i'jSitJfe. 
 
 i^arvard ^-'niveralty . G->^M,'iiate School 
 o f bVi s in e,s s a dr<t i n i 3 ti* ? ^ 1 5 o n . Yxl r e a n 
 of bim*.n€Jss research 
 1^1 lie tin 
 
 no
 
 UNIVERSITY OFCALIFORNl 
 AT LOS ANGELES
 
 % ^. ?z<.-.^^ 
 
 PUBLICATIONS OF THE GRADUATE SCHOOL OF 
 BUSINESS ADMINISTRATION, HARVARD UNIVERSITY 
 
 VOL. I, NO. 4 CAMBRIDGE. MASS. JUNE, 1915 
 
 BULLETIN NO. 4 
 BUREAU OF BUSINESS RESEARCH 
 
 DEPRECIATION IN THE 
 RETAIL SHOE BUSINESS 
 
 AT .<.QZ ARCSLSg 
 
 L. { C R: A "^ -^ 
 
 ERieaJiOiGENTs
 
 BULLETINS OF THE BUREAU OF BUSINESS RESEARCH 
 
 Bulletin No. 1. Object and History of the Bureau With Some Pre- 
 liminary Figures on the Retailing of Shoes 
 
 Bulletin No. 2. Harvard System of Accounts for Shoe Retailers, Expla- 
 nation of the Profit and Loss Statement 
 
 Price 50 cents 
 This bulletin is accompanied by the following forms: — 
 Profit and Loss Statement 
 Monthly Analysis Sheet 
 Six-month Analysis Sheet 
 
 Bulletin No. 3. Harvard System of Accounts for Retail Grocers, Expla- 
 nation of the Profit and Loss Statement 
 
 Price 60 cents 
 This bxilletin is accompanied by the following forms: — 
 Profit and Loss Statement 
 Monthly Analysis Sheet 
 Yearly Analysis Sheet 
 
 Bxilletin No. 4. Depreciation in the Retail Shoe Business 
 
 Price 60 cents 
 
 (In Preparation) 
 
 Bulletin No. 5. Harvard System of Stock-keeping for Shoe Retailers, 
 with forms Price 60 cents 
 
 The Bureau's bulletins are given without charge to those who cooperate 
 
 with the Bureau by supplying specific information 
 
 from their own businesses.
 
 BULLETIN NO. 4 
 BUREAU OF BUSINESS RESEARCH 
 
 DEPRECIATION IN THE 
 RETAIL SHOE BUSINESS 
 
 CAMBRIDGE 
 
 HARVARD UNIVERSITY PRESS 
 
 1915
 
 CONTENTS 
 Introduction 
 
 PAOE 
 
 Three main methods of depreciation in the retail shoe trade ... 3 
 
 Object of this bulletin 4 
 
 Paut 1. The Treatment of Depreciation on the Profit 
 
 AND Loss Statement of the Harvard System 
 
 OF Accounts for Shoe Retailers 
 
 Depreciation inevitable but usually unmeasured 6 
 
 Profit and Loss Statement for first period of a shoe store .... 7 
 
 Profit and Loss Statement for second period 8 
 
 The pith of mercantile depreciation 9 
 
 Table illustrating percentage depreciation, initial and cumulative 10 
 
 Misconception of shoe retailers about the percentage method 11 
 
 Profit and Loss Statement for third period 12 
 
 Comparative table of the three statements on three bases ... 14 
 Combined basis used in Harvard System of Accounts for Shoe 
 
 Retailers 16 
 
 Summary of Part I 17 
 
 Part II. Instructions for Bookkeepers 
 
 Ledger accounts needed in using the Harvard System of Accounts 
 
 for Shoe Retailers 20 
 
 Profit and Loss Account and Profit and Loss Statement 21 
 
 The ledger accounts before and after closing at end of first period 22 
 
 Making up the Profit and Loss Statement from the ledger accounts 25 
 The ledger accounts before and after closing at end of second 
 
 period 26 
 
 The ledger accounts at end of third period 30 
 
 Memorandum of cost of depreciation 32
 
 DEPRECIATION IN THE RETAIL SHOE 
 
 BUSINESS 
 
 INTRODUCTION 
 
 Bulletin Number 2 made the following statement about depreciation 
 in the retail shoe trade: — 
 
 Depreciation op MERCHA^fDISE is not insisted upon by the Bureau 
 of Business Research, nor indeed is any depreciation account essen- 
 tial to the adoption of the Harvard System of Accounts for Shoe 
 Retailers. The Bureau does recommend earnestly, however, that some 
 depreciation be allowed regularly, and wishes to know from its coopera- 
 tors just what method of depreciation is followed by them, and to be 
 assured that the method is followed consistently from inventory time to 
 inventory time. Depreciation does not affect the items of Net Sales (5) 
 or of " Expense " (20-44), but it does affect materially the accuracy of 
 the profit items — gross and net (15, 17, 45, 51, 57). 
 
 Three main methods of depreciation in use in the retail shoe trade 
 may be described as follows : — ^ 
 
 (a) The arbitrary percentage method depreciates all stock by a certain 
 fixed percentage, usually some multiple of five, — 5 %, 10 %, 
 15 %, 20 %, at each inventory time. Though this is arbitrary and 
 may be unjust to some portions of the stock, it has the advantage 
 of working surely without being affected by human bias. When 
 inventory is taken at billed cost the value is determined auto- 
 matically, that is, by the manufacturers' or wholesalers' price 
 to the retailer. Then the appUcation of a percentage for depre- 
 ciation makes the paring down also automatic. 
 
 Just what percentage should be employed must be determined 
 by experience. One important shoe concern with large retailing 
 experience employs 4 % each six months. The Bureau would not 
 advise a depreciation, at least at the start, of less than 10%. 
 
 1 Concerns which customarily take cut-downs or carry depreciated stock on their 
 books at the depreciated figures during between-inventory periods — in short, concerns 
 which take their losses from day to day on stocks that are not selling satisfactorily — 
 should consider this fact in using any of the above methods of depreciation. See 
 footnote 1, page 18. 
 
 3 
 
 :5G?73
 
 (b) The age-of-slock percentage method increases the percentage of 
 depreciation with the age of stock to which it is appHed. For 
 example, stock on hand more than one year is depreciated 50 %, 
 stock on hand less than one year but more than six months 25 %, 
 and stock on hand less than six months according to method (a) 
 or method (c). 
 
 (c) The appraisal method is based on the estimated market value at 
 inventory. In theorj^ this is the soundest method of deprecia- 
 tion. For both in theory and in fact the value of an article at 
 any time is what it will bring at that time. Unfortunately what 
 an unsold shoe will bring does not depend upon the manager's 
 or stocktaker's judgment, for he may be too optimistic or too 
 pessimistic, or for other reasons may err. However, if a concern 
 has confidence in its estimates of the market value of shoes un- 
 sold at inventory date, it may proceed in the following way: — 
 
 Upon its inventory books, or sheets, provide three columns 1, 
 2, and 3 (the first two to be filled in detail, the third to be used 
 for test purposes). In Column 1 enter the billed cost of the shoe, 
 with no discount deducted; in Column 2 enter the price at which 
 it is thought the shoe will surely sell. Then to the total of all 
 items in Column 2 apply the percentage of average gross profit 
 (including discounts taken) for the last two years and deduct the 
 amount thus obtained from the total of Column 2. This per- 
 centage of gross profit corresponds to that of Item 17 of the 
 Profit and Loss Statement. The remainder of the total of 
 Column 2 deducted from the total of all items in Column 1 will 
 give a figure of depreciation with accuracy corresponding to 
 the accuracy of the appraiser's judgment. Column 3 may be 
 used for testing the inventory appraisal, for in it may be entered 
 later the actual price at which the shoe did sell. 
 The object of this bulletin is to make clear the treatment of inventories 
 and depreciation on the Profit and Loss Statement of the Harvard Sys- 
 Object of this tem of Accounts for Shoe Retailers, and to show how the 
 bulletin Profit and Loss Statement is derived from a set of double 
 
 entry books as usualh^ kept. Part I is " The Treatment of Deprecia- 
 tion on the Profit and Loss Statement of the Harvard System of Ac- 
 counts for Shoe Retailers," and Part II, " Instructions for Bookkeepers." 
 About specific rates of depreciation the Bureau will say only a little 
 more than it has already said in Bulletin Number 2. The rapidity of 
 stock-turn (average inventory at billed cost divided into cost of goods 
 sold — see Bulletin Number 1, page 11) has a distinct relation to the 
 importance of depreciation. A large number of stock-turns means not
 
 only that the average inventorj'^ on wliich depreciation is allowed is in 
 smaller proportion to the sales than when the stock-turns are fewer, 
 but also that the average age of the stock is less, and this operates to 
 reduce the ratio of depreciation cost to sales. This point has been well 
 illustrated in the Bureau's study of the retail grocery business, where 
 depreciation has already been found to be a comparatively unimportant 
 matter, because the normal number of stock-turns annually is about 
 ten and because the business has practically no style or size risk. In 
 the retail shoe business, on the other hand, with a normal number of 
 stock-turns of from two to two and one-half a year and a considerable 
 degree of size and style risk, depreciation is of much more importance. 
 
 As a means of lessening the risk of loss from depreciation caused by 
 an accumulation of stock and overbuying, the Bureau is providing the 
 Harvard System of Stock-keeping for Shoe Retailers (Bulletin No. 5) 
 l)ased on the best shoe stock-keeping practice found by the Bureau and 
 the most modern methods of stock-keeping in general. 
 
 Though referring specially to the retail shoe business some principles 
 of depreciation are discussed in this bulletin of general application to 
 mercantile businesses, whether wholesale or retail — principles that apply 
 to any business where goods are Ijought to be sold rather than to be 
 used. (See especially pages 6, IS.)
 
 PART I 
 
 THE TREATMENT OF DEPRECIATION ON THE PROFIT 
 
 AND LOSS STATEMENT OF THE HARVARD 
 
 SYSTEM OF ACCOUNTS FOR SHOE 
 
 RETAILERS 
 
 Depreciation is a loss in value due to wear and tear and the passage 
 of time. In a factory, machines and tools wear out, and they also 
 become less valuable as they become more old-fashioned. 
 In a store, stock not only becomes shop-worn, but also 
 goes out of date. This latter loss is less obvious than the other because 
 it is a loss not of matter but of value. It is, however, inevitable. 
 Depreciation is taken into consideration in determining profits either 
 directly, with measurement in separate accounts, or, as at present in 
 the majority of retail shoe stores, indirectly and without measurement. 
 In the latter case, depreciation is taken cither by a reduction of inven- 
 tory, without showing the amount of reduction, or by clearance sales, 
 which reduce the gross sales and consequently gross profit, without 
 showing the amount of reduction. 
 
 Loss from depreciation can be in part avoided by careful buying, 
 guided by carefully kept stock records. Even then, however, the 
 caprice of fashion, with the passing of styles, or an unforeseen local 
 change in sizes demanded by the dealer's customers, may result in a 
 " bad buy " — an " unlucky season." 
 
 In the following discussion careful attention should be given to the 
 difference between gross and net inventories. Gross inventory is the 
 Gross and net total merchandise on hand at billed cost. Net inventorj'^ 
 inventories jg ^j^g gj-Qgg inventory with the allowance for depreciation 
 and discount deducted. In that its Profit and Loss Statement uses 
 both gross and net inventories the Harvard System can be called a gross 
 and net system as is further shown on page 16. A specific case illus- 
 trates the simple handling of these matters. Though the following 
 figures do not comprise an actual record of any one shoe business, they 
 are based on many such records in the possession of the Bureau, and 
 may be regarded as not in the least theoretical but representing actual 
 experience in the retail shoe trade. 
 
 On February 28, 1914, at the end of the first six months of a new 
 retail shoe business, the books show totals wliich are arranged on the 
 Profit and Loss Statement as follows (numbers at the left correspond 
 
 6
 
 with the numbers of the items of the Harvard System of Accounts for 
 Shoe Retailers) : — 
 
 Statement for First Period 
 
 5 Net Sales $20,862.05 
 
 6 Inventory Mdse. Beginning Period.. $00,000.00 
 
 7 Pdhchases Mdse. at Billed Cost . . . 28,836.00 
 
 8 Freight, Express & Cartage on Pur- 
 
 chases of Mdse 243.10 
 
 9 Total Merchandise Cost $29,079.10 
 
 10 Inventory of Mdse. End of Period $15,145.38 
 
 Less 11 Discount on Inv. Mdse. . . . $393.78 
 
 12 Depreciation of Mdse 1.475.16 1,868.94 
 
 13 Net Inventory Mdse. End op Period 13,276.44 
 
 14 Net Cost of Merchandise Sold 15.802.66 
 
 15 Profit on Merchandise $5,059.39 
 
 16 Cash Discounts taken on Purchases Mdse. 749.74 
 
 17 Gros.s Profit on Merchandise $5,809.13 
 
 44 Total of Expense Statement 5,111.20 
 
 45 Net Profit from Merchandise Operations $697.93 
 
 56 Total Interest 521.55 
 
 57 Final Surplus for the Period $176.38 
 
 Item 11 is obtained by dividing the Cash Discounts taken (Item 16) 
 $749.74 by Purchases (Item 7) $28,836, which gives .026, or 2 6/10 %, 
 as the average discount taken. This average, therefore, is assumed to 
 apply to goods still on hand which cost less than billed cost by the 
 amount of this discount. Multiplying the gross inventory (Item 10) 
 $15,145.38, which inventory was taken at billed cost, by .026 gives 
 $393.78 as the Discount on Inventory of Merchandise (Item 11) to be 
 deducted from the billed cost value. This is done because a cash dis- 
 coimt is not a profit, even though taken, until the goods on which it 
 has been taken have been sold. If this were not done. Item 16, the 
 total cash discounts taken on the purchases of $28,836, would be reported 
 as a total addition to profit even though on $15,145.38 worth of that 
 $28,836 not even the cost of the goods has been recovered to say nothing 
 of any profit. 
 
 As the business is new, no depreciation has yet been provided for 
 and the proprietors wish to provide a 10 % allowance for depreciation 
 on the unsold goods carried over at the end of the season. Subtracting 
 the Discount on Inventory, $393.78, from the gross inventory, $15,145.38, 
 leaves $14,751.60, 10% of which gives a depreciation of $1,475.16 
 (Item 12), which also deducted from the gross inventory leaves the Net 
 Inventory at End of Period (Item 13) of $13,276.44. 
 
 This is obvious; but confusion or error may arise when later Profit 
 and Loss Statements are related to this one. Take the statement at 
 the end of the next half-year, August 31, 1914.
 
 -8 
 
 statement for Second Period 
 
 5 Net Sales $24,110.78 
 
 6 Inventory Mdse. Beginning Period.. $13,276.44 
 
 7 Purchases Mdse. at Billed Cost .... 17,259.20 
 
 8 Freight, Express & Cartage on Pur- 
 
 chases OP Mdse 149.30 
 
 9 Total Merchandise Cost $30,684.94 
 
 10 Inventory of Mdse. End of Period $15,294.68 
 
 Less 11 Discount on Inv. Mdse. . . . $428.25 
 
 12 Depreciation of Mdse 1,486.64 1,914.89 
 
 13 Net Inventory Mdse. End of Period 13,379.79 
 
 14 Net Cost of Merchandise Sold 17,305.15 
 
 15 Profit on Merchandise $6,805.63 
 
 16 Cash Discounts taken on Purchases Mdse. 483.26 
 
 17 Gross Profit on Merchandise $7,288.89 
 
 44 Total of Expense Statement 5,666.03 
 
 45 Net Profit from Merchandise Operations $1,622.86 
 
 56 Total Interest 482.22 
 
 57 Final Surplus for the Period $1,140.64 
 
 In the same way as before, cash discounts taken, $483.26, divided 
 by purchases (Item 7), $17,259.20, gives the average rate of 2.8%, 
 which apphed to the gross inventory gives a Discount on Inventory 
 (Item 11) of $428.25, and this deducted leaves a remainder of $14,866.43, 
 the depreciation on which, if continued at 10%, amounts to $1,486.64 
 (Item 12), leaving a net inventory (Item 13) of $13,379.79. 
 
 It may be stated here that neither the arbitrary percentage method 
 nor the percentage 10 as employed above is actually recommended. 
 On the contrary, for reasons explained on pages 4 and 12, the Bureau 
 recommends the appraisal method as the best. Ten per cent would 
 probably be insufficient depreciation for a retail shoe business largely 
 of a specialty nature, and possibly would be too much for one largely 
 staple. The arbitrary percentage method, however, besides being very 
 common in the retail shoe trade, serves better than the other methods 
 for purposes of explanation. It clearly illustrates both principles and 
 misconceptions about mercantile depreciation which apply also to the 
 other methods of depreciation, as pointed out on page 19. 
 
 Returning to the example, it is most important to note that the 
 apparently heavy cost for depreciation (Item 12) of $1,486.64 is but a 
 Much of the ^^^^ ^^^^ ^^ $11.48, since $1,475.16 of the allowance was 
 *^^^«fi*^'**'*'" d ^o^^i'^'i '^y t^^ depreciation taken at the first inventory 
 statement (Item 12, Profit and Loss Statement, page 7). The inclu- 
 nom n on y ^^^^ ^j ^j^^ latter sum, therefore, is in one sense nominal, 
 but it is a statistical necessity because the goods are again inventoried 
 at billed cost, that is, the first 10 % taken off has been restored. If the 
 merchandise on hand at the first inventory had been recorded at billed
 
 cost less 10 % and all new goods received since that inventory likewise 
 entered with a value of billed cost less 10 % (no matter at what price or 
 profit they sold), then it would never be necessary to take subsequent 
 allowances of 10 % for depreciations on the Profit and Loss Statement. 
 But it is decidedly important for business purposes to know the billed 
 cost of merchandise on hand, and so inventories are taken at billed cost 
 each time, and the horizontal-percentage reductions are taken after- 
 wards. Consequently there is the appearance at each inventory of a 
 heavy depreciation cost when really the depreciation is only upon the 
 increase of stock over the last inventory, in this case $14,866.43 minus 
 $14,751.60 (inventories with cash discounts deducted) or $114.83, which 
 at 10% gives $11.48 as the real depreciation cost at this inventory. 
 
 The last paragraph contains the pith of the whole problem of depreci- 
 ation in mercantile businesses. It is the point that the Bureau has 
 The Bith of found most difficult to make clear to shoe retailers, 
 the deprecia- As a result of its experience the Bureau believes the fol- 
 lowing to be the most effective form of explanation. The 
 first merchandise inventory of this new business with discounts deducted 
 amounted to $14,751.60 (Item 10 of the first statement minus Item 11). 
 On this stock, a depreciation of 10 %, or $1,475.16, was taken. This is a 
 depreciation once for all at the rate of 10% on that value of stock. 
 The stock itself is changing continually but on a value of stock equiva- 
 lent to $14,751.60 a depreciation of 10% has been taken for all time. 
 Subsequent depreciations need to be taken in reality on increases only 
 of stock above $14,751.60. Conversely, on decreases of stock below 
 that value, the original depreciation will in reaUty be reduced if the same 
 rate of depreciation is allowed. This is what automatically happens 
 in any mercantile concern taking its inventories at billed cost and 
 employing the arbitrarj'^-percentage method of depreciation, which is 
 the method employed in this case. 
 
 A concrete table will make clearer the point that concerns which 
 customarily deduct a certain percentage from their inventories for 
 An illustrative depreciation do not necessarily increase the depreciation 
 table q£ those inventories each time. Take three successive 
 
 inventories, each with a value at billed cost of $10,000, and depreciate 
 regularly 10 % at each inventory: —
 
 10 
 
 Three Successive Inventories of the Same Value at Billed 
 Cost with and without Depreciation at 10% 
 
 Inventories at 
 billed cost 
 
 Gross Inventory (without de- 
 preciation) 
 
 Depreciation on each inven- q 
 tory at 10 % . Each inventory at o, 
 billed cost. Really depreciation g 
 on first inventory only, with g 
 nominal depreciation there- f^ 
 after. Proper for merchandise >■*■ 
 
 Al 
 
 _A 
 
 0. 
 
 V 
 T3 
 
 3 3 
 
 c"3 
 ¥0 
 
 ^o 
 II 
 
 Depreciation cumulative at q 
 10% — the paring method, o. 
 Amount of last depreciation de- g 
 ducted before next percentage g 
 is deducted. Proper for fix- 
 tures, but not for merchandise ^ 
 
 Further 
 
 explanation of 
 
 Column B 
 
 Bl 
 
 1 
 
 (U 
 
 S 3 
 a'o 
 
 go 
 II 
 
 First inventory 
 Second invcntorj- 
 
 Third inventory 
 
 $10,000 
 10,000 
 
 10,000 
 
 $1,000 
 1,000 
 
 1,000 
 
 $9,000 
 9,000 
 
 9,000 
 
 $1,000 
 1,900 
 
 2,710 
 
 Previous $1,000 
 plus new 10% 
 of last net in- 
 ventory (10% 
 of $9,000) 
 Previous $1,900 
 plus new 10% 
 of last net in- 
 ventory (10% 
 of $8,100) 
 
 $9,000 
 8,100 
 
 7,290 
 
 Difference be- 
 tween first and 
 third inven- 
 tories 
 
 Difference be- 
 tween first and 
 third deprecia- 
 tions 
 
 000 
 
 000 
 
 000 
 
 $1,710 
 
 
 $1,710 
 
 
 
 Difference between inventories, gross and net Al at first inventory time, $1,000 
 " " " « « « Al « third " " 1,000 
 
 « a a a « « gi « gjgt « « 1000 
 
 " " « « « « Bl « tljjyd « « 2,710 
 
 Column A represents the method of depreciation that is employed 
 when a business regularly deducts a certain percentage from each in- 
 Summary of ventory after it has been taken at billed cost. This 
 column shows that the total depreciation for three in- 
 ventories is no greater than the first depreciation or, in other words, 
 that no new depreciation was taken after the first inventory.
 
 11 
 
 The problem has been simpHfied here by assuming an imchanging 
 inventory, but the principle holds with a varying inventory. If, for 
 example, the inventory increased to $12,000, it would be found that an 
 additional depreciation of $200 would be taken as a cost once only, 
 no matter how many subsequent times it was computed; and, simi- 
 larly, if the inventory decreased to $8,000, a reduction of depreciation 
 of $200 would result but once only. 
 
 In Column B of the table, the first inventory is taken as a per- 
 manent stock to be reduced in value — the paring method, as it has 
 been called. The result in this column is seen to be depreciation in 
 three inventories of $2,710 distributed over all three, as contrasted with 
 a depreciation of $1,000 at the first inventory and none additional 
 for the succeeding two inventories in Column A. 
 
 Colunm B is a proper method of depreciation for the fixtures of a 
 store, which are for use and not for sale, but not for the merchandise 
 which is passing through the store. There is not a " turn-over " in 
 fixtures as in merchandise, hence this steady paring method of Column B 
 applies to fixtures as they tvear out in the same way that it applies to 
 the equipment of a factory. 
 
 Column A represents the percentage method of depreciation as it 
 should be in a normally operating mercantile business, for after the 
 Column A of ^S^^S of the first few months of the first stock of a new 
 the table the business the average age of stock should become no greater 
 proper method -77,1 ■ , 7 7 7 , . 
 
 provided there is at least one stock-turn between each two in- 
 ventories. For it can be assumed that in the long run newer goods take 
 the place of goods sold in approximately the same degree that goods not 
 sold grow older. Businesses not conforming to this rule cannot long re- 
 main going concerns. Therefore the depreciation of the fii'st few months 
 is not increased except as stock is increased, and consequently the de- 
 preciation allowance is not increased save on increases of stock, and is 
 decreased on decreases of stock. 
 
 Curiously, many shoe retailers who have employed the percentage 
 method of Column A have thought that they were allowing for a greater 
 Curious mis- depreciation. When they allowed, for example, 10 % a 
 mSiy ^shoe ° y^ar for depreciation, they thought that they were making 
 retailers liberal provision and were gradually reducing their valua- 
 
 tion on old shoes to little or nothing. Remembering that 10 times 10 
 is 100 they have beUeved that in ten years they have depreciated all old 
 stock 100 %, or to no value at all; or, in other words, in accord with the 
 paring method of Column B. They have not noticed that new stock 
 constantly takes the place of old and that a depreciation taken on billed 
 cost is in reality taken only once. Applying a 10 % depreciation suc- 
 cessively to a $3 article would pare it to these successive values, $2.70,
 
 12 
 
 $2.43, $2.19, etc. This is what some dealers think they are doing when 
 they apply a constant percentage year after year to billed cost, but 
 many of them never get below $2.70 for they go back to $3 at each 
 stock-taking for a fresh start. This, as has been shown, is usually 
 satisfactory. With stock moving fairly well the paring method is 
 seldom necessary, if a depreciation percentage for the whole stock is 
 employed, especially when the accuracy of the percentage is checked 
 at times by the appraisal method, since as mentioned on page 4 in- 
 sufficient depreciation on some portions of the merchandise is likely to 
 be equalized by excessive depreciation on other portions. When, how- 
 ever, stock has been moving slowly for several months the percentage 
 method becomes unreliable and resort should be made at once to the 
 appraisal method. The age-of-stock method (juoted on page 4 is in 
 reality a paring method, since it employs a percentage of depreciation 
 increasing with increasing age — 25 % for merchandise more than six 
 months old and 50 % for that more than a year old with some deprecia- 
 tion on merchandise less than six months old. Though less exact than 
 the appraisal method, the age-of-stock method is to be commended as 
 safer than the percentage method in times of .slowly moving stock. As 
 to the appraisal method (see also page 4), if the estimated selling prices 
 of Column 2 are not frequently checked l)y the actual selling prices of 
 Column 3 some form of paring method may well be employed. But 
 more about the appraisal method will be found hereafter (page 19). 
 
 A return now to the shoe business under consideration shows the 
 situation at the end of the third period, February 28, 1915, to be as 
 follows: — 
 
 statement for Third Period 
 
 5 Net Sales $27,075. 13 
 
 6 Inventory Mdse. Beginning Period.. $13,379.79 
 
 7 PuRCHA.sEs Mdse. at Billed Cost . . . 16,853.77 
 S Freight, Express & Cartage on Pur- 
 chases of Mdse 139.48 
 
 9 Total Merchandise Cost $30,373.04 
 
 10 Inventory of Mdse. End of Period $13,53.5.43 
 
 Less 11 Discount on Inv. Mdse. . . . $419.60 
 
 12 Depreciation of Mdse 1,311.58 1,731.18 
 
 13 Net Inventory Mdse. End of Period 11,804.25 
 
 14 Net Cost of Merchandise Sold 18,568.79 
 
 15 Profit on Merchandise $8,506.34 
 
 16 Cash Discounts taken on Purchases Mdse. 521.47 
 
 17 Gross Profit on Merchandise $9,027.81 
 
 44 Total of Expense Statement 6,227.28 
 
 45 Net Profit from Merchandise Operations $2,800.53 
 
 56 Total Interest 622.73 
 
 57 Final Surplus for the Period $2,177.80
 
 13 
 
 A division of discounts by purchases, as before, yields an average dis- 
 count taken of 3.1 %, whichjapplied to the gross inventory gives $419.60; 
 this deducted from the inventory leaves $13,115.83, which with a de- 
 preciation of 10 % deducted leaves a net inventory of $11,804.25. 
 
 Again, although an apparently heavy depreciation cost of $1,311.58 
 appears on the statement, it must be remembered that in fact this 
 represents no real additional cost. On the contrary, it represents a 
 decrease of $175.06 from the previous depreciation charge of $1,486.64. 
 This is because by taking the inventory at billed cost the preceding 
 depreciation is restored, just as the $3 shoe on page 11 originally depre- 
 ciated to $2.70 was restored to $3. 
 
 The Profit and Loss Statement of the Harvard System of Accounts 
 for Shoe Retailers is on neither a strictly gross nor strictly net basis. 
 It does not deal entirely with gross inventories or entirely with net 
 inventories (see also page 6), but is a combination of both, utilizing 
 the gross and net inventories so as to show the billed value, the 
 depreciation, and the actual values. For example. Item 13 — Net 
 Inventory of Merchandise at End of Period — is net, and is carried 
 as Item 6 — Inventory of Merchandise at Beginning of Period 
 — of the next statement. Items 6 and 13 then are net figures, but 
 Item 10 — Inventory of Merchandise at End of Period ^ is a gross 
 figure from which the succeeding net inventory figure is obtained by 
 deducting discount and depreciation on inventory. Arranging the three 
 preceding statements in a comparative table and on three different 
 bases — gross, net, and combined — wiU show the resulting profit to 
 be the same though the calculations for determining it are different. It 
 will furthermore show how a reduction in the allowance for depreciation 
 is in one sense a gain, just as an increase is a loss.
 
 14 
 
 Item of A Comparative Table of the Three Statements 
 
 P. & L. 
 
 State- 
 ment Net Basis Ist — Feb. 28, 1914 
 
 5 Net Sales $20,862.05 
 
 6 Inventory of Mdse. at Beginning of Period $00,000.00 
 
 7 Purchases of Mdse. at Billed Cost 28,836.00 
 
 8 Freight, Express and Cartage on Purchases 243.10 
 
 9 Total Mdse. Cost $29,079.10 
 
 13 Net Inventory of Mdse. at End of Period 13,276.44 
 
 14 Net Cost of Mdse. Sold 15,80J,66 
 
 15 Profit on Mdse $5,059.39 
 
 16 Cash Discounts Taken on Purchases of Mdse 749.74 
 
 17 Gross Profit on Mdse $5,809.13 
 
 Gross Basis 
 
 5 Net Sales $20,862.05 
 
 Inventory of Mdse. at Beginning of Period (Gro.ss) $00,000.00 
 
 7 Purchases of Mdse. at Billed Cost 28,830.00 
 
 8 Freight, Express and Cartage on Purchases 243.10 
 
 9 Total Mdse. Co.st .$29,079.10 
 
 10 Inventory (Gross) of Mdwo. at End of Period 15,145.38 
 
 Gross Cost of Mdse. Sold $13,933.72 
 
 11 Discount on Inventory of Mdse., plus 
 
 12 Depreciation of Mdse 1,808.94 
 
 14 Net Cost of Mdse. Sold 1 .5,802.66 
 
 15 Profit on Mdse $5,059.39 
 
 16 Cash Discounts Taken on Purchases of Mdse 749.74 
 
 17 Gross Profit on Mdse $5,809.13 
 
 Combined Basis 
 (Harvard System of Accounts for Shoo Retailers) 
 
 5 Net Sales $20,862.05 
 
 6 Inventory of Mdse. at Beginning of Period $00,000.00 
 
 7 Purchases of Mdse. at Billed Cost 28,836.00 
 
 8 Freight, Express and Cartage on Purchases 243.10 
 
 9 Total Mdse. Cost $29,079.10 
 
 10 Inventory of Mdse. at End of Period $15,145.38 
 
 Less 11 Discount on Inventory of Mdse $393.78 
 
 12 Depreciation of Mdse 1,475.16 1,868.94 
 
 13 Net Inventory of Mdse. at End of Period 13,276.44 
 
 14 Net Cost of Mdse. Sold 15,802.66 
 
 15 Profit on Mdse $5,059.39 
 
 16 Cash Discounts Taken on Purchases .... 749.74 
 
 17 Gross Profit on Mdse $5,809.13 
 
 • Increase over the first depreciation and discount, and hence an increase in cost.
 
 15 
 
 ON Three Bases — Net, Gross, and Combined 
 
 2d — Aug. 31, 1914 
 
 3d — Feb. 28, 1915 
 
 
 $24,110.78 
 
 
 $27,075.13 
 
 $13,270.44 
 
 
 $13,379.79 
 
 
 17,259.20 
 
 
 16,853.77 
 
 
 149.30 
 
 
 139.48 
 
 
 $30,684.94 
 
 
 $30,373.04 
 
 
 13,379.79 
 
 
 11,804.25 
 
 
 
 17,305.15 
 
 
 18,568.79 
 
 
 $6,805.63 
 
 
 $8,506.34 
 
 
 483.26 
 
 
 521.47 
 
 
 $7,288.89 
 
 
 $9,027.81 
 
 
 $24,110.78 
 
 
 $27,075.13 
 
 $15,145.38 
 
 
 $15,294.68 
 
 
 17,259.20 
 
 
 16,853.77 
 
 
 149.30 
 
 
 139.48 
 
 
 $32,553.88 
 
 
 $32,287.93 
 
 
 15,294.68 
 
 
 13,535.43 
 
 
 $17,259.20 
 
 
 $18,752.50 
 
 
 45.95 ' 
 
 
 183.71 « 
 
 
 
 17,305.15 
 
 
 18,568.79 
 
 
 $6,805.63 
 
 
 $8,506.34 
 
 
 483.26 
 
 
 521.47 
 
 
 $7,288.79 
 
 
 $9,027.81 
 
 $24,110.78 
 
 $27,075.13 
 
 $13,276.44 
 
 17,259.20 
 
 149.30 
 
 $15,294.68 
 $428.25 
 1,486.64 1,914.89 
 
 $30,684.94 
 
 13.379.79 
 
 17,305.15 
 
 $6,805.63 
 
 483.26 
 
 $7,288.89 
 
 $13,379.79 
 
 16,853.77 
 
 139.4 8 
 
 $13,535.43 
 $419.60 
 1,311.58 1,731.18 
 
 $30,373.04 
 
 11,804.25 
 
 18,568.79 
 
 $8,506.34 
 
 521.47 
 
 $9,027.81 
 
 * Decrease from the second depreciation and discount, and hence a reduction in cost.
 
 16 
 
 The result of the three plans is the same. The difference Ues wholly 
 in the explanation of the profit. The net basis shows profit on mer- 
 Net basis and chandise figures as given without any book record of dis- 
 gross basis count and depreciation on inventory, the record of these 
 items appearing on the inventory sheets only. On the gross basis, 
 depreciation appears at first when actually taken, and then on the 
 difference only between that first depreciation and subsequent depre- 
 ciations as needed by the differences in inventories. At the second 
 inventory there was an increase in stock, hence an increase in deprecia- 
 tion represented by an addition to the previous depreciation. This 
 was equivalent to an increase in cost and a consequent decrease in 
 profit. At the third inventory just the reverse occurred. There was 
 a decrease in inventory, hence a decrease in depreciation represented 
 by a subtraction from the previous depreciation. This is equivalent to 
 a decrease in cost, and a consequent increase in profit. 
 
 On the combined basis plan, which is that of the Harvard System of 
 
 Accounts for Shoe Retailers, a combination of the gross and the net basis 
 
 Combined is employed. This gives valuable records of actual and 
 
 basis is that of -ij • j.- e j. j r i. 
 
 the Harvard nommal depreciation for present and future comparison. 
 
 Acccomts^for ^^ "^^^ ^^® ^^^ beginning inventory brought over from the 
 Shoe RetaUers preceding inventory, and thus gets the cost of merchandise 
 correct at the start; and then, by using the gross inventory at the end, 
 it shows both the depreciation for statistical purposes and the net in- 
 ventory for the balance sheet. What appeared under the gross basis 
 plan to be a gain through depreciation appears under this plan where 
 it really belongs, in the merchandise account. Merchandise really 
 worth $13,379.79 is charged up at that figure to the merchandise account 
 (see " Merchandise " account. Part II, page 30), and not at $15,294.68, 
 as it was on the gross basis plan. 
 
 In other words, the difference is in the treatment of the inventory at 
 beginning and of depreciation shown. The gross basis plan uses the 
 undepreciated figure for inventory at the beginning, while the Harvard 
 plan uses the depreciated figure at the beginning, but the gross basis plan 
 charges depreciation as a cost on increase of inventory only, whereas the 
 Harvard plan shows depreciation on the entire inventory; and the result 
 is the same under either plan, as the following illustration for calculat- 
 ing the Net Cost of Merchandise Sold (Item 14) for the second period 
 shows: —
 
 17 
 
 Calculation of Net Cost of Merchandise Sold (Item 14) for 
 THE Second Period 
 
 Combined basis plan 
 (Harvard System of Accounts for Shoe 
 Gross basis plan Item Retailers) 
 
 Inventory at Beginning 6 Inventory at Beginning 
 
 (gross) $15,145.38 (net) already depreciated $13,276.44 
 
 Purchases of Merchandise . 17,259.20 7 Purchases of Merchandise 17,259.20 
 
 Freight, Express & Cartage 8 Freight.Express & Cartage 
 
 on Purchases 149.30 on Purchases 149.30 
 
 Discount on increase in in- 11 Discounton Inventory (en- 
 
 ventory (increase only) . . . 34.47 tire) 428.25 
 
 Depreciation on increase in 12 Depreciation of Inventory 
 
 inventory (increase only) . 11.48 (entire) 1,486.64 
 
 $32,599.83 $32,599.83 
 
 Less: Inventory at End of 10 Less: Inventory at End of 
 
 Period (gross) 15,294.68 Period (gross) 15,294.68 
 
 Net Cost of Mdse. Sold . . . $17,305.15 14 Net Cost of Mdse. Sold . . . $17,305.15 
 
 A summary of this whole discussion of depreciation in mercantile 
 businesses is:^ (1) After an allowance for depreciation has once been 
 adequately made, so long as stock is of the same average 
 age and of the same value at billed cost no further allow- 
 ance becomes necessary — for the stock is maintained at the same ratio 
 of cost to value, and the item of depreciation on the statement is not a 
 cost but a mere deduction for what has been entered, for convenience, 
 above actual value, in the gross inventory. (2) If stock has grown 
 older, a higher rate of depreciation should be used, and the increase 
 wUl be a new cost. (3) If, on the other hand, the stock is less old, a 
 smaller percentage of depreciation wUl be required, and the decrease 
 wUl be a gain. In this case, the profit of the business is partly in what 
 was received from sales and partly in a greater value on the shelves 
 for the same billed cost — a less depreciated value. (4) If the stock 
 has increased, more goods are depreciating, and unless the increase was 
 made at the end of the year (in which case the average age will be less 
 and the preceding case will apply), the same percentage as before will be 
 used; but since it will be used on a larger amount, the depreciation will 
 be more and the iucrease will be a new cost or loss, taken out of the 
 merchandise inventory. (5) If the stock has decreased, the old per- 
 centage appUed to a small stock will give smaller depreciation, and the 
 difference will be a gain — reaUzed through a lower cost of merchandise 
 sold.
 
 18 
 
 If, therefore, as has been seen, depreciation in a mercantile busi- 
 ness operates most heavily in the first few months of that business, then 
 Depreciation a fairly high percentage of depreciation on the first inven- 
 heavy'at' first; tory and on subsequent increases only, over the value of 
 light thereafter that inventory is in accord with the facts. The figures in 
 the table on pages 14 and 15 reflect these facts, for on the first statement 
 the gross profit is seen to be only 27.8 % of the net sales, increasing in 
 the second and third statements to 30.2 % and 33.3 % respectively.' 
 Furthermore, in some ways in the first year of any business a higher 
 rate of depreciation can be afforded since no old stock is carried into 
 the business and hence, as only new goods are to be sold, there will be 
 normally fewer mark-downs.^ So stock carried over for the first time 
 into the next season should be well dei)reciated. The periodical addi- 
 tional cost of depreciation thereafter will be small, as only increases in 
 
 ' This increase in the rate of profit is also due to a decrease in the ratio of total 
 expense and to an increase in the rate of stock-turn from 2.08 to 2.0 times annually. 
 The significance of stock-turn in connection with depreciation has already been noted 
 (page 4). 
 
 s Mark-downs frequently represent depreciation taken between inventories, and 
 do not differ in principle from depreciation allowed at inventory time to which the pre- 
 ceding discussion has been confined. A memorandum of mark-downs can be kept and 
 the totals at inventory treated as Columns 1, 2, and 3 of the appraisal method are 
 treated (see pages 4 and 12). In fact, mark-downs often are an application of the ap- 
 praisal method between inventories. If, for example, a shoe costing $2, is marked up 
 to $3 (33$%), and then marked down to $2.50 and sold, the mark-down price of J2.50 
 reduced by the average gross profit for the business, say 30%, or 75 cents, would be 
 deducted from the cost, giving a new cost after depreciation of $1.75, which leaves a 
 depreciation of 25 cents ($2 minus $1.75) or \2\% on the original billed cost. The 
 record would stand : — 
 
 Cost 
 
 Sell 
 
 Mark-up 
 % 
 
 Marked down 
 between inventories 
 to, or appraised at 
 inventory time at 
 
 Marked down 
 
 price reduced by 
 
 average gross 
 
 profit of 30% 
 
 Depreciation 
 
 on original 
 
 cost 
 
 $2 
 
 13 
 
 33i 
 
 $2.50 
 
 $1.75 
 
 $0.25= 12i% 
 
 Under the arbitrary percentage method of depreciation with a percentage of 10 this 
 pair of shoes would have been reduced from $2 to $1.80, giving on this particular 
 pair, according to the appraisal method, a depreciation insufficient by 2J%. The 
 selling of the shoes between inventories at the mark-down price will be a test of the 
 mark-down value, just as entries in Column 3 of the appraisal method should be a 
 test of the estimated values of shoes unsold at inventory time. If the above pair of 
 shoes were unsold at stock-taking it might be inventoried at billed cost ($2) and de- 
 preciated by the flat percentage of, say 10, or remain at the mark-down figure and be 
 reduced by the average gross profit, or be classified by age and depreciated accord- 
 ingly — depending on which of the three methods of depreciation is employed. These 
 are described in Bulletin Number 2, and in this bulletin on pages 3 and 4.
 
 19 
 
 value or in average age call for new allowances for depreciation. This 
 is conservative and correct and makes a solid foundation for a dealer's 
 business. 
 
 All the previous discussion and examples have been based on the 
 first of the three methods of depreciation — (a) arbitrary -percentage 
 Other methods "*^^'^o^ (^^e page 3). The other methods — (6) age-of- 
 of depreciation stock percentage method, and (c) appraisal method (see 
 do not change 'T ", , , • i rn,^ , 
 
 the preceding page 4) — would work out m the same way. Ihe only 
 
 iscussion difference would be in the method of securing the figure 
 of depreciation, for the treatment of that figure, once secured, would 
 be the same. 
 
 As a matter of fact, the appraisal method if not employed regularly 
 should certainly be employed occasionally, to see that the percentage of 
 depreciation customarily used corresponds with the facts and to pro- 
 vide for extraordinary depreciation. For example, certain portions of 
 the stock may accumulate broken Unes and end sizes to such a degree 
 that the ordinary percentage rate of depreciation can by no means cover 
 the actual depreciation, and so a fair appraisal should be made. Further- 
 more, it should again be emphasized that this fair appraisal should be 
 tested by frequent comparisons with records of actual selling prices of 
 pairs appraised. Column 3 of the appraisal method (see page 4 — c) 
 is provided for these test comparisons (see also footnote to page 18). 
 
 Practically all conditions and all common methods of depreciation 
 have now been discussed in connection with the Profit and Loss State- 
 Remainder of ment of the Harvard System of Accounts for Shoe Retailers, 
 tains double For shoe businesses keeping very simple accounts this is 
 kee^^in^""*^' probably the only treatment of depreciation required but 
 Instructions unless these figures are incorporated on the books it will be 
 necessary to preserve all inventory sheets. For those wishing to enter 
 these details on the general ledger an outline of double entry method is 
 given in Part 11 for the three statements already considered.
 
 PART II 
 INSTRUCTIONS FOR BOOKKEEPERS 
 
 This second part shows the ledger accounts for the three Profit and 
 Loss Statements discussed in Part I, with special reference to the com- 
 bined basis method of treating inventories and depreciation. It also 
 illustrates in a general way how the Profit and Loss Statement of the 
 Harvard System of Accounts for Shoe Retailers is drawn from the books. 
 
 The treatment of the accounts is in accordance with double entry 
 bookkeeping, universally recognized as the proper method. The ordi- 
 nary ledger accounts for merchandise transactions are " Purchases," 
 " Sales," " Merchandise," " Cash Discounts," " Freight, etc.," " In- 
 ventory," and " Profit and Loss." These accounts give all the infor- 
 mation necessary for making up that division of the Profit and Loss 
 Statement entitled Merchandise Statement. So far as the treatment 
 of inventories and depreciation is concerned, only those accounts in- 
 volving merchandise items need to be considered, but since other 
 main divisions of the Profit and Loss Statement, such as Expense 
 Statement, Other Business Profits or Losses, and Application of Total 
 Operating Net Profit, need consideration in order to show the net 
 results of the operation of the store for each period, a " Total Expense " 
 account and a " Total Interest " account have been included. This 
 " Total Expense " account corresponds to Item 44, Profit and Loss 
 Statement, page 7, and represents the total of the various expense 
 accounts. For brevity, since this explanation is concerned primarily 
 with the merchandise accounts, " Total Expense " only is shown here, 
 in place of the separate expense accounts which would appear on the 
 ledger. The " Total Interest " account represents Item 56, Total 
 Interest and Dividends, of the Profit and Loss Statement. The 
 " Total Expense " accomit and the " Total Interest " account are 
 closed into the " Profit and Loss " account on the books, the final 
 balance of which is Final Surplus (or Deficit) for the Period, Item 57, 
 Profit and Loss Statement, page 7. 
 
 Since no balance from a previous period is brought over into this 
 " Profit and Loss " account, and since the losses, costs, and expense 
 appearing on the debit side and the gains and income on the credit side 
 belong to that period alone, the final balance closed to " Surplus " 
 represents the net results of the business for the single period in question. 
 
 20
 
 21 
 
 In order to make clearer the relation which the books bear to this 
 form of Profit and Loss Statement, the figures used in these accounts 
 are identical with the figures used on the Profit and Loss Statement for 
 the corresponding periods, pages 7, 8, and 12, Part L 
 
 The difference between " Profit and Loss " account, as it appears on 
 the books, and the Profit and Loss Slatement of the Harvard System 
 of Accounts for Shoe Retailers should be noted. The " Profit and Loss " 
 account on the books is an integral part of the bookkeeping system 
 and is used chiefly at the close of a period to bring together into one 
 book account all profit and loss items from other accounts, thus caus- 
 ing these accounts to balance and show in the " Profit and Loss " 
 account the final balance of gains or losses, which corresponds to Item 57, 
 of the Profit and Loss Statement, Final Surplus (or Deficit), and for each 
 period is ultimately to be transferred from the " Profit and Loss " 
 account to the " Surplus " account on the books. 
 
 The " Profit and Loss " account, then, is a ledger account for grouping 
 all loss and gain items, which to a certain degree offset each other and 
 give a final balance of loss or gain as represented by the balance of this 
 account after closing, which in these accounts is closed to " Surplus " 
 account. 
 
 The Profit and Loss Statement, on the other hand, is drawn from the 
 ledger accounts at inventory time, to show, by a logical grouping and 
 analysis, the results of the operations of the period. Its final figure is 
 the Final Surplus (or Deficit) for the Period, Item 57, which is identical 
 with the final balance of the " Profit and Loss " account. 
 
 The exact entries to each of these book accounts as represented by 
 the items of the Profit and Loss Statement are fully explained in Bulletin 
 Number 2. In brief, the "Purchases" and the "Sales" accounts are 
 current accounts, all merchandise purchases being charged to " Pur- 
 chases " currently, and all sales, both cash and credit, being credited 
 to the account " Sales." " Cash Discounts," " Freight, etc.," and 
 "Total Expense" are also current accounts, but "Inventory," "Mer- 
 chandise," and " Profit and Loss " accounts wiU ordinarily be used 
 only upon closing the books. 
 
 To avoid complication, the matter of Returns and Allowances which 
 go to reduce sales has been omitted here and it is assumed that the 
 sales figures used here are Net Sales. If accounts for Returns and 
 Allowances are kept they will be closed into the " Sales " account, 
 thus reducing the gross sales figure, and giving Net Sales. For example, 
 " Returns " account is currently debited with goods which have been 
 sold but are subsequently returned, the customer, or cash, being credited 
 according as the original sale was a credit or a cash sale. At the close
 
 22 
 
 •-" (N >0 N 
 
 o ^ £ 
 
 ^ (y „ HH 
 
 ■a ■ m 
 
 2; O O S 
 
 (£ H H <; 
 
 05 
 
 T3 
 3 
 
 CC — > -< «D 
 
 05 
 
 § 
 
 d oi 
 lO CO 
 
 i 
 
 f-4 
 
 
 t^ o 
 
 -- W £ "^ f^ £ 
 B fe H c-i ■< .^ CO 
 
 
 Z CO 
 
 • .a 
 
 •a -a 
 a a 
 00 
 
 a< 
 
 ^ ^ ^ 
 
 a 
 a 
 
 bC 
 
 
 a 
 
 1 
 
 
 
 'm 
 
 1 
 
 
 
 
 a 
 
 (h 
 
 D, 
 
 4^ 
 
 3 
 
 to 
 
 -2 
 
 73 
 
 c 
 
 C 
 
 Cl 
 
 c3 
 
 > 
 
 
 
 ht\ 
 
 "Sd 
 
 is s
 
 23 
 
 
 iM o 00 "5 ° H2 SS 
 
 o -H t^ ■-; c<i "o CO 
 
 o CO =2 12 -^ ri 52 
 
 05 ^ 2 E: n^ S ^ 
 
 CO (N CO ■*.'-<. "J "-I 
 
 CO <-< "O 
 
 OS &H 
 
 p 
 
 8 
 
 § 
 
 o 
 
 o 
 
 8 
 
 8 
 
 6 
 
 5 
 
 CO 
 
 
 Q Q 
 
 ; 3 3 o 
 
 ja (M (N 
 
 H^5 
 
 ^ £ 5 5 H H M 
 
 (» to T)< 
 
 00 
 
 
 (^ ^ Tf 
 
 CO 
 
 
 CO "O to 
 
 in 
 
 
 o t^ t^ 
 
 ^ 
 
 
 CO -* IN 
 
 r- < 
 
 
 ^ r-T CO 
 
 •O 
 
 
 
 
 
 o 
 
 «« 
 
 
 00 (M 
 
 CO to 
 
 § 
 
 lO d 
 
 to 
 
 CO 
 00 
 
 lo CO 
 
 00 
 
 IN 
 
 QQ 
 
 i-t »-< 
 
 (N IN 
 
 <N IN 
 
 . • V 
 ^^ § 
 
 =a =« ^ 
 
 ru pu m 
 
 cc 
 
 H 2 
 
 H ^-
 
 24 
 
 of the period this account " Returns " is credited and the " Sales " 
 account debited for the total returns for the entire period. The credit 
 balance of " Sales " after " Returns " and " Allowances " have been 
 closed into it, is Net Sales, Item 5, of the Profit and Loss Statement. 
 
 It is assumed that this is a new business which began with a working 
 capital of -SI 5,000, borrowed on notes, represented on the ledger by the 
 " Notes Payalile " account. " Accounts Payable " is a controlling 
 account representing the total owed to all indi\adual creditors for 
 goods purchased. The working capital supplied by " Notes Payable " 
 enables the business to pay promptly and take cash discounts as 
 offered. At the close of each period, part of the cash balance is applied 
 on the notes payable, thus reducing this liability. All sales are for 
 cash, the business being on a strictly cash basis. 
 
 At the end of the first period, February 28, 1914, before any ac- 
 counts were closed, the books show the accounts mentioned, as on 
 page 22.1 
 
 A " Merchandise " account is opened, and into it is closed " Pur- 
 chases." The " Merchandise " account is then credited with " In- 
 ventory 2/28/14," an account of the same name being opened. The 
 balance of the " Merchandise " account is then closed into " Profit and 
 Loss " as part of the cost of goods sold. " Inventory 2/28/14 " is next 
 credited with Discount on Inventory, and with Depreciation of Inven- 
 tory, Items 11 and 12, Profit and Loss Statement, page 7, —both of 
 these, with " Freight, etc.," being charged to the " Profit and Loss " 
 account. The total of the debits to this account at this point repre- 
 sents the Net Cost of Merchandise Sold, Item 14, Profit and Loss 
 Statement, page 7. " Sales " and " Cash Discounts " are then closed 
 into " Profit and Loss " — that is, they are debited and " Profit and 
 Loss " is credited for their balances. The Gross Profit on Merchan- 
 dise, Item 17, Profit and Loss Statement, can then be found and proved 
 with the Statement by deducting the total of the first four debit items 
 of the " Profit and Loss " account from the total credits to the " Profit 
 and Loss " account, that is, " Sales," and " Cash Discounts." " Total 
 Expense " (Item 44), and " Total Interest " (Item 56), are then closed 
 into " Profit and Loss " account, the balance of which is Item 57, 
 
 • The numbers before the titles of these accounts correspond to the numbers of the 
 items on the Profit and Loss Statement, page 7, and accounts so numbered will be 
 seen to contain the same figures as similarly numbered items of the Profit and Loss 
 Statement, page 7. These accounts are kept in double entry and the word before the 
 figures for amounts indicates the name of the account in which the other side of the entry 
 will be found: e. g., in the " Sales " account, credit side, appears " Cash, $20,862.05 "; 
 " Cash " means that the debit corresponding to this credit to the " Sales " account 
 will be found in the " Cash " account, debit side.
 
 25 
 
 Final Surplus for the Period, Profit and Loss Statement, page 7, and is 
 transferred to the " Surplus " account, as explained on page 20. 
 After closing, the trial balance of these accounts is as follows: — 
 
 Trial Balance, First Period, Feb. 28, 1914 
 
 Cash $399.94 Notes Pay $13,500.00 
 
 Inv. 2/28/14 13.276.44 Surplus 176.38 
 
 $13,676.38 $13,676.38 
 
 The balance of " Inventory 2/28/14 " ($13,276.44) is now Item 13, 
 Profit and Loss Statement, page 7, that is. Net Inventory at End of 
 Period, and will be Item 6, Inventory at Beginning of Period, at the 
 beginning of the second period. 
 
 The books have now been closed and the accounts show the figures 
 necessary to make up the Profit and Loss Statement of the Harvard 
 System of Accounts for Shoe Retailers, as shown on page 7. The follow- 
 ing table shows how this statement is derived from these accounts : — 
 
 Profit and Loss Statement Items Figures 
 
 5 Net Sales $20,862.05 
 
 6 Inventory .'Vt Beginning of Period 00,000.00 
 
 7 PURCH.\SES AT BiLLED CosT 28,836.00 
 
 8 Freight, Express & CARTA(iE ON PoR. 243.10 
 
 9 Total Merchandise Cost 29,079.10 
 
 10 Inventory at End of Period 15,145.38 
 
 11 Discount on Inventory 393.78 
 
 12 Depreciation of Inventory 1,475.16 
 
 13 Net Inventory at End of Period 13,276.44 
 
 14 Net Cost of Merchandise Sold 15,802.66 
 
 15 Profit on Merchandise 5,059.39 
 
 16 Cash Discounts Taken on Poh. 749.74 
 
 17 Gross Profit on Merchandise 5,809.13 
 
 44 Total of Expense Statement 5,111.20 
 
 56 Total interest 521.55 
 
 57 Final Surplus for the Period 176,38 
 
 Source 
 " Sales " account 
 
 " Purchases " account 
 
 " Freight, etc." account 
 
 Sum of Items 6, 7, and 8 
 
 " Inventory 2/28/14 " account 
 
 Item 9 minus Item 13 
 
 Item 5 minus Item 14 
 
 " Cash Discounts " account 
 
 Item 15 plus Item 16 
 
 " Total Expense " account 
 
 " Total Interest " account 
 
 " Surplus " account 
 
 At the beginning of the second period, the balances of the accounts 
 on the ledger, according to the trial balance are: — 
 
 Inventory 2/28/14 
 Balance $13,276.44 
 
 Notes Payable 
 
 Balance $13,.500.00 
 
 Cash 
 
 Balance $399.94 
 
 Surplus 
 P. & L. 2/28/14 $176.38 
 
 This " Inventory 2/28/14 " balance was the gross Inventory at the 
 End of the first period less Discount on Inventory and Depreciation of
 
 ^ ;0 00 t^ 
 ^ to ■* t^ 
 
 26 
 
 O CO <N •* O M 
 CO O IN 0> O <N 
 oi to (N "fi O 1> 
 
 '^ & ■§ «°' 
 
 ''^ — — 5 
 
 ■s ^ -s s 
 
 10 
 
 •< 
 
 I O Tj< 00 
 
 ; oJ d 
 
 OS -^ 
 
 5 -^ 
 
 Pu, ci. 
 
 ui CO 
 
 <l CO 
 
 n3 
 
 ■ w w ^ P^ S 
 
 £ ^ H -< f5 m 
 
 m CM 
 
 oo 
 
 -^ 
 
 P3 OS 
 
 -e 
 § 
 
 t- 2 
 
 
 
 5 d 
 •-1 t^ 
 
 2 2 
 
 
 n 
 
 >3 
 
 •J 
 < 
 
 
 
 o 
 
 n 
 p 
 
 IS 
 
 f. 
 O 
 
 
 -2 
 
 S 
 
 00 
 
 6 
 
 P4 
 
 
 •.J* to 
 
 CO 00 
 
 
 
 t^ 
 
 «o 
 
 
 s^ 
 
 •S a, 
 
 bC o 
 
 
 
 
 ^ 
 H
 
 27 
 
 (M CO 
 
 (N 00 
 
 =3 -y 
 
 Ph Ph 
 
 s§ 
 
 o 
 
 S?2 
 
 
 
 
 o o 
 
 o 
 
 o 
 
 o 
 
 
 o 
 
 o 
 
 o 
 
 
 d 
 
 d 
 
 d 
 
 
 o 
 
 o 
 
 o 
 
 
 o 
 
 in 
 
 ici 
 
 
 f_7 
 
 c<f 
 
 <n 
 
 
 e% 
 
 
 ^ 
 
 
 O O >0 ■* CO <N ^ 
 
 03 CO <M_ U3 O (N «0 
 
 d d 00 d d (N d 
 
 ^ ■* (N 00 ffl 00 ^ 
 
 (M ^ ^ Ti*^ CO Tf ■-< 
 
 Q P 
 
 
 5^ sl^fi] M « 
 00 00 ^ ^ 5 
 
 T3 p > > 
 
 P P 3 
 
 ^ fK ,5 M H H w 
 
 iC 
 
 'If 
 
 0» 
 
 <5 
 
 <N 
 
 CO 
 
 r- 
 
 CO 
 
 00 
 
 d 
 
 d 
 
 •* 
 
 (N 
 
 00 
 
 t^ 
 
 05 
 
 T)< 
 
 ■* 
 
 CO 
 
 (N 
 
 e« 
 
 ^ 
 
 CO 
 
 in 
 
 
 
 
 «« 
 
 QP 
 
 ■2 CO CO 
 
 CI ^ J § 
 
 00 ^ J^ ^ 
 
 g Ph' Pu fq 
 
 00 
 CO 
 
 CO 
 CJl 
 
 CD 
 
 
 'I* 
 
 d 
 
 in 
 
 CO 
 
 in 
 
 
 in 
 
 in 
 
 i 
 
 
 HH O" 
 
 ■* 
 •* 
 
 o 
 
 CD 
 
 d 
 
 9 
 
 in 
 
 in 
 
 CO 
 
 in 
 
 co" 
 
 t-^ 
 
 d
 
 28 
 
 Inventory; that is, the Net Inventory at the End of the first period, 
 Item 13, Profit and Loss Statement, page 7. According to the com- 
 t)ined basis method of the Harvard System of Accounts for Shoe Re- 
 tailers this Net Inventory at the End of the first period now becomes 
 Inventory at the Beginning of the second period, Item G, Profit and Loss 
 Statement, page 8, but on the ledger it is not necessary to open a 
 new account to recoi'd this fact, for, since the Net Inventory at the End 
 of the first period and the Inventory at the Beginning of the second 
 period are identical, this " Inventory 2/28/14 " balance is closed di- 
 rectly into the " Merchandise " account of the second period. 
 
 At the end of the second period, after the closing of the " Inventory 
 2/28/14 " balance into " Merchandise " account, but before the closing 
 of the other accounts, the books will look as on pages 26 and 27. The 
 closing process is the same as for the first period, and is explained in 
 detail on page 24. 
 
 How this treatment of Inventories, Discount on Inventory, and 
 Depreciation of Inventory furnishes figures which accord with the 
 combined basis as advocated by the Harvard System of Accounts, is 
 apparent. From page 14 it will be seen that this combined method 
 shows on the Profit and Loss Statement, as Item 6, the Inventory 
 at the Beginning of the Period; Item 10, Inventory at the End of the 
 Period, reduced by Item 11, Discount on Inventory, and Item 12, 
 Depreciation of Inventory, gives Item 13, Net Inventory at End of 
 Period. This Net Inventory at the End of Period, Item 13, of one 
 period becomes the Inventory at the Beginning of the Period, Item 6, 
 of the following period. On the books this fact is recorded as follows: — 
 In the first period, the balance of " Inventory 2/28/14 " after deduct- 
 ing discount and depreciation of inventory was $13,276.44 which figure 
 agrees with Item 13, Net Inventory at the End of the first period, page 7, 
 Profit and Loss Statement. At the beginning of the second period this 
 inventory balance of $13,276.44 was closed into the " Merchandise " 
 account of the second period — this debit to " Merchandise" of $13,276.44 
 corresponding to Item 6, Inventory at Beginning of the second period. 
 Profit and Loss Statement, page 8. The inventory at the end of the 
 second period was $15,294.68. This amount was credited to " Mer- 
 chandise " and charged to " Inventory 8/31/14," this debit correspond- 
 ing to Item 10, Inventory at End of Period, Profit and Loss Statement, 
 page 8. This " Inventory 8/31/14 " was then reduced by credits of 
 $428.25 for Discount on Inventory, and $1,486.64 for Depreciation of 
 Inventory, both of which were charged to " Profit and Loss " account 
 and correspond respectively to Items 11 and 12 of the Profit and Loss 
 Statement, page 8. The balance of "Inventory 8/31/14," $13,379.79,
 
 29 
 
 was then brought forward. It agrees with Item 13, Net Inventory at 
 End of Period, Profit and Loss Statement, page 8, and also with Item 6, 
 Inventory at Beginning of the third period, Profit and Loss Statement, 
 l)age 12. This balance on the books is to be closed into " Merchandise " 
 account for the third period, and in this way the necessary information 
 for the combined basis method is easily available. 
 
 After the books have been closed for the second period the trial 
 balance is as follows : — 
 
 Trial Balance, Second Period, August 31, lilll 
 
 Cash $437.23 Notes Pay $12,.500.00 
 
 Inv. 8/31/14 13.379.79 Surplus 1,317.02 
 
 $13,817.02 $13,817.02 
 
 A table similar to that for the first period, page 25, would make it 
 readily apparent from which book account each item of the Profit and 
 Loss Statement of the Harvard System of Accounts for Shoe Retailers, 
 page 8, was taken — Item 13, Net Inventory at End of the first period, 
 being identical with Item 6, Inventory at the Beginning of the second 
 period. 
 
 To continue with these accounts through the third and last period, 
 the balances at the beginning of the third period according to the fore- 
 going trial balances are: — 
 
 Inventory 8/31/14 Cash 
 
 Balance.. $13,379.79 Balance.. $437.23 
 
 Notes Payable Surplus 
 
 Balance.. $12,500.00 Balance.. $1,317.02 
 
 At the end of the third period, after closing " Inventory 8/31/14 " 
 balance into " Merchandise " account for the third period, but before 
 the other accounts have been closed, the books look as follows: — 
 
 45B773
 
 30 
 
 (50 00 CO O 
 
 CO (N M ro 
 
 "-H M O CO 
 
 do S 
 
 99 ^- ^ 
 
 00 00 CO o o t^ 
 
 CO O <N CO O 05 
 -H (N «3 CO O i-i 
 
 -S W w '^ 
 
 -^ . — « 
 
 ti O O o 
 
 W fe H H < 
 
 00 ■-< 
 
 (N CO 
 IN 00 
 
 
 
 C 
 
 1 
 
 
 
 «- w .2 p- (S c. 
 
 — _ _ 1 tn a 
 
 .M cS OS :f^ 2 S 
 
 £ o o S o ■« 
 
 ta fe H H ■< .^ CQ 
 
 & O h- 
 
 
 ^ H 
 
 <J CO 
 
 ■3 -s 
 
 Q 
 
 J j3 
 
 CO 
 
 00 ^ 
 
 £f: 
 
 g 00 
 
 
 
 
 l-H 
 
 05 
 CO 
 
 
 O 
 
 CO 
 
 
 2 -5! 
 Q 
 
 < 
 O 
 
 to 
 
 O 'M 
 
 J8 
 
 
 05 01 
 
 o o 
 
 -t-= o 
 
 00 -i-^ 
 
 3 "=5 
 
 a 
 CO qT 
 
 CO >> 
 
 ■^ 2 
 
 bC m ij 
 
 o a, 'T- 
 
 m « 
 
 8 o 
 2 <=> 
 
 &• o
 
 31 
 
 •^ ■* lO 
 
 00 
 
 CO 
 
 (M CO IN 
 ^^ ^ "~-~ 
 (N 00 IM 
 
 J iJ J 
 
 =a °8 ■« 
 CM e^ ol 
 
 M CO O 00 00 CO o 
 
 1-j -^ o »o (N r^ 00 
 
 00 o o; »-^ bJ M i--i 
 
 05 CO 1— I rH c^ c^) r>- 
 
 CD *— ' ^ CO (N CO ""^ 
 
 o 
 
 t^ 
 
 t^ 
 
 
 CO 
 
 ^ 
 
 i> 
 
 
 ci 
 
 ^ 
 
 M 
 
 
 CO 
 
 IN 
 
 •O 
 
 
 CO 
 
 in 
 
 CO 
 
 
 to 
 
 
 CD 
 
 
 
 
 
 
 a» 
 
 
 s» 
 
 
 p 
 
 c3 03 
 
 §8 
 
 8 
 
 
 d d 
 
 O lO 
 
 •q 
 
 
 ^"«'' 
 
 
 
 O P3 
 
 Q Q 
 
 -^ IM IM " _ _3 
 
 -3 
 
 2 fe M M fH H w 
 
 O 00 "5 
 
 CO 
 
 
 CD lO cq 
 
 ■* 
 
 
 OJ ^ r)i 
 
 lO 
 
 
 rt .H O 
 
 CO 
 
 
 -* CO CO 
 
 iq 
 
 
 e© ^ ^ 
 
 CO 
 
 
 *"* 
 
 «© 
 
 
 Qq 
 
 00 
 
 00 
 
 
 IM 
 
 (M 
 
 
 ■\ 
 
 ^^ 
 
 
 IM 
 
 (M 
 
 (U 
 
 >4 
 
 iJ 
 
 13 
 
 ^ =3 
 
 ■3 
 
 ^ 
 
 pl; 
 
 M 
 
 CO 
 
 CO 
 
 CD 
 10 
 
 
 id 
 
 CO 
 
 10 
 
 06 
 
 CD 
 
 CO 
 CO 
 IM 
 
 
 CO 
 
 cd" 
 
 
 
 
 
 OS 
 
 t^ 
 
 CD 
 
 
 t^ 
 
 l--. 
 
 in 
 
 
 d 
 
 co 
 
 CO 
 
 
 t^ 
 
 in 
 
 CO 
 
 
 CO 
 
 00 
 
 iM 
 
 
 co" 
 
 cd" 
 
 d 
 
 
 
 
 CO 
 
 
 5 
 
 
 m 

 
 32 
 
 The trial balance of these accounts for the third period is as follows: — 
 
 Trial Balance, Third Period, Februarj' 28, 1915 
 
 Cash $190.57 Notes Pay $8,500.00 
 
 Inv. 2/28/15 11.804.25 Surplus 3,494.82 
 
 $11,994.82 $11,994.82 
 
 The same methods would be followed for the fourth and each succeed- 
 ing period. Although the books do not show a separate account for 
 each item of the Profit and Loss Statement, the table on page 25 shows 
 how the Profit and Loss Statement is derived from the accounts kept as 
 outlined above. From these accounts it is possible to keep a memo- 
 randum of the actual cost of depreciation at each inventory such as 
 the following: — 
 
 Period 
 
 Inventory less 
 discount 
 
 Depreciation reported. 
 
 Cumulative depreciation 
 
 cost (See Inventory 
 
 accounts) 
 
 Actual 
 depreciation 
 cost for each 
 
 period 
 
 1st 2/28/14 
 2d 8/31/15 
 3d 2/28/15 
 
 $14,751.60 
 14,866.43 
 13,115.83 
 
 10% 
 10% 
 10% 
 
 $1,475.16 
 1,486.64 
 1,311.58 
 
 $1,475.16 
 
 11.48 
 
 - 175.06 
 
 This table shows the actual cumulative depreciation at any period 
 and the actual depreciation cost for any period. For example, not 
 only is there no depreciation cost for the third period but it is even 
 reduced $175.06, and the cumulative depreciation at the end of the 
 third period is reduced by the same amount, because the inventory 
 for this period is less, as was explained in Part I. This table also 
 makes clearer the relation as presented (page 14) between the gross 
 basis method and the combined basis method of the Harvard System 
 of Accounts for Shoe Retailers.
 
 PUBLICATIONS OF THE GRADUATE SCHOOL OF 
 BUSINESS ADMINISTRATION 
 
 HARVARD BUSINESS STUDIES 
 
 Volume 1. Scientific Management A Collection of the More Significant 
 Articles Describing the Taylor System of Management. Edited by 
 CiiAKENCB Bebtrand THOMPSON, LL.B., A.M Price $4.00 
 
 BULLETINS OF THE BUREAU OF BUSINESS 
 RESEARCH 
 
 (See Inside of front cover) 
 
 STUDENT REPORTS ON BUSINESS PROBLEMS 
 
 (In Press) 
 
 Report No. 1. Comparative Basic Costs of Manufacture by Hand, 
 Linotype, and Monotype, of 8-, 10-, and 12-Point Non-technical 
 Text Matter, Set Both Leaded and Solid. By Henry Hijntly 
 Taylob, M.B.A. (Awarded the May I^e in 1914 as the best gradu- 
 ation thesis in the Harvard Graduate School of Business Adminis- 
 tration.) Price 60 cents
 
 ^xvi^iiT., i^\^j -TVi^vjr; 1^1:3 
 
 hvsc 
 
 «U '^^^ UNIVERSITY LIBRARY 
 ! CrvUroook is DUE on the last date stamped below 
 
 \9eo 
 
 
 n'ln 
 
 Form I,-;i 
 
 2;»l-2,'.13(3203) 
 
 0HIVERSITY OF CALIFORNli 
 
 "^ AT 
 
 r.ns ANGELES
 
 rt 
 
 AP.H2d nniv ersity 
 school '^f hn^iri'^'^? 
 
 admini strat i on • 
 Bureau ^f~b 
 
 reasearch 
 
 -©ypreuiatton in the 
 retail shoe^ 
 
 liD 
 
 9787 
 
 A2E2d 
 
 L 009 514 632