accounts are not necessarily a part of the costing system, although, as a general rule, it will be found advantageous to keep a record of the stores, as this provides a means of checking the employee in charge of the materials. The distinction between stores and stock is that the former consists of the materials used during the process of manufacturing for contracts or for ordinary stock purposes, whilst the term "stock" denotes the finished goods ready for sale. Where only a few different classes of materials are used in manufacturing, the necessary record of stores can be kept in a simple manner by using a Stores Inward Book, to record such materials as are purchased, and a Stores Outward Book to record the materials issued to the various departments. These books can be tabulated, a separate column in each being used for each class of stores dealt with. The Stores Inward Book will be written up from the carters' delivery notes received when the goods are delivered at the factory, whilst the Stores Issued Book will be written up from the requisitions received from the various departments. The difference between the corresponding columns in the Stores Received and the Stores Issued Books will represent the quantities of the different classes of stores on hand, and. at stocktaking, these should correspond with the actual materials. In practice it will generally be found that small dis- crepancies will arise in the quantities, especially if the stores are of such a class that they are required to be recorded in weights. If the record is kept in numbers there is no reason why these should not be balanced exactly. Where the different classes of materials used in manufac ture are too numerous to enable a sufficient record to be kept by tabulating the Stores Issued and Stores Received 393 AUSTRAL A 5:SIAN ADVA1>ICED ACCOUNTANCY. Books, it is advisable to keep, instead of these books, a Stores Ledger, in which a separate account will be opened for each class of materials. These accounts will usually be kept in quantities only. The debit side of the Stores Ledger will be written up from the carters' delivery notes received when the goods are delivered at the factory. These delivery notes should be filed and periodically checked with the Purchases Book, in order to ensure that none has been omitted. The credit side of the Stores accounts will be entered from the materials requisition slips received from the different depart- ments. These should be filed and ticked ofif each week with the Materials Summary prepared by the costing clerk. It is not thought necessary to supply an illustration of a Stores account, as this will be very similar to a Stock ac- count, an example of which is given in this chapter. STOCK ACCOUNTS.— Whilst Stores accounts will only be kept by manufacturing concerns. Stock accounts are applicable to almost every class of business, both trading and manufacturing. In certain businesses it must be ad- mitted that the keeping of efficient Stock accounts is im- practicable — e.g., those businesses which keep large and varied stocks of goods which in themselv-es are of little value. In such concerns the only method of enabling any check to be placed on the stock is by a comparison of the percentage of gross profit on the sales in each year. In con- cerns which deal in larger quantities, where the lines are not so numerous, or where the articles, although numerous, are i'-aluable, stock accounts will prove extremel}- useful. Jeweller's Stock Book,^ — leaking, for example, the case of a jeweller, it is vitally important that an accurate record should be kept of all stock purchased and sold, as the nature and size of the goods dealt in render them particularly liable to peculation on the part of employees and others. In some firms of jewellers very elaborate Stock accounts are kept. 2nd these concerns find that, although the expense of keep- ing such accounts is fairly heavy, a considerable saving is effected, as any theft or other loss of stock can be discovered with certainty, and the person responsible located. An illustration of a jeweller's Stock Book is supplied herewith. Tills book provides for a very complete record of each item of stock received into the establishment, the stock disposed ol being marked off each day from the sales dockets prepared by the different salesmen. A separate page, or set of pages, is set aside for each line of goods, and when an invoice is received for g(^o(ls jnir- chased the items on the invoice are entered under the various headings in the Stock Book, a separate line being used for 394 STORE AND STOCK ACCOUNTS. m u h- U) if) q: UJ _i _i txJ Lij J ^ .=5 f I? N i -Ji. ^ r?' \a 1! i ^ s CK &s vq > tK i 4- f) ^ > >-•) 395 AUSTRALASIAN ADVANCED ACCOUNTANCY. each item. Tlie pages in this book are numbered, as are also the lines on each page. The reference number marked on each article purchased contains the page and number of line in the Stock Book. For example, the first item, shown in the specimen herewith would be numbered 1-42, and this num- ber is recorded on the sales docket when a sale is made. When an article is sold, the date and amount of the sale are entered in the "Selling" column, under the heading of the current year. At stocktaking, the stocktaker will call out the number of each article on hand, and the stock clerk will tick it off in the proper column for the year, in the manner shown in the illustration. If the article has been sold during the year, no tick will be made in the stocktaking column. If, after stock- taking has been completed, any article, which the "Selling" columns show as unsold, remains unticked, it is clear that this article has gone astray, and inquiry will be made. l^ach day the clerks marking oft" the Stock Book prepare a list of the amounts entered in the "Selling' columns, and these are agreed with the sales, both cash and credit, shown in the Sales Day Book. Merchant's Stock Book. — The above system would, of course, prove too elaborate for an ordinary merchant's busi- ness, but the next illustration shows a Stock Book kept by an electrical supplies warehouse, which is entered systematic- ally, and proves, in practice, to be efficient for the purposes for which it is required. A sci)arate account is opened for each line of goods kept in stock, the debit side being written up from the various invoices received, and the credit side from the Day Book. A reference is made to the Day Book folio and to the numl)er of the invoice sent out. ( )n balance-day the quantities of the various classes of stock are agreed with the various accounts in the Stock Book, and these accounts arc then ruled oft' and the Inilance brought down. Card Stock Records. — As a general rule, it will be fmind that the Card system is most useful for keeping stock records, as the accounts kept for the various classes of goods can, in this way. be easil}' located, and the division and subdivision of the different classes of stocks are facilitated. The accom- panying illustration shows how the stock records of a furni- ture warehouse might be kc]it in card form. Tlic ruling of the Stock card sliown in tin- illustration, and the sju'cimen entries sup])li{'(l, will cnal'lc tlic keeping of the stock records in such a conceru to be followed without difficulty. 396 STORE AND STOCK ACCOUNTS. ^ [ Q -1 S o 1^ 1 \ 1 e t J > , . . ■■-V-i ^ 4 it: s 1 \ 1 1 d 5 ^ ^ ^ U 1 if) ^ ^ ■to M 1 ■ u ^ ^1 ^t .^^ 1^ J 5 ? < ft: 11 ■ ^4 ; ^ ] (0 1^ -^ ^ ifl Ov^ \ Al 197 AUSTRALASIAN ADVANCED ACCOUNTANCY. TABLES / TOJLET SETS. ilOEBOflRDS lUCLOTKS DESKS CHAIRS /wY^ 1&. (^ ^ rL-^A^uyui mf^* 1 jf^^S .Jm&Aui/ J>aJtM. Ji^/Vo. fim^ /k.^ SoLd, BcUa^v^ Zia^ A>./v<. /f^cd. A^Ai 5<.ici. ^•^-^i /^. J-^i ^»-o Jt'C-O 1 '>/ "/Sf £- '9^ '7 /S-0> /o /g^s- 1 irf ii.o y'o yy s ^? v^ Jo /'S Jo ii. Jo f-y XU/a jn. /s-o ^J^ V i SroCK CfifffO rORFufiNaUREW^/?£HOUSE. CHAPTER XXX OFFICE SYSTEMS AND TIME-SAVING DEVICES. General. — 'i lie designing ui time-saving devices in con- nection with uiiice systems is work to which the Public Ac- countant is peculiarly adapted, although it must be confessed that he has so far adopted a conservative rather than a pro- gressive attitude towards the many suggestions brought for- ward from time to time with the object of minimising clerical work. It is to be remembered, however, that he combines with his duties as Accountant that of Auditor to various con- cerns, and, as such, his chief thought is to ensure that any system proposed is one which a business might safely adopt, keeping in view the necessity of guarding against fraud and error. Allowing so much, there are numerous devices which can be employed in offices without endangering in any way the safety of the general system, and the Public Accountant ought, as a business expert, to make himself thoroughly con- versant with these, and be prepared to make, wherever prac- ticable, such suggestions as will result in a saving of time and labor in those businesses where he is employed. The business man is apt to appreciate the introduction of a system which will enable him, with safety, to obtain the same results with a smaller staff, more than the usual routine work of an audit, which may proceed for years without discovering an error of a serious^ nature ; and for this reason alone the Public Accountant should make himself conversant with the various time-saving devices and so qualify himself to introduce those which may be of value to his clients. So far as the writer is aware, there is no text-book dealing with this subject from an Accountant's point of view. _ There are, of course, numbers of ready-made systems which the vendors of office furniture are prepared to supply to the classes of businesses for which they were originally designed. These do not often prove satisfactory, possessing, as they do. the disadvantages which are inherent in all articles of a readv-made description. In most cases an endeavor is made to make the business fit a .system, instead of the system being prepared so as to meet the particular requirements of the concern. AUSTRALASIAN A D \' A N C E D ACCOUNTANCY. Before an3one can etificiently design a s\steni fur a busi- ness he should be thorouglily trained in accounts so as to ensure that the system will fit in with all departments of the business. In partially alterini^ the system in an office, the utmost care should be taken to see that the new portion dove- tails in with the remainder of the office work, and it is just here that most cut-and-dried systems fail. The details of nt) two businesses are precisely similar, and the person designin;., a system must be capable of ]nitting forth original ideas, in order to cope with the jjecularities of the business with which he is dealing. The adoi)tion en bloc of a system in us'i by a business of the same nature will, in most cases, be founci far from satisfactory. This matter may be summed up in brief by saying : — Make the system fit the business ; do not attempt to adjust the business so as to make it fit some par- ticular system. The chief difficulty in designing a system crops u]) in the case of a new business. Where a business has been running for some time it is not difficult for the Accountant, by tracing transactions through the books, to acquaint himself with the nature of such transactions, and the class of entries which, under the old system, it was found necessary to pass. In tnis way provision can be made for the proper recording of all transactions likely to arise. In a new business, more espe- cially one in which the exact class of transaction is perhaps problematical, the difficulties are increased considerably. The Accountant can, however, by questioning closely the ])ro- prietor or manager of the business, get a very good idea oi the ground which must be covered by him. and, with this data in his possession, he should be able to provide a system which will prove satisfactory. It may be necessary from time to time, owing to changes in the conditions, to make some slight modifications, but this is only to be expected under the circumstances. SCOPE OF THE WORK.— The scope of the Account- ant's work will l)e confined to the records as he. naturally, cannot be expected to provide a system for the technical por- tion of a ])usiness. These records are commonly of two classes: — (a) Those in connection with tlic books of account, including costing, and (b) those in connection with other ofTice records, e.g., the filing of corres])on(k'nce, Xic. ; l)iit it is not necessary to deal with the latter herein, as it usually has little to do with the accounts of a business. It has already been explained that, as the system in no Iwo businesses will l)e exactly- the same, no general system or accounts can 1k" laid down, but it is proposed to set out as briefly ;is ])ossil>](, a number of time-sa\ing ideas which can 400 OFFICE SYSTEMvS. be adopted as a basis upon which to work. The details can, of course, be altered so as to suit the requirements of the particular classes of business to which they may be ap- plicable. 'riie various s\stems explained herein will l)e dealt with under two headin.^s. viz., books of first record, such as Jour- nals, Cash Books, etc.. and books of classification, i.e., Led.e^ers. BOOKS OF FIRST RECORD.— It will be understood that it is only in connection with those transactions of a frequently-recurring nature that the necessity for time-saving- devices arises. It would, for example, be absurd to design an elaborate time-saving system to record transactions which occur at infrequent intervals. In an ordinary commercial house the transactions which occur most frequently are the pales, and it is in recording such transactions that any time- saving devices can be utilised to most advantage. It is con- «'dered unnecessary to explain in detail the usual procedure in connection with the treatment of sales in an office, as the reader should be thoroughly familiar with this, but it is i)ro- posed to explain two or three systems for recording sales in use amongst some of the business houses. For Recording Sales. — ^Vhere the oft'ice possesses a type- writer a system commonly in use is one which provides for the preparation of an invoice, a carter's delivery note, and the writing up of the Day Book in one operation, by means of carbon sheets. When the invoice is typed a loose sheet, about foolscap size, is placed beneath it. so that a carbon copv of the invoice is taken on the loose sheet. When the next invoice is typed, the copy is taken a little lower down on the same sheet, the totals of the invoices being extended in each case on the right-hand side. When this foolscap sheet is filled with copies of invoices, it is placed on a file, and this file operates as a Day Book, the totals of the various sheets being carried forward from page to page. Attached to the invoice, on the left-hand side, is a slip, somewhat shorter than the invoice itself, perforated at the point at which it is attached to the invoice form. By means cf a carbon sheet there is typed on this form (which operates as a delivery note) the whole of the particulars contained on the invoice, with the exception of the price which, as already explained, is typed on the right-hand edge of the invoice, and thus misses the delixery note. It might be mentioned that the Day Book sheets should be numbered consecutively in order to ensure that none is omitted. 401 AUSTRALASIAN AD\'AXCED ACCOUNTANCY. Another form of time-saving: device, for use in those offices where a typewriter is not employed in the preparation of invoices, and which effects practically the same saving in time, is one introduced by the writer into several country stores, where it is workin": efficiently. This book makes provision for the retention of a carbon copy of each invoice issued. This idea is. of course, familiar, but the book in question is at once longer and wider than the one in ordinary use. It is longer because it provides for at least four invoices at each opening of the book, these invoices being printed one under the other, and separated by means of a perforation. The invoices are also perforated at the fold on the right-hand edge, so that, when an invoice is prepared, it is detached by being torn downwards and across. It is possible to have more than four invoices at each opening, but, unless the invoices are very narrow, to have more than this number would make the book rather nnwieldv. The chief difference l)etween this l)ook and an ordinary book of invoice forms is that to the left of the invoices, near the binding of the book, are ruled two money columns, headed respectively "Debit" and "Credit." When an invoice is pre- pared a copy is retained on the under sheet. The total of the invoice is then extended to the debit money column, and. as soon as the page of invoices is used, this column is added and the total carried forward. At the end of the month the total sales can in this way be readily ascertained. It will be seen, therefore, that the use of such a book (Imcs nwav alto- OFFICE SYSTEMS. gethev with the necessity for writing- up an ordinary J3ay Book, as the name of the purchaser, and full details of the goods sold are retained on the carbon duplicates. The in- \oices should be numbered consecutively, the number ap- pearing- on the original invoice and on the carbon duplicate. In posting to the Ledger, this number should be inserted in the "Particulars" column, and a ready reference can thus be had to the copy of the original invoice sent out, should this iit any time be required. The accompanying illustration will, it is thousfht, be easilv understood. The use of the credit money column may require some ex-planation . This column is particularly useful in the cas2 of country storekeepers, who often receive payment or part 403 AUSTRALASIAN ADVANCED ACCOUNTANCY. payment for their goods in kind — i.e., their customer.s ma}' pay for the commodities supplied to them with produce, such as eggs, bacon, chaff, etc. Where the book is required to be utilised for such a purpose the invoices can be printed, as ?hown in the illustration, in such a way as to enable them to be utilised either as credit or debit notes, the unnecessary wording being struck out. By this means the total value of goods received from customers in payment or part payment of accounts can be readily ascertained at the end of eacl. month . Purchases. — These are, generally speaking, not so numer- ous as sales, and the call for time-saving devices is not so urgent. Undoubtedly the best method of dealing with the invoices received is to file them alphabetically, under the names of the persons from whom the purchases have been made, until the end of the month, or until the receipt of the monthly statements. These will be checked off with the in- voices, and, if the statements prove to be correct, the lattc" can be entered in the Purchases Book and posted, in monrhly totals only, to the credit of the vendors in the Bought Ledger. The statements, with the relative invoices attached, will be filed in some convenient form to facilitate ready reference. Cash Book. — The most common means of saving tiuu- in connection with the writing up of this book is by tabulation . This is a matter which has already been explained in previous chapters, and it is not intended to go further into the matter here. In any case, the tabulation of a Cash Book is a method of time-saving with which any Accountar^ will be familiar. BOOKS OF CLASSIFICATION.^The Ledgers ofYer the greatest scope for the utilisation of time-saving devices, as every transaction must be recorded therein. The greater proportion of the work in posting to the Ledgers lies in find ■ ing the accounts into which the various entries have to be posted. A saving of time in locating accounts can best be effected by the use of Card Ledgers, the operation of which it is now ])roposed to explain. Card Ledgers. — There are no fundamental (lift"ercnces between a card ledger and the ordinary bound ledger. The ordinary ledger ruling may be obtained on the cards, and a separate card is set apart for each ledger account. Anvonc familiar with the method of posting an ordinary ledger will fnid no difficult}- in performing the same work with a cord ledger. The cards ujion which the accounts are recorder' are kept in drawers, and are filed on edge between "guide' ca'xls. 404 OFFICE S VST EMS. which have projecting- tabs bearing the letters of the alphabet. These "guide"' cards form an index to the ledger, and, as each account is filed in front of the particular "guide'' card which bears the initial letter of the name of the account, these serve :h.e purpose of enabling the required account to be easily located. This method of arranging the index undoubtedly facili- tates rapid posting of the ledger. Where only a small number of accounts is kept one "guide" card for each letter of the zJphabet is sufficient, but, should the accounts be numerous, it is advisable to subdivide the alphabet and have two or more ■guide" cards for each letter. For instance, the letter "C" might be split up as follows: — Ca to Ce. Ch to CI, Co to Cy. In this way the second letter of each name is taken into c-ccount when indexing, and it will be seen that, the more "guide"" cards there are in use, the easier will it be to locate the accounts. When posting to the ledger a glance at the piojecting "guide" cards bearing the index at once enables the division in which the required account is to be found to be ascertained. The card is taken from the drawer, the necessary entry is made thereon, and it is returned to its proper position. Contrast the above iM'ocedure with the routine of posting to the bound ledger Tn the first place the proper letter in the index must be found ; secondly, the proper name must be found in the index — and, where there are perhaps fifty or sixtv names under that letter, this may take some time to discover. The folio opposite the name has then to be turned up. Added to this inconvenience is the fact that it will sometimes be found that the required account has been omitted from the index owing to an oversight, ^^^hen a new account is opened in a card ledger the card is headed with the name of the account and placed in front of its proper "guide" card. It is thus indexed automatically, and the necessity for writing the name and folio in a separate index is obviated. It is advisable, where a card ledger is kept, to have two alphabetical divisions of the ledger — one for "open" accounts and the other for "closed" accounts. The first is devoted to accounts which are "open," i.e., in which there is a balance outstanding, and the second to accounts which, for the time being, have no balance. The index in the "closed" division is a duplicate of that in the "open" ledger, and. when a cus- tomer pays off the balance of his account, his card is filed for the time being in the "closed" division. When another transaction takes place with this customer, the card is re- turned to the "open" accounts division at the time the entry in connection with the transaction is made. This procedure, which ensures that the ledger will include only "live" ac- 405 U S T R A L A S I A N ADVANCED ACCOUNTANCY. 'Ca CY Ba-Be: Bi Bo By. m r^' n-de^^(7n ^ '^' ^ = = == ^ ^ T "y " fSl ( ^.y.w/^>_. #^^w^ -^-^" ^.^,^ c .Tt^ •o> oeB'T C-C.OI- / s. ..cc j c, g .Tt-, .0, oce.T c-.o.- e«.»-ct a. -2 <'^.rr. ^, ^ „ Ja^ _/ __. _. _^ ^_ ^ _ _ r~ _ -H 4« <~A — ^ -7- - ~ — - '- - — *•, J ,7 J .ri 4 . ;, 7/ 9 _:j ^ ^ ^. _ — _-_ - _ _. ^ _ _ .^ r T ■^c'.l^f «/ i J*^ — V- — --- - - — J •A 1 fi. 7/ 1 «vJ 7 - -- . 7 f- m / /^ ■w D' c- D elaborate on the iflea here. 41? OFFICE SYSTEMS. Bl 413 AUSTRALASIAN ADVANCED ACCOUNTANCY. For wholesale businesses which utilise the Uniscript system explained aoove, the scope of the tabular ledger can be enlarged so as to combine a Ledger Balances Book with the Sales Leager, and, in effect, do away altogether with the necessity Tor keeping a Sales Ledger in the usual form. In a wholesale business there is seldom more than one credit entry in each customer's account during a month, and, as ^pecial provision can be made for any accounts which prove an exception to the rule, they can be left out of consideration for the purposes of the system now being described. With the utilisation of the Uniscript system it will be seen that there will not, as a rule, be more than one debit entry and one credit entry in any customer's ledger account during the month. This being the case, if additional columns are provided in the Sales Ledger Balances Book so as to make it agree with the illustration supplied herewith, the necessity for keeping an ordinary Sales Ledger will be practically done away with. The names should be entered in alphabetical order, and spaces left for the insertion of the names of new customers. The total of the column headed "Cash Received" should each month agree with the totals of the "Sales Ledger" and "Discount" columns on the debit side of the Cash Book. Ihe total of the "Balances" column will each month agree with the balance of the Sales Ledger Ad- justment account in the Private Ledger. It might be mentioned that the above system, in con- junction with the Uniscript system, has been used in a fairly large business for the past eight years with very satisfactory results. To ensure efficient working, the bookkeeper should be competent, but, given this much, very satisfactory results can be obtained, and it is obvious that a great saving of time and labour can be eft'ected. Cash Registers.— The outstanding feature of the ac- counts of smaller retail establishments is the extreme diffi- culty experienced in getting the staff (principally the selling staff) to keep a systematic record of the transactions as they arise. One method of ensuring (so far as it is humanly pos- sible to ensure anything in such concerns) that a classified record, upon which to base the book entries, will be kept, is by the installation of a cash register. These registers are mechanical contrivances designed to enable a record of the transactions to be kept with a mini- mum of trouble. The amount of information supplied de- penas on the class of register utilised, but those which pro- vide for a detailed classification supply the bookkeeper with a leliable record of every transaction which affects the financial 414 OFFICE SYSTEMS. portion of the business and enables him to keep his accounts correctly, and to prepare accurate statements showing the results of trading and the position of the concern. A register does not, of course, do away with the necessity for keeping books of account, as it provides only for a first record, but where one is in use it will generally prove a valuable adjunct of the complete bookkeeping system, or sup- ply a basis upon which the general system can be designed. An Accountant should familiarise himself with the possi- bilities of these registers, as he may often find one already in- stalled in the business for which he is asked to design a sys- tem of accounts, or he may, after inquiry, consider it advis- able that the business in question should acquire a register to enable the system which he institutes to be carried out efficiently. As already mentioned, the amount of information to be obtained from these registers depends upon the type of regis- ter used. The one most generally in use provides a separate cash drawer for each assistant, and supplies the following: — (a) The amount of each transaction recorded ; (b) Total credit sales made by each salesman; (c) Total cash sales made by each salesman; (d) Total cash received on account from customers; (e) Total cash paid out; (f) Number of customers waited upon by each assistant ; (g) The issue of a printed receipt to each customer; (h) Enables cash taken by each salesman to be kept in a separate locked drawer, and any error can. therefore, be located to the salesman at fault; (i) Supplies daily to the proprietor a printed detailed state- ment of all transactions. Numbers of other mechanical labor-saving devices, such as adding and calculating machines, book-typewriters, etc., are in use in many of the cities and towns throughout Aus- tralasia, but as these may be seen at work by anyone it is not thought necessary to describe them herein. 415 CHAPTl^R XXXI. RESUMPTION OF BUSINESS PREMISES UNDER STATUTORY POWERS. Accountants are frequently required to prepare or to criticise the claims made by persons whose business premises have been assumed under statutory powers, e.g., the resump- tion of property by the Crown for the purposes of construct ing railways or by a Municipal Council for widening streets. The claim, which should be submitted on the prescribed form, can, generalh' speaking, be divided under the following head- ings :— (1) (a) The value of the lease, where the claimant has a lease of the premises resumed. (b) Value of the freehold, where claimant owns the premises resumed. (2) Loss on fixtures. (3) Cost of removal of stock and fittings and the loss occasioned thereby, (4) Loss of business due to the disturbance. \a) A temporary losr during removal. (b) A ])crmanent loss owing to the impossioility of finding premises equall}- accessible to customers. It will be seen from the above that, in order to enable a claim to be prepared, it will be necessary for the claimant to retain the services of competent valuers and that a Public Accountant will only be employed in this respect in connec- tion with Item No. 4. As, however, an Accountant is fre- quently required to prepare or supervise the preparation of the statement of claim he should have some general know- ledge of the subject, sufificient in any case to ensure that a proper basis has been adopted for the whole of the valuations. Ilfi RESUMPTION OF PREMISES. It is proposed, therefore, to deal briefly with this subject under the above headings. Value of Lease. — A claim can only be made under this heading where, at date of resumption, the rental value of the premises occupied by the claimant exceeds the amount of rent payable by him under the lease, and, as evidence of this, he should be able to show that the rental paid under his lease is low by comparison with rents ruling in the immediate vicinity, such comparison necessitating close attention to details of location, accommodation of premises, etc. The market value of the lease is ascertained by taking the present value of the additional annual rent which the premises would produce if the property were sub-let for the remainder of the term, and to this may be added a percentage for compulsory sale. Where the person whose premises are resumed is also claiming for destruction or disturbance of business the profits upon which such portion of the claim is based should be adjusted in the manner shown at the end of this chapter. The valuation of the lease should, in most cases, be made by an estate agent conversant v/ith local conditions relating to real estate and propert}-. Value of Freehold. — Where the claimant owns the free- hold of the resumed property he is entitled to receive the market value of such property as at the date of resumption — i.e., the amount which a willing purchaser would, at the date m question, have had to pay to a vendor, not unwilling, but not anxious to sell (Spencer v. Com. of Aust. 1907 5 C.L.R. 418) . It is also usual to claim an additional amount (usually 10 per cent.) for the compulsory sale. This is not a statutory right, but one set up by custom, and it is applicable solely to property, whether freehold or leasehold, and the fixtures at- tached thereto. Loss on Fixtures. — ^Where the claimant owns the re- sumed property the value of the fixtures may be included in the valuation of the property and care should be taken to see that these items are not duplicated. Where, however, the claimant has a lease of the property and has erected fixtures thereon the matter requires con- sideration. In the absence of any agreement to the contrary any fix- tures attached to the property and erected by the lessee form part of the freehold and the lessee has no right to remove 417 AUSTRALASIAN ADVANCED ACCOUNTANCY. these upon the expiration of his lease. Under such circum- stances, where books are kept upon proper lines, the lessee would write off the cost of such fixtures during the currency of the lease and it is submitted that, where he has not the right to remove such fixtures, he is only entitled to a propor- tion of the cost according to the time which has expired since they were erected and the time which the lease has to run at the date of the resumption. For example, suppose the lessee erected fixtures, costing £80, five years before the date of the resumption and that, at the date when the premises were resumed, the lease had three years to run. He would be entitled, leaving interest out ofaccount. to three-eighths of the cost cf such fixtures. If the tenant is entitled under his lease to remove the fixtures erected by him he has two courses open. He can require the authority to take over such fixtures, in which case he can claim compensation on the basis supplied above, or he can remove them and claim for the difference between the depreciated value and the present break-up value. As an illustration of the latter, assume that the fixtures cost £80, that they were erected five years before the date of resump- tion, that the lease has three years to run, that the break-up value at the end of the lease was estimated to be £16, and that the present break-up value is estimated at £20. The fixtures should be written down by 5/8ths of £61 (i.e. the difference between original cost and estimated value at the termination of the lease) the result being £40. As the claimant is taking away fixtures now valued a.t £20, as break-up value, he is entitled to the difference, viz.. £20. Cost of Removal. — Where a claimant owns the freehold of the business premises he is entitled to the cost of removing his stock, fixtures, etc., to new premises, and. as a general rule, a claimant is entitled to removal expenses where he has only a lease of such premises. Loss of Business due to the Disturbance. — Ascertainment oi Profits. — In order to ascertain the amount to which the claimant is entitled under this heading a Public Accountant should be employed to investigate the affairs of the business for the purpose of ascertaining the profits made during recent years. The investigation is usually confined to the three years preceding the date of the resumption. The amount of compensation to which the claimant is entitled under this heading is generally based on the average profits earned during those years, and it is therefore necessary for the Accountant to arrive as accurately as possible at th? 418 RESUMPTION OF TRADE. profits made during the period mentioned. In the case of large businesses this may not involve much difficulty, as the books of such concerns are usually kept systematically and audited regularly. It should be noted, however, that, for the purposes now being considered, it is necessary that there should be charged against the profits a reasonable amount for the services of the proprietor or proprietors and, also, interest at the current rate (say 5 per cent.) on the capital employed in the business. The amount to be claimed under this head- ing (in the case of a permanent loss of business) is based upon the amount of damage the goodwill has sustained by the resumption and the profits, therefore, require the same adjust- ment as they would if they were being arrived at for good- will purposes. It was decided by the Full Court (N.S.W.) in McSweeney v. The Commissioner for Railways (State Re- ports, N.S.W., 1914, Vol. 14, p. 18) that, where a claimant is allowed to continue to carry on business in the resumed premises after notice of resumption, it is not permissible to give as evidence of the profit-earning capacity of his business the profits earned subsequent to the date of resumption. In estimating the loss under this heading, therefore, the Ac- countant's attention should be confined only to the results of the trading prior to such date. In smaller businesses, more especially those conducted by retail traders, considerable difficulty is usually experienced in arriving at the trading results, as such traders are not in the habit of keeping books upon proper lines. In numbers of cases it will be found that no record of transactions has been kept and it will be necessary for the Accountant to con- struct accounts from such information as is available. Care must be taken, however, to eliminate any private matters, as this class of trader almost invariably mixes his private and business affairs. It is a matter of impossibility to explain the procedure necessary where books of accounts are not kept, as the information required or available in no two cases cor- responds. The writer found it necessar3^ in one case, to prepare a statement along the following lines, in order to enable the sales of a particular business to be ascertained, and this will serve to exemplify the methods which it may be found neces- sary to adopt upon occasions: — Statement showing method of arriving at sales from the date of commencement of the business to the date of re- sumption. 419 AUSTRALASIAN ADVANCED ACGOUNTANCY. Total Lodgments at the Bank £14,283 14 3 Less Cross entries and Customers' cheques dishonoured and re-presented 85 9 4 £14,198 4 11 Less Cheques drawn for change 46 Less Change on hand 10 36 £14,162 4 11 Plus Payments from Cash: Rent £194 10 Wages to Employees 728 17 4 Wages to Proprietor 285 16 Cash Purchases 46 8 2 Sundry Expenses 12 8 5 Cost of erecting shelves and fittings . . 19 14 Payment for Cash Register (time pay- ment) 48 Proprietor's drawing from cash 126 18 3 — 1,462 12 2 £15,624 17 1 Plus Outstanding Book Debts £494 19 6 Book debts settled bv contra 24 18 ■ 519 17 6 Total Sales for period £16,144 14 7 Basis of Compensation. — Having ascertained the average net profits of the business it then becomes necessary to find what loss of business will be sustained owing to the fact that the premises, in which it is being carried on, are resumed. This will depend upon the extent to which the goodwill of the business attaches to its situation. In the case of a wholesale business, for example, the goodwill cannot be said to attach to the premises and the fact that such a business may be re- quired to remove to another street will not. generally speak- ing, afifect its profit-earning capacity. In the case of a manu- facturing business it would probably make very little, if any, diflFerence if it were found necessary to remove to another suburb. On the other hand, cases might be quoted where the re- sumption of a portion of the property of a manufacturing- business has resulted in the total destruction of the business, as it was agreed that other property of the class necessary to enable it to compete successfully with its trade rivals was unobtainable. Such cases are, however, exceptional, but they serve to indicate that no general rule can be laid down with regard to wholesale, manufacturing or other businesses in which the value of the goodwill does not commonly attach to the situation, and that the whole of the circumstances must be looked into and each particular case decided upon its merits. 420 RESUMPTION OF TRADE, Although, as pointed out above, the resumption of the premises occupied by a wholesale or manufacturing business may not affect the amount of business transacted, the claimant !S entitled to be compensated for a temporary loss suffered during removal or whilst other suitable premises are being obtained. It may also be found that, in the most suitable premises he can obtain, certain expenses of his business will be increased. If, for example, the cost of delivery will be in- creased, owing io the fact that .the claimant has found it necessary to remove further from the business centre, com- pensation for this additional expense might justly be claimed It should not be overlooked, however, that this additional expense may, to some extent, be offset by the lower purchas- ing or rental value of the more remote premises. Coming now to a consideration of the effect of a resump- tion on a business where the goodwill attaches to the situa- tion, the amount of compensation to which a claimant is en- titled for loss of goodwill will depend on whether he can obtain other suitable premises accessible to his customers in the same locality. If the claimant can obtain suitable premises where he will be able to retain his old customers no damage will be done to his goodwill, and his only claim will be for temporary disturbance of business during the removal. In some cases the resumption may enable him to remove to more convenient premises free of cost, but, as a lecturer once said, "This com- m.onsense method of regarding the situation would not easily be deduced from a perusal of a claim put forward under such circumstances, which is generally framed on the principle that the claimant is not likely to be granted more than is asked." Where the removal will result in the claimant losing a portion of his business it is a matter for agreement as to the extent of the damage to be suffered, or, failing such agree- ment, it is for a jury to decide. The claimant must do what a prudent business man would do to make his loss as small as possible, and he should make every reasonable effort to obtain suitable premises in the vicinity. Where, under the circumstances now bl a proportion of the total interest charLTcd slionld be carried forward to tlic next 428 R E D p: e m a b le d e ad rent s. period. What this proportion should be will depend upon circumstances, but the writer estimates that, in most con- cerns, if 50 per cent, of the total interest charged during the year be carried forward to the next period the result will show the position fairly accurately. This estimate was checked in detail over the accounts of a concern doing a large business on the hire-purchase system and was proved to be sufficiently accurate for all practical purposes. The rate will, of course, depend on the period over which the greatest proportion of the payments extend, but, assuming the usual terms of payment, it is thought that the estimate supplied v^'ill show a satisfactory result. A system for keeping the personal accounts of the hirers is explained in Chapter XXX., under the heading of "Card Ledger Diaries." REDEEMABLE DEAD RENTS.— Where a Colliery company leases the property on which the mine is situated the landlord is frequently paid by a royalty of so much per ton on the coal extracted from the mine. Provision is also usually made that a minimum royalty, or, more correctly speaking, rent must be paid by the company, whether the mine is being worked or not. If the amount of the royalty on the coal extracted exceeds the minimum rent the rent is merged into the royalty and is not payable in addition thereto. This minimum charsfe is known as dead rent. It is some- times arranged that dead rent paid may be redeemed out of subsec^uent royalties, or, in other words, the company does not pay more than the minimum charge until such time as it has recouped itself out of royalties for the amount of dead rent paid during those years in which dead rent exceeds the royalty on the coal extracted. Where the company has this right of redeeming dead rents the accounts must be kept in such a way as to show the true position. Any payment made in excess of the actual royalty will be debited to Redeemable Dead Rents account, and. if there is any possibility of the colliery ever being i success, this account will, until it is written ofif out of royal- ties, appear in the books as an asset. The royalty on the coal extracted will be debited to Royalty account, which will be transferred to the debit of the Working account at the end of each financial period. In each case the corresponding credit will be made in the landlord's account and from the above explanation it \vill be seen that, whilst there is any debit balance in Redeemable Dead Rents account, no royalties in excess of the minimum rent will be credited to the land- lord's account. 429 CI AUSTRALASIAN ADVANCED ACCOUNTANCY, 'J'hc followiiiLi' example should make these entries clear: — EXAMPLE. — A Collier}- company secured a lease of ex propert}- for the purpose of coal mining, the arrangement being tliat the colliery was to pay to the landlord a royalty of Gd. per ton on each ton of coal extracted from the mine. A. dead rent of £1UU per annum was provided for, any such rent paid to be redeemable out of subsecjuent royalties. Dur- ing V.)1'S and 1914, when the company was principally en- gaged in sinking shafts and performing general development work, the output was 1000 tons and 2000 tons respectively. Ihe output in 1915 was 5000 tons, and in 1916 10,000 tons. Show the following accounts in the books of the company for the four years in question: — Royalty account. Redeemable Dead Rents account, Landlord's account. ROYALTY ACCOUNT. 1913. 1913. Dec. 31 To Landlord's A/c. (6d. per ton on 1000 tons extracted i £25 Dec. 31 By Working A/c .. £25 1914. 1914. Dec. 31 To Landlord's A/c .. 50 Dec. 31 By Working A/c .. 50 1915. 1915. Dec. 31 To Landlord's A/c ..100 Dec. 31 By Working A/c .. 125 ,, Redeemable Dead Rents A/c.. .. 25 £125 £125 1916. 1916. Dec. 31 To Landlord's A/c .. 150 Dec. 31 By Working A/c .. £250 „ Redeemable Dead Rents A/c. .. 100 £250 £250 REDEEMABLE DEAD RENTS ACCOUNT. 1913. 1913. Dec. 31 To Landlord's A/c .. £75 Dec. 31 By Balance £75 1913. 1914. Dec. 31 To Balance 75 Dec. 31 Bv Balance 125 1914. Dec. 31 To Landlord's A/c .. 50 £125 £125 1914. Dec. 31 To Balance 1915. 125 Dec. 31 By Royaltv A/c ... . £25 „ Balance 100 £125 £125 1915 Dec. 31 To Balance 1916. .. 100 Dec. 31 By Rovnlty A/c 100 430 FIXTURES ON L E A S P: II O L 1) S. LxVNDLORD'S ACCOl'XT, 1913. 1913. Dec. 31 To Cash £100 Dec. 31 Bv Redeemable Dead Rents A/c £75 „ Royalty A/c. . . 25 £100 £100 1914. 1914. Dec 31 To Cash £100 Dec 31 By Redeemable Dead Rents A/c .. .. £50 „ Royalty A/c .. 50 £100 £100 1915. 1915. Dec. 31 To Cash £100 Dec. 31 By Royalty A/c .. £100 1916. 1910- Dec. 31 To Cash £150 Dec. 31 By Royalty A/c .. £150 FIXTURES ERECTED ON LEASEHOLD PRE- MISES. — The question as to the provision to be made for the depreciation of wasting assets erected on leasehold pre- mises is one which frequently comes up for consideration. In the absence of any agreement to the contrary any fixtures, A^hich at law would be deemed portion of the premises, erect- ed by the lessee cannot be removed by him at the expiration of the lease and, where this is the case, it is clear that the term of the lease as well as the life of such assets must be taken into consideration in determining the rate of depreciation to be written off. If the working life of the assets is estimated as being less than the term of the lease, then depreciation will be provided for upon the usual lines, but if the lease will expire before such assets would in the ordinary course of events lose their usefulness, the rate of depreciation must be governed by the term of the lease, and such assets must be written out of the books by the time the property is handed over to the lessee. If, however, the agreement provides that the lessee is to be compensated for any improvements, e.g.. buildings erected by him or fixed machinery left on the premises, any such assets will be written down to the amount which the lessee might reasonably expect to receive as compensation therefor. The agreement may provide that the lessee is to have the right to remove, at the expiration of the lease, all machinery, boilers, etc., erected by him on the premises and, where such is the case, he should write down such assets to their break- up values by the time the lease expires. 431 AUSTRALASIAN ADVANCED ACCOUNTANCY. CONTINGENT LIABILITIES.— A contingent liability is an amount which will only Ijccome payable on the happen- ing of a certain event which is not likely to occur. It is usual to state such an item as a footnote to the Balance Sheet or insert the amount short on the T.iabilities side. The most common example of this class of liability is that arising in connection with bills which have been dis- counted. Where a concern discounts its bills receivable with a bank or other financial institution it still remains liable to repay the money to such institution in the event of the bills being dishonored by the makers or acceptors at due dates, and such possible liability should be indicated in the publish- ed statements under a heading such as "Contingent Liability on Bills Discounted £ " In a bank's Balance Sheet the Item "Contingent Liability on Letters of Credit" is frequently seen, either as a footnote or included with the actual liabili- ties, but, in the latter case, the corresponding liability of the customers on whom bills will be drawn under such letters oi credit will be included among tlie assets. Where there is any probability that an amount which is usually stated as a contingent liability will be an actual lia- bility, provision should be made out of profits by way of a special reserve to cover the estimated loss. The exact stage at which a possible liability becomes a probable one is often dilificult to determine, but it is always better to err on the safe side. SHARES HELD AS ASSETS.— Where one company holds as part of its assets the shares of another company the question often arises as to tne valuation at which such shares should be shown in the books and Balance Sheet of the tn'si named. It may be stated as a general rule that any such shares should not be included at more than cost price, and this is so even if the nominal value of such shares is considerably higher than cost. Suppose, for example, that the "A" Co. sold a portion of its property to the "B" Co. The value at which such property stood in the books of the "A" Co. was £10,000, but the "B"' Co. issued to the "A" Co., as payment for the property, i:),n(Hi fulls i.aid shares of £1 each. These shares should not Ix- includiMl in tlie "A" Co.'s books at more than cost, i.e.. the value at wliich the asset disposed of ap- peared in its books, £10,000. If. later, the "A" Co. pells such shares at more than this an^'unt. it will then be entitled to treit the difTerence as ]^y<>U\. luil it is clearly wrong to take credit for anv iirofit until it is realised. 432 FOREIGN li RAN CUES. Where, however, shares received as C(jnsideration de- crease in value, i.e., become worth less than cost, the question arises as to whether such shares should he written down in the books. Taking first of all the legal aspect of the case, it was decided in \'erner v. The (lencral, &c.. Trust, Ltd. (1894, 2 Ch. 2iH)), that where shares are held as fixed assets, as would be the case in an Investment Company, a company is imder no obligation to provide for the decrease in value oi such shares before treating as profits the excess of current income over current expenditure, provided, of course, there is nothing to the contrary in the company's articles of asso- ciation. But if the shares are part of the floating assets of a company, as they would be if they were acquired purely lor speculative purposes, any decrease in the value of such shares must be taken into account before arriving at the profits. Where a company holds shares as an investment it is advisable to set up an Investment Fluctuation Reserve, so that, if it is desired to allow any such shares to remain in the books at cost price, provision may be made in the reserve to equalise any over-statement of the actual value of the shares in the Balance Sheet. If. on the other hand, the shares are quoted at more than cost, it is, as already mentioned, in- correct to write up the value to the credit of Profit and Loss account. If the directors wish to show the shares in the Balance Sheet at market valuation any increase in the value should be carried to a special reserve. Where shares are held for speculative i)urposes the rule is that the shares must be valued at cost price or market price, whichever is the lower, i.e., treated on exactly the same footing as stock-in-trade in an ordinary trading concern. If the shares held are not fully paid up the amount un- called thereon should be stated as a memo, beneath the asset in the Balance Sheet. FOREIGN BRANCHES.— In Australia it is not often that the necessity arises for keeping books so as to record in another currency the transactions of foreign branches. Where such branches are conducted they are frequently re- quired to supply to the head office periodical statements showing their transactions and the bulk of the bookkeeping is, therefore, performed at the head office. These state- ments will, of course, be given in the foreign currency and, as it would entail a considerable amount of work to convert the individual items into English currency, it is better to keep a separate set of books for the branch and w^ite them up from the statements received in the foreign currency. At AUSTRALASIAN ADVANCED ACCOUNTANCY. ihe end of each linancial period a Trial Balance will be pre- pared and the items in the Trial Balance should then be con- verted into l'Ji£^lish currency accordinj^ to the following rules : — ■ (a) Remittances will be converted at the rate rulin.y at the date of remittance. (b) Revenue items will be con\-erted at the average rate throughout the period. (c) Fixed assets will be converted at the original rate, i.e., at the rate ruling at the time when the assets were acquired. (d) Floating assets will be converted at the current rate, i.e., the rate ruling on l:)alance day. (e) Liabilities. — As lialiilitics at a branch arc most likely to be in connection with local purchases and ex- penses, these will be treated on the same footing as floating assets and converted at the actual rate on balance day. When the items in the Trial Balance have been converted on the lines above mentioned, it is very unlikely that the two sides will agree. The diflference between the "Dr." and "Cr.'' columns will be due to variations in the exchange rates, and the two sides' will be agreed by inserting the difference on the smaller side and treating it either as a profit or loss on exchange, according to circuni?tnnces. VALUATION OF STOCK.— The general rule as to the basis upon which the valuation of stock-in-trade is to be made is that it should be valued at cost price or market price, whichever is the lower at date of balancing. The valuation of completed and uncomj^leted stock in a manufacturing concern which has a satisfactory system of costing is a matter of no particular difificulty. but some trouble is usually experienced in getting a satisfactory valu- ation of stock in those concerns where Cost accounts are not kept or which have no systematic method of costing. The difficulty is accentuated where the articles manufactured are varied and large numbers of unfinished articles at all stages of mannfncturc are on hand at stocktaking. Where such a concern lias regular selling prices for the completed articles probabh tlic most satisfactory way of ar- riving at the cost of those uncompleted is to include them in 434 FIRE LOSSES. the Stock sheets at selling prices, less the esti4nated cost of completing, and less also the average percentage of gross profit shown by recent Trading accounts, after making due allowance for any increase in wages, prices and other elements which would affect the result. In many cases this method will prove more accurate than estimating the cost of materials, labor, and other expenses already incurred in con- nection with such goods, but the fact that such concerns can be placed in the position of being required to base the valu- ation of a part of their stock on estimates of this nature em- phasises the necessity for an effective system of costing. Although the method above described may be permis- sible in certain classes of manufacturing concerns, the same circumstances do not arise in retail establishments and the custom, which appears to be gaining hold in some such busi- nesses, of valuing stock at selling prices, less an estimated percentage of gross profit cannot be too strongly deprecated . The fact that in such concerns a varied stock is often carried, that different classes of stock yield different percentages of profit resulting in the likelihood of the percentage or gross profit on sales varying from year to year, that where a very large stock is carried a small discrepancy in the estimated percentage may result in an over-statement or under-state- ment of profits by some thousands of pounds, added to the ordinary liability of error in stock-taking and pricing, renders this an' extremely dangerous principle of valuation and one ^vhich every Auditor should, save under exceptional circum- stances, hold out against most strongly. FIRE LOSSES— "AVERAGE CLAUSE."— An Insur- ance policy is a contract of indemnity, and any person who takes out such a policy cannot claim thereunder anything in excess of the actual loss sustained by him. irrespective of the amount of the policy. Where such a policy contains the "average clause." and this clause is inserted in practically every fire policy, the policy-holder is not always entitled, even if the loss sustained is less than the amount of the policy, to recover the total of his loss. To ascertain the amount which the policy-holder is en- titled to claim under such circumstances, the amount must be "averaged" in ])roportion to: — (a) The actual value of the property insured. (b) The amount of the policy. (c) The value of the property actually destroyed. 435 AUSTRALASIAN ADVANCED ACCOUNTANCY. If the property covered by the policy is fully insured, then the policy holder can claim for any loss by fire, whether total or partial, sustained by him. On the other hand, if the property is not fully insured and there is a total destruction by fire, the policy holder can claim the full amount of the policy. But if there is a partial loss the insurance company can only be required to pay a proportion of tlic loss, ascertained in accordance with the rule above g^iven . EXAMPLE. — "A" has on his business premises stock- in-trade valued at £1000, and has taken out a fire insurance policy for that amount. A fire occurs, and t^oods to the value of £800 are destroyed. He is entitled to receive the full amount of his loss from the insurance compauA-. EXAMPLE.— "A" has stock-in-trade valued at £1000. He insures these goods for £800. and all his stock was sub- sequently destroyed by fire. He is entitled to receive from the insurance compau}' the full amount of his policy, £800. EXAMPLE. — "A" has stock-in-trade valued at £1000, which he insures for £800. A fire occurs, and goods to 'the value of £400 are destroyed. In this case the "average clause" applies. "A" cannot say that the whole of the goods destroyed formed part of the particular £800 worth w^hich he insured with the company. The correct way to look at the matter is that, as the stock was worth £1000, and he was only insured for £800, the insurance company took eight-tenths of the risk and "A" took two-tenths himself. The loss must, therefore, be borne in those proportions, and "A" will only be entitled to recover £.320 from the company. CHAPTER XXXIII THE CRITICISM OF ACCOUNTS. The criticism of published accounts is perhaps the besc possible mental exercise for the student of Accountancy, requiring as it does a thorough knowledge of the principles of correct accounting, a full acquaintance with business terminology and a good grasp of commerce and financial customs. All these branches of knowledge must be acquired in some degree before criticism can be effective and in- structive ; the keenest financier can oflfer no opinion as to the soundness of a business and its policy as revealed by its published accounts unless he has some knowledge of accounts at his disposal, whilst a mere knowledge of accounts, repre- senting the finished product of the bookkeeper, will not go far in the direction of supplying matter for criticism from the standpoint of the business man and investor. The subject of this chapter might therefore be defined as : — The application to published accounts of tests suggested by a knowledge of the principles of Accountancy, finance and the recognised methods of stating such accounts for the in- formation of proprietors and investors. The primary objects of such criticism may be briefly stated as follows: — 1. To test the accuracy and reliability of accounts. 2. To ascertain tlieir meaning and efTect. 3. To discover data for purposes of comparison. As secondary ol)jects there might he added : •i. (In the case of published criticism.) To encourage care and skill in the compilation of accounts. ."). To perform a most useful exercise in Accountancy, and consequently to deepen and strengthen one's knowledge of accounts. 437 AUSTRALASIAN ADVANCED ACCOUNTANCY. Keeping in view these objects and th^ end to be attained it may now be as well to formulate some general "plan of attack''; for criticism is in its very nature more destructive than constructive; more devoted to attack than defence; and no attack can be expected to be successful or to yield much if it is undertaken aimlessly and according to no preconcerted plan. The following is suggested as a methodical plan along which one's critical faculties might be directed. 1. Matters of form, comprising: — (a) Headings. (b) General style. (c) Lucidity. (d) Arithmetical correctness. 2. Matters of principle, looking for — (a Failure to distinguish between cai)ital ana revenue items. (b) Inconsistency between headings and account. (c) Errors caused through ignorance ; these are too numerous and varied to classify. 3. Interpretation of accounts, seeking — (a) The net results revealed by the accounts. (b) Material for future guidance. (c) Statistical information for comparati\-e pur- poses. 4. Evidence of stability in the concern as revealed l)y its accounts. 1 . Matters of Form. — The plan of attack as formulated above recpiires that criticism be directed first to matters of form in published accounts. It is admitted at the outset that this portion of the subject may be described as being of minor importance, but still it is important and there are good reasons to be urged in sui)port of the claim that all accounts should conform fo nrthorlox rcfiuirements in matters of form. 438 CRITICISM OF ACCOUNTS. The headings of published accounts should first be scan- ned, for, if they have any use at all, they should contain in- formation as to the nature of the statements which they pre- cede. In this connection it should be noted that a Profit and Loss account, using the term generally to cover all branches of Revenue accounts, should be headed as relating to a given period, thus "Profit and Loss account for the year ended 31st December," but a Balance Sheet, which does not cover a given period of time but merely sets out the position at a given point of time, should be headed "Balance Sheet as at 31st December." As mentioned in Chapter I., the headings "Dr." and "Cr." and the prefixes "To" and "By" are entirely out of place in a Balance Sheet, seeing that a Balance Sheet is not an account, but merely a statement or list of balances extracted from the ledger. Correct terminology in headings is also a matter of some importance. There is a generic term "Revenue account" which covers all accounts of any description designed to show the operations of an undertaking for a given period. In a trad- ing or manufacturing concern the sub-headings "Trading sccount" and "Profit and Loss account" are used ; in a non- trading concern such as. for example, a club or ^ church, the term "Income and Expenditure account" is used. These are all species of Revenue accounts, but it is advisable, except in those cases where the term "Revenue account" is required by statutory forms, to adhere to the terms "Profit and Loss account" for a trading concern, and "Income and Expendi- ture account" for a non-trading concern. As opposed to these there is a "Receipts and Payments account." a heading which should be used only for a summary of cash receipts and payments for a given period. The Profit and Loss account of a trading concern is gener- ally subdivided into Trading account. Profit and Loss account and. except in the case of a sole trader. Appropriation account, the third division being designed to show how the net profit for the period, together with any balances of undi\ided profits brought forward, are appropriated. In considering the question of form the critic should note in those cases where statutor}- forms are enjoined whether the accounts comply with the statute. An example of this is provided in the case of the accounts of Life Insurance Societies which are required to follow certain statutory forms, set out as schedules to an Act of Parliament. xAn illustration of such accounts is supplied in conjunction with the chapter on Insur- ance Companies accounts. AUSTRALASIAN ADVANCED ACCOUNTANCY. The Double Account system, which is applicable to cer- tain forms of trading-, is also in its origin a statutory form of presenting accounts and the recognised form should be fol- lowed, the Balance Sheet being set out in two parts, the first being headed "Capital Receipts and Capital Expenditure," and the second part, "General Balance Sheet." Still dealing with the subject under "Matters of Form," the next point for consideration is the general style of accounts submitted for criticism. There should be an orderly classi- fication of the component parts of the accounts and a group- ing together of all cognate items. Where in a Profit and Loss account, for instance, various nominal accounts, representing expenditure, can be grouped under such headings as Factory Expenses, Ofifice Expenses. Expenses of Distribution, General Administration Expenses. 8zc., it is advisable to adopt such a method. Another column should be used in the Profit and Loss account for this purpose and the various amounts under any of these headings should be stated in the inner column, the total being carried to the outer column. A little care in this direction will make the statement more useful . Again, correct nomenclature of the various items should receive more attention than is sometimes apparent. In par- ticular, any items temporarily capitalised, as. for example, Preliminary Expenses, or a special Fire Loss, or other extra- ordinary expenses carried forward should be so stated in the Balance Sheet as to make perfectly clear the exact nature of the item. Any heading that on the one hand seems to indicate that the amount represents a tangible asset, or that, on the other hand, is so vague as to be meaningless and looks as if it were intended to i)e taken impliedly as an asset, should be avoided. The use of the item "Suspense account" is nothing more than the hall mark of the careless or ineflficient ac- countant. If a Suspense account is at any time necessary the heading used should indicate the nature of the item giving rise to such, as "Error Suspense account" or "Anonymous Remittance Suspense account." Again, where a reserve is raised for a particular purpose, that purpose should be clearly indicated in the title of the account. The bare term "Reserve account" should be used cnlv for a general reserve created to meet contingencies or to increase working resources, but if. for example, a reserve is created to make provision for doubtful debts it should be styled "Doubtful Debts Reserve account" and so on. The accountant should not fear to display a little originality occa- sionally in creating a new name to meet peculiar circum- •itanccs : the onh- requirements with which he must conform 440 CRITICISM OF ACCOUNTS. in such matters are that the title must be as brief as possible and that it should fairly describe the item to which it refers. The quesion of the arithmetical and general correctness of the hgures may also be dealt with under the present head- ing. Tliis is perhaps sufficiently dealt with by the injunction "take nothing for granted." Always check additions and calculations and see that they are correct. Sometimes an miportant omission from the accounts may be disclosed in this way and a little study of the other portion of the accounts will show what the omission is. 2. Correctness in Principle. — This is a far more important field for criticism than that which has already been dealt with . Under this heading there might be placed, first, an error which could perhaps more correctly come under the heading of "Matters of Form." This error consists of an inconsistency between the heading of the account and the account itself; thus one occasionally sees a statement of cash receipts and payments styled "Balance Sheet or Profit and Loss account" and this error in the heading has occasionally led to attempts to mix a Cash account and a Revenue account, two statements which in their essential natures are as non- miscible as oil and water. A more common inconsistency between heading and ac- count, which results in an error of principle, is that of styling a Profit and Loss account "Profit and Loss account for the year ending the 31st December" and including in it items which do not belong to that period, for example, a balance of undisturbed profit brought forward from previous years on the one side, and dividends and other appropriations of profits on the other side. If an account is headed "Profit and Loss account for the year ended 31st December" the balance of that account should be the net profit earned during that period without reference to any figures carried forward from another financial period. As an illustration of the unsatisfactory result of this error Irom a shareholder's point of view, the published Revenue account of an Opera House company is su])mitted in a sum- marised form. THE OPERA HOUSE COMPANY. PROFIT AND LOSS ACCOUNT FOR YEAR ENDED 31.st AUGUST 1920 To Dividend at 8 p.c. £1,438 6 7 By Balance Income „ Interest 115 16 3 and Expenditure „ Insurance, etc., etc. 1,336 18 2 A/c. last vear . . .£1,463 12 7 „ Balance of Profit ' ., Rents 3,310 9 8 and Loss A/c . . 1,883 1 3 £4,774 2 3 £4.774 2 3 441 AUSTRALASIAN ADVANCED ACCOUNTANCY. Ill the first i)lace as tliis is the account of a non-tradini; concern it should have liceii headed "Jnconie and l^xpenditure account" as, judging l)y the first item on the credit side of the statement, it was st3ded in the previous year. In the second place, the 1)alance does not show the result of the year's w'orking. The true net profit for the year is £J857 3 5s. ;3d. This is not shown on the face of the account as it should have been ; any shareholder who wishes to find the result of the working of the company is required to make a calculation, adding to the balance shown in the account the :«mount of dividend distributed and deducting the balance brought forward from the previous year. As accounts are presumably published to give information to shareholders this result sh(^uld be set out clearly. A more serious error of principle is displayed where there has been a failure to distinguish properly between capital and revenue receipts and capital and revenue expenditure. Of rourse such errors are not always revealed in the published accounts, but whilst this is the case they should be apparent to the auditor or other person responsible for checking the accounts during course of construction. Sometimes it is clearly siiown, as was tlic case in the Profit and Loss account of a trading concern recently pub- lished, in which appeared on the credit side the item "Pro- ceeds of Sale of Land." Tt is not often, however, that such sublime ignorance of the first principles of accountancy is re- vealed in published accounts. A more common, but perha]-)s just as serious error, is that of failing to make any distinction between those items which are charges against a year's profit and those wdiich are merely appropriations of net profit when ascertained . The following statement was not long ago published shove the signature of the auditors in the prospectus of a company which was desirous of placing a new issue of shares with tlie general public: — "The business showed a net profit of £8000 for the half- year and this must be considered a highly satisfactory result. This net profit of £8000 the directors propose to apply as follows :— Dejireciation on Buildings and Plant .. .. £1000 Dividend of 8 per cent, on Capital 1000 Reserve 3000 Carried forward 1000 £8000" 442 CRITICISM OF ACCOUNTS This is quite wrong' in principle. The amount ff deprecia- tion properly attributable to the year's workinir is as much a t-harge against the profit of the year as are the wages of the workmen. The directors might with equal justification have so framed this statement as to show a net profit of £13,000, and, with the usual self-congratulatory reference, propose to apply it towards writing oft' wages £5000 and then in ac- cordance with the foregoing. It may l)e safely assumed that even the average shareliolder would imagine there was some- thing wrong with a statement which showed > £13,000 profit arrived at in such a way, and a Professional Accountant should not require to be told that it is equally wrong in principle lo treat depreciation in this manner. It may be argued that it is a small matter and that the result is the same, but this cannot be conceded. The treat- ment of depreciation complained of tends to keep alive the hoary-headed error that a charge for depreciation is a mere prudential provision to be made out of profits if sufificient profits are earned. Under this heading must also be included the necessity of watching for any error which may be due to ignorance of the principles or Accountancy, and it is obvious that such errors are too numerous and too varied to be sub-divided. Anyone in a position where he is. likely to receive numbers of published Balance Sheets with the accompanying accounts will have ample opportunity of ascertaining that many con- tain absurd errors. In the Profit and Loss account of at least two business concerns seen recently the cash balance at the end of the year was included as a debit entry in Profit and Loss account whilst mistakes of an equally absurd nature have been made in other publislied accounts. Where an obvious error of principle, as instanced above, .'s shown on the face of the accounts the critic should ask himself, what is the result of this error? Clearly the conse- quence of debiting the cash balance to Profit and Loss account is that the profits will be understated, and, as a natural result, this should prevent the agreement of the two sides of the Balance Sheet, the cash balance having appeared once in Profit and Loss account and once as an asset. This should cause the assets side of the Balance Sheet to appear greater than the liabilities side. The next step is to ascertain if this result is apparent in the accounts and, if not, how it has been covered up. For in- stance, in the accounts which contained the error above re- ferred to, a Balance Sheet was shown with both sides in agree- ment, a thing which the principles of Accountancy and the 443 AUSTRALASIAN ADVANCED ACCOUNTANCY. rules of arithmetic indicate is impossible unless a compensat- ing error is made to adjust matters. A further search may reveal where this compensating- error has l)een made. Ki the published statements of a trading concern which appeared recentl}-, the following account called "Stock and Trading account" was set out: — STOCK AND TRADING ACCOUNT FOR HALF-YEAR ENDED 31st AUGUST. To Goods Purchased £13,091 16 7 By Goods Sold .. ..£14,783 2 4 „ Goods in Stock ., Goods in Stock . . 4,970 9 3 iMarch 1st 4,688 5 5 „ Goods Ledger. A/cs „ Goods Ledger, A/cs receivable 5,078 10 9 receivable 4,036 13 7 ., Discount and In- terest 179 3 8 £21,816 15 7 „ Sundry Expenses. . 2,761 9 „ Balance being pro- fit 433 1 5 £25,011 6 £25,011 6 It will be seen that the above is really a Trading account, tnit it is debited with Book Debts, presumably at the begin- i>ing of the period, and credited with Book Debts, presumably at the end of the period. As the Book Debts are assets they have no more legitimate a place in a Trading account than has cash in a Profit and Loss account and, if the Book Debts at the beginning and end of a period are wrongly inserted in Trading account, the result must be to throw the balance of that account out by the amount of the increase or decrease m Book Debts during the period. In the present case the Book Debts ha\c increased by £1041/17/2. This error must affect the profits, so that, in- stead of the account showing a net profit of £433, it appears as if there should have been a loss of £008. The Balance Sheet whicli accompanied this account had, however, its two S'des in agreement, with the Book Debts, £5078/10/9, amongst the assets and the net profit £433/1/5 on the lia- bilities side. The published accounts showed clearly that the books had been kept by double entry and except for the error above stated the accounts were in exceptionally good form . Some explanation had to be looked for other than that a mistake had been made in the Trading account and sul)se- quently covered up by "cooking" the Balance Sheet. The apparent explanation of the niysti-ry was that the amount appearing in the Trading account as sales represented. 444 CRITICISM OF ACCOUNTS. r-ot true sales, but the actual cash receipts during the year in respect of goods sold, this total including cash sales and all .amounts received in reduction of Sales Ledger accounts. The correct statement of the position would therefore be as shown m the following Trading account: — TRADING ACCOUNT FOR HALF-YEAR. To Stock at 28/2/17 ., „ Purchases . . . „ Duty ,, Gross Profit . . . £4,688 5 5 13,091 16 7 432 12 11 2,582 13 10 £20,795 8 by Cash Receipts A/c £14,783 2 Goods sold. „ Less Sundry Debt- ors (goods) Feb. 28th 4,036 13 £10,746 8 Add do. Aug. 3Lst 5,078 10 Sales for half-year 15,824 19 6 Stock at close . . 4,970 9 3 £20,795 8 9 A note was subsequently received from the Ijookkeeper responsible for the form of accounts stating that the above account showed the position correctly. On another occasion the i'rolit and Loss account of a trading concern showed on the debit side. Book Debts last jear £3800, and on the credit side Book Debts this yea^- £4300. Ordinarily this error must have resulted in an over- statement of profits by £400, the amount by which the Book Debts had increased, and of course it should have thrown the Balance Sheet out by the same amount, the liabilities exceed- ing the assets. The two sides of the accompanying Balance Sheet were, however, shown in agreement, but an inspection showed the item, "Suspense account, £400," nestling in an unassuminsf manner anions: the assets. The presence of this Suspense account indicated clearly that the placing of Book Debts in Profit and Loss account was, in this case, a pure error and that, being unable to account for the discrepancy in the Balance Sheet, the bookkeeper had re- course to the term "Suspense account" to produce an ap- parent agreement between the two sides of that statement. 3. Interpretation of Accounts. — If accounts are carefully framed with the intention of disclosing ii formation to share- holders and investors, nothing more should be necessary in seeking to interpret them than a good knowledge of business terms and an ordinarv Avorking knowledge of accounts. A Dl 445 AUSTRALASIAN ADVANCED ACCOUNTANCY. Study of many published accounts, however, gives one the impression that they are framed, not so much to give informa- tion, as to endeavour to conceal it and, instead of the result of the transactions being clear from the Profit and Loss ac- count and the exact position of the undertaking being plainly set out in the Balance Sheet, it is often necessary that the critic should "dig" for his information and obtain by inductive and deductive reasoning what should be apparent as a direct statement. Ambiguous items often appear and their exact liature has to be determined by tests based on their relation- ship to other items. As an illustration of the class of accounts referred to and as an example of the methods required to obtain information f:om accounts in such cases, there are supplied hereunder the published accounts of a Permanent Investment and Building Society : — 446 CRITICISM OF ACCOUNTS. n ^ g a o H , o r^ ^ K iz; ^ fa o o t» lo CO o m • rt o as w cc —1 c-i (m' co" Q S o o rt - >;> ^SO' -S "^ -.n o o o •* tn ^ J O (N ^^ Ol O CO o . a -5 « a^« cj cu H a) _ on « ^^ O -5 ^ I M_2 5 . • " >^. ^ .b b£ O ^ ^ 00 ^ I- ij-> c c o M «C c: lO ?o O >— < M ^ -f o lo Gi C5 !r> aj -f" lo ira ■* o CO cc (M CO ' be tc c ?i « ?* b > 2 s c .i; ^ K ^ « A U S T R A L A S I A N ADVANCED ACCOUNTANCY. I '-'MO •t ~ "i -t r- I— C-. cc MOO '.C CO DO -to ^ 05 O • Rcnj~ur.r Current Risks, 31st AUKusl. 1911 Balance carricT«inDwl>t Securities at, UB Cape ol Oood Hope 3i% New Soutb Wales 3^': South Australian H7. Victorijn Sj"; gueensland J„ der— 9,S0O 10,000 9.700 5,700 j!-'.oo -,.000 - .■iO.400 D Balances at Branches and Agencies Bills Recen-aiile Snndry I>ebtors (or Open Accounts and Accounta, and [iformation and the books of the Coinpony WE CERTI 11.) The book vah That 111 uur beliel ics ol the Stock 1 he middle prices Aiut!s ? u ^r^ N >0 VO ^•»-» CO J ■^ x" '^ ^ 1 >> 1 ^ i (B s pa 3 ~ . : : c a -3 1 ■^ 1. en = 1 '■5 .a 1^ 4) 6^ k a- 1 ; •a c 1° « ut Q • (A H c •sl c !l S3 If I ii Ii c >, £ CQ « - H * > T3 O O <^ 1 - ^ 2^ ? .oca ^ r^ & ^p.-^i S ^ « 'T .O - N -a- 1 00 2 sl ^ ^ 1^ D cS. -; : '« 3 < >:■-■ 1 -^ (/) :^ -1 :-a : : (f) 3 Ii [I. Q dJ Z < :-|?| HSWt < -la h III! ilia ill Q. P^l Uii Q . - . H I- - " • 460 FORM OF PUBLISHED ACCOUNTS. MERCHANT. — None of the items in the Balance Sheet calls for special comment, but the method of deductini;- the amount due on mortgage of the land and buildings from the asset, instead of showing the item separately on the Lia])ilities side, 'is somewhat unusual, although perfectly correct. The item "Insurance Premiums" on the Assets side is the unex- pired proportion of Insurance Premiums paid. Profit and Loss Account.— Here again the Profit ami Loss account is divided into two portions, in order to enable the actual net profit for the year to be shown. This account is interesting as showing the proper treatment of special losses made by a business. During the period covered by this ac- count the premises occupied by the company were destroyed by fire, and, although the company was well insured, there were losses in connection with the fire apparently not covered by the policies. Any such loss is better shown as a charge against the Appropriation account, in order that the actual net trading profit for the period will not be obscured. CO-OPERATIVE DAIRY COMPANY— Balance Sheet- Liabilities Side.— The inclusion of Uncalled Capital and Calls in Arrears in the one amount is incorrect, as the arrears of calls should be shown clearly in the Balance Sheet. Marine Insurance Fund. — This company is apparently effecting its own insurances on shipments. In other words, it charges insurance premiums against the Profit and Loss account, and, instead of making the payments of these pre- miums to outside Insurance companies, it carries them to In- surance Reserve. Any losses which would be covered by marine insurances effected with outside companies will be charged against this reserve. Reference to the Profit and Loss account shows that, during the current year, an amount of £31 13s. 2d. has been charged against Profit and Loss account and added to the Marine Insurance Reserve. Assets Side. Shares in Other Companies. — It is assumed that the Memorandum of Association of this company authorises it to hold shares in other companies. This is a matter which the Auditor of the company would reipiire to look into. Butter Account. — This shows the amount of milk, cream, etc., received from the suppliers, who are i)rol)al)ly all mem- bers of the company, and the gross profits earned on the sales of butter. Profit and Loss Account. — There is nothing to show rm the face of these accounts the period covered by the Butter account and the Profit and Loss account, i.e., it is impossible to ascertain whethcM" the accoimts presented show the trading ICi El AUSTRALASIAN ADVANCED ACCOUNTANCY Che Cooperative Dairy Company, Ltd., Balance Sheet at 25th June, 1910. LUBILITES To 1*86 Sh»r». inbscnbed at £1 L«as &rre&n and uacAlled Marino Icauranca Fund Suodrj Cr«diton — Bkluire Profit aod Loss Accc 017 16 SOO «n 14 Wu i 3 4366 By Land Buildings and Wharf Less Depreciation PUnt Less Depreciation Shares in Coastal Farmers' Society Shares in Co operative Boi Coy. Sundry Debtors Stocks on Hand— Hotter Material. Boxos, etc Payments in Advance, Insurance and Telephone Balance at Bank Loss Unpresented Cheques Cash on Hand 420 20 1208 833 8 6 1313 8 C 9 15 1610 U fi 309 2 1 1301 9 3 28 8 10 Butter Account. To Stock 2032 10 Uv Sales ... 49,747 17 8 Suppli.r. Front and Loss 42.258 6 9 Stock on Hand 5937 11 £50,227 17 8 £50,227 17 8 Profit and L jOss Account. To Audi! and Directors- Fees 30 19 « fly n^lance brought forward 217 12 11 Accident and Fire lasumoce 14 12 3 . 1563 « 4 Butter Milk Bank Charsfes and Interest 20 12 1 Dividend C F S Shores 7 11 3 ConjMiistion. less C F S Bonus« 5J5 1) 11 Export balances recoivsd Cartage and Tru.nago 67 lU 8 K.nt Eichange and Discount Export Charges .. Fuel Freight Incidental Expenses lu+4 11 5 53 12 9 Marine Insunincu Unintenani'C Material . 3 33^13 ] q and Theatres . ) ' " ., Colonial Theatre Ltd. Dividends- 1.924 8 „ Interest -. J<3 tS 8' £40.820 18 4 464 FORM OF PUBLISHED ACCOUNTS. Reserve amounts to £11,83? 18s. Gd., and has been built up out of profits. On looking to the Assets side for a corre- sponding item, the investment of this reserve is conspicuous by its absence, although, seeing that the company is working on a large Bank overdraft, it is obvious that gilt-edged securi- ties would produce a far lower rate of interest than the com- pany is paying to the Bank. The treatment of the cost ol acquiring the two motor waggons is clearly incorrect. These motor waggons should be included with plant on the Assets side, as the mere fact of their being acquired does not decrease ROYAL ALEXANDRA HOSPITAL FOR CHILDREN. Stitemenl of Revenue «nd Expeoditufe fofthe Year coded 3 Jit Decembef, 19 U. 1»U. Dec. 31. REVENUE. To SuhscriptioD „ EnWrUinni „ Perpetual C 9 and Donation! ot Endowment . „ Patients' Contributiom— Indoor Outdoor ..h,te«..o„ luve&tDienu „ Sundriei .. „ K.S.W. Gov Ernment Subsidy . ., B»l4iice 1911. 8.866 13 1 «,«96 6 9 «86 19 4 Dec. SI. By Balance at Slsl December. 1910 „ Salariae and Wages, „ Auditors' tees. „ Provisions— Heat Bread EXPENDITUBE Butter and Eegl riBh and Poultry Vegetables and Fruit Groceries . . , Surgery and Ditpemary^ Drugs Surt;ical Dressings Radiography and Pathology Depirtment Wines and Spirits Halt Liquors Aerated Waters . EttaMuhment Chmr^et- Rates and Taxes Insurance . Alterations and Repair Telephones Interest on O'erdrafl Interest on Mortgages Cleaning By Mitetlianeous— Printing and Stalii Advertising Funerals . LEGACY ACCOUKT. E.XPE.NDITURE. JAMES ROBERTSON, H. RUSSELL CRANK k CO., I Additions to Laundry, Laundry Machinery Additions to Diphtheria Department al and Uuuiite Painting Investmsnt o( Russell Legacy In Govern. roent Stock Balance to be expended on Additions and Inii'iovements to Hospital . 465 A U S T K A L A S ] A X ADVANCED ACCOUNTANCY. I ©to ' © OS :2 ?g IN iC O t © 05 •<♦■ M 1^ S52 e<5 o ^ ^s i I -o o too© MOJO 30QO CC 11^ MO © oeoo 2}>n o CO t-- Q — (M 25 oi" uf c^' 3^ .c ^ . S c5 lo ce o 00 oc© S: = '2 5 M^J Eh c •d o>©©e<: (0 CO IC C 00 to © Ol (N : 5' -'2 £ 4< o 3 = E^ .00 . •*< • 2 .2 -^ - S 5 i^i- 1 '33; © t^ © ■* I I e '- 5 Has Km 466 FOR M OF P U B L 1 S II P: D ACCOUNT S. the Reserve built u]) out of ])rotits. If this procedure is cou- tinued, by the time the company has erected its freezing works and has acquired the necessary machinery for wool- &couring- the Reserve will be wiped out of the books alto- gether, and nothing will appear in the Balance Sheet to represent the assets acquired. The company will then liave a secret reserve to the extent of those assets. Shipments in Suspense. — Tliis represents goods shipped, the amount of the proceeds of wliicli has not been ascertained at the date of balancing. Profit and Loss Account. Credit Side. — In all ]M-obal)ility the item "Receipts" shown herein is intended for "Income.' The subsidy shown in the next item arises from contributions made by graziers to the company for the company's services in buying up cattle, etc., when the markets are low, thus tending to keep up the i)rices. AMUSEMENTS COMPANY.—The Balance Sheet of The Greater J. D. Williams Amusements Co.. Ltd.. is sup- plied, and, as "the items shown in this statement explain their i?ature clearly, no comment is necessary. There is a great paucity of information in the Profit and Loss account, and it IS impossible for anyone to ascertain the proportion of de- preciation written ofT the various assets disclosed in the Balance Sheet. CHARITABLE INSTITUTION.— The published state- ments of The Royal Alexandra Hospital for Children are sub- joined. It will be noted that a statement of Cash Receipts and Payments has been presented, and this shows on the Receipts side the whole of the income for the period. Such n statement is usual for this class of institution, as patrons are more interested in knowing what liquid funds the institution has available for the purpose of enabling it to carry on, than if the income for the year sufifices to meet the expenditure. Balance Sheet. — The items in the first two sections on the Lia1)ilities side show legacies, etc., specially contributed for the purposes shown. These amounts are invested, and the income is utilised in furtherance of these objects. SHIPPING COMPANY.—The published statements of the P. and O. Steam Navigation Co.. Ltd., are supplied here- with . The General Working account gives a good deal of de- tailed information with regard to the expenses incurred in carrying on this Company's business, and a careful perusal of this account is recommended. Referring to the Balance Sheet, it will be noted that the liabilities are stated on the right hand side and the assets 467 AUSTRALASIAN A D \' A X C E D A C C O L' X T A X C Y STATEMENT OF ACCOUNTS of the For the Year ended fr. GENERAL A?VORKING C s, d. 807,360 15 4'.7i3 14 5 239,829 12 I 346,503 5 8 1.435.407 7 338,633 10 EXPENDITURE. Expense of Navigating Ships, &c. — Coal.includirigfreight and all charges Lubricating and Lamp Oila and Water Portand Light Dues, Pilotage, Towage, and Miscellaneous Ships' Charges Pay of Commanders, OflBcers and Crews Provisioning of Passengers, Commanders, officers and Crews Suez Canal Dues — On ships and Passengers General Administration at Home and- Abroad, viz.— Directors' and Auditors' Fees Salaries and Wages of Employes Rents, Taxes, Fire Insurance and Repairs of Premises Telegrams, Telephones, Wireless Telegraphy, and Stamps Advertising... Stationery and Printing Office and House Expenses, Travelling Charges, &c Miscellaneous Expenses — Damages, Claims on Cargo, and Law Charges Life Assurances of Employes — Company's Contribution Quarantine Charges Compensation to Passengers, s.s. " Himalaya" October, 1910. . Ships' Repairs, Stores, and General Maintenance Charges during present year Interest on 3I per Cent. Debenture Stock Insurance Charges, viz. — Fire Insurance in P,ort, and risks to and from Antwerp, &c Sundry claims, Damages through stress of weather, and other casualties Stock in Ships — Amount carried to that Account for Depreciation on Fleet during the 5,105 o 123,425 II 15,914 10 16.987 8 14,480 6 7.705 3 14,572 13 22,280 I 4 4,462 12 n 3,413 12 10 year Surplus — Dividends due nth May, 1911, vii. — On Preferred Stock, i\ per cent. On Deferred do. 34 Dividends payable 19th December, 1911 — On Preferred Stock, aj per cent. On Deferred do. 61 ,, Bonus on ' do. do. 3 ,, Balance forward to. 1911-1912 ... Ordinary Extra 5,621 4 10 5.062 15 3. 425.041 « 134.500 6 30.156 7 8,975 " 205,810 14 63,oco o 10,684 o 559.541 12 4 £29.000 40,600 £29.000 75.400 34,800 139,200 o 67,616 15 J0O.81C 15 276,416 15 £3,471.808 19 468 FORM OF PUBLISHED ACCOUNTS. JPeninsular ani) (Oriental Steam gtabigation Compang, 30th September, igii. ACCOUNT. €r. RECEIPTS. Amount brought foryvard from last Account Lt%% : Dividends, &c., due 20th December, 1910 Passage Money Freight, Charters, and Miscellaneous Services .. Government Contract Services — India, China and Australia (net amount) Interest, Discount and Exchange — Balance of Account £. s. d. £ s. d. 206,381 13 7 139,200 o o 1,294,421 O II ,721,666 9 2 3,016,087 10 r 296,137 o I 92,402 15 3 £3,471,808 ig o 469 AUSTRALASIAN' ADVANCED ACCOUNTANCY $r. GENERAL BALANCE SHEET. ASSETS. i^ s. d. Stock in Ships, viz. :. Reduced Book Value of Fleet at 30lh Sept., 1910... ;^3, 655,561 10 o Deduct Proceeds of S.S. "Japan" ... L^A^l '7 o . Amount written off Fleet, as per General Working Account .. 559.54' la 4 '— 568,039 9 4 3,087,522 o 8 Payments on account of New Ships ... ... ... ... 786,528 Ii 9 Steam Tenders, Launches, and Lighters ... ... ... ... 107,688 8 11 Coal, Naval and Victualling Stores... ... .. ... ... 31,726 15 9 Graving Docks, Workshops and Machinery, Wharves, Buildings and Land (Freehold and Leasehold), Moorings, &c. ... ... ... 319,723 4 3 Cash at Bankers, in hands of Agents, and Investments (less acceptances) 2,665,603 11 2 ;,C6,998.792 i2 6 on the left, but nobody is likely to be misled thereby, as the headings are shown distinctly. This statement might con- tain a good deal more information. For example, the term Suspense account, shown on the Liabilities side, gives no clue as to the nature of the composition of this item of £250,000. It may be a general reserve built up to cover the unearned proportion of passengers' return fares, or freights on uncom- pleted voyages, with the object of saving the calculation of these items in detail at the end of each financial period. It may, on the other hand, have something to do with the Insur- ance Reserve, although this is hardly likely, as the amount is not large enough. This Company effects its own insurances, and, although no reserve is disclosed in the Balance Sheet, it is probal)ly hidden by an understatement of the value of the Stock of Ships. Provident and Good Servi'^c Fund is. in all probability, a pension fund for retired oflficers. CIVIL SERVICE CO-OPERATIVE SOCIETY.— The i-nnual statements of the Civil Service Cn-opcrative Society of New South Wales, Limited, are supplied. The business ot the Society is conducted on a cash basis, but provision is made in the rules whcrebv shareholders who desire the con\-enience 470 FORM OF PUBLISHED ACCOUNTS. SOth September, 1911. Cr. LIABILITIES. Capital authorized : £3,59°*°°° Issued in Cumulative 5 per cent. Preferred Stock ..;;t 1,160,000 o o Do. in Deferred Slock ... ... ... 1,160,000 o o 2,320,000 o o Debenture Stock at 3^ per cent 1,800,000 o o Reserve Account 1.250,000 o o Suspense Account 250,000 o o Provident Good Service Fund 50.00° o o Sundry Balances ; and Accounts not closed .. General Working Account— 1,121,975 '7 5 Surplus ^^276,416 IS I Less DiJqdendsdue nth May, 1911 ... 69,600 o 206,816 15 I ;f 6,998.792 13 6 of paying their accounts at regular intervals can do so by making deposits with the Society. They can then have goods supplied to them for payment, say, monthly, but not exceeding the value of the deposits made. The above explanation will enable all the items on the Liabilities side of the Balance Sheet to be understood without difficulty. With regard to the /vssets side, the only item calling for any explanation is "Equalisation of Rent, £4195 6s. Id." The name given to this item, although it describes its nature accurately, is unusual, and a shareholder not possessed of a knowledge of the facts would be unable to arrive at its meaning with any degree of certainty. It represents a premium paid for the lease, the amount' of the premium being treated as capital expenditure to be written off over the term. This item might have been called "Premium for Lease," a heading wliich would be more readily understood. GOLD-MINING COMPANY, LIFE INSURANCE COMPANY, SHEEP AND CATTLE STATION.— Spoci- ii:en Balance Sheets of the above classes of concern are sup- plied, in conjunction with Chapters 13, 21 and 32 respectively, and reference should l)c made thereto. 471 AUSTRALASIAN ADVANCED ACCOUNTANCY JIlv aivMl Seivicc Co-opeiiTtivc Society of IRew South Wlake, Itmiteb. BALANCE SHEET. JANUARY 3L 1912 LIABILITIES ToCapiul Authonsed 14,000 Sbaniol £1 Mcb Lrss UnaUoUed C«plt»l C»i.iUl puKl up „ New PrviiiMcs Duilding Loan „ Reserve Fund „ DiTidends unclaimed „ Bills payable „ Sundry Creditors ., CliStomrrs' Deposits A Credit* Bslance Prulit i 19,321 3 10 14.582 6 2 £91,162 V 1 ASSBTS. By The Commereul Banking Co o( Sidney, Ltd. Piled Depoiit BalAnoe on Cnmnt Aaooont „ Cash on band .. Stock 43,238 4 8 .. Offloe Stationary .. 44B 18 II Pomiture and Fittings 8,682 10 4.19S 6 I 396 8 II £91,162 I PROFIT AND LOSS ACCOUNT FOR HALF YEAR ENDED Jlst JANUARY. 1912 Cr To Working Eiptpses . . , . „ Discount on .Shareholders' Montbfj Accounts Balance carried to Pro6t and Loss Appropriation Account 25.809 13 10 186 16 ft 1.216 19 10 27.537 9 S 13.418 18 I £40.956 7 6 By Gross Profit . . 39,330 12 4 „ Discount (or Cash PaymenU . . 1,688 12 6 „ Interest Filed Deposit 82 10 Leas Interest Bank Account Sale of Rules PROFIT AND LOSS APPROPRIATION ACCOUNT September 29th. 1911 Total Appropriation 11.489 18 6 £13,168 3 4 13.168 3 4 £13.168 3 4 January 31st. 1912 By Balance brought (rom Profit and Loaa Acooont being Net Profit (or half-yeu ended 3lat January. 1912 RESERVE FUND ACCOUNT 472 CHAPTER XXXV. FEDERAL INCOME TAX. It is not practicable in a general work of this nature to do more than deal very briefly with the main points of a subject of such vast importance. Those desiring to make a study of the question are referred to one of the several text books dealing exclusively with taxation matters. The Commonwealth Income Tax was introduced in 191.J, the original Income Tax Assessment Act (the Machinery Act) and the Income Tax Act (Rates of Tax Act) both be- ing assented to on the 13th September, 1915. The Assess- ment Act was amended in 1915, 1916, 1918 and 1921. In this chapter, the Act, including all amendments to date, is dealt with, and at the end a summary is provided showing the effect of the several amendments of the original Act so far as they relate to the principles of assessment and other matters of interest to accountants and their clients, thus enabling the effect of the tax in relation to assessments for earlier years to be considered. The Income Tax Assessment Act remains in operation until repealed, but the Income Tax Act, which imposes the tax. is applicable only for one year, and requires re-enactment annually. Financial Year. — The financial year provided by the .\ci is that ending on the 30th June, and assessments for one financial year are based on the income of the preceding twelve months. For example, the first financial year for which Federal Income Tax was levied was the year 1915/16, the income included in the assessments for that year being that of the year ended 30th June. 1915. Scope of the Act. — The Federal Income Tax applies to all income derived from sources w'ithin Australia and Papua, but does not apply to income derived from Papuan sources by a resident of that place, nor to income earned in Papua from personal exertion by any person while there. Income. — Income is divided into two classes — "Income from personal exertion" and "income from property." 47;i AUSTRALASIAN ADVANCED ACCOUNTANCY. "Income from personal exertion" means income con- sisting of earnings, salaries, wages, commissions, fees, bonuses, pensions, super-annuation allowances, retiring al- lowances and gratuities not paid in a lump sum. allowances and gratuities received in the capacity of employee, whether in cash or kind, and the proceeds of any business carried on by the taxpayer, either alone or as a partner, or by a trustee under any will, settlement, deed of gift, or instru- ment of trust, under which the taxpayer is entitled to in- come, and any income from any property where the income forms part of the emoluments of any office or employment of profit held by the individual. Where a person w'hose principal place of business is outside Australia and who, either as owner or charterer of a ship, carries passengers or goods shipped in Australia, his income derived therefrom is deemed to be 10 per cent, on the amount paid for such carriage. "Income from property" means all income not derived from personal exertion, and specifically includes: — (a) Dividends, interest, profits or bonuses credited or paid to a depositor, member, shareholder, or de- l3enture-holder of a company which derives income from an Australian source, or of a company which is a shareholder in another company earning Aus- tralian income. The exceptions to this are : — (1) Where a company derives part of its income from a source outside Australia, the dividends paid by that company are taxable to the shareholders only as to that proportion which corresponds with the ratio that the Australian income of the com- pany Dears to its total income from which the dividend has been paid. (2) Profits which were accumulated prior to 1st July. 1!)11. in a Reserve or other account, not being a Profit and Loss accoimt or similar account, are not taxable to shareholders upon distribution. (3) Prt)fits which stood to the credit of Profit and Loss account prior to 1st Jul}', litll. and which have been utilised for the purpose of issuing bonus shares are not taxable to shareholders when so used. (4) \\'here a company's ])rolits have l)ccn taxed to the coni])an}' as undistributed income, and are subse- quently distriljuted a rel)ate of tax is allowable to FEDERAL INCOME TAX. the sharehuklcr of thr amount oi tax that the compau}- paid on the sum distributed to the particular shareholder, ur the proportion of such shareholder's own gross tax attributable to that distribution, whichever is the less. (b) Ik-nehcial interests in income (other than income from personal exertion — see definition above) de- rived under any will, settlement, deed or gift, or instrument of trust. (c) Royalty or bonuses, and premiums fines or lore- gifts or consideration in tlie nature of premiums, fines or foregifts in connection with leasehold estates ; and any payment received by a lessee upon assignment or transfer of a lease to another person, less the part (if any) which is attributable to the transfer of other assets than the lease, and less so much of any fine, premium or foregift or sum paid by the lessee upon previous acquisition of the lease by him as is attributable to the period of the ori- ginal lease unexpired at the time of assignment or transfer. This provision does not apply to the sale or assignment of a lease of mining property (other than coal mining) where the Commissioner is satisfied that the lease has been transferred by a bona fide prospector, or by a person, partner- ship, syndicate, or company who or which does not make a business of buying and selling mining properties, and who or which purchased the lease from a bona fide prospector, and worked the property in a proper and efficient manner. (d) 5 per cent, on the capital value of property owned and used or used rent free by the taxpayer for the purpose of residence or enjoyment. This does not ai)ply to a residence occupied by an em- ployee in connection with his employment. In such a case the employee is taxable on the annual value to him (which may not necessarily be 5 per cent, on the ca])ital \alue) of the residence as income from personal exertion. (e) 5 per cent, on the capital value of a retiring allow- ance or gratuity paid in a lump sum. (f) A cash i)rize in a lottery. In connection Avith the foregoing, two difficulties arise. The first is — what is meant by the word "income" in the definitions of income from ])ersonal exertion and income from 475 AUSTRALASIAN ADVANCED ACCOUNTANCY. within the meaning- of that word in the dehnilicjn of inconit from personal exertion ? Broadly, income is everythinj^ that comes in, but there are certain exceptions to this which have been laid down by the Courts from time to time. Except where the Act speci- fically classes certain items as income the word contemplates receipts, which, in their nature, are probably recurrini^". For example, gifts, legacies, and repayment of loans are not in- come. The distinction between a gift and a gratuity granted to an employee in relation to his employment is sometimes difficult to determine. If a so-called gift can be shown to have been made really by way of recognition for services rendered, though the payment may not be obligatory or in any way covered by the contract of employment, it is in- come. Amounts, such as rent or interest, which may have ac- crued due, but which may never be received, are not income — they have not "come in." But it has been held that where the Profit and Loss account of a business is made up from year to year, taking credit for all sales made, irrespective of whether at the balance date payment therefor has been re- ceived, the credits shown in such Profit and Loss account are income. This, too, is evidentl)-- contemplated by the Act, for it provides for deduction on account of Bad Debts. Obvi- ously Bad Debts would not be deductible if profits had not been taken credit for prior to receipt of payment. Inconu' is deemed to have been deri\ed, though it is not actualh- paid over to the taxpayer, ])ut is re-invested, ac- cumulated, cai)italised, carried to any reserve, sinking or in- surance fund, however designated or otherwise dealt with on his behalf or as he directs. Items so treated have in ef- fect "come in" and are rightlv subject to tax. With regard to the question as to whether income arises from a business, it is necessary to ascertain in any specific case whether a business is actually being carried on. and this is frequently a matter of no little difficulty. "Business" implies continuity of transactions entered into with the ob- ject of the acquisition of gain. Thus, if a person sold his residence at a profit, the proceeds would be Capital and not Income. On the other hand, a company or syndicate might be formed for the specific object of carrying out one business transaction, and in that case the proceeds would be profit of a business and subject to tax. A professional man who in- vested his savings in shares and sold a parcel of those shares, would not derive from such sale profits of a business. Tie might, however, effect a number of purchases and sales of sliares, in whicli case he would be carrving on a business. -170 FEDERAL INCOME TAX. He might even effect one single transaction with the intent that it should be the first of several transactions, and that transaction might be the first transaction of an actual busi- ness, and consequently be taxable. Then certain profits may arise from a pastime which are not business profits. In the New South Wales case of R. C. Allen, it was admitted that profits made in racing were profits of a business, but the Court upheld the conten- tion that bets won by the appellant on his own and other persons' horses were free of tax, not bemg proceeds of Al- len's business. Stock Valuation. — In determining the amount of net in- come, another factor which has to be taken into considera- tion is the value of stock-in-trade on hand at the beginning and end of the year. The Department accepts stock valued at cost or market value, whichever is the less, except in the case of live stock, which is specifically dealt with by regula- tion. This regulation provides a basis of valuation for live stock, which is as nearly as possible actual cost. The department has followed the usual commercial prac- tice by allowing stock-in-trade to be valued at cost or market price, whichever is the lower. On a falling market no busi- ness should include its stocks at more than the cost of their replacement. The term "market value" must therefore have relation to the particular class of business being considered. In a retail concern it will ordinarily mean the cost of pur- chasing the same class of goods from a warenouse. In an importing concern it will refer to the amount to be paid for the goods overseas, plus freight, duty and landing charges. \\'here live stock has been bought and kept separate and apart from the general flock or herd, it is valued, so long as it is held, at actual cost, but apart from this the value per head of the stock on hand at the end of the year is arrived at by taking the stock on hand at the beginning of the year at its actual cost, if known, and if not known, at the average cost arrived at for the jjrevious period in the same manner as that now being explained. The purchases of the year (other than those kept apart, to which reference has already been made) are to be taken at actual cost, and the natural increase of the year at prescribed fair average values set out below. The numbers of stock at the beginning of the year, the purchases (other than those kept apart) and the natural increase, and the respective values are added. The sum of the numbers is divided into the sum of the values, and the quotient represents the average cost per head, which is ap- plied to_ the number of stock actually on hand at the end of the period. 477 Fl AUSTRALASIAN ADVANCED ACCOUNTANCY. EXAMPLE:— Stock on hand at 1/7/1921 .. 10,000 at cost of 12/ per head .... £6,000 Purchases dviring year ending 30/6/1922 5,000 at cost £1 per head 5,000 Natural Increase 7,000 at fair average value 10/ (N.S.W.) 3,500 22,000 £14,500 22,000 head at £14,500 = £.659 per head. The num- ber on hand at the end of the year is, say, 12,000, which, at £.659 per head = £7,908. This value of £7,908 is credited as the value of stock on hand at 30/6/192-^, for the purpose of arriving- at the profits for the year ending on that date, and is debited on 1/7/1922 for the purpose of arriving at the profit of the year ending 30/6/1923, a fresh average cost ar- rived at in the same manner being applied to whatever stock is on hand at 30/6/1923, and so on from year to year. In effect, this provision assumes that the stock on hand at the end of the year consists proportionately of (a) stock on hand at the beginning of the period, (b) purchases, and (c) natural increase. This assumption does not always work out equitably, though in the average case it is pro- bably as fair as any other invariable rule could be. The fair average values prescribed for application to natural increase are as follow : — FAIR AVERAGE VALUE OF LIVE STOCK (OTHER THAN STUD STOCK). Sheep. Cattle. Horses. Pigs. £ s. d. £ s. d. £ s. d. £ s. d. New South Wales 10 6 8 1 Victoria 12 6 6 15 2 10 Queensland . . . . 9 3 4 15 , South Australia . . 10 5 7 2 Tasmania 10 3 20 15 Northern Territory 12 6 2 5 Western Australia 5 1 1.-) East Kimberley 5 2 ,-, West Kimberley 7 2 10 N.W. Division, North ot Tropic of Capricorn " 9 3 10 N.W. Division, South of Tropic of Capricorn ^^ 12 4 10 S.W. Division „ 7 2 10 Eucla & Central Division „ .-) I 15 Eastern Division Place of Derivation of Income. — The Act sets out to tax inciimc derived directly or indirectly by every taxpayer from sources within Australia. The question of the place of de- rivation is a very vexed one. As regards salaries, the position may arise that an em- ployee of an Englisli company is sent out to Australia to 478 FEDERAL INCOME TAX. undertake certain work incidental to the company's English business, the company remitting the salary from time to time. At first sight it might seem tliat, as the agreement is en- tered into in England, payments come from England, and the expense is incurred to produce English income to the employer, the employee's salary is derived from a source outside Australia. However, this is not so, the source of the income being the employment, which is within the Com- monwealth. Such income may always be taken to be de- rived where the work is done. If a person remunerated by salary, performs his duties in Australia during part of the year and abroad during the balance of the year, the total salary requires apportionment on the basis of time, the Aus- tralian portion only being taxable here. The most common question under this heading is that of the place of derivation of profits earned by a business trading both in and outside Australia, where buying, or buying and manufacture, take place in one country, and selling in another, or where buying is effected in one place and manufacture and selling in another. Many English decisions have been given as to whether trade is, under different circumstances, exercised in the United Kingdom. Many of these decisions are of little value in considering the Commonwealth Income Tax, because of the diiiference in construction between the two Acts. There are a few decisions on Australian Acts, but while they are some guide they do not go far enough to make the position clear. The rules at present laid down by the Department may be summarised as follows : — {1) As regards imports : — (a) If contract of sale, delivery of and payment for, the goods, or any two of these take place outside Aus- tralia, nothing is taxable. (b) Where two of these three factors take place in Aus- tralia the invoice price passed by the Customs De- partment (which is in normal times the wholesale price abroad) is, for the purpose' of Federal Income Tax. regarded as the purchase price. The excess of the sale price over this "purchase price" plus Aus- tralian expenses, represents the Australian profit. The Australian selling agent or branch office is re- quired to pay the tax in this case on behalf of the absentee principal. 479 AUSTRALASIAN ADVANCED ACCOUNTANCY. (5i) As regards exports : — (a) Where the goods are sold before export (otherwise than by an agent outside Australia) the whole profit is taxable in Australia. {h) Where the contract of sale is made by an agent abroad on his own authority, the profit is con- sidered to arise according to the extent of the pro- cess carried out in the respective countries. To de- termine this the rule has been laid down that the total profit shall be apportioned on the basis of the expenses (excluding sea freight, marine insurance and exchange) incurred in and out of Australia re- spectively. The question of whether these rules would hold before a Court has. not so far been tested. Exemptions. — The following is a summary of exemp- tions from Federal Income Tax : — (a) The revenue of a municipal corporation or other local governing body or of a public authority; (b) The income of a society registered under a Friendly Societies Act of the Commonwealth or a State and not carried on for pecuniary profit ; (c) The income of a trade union or of an association of employert or employees registered under any Act of the Commonwealth or a State relatmg to the settlement of industrial disputes; (d) The income of a religious, scientific, charitable, or public educational institution; (e) The income derived from the bonds, debentures, stock, or other securities of the Commonwealth is- sued for the purpose of Commonwealth War Loans the interest on which is declared by the prospectus to be free from Commonwealth Income Tax — that is, the 4| per cent. Loans, which were the first, second, third, fourth, fifth, and portion of the sixth Commonwcaltii A\'ar Loans. If a company, which has derived income from exempted Commonwealth War Loan, pays any portion of that income in dividends to its shareholders, the exemption extends to the proportion of the dividend which has been paid out of such income. 4S0 FEDERAL INCOME TAX. Thoug-h the le.c:al position appears a little uncertain, the Commonwealth does not attempt to tax interest derived from State Government loans. Where, however, such interest is derived by a company, and by it distributed to shareholders as part of the dividend, the exemption does not carry through to the shareholders. (f) The income of a provident, benefit, or superannua- tion fund established for the benefit of the employees in any business or class of business and the income of a fund established by any will or instrument of trust for public charitable purposes if the Commis- sioner is satisfied that the fund is being applied by the trustees to public charitable purposes; (g-) The salary of the Governor-General and the salaries of the Governors of the States ; (h) The official salaries of foreign consuls and the trade commissioners of any part of the British Dominions; (i) Pensions paid under the War Pensions Act, 1914-16; (j) The income of any society or association not car- ried on for the purposes of the profit or gain to the individual members thereof, established for the pur- pose of promoting the development of the agricul- tural, pastoral, horticultural, viticultural, stockrais- ing. manufacturing, or industrial resources of Aus- tralia ; (k) The revenue of social, sports and other clubs de- rived from annual subscriptions of the members. (These subscriptions are not "income" — Bohemians Club v. Acting-Commissioner of Taxation (191S) 24 C.L.R. 334). "^ (1) Rebates received by members of a co-operative com- pany based on their purchases from that company where the company is one which usually sells goods only to its own members. (m) Income derived from personal exertion by any person who was on active service outside Australia during the Great War with any of the naval or mili- tary forces of the Empire or of any Ally of Great Bri'tain, from the date of his enlistment in or ap- pointment to those forces, until the date of his dis- charge or the termination of his appointment. 481 AUSTRALASIAN ADVANCED ACCOUNTANCY, (n) Dividends from Companies: — (1) To the extent to which they are paid out of profits earned by the company outside Australia; (2) To the extent that they are paid out of income ac- cumulated prior to 1st July, 1914, in an account other than a Profit and Loss account or similar account; (3) Where the Commissioner is satisfied that the dividend has been appropriated out of an amount standing to the credit of Profit and Loss account prior to 1/7/1914, for the purpose of being credited to shareholders and retained to pay for an in- crease in value or number of shares issued to the shareholders. (o) Income of any person from the 1st July in any year to the date of his death prior to the following 30th June in a case where his estate is liable to Federal Estate duty. Deductions. — The deductions allowable are set out be- low, and are amplified where amplification appears neces- sary: — (a) All losses and outgoings, not being in the nature of losses and outgoings of Capital, including com- mission, discount, travelling expenses, interest, and expenses actually incurred in Australia in gaining or producing assessable income. Assessable income is the gross income which is not exempt from taxation. The obvious intention of the fore- going was that the losses and outgoings referred to, in order to be deductible, should be actually incurred in Australia in gaining or producing the assessable income, but the judg- ment of the High Court in the tase of the Alliance Assur- ance Co.. Ltd.. V. Federal Commissioner of Taxation, de- livered on 25th August. 1921. lays down that the words "actually incurred in Australia in gaining or producing the assessable income" relates to "expenses" and do not also re- fer to "all losses and outgoings." The eflFect of this is that all losses and outgoings, not being in the nature of losses and outgoings of Capital, arc deductible, though thev may not have been incurred in Australia, and may not have been incurred in gaining or producing assessable income. Thus, to take an extreme case, a company with a branch in Lon- don could incur expenses there in the production of Eng- lish income and yet the whole of those expenses would be 482 FEDERAL INCOME TAX. deductible in the Federal assessment. It is highly probable that this anomaly will at an early date be rectified by an amendment of the Act. Prior to the judgment referred to, one of the greatest difficulties in the administration of the Income Tax Assess- ment Act was the determination of the question whether in spectific cases losses and outgoings were actually incurred in the production of income. In view of the decision, how- ever, this difficulty does not for the moment arise. It is still necessary to determine whether the losses and outgoings re- ferred to are "in the nature of losses and outgoings of Capi- tal." Capital expenditure may be described as expenditure that is incurred once and for all, and does not recur from year to year. Generally Capital expenditure creates an as- set which remains in the place of the money spent, whereas revenue expenditure is absorbed in the conduct of a business, and leaves no asset behind. The following are a few instances of losses of Capital, which have been held by the Courts not to be deductible :^ (1) A professional man purchased shares in a com- pany, and sold them at a loss ; his loss was a loss of Capital. (2) Railway authorities, at the request and expense of a taxpayer, erected a railway siding near the tax- payer's property ; it was held that this was an ex- penditure of Capital. (3) Cost of removal and re-erection of machinery was held to be a Capital expenditure, and not deduct- ible. (4) Deduction was claimed in respect of partial ex- haustion, through working, of a mine. It was de- cided that this was not allowable being a Capital loss. (5) Deduction was claimed by a railway company for expenditure upon the improvement of the per- manent way and for the extra weight in re-laying portion of the line with steel in place of iron rails. These items are held to be Capital ex- penditure and not deductible. (b) All rates and taxes (except Federal Income Tax"^ actually paid in Australia during the year in which the income was received. The provision covers deduction of War-time Profits Tax, but in regard to that the deduction is the amount pay- able in respect of the income — not the amount paid during AUSTRALASIAN ADVANCED ACCOUNTANCY. the year. In practice this deduction is generally made as a set-off against the War-time Profits Tax itself. Rates and taxes are deductible whether or not they re- late to property from which income is produced. Refunds of any Australian taxes (other than Federal Income Tax) are taxable in the year of receipt. (c) Every premium or sum (not exceeding £50) paid by a taxpayer on the insurance effected in Australia on the life of himself, his wife or his children, or for a deferred annuity or other like provision ef- fected in Australia for his wife or children, or in respect of any fidelity guarantee or bond, which he is required to provide in the exercise of his business. (d) Expenditure for repairs to or on that part of any property occupied for the production of income, or for residence (where 5 per cent, on the Capital value or the annual value of such residence is subject to Income Tax) and for the repair of machinery, im- plements, utensils, rolling stock and articles em- ployed for the purpose of producing income. A distinction must be drawn between "repairs" and "re- placements," "alterations," or "improvements." If an item of plant is replaced by a new one any expenditure in con- nection therewith is Capital expenditure, and not a repair. Such expenditure is intended to be covered by the provision for depreciation — see (e) below. Alterations and improve- ments or additions to assets are also Capital expenditure and cannot be deducted under this provision. (e) Such sum as the Commissioner thinks reasonable as representing the diminished value per centum by wear and tear (which may not be made good by re- pairs) during the year in which the income w^as de- rived, of any machinery, implements, utensils, roll- ing stock and articles used by the taxpayer for the purpose of producing income. It will be observed that this provision for deduction on account of depreciation relates only to "wear and tear." In fixing the rates of depreciation, therefore, the Commissioner takes no cognisance of obsolescence, nor of deterioration ot plant through its remaining idle. The assets in respect of w^hich deduction may be allowed are also limited, so that the provision does not apply to such items as buildings, fences, earthen tanks, etc. 484 FEDERAL INCOiME TAX. Rates of depreciation have been fixed by the Commis- sioner in regard to most classes of plant, and are available in pamphlet form. These rates may be varied if the special circumstances of a particular business justify the alteration. The rates laid down are applied to the value of the plant on hand at the beginning of the year of income. That value may be arrived at by taking the original cost and writing it down from year to year at the rate prescribed by the Com- missioner. Expenditure upon food and rent of quarters provided for an employee (other than a member of the taxpayer's own family under 15 years of age) who is employed exclusively in the business yielding an income to the taxpayer. Where the employer is being taxed upon 5 per cent, of the Capital value of his residence and provides quarters for employees in such residence, the proportion of the 5 per cent, of the Capital value applicable to the quarters occupied by the em- ployees is deductible. "(g) Payments not exceeding £50 by a person who is in receipt of salary, wages, allowances, stipends, or annuities, to superannuation, sustentation, widows or orphans funds established in Australia, or to any society registered under a Friendly Societies Act in the Commonwealth. (h) Payments made or gifts purchased and forthwith presented during the Great War (the war ended on 31/8/1921), to any patriotic fund, established in the Empire, or any Allied country for any purpose con- nected with the War. (i) Contributions made to the Repatriation Department or to any public authority for the purpose of being handed over to that Department. These contribu- tions may be either in cash or kind, but if in kind, the value must be verified to the satisfaction of the Commissioner. (j) Gifts exceeding £5 each to public charitable in- stitutions in Australia. Each separate gift must ex- ceed £5; a number of smaller gifts to the same in- stitution not falling within the provision, notwith- standing that the aggregate may far exceed £5. The institution here referred to must he both public and charitable. Charitable means "affording relief to per- sons in necessitous or helpless circumstances, and in most instances, at all events, if required, gratuitously." A Tech- nical College — an educational institution — was held by the 485 AUSTRALASIAN \DVANCED ACCOUNTANCY. High Court not to be a public charitable institution. (Swin- burne V. Commissioner of Taxation). (k) The full amount of calls paid during the year of in- come on shares in a mining company or syndicate carrying on operations in Australia, and 5 per cent, on the amount of calls on shares of other com- panies operating in the Commonwealth. (1) Sums set aside or paid by an employer of labour, or by any other person, as or to a fund to provide individual personal benefits, pensions, or retiring al- lowance to employees of any business or class of business. In order that this deduction may be al- lowable the Commissioner must be satisfied that the right of the employees to receive the benefits has been fully secured, or that actual payment to them has been made. (m) £30 in respect of each child under the age of six- teen years at the beginning of the year of income, who is wholly maintained by any resident taxpayer. Where a child is born during the year of income the Commissioner allows a proportionate deduction for the part of the year during which the child was maintained. On the other hand the full deduction is allowable in the year in which the child attains the age of sixteen years, though he may be over that age for most of the period. This pro- vision relates to any child maintained, and is not restricted to the taxpayer's own children. (n) Payments by way of commission for collecting in- come. (o) Interest paid on mortgage of property, in respect of which the taxpayer is assessed on 5 per cent, of the Capital value or on the annual rental value to him. The Commissioner may refuse to allow this deduc- tion if he is not satisfied that the mortgage was en- tered into in good faith. (p) The annual sum necessary to recoup expenditure, made under covenant with a lessor, on improvements on land by a lessee who has no tenant rights in the improvements. The annual deduction is ascertained by dividing the total expenditure by the number of years in the unexpired period of tlie lease at the date the improvements were effected. (q) The annual sum necessary to recoup the amount of any fine, premium or foregift paid by a lessee for FEDERAL INCOME TAX. a lease or a renewal of a lease or an amount for the assignment or transfer of a lease of premises or machinery used for the production of income. This deduction is also arrived at by dividing- the amount paid by the number of years in the unexpired period of the lease at the date of payment. (r) Bad Debts proved to be such to the satisfaction of the Commissioner, provided that the taxpayer has in the year of income or any previous period in- cluded those debts as income in his Federal Income Tax return. The effect of the latter part of the foregoing is that the original credit must have been taken in since the commencement of Federal In- come Tax on 1/7/1914, and that the debt must have arisen as a trade debt as distinct from a Capital item. Capital items would not of course have been included as income in the Federal return. The deductions allowable in respect of — (a) Life assurance premiums and fidelity guarantee. (b) Contributions by employees to superannuation funds and friendly societies. (c) Gifts to patriotic funds, Repatriation and public charitable institutions. (d) Maintenance of children (£30 each) are to be taken from the class of income — personal exertion or property — whichever is the greater; all other deductions are taken from the class of income to which they relate. Where, however, that class of income is exceeded by the amount of deductions, the excess is deductible from the other class. 'Where a taxpayer, either alone or in partnership, car- ries on more than one business, in one or more of which there is a loss, or where he has a business which shows a loss, and at the same time has other earnings from personal exertion, the losses are deductible from the profits or earn- ings. Where a taxpayer has income from property any ex- cess of losses over profits in connection with his personal exertion undertakings is deductible from the propertv income. Thus a taxpayer is never in any year assessed on more than the net income which he derives from all Australian sources. Statutory Deduction. — Except in the case of companies and absentees, a special deduction is allowable to all tax- payers whose income does not exceed a certain sum. 487 AUSTRALASIAN ADVANCED ACCOUNTANCY. Where a person is not married, and has no dependants (a dependant is a relative towards whose maintenance the taxpayer has contributed at least £26 during the year), the deduction is £104 less £l for every £3 by which the net income exceeds £104:. Where a taxpayer is married or has a dependant the deduction is £156 less £1 for every £3 by which the net income exceeds £156. It will be seen that where the net income amounts to £520 or more in the case of a person who is single and is without a dependant, or to £624 or more in the case of a person who is married or has a dependant, this statutory deduction does not apply. Where the taxpayer's income consists partly of income from personal exertion and partly of income from property, the statutory deduction is made in the first place from in- come from property, but where, it exceeds the net income from that source the excess is taken from income from per- sonal exertion. Companies and Shareholders. — In order to deal satisfac- torily with this heading it will be necessary to repeat some of the matter appearing elsewhere. Companies pay tax on income which is not distributed to shareholders, while the shareholders are assessed on dis- tributions of income made to them by companies. It is obvious that the distribution of the profits of a Company for any year cannot generally l)e completely made within that period, for the results of the year's transactions have first to be ascertained. In practice the distribution is re- cognised as a deduction if made within a reasonable time after the close of the year, and the presentation of the ac- counts to the annual meeting of the company. The share- holder is taxed on his dividend — not in the year in which the company earned the profit from which it was paid — but in the year of actual receipt by the shareholder. Where a company's profits arc not distril)utc(l within a reasonable time, and are. therefore, taxed to the comi)any as undistributed income, but arc subsequently distributed, the shareholders are taxable on such distribution with a re- bate of tax representing the amoimt of tax previously paid by the company on the amount distributed, or tlie propor- tion of the gross tax of the recipient attribiUal)le to the amount referred to, whichever is the less. FEDERAL INCOME TAX. Where a company derives part of its income from abroad or from 4| per cent. Commonwealth War Loan and part from a taxable Australian source, dividends are, in the absence of evidence to the contrary, regarded as paid pro- portionately from the whole of the profits of the year, m which case the company receives deduction of only part o! the dividend as against its assessable income and the share- holders are taxed on the same part. For example, a com- pany has a total income of £30,000 consisting of 4-^ per cent. War Loan interest £5,000, income derived from abroad £10,000, and income derived in Australia (apart from War Loan) £lo.OOO. If it pays a dividend of £20,000, 15,000/- SO.OOOths. of this dividend = £10,000, is deductible by the company and is taxable to the shareholders. A company may, however, pay a dividend specifically out of any of its profits, and if it satisfies the Commissioner he will assess in accordance with the actual facts. For ex- ample, a company may choose to distribute profits standing in Reserve prior to l/'^/lOli (wdiich, in the hands of the shareholders, are exempt from tax). In such a case, if the Commissioner is satisfied as to the facts, he Avill not tax the shareholders on the distribution. W-^ith the following two exceptions, any income derived by a company, which, in the hands of the company would not be subject to Federal In- come Tax. is, when distributed to shareholders, also exempt. The two exceptions are — (a) Interest on State Government Loans. (b) Dividends received by a company from another Australian company, which derives its income from a source beyond Australia. While the Commonwealth does not at present seek to tax interest on State Loans, the Commissioner holds that upon distribution the shareholders do not receive interest from State Loans; what they are paid are dividends, which, under the Act, is income subject to tax. In connection with (b), the Act provides that dividends received by shareholders are income subject to tax, with the proviso that where the paying company derives income from sources both in and outside Australia, the dividend shall be regarded as being paid proportionately out of those profits, the proportion attributable to the ex-Australian profit being exempt. Where Company "B" receives a dividend from Company "A" (an Australian company) that dividend is de- rived by Company "B" from a source within Australia, not- withstanding that the profits of Company "A" may have been derived by it either wholly or partly outside the Com- AUSTRALASIAN ADVANCED ACCOUNTANCY. monwealth. Therefore, while Company "B" itself would not be taxable on the ex-Australian proportion, that Com- pany's shareholders are taxable in full when distribution to them is made. As already mentioned, the tax on profits of companies which are distributed to shareholders, and on interest paid to debenture holders and depositors is assessable to the re- cipients. This is practicable with resident shareholders, but with absentees it is a very difficult matter, and in some cases a legal impossibility, to collect the tax. Therefore, com- panics, in addition to paying tax on undistributed income, are also chargeable with tax at a lower rate on (a) So much of the income (other than exempt income) of the company as is distributed to absentee share- holders, and (h) Interest paid or credited to absentees upon money raised by debentures and used in Australia, or on deposits at interest with the company in Australia. In certain cases, notably where an absentee has an Aus- tralian agent who receives his dividends, etc., the Depart- ment is able to tax the absentee through his agent. Where this is done, in the personal assessment a deduction is al- lowable from the gross tax, of the amount of tax paid by the company on dividends or interest received by the absentee. Where a company pays tax in respect of distributions to absentees, it is empowered by the Act to deduct that tax from dividends or interest payable to such absentees. With respect to debenture or stock payable to bearer, it was found that as the companies could not supply lists, there was no check upon the debenture-holders or stock- holders to ensure that interest and dividends were not omit- ted from their returns. It was therefore enacted that the companies, in such cases, should pay tax upon so much of the income of the company (other than exempt income) as was distributed to bearer debenture-holders or stock-holders, as if the total amount so distributed were the income of an individual. Thus the rate of tax chargeable, being based upon the total amount of interest or dividend paid to bearer debenture-holders or stock-holders is generally a very high one, the provision thus becoming a penalty and causing many companies to register their delientures and stock, in order to avoid this imposition. A company is authorised to deduct from the amount of interest or dividend so payable, a sum sufficient to pay the tax. 490 FEDERAL INCOME TAX. ii the Commissioner is satishea that the holder of de- bentures or stock payable to bearer is a person not liable to make a return the amount of tax paid by the company in re- spect of the interest or dividend payable to that person may be refunded to him. Where a bearer, debenture-holder or stock-holder in- cludes the interest or dividend in his own return and pays tax thereon, he is entitled to a deduction from his tax of the amount paid by the company in respect of his interest or dividend. If a company in any year has not, in the opinion of the Commissioner, distributed to its shareholders a reasonable proportion of its income, the whole of its taxable income is deemed to have been distributed to the shareholders in pro- portion to their interest in the paid-up Capital of the com- pany, provided that the Commissioner is satisfied that the total tax paya'ble on it in the hands of the shareholders is greater than the tax the company would pay. This is a most important power given to the Commis- sioner. It chiefly operates in the case of companies with few shareholders, who abstain from drawing large dividends in order to build up the business of the company. In some of these cases, distribution of the profits of the company would involve the shareholders in tax at a rate exceeding 8/- in the £, whereas the company rate is only 2/8. The Sec- tion, in such cases, empowers the Commissioner to collect the tax from the shareholders at the higher rate, though it will be noticed that the Commissioner does not require the actual distribution of the income ; he merely taxes it as if it had been distributed. In the event of subsequent actual dis- tribution, no further tax would be payable. Visiting Ships. — Shipping companies whose principal place of business is outside Australia are taxed on 10 per cent, of outward freights and passage money, instead of an endeavour being made to ascertain the actual income earned in the Commonwealth. Where a ship carries goods or pas- sengers from the Commonwealth and the owner has no re- gular agent here, the master must pay the tax before he can be granted a clearance by the Customs authorities. Fire and Marine Insurance Companies. — Until recently these were taxed in the same way as other companies, that is, on their net income derived from sources within Aus- tralia, but one important deduction was not allowed. This was the amount of premiums on re-insurances effected with companies abroad, the Commissioner claiming that these premiums were not losses and outgoings incurred in Aus- 491 AUSTRALASIAN ADVANCED ACCOUNTANCY. tralia in the production of the income of the Australian com- panies. The High Court in the case of the Alliance As- surance Co., Ltd., V. Commissioner of Taxation, however, decided that the words of the Act did not intend this to be so, and that the Company need only show that the re-insur- ance premiums were losses and outgoings of the business. The deduction was accordingly allowed by the Court. Life Assurance Companies. — These companies are en- titled to deduct from their total income the amount of life premiums received. In practice, therefore, they are free of tax because the working expenses always exceed the income other than premiums. Mining Companies. — There are special provisions in the Act designed to foster the mining industry. By the original Act, mining companies (other than coal-mining) were al- lowed a deduction which should represent the fair propor- tion of the total expenditure on plant and development, to be recouped out of the profits of the particular year. The excess of the total expenditure on plant and development over the total profits to date was divided by the number of years estimated to be the remaining life of the mine, the re- sult being allowed as a deduction. Thus, if the estimate of life be correct, the provision enables the wdiole cost of plant and development to be recouped out of profits without the amount so used for recoupment being taxed to the company. It will be noticed, however, that this relief does not extend to the shareholders when they receive dividends, these be- ing taxable in the usual way, even though the shareholders may never have their Capital returned. By the 191 <^ amendment, a further sub-section was en- acted, intended chiefly to give relief to mining companies whose profits had already exceeded the expenditure on plant and development, and which, therefore, could not benefit under the original section. The new provision allows, as an alternative to the old, a deduction of the amount of income of the year expended on development or appropriated for new plant and development. Where an amount so appro- priated is not expended by the end of the succeeding year it then becomes taxable. Plant, the cost of which is here deductible in full, docs not carry the usual depreciation al- lowance. Co-operative Companies. — Income of a co-operative com- pany or society includes all sums received from members in payment for commodities supplied or animals or land sold to them, or received for commodities, animals or land .«^old by the company, whether on its own account or on accoimt of its members. 492 FEDERAL INCOME TAX. It is customary with co-operative companies to pay shareholder-suppliers a certain price upon delivery of goods to the company. Where the shareholders are purchasers from the company they pay the company a certain price at the time of purchase. In both these cases, at the end of the financial period the company distributes the whole or portion of its surplus to its shareholders — not in proportion to their shareholdings, but on the basis of the value of goods sup- plied to the company or purchased from it. These rebates are deductible in the company's assessment. Where such a rebate is received by a member of a co- operative company based on his purchases from that com- pany — the company being one which usually sells goods only to its own members — the recipient is not taxable on the re- bate. It will be observed that this exemption does not ap- ply to rebates distributed to members where the rebates are based on the members' sales to or through the company. Relief on Account of Double Taxation. — It does not fol- low that because income is subject to Commonwealth and State Income Taxes in Australia it is not also taxed else- where. Owing to the basis of the British Act being dif- ferent from the Australian Statutes, it frequently happens that income is taxable both in the United Kingdom and Australia. Reciprocal provisions have now been inserted in the Commonwealth and British Acts to overcome this serious inequity. The effect of these provisions is as follows: — (1) Where the Commonwealth rate of tax is greater than the British rate, the Commonwealth allows a rebate of one-half the British tax, and the United Kingdom allows a rebate of the other half. (2) Where the Commonwealth rate is not greater than the British rate, but not less than one-half there- of, the rate of rebate allow^ed by the Common- wealth is the excess of the Commonwealth rate over one-half of the British rate, while the United Kingdom allows a rebate of one-half of the British rate. Where both Federal and State Income Taxes are charged on income which also pays tax in the United King- dom, the sum of the Commonwealth and State rates instead of the Commonwealth rate alone is compared with the Bri- tish rate in the manner indicated in (1) and (2). and the 493 Gl AUSTRALASIAN' ADVANCED ACCOUNTANCY. Commonwealth rebate is reduced to that proportion of the rates stated above which is represented by the Common- wealth rate as compared with the aggregate of the Common- wealth and State rates. For example, under (1) the Aus- tralian rebate would be one-half the British rate, that is, one-half of 6/- = 3/-. If the Commonwealth rate were, say, 7/-, and the State rate 1/-, the net rebate allowable would be 7/8ths of 3/-. The net effect of this provision is that a taxpayer now actually pays tax at approximately the aggregate of the Commonwealth and State rates or the aggregate of the Bri- tish and State rates, whichever is the greater, so that double taxation between the Commonwealth and the United King- dom is avoided. The cases in which only the United Kingdom and the Commonwealth rates, and not the State rate, are involved, are chiefly those in which the income consists of dividends. Dividends are not subject to State Income Tax. Taxation of Non-residents where Loss of Tax is Sus- pected. — Where a non-resident person carries on business with a resident of Australia, and it appears to the Commis- sioner that, owing to the close connection between them, and to the substantial control exercised by the non-resident over the resident person, the course of business between these persons can be so arranged and is so arranged, that the business done by the resident person in pursuance of his connection with the non-resident person produces to the re- sident person either no taxable income or less than the ordin- ary taxable income which might be expected to arise from that business, the non-resident person is chargeable to tax in the name of the resident person as if the resident were an agent of the non-resident person. Where it appears to the Commissioner that the true amount of the taxable income of any non-resident person so chargeable cannot be readily ascertained, the Commis- sioner may assess the non-resident person on such percentage as he thinks reasonable on the turnover of the business done. Cases have arisen in which two companies of substan- tially the same ownership, one operating outside Australia and the other within the Commonwealth, have so arranged their business that the foreign company sells to the Aus- tralian company at a price which makes it impossible for the Australian company to show a fair margin of profit, the foreign company of course making so much more. In these instances, the foreign company, having derived its income outside Australia, is free of Federal Income Tax, while the local company has made little or no income in Australia, 191 FEDERAL INCOME TAX. SO that between them, although they may be carrying on a profitable Australian business, the Commonwealth fails to secure a reasonable amount of tax. Rates of Tax. — The principle underlying the rates of Federal Income Tax is that except in the case of companies and lottery prizes the rate of tax per £ on each and every £ of the taxable amount shall increase as the income of the taxpayer increases. For example, under the rates ap- plicable to income from personal exertion for the first year of tax, if the taxable income is £1, the rate of tax thereon is 33/800d. in the £ ; if the taxable income is £2, the rate of tax on each of these £2 is 3G/800d. in the £ ; if the taxable income is £100, the rate of tax on each £ is 3300/800d. in the £. This gradual increase goes on until the total taxable income amounts to £7,600, where the maxi- mum rate is reached. This maximum rate then applies to all income in excess of £7,600. As regards income from property, the same principle applies up to where the taxable income is £546, though the increase in rate per £ is greater than under the personal exertion scale. From £546 up to £2,000 the increase in rate of tax does not progress in a "straight line," but in what the Act describes as "a. curve of the second degree," which, how- ever, is very slightly diflferent from the straight line. From £2,000 to £6,500 "a curve of the third degree" applies. This curve, which is a little different again from the curve of the second degree, is still very nearly a straight line. From £6.500 onward the maximum rate applies, which maximum is the same as the maximum rate on income from personal exertion where that income exceeds £7,600. Where part of a taxpayer's income is derived from per- sonal exertion and part from property, the rate of tax ap- plicable to the portion which arises from personal exertion is the rate which would apply if the total income from both sources were all derived from personal exertion ; and the rate of tax applicable to the income from property is the rate which would obtain if the total income from both sources w^ere all derived from property. For example : As- sume that a taxpayer's total income is £1,800, consisting of £1.000 from personal exertion and £800 from property. The present personal exertion rate of tax on an income of £1,800 is 16.6359d. in the £ ; the property rate for a similar income is 29.7297d. in the £. Therefore (£1,000 x 16.6359) plus (£800 X 29.7297) gives in pence the total tax on this composite income. It will be found that in every case the tax so arrived at is greater than the tax on the same total 495 A.USTRAL ASIAN ADVANCED ACCOUNTANCY. income all at personal exertion rate and lower than the tax on the total income all at property rate. The ascertainment of the amount of tax from the Act itself, particularly where there is an income from property exceeding £546, is a difficult matter, but the Commissioner issues a Ready Reckoner, from which the information is readily obtainable. For the first year of the tax (based on income of the year ended 30th June, 1915) the rates were as follows: [The increases and variations made from time to time since then are set out in the schedule at the end of this chapter.] Income from Personal Exertion. — For so much of the whole taxable income as does not exceed £7,600, the aver- age rate of tax per £ is 33/800 of one penny where the tax- able income is £1, and increases uniformly with each in- crease of £l of taxable income by 3/800ths of one penny. The rate of tax may be calculated from the following for- mula : — R ::= average rate of tax in pence. I = taxable income in £. 3 R = (3-1- — I) pence. 800 For every £ of taxable income in excess of £7,600 the rate of tax is 60d. Income from Property. — For such part of the taxable in- come as does not exceed £546, the average rate of tax per £ is that given by the following formula : — R = average rate of tax in pence. I = taxable income in £. I R = (3 -[- ) pence. 181.058 For such part of the taxable income as exceeds £546 but does not exceed £2,000 the additional tax for each ad- ditional pound of taxable income above £546 increases con- tinuously with the increase of the taxable income in a curve of the second degree in such a manner that the increase of tax for one pound increase of taxable income is : — 11.713 pence for the pound Sterling between £545/10/- and £546/10/- 12.768 pence for the pound sterling between £599/10/- and £600/10/- 14.672 pence for the pound sterling between £699/10/- and £700/10/- 16.512 pence for the pound sterling between £799/10/- and £800/10/- 18.288 pence for the pound sterling between £899/10/- and £900/10/- 20.000 pence for the pound sterling between £999/10/- and £1000/10/- 27.600 pence for the pound sterling between £1499/10/- and £1500/10/- 33.600 pence for the pound sterling betwe-n £1999/10/- and I'2000/IO/- FEDERAL INCOME TAX. For such part of the taxable income as exceeds £2,000 but does not exceed £6,500, the additional tax for each ad- ditional pound of taxable income above £2,000 increases continuously with the increase of the taxable income in a curve of the third degree in such a manner that the increase of tax for one pound increase of taxable income is : — 33.500 pence for the pound sterling between £1999/10/- and £2000/10/- 40.000 pence for the pound sterling between £2499/10/- and £2500/10/- 45.300 pence for the pound sterling between £2999/10/- and £3000/10/- 49.600 pence for the pound sterling between £3499/10/- and £3500/10/- 53.000 pence for the pound sterling between £3999/10/- and £4000/10/- 55.600 pence for the pound sterling between £4499/10/- and £4500/10/- 57.500 pence for the pound sterling between £4999/10/- and £5000/10/- 58.800 pence for the pound sterling between £5499/10/- and £5500/10/- 59,600 pence for the pound sterling between £5999/10/- and £6000/10/- 60 000 pence for the pound sterHng between £6499/10/- and £6500/10/- For every pound sterling of taxable income in excess of £6,500 the rate of tax is 60d. Income Partly from Personal Exertion and Partly from Property. — The method of ascertaining the tax on composite incomes is illustrated above. Companies. — For every pound of taxable income of a company, which has not been distributed to the members or shareholders, the rate of tax is 2/8d. and 8d. in the £ on such of the assessable income of the company as is distri- buted to absentee members or debenture holders. Rate of Tax on Income from Primary Production. — By an amendment of the Act in 1921, made at the instance chiefly of the pastoralists whose income from year to year probably fluctuates to a greater extent than that of persons in most other industries, a special method of ascertaining the rate of tax applicable to primary producers was pro- vided. "Primary producers" here referred to means per- sons engaged in the production resulting directly from cul- tivation of land or maintenance of animals or poultry, and includes persons who, as well as cultivating- land or main- taining animals or poultry, manufacture dairy produce, which is made principally from the raw material raised by them. The tax is still charged on the actual amount of income of the year, but for the purpose of ascertaining the rate of tax to be applied to such income, the taxpayer's income de- rived from primary production is taken to be — (a) For the year ending the thirtieth day of June, One thousand nine hundred and twenty-two, the average of the amounts of taxable income derived by the taxpayer during that and the preceding financial year from primary production ; 497 AUSTRALASIAN ADVANCED ACCOUNTANCY. (h) For the year ending the thirtieth day of June, One thousand nine hundred and twenty-three, the aver- age of the amounts of taxable income derived by the taxpayer during that and the last two preceding financial years from primary production ; (c) For the year ending the thirtieth day of June, One thousand nine hundred and twenty-four, the average of the amounts of taxable income derived by the taxpayer during that and the last three preceding financial years from primary production ; and (d) For all subsequent financial years the average of the amounts of taxable income derived by the tax- payer during the year itself and the last four pre- ceding financial years from primary production. The average of the amounts of taxable income from primary production is arrived at by dividing by the number of years upon which the average is based the sum of the amounts of taxable income derived by the taxpayer from primary production during each of the those years, less the amount (if any) of losses on primary production during any of those years. Where a primary producer has not been engaged in primary production for the number of consecutive years in respect of which the rate of Income Tax upon his income from primary production is required to be ascertained as set out above, the average is struck on the number of consecu- tive years during which the taxpayer has actually been en- gaged in primary production. Examples. — (1) Assessment on income of the year ending 30/6/1925, the taxpayer being engaged solely in primary pro- duction : — Income of year ending 30/6/1921 2000 Income of vear ending 30/6/1922 1500 Income of vear ending 30/6/1923 .. 300 Income of year ending 30/6/1924 2600 Income of year ending 30/6/1925 1200 517600 i-1520 The tax is charged on the actual income of £1,200 al the personal exertion rate applicable to £l,')20. (2) Assessment on income of the year ending 30/6/1025, the taxpayer being solely engaged in primary pro- duction : — FEDERAL INCOME TAX. £ £ Income of year ending 30/6/1921 2000 Income of year ending 30/6/1922 1500 Income of year ending 30/6/1923 300 Loss for vear ending 30/6/1924 2600 Income of y.ar ending 30/6/1925 1200 2600 5000 2600 5)2400 £480 The tax is charged on the actual income of £1,200 at the personal exertion rate applicable to £480. (3) Assessment on income of year ending 30/6/1925, the taxpayer being engaged solely in primary produc- tion : — £ £ Income of year ending 30/6/1921 2000 Loss for year ending 30/6/1922 1500 Income of year ending 30/6/1923 300 Loss for year ending 30/6/1924 2600 Income of year ending 30/6/1925 1200 4100 3500 3500 Deficit £600 In this case the amount of income upon which the rate should be based is a minus quantity, although there is an actual income of £1.200 to be assessed. The tax, must, therefore, be nil. (i) Assessment on income of year ending 30/6/1925, the taxpayer being engaged solely in primary pro- duction :- Income of the year ending 30/6/1921 Income of year ending 30/6/1922 .. Income of year ending 30/6/1923 .. Income of the year ending 30/6/1924 Loss for the year ending 30/6/1925 1200 1200 £ 2000 1500 300 2600 6400 1200 5)5200 £1040 499 AUSTRALASIAN ADVANCED ACCOUNTANCY. The income upon which the rate should be based is £1,040, but as the actual income for the year is a minus quantity, the tax must be nil. (5) Assessment on income of year ending 30/6/1925, the taxpayer being solely engaged in primary pro- duction, but having commenced that business only on 1/7/1922 :— Income of year ending 30/6/1923 300 Income of year ending 30/6/1924 2600 Income of year ending 30/6/1925 1200 3)4100 £1367 The tax is charged on the actual income of £1,200 at the personal exertion rate applicable to £1,367. (6) Assessment on income of year ending 30/6/1925, the taxpayer being engaged in primary production and also another business : — Primary . Other Production. Business. Income of year ending 30/6/1921 . Income of year ending 30/6/1922 . Loss for year ending 30/6/1923 . . Income of year ending 30/6/1923 . Income of year ending 30/6/1924 . Income of year ending 30/5/1925 . 1000 £ £ 200 2000 100 1500 3000 300 1800 200 2500 1000 800 Deficit £200 As the income from primary production upon which the rate should be based is a minus quantity, there is no rate to apply to any of the income of either of the businesses, for the Act, as it stands at present, provides that the rate of tax ascertained on the basis of the primary production business shall be applied to the actual taxable mcome of the taxpayer, that is, the whole taxable income from all sources. Even if the primary production section showed a small excess of profits over losses the low rate of tax based on such small excess would be the rate applicable to the whole of the tax- payer's income, notwithstanding the large amount of his income from the separate l)usiness. 500 FEDERAL INCOME TAX. In view of these and other anomalies in this provision, it seems highly probable that the Act will be further amend- ed before this Section of it comes into actual operation. Partnerships and Trustees. — Generally, partnerships and trustees are not taxable, their income being assessed to the partners or beneficiaries according to their respective in- terests in the income. In the case of a partnership formed since 13th September, 1915, a partner in which is free from tax on account of the statutory exemption, if it appear that such partner is merely a dummy, the Commissioner may assess the partnership on the dummy partner's share of the partnership income at the rate applicable to the total taxable income of the partnership. Where, in a trust, a beneficiary is under legal disability or no one is presently beneficially entitled to the income, the trustee must pay tax on the income in question. Winding up of Business. — The liquidator of a company must give notice of the liquidation to the Commissioner, and set aside such amount as the Commissioner requires to meet the tax. A resident agent conducting the business of an absentee principal is subject to similar obligations. Failure to give notice and make the required provision renders per- sonally liable the liquidator or the agent, as the case may be. Penalties. — Penalties are provided for failure to make returns, late lodgment of returns, omission of income from returns, claims in returns for non-allowable deductions, and for furnishing incorrect information. These penalties take the shape of additions to the tax, but, alternatively, the Com- missioner may prosecute. For late payment of tax 10 per cent, additional tax is chargeable. The Commissioner has power to remit wholly or partly any penalty. Recovery of Tax Due by Employees. — Where the Com- missioner believes that it will be difficult to collect tax from an employee — for instance, one who works on a dozen dif- ferent jobs in a year under twelve different names — he may require the employer to deduct the tax from the wages. Death of Taxpayer. — With one exception no income es- capes tax owing to the death of a taxpayer, his executors be- ing liable to make returns and pay the tax found to be due. The exception is that where a taxpayer dies during a financial ')01 AUSTRALASIAN ADVANCED ACCOUNTANCY. year, the income derived between the beginning of that finan- cial year and the date of death is free of tax if the estate is subject to Commonwealth Estate Duty. Objections and Appeals. — A taxpayer who is dissatisfied with his assessment may, within thirty days after service of the notice of assessment, lodge with the Commissioner or Deputy Commissioner, an objection on the prescribed form, stating the grounds of his objection. The Commissioner considers this objection, and may either allow or disallow it, wholly or in part. The taxpayer is then advised of the Commissioner's decision, and if he is still dissatisfied he may serve the Commissioner with a written request to have the objection treated as an appeal. On a question either of law or of fact the appeal may be made to the High Court of Aus- tralia or the Supreme Court of a State, and on questions of fact only appeal may be made to the Board of Appeal. This right of appeal to the Board of Appeal was only created in 1921. Board or Boards to be constituted will consist of three members to be appointed by the Government. Relief on Account of Hardship. — Where it is shown to the satisfaction of a Board consisting of the Commissioner of Taxation and two other members, that a taxpayer (a) Has become bankrupt or insolvent, or (b) Has suffered such a loss, or is in such circumstances. or, owing to the death of a person, who, if he had lived, would have paid tax, the dependants of that person are in such circumstances, that the exaction of the full amount of tax would entail serious hard- ship, the Board may release the taxpayer or his executor, as the case may be, either wholly or partly from his liability. Administration and Returns, — The administration of the Act is vested in a Commissioner who is assisted by an As- sistant Commissioner and a number of Deputy Commis- sioners. • There is a Deputy Commissioner for each State, and also one for the Central Office. If a taxpayer's income is derived solely from one State his return is submitted to and assessed by the Deputy Commissioner for that State ; if he has income from more than one State his return is lodged at the Central Office in Melbourne. Where the only income derived outside one State consists of dividends from companies, such dividends are ignored in determining the place of lodgment of the return, and the taxpayer is deemed to derive his income all from one State. FEDERAL INCOME TAX. ^2 6z QP MO WW ^ Qo ^< WW 1^ w wS ^^ Wcrj «i OO S^ oo +> C O (U O OT O +j to 4J P. „; C C >,£ >,.Si rt^ ^u. .C .G H p. o 2 P a. u, a! * en y Oh a)C "* c "p.. ^ g ^ o B "^ - £2 « rt b S^ Hi ' c CJ t- O O aJ ft rt -5 rtvp<; 503 AUSTRALASIAN ADVANCED ACCOUNTANCY. § 1 c 1 00 OS ."^ H rtC ^^ ^5 a'rt (u-o « rt w « ?J O ^ rt ^ "-• C "^ eS g-rt ^-^.a-rt i s S ID T3 G 1 ^^■saS i 1 '2 rt a c ^ a sis re a™ "■ no fe 5 0) M CO j 505 AUSTRALASIAN ADVANCED ACCOUNTANCY S i- c^£ i5 2; S 3 E = ^ *^ . ^ a o «i o '^ ^ " -5 *" • - o ■;3 *^ o J- -c •-: t. ii"s..>2 ^o 5=i CJ: S2 C/3 S2 S2 r. Oi :S"o 3 tn fe ca ^ rt ^ ^ > ca « ^ s < (^1 2 y^ *cS w.s •C 3 4S o • 6 -rl o O O .2 w := c w 3 5;S g <«a, T3 5; TO Q<0 ■^ * .2 o C R o ^ l-H a n > ,2 a 1 I-C i2 n ^ & rA c =rt •^ TJ _C 6 >; , T^ ^ o (U >, t3 (U OJ cJ ft li ?3 8 s- « '5 13 OS a o a o ft .22 a c5 ^2 55^ 6 -gS "p. dj £ a> Cu a> 2 +j 0! .2 H iS "^ .^ uS '^ c a ^B > OJ > .= hH O ^ .ti e^^.^:pla ■^ C 3-0 .a ^ +J o oi 6 a^s.ii'S.a B S >, (U Wh « . m J2 .5? 3t5 a o ^ •-' (U C 0) . -a •" tJ fo 10 «J !> '*- *^ p - - ^ O " U3 _ d _ § _ ►^ -'^ & s 0,9 w;3 g.a^.fg"-^ ■- ""^Q ^ O § Ig O ^ O C O T3 .ti ^ "^ rt > p: .2 ft'2 _ <^ 15 t >^3 Q-^^.SS^ 508 FEDERAL INCOME TAX. 1 G u 1 22 Oi 05 Cfl (U Do. d Q d Q 1 s CO a d d Year ended 30/6/ 19 1& 6 Q s 1 Year ended 30/6/1918. In place of Sinking Fund, deduction now ascertained by divid- ing the sum paid by the number of years of the unexpired period of the lease at the date the amount was paid The annual sum necessary to recoup expenditure made under covenant with the lessor by a lessee who has no tenant rights in the im- provements is de- ductible. Deduction is ascertained by dividing the expen- diture by the num- ber of years of unex- pired period of the lease at the date im provements effected B ^2 Extended to include Gifts purchased and forthwith presented also gifts in cash or kind for Repatria- tion piurposes. The £5 minimum is alao eliminated (UT3 \ ""1 Year ended 30/6/1916. Extended to cover payments made to a lessee for purchase ot his lease S a Year ended 30/6/1915. Sinking Fund allow- able calculated on prescribed tables to recoup taxpayer the amount paid as pre- mium for lease C 0) Contributions not ex- ceeding £5 to each Patriotic Fund allow- able f ! t ! 'a a III nil Improvements on leasehold made un der covenant 0) ol — +J .ti "to Gifts to Patriotic Funds, connected with the War, and for Repatriation 509 G2 AUSTRALASIAN A D V A x\ C E D ACCOUNTANCY i 1 •o 1 en S2 a J5 Introduced this year. See special paragrapn for details Same as 1920 except that the minimum tax of £1 on single persons is repealed. See also next heading re rates applicable to primary producers. 1 00 2 s OS ^3 Except as to Com- panies and cash prizes in lotteries, all rates increased a fur- ther 5 per cent., i.e., 5 per cent, on 162.5 per cent, on the ori- ginal rates, or 170.625 per cent, on the ori- ginal rates. Company rate's re- main at 2/8 and 8d respectively. The rate on cash prizes in lotteries is 14 per cent, on the gross prize money Year ended 30/6/1919 Same as 1918 1 Same as 191S Year ended 30/6/1918. Allowable if Commis^ sioner is satisfied payments have been made bona fide and for services rendered Except as to compan- ies, all rates increased a further 30 per cent. ; i.e., 30 per cent, on 125 per cent, of the original rates, or 62.5 per cent, on the ori- ginal rates. Company rate 2/6 in the f. Company rate on ais- tributions to absent- ees 8d. in £ Year ended 30/6/1917 Same as 1915 Same as 1916 <6 ! o o Same as 1918 H > 1 ■s CO s a ca |4 is 2 OS 1 -d 0) C 1 ICO ' 4) (U C «o ^. ^ oc '0 s T3 OT c C3 (U rt ID 6 M _; ^ CD \ U 00 ^3 s ^ u: (U ""^ T3 0)22 E2 O t3 § .2 g, o) ?-■ rt ji B2 ►-H c a! c/^O o 2 xl 5.2 5 rt Cj « aS o 513 INDEX ABATEMENT OF LEGACIES. 285. ACCOUNTS. Adjustment, 23, 25. 27. Branch, 221. et seq. Classification of Ledger, 13. ■ Companies, 127 et seq. Consignment, 191 et seq. Cost, 357 et seq. Criticism of. 437. Departmental, 218 et seq. Executors, 254. 275, 276. Impersonal, 13, 14. Income and Expenditure, 19. Insurance Companies, 287 et seq. Joint, 199. Liquidators, 325 et seq. Mining Companies. 166 et seq. Nominal, 13, 14. Partne s, 57. Personal, 13. 14. Profit and Loss, preparation of, 14. 17 Real, 13, 14. Receipts and Payments, 19, 20. Reduction of Capital. 309. Revenue, 19. Station, 298. Trading, Preparation of, 15. ACCOUNT CURRENT. Definition of 193. Illustration of, 196. Interest, Calculation of, 203, 204 Interest, Rebate of. 204. Source of Entries in, 203. ACCOUNT SALES. Book, 201. Definition of. 193. Illustration of, 195. .ACCRUED INCOME. Agents' Commission 40. In Executors' Accounts, 283. Treatment of, on Balance-day. 39. ACCRUING EXPENSES. 40. ACCUMULATED FUNDS. Nature of. in Insurance Companies, 294. 515 AUSTRALASIAN ADVANCED ACCOUNTANCY. ADEMPTION OF LEGACIES, 257. ADJUSTMENT ACCOUNT. Sales Ledger. 23-29. Bought Ledger, 23-29. Private Ledger, 30. Cost Ledger, 377, 378 380. ADJUSTMENTS. Balance-day, 37. Contributories, Rights of, 333. Garner v. Murray, Rule in, 80. Insurance Premiums, 294. Partners, of losses between, 80. Partners, of profits between, 71. Outstanding Consignments, 198. Reversing Branch figures, 235. ADMINISTRATORS (see EXECUTORS). ADVANCES BY PARTNERS. Interest on, 61. 71. Repayment of, 75, 79. Where firm insolvent, 253. AGISTMENT FEES, 304. ALLOTMENT OF SHARES. Entries in Application and Allotments Book, 148- 52 Entries in Private Ledger on. 128. For Consideration other than Cash, 125. Restrictions on. 121. Return showing. 125. ALTERATIONS. In Federal Income Tax. 503 et seq. AMALGAMATION OF COMPANIES. Prooedure Similar to Reconstruction, 342. (See RECONSTRUCTION OF COMPANIES.) AMUSEMENTS COMPANY, PUBLISHED STATEMENTS OF, 464. 467. ANNUAL LIST AND SUMMARY. Companies to file copy of, 125, 153. ANNUITIES. Left by Testator, Payment of. 285. Payable by Insurance Companies, 291. ANNUITY SYSTEM. Illustration of Depreciation by, 48, 49 Providing for Depreciation by, 47. APPLICATION FOR SHARES. Entries in Application and Allotment Book for. 148-152. Entries in Private Ledger, 128. Oversubscription, Procedure on, 150. APPORTIONMENT. Of Expenses between Departments, 221. Of Instalments between Principal and Interest, 425 et seq. 516 AUSTRALASIAN ADVANCE]^ ACCOUNTANCY. APPORTIONxMENT (In Executor's Accounts) Definition of, 258. Of Bonus Shares, 260 et seq. Of Dividends on Preference Shares, 2C3. Of Executors' and Trustees' Expenses, 272. Of Expenditure in Station Accounts, 265. Of F're Premiums, 266. Of Interim Dividends, 259. . Of Loss on ReaHsation of Security, 264. Of Profits of Partnership Business, 266. iH Rent paid in Advance, 266. On Cessation of Interest of Life-tenant, 259, 284. On Change of Investments, 266 et seq. On Death of Testator, 258, 276, 278, 283. Not made, Cases where, 266. APPRECIATION OF ASSETS, 55. APPRENTICES' PREMIUMS. Preferential in Bankruptcy, 246-248. "APPRO." GOODS SENT ON, 205. APPROPRIATION ACCOUNT, 70, 136. 4.56. ARRANGEMENTS WITH CREDITORS, 242. 243. ARREARS ON PREFERENCE SHARES. Apportionment of, between Corpus and Income, 263. Treatment of, in Winding Up, 333. ARTICLES OF ASSOCIATION. Alterations to, 114. Everyone fixed with notice of, 114. Increase of Capital to be authorised by, 115. Members bound by, 114. Nature of. 111. Rights of Shareholders mav be defined by, 115. Rights of Shareholders in Winding Up, 327, 333. Reduction of Capital to be authorised by, 309. Restrictions on Transfer of Shares in, 114. What Companies must register. 111. ASSESSMENTS, 302. ASSETS. Accounts of Income-producing, 279. Appreciation of, 55. Basis of Valuation of, in Statements of Affairs, 243. Classes of, 18. Deprecia1;;on of, IS, 41. Fixed, 18. Floating, 18. Fluctuation of, 44. Intangible, 89. Marshalling, 257. Order of stating, in Balance Sh.eet, IS. Rules to distinguish from losses, 14, 15. Shares held as. Valuation of, 432. Writing up, 55. 517 AUSTRALASIAN ADVANCED ACCOUNTANCY. ASSIGNMENT TO TRUSTEE, 242 et seq. AUTHORISED INVESTMENTS, 268 et seq. "AVERAGE" CLAUSE IN FIRE POLICIES, 435. AVERAGE DUE DATE, 204. BAD AND DOUBTFUL DEBTS. 37-39 BALANCE-DAY ADJUSTMENTS, 37 et seq. BALANCE SHEET. Compared with Statement of Affairs, 243. Contingent Liabilities in. 431. Form of Statement of, 17. Incorporation of Branch figures in, 225 et seq. Nature of Accounts comprising, 17. Preparation of, by Branch, 223. Private in Victoria, 125. Provisions of Victorian Act as to, 125. Rules to facilitate preparation of, 14, 15. Shares held as Assets, in, 432. (See also, PUBLISHED STATEMENTS.) BANK, PUBLISHED STATEMENTS OF, 454, 455. BANK RATES OF EXCHANGE. "Buying" and "Selling" Rates, 186. Costs of various modes of remitting, 189. Dealings with "Trade" bills, 185. Differs from Foreign Exchange, 185. Examples of various modes of remitting, 189, 190. Example of transactions, 187. Ordinary Rates, 186. Wool Season Rates, 187. BANKRUPTCY. Administering Deceased's Estate in, 256. Filing petition in, by Debtor, 243. Filing petition in, by Creditors, 243. BILLING SYSTEMS, 401-403. BILLS DISCOUNTED. Rebate on, 455. Stated as Contingent Liability, 432. BILLS OF EXCHANGE. Bank Rates for Buying and Selling, 186. Drawn as Advances against Consignments, 193, 197 Settling debts by means of, 179 et seq. • BONUS SHARES. Apportionment of, between Corpus and income, 260 et seq Procedure on issue of, 134, 135. BOOK DEBTS. Adjustments on Balance-Day, 37. Reserve for Doubtful. 38. 518 A U S T R A L A S I A N ADVANCED ACCOUNTANCY. BRANCH ACCOUNTS. Balance-Day procedure in H.O. books, 225. Balance-Day procedure in Branch books, 223. Branch acting as Distributing Agency, 222. Closing entries in Branch books, 224. Different arrangements as to Accounts. 222. Different methods of incorporating Branch figures, 225 et seq. Entries in Branch books, 222. Entries in H.O. books, 223. Example, 238 et seq. Foreign (see FOREIGN BRANCHES), 433. Goods and Remittances in transit, 237. Reconciliation of books, 235. Reversing entries, 231. Remittances, treatment of, 223, 434. Where Branch keeps its own books, 222. Where Branch prepares Revenue Accounts, 224. Where Goods supplied above Cost, 231. BUILDING SOCIETY, PUBLISHED STATEMENTS OF, 447 et seq., 458 459. BUSINESS PREMISES. Resumption of, under Statutory Powers, 416 et seq. BUYING RATE OF BANK. 186, 187. CALLS ON SHARES. Entries in Private Ledger for, 129, 132. Entry in Calls Book. 155. No-Liabilitv Companies', 167. Paid in Advance, 133, 335. Procedure in Making, 155. CAPITAL. Account, Overdrawn by Partner, 80. Accounts, in No-Liability Company, 168. Accounts of Limited Companies, 127-147, 164, 454. Authorised of. Company. 128, 168. Contributing, in Mining Company, 167. Due on Retirement of Partner, 62. Increase of, by Company, 115, 134. Interest on Partner's 60, 71. Nominal, of Company, 128. 168. Of company, fixed by Memorandum, 115. Of Partners, 59, 70. Or Corpus Account, 276. Preservation of, 41 et seq. Reduction of, in Limited Company, 309. Return of in Mining Companies, 173. Station Accounts, Sinking Fund to replace, 265 Unallotted, in Companies, 128, 168. Uncalled, in Companies, 128, 168. Watering, 134. Writing off lost Paid-up, 309 et seq. - CAPITAL EXPENDITURE, 18. CARD LEDGER. .Advantages of, 404 et seq. Compared with bound Ledger, 405. 519 AUSTRALASIAN- ADVANCED ACCOUNTANCY CARD LEDGEFf— Continued. Diaries, for Subscribers, 408. Diaries, for Advertisers. 409. Diaries for Time-payment accounts, 409. Disadvantages of. 407. Illustrations of, 406, 408. CARD STOCK RECORDS, 397, 398. CARRYING ON BUSINESS. Of Testator. Executor's position in. 271 CASH BOOK. Dissection of, 33. E.Kecutor's. Example of, 282. Insurance Company's, 293. Liquidator's, 337. Tab-alated. 210, 211. CASH REGISTERS, 414. CHARITABLE INSTITUTION. Published Statements of, 465 et seq. CIVIL SERVICE CO-OPERATIVE SOCIETY, LTD. Published Statements of, 472. CLAIMS ON INSURANCE COMPANIES. 291. CLAIMS FOR COMPENSATION. (See RESUMPTION OF BUSINESS PREMISES.) CLASSIFICATION. Of Assets, 18. Of Ledger Accounts, 13. Of Accounts in Profit and Loss A/c, 440 COINAGE ACT, 178. COMMISSION ON SHARES, 134. COMMENCEMENT OF BUSINESS. Restrictions on, 122. COMPANIES. Annual List and Summary, 125. Articles of Association, 111, 114. Capital of, 115. Classes of Shares, 115, 116. Compulsory Books. 118. Contracts by, before Registration, 123. Contents of Memorandum. 112 et seq. Differences between Partnerships and. 57, 109, ll.t. 111. Federal Income Tax, 488 et seq. Foreign, 126. History of legislation for, 109. Incorporation of, by Special Act, 109, 110. Incorporation of. by Royal Charter, 109, 110. Liability of Members of, 57, 118. Limited by Guarantee, 112. Limited by Shares, 113. Liquidation of, 325 et seq. AUSTRALASIAN ADVANCED ACCOUNT AN C Y COMPAN I ES— Continued. Miembers of, 117. Members of, Who may be. 117. Memorandum of Association, 111, 114. Minimum number of Members of. 111. Nature of, 113. Origin of, 109. Procedure on Registration of, 111. Prospectus of, 119. Private, in New Zealand, 122, 123. Proprietary, in Victoria, 123. Published Statements of, in Victoria, 125. Rate of Federal Income Tax Payable by, 497- Restrictions on Allotment of Shares, 121. Restrictions on Commencement of Business, 122. Return of Allotments, 125. Scrip of. 117. Share Certificates of. 117. Shares, Classes of, 116. Stock of, 117. UnHmited, 112. (See also COMPANY ACCOUNTS: MINING COMPANIES; LIQUIDATORS' ACCOUNTS; RECONSTRUCTION, AMALGAMATION; REDUCTION OF CAPITAL.) COMPANY ACCOUNTS. Application and Allotments Book, 148 et seq. Bonus Shares, Issue of, 134, 135. Call Book, 155. Calls Paid in Advance, 133, 335. Commission on Shares, 134. Conversion of Private Concerns, 139. Debentures, Issue of, 136. Debentures, Issued at Discount, 138. Debentures, Issued at Premium, 138. Debentures, Register of, 158. Discount on Shares, 134. Dividends in, 135. Dividend Book, 157. Double Accoimt Svstem in, 161. Forfeited Shares, Treatment of, 130. Increa.se of Capital, 115, 1.36. Opening Entries in, 127 ie,t .seq. Premiums on Shares in, 133. Profits prior to Incorporation, 141. Reduction of Capital, 309 et seq. Register of Member.s, 152, 154. Register of ^Mortgages 157. 159. Register of Transfer.?, 153, 156. Share Register. 152, 154. Watering Capital, 134. COMPENSATION, CLAIMS FOR. (See RESUMPTION OF BUSINESS PREMISES) . COMPULSORY BOOKS, US. COMPULSORY WINDING-UP, 325. (See LIQUIDATORS' ACCOUNTS). CONDITIONAL PURCHASE, 302. 521 AUSTRALASIAN AD\'ANCED ACCOUNTANCY CONSIGNMENT. Definition of, 191. Differs from Sale or Purchase, 191, 192. Differs from Advejiture, 199. (See also CONSIGNMENT ACCOUNTS.) CONSIGNMENT ACCOUNTS. Adjustments on Balance-day, 198. Consignor and Consignee, 191. Entries in Ordinary Trader's books, 191. Consignors' books, 191. Account Sales, 193, 195, 19S, 201. 203. Account Current, 1P3, 196. 203. Example, 193, 194. Entries in Consignee's books, 197. Drafts drawn in advance, 197. Expenses of Consignee, 197. Commission, 197. Example, 198. Entries where Consignments frequent, 200. in Consignors' books, 200. in Consignees' books, 201. Equation of Payments, 204. Joint Accounts, 199. CONSIGNMENTS INWARD BOOK, 201. CONSIGNMENT DAY BOOK, 200. CONSIGNMENT LEDGER. 200. CONTINGENT LIABILITY. Arrears on Preference Shares a, 264. Miethod of Statement in Balance Sheet, 431. CONTRIBUTING CAPITAL, 167. CONTRIBUTORIES. Adjustment of Rights of, 333 et seq. Definition of, 326. List.-: of, "A" and "B," 326. Petition for Winding-up by, 325, 326. CONVERSION. Of shares into Stock, 117. Of Private concern into Company, 139. Of books from Single to Double-entry, 30-36. GO-OPERATIVE DAIRY COMPANY. Published Statements of, 461, 462. CO-OPERATIVE COMPANY. Federal Income Tax, 492. CORPUS (see EXECUTORS). CORPUS ACCOUNT. Source of Entries in, 276. Example of, 278, 280. COSTING AND COST ACCOUNTS. Adjustment Account for, 361, 377, 378, 380. Balancing Cost Ledger, 361, 378. Building Contractors, etc., 387. 522 AUSTRALASIAN ADVANCED ACCOUNTANCY. COSTING AND COST ACCOUNTS— Continued. Costing Day Book, 373. Cost Ledger, 373, 374. Cost Sheet, 360, 363. Departmental Costing, 376. Different Classes of Costing, 357. General Procedure, 358. Manufacturing Accounts, 389. Materials, Summary of, 366. Materials, Direct, 366, 377. Materials, Returns of, 366. Materials for Stock Jobs, 367. Oncost, Factory and Office, 359, 363, 370, 37.?, 381 Object of Cost Accounts, 358. Outside Work in, 363. Output, 376. Percentages, Value of, in. 352 et seq. Process, 376. Progress Payments in, 389. Summarv of Procedure, 375. Terminal, 357. Trading and Manufacturing Accounts, 383 et seq. Uncompleted Contracts or Jobs, 381, 387. Wages in, 361, 367 et seq. Work Docket, 364. COST LEDGER. Adjustment Account, 361, 377, 378, 380. Illustration of. 374. Nature of entries in, 358. Self-balancing, 361. Use of Cards for. 373. COST SHEET, 360 et seq. COSTING DAY BOOK, 373 et seq. CREDITORS. Partly Secured, 246. Preferential, in Statements of Affairs, 244. Preferential, in various States (Bankruptcy), 246 et seq. Preferential, in various States (Winding-up), 331 et seq. Rights of, on Reduction of Capital, 310 et seq. Rights of, on Reconstruction of Amalgamation, 340. Secured, 246 CRITICISM OF ACCOUNTS. Building Society's Accounts, Criticism of, 446 et seq. Correctness in Principle. 441 et seq. Interpretation of Accounts, 445 et seq. Matters of Form, 438. Objects of, 437. Qualifications of Critic, 437. Stability of a Concern, 452. Stability of a Concern, Evidences of, 453. DAY BOOK, TABULATED, 207, 208, 209, 428. DEAD RENTS, REDEEMABLE. 429. AUSTRALASIAN ADVANCED ACCOUNTANCY. DEBENTURES. Definition of, 136. Different classes of, 137. Entry of, in Register of Mortgages, 158. Issue of, at par, 137. Issue of, at a premium, 138. Issue of, at a discount, 138. Register of, 158, 159. Sinking Fund for redemption of, 106. DEDUCTIONS. Federal Income Tax, 482. DEFERRED CREDITORS OF PARTNERSHIP, 64. 253. DEFERRED SHARES, 116. DEFICIENCY. Where partner unable to pay in, 80. DEFICIENCY ACCOUNT, 249. DEMONSTRATIVE LEGACY, 256, 257. DEPARTMENTAL ACCOUNTS, 218 tt seq. Apportionment of Expenses in, 221. Estimated Stock Statements, 219. Transfers in, 219. DEPARTMENTAL COSTING, 357, 376. DEPOSITS WITH APPLICATIONS FOR SHARES, 150 et seq. DEPRECIATION. Annuity System of providing for, 47. Causes of, 41, 44. Distinction between Repairs and, 44. Effect of Non-provision for, 41, 42. Elements to be considered in, 45. Equation of Cost and Repairs, 46. Federal Income Tax, 484- Fixed Assets, on, 19, 51, 53. Fixed Instalment system, 45. Fixtr.res erected on Leaseholds, of, 431. Floating Assets of, 18, 53. Fluctuation and, 44. Good n' ill, of, 97. In Station Accounts, 303. Legal Aspect of, 53. Maintenance out of Revenue, 50. Redvcing Instalment System, 45. Reserve for. of Goodwill, 97, Reserve for, 103, 108, 140. 163. Sinking Fund System, 49, 108. Treatment of, in Double Account System, 1G3. Valuation method of. 47. Wa.sting Assets, in Companies working. 50, 173. Why provision for, should be made, 41 et seq. Wrongful treatment of, 442, 443. DISCOUNT. Adjustment of, 39. On Fhnres, 134. On Debentures, 138. Kate of Bank of England, 182. Suspense Account for, 39. 524 AUSTRALASIAN ADVANCED ACCOUNTANCY. DISSECTION. Oif C:ish Book, 33. Of Sales Ledser, 32. DISSENTIENT SHAREHOLDERS. Rights of, in Reconstruction, etc., 341. DISSOLUTION OF PARTNERSHIP. Amount due to Outgoing Partner on, 62. Amounts due by Partners on, 80. Compulsory, 75. Death or Bankruptcy, by, 62. Examples of, 82 et seq. Garner v. Murray, Rule in, 80. Liability of Partners on, 65. One Partner purchasing, 77. Order of Distribution of Assets on, 75. Procedure on, by Sale, 78. Realisation Account, entries in, 79. Restrictions on retiring Partner on, 63. Retirement, by, 61, 93. Retirement of one Partner, 76. Rule in Garner v. Murray, 80. DISTURBANCE OF BUSINESS. Claim for, where Premises resumed, 418 et seq. DIVIDENDS. Accrued, in Executorship Accounts, 260. Entries for, in books, 136, 157. In Relation to Federal Income Tax, 489. Interim, Apportionment of, by Executor, 259. Payment of, out of Capital, 50 et seq. Table "A," provisions of, as to, 136. DOUBLE ACCOUNT SYSTEM. Compared with Single Account System, 164. Concerns to which suitable, 163, 173. Depreciation, treatment of, under, 164. Example of Balance Sheet under, 175, 176. Fixed and Floating A.ssets under, 162. Objections to, 163 et seq. Origin ol 161, 440. Preliminary Expenses under, 165. DOUBTFUL DEBTS RESERVE, 38. DRAWINGS. By Partners from Profits, 60. Interest on Partners', 61, 71. EQUATION OF COST AND REPAIRS. Providing for Depreciation by, 46. EQUATION OF PAYMENTS, 204. ESTATE DUTY, FEDERAL, 482, 502. ESTIMATED STOCK STATEMENTS, 219. 525 AUSTRALASIAN ADVANCED ACCOUNTANCY ESTOPPEL. Liability as Partner by, 64. Membership of Company by, 117. EXAMPLES (see also ILLUSTRATIONS). Adjustment Accounts, 26, 27. Adjustment of Discounts, 39. Adjifetment of Profits, 423. Adjustment of Rights of Contributories, 335, 338, 339. Amalgamation of Companies, 344 et seq. Annuity system of Depreciation, 47. Apportionments between Corpus and Income, 259 et seq. "Average" Clause — Fire Losses, 436. Average Due Date, 205. Balance Sheet on Double Account System, 175, 176. Balance Sheet of Manufacturer, 388. Branch Account in H.O. books, 227 et seq. Closing Entries in Branch Books, 224. Comparison of various Rates of Exchange, 189, 190 Consignment Accounts, 194 et seq. Conversion of Private Concern to Limited Company, 142. Cost Accounts, Monthly entries, 377 et seq. Cost Ledger Adjustment Account, 380. Debentures, issued at discount, 138. Debentures, issued at premium, 138. Deficiency Account, 252. Diss«ction of Cash Book, 33. Dissection of Sales Ledger, 32. Division of Profits in Partnership, 73. Entries incorporating Branch figures, 224, 226, 228.. 23C. Entries on retirement of Partner, 82. Entries where one Partner takes over, 83. Estimated Stock Statement, 219. Executor's Accounts, 277 et seq. Federal Income Tax, Losses of Capital, 483. Forfeited Shares A/c in No-Hability Company, 171. Forfeited Shares A/c in Limited Company, 132. Goodv.'ill, payment by incoming Partner, 95. 96. Goodwill, payment to retiring Partner, 93. Hire-Purchase Accounts, 425. Hire-Purchase Day Book, 428. Illustrating Gamer v. Murray, 86. Insurance Company's Balance Sheet, 297. Insurance Company's Revenue Account, 296. Liquidator's Cash Account, 337. Live Stock Values Federal Income Tax, 478. Manufacturing Account, 391. Monthly Entries for Premiums, 290. Monthly Journal Entries, 28. Oncost, charging of, 382 et seq. Opening Entries in Company's books, 128. Opening Entries of Partnership, 70, 72. Opening Entries in No-Liability Company, 169. Opening Journal Entries, 36. Primarv Producer's Tax Calculation, 498. Rates of Tax, 496. Realisation of Partnership Assets, 84. Reconstruction of Companies, 344 et seq. Reduction of Capital, 312 et seq. Royalty Accounts, 430. Sale;, Arriving at, 420. Settlement of debts between Foreign countries, 179, 185. 526 AUSTRALASIAN ADVANCED ACCOUNTANCY. Sttitement of Affairs, 251. Statement of Claim, 423. Tabular Journal, 29. Trading Account, Profit and Loss A/c, etc., of Trader, 21, 22. Trading Account, Departmental, 220. Trading Account, Manufacturing A/c and P. and L. A/c, 383 et seq. Valuation of Goodwill, 90. EXEMPTIONS. Federal Income Tax, 480. EXCHANGES, 178. (See FOREIGN EXCHANGES and BANK RATES OF EX- CHANGE.) EXCHANGE, PROFIT OR DOSS ON. 434. EXECUTORSHIP ACCOUNTS. Abatement of Legacies, 285. Accounts of Income-Producing Assets, 279. Accrued Income in, 276, 283. Annuities in, 285. Apportionment in, 278. Book^ required for, 276. Cash Account, Form of, 281. 282. Corpus Account in, 278. Distribution of Estate, 280. Example of, 277 et seq. Journal, Use of, 276. Life Tenant, Death of, 284. Opening Entries in, 276, 278. Stocks and Shares, Valuation of, 283. (See also EXECUTORS.) EXECUTORS. Accounts of, 274, 276 et seq. Apportionment hv, 258 et seq. (See APPORTIONMENT.) Business, Carrying on by, 271. By whom appointed, 254. Classes of Legacy, 255. Commission of, 272. Death of Legatee, 258. Distribution of Estate by, 256, 257. Expenses of, 272. Federal Estate Duty, 482, 502. Intestate Estates, Distribution of, 272 et seq. Investments, 267. Investments, Authorised, 268 et seq. Investments, Purchase of, 271. Legacies and Devises, 255 et seq. Marshalling the Assets, 257. Payment of Legacies, 257. Probate, applying for, 2.54. Remuneration of, 272. Repairs to Property, 272. Stations, Apportionment of Expejnditure on, 265. When appointed, 255. EXPENSES PAID IN ADVANCE, 40. EXTRAORDINARY RESOLUTION. Authorising arrangements with Creditors, 329. For Voluntary Winding-up, 329. 527 AUSTRALASIAN ADVANCED ACCOUNTANCY. FACTORY COST, 372. FEDERAL ESTATE DUTY, 482, 502. FEDERAL LXCOME TAX. Alterations in Assessment Act, 503. Casual Employees, Collection of Tax from, 501. Companies and Shareholders, 488. Co-operative Companies, 492. Death of Taxpayer, 501 • Deductions, 482. Exemptions, 480. Financial Year, 473. Fire and Marine Insurance Companies, 491. Income, 473 et seq. Place of Derivation, 478- Live Stock Valuation, 477. Life Insurance Companies, 492. Liquidator of Company, 501 . Mining Companies, 492. Non-Residents, Taxation of, 494. Objections and Appeals, 502. Partnerships and Trustees, 501. Penalties, 501 . Primary Producers, 497 et seq. Rates of Tax, 495 et seq. Relief, Double Taxation, 493. „ Hardship, 502. Scope of Act, 473. Statutory Deduction, 487. \'isiting Ships, 491- FIRE LOSSES "AVERAGE" CLAUSE, 435. FIRE AXD MARINE INSURANCE COMPANIES. Federal Income Tax, 491. FIRMS. Name of, 59. Registration of, 58. FIRST PREMIUMS. In Insurance Offices, Treatment of, 287 et seq. FIXED ASSETS. Basis of Valuation of, 19, 432. Conversion of, to English Currency, 434. Definition of 19. Depreciation of, 19, 54, 55, 163. Double Account System, Treatment under, 161 Fluctuation in value of, 47, 54, 55, 433. Shares held as. Valuation of, 432. FIXED INSTALMENT SYSTEM. Providing for Depreciation by, 45. FIXTURES. Erected on Leasehold premises. Depreciation of, 431. Loss on, when premises resumed, 417. 528 AUSTRALASIAN ADVANCED ACCOUNTANrY. FLOATING ASSETS. Basis of Valuation of, 19. Conversion of. to English currency, 434. Definition of, 19. Depreciation of, 19, 54, 55, 163. Double Account Svstem, Treatment of under, l(i3 Shares held as, Valuation of, 432, 433. FLUCTUATION. Differs from Depreciation, 44, In Investments, 432, 433. Of Rates of Exchange, 180. FOREIGN BRANCHES, 433. FOREIGN COMPANIES, 126. FOREIGN EXCHANGES. Bank Drafts for Settling, 183. Bank of England, Resen.-es of, 181. Bank of England, Discount Rate of, 182. Basis of, 178. Example of. 184. Export Gold Point, 181. Fixing Rate in Foreign Countries, 180. Fluctuations in Rate 180. Gold as Medium of Settlement, 178. Import Gold Point, 183. Mint par of Exchange, 179. Mode of Settling Trade Debts, 179 (See also BANK RATES.) FORFEITED SHARES. Entries in books for, 130, 131, 170, 171. Mining Companies, in, 167. Profit on, 130 Sale of, by auction, 168. FORMATION OF COMPANIES, 111. FREEHOLD. Value of, where premises resumed, 417 GENERAL LEGACY, 255. "GOLD POINT," 181, 183. GOLD RESERVES OF BANKS, 181. GOODS ON SALE OR RETURN, 205. GOODS IN TRANSIT. Between Branch and Head Office, 236. GOODWILL. Damage to, where premises resumed, 420. Depreciation of, 97. Division of, between Partners, 62, 93, 95. Example of, in Partnership Accounts, 72, 93, 94, 95. Introduction of New Partner, on, 94. Lease, term of to be considered in valuing, 90, 422, 423. 529 AUSTRALASIAN ADVANCED ACCOUNTANCY. Nature of. 89. Payment by Companies for, 140, 343. Restrictions on Vendor of, 92. Retirement of Partner, 93, 97. Suggested Agreement between Partners as to, 62. Treatment in Books of Vendor, 92. Treatment in Books of Purchaser, 92. Valuation of, 90. GUARANTEE, COMPANIES LIMITED BY, 112. HEADINGS TO PUBLISHED STATEMENTS, 439, 454, 456, 462. HIRE-PURCHASE. Card Ledger for. Accounts, 409. Definition of, 424. Entries in Books, where transactions not numerous, 425. Entries in Books, where transactions numerous, 427. Principal and Interest, separation of, 424. Sales Day Book to record, 428. HOTEL LEDGER, 216, 217. ILLUSTRATIONS. Account Current, 196. Account Sales, 195. Application and Allotments Book, 149. Billing Systems, 402. Card Ledger, 406. Card Ledger Diary, 408. Card Stock Record. 398 Cost Sheet 360. Daily Time Card, 368. Dissection of Sales Ledger, 32. Dissection of Cash Book, 33. General Rate Book, 215. Hotel Ledger, 217. Insurance Company's Cash Book, 293. Jeweller's Stock Book, 395. Job or Cost Ledger, 374. Loose Leaf Ledger, 409. Merchant's Stock Book, 397. New Business Register, 288. Register of Transfers, 156. Register of Mortgages, 156. Register of Debentures, 159. Renewals Register. 289. Sales Ledger and Ledger Balances Book, 413. Sale or Return Book, 206. Share Register, 154. Tabulated Ca.sh Book, 210, 211. Tabulated Day Book, 208. Tabulated Journal, 212, 213. Uniscript System. 411. Wages Dissection Sheet, 371. Wages Summary, 369. Work Doc-ket, 364. (See also EXAMPLES.) IMPERSONAL ACCOUNTS, 13, 14. IMPREST SYSTEM. 172. 530 AUSTRALASIAN ADVANCED ACCOUNTANCY. INCOME— FEDERAL INCOME TAX. Alterations in Assessment Act, 503. Assessable, 482. Deductions from, 482. Exempted from Tax, 480. From Personal Exertion, 474, 496. Property, 474, 496. „ Business Sources, 476. Live Stock, 477. Place of Derivation, 478. INCOME AND EXPENDITURE. Accounit, differs from Receipts and Payments A/c, IS. Apportionment of, in Executor's Accounts, 258 et seq Class of. not apportionable, 266. Class of concern to which applicable, 439, 442. INCOMING PARTNER. Assets introduced by, 79. Liability of, 65. Payment for Goodwill by, 69, 94, 95. INCORPORATION. Of Limited Companies, 111. Of No-Liability Companies, 166. Profits prior to,, 141. INSOLVENCY. Administering Deceased's Estate in, 256. Filing petition by Debtor in, 242. Filing petition by Creditors in, 243. INSTALMENTS PAYMENT BY, 424 et seq. INSURANCE COMPANIES' ACCOUNTS. Accumulated Funds in. 294. Agents' Accounts, 290. Annuities, 291. Balance Sheet, 295, 297, 456, 457. Balance Sheet Valuation, 295. Bonuse.^;, 292. Claims, 291. Genertd Cash Book, 292, 293. General Expense.s, 292. Investments, 290. Loans on Policies, 291. New Business Register, 288. Premiums, Treatment of, 287. Premiums paid in Advance, 294. Proposals. Treatment of, 287. Re-Insurance, 291, 456. Renewal Premiums, 2S9. Revenue Account. 292, 296. Specimen Monthlv Entries, 290. Surrenders, 292. "Valuation" Balance Sheet, 295. . INSURANCE RESERVE, 461, 462. INTERIM DIVIDENDS. Apportionment of, by Executor, 259 INTERPRETATION OF ACCOUNTS, 445. 531 AUSTRALASIAN ADVANCED ACCOUNTANCY. INTESTATE ESTATES. Apportionment of Administrator for, 254. Distribution of, 272. INVESTING SHARES, 458. INVESTMENTS. Of Insurance Companies, 290. INVESTMENT OF TRUSTEES AND EXECUTORS Authorised, in various States. 268 et seq. Change of, no apportionment on, 266. Class of, 268. Consisting of Wasting Assets, 267. Expenses in purchasing, 271. Rule as to. in Howe v. Lord Dartmouth, 267 INVOICE BOOK, TABULAR, 209. JEWELLER'S STOCK BOOK, 394, 395. JOINT ACCOUNTS, 199. JOINT STOCK COMPANIES (see COMPANIES). JOURNAL. Executor, Use of by, 276. Opening Entries in, 36. Station Accounts, Use of in, 298. Tabular, for Self-balancing Ledgers. 29. Tabular, for Indent Agents, 212, 213. LEASE, VAI,UE OF. Where premises resumed, 417. Adjustmient of profits in arriving at, 422 LEDGER. Accounts Classification of, 13, 14 Balances Book. 412, 413. Card, 374, 404. Cost or Contract, 374. Dis.section of Sales, 31. General, on Station, 301. Loo-se-Leaf, 409. Personal, on Station, 300. Sales. Time-saving device for, 412 413 Self-Balancing, 23. Stores, 394. Stores, on Station, 301. Subdivision of Sales, 29. • Tabular, 214, 412, 413. Tabular and Ledger Balances Book. 412, ^i.*^ LEGACIES. Abatement o>, 257. 2S5. Death of Legatee. 258. DifTerent classes of, 255. Nature of, 255. Notification to Creditors before pavment of, 254, 255 Payment of, 257, 277, 280 532 A U S T R A L A S I A N A D V A S C E D A C C (J I' X T A N C ^' LETTERS OF CREDIT. Stated as Contingent Liability, 431, 455. How Liability on, arises, 455. LIABILITIES Contingent, 431, 455. Conversion of, to English Currency, 434. Ruk:s to distinguish from profits, 14, 15. Statement of, in Statement of Affairs, 245. LIABILITY OF MEMBERS. Of a Limited Company, 118. Of a Limited Company, Reduction of, 310, 316 Of a Partnership, 57 65. LIFE INSURANCE COMPANIES. Federal Income Tax, 492. LIFE TENANT. Apportionment on death of, 259, 284. And Riemainderman, Apportionment between, 259, 264 et seq. LIMITED COMPANIES (see COMPANIES). LIMITED MINING COMPANIES. Provision as to, in certain States, 174. LIMITED PARTNERSHIP. Provisions as to, in certain States, 66. IIQUIDATOR (see also OFFICIAL LIQUIDATOR). Accounts of, 333 et seq. Appointment of, by Company, 329. Appointment of, by Creditors, 329. Appointment in No-Liability Company, 331. Delegation of appointment to Creditors, 329. Effect of appointment, 330. Expenses of, 331 et seq. Fecleral Income Tax, duty regarding, 501. Must call meetings of members, 330. Must send notice to Registrar, 330. Powers of, in Winding-up under supervision, 330. Preferential Payments by, 331 et seq. Remuneration of, a preferential claim, 331 et seq LIQUIDATION AND LIQUIDATORS' ACCOUNTS. Adjustment of rights of Contributories in, 333. Bookkeeping necessary in, 325. Calls paid in Advance, 335. Distribution of Surplus, 334, 335. Examples, 334, 335, 337, 338. No-Liability Companies, 331. Preferential pavments in, 331 et seq. Rights of Preference Shareholders, 333, 335. Statement of Affairs, 335. Statement of Receipts and Payments, 336, 337. Various methods of Winding-up, 325 et seq. . Voluntary Winding-up, 329 et seq. Winding-up by Court, 325 et seq. Winding-up under supervision of Court. 330 et seq. Winding-up for purpose of Reconstruction, 340. 533 AUSTRALASIAN ADVANCED A C C O U N T A N C Y. LOANS BY PARTNERS (see ADVANCES BY PARTNERS). LOANS TO FIRM. Treatment of, in Insolvency. 253. LOANS ON POLICIES, 291. LOOSE LEAF LEDGERS, 409. MANUFACTURER. Balance Sheet of, 388, 462. 463. Value of Costing system to, 358 et seq. MANUFACTURING ACCOUNT. And Trading Account (Cost Accounts), 383, 384. Class of entries in, 389. Example of, 391. Value of, 390. MARKET QUOTATION. Waluation of Shares at, by Executor, 283. Valuation jvhere two quotations given, 283. AfATERIALS. Cost Account, Treatment of, in, 365 et seq Direct, 366, 377. Requisitions for, 365. Returns of. 366, 378. Stock Jobs, for, 367, 370. Summary, 370. MEMBERS OF LIMITED COMPANY. Bound by Memorandum and Articles, 114. Composed of Holders of Shares, 117. Different methods of becoming, 117. Liabihtv of, 118. Register of, 119. 152, 154. Signatories to Memorandum become, 117. Who may be. 117. MEMORANDUM OF ASSOCIATION. Alterations to, 114, 309. 311. Binding on Members, 114. Contents of, in Guarantee Companies, 112. Contents of, Joint-Stock Companies, 113. Contents of, in No-Liability Companies, 166. Contents of. in Unlimited Companies, 112. Everyone fixed with notice of contents of, 114. Minimum number to sign. 111. "Objects" Clause in, 114, 340. Rights of Members may be fixed bv, 115. Signatories to, become Members, 117. Statement of Capital in. 115. MERCHANT, PUBLISHED STATEMENTS OF, 460, 461 MERCHANT'S STOCK BOOK, 396, 397. MINING COMPANIES. Balance Sheet of, 173. Balance Sheet of, under Single A/c System, 177 534 AUSTRALASIAN ADVANCED ACCOUNTANCY. Balance Sheet of, under Double A/c System, 175, 176. Calls on Shares of. 167. Contributing Capital of, 167. Definition of No-Liability, 166. Depreciation In case of, 173. Entries on Forfeiture of Shares in, 170. Federal Income Tax Provisions, 492. Forfeiture of Shares in, 167. General Bookkeeping of, 172. Opening entries for, 168. Registration of, 166. Revenue Account of, 173. Winding-up of, 331. MINT PAR OF EXCHANGE, 179. MINUTE BOOK, 118. MONTHLY STATEMENTS, 410 et seq. MORTGAGES. Advances under, by Building Society, 458. Provisions as to, in certain States, 158. Register of, 118, 157. Register of, Issue of Debentures entered in, 158. NET PROCEEDS, 193. NFW BUSINESS REGISTER, 288. NO-LIABILITY COMPANIES (see MINING COMPANIES). NOMENCLATURE OF ACCOUNTS, 19, 439 NOMINAL ACCOUNTS, 13, 14. NOMINAL CAPITAL, 127, 168, 312. OBJECTIONS AND APPEALS. Federal Income Tax, 502. "OBJECTS" CLAUSE. Modification of, in Companies, 114, 340. Alteration of, by Reconstruction, 340, 341 OFFICE SYSTEMS. Altering, 400. Billing Systems, 401. 402. Card Ledgers, 404 et seq. Card Ledger Diaries, 408 et seq. Cash Registers, 414. Designing, for new business, 400. Designing, work of Public Accountant, 399. Loose-Leaf Ledgers, 409. Purchases for recording, 404. Ready-made, disadvantages of, 399. Sales, for recording, 401. Sales Ledger and Ledger Balances Book combined, 412, 413. Scope of, 400. Storekeepers, Useful Book for, 402, 403. Tabular Ledgers, 412. Uniscript System. 410. 5i35 AUSTRALASIAN ADVANCED ACCOUNTANCY OFFICIAL LIQUIDATOR. Appointment of, by Court, 326. Duties and Rights of, 326, 327. Provisional, in Queensland, 327. ONCOST. Basis on which charged, 3.59. Checking Factory, by Accounts. 381, 3S4. 386. Checking Offtce, by Accounts, 386. Class of Expenses includied in, 359. Factory, 359, 381 et seq. Illustration of charging of, 363, 372, 373. Nature of, 359. Office. 359, 381 et seq. OPENING ENTRIES. In Partnership books, 69. In Company's books, 127. In No-Liability Mining Companies, 168. In Executor's books, 278. On conversion of Private concern to Company, 139 ORDINARY SHARES. Rights of Holders of. 116. Rights of Holders of, in Winding-Up, 334 Treatment of, in accounts, 130. OUTGOii'^JG PARTNERS. Amount to be paid to, 62. By death or bankruptcy, 62. By retirement, 62. Liability of, 65. Restrictions on, 63. Share of Goodwill of, 76, 93, 96. Share of Re.ser\'es of, 77. OUTPUT COSTING, 357, 376. OUTSIDE WORK. Treatment of, in Costing, 363. PARTNERSHIP. Accounts of, 60. Amounts payable to partners on dissolution of, 52 Arbitration, Reference of disputes to, 63. At will. 59. Authority of partners, 60. By Estoppel, 64. Capital of, 59. Definition of, 57. Differences between, and Company, 57, 114 Deferred Creditors of, 64, 253. Division of profits of, 60. Drawings by partners, 60. Federal Income Tax Provisions, 501- Goodwill of, 62 (see GOODWILL). Interest on Capital, 60. Interest on .\dvances, 61. Interest on Drawings, 61. Liability of Incoming Partner, 65. Liability of Retiring Partner, 65. 536 AUSTRALASIAN ADVANCED ACCOL NTANCY. PARTNERSHIP— Continued. Liability of Partmers, 57. Limited Partnership, 66. _ Management of bu.smess of, o/, bU. Name of. 5S. Nature of Business of, 59. Partners' Salaries, 60. Profits of, when apportionable, 2bb. Receipt of profits, evidence of. 63. Registration of, 58. Relation of Partners. 64. Restrictions on retirmg Partner, b6. Restriction on number of members of. 5/ Retirement of Partner, 62. Special, 68. Statement of Affairs for, 2o3. Term of. 59. ^^sT: rrpTRTNERSHIP ACCOUNTS.) PARTNERSHIP ACCOUNTS. Appropriation Accounts m, 70. Examples of, 72 et seq. Goodwill in, 93 et seq.__ Interest on Advances, 71. Interest on Capital, 71. Interest on Drawings, 71. Opening entries in. 70. Partneis' Capital Accounts, /O. Statement of Affairs for, 253. Treatment of Partners' Salaries m, 71. Treatment of Reserves in, 70. ""(teTo°PAR?NERsS'ip 'L DISSOLUTION OF PARTNERSHIP.) PECUNIARY LEGACY, 255, 257. PERCENTAGE. ,^ ^^, Of Profit in Trading Account, lb, 221. Of Profit on Consignments, 192. Statements, 352. Statements. Advantages of, 3o2, 353. Statements. Basis of, 355. Statements, Errors discowlred by, 352. Statements, Examples of, 353, 354, 383, 385. Statements of cost per unit, 355. Statements. Trading A/c, form of, for. 355, d»d. PERSONAL ACCOUNTS, 13, 14. PERSONAL ESTATE. Of Testator, vests in Executor, 255. PERSONAL LEDGER Posting to, from Stores Ledger, 301. Usi? of, on Station, 300. PETTY CASH BOOK. TABULAR, 212. PREFERENCE SHARES. Accounts, method of treatment in, 130. Arrears on. Apportionment of, 263. 537 AUSTRALASIAN ADVANCED ACCOUNTANCY Cumulative. 116. Non-cumulative, 116. Position of, on Reduction of Capital, 321. Rights of. Holders, 116. Rights of Holders, in Winding-up, 333. PREFERENTIAL CREDITORS. In Bankruptcy, in various States, 246 et seq. In Statements of Affairs, 243 et seq. In Winding-up, in various States, 331 et seq. PRELLMINARY EXPENSES, 165. PREMIUMS. First and Renewal, on Policies, 290. Of Insurance Companies, 287. On Debentures, Entries for, 138. On Policies, paid in Advance. 294. 295. On Shares. Entries for, 133. On Shares issued as consideration, 343. On Shares, Provisions of Victorian Act as to, 133 PRE-PAYMENT COMPANIES, 174. PRIMARY PRODUCERS. Federal Income Tax Provisions, 497 et seq. PRIME COST. 359, 363. 372. PRIVATE COMPANIES. 123. PRIVATE CREDITORS OF PARTNERS, 253. PROBATE. Application for, by Exiecutor, 254. Position of Executor, before granted, 255. Statement for purposes of, 254, 255. PROCESS COSTING. 357, 376. PROFITS. Division of, between Partners, 60, 62, 75, 78, 79. On realisation, division of, 79. Prior to Incorporation, 141. Sharing of, as evidence of Partnership, 63. PROFIT AND LOSS ACCOUNT. Branch, in H.O. books. 229. Cost Accounts, form of, to check, 386. Dcipartmental, 221. Departmental E.xpenses in. 221. Disposal of balance of, 17. Divi.^ion of, in Partnership Accounts, 70. Incorporating Branch figures, 227. Mining Company, of, 173. Percentages in, 353, 354, 385. Prepaiatiop of, at Branch, 223. Preparation of from books kept bv SinglcEntrv-, 30 et seq. Prepaiation of, Rules to facilitate, 14, 15. Use of term, 439. 338 AUSTRALASIAN ADVANCED ACCOUNTANCY PROGRESS PAYMENTS. 389 PROPOSALS, 287. PROPRIETARY COMPANIES, 123. PROSPECTUS. Contents of, 119, 120. Certificate of profits in, 121 Rule in New Brunswick Co. case, 120. PUBLISHED STATEMENTS, FORM OF Amusements Company, 464. Bank, 454. Building Society, 459. Charitable Institution, 465 et seq. Civil Service Co-operative Society, 472. Co-operative Dairy Company, 461. Gold Mining Company, 175 et seq. Insurance Company, 457 et seq. Life Insurance Company, 296, 297. Manufacturing Company, 463. Merchant, 460. Sheep and Cattle Station^ 307, 308. Shipping Company, 468,471. PURCHASES. Simple method of recording, 404. RATES OF FEDERAL INCOME TAX, 495 et seq. RATES. As pieferential payment in Bankruptcy, 246 et seq. As preferential pavment in Winding-up, 331 et seq. Book, for Shire or Municipalitv, 214, 215. Deductions in case of Federal Income Tax, 483. RATIONS. Book, class of entries in, 299. Issue of, from Stores, 299. Value at which issued, 300. REAL ACCOUNTS, 13, 14. PEAL ESTATE. Of Testator, vests in Executor, 255. REBATE ON BILLS DISCOUNTED, 455. RECEIPTS AND PAYMENTS ACCOUNT. Charitable Institution, of, 466. Diffeis from Income and Expenditure A/c, 19, 441. Liquidator's, 328, 336, 337. RECONCILIATION. Branch books with H.O. books, 235. Goods in transit, 237. Remittances in transit, 237. 539 AUSTRALASIAN ADVANCED ACCOUNTANCY. RECONSTRUCTION OF COMPANIES. Alti^ring nature of business by, 341. Altering "Objects" clause, 340. Disposal of Shares not taken up, 342. Dissentient Shareholders, rights of, 341. Dissentient Shareholders, paving off, 341. Entries on, 342. Examples, 344 at sieq. Goodwill, payment for, on, 343. Liquidator ac^'epting shares as consideration, 341. Nature of. 340. Premium on Shares on, 343. Profit on transfer on, 343. Reasons for, 340. Reducing Capital by, 340. Shares received on, in books of Vendor, 342. Shares i.ssued on, in books of Purchaser, 343. REDEEMABLE DEAD RENTS, 429. REDUCING INSTALMENT SYSTEM. Providing for depreciation by, 45. REDUCTION OF CAPITAL. Authorised by Articles, to be, 309. By Reconstruction, 340. Cancelling Unissued Shares, 309, 313. Consent of Court to, 310. Consent of Creiditors to, 310, 316. Court settles list of Creditors, 311. Discharging liabilities before, 311. Entries on, 312 et seq. Entries Cancelling unissued shares, 313. Entries Returning Surplus Capital, 313. Entriics Writing ofT Paid-up Capital, 314. Entries Writing off Uncalled Capital, 316. Entries preserving uniformity of Shares, 315. Examples of, 318 et seq. Preference Shareholders, Position of, 312. Protecting Interests of Shareholders, 312. Reducing Liability on Shares, 310, 316. Returning Surplus Capital to .Members, 310, 313. Special resolution necessary for, 309. Special resolutidii, Definition of, 309. Uncalled Capital, Reducing. 310., 316. Use of words "And pelduced," 310. Various reasons for, 309. Writing-off lost Capital., 310, 314. REGISTER, CASH, 414. REGISTER OF DEBENTURES, 158. REGISTER OF MEMBERS, Entries in, 151. 1.52, 154, Information to be contained in, 119. No-Liabilitv Companies' 168. REGISTER OF MORTGAGES. Debentures, Issue of. to be entered, 158. Information contained in, 118, 157. Open to inspection, 119, 157. REGISTER OF TRANSFERS 153. 156. 540 AUSTRALASIAN ADVANCED ACCOUNTANCY. REGISTRATION. Of Companies, Procedure on, HI. Of Companie'; after Flotation, 141. Of Firms, 58. Of No-Liability Companies. 166. Of Transfers of Shares, 155. RE-INSURANCE, 291, 456. RELIEF FROM FEDERAL TAXATION. 493, 502. REMAINDERMAN. Bonus Shares apportioned betweem, and Life Tenant, 260. Meaning of term. 279. REMITTANCES. Conversion of to English Currency, 434. In Branch Books, 223. In Transit adjustment of, 237. REMOVAL. Cost of, where premises resiimed, 418. Loss of Profits during, Claim for, 421. REMUNERATION OF TRUSTEE OR EXECUTOR, 272. RENEWAL PREMIUMS, 289. RENEWALS REGISTER, 289. RENT. Preferential Claim for, in Bankruptcy, 246 et seq. Preferential Claim for, in Winding-up, 331 ©t seq. Redeemable Dead, 429. Station Books, in, 304. REPAIRS. Depreciation and Cost of, 41, 44. Executorship Accoimts, in, 272. Reserve' for, 304. RESERVE. Acquisition of Asset, for, 466. Capitalisatioi. of profit.- bv transfer tj. 262 Depreciation, for, 103, 108, 140, 163. Differs from Reserve Fund, 100. Division of, between partners, 77. Doubtful Debts, for, 38, 99, 440. Efifect of creating, 99. Gold, of Banks, 181. Fluctuation of Investments, for, 433. Illustration of, 102. Insurance. 462, 468. Nature of, 93. Re-Insurance, 4.56. Profit on Purchase, Transfer of. to, 343. Secret, 103 Sinking Fund. 104. Special (see SPECIAL RESERVES^ Views of various Authors on, 100. 541 AUSTRALASIAN ADVANCED ACCOUNTANCY. RESERVE FUND. An Asset, correctly shown as, 101. Decision in Gilbert v. Mea.sures Bros., 102. Differs from Reserve, 100. Differs from Sinking Fund, 105. E.xample of, 102. Investments, 100, 101. Meaning of term "Fimd," 101. Method of crelating, 99. Nature of, 99. Views of various Authors on, 100. RESIDUARY LEGACY, 256. RESUMPTION OF BUSINESS PREMISES. Adjustment of Profits, where claim for Lease, 422. Adjustment of Profits in valuing Goodwill, 419. Business, Los.s of due to Disturbance, 418. Claim Statement of, 423. Compensation, Basis of, 420. Fixtures, Loss on, 417. Freehold, Value of, 417. Goodwill, Damage to, 419. Goodwill, Damage to, in Wholesale business, 421. Goodwill, Damage to, where attaches to Premise.^, 421. Headings under which claim divided, 416. Lease, Value of, 417. Lease, Value of and Adjustment of Profits, 422. Lease, Term of, 422. Profits, ascertainment of, 418 et seq. Profits, Compensation based on, 418. Removal, Cast of, 418. Under Statutory Powers, 416. RETIRING PARTNERS (see OUTGOING PARTNERS). RETURNS BOOK, TABULAR, 209. RETURNS BY COMPANIES. Annual List and Summary, 123, 153. Mortgages and Charges Created, 157. Return of Allotments, 125. REVENUE. Account, nature of, 19. Expenditure, where heading used, 439. Expchditure, Definition of, 19. REVERSING ENTRIES. Branch figures in H.O. books, 231. Stock sent to Branch at more than cost, 235. SALARIES. Preferential Claim for, in Bankruptcy, 246 et seq. Preferential Claim for, in Winding-up, 332 et seq. SALES. Rilling svstems for recording, 401 et seq. Ledger, Time-saving device for, 412, 413, 414. SALE OR RETURN, GOODS ON. 205, 206. SCHEDULE. Showing Alterations in Federal Income Tax, 503 et seq. 542 AUSTRALASIAN ADVANCED ACCOUNTANCY. SECRET RESERVE. Effect of creating, 103, 104. Propriety of creating, 104. SECTIONAL LEDGERS (see SELF-BALANCING LEDGERS). SELLING RATE. Bank, for Drafts, 186, 187. Examples, 189, 190. SELF-BALANCING LEDGERS. Adjustment Accounts. 24, 25, 26, 27. Cost Ledger, 370 et seq. Monthly entries for, 25 et seq. Nature of, 23. Procedure to commence, 24. SHARES. Bonus, Apportionment between Corpus and Income, 260 et seq. Bonus, Procedure on issue of, 134, 135. Calls on, in Limited Companies, 129, 131, 155. Calls on, in No-Liability Companies, 167. Certificate for, 117. Classes of, 116. Commission on, 134. Deif erred, 116. Differ from Stock, 117. Discount on, 134 Division of Capital into, 115. Entries on Application and Allotment of, 129, 148. Forfeiture of, in Limited Companies, 130. Forfeiture of, in No-Liability Companies, 167 et seq. Held as Assets, 462. Held as A.'^sets, Valuation of, 432. Investing, in Building Society, 458. Issued for consideration other than cash, 141, 343 . Ordinary 116, 312. Preference, 116, 263, 312. Preference, Arrears on, 263. Premiums on, 133, 343. Register of, 152, 153. Restriction on Allotment of, 121. Subscribed for, in Memorandum, 117. Transfer of, 153, 154, SHARE CERTIFICATE OR SCRIP, 117, 167. SHARE REGISTER, 151, 152, 154. SHAREHOLDERS, DISSENTIENT. Rights of, in Reconstruction or Amalgamation, 341. SHEARERS, DEPOSITS, 304. SHEARING EXPENSES, 304. SHIPPING COMPANY. Published Statements of, 467 et seq. SHIPS VISITING AUSTRALIA. Federal Income Tax Provisions, 491. SINGLE ACCOUNT SYSTEM (see DOUBLE ACCOUNT SYSTEM), 543 AUSTRALASIAN ADVANCED ACCOUNTANCY, SINGLE-ENTRY. Dissection of Cash Book. 35. Dissection of Sales Ledger. 3L Nature of. 30. Opening books iov dissection, 36. Preparing Statements from books kept by, 30. SINKING FUNDS. Depreciation, providing for, by, 49. Diffe; from Reserve Funds, 105. Example of, 107. Method of creating, 105. Reasons for establishing, 104, 105. Renewal of Leases, for, 458. Renewal of Wasting Assets, 108, 458. Repayment of Debentures, 106. Replacing Capital in Station Trustees Accounts, 265. Treatment of Interest on, 105. SPECIAL LOSSES. Method of stating in published Accounts. 460, 461. SPECIAL PARTNERSHIPS, 68. SPECIAL RESERVES. Doubtful Debts, 38, 440. Depreioiation, 97, 103, 108, 140, 163, 173 Equalisation of Dividends. 103. Fluctuation of Investments, 433. Forfeited Shares. 131. Insurance, 462, 468. * Investment Fluctuation, 433. Premiums on Shares, 133. Re-Insurance,456. Secret, 103. SPECIAL RESOLUTION. Authorising arrangements with Creditors, 329. Authorising Liquidator to accept shares, 340. Definition of, 309. Notification of, to Registrar, 309. Reduction of Capital, required to authorise, 309. Winding-up by Court, for, 320. Winding-up Voluntarily for, 329. SPECIFIC LEGACY, 256, 257. STATEMENT OF AFFAIRS. Arrangements with Creditors. 242. Assets side, 245. Basis of Valuation of Assets, 243. Companies', in Winding-up, 328. 335. Compared with Balance-shclet, 243. Deficiency Account with, 249, 252. Example of, 251, 252. Filing petition in Bankruptcy, 242, 243. Form of. 245. Liabilities side of, 245. Liabilitaes, Different treatment of 243. Loans by partners and others, 253. Partnership, for 253. Partnership, Separate rtatement for each partner, 253. Preferential payments, 243, 244. 246, et seq. 544 AUSTRALASIAN ADVANCED ACCOUNTANCY. STATEMENT OF AFFAIRS-Continued. Preparation of, 245. Private arrangements, 242. Required in Bainkruptcy. 243. Transfer to Truate'e for Creditors, 242 243 Windiing-up, in, 328. 335. STATION ACCOUNTS. Assessments, 302. Balance Sheet, form of, 307. Books of Account, 298, 301. Books of Record, 298, 304, 305, 306. Conditional Purchase, 302. Depreciation in, 303. Plant in, 303. Profit and Loss Account in, 308. Rabbit and Vermin Destruction, 303 Rent-,, 304. Repairs, 303. Shearers' Deposits. 304. Shearing Expenses, 304. Stock Valuation of. 302. Stock Valuation for Federal Income Tax, 477. Trustees, Apport.ionment between Corpus and Income 265 Wool in, 304, 305. STATION TRUSTEES' ACCOUNTS. Appcrtionmient of expenditure in, 265. STATUTORY DEDUCTION. Federal Income Tax, 487. STOCK. Accounts for, on Station, 302. Book, on Station, 305. Differs from Shares, 117. Jobs, in Cost Accounts, 367, 370. Valuation of, 434. Valuation of, on Station, 302. (See also STORE AND STOCK ACCOUNTS). STOCK AT BRANCH. Treatment of, in H.O. books, 227, 228. Where supplied at above cosit, 231 et seq. STOCK STATEMENTS, ESTIMATED, 218. 219. ?TORES ON STATION, 298 et seq. STORE AND STOCK ACCOUNTS. Diflference betweietn Stores and Stock, 393. Not part of Cost Accounts, 393. Stock Accounts, where useful, 394. Stock Account.s, Jewellerr's, 394, 395. Stock Accounts, Merchant's, 396, 397. Stock Accounts, Card Records, 396, 398. Store Accounts, 393. Stores Ledger, 394. SUNDRY CREDITORS ACCOUNT, 24-26. SUNDRY DEBTORS ACCOUNT, 23-26. SURRENDER OF POLICIES, 292. 545 AUSTRALASIAN ADVANCED ACCOUNTANCY SUSPENSE ACCOUNT. Exampkis of wrongful use of term, 440, 445, 467. TABLE "A" OF COMPANIES ACT. Application of, to Companies, 111. TABULAR BOOKKEEPING. Tabulated Cash Book, 209 et seq. Tabulc.ted Day Book, 207. 208. Tabulated Invoice Book, 209. Tabulated Journal, 212 et seq. Tabulated Petty Cash Book, 212. Tabulated Returns Books, 209. Tabular Ledgers, Wherei useful, 214. Tabular Ledgers, General Rate Book, 214, 215 Tabulnx Ledgers, Hotel, 216, 217. Where tabulation advisable, 207. TABULAR JOURNAL. For liident Agents, 212, 213. For Self-Balancing Ledgers, 29. TABULAR LEDGER. Examples of, 215, 217, 413. Ledger Balances Book, and, 413, 414. Nature of, 214-216. TALLY BOOK. 306. TAXATION.— See Federal Income Tax. TERMINAL COST ACCOUNTS, 357 et seq. TESTATOR. Ademption of Legacies by, 257. Appointment of Executor by, 254. Executor, personal representative of, 255. Gifts by will by, 255. TIME-P.AYMENT ACCOUNTS (see HIRE-PURCHASE). TIME-SAVING DEVICES (see OFFICE SYSTEMS). TIME TICKET OR CARD, 362, 368. TRADING ACCOUNT. Branch, in H.O. books. 229, 230. Class of entries in, 15. Departmental, 220, 221. Incorporating Branch figures in, 226. Manufacturing Account, and, 379, 383, 384, 392. Percentages in. 353. 383. Percentages of profit in, 16 Preparation of, by Branch, 223. TRANSFERS. DEPARTMENTAL, 219. TRANSFERS OF SHARES. Illustration of Register of. 156. Registration of, with C-ompany, 154. Restrictions on, 155. TRUSTEES (see EXECUTORS). TRUSTEES. Federal Income Tax Provisions, 501. TRUSTEE FOR CREDITORS. 242. 243. UNALLOTTED SHARES. Cancelkition of, 309, 313. Enti-ics for. 128. UNCALLED CAPITAL. . Entries for. 128. Writing down, 310, 316. 546 AUSTRALASIAN ADVANCED ACCOUNTANCY. UNCOMPLETED JOBS OR CONTRACTS. Adiiistment of, on Balance-day, 381. Profit on, 387. Progress payments on, 389. UNLIMITED COMPANIES (see ('OMPANIES). UNISCRIPT SYSTEM. Advantages of, 412. Illustration of, 411. Monthly Statements of Customers under, 410. Object of. 410. T'NIT OF OUTPUT. Output Costing, in, 376. Percentage of Cost per, 355. Process Costing, in, 376. VALUATION OF ASSETS. Goodwill, 90. Goods purchased on Hire-Purchase system, 424, 425 Of deceased person's Estate, 254, 255. Of Shares at Testator's death, 283. Of Shares where two quotations given, 283. On retirement of Partner, 76. Providing for Depreciation by periodical, 47. . Shares held as Assets. 432. Stock on Balance-day, 434. Stock supplied to Branch above cost, 231-235. Uncompleted Jobs or Contracts, 381, 387. "VALUATION" BALANCE SHEET, 295. VALUATION OF STOCK. Tn Manufacturing concern, 434, 435. In Retail Etrtablishmeats, 435. VOLUNTARY WINDING-UP (see LIQUIDATOR'S ACCOUNTS). WAGES. Cost Accounts, Treatmer.t of, in, 361, 367, 374, 378. Preferential Claim in Bankruptcy, 246-248. Preferential Claim in Winding-up, .331-333. Sheets, Fraud in, 352. WAGES DISSECTION SHEET, 370, 371. WASTING ASSETS. Coiiserv-ative valuation of, 452. Depreciation in case of Companv working, 50. Held as Investment by Trustee, 267. Sinking Funds for renerwal of, 108, 458. WATERING CAPITAL, 134-135. WINDING-UP (see LIQUIDATOR'S ACCOUNTS). WOOL IN STATION ACOOU^JTS. 304. 305. WORKING ACCOUNT. Of Aiming Company, 173. WORK DOCKET, 362, 363. WRITING DOWN CAPITAL (see REDUCTION OF CAPITAL). WRITING UP ASSETS, 55. 547 Memoranda. 548 ThVs book on the °^ll°:^^oH THE FOURTH \U re847 UNIVERSITY OF CAUFORNIA LIBRARY II n'H'