ii!!|i!!!!!!!!"!!l!!!ii!!f HiiiliiliiHIlliii hftl' iiitiiiiitriit ilifllir'n^nr;! I il llliilli'l"^ .11 'II llllil! iipi II--'" ! i ! lilll I! I! !i;i|;i;fli^i;rmiii"lliili.*viiiiiin:i;iiii' ill II I !! i H''!! ill!! il! !lti I III ■ 1 ilili il iilli i I III iii^ |! P I' I i ■I iii I H! lili^ ! 1 il liilplilll IMM^^^^^^^^^^^^^^^ m m pi I iiiiiii 11 I iiiii I! i |-^ PllililiPli i pi! iiiiiiiiiiiiiiiiii! I |iiii !l !il!|l!!!||||iP"»' IIP* !l i Pi ni|t|il|!| i 1 ! ^& ijiii I Iii 11 1 1 iill! ill i Hijihi ' ni ! LIBRARY OF THE University of California. Class Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/accountingpractiOOdaycrich ACCOUNTING PRACTICE ACCOUNTING PRACTICE BY CLARENCE MUNRO DAY II CERTIFIED PUBLIC ACCOUNTANT University of the State of New York 9 J O' » 1 »»» »,':', s 'j J J D. APPLETON AND COMPANY NEW YORK 1908 ^^t^ Copyright, 1908, by D. APPLETON AND COMPANY PuhUsJied September, 1908 l^AHO'-lUA INTRODUCTION The idea prevalent some years ago, that an accountant was sim- ply a '' bookkeeper out of a job," has long since been dispelled. To-day the business has attained a high standard as a profession. To check a set of books, and simply verify the clerical accuracy of the work, is not auditing in the true sense of the word. There are methods requiring little work which make such checking unnecessary. The accountant, while he understands bookkeeping, is more than a bookkeeper. He must be capable of dealing with the difficult prob- lems of business and he must know how to interpret the intricacies of affairs so that a layman can comprehend and be guided by his observations. The accountant must know theory in order properly to understand his business; but a man able and proficient in theory is not necessarily a competent accountant. He must acquire practice by actual experience, in order to develop ability as an accountant; for it is the art of applying theory in practice which makes the theory valuable. In the natural order of things, we learn from the experience of others, and the advantage each generation has over the preceding one lies in the knowledge gained by the experience of the preceding gen- eration. The business of accounting has developed so rapidly that the ref- erence books, essential to the business as a profession, have not kept pace; consequently the books available are not on a par with the ref- erence books of other professions. For many years, it has been the duty of the author to supervise the work of others, and during his experience he made notes of the best methods under his observation. These notes have been valuable for reference, and the many requests from prominent accountants for access to the notes have influenced the author to publish them. The language is simple, telling how to do certain lines of work so as to lead directly to the desired results and avoid repetition. vi INTRODUCTION The book is divided into four parts, namely : I. Methods of Working, II. Cost Accounting, III. Operating Forms, and IV. Report Forms. I. The first part of the book treats of methods of working which have been developed by years of experience and will be valuable to any accountant who desires to attain a high standard of excellence. It also contains miscellaneous notes which are the opinions of com- petent auditors. II. The second part of the book treats cost accounting in a new and original way. The systems are all simple and practical, having been successfully worked out. The original working instructions are submitted, which made repetition necessary in some instances, for it did not seem advisable to eliminate any part of the original working instructions. III. The third part of the book contains the operating forms which were referred to in so many different places that it was con- sidered best to group them. The author suggests that the student make rough copies of the forms necessary to each system and study each system as a unit instead of so many parts. IV. The fourth part of the book is devoted to report forms and forms of a statistical character. The first nine forms are never sub- mitted as the main exhibits of a report, but are generally made by the auditor as a basis upon which he can prepare his report and other statistics. From Form lo on are the forms to be submitted as ex- hibits when making the official report. CONTENTS PART I. METHODS OF WORKING CHAPTER PAGE I. How TO Plan and Perform a General Audit in Detail . 3 1 . The Character of the Business 3 2. The Books Employed and Plan of Keeping Them 4 3. The Object of the Audit 5 4. Auditing a Trading Business 5 5. Audit of the Cash •. 6 6. Preliminary Steps 6 7. Grouping the Books 7 8. Making the Working Plan of the Audit .... 9 9. Order of Work 13 10. General Suggestions 14 II. How TO Audit the Cash 17 1. Summary of Cash Book Account 19 2. Summary of the Check Book Account 19 3. Summary of the Pass Book Account 20 4. Vouch Payments with Canceled Vouchers . 21 5. Reconciliation of Payments and Checks 21 6. Reconciliation of Checks and Canceled Vouchers 22 7. Check Deposits with Receipts . . . . 23 8. Reconciliation of the Receipts and Deposits ... 23 9. Reconciliation of Check Book and Pass Book Deposits . 23 10. Vouch Cash with Regular Vouchers 25 III. How to Analyze an Account 27 IV. A Financial Audit 37 V. The First Audit of a New Corporation 44 VI. Making Adjustments to a Ledger 46 VII. Preparation of the Report .....••• 48 VIII. Locating Differences in the Ledger 54 1. To Analyze a Ledger 54 2. How to Section a Ledger 57 3. How to Block a Ledger 60 4. When to Block a Ledger 63 IX. Planning a General System of Books 65 I , A Trading Business ^^ X. General Notes and Suggestions -77 vii viii CONTENTS PART II. COST ACCOUNTING CHAPTER PAGE I. Cost Systems in General 89 1. Elements of Cost .89 2. Kinds of Cost Systems .91 II. Planning the System 93 1 . Planning the Controlling Accounts 93 2. Method of Operation 98 3. The General Books and a Cost System . . . .101 4. How to Plan the Cost System 102 5. Correct Foundation for Cost Figures and Reports . .108 III. Percentage Costs 114 1 . Determining Percentages 114 2 . Use of Percentages 119 IV, Installing a Cost System 118 V. Schemes for Simplifying Work 120 VI. Computing Costs where No System Has Been Operated , 124 VII. Cost Systems with Original Working Instructions . .128 1. Shoe Carton Factory Cost System 128 2. Cotton Mill Cost System 135 3. Cost System for a Drug Compounding Laboratory and Factory 146 4. Cost System for a Silk Mill 152 5. Working Instructions for a Cost System for Woolen Mill . 154 6. Outline of Cost System for Lithographing Company . 161 PART III. OPERATING FORMS 173 PART IV. REPORT FORMS . . . 217 INDEX 313 PART I METHODS OF WORKING I • » » > I. HOW TO PLAN AND PERFORM A GENERAL AUDIT IN DETAIL In order to plan an audit, it is necessary to consider (a) the character of the business, (b) the books employed and the plan of keeping the books, and (c) the object of the audit. The Character of the Business This is the most important feature to be considered when plan- ning an audit, for the nature of the business will give an insight into the matters to be provided for and consequently a definite idea of the books required by the business. The idea is this : When you enter an office to plan an audit, think of the character of the business and establish in your mind what classes of entries are essential to keep records of the business. After you have established in your mind what matters should have been provided for, an examination of the books as hereinafter described will reveal the provisions which were made for keeping the records of the business and assembling the results, also the methods em- ployed in bringing out the important features of the business. A little careful thought on the character of the business at the beginning of the examination will give you a clearer insight into the system of keeping the records, and enable you to grasp the situation more thoroughly and work intelligently and with confidence. Trading Business If it is a trading business, they buy and sell, in which case you will expect to find books for the purchases and books for the sales ; and in addition to the books which are peculiar to that particular business you will find the books which are common to every busi- ness : namely, the cash books, the journal and the ledger. 3 o'S>S" .i^CCOUNTiNG PRACTICE Manufacturing Business If it is a manufacturing business, they purchase raw material and supplies, manufacture and sell or ship to selling agents. In that case you will expect to find books for the purchases, and sales or ship- ments to selling agents, pay roll books, and in addition to the books peculiar to the business you will find the books which are common to every business : namely, the cash book, the journal and the ledger. The Books Employed and Plan of Keeping Them Make a complete list of the books that were in use during the period to be examined. While making this list, make a memorandum of the part each book performs, its object and endeavor to establish in your mind its relation to the system as a whole, also the names and duties of the clerks engaged in keeping the books, and per- forming the various functions associated with them. At the same time inquire regarding the methods of entering and filing orders, invoices, receipts, etc. If you acquaint yourself with the methods of the office at the outset, it will enable you to plan the work so as to interfere as little as possible with the regular office routine and facilitate matters when you desire to investigate any questionable entry. If you know where to look and what to look for, it will not consume a fraction of the time that will be required if you are not familiar with the office routine, and it will be more agreeable to all concerned, than if you are obliged to make indiscriminate in- quiries regarding every matter you deem it expedient to investigate. In examining the books when planning an audit, give especial attention to the books which are peculiar to the business, and en- deavor to learn the reason and object of every diversion from ordi- nary methods. The methods employed, in making records which are similar, vary owing to circumstances and diflferences of opinions and ideas, but the object in view is the same and the results similar. To illus- trate: There may be a hundred different ways of preparing records of the sales, but the main object of all is to determine the amount of the sales, and the resultant must necessarily be the total of the sales. Consequently the diversity of methods should not confuse HOW TO PLAN A GENERAL AUDIT ^ you; your object is to verify, to your satisfaction, the total amount of the sales, the analysis being a secondary consideration. The Object of the Audit The object bears an important influence when you are planning an audit, for it is the first consideration of the audit and the excuse for its performance; nevertheless it is impossible to offer more than suggestions regarding the procedure, especially when the informa- tion desired is of special import or of an extraordinary character. This much might be said : When you are called upon to perform an audit with a view to obtaining certain information, it is necessary to keep the information desired foremost in your mind, to give it first consideration without sacrificing the safeguards necessary to your own protection, and to give especial attention to all books and items bearing on the matter in question. If you make an examination of a set of books simply to obtain certain peculiar information and neglect to satisfy yourself that the cash was all right at that time, the layman, should an embezzlement be discovered later, will alm#st invariably condemn you for your neglect and will not consider the circumstances of your case; con- sequently it is inadvisable to render such service unless your instruc- tions are in writing and specify that you are not to examine the financial end of the business. Auditing a Trading Business Illustrating the method of procedure you would go through in familiarizing yourself with a business, as a preliminary step to plan- ning a general or detailed audit, let us consider a trading establish- ment. The character of the business consists of buying and sell- ing. By specializing the features in this way we predetermine what the business operations are, and create in the mind an outline of the business; this should enable you to grasp the situation quickly and help you to formulate your ideas of what is necessary to prepare proper records of the transactions of the business. Since the business consists of buying and selling, you first ascer- tain how the buying and selling have been recorded. 6 ACCOUNTING PRACTICE Buying Who did the ordering? What books were kept to record the pur- chases and the various transactions appertaining thereto? How were the returned purchases treated? What provisions were made to take advantage of discount on bills? Who was authorized to approve these and what safeguards were adopted to prevent errors of omis- sion or commission in settlement? Selling What books were kept to record the sales and the sales credits? How were they analyzed and summarized? What methods were employed to avoid errors in charging and shipping, and who was authorized to approve orders for shipment? Books Common to Every Business There are certain books common to every business and, while it is not intended to minimize their importance to the business, the con- sideration of their character is not important when endeavoring to comprehend the scope of the business. These books are the cash book, the journal and the ledger, and they are used and treated the same in almost every business. Audit of the Cash Plan to audit the cash as outlined hereafter and ascertain who had charge of the cash, the powers of the persons responsible for the cash and the restrictions upon them. Ascertain the methods em- ployed in handling the receipts, the channels through which the re- ceipts came and the check upon them. Ascertain what methods were employed in making the disbursements, the persons authorized to approve the payments and, if a petty cash account was in opera- tion, obtain a clear conception of the way it was handled and its rela- tion to the general cash. Preliminary Steps The plan of the books should unfold itself to you as you proceed with your preliminary examination; if it does not, it will be better HOW TO PLAN A GENERAL AUDIT 7 to devote ample time to quiet thought, until you feel that you fully comprehend the situation. After obtaining a well-defined idea of the books and methods of conducting the business, a glance at the trial balance will reveal the accounts which were kept to control the business and will show the way they have been subdivided. When considering the trial balance group the accounts in the following way: Capital Accounts, Representing Assets and Liabilities. Nominal Accounts, Controlling Expenses and Income. Personal Accounts, Accounts with Individuals and Companies. The assets and liabilities are further classified as fixed and cur- rent, the fixed assets being the plant and equipment accounts and the fixed liabilities being the capitalization accounts, which include capi- tal stock issues of every form and the bonded indebtedness. The current assets are the active accounts of assets, such as cash, bills receivable, merchandise, accounts receivable, unexpired insurance, etc. ; the current liabilities are the active accounts of liabilities, such as bills payable, accounts payable, loans, etc. By devoting sufficient consideration to the accounts which have been provided, you can generally determine the features of the busi- ness that it was desirable to have predominate. Examine carefully the profit and loss account and see how the closing of the accounts was performed; if the journal was used as a medium for making the closing entries, study carefully the closing entries which were made in the journal. Grouping the Books In your preliminary examination your prepared the following list of books : Private Ledger. General Ledger. Purchase Ledger. Sales Ledger. Bad Debt Ledger. 8 ACCOUNTING PRACTICE Petty Ledger. General Journal. Purchase Journal. Private Journal. Purchase Credit Journal. General Cash Book. Petty Cash Book. Check Book Amsterdam Trust Co. Check Book First National Bank. Check Book Lincoln National Bank. Pay Roll Book. C.O.D. Book. Sales Book (Press copy books). Sales Credit Book (Press copy book). Approbation Book. General Ledger Trial Balance Book. Purchase Ledger Trial Balance Book. Private Ledger Trial Balance Book. Sales Ledger Trial Balance Book. Receiving Book. Shipping Book. Stock Book. Inventory Book. Order Book. To follow the plan of specializing according to the peculiar fea- tures of the business, group the books by discriminating between the books for the buying, the books for the selling, and the books for the centralization and control of the business ; by arranging them according to the order of operation, you will readily observe any omission. Buying: Order Book. Receiving Book. Purchase Journal. Purchase Credit Journal. Purchase Ledger. Purchase Ledger Trial Balance Book. HOW TO PLAN A GENERAL AUDIT 9 Selling: Stock Book. Shipping Book. Sales Book. Approbation Book. Sales Credit Book. Sales Ledger. Sales Ledger Trial Balance Book. Petty Ledger. Bad Debt Ledger. C.O.D. Book. Cash : Cash Book. Petty Cash Book. Check Books. Pay Roll Book. Centralization: General Journal. General Ledger. General Ledger Trial Balance Book. Private Journal. Private Ledger. Private Ledger Trial Balance Book. Inventory Book. By arranging the books similarly to the above you will be enabled to determine whether each division of the books is complete. Making the Working Plan of the Audit After you have carefully revised the schedule of books and arranged them according to the features of the business, and satisfied yourself that you have not overlooked any of the books, take a sheet of paper and make your final zvorking plan of procedure: Write the name of each book, and under the name of the book write what work you propose doing in connection with it. Do this with every book in the order in which it appears on the list, viz: Order Book: Used to verify purchases. Receiving Book: Used to verify purchases. 2 lo ACCOUNTING PRACTICE Purchase Journal: Vouch the entries with the bills. Check the distribution of the items. Check the footings. Prove the totals of the distribution. Check the postings to the purchase ledger. Check the postings of results to general ledger. Purchase Credit Journal: Check the distribution of the items. Check the footings. Prove the totals of the distribution. Check the postings to the purchase ledger. Check the postings of results to general ledger. Purchase Ledger: Check footings of the accounts. See that all items are checked. Schedule unchecked entries. Make careful memorandum of all irregularities. Purchase Ledger Trial Balance: Verify balances for beginning of period. Verify balances for end of period. Make copy of trial balance for end of period. Compare with controlling account in general ledger. Stock Book: Examine general appearance of entries. Compare inventory at beginning of period. Compare inventory at end of period. Make a memorandum of all irregularities. Verify entries for purchases. Verify entries for shipments. Shipping Book: Check shipments with sales. Examine general appearance of entries. HOW TO PLAN A GENERAL AUDIT „ Sales Book: Verify extension of items. Check footings of sales. Check postings to sales ledger. Check postings of results to general ledger. Approbation Book (Shiptnents on Approval) : Examine general appearance of entries. Check transfers of charges to sales book. Verify return of entries canceled. Sales Credit Book : Verify extension of items. Check footings of sales credits. Check postings to sales ledger. Check postings of results to general ledger. Sales Ledger: Check footings of account. See that all items are checked. Schedule unchecked entries. Make careful memorandum of all irregularities. Sales Ledger Trial Balance Book: Verify trial balance for the beginning of period. Verify trial balance for the end of period. Make copy of trial balance for the end of period. Compare with controlling account in general ledger. Bad Debt Ledger: See that transfers to this ledger are authorized. Make schedule of all bad debts. Verify cash entries. CO.D. Book: Check CO.D. entries ^rom sales book. Verify returns with receiving book. Check entries in cash book. Make list of outstanding items. Compare with controlling account in general ledger. 12 ACCOUNTING PRACTICE Cash Book: Balance cash on hand. Make a summary of cash book account. Make a summary of check book account. Make a summary of pass book account. Vouch cash payments with canceled checks. Reconcile cash payments and check book account. Reconcile check book and pass book accounts. Check deposits with receipts. Reconcile receipts and deposits. Vouch cash with regular vouchers. List missing vouchers. Check postings to purchase ledger. Check postings to general ledger. Check postings to sales ledger. Check postings to petty ledger. Check postings to private ledger. Petty Cash Book: Vouch payments. Check transfer of items to cash book. List missing vouchers. Pay Roll Book: Check footings of pay rolls. Verify items with time books. Check entries in cash book. General Journal: Examine carefully all entries. Verify or vouch all entries. Copy entries which are questionable. Copy entries relating to bonds, stocks and capital. Copy entries for closing books. Check postings to general ledger. Check postings to purchase ledger. Check postings to sales ledger. Check postings to petty ledger. Check postings to bad debt ledger. HOW TO PLAN A GENERAL AUDIT 13 General Ledger: Check footings of accounts. See that all items are checked. Schedule unchecked entries. Make careful memorandum of irregular entries. General Ledger Trial Balance Book: Verify balances for beginning of period. Verify balances for end of period. Make copy of trial balance for end of period. Private Journal: Examine carefully all entries. Vouch all entries with general books. Copy all entries which are questionable. Copy entries relating to bonds, stocks or capital. Copy entries for closing books. Check postings to private ledger. Private Ledger: Check footings of accounts. See that all items are checked. Examine carefully alterations and corrections. Verify trial balance for beginning of period. Verify trial balance for end of period. Make copies of trial balances. If you wish to estimate the time required to perform the audit, when making a list of the books estimate the time required to exam- ine each book and check the work, allowing sufficient time for pre- paring the report. The total is the time required. Order of Work In most cases it is advisable to commence by auditing the cash. This will enable you to become better acquainted with the business and familiarize yourself with the system. 14 ACCOUNTING PRACTICE It is not necessary or advisable to perform the audit in the order of the plan, nor is it advisable to attempt to lay out the plan in the order you intend to do the work. After completing the audit of the cash, you can use your judgment in the performance of the balance of the audit. As each particular item of the work is completed, check oflf the item on your plan of audit; and where more than one person is engaged on the audit, the name of the auditor and the date the service was rendered should be inserted opposite the item of work on the plan of the audit. If any part of the work is only partly completed, insert the word " part " on the plan of the audit to indicate that it was not com- pleted, and make suitable notes in your working papers to enlighten your successor regarding it, so that he will be enabled to commence where you left off. General Suggestions Where the audit is extensive and the working papers are numer- ous, number each working paper and make an index of the working papers. Use these numbers for referring from one paper to another. Group the papers in a regular order similar to the following, so that you can readily refer to it: (i) Plan of audit and index to working papers. (2) Trial balances. (3) Cash and bank account papers. (4) Notes and text of report. (5) Analysis of accounts. (6) Statements for the report. (7) Memorandums for future audits. If you have assistants, devote your attention to the important matters and assign the assistants to the extensive checking, vouching, and footing. When directing work you can often accomplish more by devoting a generous portion of your time to careful thought, con- sidering well every feature and circumstance. The time employed making careful observations is not wasted. The maker of the books, the style of ruling and all the various HOW TO PLAN A GENERAL AUDIT i^ details may be important points especially if the books are loose leaf and there is reason to believe the matter is not the original, but has been copied or replaced. In performing an audit, it is the duty of the auditor to ascertain what the various results of the business are and satisfy himself as to their correctness, the net purchases, the net sales, etc., and the changes in the assets and liabilities. The assets and liabilities not shown, whether contingent or other- wise, should be carefully recorded on the working papers, especially bills receivable which have been discounted, and indorsements made to accommodate others. An auditor should use every means to determine whether all the assets which ought to be there are shown, and, if there is reason to believe that any assets have been dissipated or hypothecated, it is his duty to qualify his report to that effect and decline to cer- tify the balance sheet unless it is accompanied by the text of the report. If the business is a partnership, the auditor should examine the partnership agreement and make sure all the conditions have been complied with, and see that all entries relating to the partners have been properly entered on the books. If the auditor is not thoroughly familiar with the composition of the accounts after performing an audit in detail, it is advisable for him to analyze the accounts as directed in the instructions relating to the performance of a financial audit. If the business is a corporation, the auditor should examine the articles of incorporation, the stock books and the minutes, to see that the purport of the minutes has been executed and properly entered on the books. The auditor should see that all issues of stock bonds or other capitalization have been properly made and the values absorbed by the business ; if they have not, he should report it. Adjustments to Ledger Do not make adjustments to the ledger until the work is com- pleted. Make a complete schedule of all adjustments, showing full detail of the items, the books and folios, and all matters relating to l6 ACCOUNTING PRACTICE them. When the work is completed, make the adjustments as here- inafter described. Corrections If an entry was made incorrectly, correct it, or, better still, have it corrected at once and make a note of all corrections on a sheet used for that purpose only. II. HOW TO AUDIT THE CASH Outline of the Method (i) Make a summary of the cash book account. (2) Make a summary of the check book account. (3) Make a summary of the pass book account. (4) Vouch the cash payments with the canceled vouchers which were returned by the bank. (5) Reconcile the total payments on the summary of the cash book account with the total checks on the summary of the check book account. (6) Reconcile the total checks on the summary of the check book account with the total canceled vouchers on tlie summary of the pass book account. (7) Check the deposits with the receipts entered in the cash book. (8) Reconcile the total receipts on the summary of the cash book account with the total deposits on the summary of the check book account. (9) Reconcile the total deposits on the summary of the check book account with the total deposits on the summary of the pass book account. (10) Vouch the cash with the regular vouchers and list all miss- ing vouchers. This method of auditing the cash is simple and complete, and enables the auditor to perform an audit of the cash in an incredibly short time when the work is extensive ; it also makes interesting what would otherwise be excessively monotonous. It (i) proves the cor- rectness of the footings of the cash book, (2) proves the correctness of the footings of the check book, (3) proves the correctness of the bank account, (4) reveals all errors and adjustments affecting the cash, (5) reveals all contra entries, (6) reveals all errors in the check book account, (7) reveals all errors in the bank pass book account, 17 i8 ACCOUNTING PRACTICE (8) exposes all items which were entered in the cash book and not deposited, (9) exposes all items which passed through the bank ac- count without being entered on the cash book, (10) makes it impossi- ble to overlook errors of omission or commission, and (11) develops positive control of the cash and bank accounts. Balance the Cash First Always balance the cash immediately; this is imperative. While doing this, make memoranda of the following: (i) The footing of the debit side of the cash book and the last item included in the footing. (2) The footing of the credit side of the cash book and the last payment included in the footing. (3) The footing of the deposits on the check book and the amount of the last deposit included in the footing. (4) The footing of the checks on the check book and the number and amount of the last check included in the footing. (5) A complete detailed statement of the balance compiled by you. If there is cash other than cash in banks, make a minute record of it and be very particular regarding items other than currency. It is necessary that full details of all tickets be made a part of your working papers. Checks Outstanding Most bookkeepers make a record of the checks outstanding when the pass book is balanced. If this has been the custom in your case, make a copy of the list of outstanding checks for the beginning and end of the period to be examined. Preserve the papers relating to the cash balance and extend the examination up to the point where the balance was made, to satisfy yourself that the balance was correct and in order. Certificate Request the firm to secure from the bank a letter stating the amount on deposit on the day when the account was balanced and file this with your working papers. This is customary, and the banks generally provide a form to meet such requests. HOW TO AUDIT THE CASH 19 1. Summary of Cash Book Account Make a summary of the cash book account, showing the balance on hand at the beginning of the period, the receipts according to the cash book, the payments according to the cash book and the balance at the end of the period, similar to the following: Summary of the Cash Book Account Balance Jan. i, 1891 . .$10,601.15 payments. RECEIPTS. January,. 1891 $10,415.70 Jan., 1891 ..$9,610.51 February, 1 89 1 11,217.65 Feby., 1891.. 10,408.22 March, 1891 13,371.52 March, 1891.15,310.75 Total Payments $35,004.87 Total Receipts $35,329.48 Bal. Mch. 31, 1891... 10,925.76 $45,930.63 $45,930-63 2. Summary of the Check Book Account Make a summary of the check book account for the same period, showing the balance on hand according to the check book at the begin- ning of the period, the deposits, the checks drawn and the balance on hand at the end of the period, similar to the following: Summary of the Check Book Account Balance Jan. i, 1891. $8,745.63 checks. DEPOSITS. January, 1891 $10,315.91 Jan., 1891 ..$10,752.63 February, 1891 12,314.21 Feby., 1891. 11,822.31 March, 1891 12,982.15 March, 1891. 14,987.16 Total Checks $35,612.27 Total Deposits $37,562.10 Balance 10,695.46 $46,307.73 $46,307.73 20 ACCOUNTING PRACTICE ^ 3. Summary of the Pass Book Account Make a summary of the pass book account covering the period. Show the balance on hand according to the pass book at the begin- ning of the period, the deposits, the canceled vouchers returned by the bank and the balance at the end of the period, as follows : Summary of the Pass Book Account Balance Jan. i, 1891 . .$11,431.22 canceled vouchers. DEPOSITS. January, 1891 $14,382.91 Jan., 1 89 1.. $10,752.63 February, 1891 11,374.63 Feby., 1891. 11,822.31 March, 1891 12,222.57 March, 1891. 14,007.52 Total Vouchers $37,980.11 Total Deposits $36,582.46 Bal. Mch. 31, 1891... 10,033.57 $48,013.68 $48,013.68 In making the summaries of the cash book, check book and pass book accounts, endeavor to have the summaries conform to the clos- ings which were made on each book, for it is very easy to eliminate the matter belonging to the prior or subsequent periods. That is, if the period being examined is the month of June and the pass book was not balanced since May 20th, commence the pass book account at May 20th, have pass book balanced, and bring summary to date. If there are several cash books, make a summary for each and every book and then make a summary of all the cash books, so that you know the total cash received and paid. If there are several bank accounts, make a summary of each and every check book and make a summary of all the check books ; also make a summary of each and every bank pass book and make a summary of all the pass books. 4. Vouch Payments with Canceled Vouchers Vouch the cash payments with the checks returned by the bank. If you use a blue pencil, make a blue double check mark on the HOW TO AUDIT THE CASH 21 summary of the Pass Book Account to indicate that you have vouched the cash with the checks and used a blue pencil to establish the identity of the items which were checked. In making check marks on the books, be careful and make a small, neat and distinctive mark; take pride in having them appear regular instead of slovenly and hideous. (Little things express character.) When vouching the items of the cash book with the checks, exam- ine the indorsements and compare the payee with the cash book entry ; if you notice any irregularity in the indorsement or payee, make a memorandum of it, and make a small cross which will attract your attention when you are vouching the cash payments with the vouch- ers. In making notes relating to checks, enter on your working papers the full details of the checks. Make a list of all checks and bank charges which do not appear to be entered on the cash book. When all the checks which were returned by the bank have been checked off on the cash book, make a small circle (o) opjxisite each payment, which is for a check outstanding at the end of the period. If you have no list of them, this is the time to prepare a list of checks outstanding. Make a schedule of the items of payments entered on the cash book which were not checked. 5. Reconciliation of Payments and Checks Reconcile the total payments according to the summary of the cash book account and the total checks according to the summary of the check book account, as follows: CASH BOOK CHECK BOOK ACCOUNT. ACCOUNT. Cash book payments, as per cash book $35,004.87 Cash book items not checked . $200.00 Checks, as per check book 35>6i2.27 Checks entered subsequent period 230.30 Exchange, etc., not on cash book 577- 10 $35,812.27 $35,812.27 22 ACCOUNTING PRACTICE 6. Reconciliation of Checks and Canceled Vouchers Reconcile the total checks according to the summary of the check book account and the total canceled vouchers returned by the bank according to the pass book account, as follows: CHECK BOOK PASS BOOK ACCOUNT. ACCOUNT. Checks, as per check book $35,612.27 Outstanding January ist 2,685.59 Canceled vouchers, as per bank $37,980.11 Outstanding March 31st 317-75 $38,297.86 $38,297.86 Reconciliation of Cash Payments and Canceled Vouchers CASH BOOK PASS BOOK ACCOUNT. ACCOUNT. Payments $35,004.87 $37,980.1 1 Checks not on cash book 230.30 Exchange, etc., not on cash book 577- 10 Checks of prior account 2,685.59 Outstanding end of period 317-75 Cash items not vouched with checks 200.00 $38,497-86 $38,497-86 If the results do not agree, it should not take you long to ascertain what the trouble is ; for, if your work has been done correctly, it must be one of three things, viz. : ( i ) a check missing which passed through the bank, (2) bank account incorrect or (3) footings wrong on check or cash books. If the results agree, you know wherein the cash book, check book and bank book accounts differ and can devote your attention to the extraordinary items which developed as the work progressed. Examine cautiously every item on the list of " canceled bank vouchers not entered on the cash book," and give especial attention to the list of items on the cash book which were not paid through the bank. HOW TO AUDIT THE CASH 23 7. Check Deposits with Receipts If the records are in such condition that it is possible to do so, check the receipts entered in the cash book with the deposits entered in the pass book. If inconvenient to check the receipts direct to the pass book, check the receipts with the deposits entered on the stub of the check book and check the totals to the pass book. Make a list of all items in the pass book which do not appear on the cash book and make a list of all items on the cash book which were not deposited. 8. Reconciliation of the Receipts and Deposits Reconcile the total receipts according to the summary of the cash book and the total deposits according to the summary of the check book account, as follows: CASH BOOK CHECK BOOK ACCOUNT. ACCOUNT. Receipts, as per cash book $35,329.48 Receipts prior account 1,855.52 Deposits, as per check book $37,562.10 Cash book items not deposited 200.00 Deposits not on cash book 577- 10 $37,762.10 $37,762.10 9. Reconciliation of Check Book and Pass Book Deposits Reconcile the total deposits according to the summary of the check book and the summary of the pass book, as follows: CHECK BOOK PASS BOOK ACCOUNT. ACCOUNT. Deposits $37,562.10 $36,582.46 Deposits made subsequent period 979-64 $37,562.10 $37,562.10 24 ACCOUNTING PRACTICE Reconciliation of Cash Receipts and Pass Book Deposits CASH BOOK PASS BOOK ACCOUNT. ACCOUNT. Receipts, as per cash book $35,329.48 Deposits, as per pass book $36,582.46 Receipts prior account 1,855.52 Deposited subsequent period 979-64 Deposits not on cash book 577* 10 Cash book items not deposited 200.00 $37,762.10 $37,762.10 If the cash book, check book and bank pass book accounts agree, it is hardly necessary to check the footings of the cash book and check books; nevertheless, it is always advisable to prove all the footings. Where all receipts were deposited, regard with suspicion every item entered in the cash book as received and not deposited in the bank, and regard with suspicion every deposit in the bank account which was not entered on the cash book. Report every case where money was drawn from the bank account and not entered on the cash book, no matter if it was deposited again later on. Report every note negotiated which was not entered on the cash book. See that all receipts were deposited for the amount entered on the cash book and be very careful regarding discounts. If discount was charged as an offset to the amount on the cash book, be sure the check deposited in the bank account was for the short amount entered as received on the cash book. When- verifying receipts for interest or other payments on mort- gages, notes, etc., examine the notes and check off the payments entered on the backs of the notes, to make sure the entries were prop- erly made on the cash book. HOW TO AUDIT THE CASH 25 10. Vouch Cash with Regular Vouchers Inquire who was authorized to approve vouchers for payments, before commencing to vouch the cash with the regular vouchers which are the receipts for the payments. Vouch the cash payments with the regular vouchers, making a small initial letter mark to indicate its character. Devote special attention to the items which you marked with a cross or which were not checked at all, when you were vouching the payments with the canceled checks. If there was a petty cash book, vouch the cash book payments with the petty cash book, making the check mark with a red pencil. Check the items on the cash book for receipts which were absorbed by the petty cash account. When vouching payments for notes, bonds and mortgages which were retired, be sure to see the original documents and if they were not canceled, confer with the proper officials and insist upon having them canceled ; if they decline to cancel them, report the facts of the case. When vouching payments for interest on notes, bonds, etc., be sure to ascertain whether the interest payments were properly made, and if there were coupons, see that they were canceled. When vouching payments for investments in stocks and bonds, require the broker's memorandum of the sale and see if the checks were made direct to the broker; examine the securities to see that they were registered in the name of the company. When vouching payments for purchases of realty, require the deed and at least see that this has the recording clerk's memorandum entered thereon ; note also date recorded. When vouching payments for certificates of deposit, notice par- ticularly the date, and regard suspiciously a change of date; see also that the certificate is registered in the name of the company. When vouching payments which require the approval of the Board of Directors, examine the minutes and see if the payments were properly authorized. When vouching payments for dividends, examine the minutes and see that they were properly authorized by the Board of Directors and that the dividends were equitable distributions to all the stockholders. 26 ACCOUNTING PRACTICE When vouching payments for salary of the officers, see that same were properly authorized by the Board of Directors. When vouching payments for office salaries or pay rolls, satisfy yourself that these are correct and report all matters which appear to be irregular or extraordinary. In all your work, use colored pencils and peculiar marks for specific purposes so that you can identify a check mark by referring to your working papers. Then, if you desire to know why you checked an item which is questioned, the check mark will indicate it. In making periodical audits, do not neglect to refer to the working papers of the prior audit and verify the former figures before com- mencing. Be deliberate in what you do, for accuracy is of vital importance and haste only means a waste of time and annoyance. It is the auditor's duty to ascertain whether all the cash, which should have been received, has been received and entered in proper form, also that a full and complete record has been made of each and every transaction. All the business should be spread on the books. If you make a careful examination of the cash first and satisfy your- self that it is correct or ascertain wherein it is not as it should be, you will find it much easier to proceed with the audit of the books; you will have more confidence in your work than if you defer the examination of the cash until you have wearied yourself with the rest of the audit. There are many unforeseen contingencies which might occur that would make it difficult for you to give the cash proper attention, if you defer the examination of same until the last. If you uncover what appears to be fraud or embezzlement, do not mention it until you are absolutely certain of your position. In the majority of cases it is advisable to wait until you have completed the audit of the cash before exposing the culprit. If, however, you are certain, and there is a possibility of the person escaping, it may be advisable to mention your suspicions, stating the facts without color- ing them. Qualify what you say with the statement that, as the work is incomplete, you are not yet in position to give definite infor- mation, but thought it advisable to call attention to the facts. If you are under authority, consult your superiors before making a verbal report regarding any matter. III. HOW TO ANALYZE AN ACCOUNT To analyze an account is to classify the elementary items of the account by grouping them under several headings, in order to obtain a more definite knowledge of its composition. This is one of the most important functions of an auditor, and an acquired habit of exercising great care in analyzing will be of ines- timable value to him. The ordinary account conveys little intelligence other than what the heading implies and very often that is misleading; therefore, in order to obtain definite knowledge of the composition of an account, it is necessary to examine it in detail. This can best be accomplished by commencing at the beginning and examining every item individ- ually, in the order of the entry, during which procedure it is a very simple matter to group the elementary items of the account in any manner desired, with the aid of a sheet of analysis paper. There are three methods of analyzing an account, and, while the results obtained will be the same, there are circumstances which make it more desirable to adopt one than another. The three methods are : The simple analysis. The comprehensive analysis. The analysis for a summary account. Any one of these three methods can be employed for any kind of work. The simple analysis is the method in which the items are dis- tributed in the columns on the analysis sheet, without providing any means of referring to where the items appear in the account or where the items originated. It is the method commonly used by auditors be- cause it requires less time than either of the other methods. The comprehensive analysis provides a record of where the items appear on the books of original entry and is very satisfactory 27 28 ACCOUNTING PRACTICE when giving testimony ; for the most essential thing then is to be able to refer your inquisitor to the place where the items appeared on the books of original entry. The analysis for a summary account shows a true copy of the account, given where the items appeared on the books of original entry and the analysis of each and every item of the account. It is the most satisfactory method for all purposes, but as it requires considerable time it is not usually employed. The copy of the ledger account shown is a case where each of the various items of the account specifies what the charge was made for, but in bookkeeping this is the exception rather than the rule, and if it is customary in the case in hand, it would not be advisable to accept it, for it is the duty of the auditor to refer to the original entry and verify each item. Never take anything for granted, and never accept any person's word when it is possible for you to ascertain the true nature of an item. In all cases where statements of any character affecting your work are made, always make a memorandum on your working papers of the statement, the date, and the name of the party making the statement, and as far as possible verify it. If the state- ment has any bearing on the matter to be reported, embody in your report the statement and the details relating to it. The Simple Analysis of an Account A copy of an account on page no of ledger No. 4 of the books of Jones and Kilby is submitted to illustrate the method of pro- ceeding. As the heading of the account implies, cartage, freight and expressage were charged to this account, and you find it necessary to know the total amount of each in order to make a satisfactory report. Preparing the Analysis Sheet Take a piece of analysis paper, and make a memorandum of the following at the top of the analysis sheet (see page 31). (i) The number and name of ledger and the page of the account. (2) The name of the company. (3) A comprehensive description of the analysis, and (4) The period covered by the analysis. HOW TO ANALYZE AN ACCOUNT 29 The following is an illustration of the headings for an analysis sheet, viz: "Ledger 4, Page no Jones and Kilby " Analysis of Express, Cartage and Freight Account " For the three months ending March 31st, 1890." In writing your description of the account for the heading of the analysis sheet, make an exact copy of the name of the account as it appears on the ledger. In this case, it is desirable to divide the items of the account into three different classes ; so you head a column " Expressage," another " Cartage," and another " Freight " as shown on the copy of the analysis. Deciding the Headings for the Columns When making the analysis, the items of the account can be dis- tributed on the analysis sheet under as many headings as the circum- stances warrant ; but when making up the report, it is not advisable to submit a long list of items. It conveys nothing to the average mind, and only confuses ; whereas the items can be grouped under a few selected headings which will give a definite idea of the composition of the account. For illustration we will assume that the bookkeeper simply made the entry " January 10, 1890 Cash 71 $14.20 " and made ditto marks for the other items which were posted to the account. In that case, he would have nothing to indicate the composition of the account and would not know what headings to use until he com- menced analyzing the account. The first item examined would be the $14.20; it having been posted from the cash book, reference to the cash book would show the expenditure had been made for cart- age, in which case he would head a column " Cartage '* and enter the $14.20 in it. Reference to the original entry for the next item of the account would reveal the item for freight "$115.70," and he would head a column " Freight " and enter the amount in the column, and so continue through the entire account. 30 ACCOUNTING PRACTICE Analyzing the Debit Side of an Account The first item of the account, Cartage $14.20, should be entered in the column headed " Cartage " on the analysis sheet. The next two items, Freight $115.70 and $94.20, should be entered in the column headed " Freight " on the analysis sheet. The next item. Cartage $11.23, should be entered in the column headed " Cartage " on the analysis sheet. The next item, Expressage $1.25, should be entered in the column headed " Expressage " on the analysis sheet. The next item, Cartage $115.80, should be entered in the column headed " Cartage " on the analysis sheet. The next two items, Expressage $2.25 and $1.40, should be en- tered in the column headed " Expressage " on the analysis sheet. The next item. Cartage $41.75, should be entered in tlie column headed " Cartage " on the analysis sheet. The next four items, Expressage $0.40, $1.50, $3.05, $1.15, should be entered in the column headed " Expressage " on the analysis sheet. The next two items, Cartage $10.73 ^^^^ $4-75 should be entered in the column headed " Cartage " on the analysis sheet. The next item. Freight $104.71, should be entered in the column headed " Freight " on the analysis sheet. The next and last item on the debit side of the account, Expressage $4.35 should be entered in the column headed " Expressage " on the analysis sheet. All the debit items of the account having been examined and dis- tributed on the analysis sheet, the actual analysis of the debit side of the account is completed. Foot the columns on the analysi-s sheet. Add the totals of the col- umns, and prove the result with the ledger account. Be absolutely cer- tain of the proof, and never leave it until you know it is correct. Make an analysis of the credit side of the account on the same plan as the debit. Deduct the total of the analysis of the credit side of the account from the total of the analysis of the debit side of the account. If the result is correct, make a summary, viz: HOW TO ANALYZE AN ACCOUNT 31 (Copy of Ledger Account) 110 Express, Cartage and Freight 1890 1890 Jan. 10 Cartage 71 14 20 Jan. 15 Freight Rebate 75 4 75 15 Freight 92 11570 23 Allowance Cartage 99 3 10 17 19 Cartage 73 75 9420 II 23 Mch. 31 Balance P. & L. 520 57 V 21 Expressage 77 1 25 \ 22 Cartage 109 115 80 \ 31 Expressage 79 2 25 \ Feb. I 2 3 4 5 9 20 Cartage Expressage Cartage 83 III 85 86 87 90 "5 I 41 I 3 I 10 40 75 40 50 05 15 73 \ Mch. 10 " 119 4 75 \ 15 Freight 95 104 71 \ 1 31 Expressage 97 4 528 35 42 528 c (Copy of Analysis) Ledger 4, page 110 Jones & Kilby Analysis of Express, Cartagje and Freight Account For the three months ending March 31, 1890 Expressage Cartage Freight I. 25 14. 20 115.70 2.2s 11.23 94.20 1 .40 115.80 104.71 .40 41.75 1.50 10.73 305 4-75 115 4-35 1535 198.46 314.61 3.10 4 75 1535 19536 309 86 Freight 195 36 Cartage 15 35 Expressage 520 57 Balance 32 ACCOUNTING PRACTICE Summary of the Analysis DEBITS. CREDITS. NET. Expressage $15.35 $ $i5-35 Cartage 198.46 3.10 195-36 Freight SH-^i 4-75 309.86 Totals $528.42 $7.85 $520.57 Always make a summary of the analysis in a prominent place, and do not crowd it on the analysis sheet. If the sheet is full, it is better to take another paper and make the summary clear and plain, in order to avoid uncertainty regarding the results, and endeavor to arrange the summary so that it may be comprehended at a glance. When the analysis of an account is completed, arrange the various papers relating to same in the manner that appeals to you as being most convenient for reference, always placing the summary on the top. Join the papers together with a pin or clip and file for future reference. Improper Entries When analyzing an account, examine each and every item individ- ually, refer to the original entry and, if not satisfactorily explained, trace the matter out until you are satisfied you have obtained all the information to be had. Never leave it until you have an intelligent understanding of the item in question. If the item is such that, in your judgment, it is not a proper charge to the account you are analyzing, make a memorandum of the item on your analysis sheet, and on another paper make an exact copy of the original entry, and all the entries relating to it. Be sure to note the book and folio of each item, and, while the matter is fresh in your mind, write a synopsis of the facts of the case. Adjustments Cash Book 2/751. R. Graham. Bay Gelding $100.00 Charged against Expense Account, should have been charged against "Horses and Trucks." Cash Book 3/57. Walker & Co. Light Wagon 300 . 00 Charged against Expense Account, should have been charged against "Horses and Trucks." Cash Book 3/191. Brooklyn Furniture Company Cabinet 322. 50 Charged against Expense Account, should have been charged against "Furniture and Fixtures." Total as per Summary of Analysis Sheets $722 . 50 HOW TO ANALYZE AN ACCOUNT 33 Headings for the Columns of the Analysis Sheet If you know the composition of an account, as shown on the illus- tration, (in which case you know the account was composed of ex- pressage, cartage and freight), you have a definite analysis in view and simply head the columns of the analysis sheet to meet your re- quirements; but if the account reveals nothing to guide you in choos- ing the headings for your analysis sheet, proceed with the work, and the headings will develop as the work progresses. By that I mean: If the first item is expressage, head a column " Expressage " ; if the next is freight, head a column " Freight," and so continue ; then if you are producing too many headings, group the unimportant head- ings. Be judicious in providing headings, for an extended analysis often deprives the result of its best value. No set rule can be given, there- fore you must consider the circumstances and be guided by your own judgment. Analyzing Extensive Accounts When an account is extensive, it is better to analyze it in sections and make a summary of the sections. Summary of Several Analysis Sheets Sheet No. Total Expenses Supplies Rent Travelinj? Expenses Adjust- ments I 2 3 2232.35 2445.20 2466.40 I171.20 1280.60 1371-50 471.15 504.10 217.24 150.00 210.00 150.00 340 . 00 150.50 405.16 100.00 300.00 322.50 714395 3823.30 1192.49 510.00 895.66 722.50 Salary and Wages In making an analysis of the salary and wages account, analyze the salaries first, putting pay-roll items in one column, and, after proving the analysis, proceed to analyze the pay-roll column accord- ing to departments, which, if correct, will agree with the column pro- vided for the pay-roll on the original analysis of the salary and wages account. 34 ACCOUNTING PRACTICE If it is possible to discriminate between productive and non-produc- tive labor, show the amount of each in the various departments. The Comprehensive Analysis of an Account for Legal Accounting In analyzing accounts preparatory to making a report which is likely to be examined in court, it is advisable to compile your analysis so that you know definitely the source of your information; this necessitates preparing the working papers so that reference can be made to the original entry of each item. If there is anything confus- ing when being cross-examined, it is the inability of the witness to state quickly the source of the information and the reasons for the deductions, consequently it is necessary to prepare the analysis sheets on a more elaborate plan than is generally adopted by auditors. The expense account conveys a fair idea of the average account. The first item of the account is $11.75 > the particulars entered by the bookkeeper being " Sundries " you find it necessary to refer to the folio given, of the cash book; upon examination, you find the desired page to have been in Cash book No. 3, and the details entered there ^' Expense Account, Brooklyn Gas Company, $11.75." This item is one of many for which you have seen the vouchers and, being an expendi- ture for light, it should be entered in the column provided for " Heat, Light and Power " in the manner shown on the analysis sheet. If, for any reason, the date is an important consideration, enter the date of each item on the analysis sheet in addition to the above. In making a comprehensive analysis of an account, give a synopsis of each item, and the book and folio of the original entry. Then, if you are called upon to state the composition of any part of the report, by referring to your working papers you can give a definite idea of what the item is for and refer your inquisitor to the original entry of each item. In the lower left hand corner of the analysis is a memorandum of the footings of the account, showing the amount deducted for prior account, which proves the analysis. Never neglect to make this a part of your analysis sheet, and never check it off as correct until you are absolutely certain that it is correct. Use the double check mark as a means of identifying the items which you used to check each other. HOW TO ANALYZE AN ACCOUNT 35 Expense Account J LO kJ 1890 ~~ ^^_ '~' June 5 Brought forward Sundries 119 907 II 60 75 7 102 500 00 9 121 "5 80 10 104 1500 00 " 162 210 50 15 171 lOI 50 17 104 91 17 21 "7 50 25 119 72 18 30 IIS 81 52 30 119 no 22 3752 24 Ledger 3, folio 183 Jones & Walker Co. Comprehensive Analysis of the Expense Account For the Month of June, 1890 Heat, Light & Power Rent Expenses ^^^Bklyn. GasCo. "75 ^^ Store Rent June 102 •' 500.00 7^ Moving 101 .50 ^^^N.Y.SteamCo. 121 II 5 . 80 ^^^ Warehouse Rent June, July, Aug. 1500.00 ^^ Stationery 91.17 ^^^EdisonElec.Co. 162 210.50 ^^5 Yard Rent June 117 •' 50.00 ^^ s Sundries 119 72.18 ^^ 5 Cons. Gas Co. IIS 81.52 ^^ Edison Elec. Co. 119 no. 22 529.79 2050.00 Expenses Rent Heat L. & P. 264.85 2050.00 529.79 Footings 3752.24 907.60 2844.64 2844.64 36 ACCOUNTING PRACTICE Be deliberate and positive in whatever you do. Use the double check mark only to indicate that the result checked is indisputably correct, and never use it excepting to check such results; then, if an error develops in the work, you will save yourself considerable work and annoyance. Adjustment Entries If you discover items which do not belong in the account, make up the summary of the analysis, showing first the balance as it would have been if the item in question had not been posted to the account, and then add to the correct balance each item to be eliminated, with full details, so that balance of the analysis sheet will agree with the balance of the ledger account as it stands on the book. Summary of Analysis of Traveling Expense Account (Showing item of salary which requires adjusting entry) Debits Credits Net TraveUng Salesmen Officers and Directors 11,140.00 570-15 5137 916. 50 5-25 10,223 .50 564.90 5137 Allowance to Buyers Jl. 5/175 R. B. Cliff Salary for Jun 11,761.52 e, 1890 921.75 10,839.77 100.00 Balance of Traveling Expense Acc( Dunt 10. 939-77 How to Analyze a Summary Account A very satisfactory way of analyzing a summary account is to take a piece of analysis paper and enter the items of the account in the first column, then head the next succeeding columns to meet the re- quirements. Examine each item individually and enter the analysis of it opposite the item by distributing the analysis in the succeeding columns on the same line the item appears. IV. A FINANCIAL AUDIT A financial audit is an audit made in the interest of a fiscal agent or of a prospective purchaser of the business. It seldom comprises a complete audit in detail, because the client, as a rule, prefers to waive the examination of the sales and purchase in detail, being satisfied to accept the sales and purchase records, pro- vided a superficial examination satisfies the auditor that they are legitimate. When the auditor enters upon such an audit, he should test the sales about the end of the period and, by checking important items with the shipping records, endeavor to ascertain whether the sales are legitimate. The footings and postings of the sales totals should be verified. The purchases should be examined to see if the invoices were entered promptly, and a falling off at the end of the period or neglect to enter invoices should be regarded suspiciously. The footings and postings of the totals of the purchases should be verified. Plan of Financial Audit 1. Audit the cash in detail. 2. Make trial balances for the beginning and end of the period examined. 3. Make a condensed trial balance for the end of the period. 4. Analyze the accounts of the condensed trial balance for the end of the period. 5. Make a complete copy of each and every real account. 6. Make a balance sheet for the end of the period and verify the items. 7. Make copies of the profit and loss account, surplus, re- serves, etc. 8. Make schedules of notes and accounts. 37 38 ACCOUNTING PRACTICE 9. Foot sales and purchases. 10. Make copies of all journal entries relating to capitalization, stocks, bonds, etc. 11. Summarize the books of original entry. 12. Make a superficial examination of all books not examined in detail. If possible, the postings of the cash to the sales and purchase ledgers should be checked, and the items in the credit journals should be verified and checlced. 1. Make a complete audit of the cash in detail as instructed in the previous chapters. Satisfy yourself that it is correct and in order, before proceeding with the audit. In some cases an examination of the cash is waived by the client. If that is the case, qualify your report to that effect. 2. Make a copy of the trial balances for the beginning and end of the period, and verify the balances by comparison with the ledger accounts. 3. Make a condensed trial balance for the end of the period. — A condensed trial balance is composed of only the general accounts. The equilibrium is established by adding to the debits the total of the personal account debits as accounts receivable, and adding to the credits the total of the personal account credits as accounts payable. (See Report Form No. 46.) When preparing a condensed trial balance, it is always advisable to discriminate between sales accounts, purchase accounts, accounts with individuals, accounts with stockholders, and accounts with em- ployees, by carrying the amount of each short. When preparing a condensed trial balance, it is essential that you copy the names of the accounts exactly as they appear on the books, and, if a name is ambiguous or uncertain, make suitable notes on your working papers to enlighten you regarding the true character of the account. 4. Analyze accounts composing the condensed trial balance to de- termine the composition of each and every account. A summary should be made of the analysis of each account and the balance should agree with the balance shown on the condensed trial balance. When analyzing the accounts of profit and loss, and all accounts A FINANCIAL AUDIT 39 associated with it, be very careful that you prepare the analysis sheets so that you have an intelligent understanding of each and every item. The object of this is to enable you to prepare statements setting forth the results of the business, to do which, you must be able to state (by referring to your working papers) what the items are and your reasons for setting up the statement as you do. Comparative Condensed Trial Balance Another method of analyzing the accounts is to make a compara- tive condensed trial balance of the trial balances for the beginning and end of the period ; then to extend the diflferences, debit and credit, in the next succeeding columns, and analyze the differences. The advantage of operating in this method is, that it shows clearly all changes which have occurred during the period examined. After making the comparative trial balance, showing the differ- ences in the accounts which are the results of the entries made during the period, analyze eadh account to determine the composition of the entries made during the period, and compile the summary of the analysis of each and every account, so that the result of the analysis of each account will agree with the difference shown on the compara- tive trial balance. Interest and Discount When analyzing interest and discount, if possible show the earn- ings and expenses, discriminating between interest on notes, loans, accounts, bonds, and discount on accounts receivable and payable. Dividends Examine carefully all dividends and ascertain whether they were properly authorized by the board of directors. Dividends should be paid only from earnings from operation and if not earned the fact should be reported. Dividends are paid from surplus and are proper charges reducing surplus account. 5. Make a copy of each and every real account. — Real accounts are plant and equipment, machinery, realty, stocks, bonds, etc. This is simply for reference and record. 40 ACCOUNTING PRACTICE 6. Make a balance sheet for the end of the period and verify the items. (a) When verifying the accounts receivable, check the trial bal- ance with the ledger accounts and make a schedule of them. In making a schedule of the accounts receivable, the items may be classi- fied as good, questionable and bad; or they may be classified as cur- rent accounts and past due accounts. When preparing a statement classifying the items as mentioned above, use extreme care so as to avoid criticism. If the accounts are to be certified, a copy of each account should be sent out with a return slip and a request that the account be com- pared and, if correct, advice to be forwarded on the return slip, in an inclosed stamped envelope bearing the address of the auditor. (b) When verifying hills receivable, insist upon seeing the notes. Examine the notes and make a complete schedule showing the details of the notes : maker, payee, endorsers, date executed, date due, where payable, amount, etc. If bills receivable, which were discounted, have not matured, a schedule should be made of them and the total set up as a contingent liability, when preparing the balance sheet. If notes are secured, make a careful record of the security, and require some evidence that the security is actually placed with the notes if they were negotiated. (c) When verifying stocks, insist upon seeing the certificates and make a schedule of them, showing the number of the certificates, the number of shares, the name of the company, the name in which they are registered, whether common or preferred, the total issue, whether full paid and nonassessable, and all important data. (d) When verifying bonds, insist upon seeing the securities, ex- amine them carefully, and make a schedule showing the numbers of the bonds, the name of the company, the character of the bonds, the denomination, the name in which they are registered (if coupon, make a record of the coupons attached), the amount pay- able on each coupon, the interest rate, the interest dates, the term of the bond, the date of maturity, and all information regarding them. (e) When verifying cash, count the cash on hand and request the firm to obtain a certificate from the bank stating the balance A FINANCIAL AUDIT 41 which is on hand at the time. If the cash is to be verified as at a past date, examine the cash carefully and ascertain just what became of the cash which was purported to be on hand at the time specified. (f) When verifying property, require the deeds of the property, and, if you do not look up the official records to see that the deeds are properly registered, state the fact in your report. Make a schedule of the properties, giving location, measurements, tax assessed valua- tions, book valuations, purchase valuations, and all information obtain- able which may be valuable or desirable. (g) When verifying unexpired insurance, make a schedule of the policies, giving a complete description of them, showing the name of the insurance company, the name of the party to whom the policy is issued, the property insured, the amount of the insurance, the rate, the premium, the term of the policy, the date the policy expires, and the address of the agent with whom the insurance was placed. Show the unexpired term and extend the unexpired portion of the premium out in the column to be added. (h) When verifying unearned discount on notes which were dis- counted, make a schedule of the bills payable, showing the date dis- counted, the face of the note, the payee, the name of the party who discounted the note, the amount of the discount, the life of the note, the unexpired period, and extend the unearned portion of the discount out in the column to be added. (i) When verifying inventories, make an examination of the in- ventories, check the footings and the extensions, make tests by com- paring the prices with the sales and purchase to determine whether they are excessive or conservative. It is always advisable to specify in the report that " no responsibility is assumed for quantities and prices," nevertheless no effort should be spared to verify same. (j) When verifying bills payable, examine the cash and ledgers to determine whether the value was actually absorbed by the business and that they are a true liability of the business. Make a list of the notes and, if secured, verify the collateral and make a careful memorandum of all the details of the collateral. (k) When verifying accounts payable, examine the ledgers and endeavor to ascertain whether all the accounts are entered in the books, by examining and comparing the statements which were re- 42 ACCOUNTING PRACTICE ceived. In some cases the creditors are requested to mail statements of their accounts and these are compared. A schedule should be made of them, showing the important detail. In examining the ac- counts, satisfy yourself that the items are a proper liability of the company for value absorbed by the business. Be very particular regarding accounts with officers, stockholders or interested parties; make true copies of these accounts. (1) When verifying loans, examine the original entry of each, and see that the value was actually absorbed by the business. Make a schedule of the loans, giving the names of the parties, the amount, the conditions of the loans, whether interest-bearing, and all other impor- tant information. (m) When verifying a surplus account, examine the books and satisfy yourself the surplus was earned; if it was not make a care- ful record of how the surplus was created. (n) When verifying capital stock, examine the entries for the original issue and see if the stock was issued for value, as dividends, water, or under what conditions it was issued. Make a complete rec- ord of the stock authorized and issued. (o) When verifying bonds, see that the bonds were issued origi- nally for cash ; if they were not get full details regarding the issue. Make a complete record of the bonds issued and the bonds author- ized, the term of the bonds, the date of maturity, the trustees, the character of the bonds, the interest dates, the denominations, and all information available. (p) When verifying certificates of indebtedness, examine carefully the original issue and make a schedule showing the character of the issue, the conditions, the names of the parties to whom they were issued, the amount, the denomination, and all available information regarding them. 7. Make a copy of the profit and loss accounts, surplus, reserves, etc.' — It is also advisable to make an exact copy of the closing entries, when the closings are made by journal entry. 8. Make schedules of the notes and accounts. — This is generally done when verifying the assets. When making the schedules, arrange them in the form they are to be set up in the report. This will obviate the necessity of copying the schedule when preparing the report. A FINANCIAL AUDIT 43 9. Foot the sales and purchases. — This should be done and, when doing it, make an examination of the sales. Make test examinations by verifying the sales with the record of shipments. If stock books are kept, verify the sales by the stock records. By testing is meant to pick out items here and there and verify them. 10. Make copies of all journal entries relating to capitalization, and examine the minutes to determine whether the entries are in accord with them. Copies should also be made of the minutes author- izing the entries. 11. Summarize the books of original entry. — It is not absolutely necessary to do this, but the author finds it very desirable. To sum- marise the books is to make a summary of each book, so that you have one entry for the whole period instead of an entry for each month. 12. Make a superficial examination of all the books not examined in detail. — When doing this examine the journal very carefully and scrutinize every entry. Make a copy of every entry which is question- able. In general, when making an audit to secure information for a prospective purchaser, if for the whole or a part interest in the com- pany, make a list of the parties interested in the business, and be very particular regarding the general conditions of the business. If certain interested parties, or associate companies, are the heaviest customers, give full details regarding their accounts and full infor- mation regarding their relations with the business. If interested par- ties are interested in such a way that the withdrawal of their sup- port would embarrass the business, be sure to get the full details and report them. V. THE FIRST AUDIT OF A NEW CORPORATION When making an audit of a new corporation or consolidation, a careful record should be made of the details of the organization and capitalization. Vendor's Agreements Examine the vendor's agreements and make a synopsis of them. Verify the payments made to vendors and make a summary showing when and how paid, whether in cash, stock or bonds, and the amount of each. Make a copy of the minutes of the meetings of directors, officers and stockholders, authorizing and approving the agreements. Promoter's and Preliminary Expenses Examine the entries for promoter's and preliminary expenses and make a summary of them. Inquire whether they have all been paid and, if not, obtain full details of the obligations. Capital Stock Make notes of the capital stock authorized, its character, the num- ber of shares, and the par value. What stock has been issued, and for what? Examine carefully all entries in the books for capital issued, and see whether the value was actually paid in. Bonds What bonds were authorized and issued, and for what issued? In preparing notes relating to bonds, make a record of the amount subscribed, the amount issued, the amount paid to date, the trustees, the date of execution and authorization, the denominations, the rate 44 FIRST AUDIT OF A NEW CORPORATION 45 of interest, the dates interest is payable, whether coupon or otherwise, the date of maturity and the character of the bonds. Make a careful copy of all minutes bearing on the issue and specify whether the minutes are of directors' meetings, executive board meetings, or stockholders' meetings, giving the date and place of meeting. If commission was paid or allowed for placing the stock and bonds, obtain full details regarding same, especially to whom paid, and how\ VI. MAKING ADJUSTMENTS TO A LEDGER Never make adjustments to a ledger during the progress of an audit. Make a schedule of all adjustments, debits and credits, on a sheet used only for that purpose. Copy the trial balance on a sheet of analysis paper with at least six columns. Head the first two columns for the debits and credits of the trial balance; head the next two columns for the adjustments, debits and credits; and head the next two columns for the final adjusted trial balance, debits and credits. For every lot of adjustments use a set of columns debit and credit. Post the adjustments to the sheet in the columns for the adjustments and foot the columns of adjustments to prove the postings. When the adjustments are posted to the sheet, compute the net result of each account and extend the adjusted balance in the columns for the adjusted trial balance. If the work has been done correctly the final trial balance will be correct; if not, the difference can be located by proving the work, sheet by sheet, or by accounts. Another method of making adjustments is to take a large sheet of analysis paper and open an account for each item of the trial balance on the analysis sheet. A twenty-four column analysis sheet with fifty lines will be sufficient for ninety-six accounts. After preparing the analysis sheet and posting the trial balance to the analysis sheet with red ink, prove the sheet by making footings of the columns and verifying the totals with the total of the trial balance. Post the adjustments to the accounts on the analysis sheet with black ink; foot the accounts on the analysis sheet and prove the balance. Make an adjusted trial balance from the analysis sheet. 46 \ MAKING ADJUSTMENTS TO A LEDGER 47 In making adjustments to a ledger (especially where there are a large number of adjustments), never commence by making indis- criminate changes in the accounts, but do it in a systematic manner. The above mentioned methods insure accuracy and provide a rec- ord of all adjustments made. VII. PREPARATION OF THE REPORT As the audit progresses, any matter which you deem it expedient to embody in your report should be written up immediately, while the matter is fresh in your mind. Use a separate piece of paper in doing this, exercising great care in the composition and arrange- ment of the facts. Confine yourself entirely to a statement of the facts; giving all the details, especially where the matter appears in the books. State the names of the books as they are commonly known and the folios upon which the matter appears. Be very careful in the preparation of such material and especially in quoting books and folios. Never, never make suppositions or take anything for granted. Do not venture opinions unless requested to do so and then men- tion the request. The business of an auditor is to state facts, and any evidence of prejudice or bias in the text of a report destroys the value of the report. If you prepare (on separate pieces of paper) the matters which you intend to embody in your report, as part of the text of the report, you can eliminate what your examination proves to be superfluous; and, when you have completed the audit and finally prepare the report, it will not be necessary to copy the matter (and thus risk errors in facts and figures). The preparation of the report will simply be a matter of arranging the sheets in the order you wish the facts to appear in the text of the report. Have the report copied from the working papers which were prepared when your mind was devoted exclusively to the matter. If you simply make notes during the progress of the audit, and the notes are brief, it may be difficult and sometimes impossible, when preparing your report, to compose the matter so as to express what you desire in the way you would report it; because your mind is not confined entirely to the consideration of the subject in question. If 48 \ PREPARATION OF THE REPORT 49 you prepare the notes in form suitable for embodying in the text of the report, when you prepare the final text for the report, your ener- gies will not be absorbed by the composition, but can be devoted to reviewing the subjects and thus secure better results. Then again, if you only make brief notes during the progress of the audit and return to the office to prepare the text of the report, you may find you have neglected to secure some data which is vitally important to your report. Therefore, prepare each matter in form suitable for embodying in the report and check up very carefully all the figures, folios, quota- tions, etc. Be absolutely certain that they are correct. Remember, your report is the most important feature and may be subjected to unfriendly examination. Do not generalize; be specific and definite in your report, con- fining yourself to facts. If you have nothing to report, do not compose a lot of elaborate matter simply to show oflf your composition. If you find nothing in particular that commends itself to you as worthy of consideration, do not attempt to create something. Never use invective language or names derogatory to the repu- tations of others; leave it to the proper authorities to convict; your business is to show facts and not pass judgment. The text of the report should deal first with the instructions and the period ; a copy of the instructions can be embodied in the text of the report when desirable. After this, mention the exhibits which are embodied or attached as part of the report, the list of exhibits being given in order suitable for reference, and the various matters relating to the exhibits submitted. Finally make general remarks relating to the audit and the certification. Report on a Trading Business The report on an audit of a trading business should embody the following exhibits : Balance Sheet for beginning of period. Balance Sheet for end of period. Surplus Account for the period (optional). Profit and Loss Account for the period, 50 ACCOUNTING PRACTICE Trading Account for the period, Schedule of Bills Payable for the end of the period, Schedule of Bills Receivable for the end of the period, Schedule of Accounts Payable for the end of the period, and Schedule of Accounts Receivable for the end of the period. If the report is a periodical audit, the balance sheet for the begin- ning of the period should be omitted. If the surplus account consists of only a few items, they can be shown on the balance sheet for the end of the period. Report on a Manufacturing Business The report on an audit of a manufacturing business should embody the following exhibits: Balance Sheet for the beginning of the period, Balance Sheet for the end of the period, Surplus Account for the period (optional), Profit and Loss Account for the period, Manufacturing Account for the period, Schedule of Bills Payable for the end of the period, Schedule of Bills Receivable for the end of the period, Schedule of Accounts Payable for the end of the period, and Schedule of Accounts Receivable for the end of the period. Report on a Manufacturing and Trading Business The report on an audit of a manufacturing and trading business should embody the following exhibits: Balance Sheet for the beginning of the period. Balance Sheet for the end of the period, Surplus Account for the period (optional), Profit and Loss Account for the period. Trading Account for the period. Manufacturing Account for the period. Schedule of Bills Payable for the end of the period, Schedule of Bills Receivable for the end of the period. Schedule of Accounts Payable for the end of the period, and Schedule of Accounts Receivable for the end of the period. PREPARATION OF THE REPORT ^j The manufacturing and trading accounts are combined when it is impractical or inconvenient to show them separately. Report on the Books of a Treasurer The report of an audit of the books of a Treasurer should embody the following exhibits: Balance Sheet for the beginning of the period, Balance Sheet for the end of the period, Statement of Receipts and Disbursements, Statement of Expense and Income, and Schedules of Securities and Properties. Report on an Operating Business The report of an audit of an operating business should embody the following exhibits: Balance Sheet for the beginning of the period, Balance Sheet for the end of the period, Surplus Account for the period (optional), Profit and Loss Account for the period, and Operating Account for the period. In General Make it a point to condense the main exhibits as much as possible, consistent with good form. If an item of the balance sheet is composed of one or two items of detail, it is hardly necessary to make a separate exhibit of one or two items. Nevertheless, it is always preferable to show separate exhibits, giving full detail of such items as bonds, stocks, realty, notes, accounts, loans, etc. When an audit covers several fiscal periods, the balance sheets of intermediate dates can be embodied in the report if desirable, and a comparative balance sheet can be shown. Never omit the main balance sheet which is being shown in detail and certified, because it is included in a comparative statement. The certified balance sheet must always be. set up alone, with appropriate schedules and supplementary statements must lead up to the certified balance sheet. 52 ACCOUNTING PRACTICE In preparing a report on several plants operated together, it is advisable to make a report on each individually and then make a consolidated report on the operation of all plants. If an audit is made of several years or fiscal years, show separate accounts for each year, excepting the surplus account which may be set up to cover the full period. If a balance sheet is shown for each intermediate period, the sur- plus account should be closed at the end of each period so that the surplus as at the date of each balance sheet will be evident. If desired, comparative statements can be set up in a report cover- ing several periods. Balance Sheet If an audit is made with a view to determining the condition of the business, for stockholders, or other parties interested as investors, the balance sheet should be set up to show first the fixed assets and the fixed liabilities, and after them the current assets and current liabilities. (See balance sheet Report Form No. 28.) If the audit is made for the parties operating the business with a view to determining the condition of the business from an operating standpoint, the current assets and current liabilities should be set up first, and the fixed assets and fixed liabilities under them. (See bal- ance sheet Report Form No. 20.) When setting up a balance sheet showing the current assets first, always arrange the items so that the quick assets will appear first, ^d set up the assets not so easily converted into cash according to degree of convertibility. Form of Report These exhibits we certify to be correct statements of the affairs of The Willis Hardware Company according to its books, accounts and vouchers. Form of Report These exhibits we certify to be correct in accordance with the books, accounts, and vouchers of The Willis Hardware Company at the close of business on December 31, 1905. PREPARATION OF THE REPORT 53 Form of Report We report that we have made an audit of the books, accounts, and vouchers of The Willis Hardware Company and we havt verified the balance sheet attached hereto; same is properly drawn up so as to exhibit a true statement of the condition of the business on December J 7, 1905 y as shown by the books of the company. VIII. LOCATING DIFFERENCES IN THE LEDGER I. To Analyze a Ledger To analyze a ledger means to go through a ledger and analyze the accounts according to the books of original entry. First check the balance for the beginning of the period to be analyzed, and mark the ledger totals which make the balances so that you can identify the totals at a glance. If an intermediate period is to be analyzed, check the balances for the end of the period and mark the ledger totals which make the bal- ance, so that they can be identified at a glance. This is done to avoid error and confusion, which would result from uncertainty regarding the postings which were made to the ledger during the period ex- amined. Before commencing to analyze the ledger, ascertain how many books were posted to the ledger, and make a summary of the total postings made from each book ; e.g. : General Journal $401,605.70 Purchase Journal 561,315.90 . Sales Books 906,713.22 Cash Receipts 874,392.87 Cash Payments 903,998.15 Total Debits and Credits $3,648,025.84 Take a piece of analysis paper with at least six columns and head the columns, as shown on Form 31, which provides a column for the total entries made to that side of the account and a column for the postings of each book of original entry. Commencing at the beginning of the ledger, take each account and analyze the debits according to the books of original entry. 54 LOCATING DIFFERENCES IN THE LEDGER 55 Referring to the copy of the account of F. W. Brown & Co., Form 32, you see the account commenced with a balance of $10,701.50. This is the balance marked as having been checked according to the trial balance for the beginning of the period, so is used only to prove the analysis. An analysis of the postings made to the debit side of the account reveals the following: Postings from the sales books $6649.91 Postings from the cash book 19.20 Postings from the journal 125.00 Total postings during period $6794.1 1 Balance of account at beginning 10,701.50 Total footing of debits $17,495.61 The total of the postings made to the debit side of the account during the period which is being analyzed was $6794.11. Refer to Form No. 31 ; the total $6794.11 is entered in the totals column No. i opposite the ledger folio 5 and the analysis of the total is entered as shown: $125.00, having been posted from the journal, should be entered in the column headed General Journal No. 2 ; $6649.91, having been posted from the sales book, should be entered in the column headed Sales Book No. 4; and $19.20, having been posted from the cash book for cash payments, should be entered in the column headed Payments No. 6. Analyze the debits of each account in the order the accounts appear in the ledger, and enter on the analysis sheet (Form 31) the result of the analysis. After all the accounts have been analyzed, the columns of the analysis sheet (Form 31) should be footed. If the work has been done correctly: The total of the totals column No. i will equal the total debits and credits as shown on the summary of the postings made from books of original entry. The total of the general journal column No. 2 should equal the total of the postings made from the journal or the total of the jour- nal footings. .56 ACCOUNTING PRACTICE The total of the purchase journal column No. 3 should equal the total of the postings made from the purchase journal. The total of the sales book column No. 4 should equal the total of the sales book. The total of the receipts column No. 5 should equal the total cash receipts. The total of the payments column No. 6 should equal the total cash payments. If the totals agree with the summary of the postings made from books of original entry, the work is correct and in order. After the debit side of the ledger has been analyzed and the totals verified, make a similar analysis of the credit side of the ledger. Any difference existing on the ledger must be limited to the post- ings of a specific book; and when it is determined which set of post- ings are wrong, check up the postings, unless the error appears to be peculiar, such as a transposition of figures. Transposition of Figures If the difference is a multiple of nine, it is generally a transposi- tion of figures. This is easily located because the multiple limits the error to certain items. A shortage of 45 must be a transposition of 50, 61, 'J2, 83, or 94. Naturally, you would glance over the book of original entry and check the postings of items having such units. A difference of nine is caused by transposing 10, 21, 32, 43, 54, 65, 76, 87, or 98. A difference of eighteen is caused by transposing 20, 31, 42, 53, 64, 75, 86, or 97. A difference of twenty-seven is caused by transposing 30, 41, 52, 63, 74, 85, or 96. A difference of thirty-six is caused by transposing 40, 51, 62, 73, 84, or 95. A difference of forty-five is caused by transposing 50, 61, 'J2, 83, or 94. A difference of fifty- four is caused by transposing 60, 71, 82, or 93. LOCATLNG DIFFERENCES IN THE LEDGER 5^ A diflference of sixty-three is caused by transposing 70, 81, or 92. A difference of seventy-two is caused by transposing 80 or 91. A difference of eighty-one is caused by transposing 90. 2. How to Section a Ledger To section a ledger is to divide the ledger into sections of one hundred pages and keep a control of the sections on separate sheets. To do this, first analyze the trial balance for the beginning of the period, to determine the amount of debits and credits of the trial balance in the various sections. All the postings of the books of original entry are then analyzed according to the sections of the ledger. The results on the analysis sheets are posted to control sheets and the net results are determined. After this is done the trial bal- ance for the end of the period is analyzed and the results on the control sheets are compared with the analysis. Outline of Method (i) Analyze the trial balance for the beginning of the period, to determine the amount of ledger balance in each section. (2) Make a control sheet for debits and one for credits (see Forms 30 A and B). (3) Post the analysis of the trial balance for the beginning of the period to the control sheet. (4) Analyze the debits and credits of the postings from the books of original entry, and make a summary of the debits and credits of each book on summary sheets. (5) Post the results of the summary sheets for books of original entry to the control sheets. (6) Carry the totals of the debit sheet to the credit sheet, enter- ing the debit results under the credit totals; and carry the totals of the credit sheet to the debit sheet, entering the credit results under the debit totals. Where the upper amount is greater than the lower, carry the diflference down. The total of the diflferences carried down on the debit sheet should equal the total of the diflference carried down on the credit sheet. 6 58 ACCOUNTING PRACTICE Details of Method (i) The most practical method of analyzing the trial balance is simply to foot the debits and credits of each section and make a sum- mary of the results. If correct, the total debits will equal the total debits of the trial balance and the total credits will equal the total credits of the trial balance. (2) Study the control sheets, Forms 30 A and B. Accustom your- self to the numbers o, i, 2, 3, 4, 5, 6, etc., and so divide the sections that the section numbers will be evident when you see the folio of the ledger. All folios under 100 will be classed number o, and folios commencing with the hundred will belong to the section indicated by the hundred expressed in the folio number. If the ledger has 500 pages, divide it into 5 sections; if it has 1500 pages divide it into 15 sections, and always include the last page with the previous section, when this page is the beginning of a new hundred. (3) Post the analysis of the trial balance for the beginning of the period to the control sheet. Forms 30 A and B. Do not change the analysis after you prove the analysis sheet; enter the exact figures on the debit control sheet, so that the total footed across the sheet will equal the total of the footing of the debits on the trial balance. Always prove the figures after making postings to the control sheet. (4) Analyze the postings of the books of original entry ; for illus- tration take the journal. Commence at the beginning of the journal entries for the period, and take off the ledger folios for as many pages as practical. To take off the ledger folios, an ordinary plain sheet can be used. Along the top of the sheet run the numbers, rep- resenting the sections of the ledger o, i, 2, 3, 4, 5, etc. Take off the folios for the debits (only) and enter the folios on the sheet under the number representing the section to which they belong. After tak- ing off all debit folios, take another sheet of paper and make a proof sheet by entering the folios on the sheet in their numerical order, leaving a space between the folios of the sections. When preparing the proof sheets, make a memorandum on the proof sheet of the footings of the book of original entry up to date and deduct the prior footing. The difference will be the part of the LOCATING DIFFERENCES IN THE LEDGER 59 book you intend to prove, and the total footing of the summary sheet for that book will always agree with the proof sheet. After preparing this proof sheet, turn to the first ledger folio appearing on the sheet and take from the ledger the total of the post- ings to that page which were made from that part of the journal. Turn to each successive ledger folio appearing on the sheet, and when complete the total of the sheet will equal the journal postings. Next prepare a sheet for the credits and prove the credit postings made from the journal. Analyze the sheets, and make a summary of all the journal debit sheets on a form like No. 30 and a summary of all the credits sheets. Prove the posting of every book of original entry in this way. When taking the items from the ledger, make a peculiar mark opposite the items to indicate the proof has been taken. A common method of marking is to make a heavy dot at the junction of the cross line and the unit line farthest from the item. When this method is operated by an auditor in charge of an office, the auditor keeps the control sheets and each bookkeeper takes off the proof sheets after posting. The proof sheets are delivered to the auditor, who analyzes the sheets by simply footing the sections with red ink. The red ink footings are proved by comparing the total with the totals on the proof sheet. The auditor foots the control sheets and tells the bookkeepers where the difference lies (about), without looking at the ledger. After all the books have been posted to the ledger and the proof sheets taken off, the summary sheets for each book should equal the total postings from the book. That is, the total of the summary sheet for the cash receipts should equal the cash receipts as shown by the cash book. The same applies to the cash payments and every book. (5) The summary sheets for books of original entry completed, post the results to the control sheets, as shown on Forms 30 A and B. After the proof figures on the control sheets have been obtained, the trial balance for end of the period can be footed according to sections and any difference confined to sections. If care is exercised in the various operations, it should not take long to locate the trouble. Transfers made without journal entry must be considered, and, 6o ACCOUNTING PRACTICE where the system is operated, no transfers should be made without using the journal. This method has been operated by some of the largest companies in New York for over twenty years, and the taking of the trial bal- ance is only to verify the proof sheets (control sheets). 3. How to Block a Ledger To block a ledger is to take from the ledger the postings of each book of original entry separately, and verify the postings by com- parison with the summary of the postings which is compiled from the books of original entry. To illustrate: Commence at the first page of the ledger and go through the ledger, page by page, taking off the journal debits for the period in question. After going through the entire ledger, foot the sheet containing the journal debits and compare the result with the total postings made from the journal. Next go through the ledger and take off the ledger all the journal credits which are footed and verified. This proves that the postings are correct and provides data necessary to prove the ledger as a whole. Make a summary of the monthly totals of each book of original entry for the period to be examined. To do this it is necessary to foot the journal. After making a summary of each book, make a summary of all the books, compiling it as follows: General Journal $194,257.41 Purchase Journal 947,608.22 Purchase Credit Journal 9,608.75 Sales Book 1,540,602.89 Sales Credit Journal 3i»7i5-63 Cash Receipts 1,910,622.70 Cash Payments 1,897,322.50 The total amount of debit or credit entries. .$6,531,738.10 Always commence with the journal ; check out the journal debits and credits, making your check marks on the ledger with blue pencil. It is always advisable to check the journal, because the number LOCATING DIFFERENCES IN THE LEDGER 6i of entries is generally small and checking identifies the journal items positively, obviating the confusion which would result from uncer- tainty regarding them. Consequently, if the entries are distinct, it is unnecessary to check the journal. After all the items from the journal have been checked off on the ledger, go through the ledger, page by page, commencing at the first page, and take off the total journal debits on each page, entering on a sheet of paper the ledger folio and the total amount of the jour- nal debits posted on the page. This will be a very easy matter, as the journal items will be con- spicuous and easily distinguished by the blue check marks which you have made. When the journal debits have been taken off the entire ledger, the sheet should be footed and, if the total amount of the sheet agrees with the summary of the footings of the journal, it is correct. If corrections are necessary, do not add or subtract from the total, but correct the item opposite the folio. Commencing at the first page of the ledger, go through the ledger again, page after page, and take off the total journal credits on each page, entering on another sheet the ledger folio and the total amount of the journal credits posted on each page, in the same manner that the debits were taken off. Foot the sheet containing the credits and see that it agrees with the total of the debits. If the cash postings to the ledger have been made in a manner which makes it a simple matter to discriminate between the cash and other items, it should not be necessary to check out the cash; but if not, check out the cash postings, making your check marks on the ledger with a red lead pencil. The red pencil will identify the items, so that they can be distinguished from the other postings. Commencing at the first page of the ledger, go through the ledger once more, page after page, and take off the total debits for cash pay- ments on each page, entering on a sheet, each ledger folio and the total amount of the items posted on the folio. Foot the sheet con- taining the cash payments taken from the ledger and, if it is correct, it will agree with the cash payments on the summary. Commencing at the first page of the ledger, go through the ledger again and take off the credits for cash receipts; foot the sheet and compare the total with the total cash receipts. 62 ACCOUNTING PRACTICE Commencing at the first page of the ledger, go through the ledger again and take off the debits posted from the purchase credit jour- nal; foot the sheet and verify the total. Next, take off the ledger the credits from the purchase journal. Next, take off the ledger the credits posted from the sales credit journal. Next, take off the ledger the debits posted from the sales book. In all cases, carefully check the postings to the ledger, of the totals or analysis of the cash receipts and payments, purchases, pur- chase credits, sales, and sales credits, and, after the work has been completed, if the equilibrium of the ledger has not been established, the difficulty can be located by bringing the figures together in the following manner: Take the trial balance for the beginning of the period; see that the folios of the ledger are in their consecutive order; foot the debit balances and the credit balances taken from pages i to 99 of the ledger; foot the debit balances and credit balances taken from pages 100 to 199; do the same with the balances taken from pages 200 to 299 ; 300 to 399 ; 400 to 499 ; 500 to 599 ; 600 to 699 ; and so on through the entire ledger. For illustration we will presume that the ledger had 500 pages (see Form 30). DEBITS. CREDITS. Pages I to 99 $599,601.22 $1,000,000.00 " 100 to 199 710,820.91 10,700.60 " 200 to 299 47-31 150,401.70 " 300 to 399 87.20 210,871.16 " 400 to 500 90,601.15 29,184.33 Totals as per trial balance $1,401,157.79 $1,401,157.79 The ledger is now divided into sections of one hundred pages to each section (can be any quantity desired) and the work is analyzed in accordance with the sections. Prepare a sheet as illustrated on Form 30 A for debits and also prepare a sheet Form 30 B for credits. Enter on the Form 30 A, in the column headed " i to 99," the total amount of the debit balances taken from pages i to 99 of the LOCATING DIFFERENCES IN THE LEDGER 63 ledger; in the column headed " icx) to 199," enter the total of the debit balances taken from pages 100 to 199; in the column headed ** 200 to 299," enter the total of the debit balances taken from pages 200 to 299 ; in the column headed " 300 to 399," enter the total of the debit balances taken from pages 300 to 399 ; and in the column headed " 400 to 500," enter the total of the debit balances taken from pages 400 to 500. When footed across the sheet Form 30 A, the total must be the footing of the trial balance. Enter the credits sum- marized on Form 30 B, in the same way the debits were entered on Form 30 A. Foot the various sheets for debits and credits and enter the debits on the summary (Form 30 A) and credits on the summary (Form 30 B). Foot the columns of 30 A and 30 B, and carry the total foot- ings of Form 30 A to Form 30 B and the total footings of Form 30 B to Form 30 A. On both Forms 30 A and 30 B, where the sheet footings are greater than the footings carried from the other sheet, carry down the difference, and the footings of the differences on Forms 30 A and 30 B will agree. The trial balance for the end of the period can now be analyzed according to sections and, as the footings of each section of the trial balance, are made, they can be compared with the results shown on Forms 30 A and 30 B. 4. When to Block a Ledger The writer has been very successful in locating balances and as a rule has been able to say about when he would be finished ; because he never goes to work blindly, commencing to check before thinking out his plans. Sit down and think it over carefully ; for in most cases the book- keepers and auditors of the company have exhausted every available means before engaging an auditor. Learn just what has been done, then look over the books. In a case where the majority of the postings are of one class — such as in a newspaper advertising business, where there are a multi- plicity of entries charging the accounts and only a very few entries for cash, allowances and journal sundries — to check the charges like 64 ACCOUNTING PRACTICE advertising would require almost the same time taken to make the postings, whereas to block off the charges for advertising would take a very little time. If the block for a year does not agree, the totals taken from the ledger can be analyzed according to months and the difference confined to one month. If it agreed, the other postings can be proved in a short time and the work completed. In many cases where it was impossible to check out the books, this plan has been operated with success. IX. PLANNING A GENERAL SYSTEM OF BOOKS Examine the books which are in use and make a description of the books, using a separate piece of paper for each book; pin these together and use them for reference and also make notes relating to each book on the memorandum of that book. Take off a trial balance showing the accounts on the ledger, and make a condensed statement of profit and loss. (Report Forms I. to 9.) Care should be exercised in the preparation of this statement, for the object of the statement is to determine the most satisfactory man- ner of assembling the accounts. Make a condensed trial balance of the business (see Report Form No. 46) ; this will show the features of the business which have been made prominent and the analysis of the various accounts. From this you should be able to design a monthly statement (Form No. 2y). This is what the books are to work up to and should give the desired information. Always endeavor first to give the client the information he needs, in the simplest statement possible. Let your ideas be elastic and never force them upon a client. If you think you have a method which would prove valuable to the client, explain it to him in detail, giving the reasons for your deductions; if not acceptable, get an idea of what he does want and show enthusiasm in working up his ideas. Do not try to formulate a plan for the complete system at once; it only confuses the mind and exhausts your vitality. Take each division of the work separately , and give it your indi- vidual attention. Formulate the plan of operating that particular branch of work 65 66 ACCOUNTING PRACTICE and, when you are satisfied you have it right, make up your forms in rough and write a careful description of your plan of operating same. Make an entry which will incorporate the results in the general books, and study it carefully before considering the next division of the business. Take up each division of the business and consider it carefully. After you have done so and have an entry for each book, review the matter and see if you have overlooked any class of entries. Formulate a plan of operating the system as a whole when you are satisfied that you have covered the detail thoroughly. The best method of satisfying yourself is to rewrite the books for a month or so, not every entry but every style of entry appear- ing on the books. Preserve these notes carefully, for your mind will require refreshing when installing the books. To Illustrate: A Trading Business In a trading business you have buying and selling. By preparing a condensed statement of profit and loss (Report Form No. 3), and a condensed trial balance (Form 46), you get an idea of the features which were considered prominent by the people who developed the business. Sales Examine the sales carefully and see if the method of handling the sales is open to improvement. Do not install special column bound books where a number of clerks are posting from the same book. It causes confusion, because only one person can use the book at a time. Always consider whether the book can be conveniently operated. The sales accounts should always be entered in a special ledger and a control account for them kept in the general or private ledger. After deciding the most desirable way of handling the sales, if you plan a new form, make a rough outline, and an entry covering the sales for a month. See sales journal Form No. 25 ; the following entry will incor- porate the results of that form in the general books: PLANNING A GENERAL SYSTEM OF BOOKS 67 Sales Journal Debits : Cash Sales Account $1 19.70 Sales Ledger Account 37,601.72 Purchase Ledger Account 401.15 Credit: To Sales Account $38,122.57 Debit : Cost of Sales Account 24,619.22 Credit: To Merchandise Account $24,619.22 Consider very carefully before making radical changes. It simplifies matters to have all work of a similar character com- piled in a like manner. Endeavor to arrange the books so that one entry will incorporate the results on the general books. Purchases Study the expense and merchandise purchase accounts on the ledger, and see where the entries originated. If a large number of entries of a certain class must originate in the cash book, note the fact on the memorandum for the cash book. Decide whether it is advisable to keep a voucher register (Form '32) or a purchase ledger. If the purchases are made of certain creditors, the purchase ledger should be kept; but if there are an extraordinary number of parties from whom purchases are made, the voucher register should be given the preference. Examine the methods which were in vogue for compiling the pur- chases, merchandise and expense. ( 1 ) Would it be advantageous to make a special column purchase journal ? (2) Would it be desirable to have a purchase journal for ex- penses and a purchase journal for merchandise? (3) Is it necessary to keep a purchase ledger? The bulk of the merchandise purchases in many cases is purchased of such a large number of parties, that it would be a waste of time making an account for each purchase. 68 ACCOUNTING PRACTICE (4) If not necessary to keep a purchase ledger, how should the purchases be kept? (5) Would a voucher system be desirable? (6) Would a vertical file be desirable? (See improved voucher system.) After deciding upon the book to be used for the purchases, make a rough draft and an entry covering the purchases for a month. See Purchase Journal, Form No. 24 ; the following entry will in- corporate the results of that form in the general books : Purchase Journal Debits : Expense Account $371.60 Merchandise 47,691.77 Freight and Cartage 139-87 Advertising 300.00 Repairs and Renewals... 194.16 Selling Expenses 1,122.57 Provisional Account 301 -70 Credits : To Sales Ledger $317.22 To Purchase Ledger .... 49,804.45 $50,121.67 $50,121.67 See also Voucher Register Form No. 32 ; the following entry will incorporate the results of that form in the general books : Voucher Register Debits : Expense Account $371.60 Merchandise 49,691.77 Freight and Cartage 139-87 Advertising 300.00 Repairs and Renewals 194.16 Selling Expenses 1,122.57 Provisional Account 301.70 Credit : To Accounts Payable $50,121.67 PLANNING A GENERAL SYSTEM OF BOOKS 69 Cash Receipts Study the cash receipts and ascertain their sources. Decide whether it would be advisable to inaugurate a system like Form 26, entering nothing but checks on the cash book, or a system like Form 29, entering cash and checks on the cash book. There are many reasons why the system of entering nothing but checks on the cash book is the better one: It is more susceptible to an audit ; it makes the entries and payments final ; it is easy to prove and locate differences. There are many other reasons too numerous to mention. Petty Cash Fund This plan of operating the petty cash account was devised by the author and is being universally adopted, because it is simple and makes it possible to enter nothing but checks in the cash book. All receipts are deposited and never confused with the petty cash fund. The amount received is set aside until deposited. An even sum, say $500, sufficient to meet the requirements of the business, is set aside as a fund from which all petty items are paid and all matters not conveniently paid by check. Each payment is entered in a book or on an envelope. At any time it is desirable to balance the cash, the total payments should be counted as so much cash and the balance must equal $500. This enables the bookkeeper to square up his cash quickly and turn it over to another as often as desired. When it becomes necessary or desirable to reimburse the fund, the account is closed and a check is drawn for the amount which was paid from the fund, the original record of the payments being sub- mitted as a voucher for the check and the details of the check noted on the record. If an envelope is used, the size should be such, that it can be conveniently filed with the voucher for the check. The check is entered on the cash book like all other checks, and the record is final and complete. Nothing but checks are entered on the cash book; consequently the deposits on the cash book should agree with the check book account and the cash' payments should equal the checks. 70 ACCOUNTING PRACTICE See Cash Receipts Form No. 23; the following entry will incor- porate the results of that form in the general books: Cash Receipts Debit : Discount $1 icx^7 Bank Account 52,133.31 Credits: To Sales Ledger Account $21,777.86 " Purchase Ledger Account 41-32 " Bills Payable Account 30,0(X).oo " Cash Sales 1 19.70 " Exchange 305.00 $52,243.88 $52,243.88 Discount Column This column is provided when discount is allowed in settlements. If there are also petty allowances for freight, etc., columns can be provided if desired. Bank Column This column is for the deposits and should agree with the pass- book account. Sales Ledger Column This column is for all items posted to the credit of sales ledger accounts. The total amount credited to the sales ledger should be entered in this column. Purchase Ledger Column This column is for credits posted to the purchase ledger for cash received. The total amount credited in the purchase ledger should be entered in this column. Bills Payable and all such items, occurring only occasionally, are entered in the private ledger column and posted direct to it. Cash Sales Where cash sales are made, it is very convenient to provide a column for same on the cash book. If this is done, a column should PLANNING A GENERAL SYSTEM OF BOOKS 71 also be provided in the sales journal or some method devised for proving the cash sales. Exchange An exchange column should be provided on both sides of the cash book and all items of exchange entered in it. This is necessary to make the cash and check books agree in totals. The following entry will incorporate the results of Form 26 in the general books: Cash Payments Debits: Purchase Ledger Account. . . .$11,701.50 Sales Ledger Account io-75 Bills Payable 10,000.00 Postage 50.00 Expense 71-92 Salary 475-00 Wages 392.00 Merchandise 94-73 Freight and Cartage 71.62 Commission 95-00 Interest 1 17.40 Exchange 305.00 Credits : To Discount $1 12.31 To Bank 23,272.61 $23,384.92 $23,384.92 Cash Payables To obviate the necessity of an extended analysis of the cash book payments, the following method was devised by the author: Provide a column beside the purchase ledger column on the pur- chase journal (see Form 28), and also on the cash book (see Form 29). All items it is desirable to pay in cash without opening an account on the purchase or sales ledger, can be entered in the pur- chase journal, just as any other invoice and the payment made, charg- ing the item in the cash book in the column for Cash Payables. 72 ACCOUNTING PRACTICE The Cash Payables on the purchase journal will offset the Cash Payables on the cash book. Summing Up After you have drawn up your forms and made your entries, list the entries on a sheet of journal paper and foot them. Take a sheet of analysis paper and enter the condensed trial bal- ance of the business (rearranged to meet your scheme). Post to the sheet the entries for the forms you have made and extend the results just as designed on Form 27. In posting to the sheet, it is desirable to have some character represent each of the entries so that they can be distinguished at a glance. To illustrate: Have a square at the entry for sales, a diamond at the entry for cash receipts, etc. If it works out satisfactorily, it is safe to go ahead and have the forms made. Monthly Entries The best and cleanest method of making the monthly entries is to spread in the journal the entries for each book, so that one page (or two if necessary) will contain the entire results of the business. This has been accomplished in some of the largest concerns. The total of the journal footings will equal the totals in the columns for " Entries for the Month " on Form No. 27. If an error occurs, it can be located quickly by checking the state- ment with the journal. This is accomplished with ease by having a printed form for each book, so that the footings can be entered without writing the names of the accounts. Daily Balance Sheet This is virtually the method employed to secure a daily balance sheet; the results of each book are so arranged and reported, the total for each day being posted to a statement (Form 27). The total debits and credits of the entries for the day (month or week) should equal, and the amount for each account should be added to the results of the previous day and extended into the columns for trial balance up to date. PLANNING A GENERAL SYSTEM OF BOOKS 73 The daily results are sometimes more conveniently reported for the month up to date, in which case the results reported are added to the results for the closing of the previous month. Opening a New Ledger Before opening a new ledger, design the periodical statement for the business. (See Form No. 27.) Make a copy of the periodical statement and note, opposite the name of each account on the statement, the number of ledger pages it is expedient to assign to each account; add the total of the pages and see if the total exceeds the number of pages of the new ledger. After you have reduced or increased the pages assigned to each account to the required capacity of the ledger, enter the folio of each account opposite the name of the account on the statement. Then commence and open each account on the ledger according to the design on the statement. General Ledger Index To provide a convenient index for the general ledger, make a list of the accounts and folios on a sheet of paper a little shorter than the ledger. Leave a margin of about four inches on the left hand side and paste the sheet on the last fly leaf of the ledger, so that when the list is turned outward, the account names and folios will be in evidence. When not in use, turn the list inward so it will not show or be in the way. Provisional Account In every business there are certain items of expense such as in- surance, taxes, etc., which should be distributed over an extended period. It has been the custom to carry these items in such accounts as Unexpired Insurance, Unexpired Taxes, etc. ; but this requires con- siderable labor each month in order to determine accurately the amount which should be charged against that particular month. To obviate this repetition, necessitated each month, a book was devised by the author which is called the Provisional Account Book. The book is a sub-analysis with fourteen columns (see Form No. 22), the first column being for the amount, the next twelve col- 74 ACCOUNTING PRACTICE umns being for the twelve months of the year, and the last column for the proportion of the expense expiring the following year. A column is provided on the purchase journal for provisional account (see Forms Nos. 24 and 29). Each and every item charged in this column is entered in the Provisional Account Book, the total amount being entered in the first column, and the amount chargeable to the current year distributed in the columns for the months to which the several amounts apply. The amount which will be unex- pired at the end of the fiscal year is entered in the last column. Several sheets (Form No. 22) can be used to further analyze this expense,' by discriminating between taxes, insurance, etc., by using a sheet for each, with only one provisional account in the ledger. Improved Voucher System If the purchases are made from so many different parties that it is unadvisable to keep a purchase ledger account of each, the fol- lowing plan will appeal to many: Provide a vertical file for invoices and divide it into two divisions : one for unpaid and one for paid bills. Enter the invoices in the voucher register Form No. 32. All invoices are registered in the order of entry, the number being entered on the invoice. File the bills alphabetically in the division of the vertical file for unpaid bills, using a bellows file (monthly) for large accounts, and allow them to remain there until paid. Parties requiring invoices must never take the bills from the files without leaving a receipt. In fact, one person should be responsible for the file and no others should have access to it. When the bills are paid, they are removed from the division for unpaid bills, stamped paid, voucher register record made and the bills put in the division for paid bills. Voucher Register Record When the bills are paid, the payment should be entered opposite the item in the voucher register in the column provided for the cur- rent month. PLANNING A GENERAL SYSTEM OF BOOKS 75 The voucher register has three cohimns for the memorandum of amount of the payment. These are for the current month of entry and the next succeeding month (assuming all bills are settled in two months). If a bill is paid the same month as entered in the voucher register, the payment is entered in the column for current month. When balancing the books, a list should be made on the adding machine of the items unpaid and the total compared with the control account. If one or two items extend beyond the two months, they should be carried forward in red ink on the voucher register. The total payments for any month should agree with the total of the columns on the voucher register for payments made during that month. Branch Office Accounts The branch office books should be as simple as possible ; the books of original entry should be made in manifold and the originals sent to the home office. The branch office books should have columns for the home office and the purchase journal should have a column for the bills to be settled by the home office. Each branch office should have a fund from which all expendi- tures should be made by check only, and the branch offices should be reimbursed for the actual expenditures as approved by the home office. A monthly statement should be provided for each office similar to Form No. 27; in addition a summary of income and expenses, showing the results for the month, same month last year, for the year to date and same period last year; a summary of the sales, showing the inventory at the first of the month, plus the purchases, less the inventory at the end of the month, which makes the cost of the sales. In connection with this report should be a statement of the sales, deducting returns and allowances and showing the net sales. From the net sales should be deducted the cost of sales, showing the gross profits on each line of merchandise, according to the anal- ysis in common use. 76 ACCOUNTING PRACTICE A control plant ledger should be kept at the home office. This ledger should be a duplicate of the ledgers at the plants. A trial balance from the plant ledger should give a balance sheet in total and detail of all the plants. The final report should be the balance sheet of the entire busi- ness as one, and this should be supported by the balance sheet show- ing the detail of each item of the first balance sheet. By detail is meant how much is at each plant. This plan can be operated so that no ledgers are kept at the plants, by having the manifold sheets forwarded to the home office for entry. It is no more work for the home office and takes the results and the work from the branch offices. X. GENERAL NOTES AND SUGGESTIONS 1. Amplified Trial Balance In a case where it is necessary to eliminate entries which were superfluous or tended to confuse, it is very satisfactory to make an amplified trial balance, and after determining the entries to be elimi- nated, to deduct such from the accounts and thus produce the results which would have appeared had the books been written up correctly in the first place. An amplified trial balance differs from an ordinary trial balance in that, instead of taking off the balance of the account, the total debits and total credits are taken oflF. The difference between the debits and credits of each account (as taken oflf for the amplified trial balance) should equal the balance of the account as per the regular trial balance. 2. Account Current An account current is an account between two offices, and, all entries made by each being considered, the debit balance on the books of one office should equal the credit balance on the books of the other office. If a request is made by one office to another for an account cur- rent, it should be furnished with a detailed statement of its account as it stands on the books, commencing with balance the last time an account current was rendered, showing all the debit items and credit items entered in the account and the balance at the end. 3. Bills Receivable Discounted The auditor should make a record of all discounts when auditing and if not settled as at the date the assets are verified, the items should be scheduled and set up in the report as a contingent asset and a contingent liability. 77 yS ACCOUNTING PRACTICE 4. Accommodation Paper If the business is in any way liable as indorser or maker of accommodation paper, the notes should be considered a contingent liability when preparing a balance sheet. 5. An Exhibit An exhibit is something displayed or presented to view. In sub- mitting statements, schedules, etc., as part of a report, it is proper to characterize all as exhibits, inasmuch as all schedules and statements are exhibits, but all exhibits are not statements or schedules. Anything submitted with a report or supplementary to a report is an exhibit, and should be so characterized, whether it is a photo- graph, plan, design, letter, or copy of any instrument. 6. A Statement In accounting, a statement is an arrangement of figures, compiled to show certain results. Although a schedule is virtually a statement, a distinction is evident and, inasmuch as each sets forth distinctly its character, accountants are recommended to discriminate in using the words by adapting the special significance of the words. 7. A Schedule In accounting, a schedule is a list of items or an inventory. Al- though many accountants to-day interpret the meaning of schedule to be a statement, the old professional accountants interpreted the meaning of the word to apply only to a list. If the list was converted into a statement at the end, it was characterized as a statement. 8. Unexpired Insurance Unexpired insurance is an asset and should be considered in pre- paring a statement of assets and liabilities. To determine the amount of unexpired insurance, make a schedule of the insurance policies showing the number of the policy, name of insurer, insured, prop- erty, term, premium, and extend the unexpired portion of the pre- mium. The total of the unexpired portions of the premiums is the amount which should be set up as unexpired insurance. GENERAL NOTES AND SUGGESTIONS 79 When preparing a statement of the vahie of unexpired insurance for a continuing company, distribute the premium equally over the months of the term of the policies; but when the statement of the value of unexpired insurance is for a company which has ordered the cancellation of all policies, estimate the value of the unexpired portion of the premium on the basis of its rebate value. Unexpired insurance should be carried in a Provisional Account as described and distributed on Form 22, 9. Commission on Sales of Bonds and Stocks Commission paid on the sales of bonds and stocks issued as capi- talization is a charge against surplus; but is not always written off immediately, but classified with promoters' expenses and spread over a period of several years. This also applies to rebates and allowances of every character made to advance the sale of such securities. 10. Plant Equipment Written Off Arbitrarily Plant and equipment arbitrarily written off the books should be charged against surplus account. 11. Labor in Trading Account Labor should be charged in the trading account when the labor is a direct cost chargeable against sales ; to illustrate, take the labor of making and laying carpets, which is illustrated on Report Form No. 19. 12. Bad Debts Charged Off When rendering a report or an audit, always submit a schedule of the bad accounts charged to profit and loss during the period. If sales are being made to parties whose accounts were previously written off as bad, look up the correspondence relating to the accounts. 13. Collections of Bad Debts If collections are made of bad accounts which were charged to profit and loss, the collections should be credited to profit and loss account, and set up as an offset to the bad debts charged against profit and loss during the current period. 8o ACCOUNTING PRACTICE 14. Surrendered Capitalization Dividends Waived Gifts to Corporations Capitalization surrendered without consideration, dividends waived, and all gifts to a corporation should be credited to surplus accounts, but should never be the basis for declaring dividends. 15. Dividends from Investments In an industrial company, all dividends from investments in out- side enterprises should be credited to surplus. If desired, special accounts can be maintained to show the return from certain invest- ments, but the accounts should be closed into surplus without con- fusing them with the profit and loss from operation. 16. Unexpired Discount Discount on bank accommodations should be considered as an asset when preparing a statement of assets and liabilities. A schedule should be made of the discounts showing the number, date, bank, due date, rate, discount, and unexpired portion of the discount. The total of the unexpired portions of the discounts is the unexpired discount. 17. Accrued Taxes Accrued taxes should be considered as a liability when preparing a statement of assets and liabilities; if the amount due is not set up as accrued taxes among the current liabilities, a reserve should be set aside to cover the amount due. 18. Promoter's Expenses Promoter's expenses are a charge against surplus account, but are not always written off immediately, being spread over a period of several years. 19. Administrative Expenses (meaning home office) The salary and expenses incurred by executive and administrative offices should be prorated over the various auxiliary offices. The GENERAL NOTES AND SUGGESTIONS 8i apportionment of these may be made on a basis of the production, or sales of the auxiHary offices or plants. 20. General Expenses This classification should include all the expenses, of the business which are of a general character, salary and expenses of officers, and general office staff; in fact, all expenses incurred by the management in the supervision of the business, including executive and administra- tive expenses. 21. Factory Expenses This classification should include all expenses of the factory at large, which cannot be assigned to particular departments because they are common to all ; such as salary and expenses of the factory superintendent and his staff, light and power for elevators, insurance and taxes which cannot be applied to departments, accidents, etc. Factory expenses should be prorated equitably over the various de- partments, to be applied against the production of the departments. 22. Departmental Expenses This classification should include all expenditures chargeable directly and specifically to each department for supplies used in the process of manufacture which do not enter directly into the product as a component part of it; also, rent of factory (computed according to required floor space), heat, light and power, building and machinery repairs, insurance and taxes, reserve for depreciation, and any charge for which the department is directly responsible. Department expenses should be distributed equitably over the pro- duction of the department. 23. Good Will Good will is a legitimate asset in an industrial enterprise and the most accepted method of computing the amount of good will is to take the total profits for the last five years and deduct from them five years' interest on the capitalization at seven per cent per annum; the balance is good will. The rate of interest is based on the assump- 82 ACCOUNTING PRACTICE tion that no capitalist would invest in an enterprise unless he was assured at least seven per cent annual return. Good will should be written off the books during five subsequent years by charging off one-fifth against each succeeding year. 24. Relation of Profits to Investment The relation of the profits to the amount of money invested is one important feature to be considered when performing a financial audit. The small percentage of profit on sales showing a large percentage on investment is preferable to a large percentage of profit on sales with a small percentage of profit on the investment. 25. Voucher Check The common form of folding voucher check is undesirable for many reasons, and is being dispensed with. As a rule, the indorse- ment is overlooked in conforming to the many details required in executing the voucher. The indorsement is of greater importance than the receipt, and any voucher check which neglects the indorse- ment should not be used. The most satisfactory form of voucher check is the check with a small form on the back of the check, which can be used to enter the necessary memorandum of the settlement, under which should be printed, ** Indorsed in settlement of the above." 26. Control Accounts In order to divide the responsibility for the work of keeping the books, large concerns are obliged to keep control accounts on the general ledger, which keep a record by totals of the detail entered in the various supplementary ledgers. The control account shows what the balance of the supplementary ledger should be. To illustrate, consider a sales ledger. The control account in the general ledger would be charged with the total sales posted to that ledger and credited with the cash receipts and sales credits for the ledger. Consequently, if the detail posting to the sales ledger is done correctly, the balance of the sales ledger must equal the balance shown by the control account in the general ledger. GENERAL NOTES AND SUGGESTIONS S^ This method has been very satisfactory, and has simpHfied the taking of the trial balance so much, that it is being adopted by most concerns. It also enables the bookkeeper to show the results of the business promptly, even when the postings to the sales and purchase ledgers have been permitted to fall behind ; because the accounts in the general ledger are few and the totals of the business can be posted in a short time, and thus the results of the operations of the business known. 27. Planning General Ledger In planning a general ledger, it is very desirable to limit the accounts to as few as practical. The analysis need not be neglected, because the totals of four or five of the purchase journal items are posted to one account, for the detail of the account can be known (if question arises) by making a summary of the monthly totals of the purchase journal. Another plan is to have a few pages of the ledger made especially for the expense accounts, by using a whole page for debits and a whole page for credits, and ruling five or six columns on each page. By using the columns for an analysis of the items and posting all the items to total columns debit and credit, so that the diflFerence of the total columns will be the balance of the account and the analytical columns will show the detail of the total columns. 28. Excessive Valuation of Inventories When the inventories are valued at excessive prices, a reserve should be set up to offset the excessive valuation. 29. Items Previously Charged to Capitalization If a physical inventory includes items which have been previously charged to capitalization, the increased value of assets should be set up in some account in the nature of a reserve, until the proper ad- justments have been made. To set it up as surplus is misleading. The same applies to tools, implements, etc., previously charged to capi- talization. 84 30. ACCOUNTING PRACTICE Inventories of Merchandise Where Two Values Are In Evidence Inventories should be figured at two values if profits are figured on the production : the greater at the market value and the lesser at the cost value. The difference between the totals of the inventories should be set up as a reserve. Market Value Cost Value Reserve Material 190,401 . 10 215,981,70 167,501 .30 201,662 . 15 22,899.80 14,319-55 Merchandise Total 406,382.80 369,163.45 37.219-35 In the preparation of the statements attached to a report, the inventories are considered at the cost value, this being considered the most conservative. The reserve represents anticipated profits. 31. Purchases (in report) If desirable, for any special reason, to draw attention to the cred- its for returns and allowances on purchases or the gross purchases, the amount of same can be carried short. The net amount is generally shown because a multiplicity of deductions in a report only confuses. 32. Supplies The most practical method of handling supplies is to include the net cost of supplies in the expenses, general and manufacturing, show- ing only the net expenses in the statements and the value of the inventories of supplies in the balance sheet. 33. Dates Used In Reports Never make the date January ist when the books were closed as at December 31st. 34. Interest on Capital Interest on capital should be set up as an expense when the inter- est is charged in lieu of salary of the proprietors of the business. If making an audit to show profits, the interest should be set up separately no matter what the conditions are. GENERAL NOTES AND SUGGESTIONS 85 If making an audit for the parties in control of the business, inter- est on capital should be set up as a special item of profit and loss. 35. Closing Books of Corporations When closing books of corporations, the profits should be trans- ferred to surplus, and dividends authorized should be charged against surplus and credited to Dividends Payable. 36. Closing Books of Partnerships When closing the books of partnerships, the profits and personal drawings should be carried to the partners' investment accounts. 37. Arrangement of Exhibits In preparing a report, the main exhibits should be arranged in accordance with their relation to each other, the main exhibits being submitted first and the supplementary exhibits, statements and sched- ules following. Exhibits are also arranged according to their relative importance. 38. Check Marks Be neat and careful in making your check marks ; the work of excellent accountants has been condemned severely because of sloven- liness in this regard. The majority of business men take pride in the neat appearance of their books and regard with disgust, careless- ness in marking the books, especially when done by a high-priced man. It is generally necessary to use different colored pencils to distinguish the different marks. 39. Queries Queries arising in the course of the audit should be recorded on a working paper devoted to that purpose only, and when investigated and approved, the items should be checked off on the working paper. 40. Source of Statements In making notes of statements made by others, state who made the statements, when, and endeavor to record their exact words with- out ela'boration. Always state facts. 86 ACCOUNTING PRACTICE 41. Binding Reports Reports are bound in book form by using a cover and binding the sheets in the cover with eyelets. The use of ribbons, placed through the eyelets and fastened in the front of the cover with a seal has been discontinued. 42. Letter Heads Professionally, it is not good taste to have self-praise or adver- tising matter printed on the letter heads. Your name, public account- ant, auditor and accountant, or your degree, your address, associates, if any, are all that first-class accountants use. 43. Forms of Report The idea of submitting these various forms has been to set forth the principle and not to show forms which are to be copied without considering the circumstances. Always have a regard for the fitness of things. To follow set rules is not always expedient. Consider what is appropriate to the conditions and endeavor to prepare a report suited to the business conditions. 44. Checking When auditing never, under any circumstances, arbitrarily check items which are unchecked. Never do such a thing during the prog- ress of the audit, especially when seeking a difference. Even though you do give it up, do not make arbitrary check marks. Keep a record of the marks used for checking postings and vouch- ing items. A distinctive mark should be used for checking, so that you know by the mark why the check was made, and a memorandum should be made on the working papers of the marks which were used. PART II COST ACCOUNTING I. COST SYSTEMS IN GENERAL A cost system is a method of bookkeeping designed to show the cost of manufacture, and to provide a means of reckoning the basis upon which it is profitable to sell the production. It should also show the results of purchasing, conserve the material, expose unnecessary losses and supply suitable statements of the progress of the manu- facturing department. 1. Elements of Cost The elements of cost are primarily material, labor and expense, and under ordinary conditions all expenditures can be so classified. Material : Labor: j Productive. ( Nonproductive. i Departmental. Factory at large. General Expense. Selling Expense. Work Purchased Expenditures are classified as work purchased, when an outside party is paid for performing some special operation which cannot be classified as labor or material. If the work was done in the factory, it would be a labor cost; but since it is not, it cannot properly be classified as labor, especially when the percentage costs are based on the per man hour. Since it cannot be classified with either labor or material, it should be treated as an independent factor and set up by itself. If the expense percentages are based on labor and mate- rial, it should not be included in the amount upon which the per- centage charges are computed; but if the percentage charges are 7 89 go ACCOUNTING PRACTICE based on the total prime cost, it should be included before the per- centage charges are computed. What Is Material? There has been considerable discussion regarding this question, and in some cases it has been vexatious discriminating between mer- chandise, material, and supplies. The product of one business may be the material of another ; con- sequently, the same must apply to a compound business, in which case the principle would apply to departments. But it would not be ex- pedient to record as sales the product of one department delivered to another ; and even if actually sold, conditions might be such that these sales would be a byproduct set up as an offset to the material cost. Shoes are the product of which leather is the material; leather is the product of which hides are the material. If the business was simply making shoes, the material would be leather; but if the tannery was operated in connection with the shoe factory, and tanned leather was a considerable item of the sales, the product of the tannery must be the raw material of the shoe factory. Intercharges In a compound business, the product of one department delivered to another as sales should be treated as intercharges, and the analysis of the sales and purchases should each have a column for inter- charges, in order to show the amount of intercharges on each. The amount of intercharges on the sales journal should equal the inter- charges on the purchase journal. Supplies The simplest and most satisfactory method is to treat as supplies all articles used in a general way in the department, which are not a component part of the product and cannot be charged to the orders as a definite quantity. Prime Costs The prime costs are labor and material. In some cases, the ex- penses are based on the labor only. The latter method has been re- COST SYSTEMS IN GENERAL 91 ceived with favor, when the material cost varies 'so extraordinarily that it would be inequitable to base the expense cost on it. Percentage Costs After the prime costs have been determined, percentages are added for expenses ; these are called the Percentage Costs. Basis of Computations In all cases of similar import, the past must be the basis for the future computations, and to be accurate, all contributing conditions should be considered whether favorable or otherwise. (See con- densed statements of profit and loss, Report Forms i and 2.) 2. Kinds of Cost Systems There are many kinds of cost systems and some are combinations of various methods. The following are some of the methods of keep- ing costs: (i) The cost system in which the records are kept according to order numbers. In this method, it is customary to provide a cost sheet for each and every order number. The cost sheet should be ruled so that the items will be grouped according to the desired analysis and provision made for a summary of the results. (See Form No. 7 for illustration of ruling.) (2) The cost system in which the records are kept according to departments. In this method, a cost sheet is kept for each department. The cost sheet should be ruled so that the items will be grouped according to the analysis and provision made for a summary of the results. It should also provide for a record of the quantity of work passing through the department, according to the unit of measurements. (See Form No. 21 for illustration of ruling.) (3) The cost system in which the records are kept according to the operations or processes. In this method, a cost sheet is provided for each and every process. The cost sheet should be ruled so that the items will be grouped g2 ACCOUNTING PRACTICE according to the analysis, and provision made for a summary of the results. It should also provide for a record of the quantity which underwent the process and the rate per unit of measurement. (See Form No. 21 for illustration of ruling.) (4) The cost system in which the records are kept according to machines. This is known as the machine cost and the cost sheets are made for individual machines or groups of machines. The cost sheet should be ruled so that the items will be grouped according to the analysis, and provision made for the summary of the results. It should also provide for the record of the results from operating the machines and the number of hours in operation. A rate is charged for the time the machine is occupied. This rate is known as fhe ** machine hour " and is based on the expense of operating the machine, considering only the number of hours in operation. (See Form No. 21 for illustration of ruling.) II. PLANNING THE SYSTEM 1. Planning the Controlling Accounts The classification of the items, the arrangement of the ledger accounts, and the method to be adopted are the difficult features. For this reason, I submit the chart showing the grouping of ac- counts, which I entreat you to study until your mind automatically groups the accounts and arranges the control of the operations as described. Plan of Operation Chart Showing the Grouping of the Accounts CASH ACCOUNT n (2) (3) ' f f MATERIAL LABOR EXPENSE ACCOUNT ACCOUNT ACCOUNT G) (i) (6) r ' 1 WORK-IN-PROCESS ACCOUNT 6) PRODUCTION ACCOUNT (5) / CASH ACCOUNT 93 94 ACCOUNTING PRACTICE Each one of the rectangles shown in the chart represents an account on the ledger. Cash is paid for material in detail and the cash account is credited with the total, which total is debited to the material account. Toll Station No. i is the material column. Cash is paid for labor in detail and the cash account is credited with the total, which total is debited to the labor account. Toll Station No. 2 is the labor column. Cash is paid for expenses in detail and the cash account is credited with the total, which total is debited to the expense account. Toll Station No. 3 is the expense column. Material is charged to the cost sheets for work in process in detail and the material account is credited with the total, which total is debited to work in process account. Toll Station No. 4. Labor is charged to the cost sheets for work in process in detail and the labor account is credited with the total, which total is debited to work in process account. Toll Station No. 5. Expense is charged to the cost sheets for work in process in detail and the expense account is credited with the total, which total is debited to the work in process account. Toll Station No. 6. As the work is completed, the cost sheets are figured in detail and the total of the completed cost sheets is debited to the produc- tion (or similar account) and credited to work in process. Toll Station No. 7. Now study the following concrete plan of operating the cost sys- tem No. I, and endeavor to comprehend the relation of the accounts to each other before studying the detail of the items : CONCRETE PLAN OF OPERATING THE COST SYSTEM No. i (i) Balance commencing the period $17,691 . 83 (2) Charges made in detail to the Cost Sheets, during the period : Labor 1721 .60 Material 4782 . 95 Expense 649 . 87 (3) Total in operation during period $24,846 . 25 (4) Deduct Cost Sheets for orders completed during the period. . . . 10,791 .44 (5) Balance at end of period $14,054.81 Value of Work in process at the end of period. List of unfinished Cost Sheets should equal this balance. This balance is the balance for the beginning of the following week. PLANNING THE SYSTEM 5,5 There are three classes of expenditures to be considered, and, no matter how they are ultimately subdivided, you should consider them primarily as: Material. Labor. Expense. You should study the chart until your mind inadvertently groups them in this manner. The cash is paid for material, labor and expense; the respective accounts on the ledger are charged and the cash account credited. The entry should be: Material, Dr $1005.00 Labor, Dr 960.00 Expenses, Dr 100.00 To Cash, Cr $2065.00 The material, labor and expense are charged to cost sheets, which are a record of " Work in Process." The amount so charged to cost sheets is controlled, and the work in process account on the ledger is charged, and the material, labor and expense accounts on the ledger are credited. The entry for same should be: Work in Process Account, Dr $7154.42 To Material Account, Cr $4782.95 " Labor Account, Cr 1721.60 " Expense Account, Cr 649.87 $7154.42 $715442 When the work is completed, the total value of the completed cost sheets is charged to the production account (or similar account) on the ledger and credited to the " Work in Process Account " on the ledger. The entry should be : Finished Product Account, Dr $10791.44 To Work in Process Account, Cr $10791.44 96 ACCOUNTING PRACTICE After examining the chart, it must appear to you that creating a cost system revolves itself primarily into a matter of arranging the control accounts and providing a means of controlling the passages from one account to another. The material is delivered to the work in process. What is the best, simplest and most practical method of making a record of the delivery, and securing a competent record of the material delivered to work in process? If a requisition is made for the material, the store clerk or party in charge of the material could make the necessary entries on the slip for the identification and price of the material actually delivered, and the requisition could be used as a basis for the charge. In fact, any form of any kind, which is a competent record of the material delivered, could be returned to the cost department, to be used as a basis of the charge for the material on the cost sheet. The forms for material to be charged to cost sheets could be figured and totaled on an adding machine, and the detail posted to the cost sheets direct from the forms. The labor is expended on work in process. How can a record be made of the work which will not only insure returns for the expendi- ture, but provide a means of charging the labor to the cost sheets for work in process? Study carefully the diflferent classes of time cards, and choose the method which appeals to you as most adapted to the requirements of the situation. (See Operating Forms i and 2.) The expenses must be added as an additional or supplementary cost. What basis should be employed to secure an equitable distri- bution of the expenses? (1) Work in Process Account on the Ledger Work in process account on the ledger is the same kind of account as the sales ledger account on the private ledger. The sales ledger account is charged with a total for sales made; but the items are charged in detail to the individual accounts in the sales ledger. Collections are credited in total to the sales ledger account ; but the items are credited in detail to the individual accounts on the sales ledger. PLANNING THE SYSTEM 97 So it is with the cost system. Work in process account is charged with a total for material, but the items in detail are charged to the individual cost sheets. The labor is charged in total to the work in process account on the ledger; but the items are charged in detail to the individual cost sheets. The expense provision is charged in total to the work in process account on the ledger; but the items in detail are charged to the cost sheets. If a list is made of the accounts in the sales ledger, the total of the balances (trial balance) in the sales ledger will equal the balance of the sales ledger account on the private ledger. So it is with the cost system ; if a schedule is made of the cost sheets which are uncom- pleted, the total of the uncompleted cost sheets will equal the balance of the work in process account on the ledger. To sum the matter up briefly : the work in process account on the ledger is simply a ledger account controlling the work in process. (2) The Material Account on the Ledger The material account on the ledger is an account controlling all material on hand, which has not been delivered to work in process of manufacture, excepting articles classified as manufacturing ex- pense supplies. The balance of the material account should be the value of the inventory of the material and, when an inventory is taken to prove the work, the physical inventory of material should be the equivalent of the balance of the ledger account. The material account may be subdivided into as many accounts as desirable; but the disposition to subanalyze is generally carried to extremes, the result being an enormous amount of labor without any valuable return, and quite often the main objects are swamped in a mass of valueless detail. Under the heading material could be grouped every conceivable article used in the factory which is delivered under control; but it is unadvisable to do so. Discriminate between supplies and material by classifying as mate- rial only articles that become a component part of the product. Experience has demonstrated this to be the most practical plan. g8 ACCOUNTING PRACTICE (3) Pay Roll Account on the Ledger The pay roll account is an account to which all labor is charged. The labor account should be absorbed by the cost system, unless advances are made or advance charges made for wages. (4) Expense Accounts on the Ledger The expense accounts on the ledger may be subdivided into as many accounts as it is deemed expedient. The accounts should be grouped or analyzed, so that it is possible to determine ( i ) the depart- mental expenses, (2) the factory expenses, (3) the general expenses, and (4) the selling expenses. The total of the expense accounts should not exceed the amount provided to meet expenses (by charges made to cost sheets), unless some payment has been made for advances. The credits to the expense accounts should be sufficient to cover all accrued expenses and transfer the expenses to the cost sheets. 2. Method of Operation (1) Balance of Work in Process Account at the Beginning of the Week. (See plan of operating system No. 2.) The balance of the work in process account on the ledger should be the value of the production in various stages of manufacture, as shown by the cost sheets, and a schedule of the cost sheets at any closing period should equal the balance shown by the ledger account. Work in process account is the account representing the entire prod- uct in process of manufacture. It may be subdivided into depart- ments, but this is a supplementary matter to be treated hereinafter. (2) Charges Made to Cost Sheets The charges made to the cost sheets should be controlled and analyzed, so that the total amount is known and also an analysis of the total. The credit to material account for the charges made to cost sheets should reduce the material account to the inventory value of same. The credit to labor account should offset the account for pay roll on the ledger. PLANNING THE SYSTEM 99 OPERATION AND CONTROL OF COST SYSTEM No. 2. Ledger Accounts Work in Process. Total Analysis of Charges to Cost Sheets Material Labor Expense (0 (2) Balance of work in process account at the begin- ning of the week Charges made to the cost sheets during week »6739i5 2600.00 $4150-75 1 100.00 $1910.60 950.00 $675.80 550.00 (3) Total in operation during week 933715 2100.00 525075 1020. 15 2860.60 829.30 1225.80 250.5s (4) Cost sheets for completed orders (5) Balance for work in proc- ess account at the end of the week 7237. IS 4230.60 2031.31 975-25 (3) Total in Operation This total shows the value of work in process which was in oper- ation during the week. It does not mean that the work in process at any time during the week was worth that amount, as the majority of it may have been delivered during the early part of the week. (4) Completed Cost Sheets The cost sheets should be scheduled as they are completed and an analysis made of them to determine the amount of labor, material and expense which was charged to them. The analysis of completed cost sheets is required only for proving, and is not essential unless you desire to prove each class of entries, as shown on the plan of operating No. 2. (5) Balance of Work in Process Account at the End of the Week The balance of work in process at the end of the week is similar to the balance at the beginning (No. i) and this balance at the end of the week is the balance for the beginning of the next succeeding week. lOO ACCOUNTING PRACTICE Proof of Work The cost sheets are Hsted at the beginning of the period; charges are made to the cost sheets during the period ; all cost sheets for com- pleted orders are scheduled and analyzed according to material, labor and expense (or any analysis planned) and the total is deducted (see No. 4 of plan). The balance of the cost sheets should then be listed on the same form and the result, if correct, will be the total of the uncompleted cost sheets (see No. 5), and an analysis showing the amount of labor, material and expense. The object of operating the cost system according to the analysis of the charges is: It gives a proof of the work in such a way, that if an error was made in the work, it will not be necessary to go over the entire work but only the part in which the error occurred. If the error is in the pay roll charges, examine them ; if in the mate- rial, examine the material; if in the expenses, examine the expense. Basis of Percentage Charges It is inadvisable to base expenses on a period of a week or a month, as this necessitates carrying over from one period to another a surplus or deficit. The percentage charges, under normal conditions, should be based on the past year or years. Therefore, the business should be sub- jected to rigid scrutiny, and all contributing conditions considered. Idle Periods The fixed expenses of a business, or department of a business, are continuous, whether in operation or not, and the expenses of pres- ervation during an inactive period is as much a cost of operation chargeable to an active period, as the fixed expenses of the active period; for it is necessary to preserve the integrity of the business during the inactive period, in order to make possible its operation during the active period. To illustrate: If a business with an annual rental of $12,000 was of a character prohibiting operation four months during the year, it would be deceptive and inequitable to compute costs on a basis of » 1 > J J 1 •> > ? ,» PLANNING THE SYSTEM''-" '-' ^'' VcjV $i,ooo per month, because (other elements being accurate) the results would show an additional loss of $4,000 per annum. Verifying Percentages In a cost system where the percentage charges are based on annual statements, the provisions made for such expenses should be so arranged, that comparisons can be made monthly with the ledger accounts for such expenditures. Provisions for Expense Account When the cost system results are incorporated on the general ledger, it has proven very satisfactory to arrange the expense account so that, when a trial balance is taken, the accounts are in order, mak- ing it possible to foot the expenses, and, instead of crediting the ex- pense accounts with the percentage charges, which were made on the cost sheets, allow the accounts to stand in their integrity, making suitable provision for unexpired expenses, depreciation and long term expenses to insure an accurate record of the expenses which have actually expired; then accounts should be set up in the ledger to show the provisions made to meet them. 3. The General Books and a Cost System The general books can be made to cooperate with the cost system and matters simplified by arranging the purchases for account of material and expenses to meet the requirements of the cost system. If the general books are designed so as to give you all the infor- mation required for the cost system, it is not advisable to make any change, especially at this time. Production Ledger A production ledger can be kept as a part of the cost system and only the accounts required for the cost system kept in same, a bal- ance being entered in an account for general ledger to establish the equilibrium of the production ledger. The accounts in the production ledger would be as follows : General Ledger Account. Work in Process Account. i}^^^'^'^ '' ' "' '^'-ACCOUNTING PRACTICE Material Account. Labor Account. Production Account. Provision for Departmental Expenses. Provision for Factory Expenses. Provision for General Expenses. Provision for Selling Expenses. The general ledger account would have a balance, necessary to establish the equilibrium of the production ledger. The work in process account would be the record of work in process as described heretofore. The labor account would be the provision made to cover the cost of labor and would be the opposite of the balance on the general ledger. The provision for department expenses should be a credit and the equivalent of the total debits of the accounts in the general ledger for department expenses. The provision for factory expenses should be a credit and the equivalent of the total debits of the accounts in the general ledger for factory expenses. The provision for general expenses should be a credit and the equivalent of the total debits of the accounts in the general ledger for general expenses. The provision for selling expenses should be a credit and the equivalent of the total debits of the accounts in the general ledger for selling expenses. Thus it is evident, the production ledger is the reverse of the general ledger; and a trial balance, showing the results taken from the ledgers, when placed so the accounts are opposite each other, should show results which offset each other. 4. How to Plan the Cost System (i) Examine the general books and prepare a condensed state- ment of the profit and loss for the year or several years (see Re- port Forms Nos. i to 9). This is to be the basis upon which the percentage charges are made, and will show the ratio of the PLANNING THE SYSTEM 103 various elements of cost to the whole cost, to the sales and to each other. The information required to prepare the condensed statement of profit and loss can generally be obtained from the trial balance taken from the books before closing. While making the examination of the general accounts, it is advisable to investigate the material accounts and get some idea of the way it has been customary to handle material on the general books. Note how the invoices are approved, entered and paid. (2) Look over the plant, request some one to show you over who is conversant with the various operations and processes, who can commence at the beginning and follow the production through the various stages and give you an intelligent description of it so that you can (a) comprehend the general scheme of operation, (b) get an idea of the methods of delivering material, (c) the way the mate- rial is worked, (d) the records of the work which are made in the factory, (e) the departments and object of each, (/) the process and operations of each, (g) the records of labor, (It) the time con- sumed to perform the operations, (i) the time the product requires from start to finish, (;) the packing of the product, and (k) the delivery. Commence at the place where the raw material is received, and follow it through every process until delivered. When looking over the plant, group in your mind all persons doing work of a similar character, and do not be dismayed by a large force of employees. Do not entertain thoughts of the magnitude of a plant, for it is easier to put a system in a plant employing two thousand persons, than it is to put a system in a plant employing twenty. Consider for your purposes one thousand persons doing the same thing as one person ; learn to do this and you have made a step in advance. Make notes of the various operations, the time consumed and the number so employed. (3) Consider the various methods of operating cost systems and decide whether it would be advisable to operate the system according to individual orders, departments, or otherwise. If you cannot decide upon the general outline or control, examine the departments in detail I04 ACCOUNTING PRACTICE and prepare a plan of keeping costs for each; then decide upon the control. (4) Draw up a rough outline of your plans, seclude yourself some place where you are sure you will not be disturbed, and go over your plans carefully to make sure the foundation is sound. (5) Work up the details one at a time, and be sure to make care- ful notes of your prospective methods and reasons for them. Material Examine carefully everything in connection with the material, its value, quantities, stores, issue, and formulate a plan of controlling it. As the material is delivered to work, it should be charged. Devise a method of making the charge and the means of ascertaining the cost of the material at which the charge is to be made. The cost value of the material is the purchase value plus charges for storage, freight, etc.; but this is not generally used. Labor Examine carefully the labor and see if it is possible to make a record of the cost without expecting too much of the employee. Decide upon the style of time cards. (See Forms Nos. i and 2.) Consider the nonproducers and decide whether their time should be prorated over the whole or special operations. As the labor is performed the record of the time is made on the form provided, and the charge to the cost sheet is based on that. There are two classes of labor, productive and nonproductive. Productive labor is the labor chargeable to specific costs, and nonproductive is all labor not chargeable to specific costs, which must be prorated over the items of productive labor. The nonproductive labor should be prorated over the productive labor if your plans require the full cost of labor. Wages of Foremen The question of how to treat the wages of the foreman has been vexatious at times, but a solution is easy if the right principle is applied. When the foreman is the brains of the employees under his super- PLANNING THE SYSTEM 105 vision, his wages are a part of theirs, because he supplies what is deficient in them. Therefore, if you are paying ten employees $15.00 per week and paying a foreman $50.00 a week to supervise their work, each one of the employees cost $20.00 per week. (6) After preparing the plans for making and collecting the records in the factory, it is necessary to design the forms for the cost department to use in computing the records. Factory Records ^ Do not burden the employee with records, remember he is not a bookkeeper and is not supposed to keep accounts. Strive to make his end as simple and easy as possible. In a well-regulated factory, the basis of a cost system already exists, and it is simply a matter of gathering the necessary figures and arranging the control of the elements of cost, so that the costs may be determined and the gross results known. Every business has developed certain records and systems which are valuable and suitable to their needs; for this reason it is ex- tremely bad policy to predetermine the system simply because it was successful elsewhere. It should be your purpose to examine care- fully every little detail of the business, in order to incorporate old methods in the new system. The custom of prearranging a cost system, and entering a factory with the determination of making the factory conform to the system, is unreasonable and has caused more disappointment to all concerned than anything else, not to mention the excessive financial loss entailed. Work Order Where a cost system is operated, orders should be provided for all work of general character, such as repairs, construction, etc. This is to identify the work and make it possible to determine the cost. These orders are called work orders to distinguish them from the regular orders. Planning Charges When planning how to make the charge to the cost sheet for labor or material, ascertain your objective points, and devise the io6 ACCOUNTING PRACTICE simplest and shortest way of getting the charge from one point to the other point. By that I mean — do not confine yourself to set rules and argue that, being delivered from a storeroom, an issue book miist be kept in the storeroom; that this book must be analyzed and the result credited to stores; that a journal must be kept from which to make the charges to the cost sheets, etc. That is all very good if the firm desire a mass of valueless detail and have no regard for expense. But the majority of business men only care for results and will be just as well satisfied if you use the delivery sHp, which might also be the requisition, and if the cost system records are made on it; you can get just as satisfactory results by simply listing the slips on an adding machine and making the charge to the cost sheets direct from the delivery slip. Machine Shop Expense The maintenance of a machine shop operated in connection with a large factory or mill, can be covered by a percentage to be added to cover the expense of it, unless the machine shop is occupied with some work not chargeable to expense. If the machine shop is not essential to any product or department, it should not be considered an expense against it. Factory Expenses and Supplies The author believes that the most satisfactory solution of how to handle the cost of factory expenses and supplies is to base the charge on the annual expense incurred, and add a percentage to cover it. Heat, Light and Power The maintenance of a heat, light and power plant should be charged according to the requirements of the departments, and a per- centage based on the cost of the previous year added to cover it. Perpetual Inventory It was always deemed absolutely essential to a cost system to have a storeroom, and to systematically issue material in order to obtain a record of it. PLANNING THE SYSTEM 107 In fact, the storeroom and cost system have been synonymous, the storeroom being considered so important to a cost system, that its estabHshment was the first consideration. The following method devised by the author eliminates the neces- sity of a storeroom, and, while it provides excellent records of the material without one, it is valuable when operated in conjunction with the storeroom. Registering Material Everything is registered in the receiving record (made in dupli- cate) when received, without regard to the character of the article. This register number is a mark of identity and is put on the goods in some manner which enables the number to be characterized on sight as the register number. The register number is placed on the invoice when the invoice is approved by the receiving clerk; it is placed on all books of record where the entry for the invoice is made and placed in the ledger account which keeps a record of the purchases. These numbers are entered into the receiving book in their numerical order, and each lot receives a number. For receiving record form see Form No. 3. If several classes of articles are received in one lot, separate num- bers may be assigned to each class. The first number might be lumber, the next oil, the next office supplies, etc. This number being placed on the case or package or object, is, as stated, a mark of identity; and when passing through the factory, if question arises regarding any unopened case, information regarding the case can be obtained instantly by referring to the number on the receiving record. When the invoices are approved, the full details of the articles should be entered on the receiving record, which is used for refer- ence. If an inventory is made, the numbers are an index to the prices and indicate the time the material came into the factory. These numbers are used in keeping the stock records, and are entered on the delivery slip for charge to work in process. The number provides a means by which the cost department can price the delivery slips at actual purchase prices. Charges for freight, brokerage, etc., which are an additional cost of merchandise can be made to the merchandise account in total, and io8 ACCOUNTING PRACTICE posted in detail to the record on the stock card, thus insuring a charge for material at full cost. The charges made to the cost sheets should show these numbers, and any question regarding the material can be referred instantly to the original invoice, so that the net results from specific lots of mate- rial become evident without keeping a special record. A stock card or suitable record of each lot can be kept according to these numbers and complete record of stock made ; these are indis- putable because they are supported by the invoices and cost sheets. The stock card can be made out from the invoice after it is approved by the receiving clerk. This provides a means of establishing a perpetual inventory in detail which requires very little work. It establishes a common iden- tity to material which is used by all departments in the factory and office. It makes it possible to keep in close touch with the purchasing agent and keep advised regarding his judgment in making purchases. Results of Operating the Cost System The results of the operation of the cost system should be presented in a simple statement, which can be conveniently analyzed and veri- fied quickly, by reference to records which are unquestionable. 5. Correct Foundation for Cost Figures and Reports Percentage Costs in General The most common error in figuring costs is to prepare a wrong basis. To obviate the disappointment which must inevitably result from a wrong basis, the author suggests making a condensed state- ment of profit and loss. (See Report Forms Nos. i and 2.) When the prime costs are labor and material, divide the total expenses to be provided for, by the total of the labor and material. This gives the percentage to be added to labor and material for such expenses. Always use as a basis the total labor as per pay roll and increase the detail amount by the percentage for non-productive labor before computing the percentage charges. Study carefully the condensed statement of profit and loss (Report PLANNING THE SYSTEM 109 Form No. i) and the relative percentage of the various elements of costs. The percentage to be added to the cost of (i) material and (2) labor to provide for (3) manufacturing and (4) general expenses would not be 12^ because the expenses are 12^ of the manufacturing cost. The total percentages of the expenses divided by the total percentages for labor and material would give the percentage to be used. Hypothesis: (3+9)^(57 + 31) = 13.6% ($10,693.77 + $30,766.55) -f- (198,551.28 + 107,61 1.43) - 13.6% The cost of manufacturing being determined, the provision for selling expenses (where selling expenses are based on sales) and the provision for profits should be made by dividing the manufacturing cost by the percentage the manufacturing cost is to be of the sales, and marking off two points. Hypothesis: Manufacturing Cost X 100 Percentage Manufacturing Cost is of Sales = Price to Sell. In a compound business, the percentages of the elements of cost are affected by the trading department of the business. The expense ratios should be smaller, because the trading department assists in carrying the expense loading. To determine the percentages which the manufacturing costs are of the sales ; first compute the percentages the elements of cost are of the manufacturing cost; next compute the percentage the cost of sales is of the sales. Multiply the percentage the cost of sales is of the sales, by the percentage the manufacturing expense is of the manufacturing cost, and the result will be the percentage the expense is of the selling value. The same applies to labor and material. Report Form No. 3 This is a condensed statement of the profit and loss of a simple trading business. no ACCOUNTING PRACTICE The important features of the busmess are as follows: (i) The net cost of the merchandise, (2) The expenses of conducting the business, (3) The expenses of selling, and (4) The net sales. In preparing a report of such a business, it is not proper to charge any portion of the general expenses to selling expenses. Confine the selling expenses entirely to expenditures chargeable directly to selling expense. Report Form No. 4 This is a condensed statement of the profit and loss of a manu- facturing business disposing of its product through selling merchants. The important features of the business are as follows: (i) The cost of material, (2) The cost of labor, (3) The expenses of manufacturing, (4) The expenses of conducting the business, (5) The cost of the manufactured product, (6) The expenses of selling, and (7) The net sales. In preparing a report of such a business, it is not proper to charge any portion of the general expenses to manufacturing expense or selling expense. The prime business of the company is manufacturing and the expenses are all chargeable to manufacturing cost, except expendi- tures chargeable directly to selling expenses, such as advertising, com- mission, brokerage, etc., paid in addition to the regular commission and guarantee. Report Form No. 5 This is a condensed statement of the profit and loss of a business which purchases merchandise in addition to manufacturing it, but does not prepare the inventories to show the value of the merchan- dise separate from the material. PLANNING THE SYSTEM m This form is submitted to show the method of entering the mer- chandise purchases, and arriving at the cost of material and mer- chandise consumed to produce the sales. The important features of the business are as follows: (i) The cost of merchandise and material, (2) The cost of labor, (3) The expenses of the factory, (4) The expenses of conducting the business, (5) The expenses of selling, and (6) The net sales. Report Form No. 6 This is a condensed statement of the profit and loss of a com- pound business. The prime division of the business is manufactur- ing and the selling is only incidental. The important features of the business are as follows: (i) The material consumption, J%^ (2) The cost of material, ^ ^^9^ (3) The cost of labor, (4) The expenses of manufacturing, (5) The manufacturing cost of production, (6) The cost of sales, (7) The expenses of conducting the business, (8) The expenses of selling, (9) The sales of waste, and (10) The net sales of merchandise. This form is submitted to illustrate the method of determining the cost of the production, and relation of sales of waste to the con- sumption of material. The sales of waste are an oflFset to the material consumption and should be deducted from the material consumption to determine the cost of material. Classify as selling expenses all expenditures which could be elimi- nated if the sales were made through selling agents. If a selling division is maintained and the general expenses are prorated over the manufacturing and selling divisions, show the 112 ACCOUNTING PRACTICE amount so charged separately from the regular division charges and also show the basis upon which the expenses are prorated. Report Form No. 7 This is a condensed statement of the profit and loss of a furni- ture business which buys rough, unfinished parts, finishes them and sells the finished furniture. The important features of the business are as follows: (i) The cost of sales, (2) The expense for salary and wages, (3) The other expenses of conducting the business, (4) The whole cost, and (5) The net sales. The form is submitted to show the method of setting up labor under such conditions. When labol- is an element of cost included in the inventory values of a trading business, such labor should be set up as part of the cost of the merchandise, before deducting the inventory for the end of the period. Report Form No. 8 This is a condensed statement of the profit and loss of a complex trading business. The important features of the business are as follows: (i) The cost of material and merchandise, (2) The cost of labor (when an added cost), (3) The expense for salary and wages, (4) The other expenses of conducting the business, (5) The whole cost, and (6) The net sales. The form is submitted to show the method of setting up labor in a trading account, when labor is an element of the cost of sales. When labor is an added cost included in the sale as part of the sales, such labor should be set up in the trading account after show- ing the cost of the material. PLANNING THE SYSTEM 113 Report Form No. 9 This is a condensed statement of profit and loss of a simple trad- ing business. The important features of the business are as follows: (i) The cost of sales, (2) The expenses of conducting the business, (3) The expenses of selling, and (4) The net sales. This form is submitted to show the method of setting up duty, foreign freight, etc., in the trading account. The above items, being part of the purchase cost included as in- ventory values should be set up as part of the total charges, before deducting the inventory for the end of the period. III. PERCENTAGE COSTS 1. Determining Percentages After the material and labor cost has been computed, for either the department or the plant at large, a percentage is added to said cost to cover the expenses. More disappointment is caused by making errors in determining the percentages to be employed than in any other way. Extreme care should therefore be used when preparing the percentages. Percentage of Expense Based on Labor Cost If the percentage of the expense is to be based on the labor charge, ascertain the amount of the labor and expenses for the year, and divide the total expense by the total labor. Hypothesis: Expenses -^ Labor = Percentage. This percentage is the ratio of the expenses to the gross labor charge. Consequently, if the charge to the cost sheet is for produc- tive labor only, the productive labor must be increased by the per- centage for nonproductive labor. To determine the percentage to be added to productive labor for nonproductive labor, divide the nonproductive labor by the productive labor. Hypothesis: Nonproductive Labor -^ Productive Labor = Percentage. The percentage is the ratio of the nonproductive labor to the pro- ductive labor. Selling Expenses The cost of manufacture should be determined before provision is made for selling expenses, because the ratio of the selling expenses 114 PERCENTAGE COSTS jj^ is to the sales, and is not in any way influenced by the labor or material cost. After determining the whole cost of manufacturing, a percent- age should be added to provide for selling expenses. To determine this percentage, divide the selling expenses for the year by the whole cost. Hypothesis: Selling Expenses -V- Manufacturing Cost = Percentage. This is the ratio the selling exj^enses are to whole cost. Percentage for Profits If the intention is to add a percentage to the cost to provide a profit based on the sales, the best method is to multiply the whole cost by IOC and divide the result by the percentage the whole cost bears to the selling price. Hypothesis: 100 per cent- Percentage for profit - Percentage of Whole Cost to Selling Price; (Whole Cost X 100) -^ Percentage of Cost => Price to Sell. It simplifies matters if you charge all supplies to appropriate ex- pense accounts and include in the percentage costs a sum sufficient to meet them. Distributing Unproductive Labor and Expenses When the expenses are applied to the labor cost on a basis of per man, hour, or any method using the labor as the only basic cost, the pay roll can be made up according to departments on Form ii, and the expenses and unproductive labor can be applied in whole or according to departments on a percentage basis or on a basis of fifty- two weeks. The pay roll should be made up according to departments, and the productive and nonproductive labor shown. The expense chargeable to each department for the week should be entered opposite the department and the total expenses of the department shown. ii6 ACCOUNTING PRACTICE The total expenses and the nonproductive labor should also be shown in the column provided, and the percentage to be used as a basis of distributing the expenses and nonproductive labor over the productive labor, determined by dividing the productive labor by the nonproductive labor plus the expenses. With this method of distributing the expenses, it is a very simple matter to compute individual orders, if you have the material and productive labor. Hypothesis: Cost of Material $200.00 Pay Roll (productive only) 100.00 Expenses 65^ of Pay Roll 65.00 Manufacturing Cost 365.00 Provide 20^ for profits and selling expenses. {$365.00 X iqo) -^ 80 = Sell for $456.25 2. Use of Percentages Computing Costs. (First Plan) Plan of computing the cost where the basic costs are labor and material. Cost of Material $1 12.60 Productive Labor $47.60 Nonproductive Labor 10^ 4.76 Cost of Labor 52.36 Cost of Labor and Material $164.96 Expenses 11^ of Prime Cost 18.15 Manufacturing Cost $183.11 Provide 10^ for Selling Expenses. Provide 20^ for Profits. ($183.11 X 100) -=- 70 = Sell for $261.59 The price to sell at in order to provide 10^ for selling expenses and 20^ for profit. PERCENTAGE COSTS 117 Computing Costs. (Second Plan) Plan of computing costs where the basic cost is labor. Cost of Productive Labor ; . . . $93.15 Nonproductive Labor 10^ 9.32 Cost of Labor $102.47 Expenses 6o<^ of Labor 61.48 Material 301.70 Manufacturing Cost $465.65 Provide lo^i^ for Selling Expenses. Provide 20 p. PS 1^ Deliveries Order No. Quantity Order No. Quantity Order No. Quantity 176 Form No. 4- —Work Order S C e •c & 5 t/3 u •0 c 4) •<-> C 'C 4> a 3 t/) d Z h « •o u 4-» c .. t B 1 4-» Ud u H S z Cu 5? u 1 s Q B a! 5) : 2 ^ u & 5 b & i—i c es a. ^ H .tlS a Qu « ^ >» 1 SI QQ z J3 JS JS U u u .J * c c c n « E «#- «*• 4> Xi « c ' s« 2 8 11 ^ 3 111 1 V •" ES d) « -^ iS £ " ^ III w 178 Form No. 6 — Stock Card Register No. Description Record of Goods Received Location Date Cost $ Added Charges Rate $ per Nnmber Quantity Amount Deliveries Order No. Quantity Amount 179 Form No. 7— Cost Sheet •s E E 3 C/3 ^ u a •S i 5 o ^ CO a e/} CL •a B 0) E E .3 a s ©' -s 4> 4> h u O O I So Form No. 8— Order Tag Order Issued Carton Order No. ^iSS Cnmhining Order IsKued Rotary Machine: Cnmmpnrerf IQt Notes: Machine No. _ Operator No.. Counting Macli At Finish At Start incRegtotered: Coui it Folding and Gloios Machine: Commenced IM Notes: Machine No. _ Operator No.- Counting Mach At Finish^ At Start - Cout _ <► ine Registered : PRINTING ORDER Order No. 2155 WRAPPER ORDER Order No. 2155 Form No. 9 — Charge Slip. (Misc.) CHARGE 0">riPi> Nn nplivf»f to Register Number Particulars Rate Per Amount 1 • - Date Signed ion 182 Form No. io^Charge Slip CHARGE Comhininsr Order No. Department. Date 1 Register Number Original Weight Weight Returned 1 ! Charge Weight 1 Rate Amount Body Paper Glazed Paper News Paper Paste Sien ed 183 . 1 -1 w t: "o 5> == t; © 1 ^^ "£ Form No. II — > •« « Pay Roll Summai lY 51 s 1 © 2 ^ £• H e. < a -J '^^ => «M 03 h O e V X O 4> M C o. u X o U A 5 C 1 Q> o > !s 'S *^ u £ •♦i^ s a B O "5 e p 1 a c o D •o > c ^ c« s If) £ u o. 1 s ' X V 1 s 1 c a. . • o ^M s I ^ 's 'C £ ^ >» to <£ a , 43 (J M g ti S. ^ 184 Form No. 12 Envelope as 1 2L 22 IC o rf vO « so •c 4J c "^ s: 1 - •g > » C/) ^^ > ca •a Ji: f*5 3 — 1 CQ = ® J • 1 o ■ 4> gl o 9s w •» 4> QO ^ •k jg l^ « SO E -^ >» m g 1 V ^ •2 E S: M CO 4J 1 33 elf •> i Z tX) z •o a " Small Used " Broken Bottling Corks, Large Used " Broken " Small Used Labeling " Broken Labels, Large Sets Used " " Broken " Small Sets Used " " Broken Pamphlets, Large Used Small " " Destroyed 1 Cartons, Large Used " Destroyed Casing " Small Used " Destroyed Packing Packing Cases, Large " Small Total Material Labor ^ Production: Large Small 86 Tank No.. Gallons _ Emulsion No. ^^5 ^ Compounded Commenced Bottling Summary of Costs Particulars Drugs: Machines @ Material Labor Expense Amount Shipments of Medicine Shipping Number Order Number Urge Small Cost per bottle: Large Small Completed: 190 87 /Emu No. ^ Compound Compound Ision »050 — - Tank No. Gallons_ — -\ Form No. 14 — ed Order Tag Large Small Cases Quantity Cost Value Loose Bottles Large Small Packed Emulsion No. 6050. Pamphlets and Cartons Pamphlets Reg. No. Rate Used Value Destroyed Value Large Small Cartons Large Small Emulsion No. 6050. Labels 11 Rate Quantity Ruined Large Sets Used Per Set $ "5 eg 5 Per Set $ J Emulsion No. 6050, Corks Reg. No. Cost Used Value Destroyed Value Large Small Emulsion No. 6050. Bottles Reg. No. Cost Used Value Destroyed Value Large Small 188 Form No. 15 Warp No. Yards Ends Warper's No. Warper Ticket Lot No. Weight. Rate, $ _ Amount, $ Form No. 16 Warp No. Twister Ticket Loom No. Ends Twister's No. Rate, $ Amount, $ Form No. 17 Picker Ticket Factory Piece No. Yard* Width Rate, $ Amount, $ Picker's No. Approved 189 Form No. i8D Factory Piece No, II71 Style No Finished No. Finished Weight Finished Yards Weaver's No Loom No Weight Yards Form No. 18 C Form No. 18 B Sewing Ticket Factory Piece No. II7I Sewer's No. Yards Burling Ticket Factory Piece No. II7I Employe's No. Yards Form No. 18 A Weaving Ticket Factory Piece No. II7I Weaver's No. .. Cut. Yards [90 Form No. 19 — Cost Sheet Basis: Raw Silk @ $ per pound. Quality No, Yards Weight Width Make up of Warp Ends Yards Make up of Filling Picks Width Reed Disposition Skeins Per cent, added for profits % Materia! Warp -lbs. @_ Throwing. Dyeing Filling Dyeing. Wages Winding Silk lbs. @. Winding Cotton ♦« Warping «* Twisting « Weaving yds. @. Picking *• Burling ♦* Sewing " Total Productive Labor Non-productive Labor Finishing. .yds. Refinishing. Scouring Piece Dyeing. Total Material and Wages Expense Loading Cost of Product. Cost of 100 Yards Sell for .% % .yds. per yd. 191 Form No. 20— -Cost Journal CO +-> ^ a> u O 4> 00 O ^ CO M a> ^ ^ O •3 Mm {i^ O s 'cQ 1 >> ':3 ' 1 03 < 3 S 09 0) 03 a> boo at ^^•^ M ^ o CO v^ ^ ;j o "g 0^ • M -1 192 Form No. 21 — Cost Sheet i2 o a> a 1 1 •«j ■ g <{ «> ► < s 1 'S t •^ u t^ u 1 pc, ^ «« 4> ■♦J S ^ Q ;2 © ^ « > < * a (U ^ d etf 3 4) ctf Q __ — _— — Provide for binding here 193 Form No. 22 — Sub-Analysis 5 1 i 1 is 1 1 1 i i. CO M 1 1 1 04 1 1 c 3 i < -2 c 1 2 S 1 1 194 Form No. 23 — Journal £ If 00 «> 195 Form No. 24- -Purchase Journal _^ c 3 O B rovi ona cou < "S toO^ 4-» d S3 Sf "^-^ o .^'^ +J a^ •s 0) . i: o &^ tu "rt 1 Q 196 Form No. 25- —Sales Journal i Cost of Sales • mount of Sales < « S S ^& to .. l-^ a .s! 2§i, u Bj-a i s IH a> U3 a ;:i ^ ^ a P 197 Form No. 26 — Cash Book. Continued on next page 1 e a (U y ^z > ^ m y 6 4S r-^^ U 1 a <2 Pu 3 ud u 03 «J ^ Q. (U 1 cs Q bb •g X UJ <4H ■4-» , d Uco g ^ in 1 -< « to 1 2 a, -J ^ _ ■M ra (u ^ f,^ 4> S « U /?-J Ol h> ^ ^ t/i S <« 3 •1 X , 1 •s B 1 i E 1 1 1 X 1 i5 fc ;i3 |5 1 9 C 1 o U 1 1 J, •S « o 1 '99 Form No. 27 Monthly Statement for Ledger Accounts Ledger Folio Name of Accounts Postage Expense Salary Wages Freight & Cartage Repairs & Renewals Insurance & Taxes Advertising Selling Expenses Cost of Sales Sales Interest & Discount Merchandise Cash Sales Provisional Account First National Bank Petty Cash Fund Sales Ledger Purchase Ledger Bills Receivable Bills Payable Plant & Equipment Capital Surplus Dividends Profit & Loss For month Balance to date Entries made during the month Debit Credit Trial Balance up to date Profit and Loss Expense Income Balance Sheet Assets Liabilities Form No. 28 — Purchase Journal tMO I .i2 o c c CO uj c a. '•3 4> 4; u) a> 2 14 Form No. 29 — Cash Book 4> M a i A 1 M H 1 ^ " <4H 2^ 55 •M «> M 8 If £^ « +* U ll 1^ ij8» (tft^ "»^ ■«-• §« ' « - oa c« , 1 d jS ^ a< .•S & 1 j3 a (0 Qtf OB « S u ■c <« P4 •♦- A 0) Q 4> . r^ ^ ■* in in ^ 1 Tf 8 CO 8 t-. N CO CO i ^t Tt N M Tf (N • " ^^ 9 d in N 00 8 8 8 8 in d 8 ON ON CO C4 a Q in M Tt *^ CO f^ M N ■t CO § CO rt in CO M C4 00 CO I^ -^ t^ t^ HH »n -^ " - M p» 8 CO t-- CO 'w N I-- t- M o\ M tJ- m' 06 in co" in 5 ON ? s r^ 8n M c> in CO t^ M CO y^ -— ' in '-' ON ON ^ CO in Tt in b be ■*-> G a 'S c •3 *& a JD CO g (4-1 Trial Balance at 3 tfl C t/) .^ tfl tfl V) in CJ in CO in ON 1 xrt in C4 CI 3 5 s t^ ^ CO t ^ en cn CO CO -t CD xrt ON 0^ *^ M 1-1 ^ t^ r^ M ^,,^ § IT) CO IT) °. 8 ? 8 8 8 CO CO rf l-l u-> ■4 xrt in oo xrt ►H r-. M CO *^ tH CO «n ""t § N M ^ Tt N •H fJ. ^ •* xrt m ^ ^_^ to 8 8 en 8 8 •R 8 00 CO CO 1^ vd vd ■4 00 d tA r^ C4 CO o* in rj- CO i^ 00 ^ t^ t^ 8 «0 ro CO 8. t^ «0 CO M to N tf> ^ C4 •t t^ fO M --^ 1 R 8 8 ^ 8 8 xrt 1^ i-i CO a» CO xrt oo ? .? ^ fS tH § s 8 8 8 8 8 8 CO ON •^ 8 »n 0' ON in t^ r^ ""t « Tt in Tf M CO M M M r^ M ^ '2 8 9 ^ 8 xrt CO 8 ". r^ >* M at Q u-» d pi co CI xrt in co' t^ X t- w >s i-< N M 00 fO vO M M ON M ^ Q ^ M r^ 0^ ,_, CO r^ ■^-' X t>. 0^ 4 w xrt OO, xn in in M M •^ "^ rt 1- •S ' a H C3 2 ■& .a X3 •^ cl W5 tn c « V) VI 8 c rt 1 G V '-3 w VI tn tf> u 'S s •— > u ,14 '5 2i .s 1 1 H Pi & u Q tf) PQ rt c x Xi J3 - "rt ^ •n :3 Q ^ D : : ^ 1 .2^. s| ^a S i2 =»• -^•§ No. itings hRe ^ ^ u S t« On ^ ^ ^ 8 ON 6 ^W vO :! -s 2J VO 1- r— < c^ Ji c« •-» bjO i= g to to H-> "^ d ^- iz; .S 2 S S Ph ^i tfl . &fl j_, _ C g . « 'g § On • P y r^ fi. u ^ -72 < VO CT] tiJ +i H 1 c :5 2i "c t; 6^ 6 . 2 s. 4> Od (/> •5. D. • • 3 MH C/) d a> ;s ^ at >» w 'O C3 4> GO ^ V 4:3 p. X UJ 5) -a t S g e < 4> Xi ctf >^ ctf 9i ts Q Form No. 35. price to sell: Cfeik. -AlblMd- DATB EXECUTED. B«»ed on: Cost Sheets of Mill for quarter ending Cost of Cotton Porchased @ Figured on pounds of Cloth Mannfactnred. Made on Warp Yarn No Sley FiUing Yarn No Picks. 190 per pound Loom Length of Warp prepared - yards to produce. .._ .„... yards of Cloth u Warp Yarn : Requires % ^ per pound 1 1 (Allowing for Waste by Charging quantity used during quarter) M 1^ FUlmfYam: Requires % & per pound IS (Allowing for Waste by Charging quantity ated during quarter) -f\ i\ Weaving: 100 pounds of Manufactured Cloth Q per pound £ i Total Coat : 100 pounds of Manufactured Cloth Blaackinc: Cost per yard Pmialunc A BookfpUii^: Cost per yard Trinuninc tt Papcrinc.- Cost per yard ToUi Coat per Yard: Reducmg ^ for increased yardage by stretch in Bleaching & Finishing ProTiduiK fi for Selling Expenses Providing % for Commission and Guarantee Providing % for Profit Increases Total Coat 100/ and equals SeU for per yard 1 Form No. 36. PRICE TO SELL: YARN No Style - DATE EXECUTED - 190 B R 190 inH ased on... Cotton . . purchased .. @ per poi Co«t to Manufacture Yam : Per pound Dveinff Cotton : Color Per pound Twisting: ply; Per pound (Average Labor Cost increased by proportion of Department Expenses) Windinjr: On Per pound Yarn Supplies : Cost of Cones, Tubes, Packing Materials etc. Spooling: Per pound (Average Labor Cost increased by proportion of Departmenf Expenses) Total Cost Allowance ^ for Waste in Winding and Twisting Providing ^ for Selling Expenses freight, etc. . Providing ^ for Profit [ Increases Total Cost 100/ and equals Sell for per pound 212 Form No. 37. Number Range Nt>.. FABltiC Selling Weight ...Ounces Date. .190 Warp Dreased Yds. Maktt-uD of Lets. Weijtht Lbs Rods ricks. Filline Yarn. Ll«. Loom Width Inches csurora WEIGHT ACTOAL WEIGHT ntiCB oeahes COST SUMMAKY Off Loom, Material, Yards, Weight, Lbs. Width, Inch« Total Charge for Material, Finished, Ywds, W.g«, Mixing and Oiling, Lbs. @ Weight, Lbs. Carding and Spinning, Lte. Q Width, Inchca Dyeing, Lbs. O Twisting, Lbs. & Sell 8 per Yard Warp Spooling LU. @ Warp DrtMing and Drairing in Yds. @ Wearing and Weaving Expense Yds. @ Bnrliog and Sewing, Yds. fl m-einsr in Piece. Lbs. ft FinishiDK. Yds. Total Charge for Material and W«r«s. Adding % for all Expenses. Cost of Prodi cing and Selling, f per Yard ._. ._ 213 PART IV REPORT FORMS REPORT FORMS Report Forms Nos. 1 to 9, inclusive These forms are never submitted as the main exhibits of a report, but are supplementary exhibits added, to supply statistics used in figuring costs and the selling basis. (See percentage costs.) Report Form No. 10. (Page 236.) This form is a balance sheet to be submitted as part of the report to the proprietors of the business. Your attention is directed to the way the items for inventory and furniture and fixtures are qualified; to the method of summing up the current liabilities ; and to the form of entering the changes in the capital accounts when it is not desirable to make an exhibit showing the partnership accounts. The balances carried, from Exhibit B are the connecting links between the balance sheet and the statement of profit and loss. Report Form No. 11. (Page 238.) This form is a profit and loss account for a trading business. The object is to show the net profits of the business for the period and the distribution of the profits to the interested parties. On the debit side of the account is charged the expenses, the accounts being grouped so as to exhibit in detail and in total the expenses of the business in the manner most suited to the require- ments of the business. Your attention is directed to the grouping of the expenses and the detail. Never show an extended analysis unless required ; the tendency to go to extremes in analyzing accounts too often destroys the value of the report. The average layman cannot comprehend an elaborate report and is only confused with a mass of detail. The gross profit in trading carried from Exhibit C is the con- 15 217 2i8 ACCOUNTING PRACTICE necting link between this exhibit and the trading account; the dis- tributed profit carried to the partners' accounts in the balance sheet is the connecting link between this exhibit and the balance sheet. This method of closing the account and carrying the net profit down for distribution is not universally adopted. Some accountants simply show the distribution of the net profit by carrying the items short ; viz. : Balance being net profit for the year distributed as follows: Edward S. Johnson, one third $6 253.72 David J. Hill, two thirds 12 507.43 Total for the year 1901 (extended).... $18 761.15 Report Form No. 12. (Page 240.) This form is a trading account for a trading business. The prime object in view is to exhibit the basis upon which the goods can be priced. The cost of sales is shown as a charge against the net sales, and the result is the gross profit on trading. On the debit side, the inventory of merchandise for the beginning of the period should be added to the net purchases of merchandise for the period, and from the sum should be deducted the inventory for the end of the period. The result should be the cost of the merchandise sold. The sales are entered on the credit side of the account for the gross amount, and the returns and allowances on the sales are de- ducted to show the net sales for the period. The balance of the account is the gross profit, and the percentage of the gross profit to the cost of sales should be about the average per cent, added to the purchase price of the merchandise to determine the selling price. Never confuse the sales and purchases by including sales returns and allowances with the purchases, or by including the returned pur- chases with the sales. The English custom of entering trading charges in this account is not regarded favorably in America, except when showing the operations of several departments of the same business; in this case REPORT FORMS 219 the expenses of each department are entered to show the result for the department. Report Form No. 13. (Page 242.) This form is a balance sheet to be submitted as part of the report to the officers or directors of a corporation. Your attention is directed to the method of setting up the capital stock so as to show the amount authorized and the amount issued. Note also the means of showing the surplus account. If dividends were paid, an exhibit should be made for the surplus account. The net profit carried from the manufacturing and trading ac- count is the connecting link between this exhibit and Exhibit B. Report Form No. 14. (Page 244.) This form is a manufacturing and trading account to be prepared where no distinction is made between manufacturing and selling. The form is sometimes split after the manufacturing expenses and the balance gross profit is carried to a profit and loss state- ment, where the general expenses and commission and guarantee are set up against the gross profit. (See Report Form No. 15.) Where items, foreign to the business, are entered in the profit and loss account, a statement of profit and loss should be made in addition to the manufacturing and trading account. Report Form No. 15. (Page 246.) This form is a profit and loss account to be submitted in con- nection with a trading account, when the selling division of the busi- ness is operated independently. The connecting link between the surplus account, or balance sheet, and this exhibit is the net profit. The connecting link between the trading account and this exhibit is the gjoss profit carried from the trading account. Report Form No. 16. (Page 248.) This form is a trading account to be submitted in connection with a manufacturing account and a profit and loss account. The method of setting up the cost of production as part of the 220 ACCOUNTING PRACTICE purchase price, in determining the cost of sales, is shown, and this item is the connecting Hnk between this exhibit and the manufactur- ing account. The connecting link between this exhibit and the profit and loss account is the gross profit on trading which is carried to profit and loss. Never show the sales of waste in a trading account. Report Form No. 17. (Page 250.) This form is a manufacturing account to be submitted in connec- tion with a trading account. The prime feature is the cost of the production which is the con- necting link between the manufacturing account and the trading account. The sales of waste are an offset to the cost of material consumed and should be set up in this account, but not deducted from the cost of material consumed. Report Form No. 18. (Page 252.) This form is a comparative statement of profit and loss, to be submitted in connection with a comparative trading account and a balance sheet for a business operated by separate departments. Report Form No. 19. (Page 254.) This form is a comparative trading account to be submitted in connection with Report Form No. 18. Your attention is particularly directed to the way the labor is treated in the carpet department and in the furniture department. Both items of labor appear in the trading account as set up, because they are elements of the cost of sales. The labor of the furniture department is included in the inventory for the end of the period, because the finished furniture is inventoried at the finished value, and the labor charged is not conditional with the sale, whereas the cost of making and fitting the carpets is condi- tional with the sale and, in character, virtually an added cost. The connecting link between this report and the profit and loss account, Exhibit B, is the gross profit. REPORT FORMS 221 Report Form No. 20. (Page 256.) This form is a balance sheet which is submitted as part of the report consisting of Forms Nos. 20 to 2"^, inclusive. The reference to exhibits is made to illustrate a complete report. Your attention is particularly directed to the form of certifying the main exhibits when the report is certified. The connecting link between this exhibit and Exhibit B is the net profit for the fiscal year. Report Form No. 21. (Page 258.) This form is a statement of profit and loss for a fiscal year (year ending some date other than the calendar year). Your attention is directed to the form of setting up bad debts charged off and recovered; and to interest and discount earnings and expenses. The connecting link between this exhibit and Exhibit C is the gross profit, which is carried from the trading account. Report Form No. 22. (Page 260.) This form is a trading account which is submitted in connection with the foregoing Exhibits A and B. The features to be considered are the purchases of domestic mer- chandise, the purchases of foreign merchandise and the entry for duties, foreign freight, etc. Special charges for expenses incurred in connection with pur- chases, which are considered as part of the purchase price and in- cluded in the inventory, should be set up with the purchases before deducting the inventory for the end of the period. The connecting link between this exhibit and Exhibit B is the gross profit on trading which is carried to the profit and loss account. Report Form No. 23. (Page 262.) This form is a schedule of the bills receivable (notes of others held by the company). Some accountants describe such exhibits as schedules in the text of the report. There is no more reason for characterizing a balance 222 ACCOUNTING PRACTICE sheet or statement as an " exhibit " than there is for characterizing a schedule as an " exhibit." The arrangement of the items is not imperative, unless the report requires full detail. The commonest plan of arranging bills receivable is to head col- umns for maker, time, due date and amount, and simply schedule the items using only one line for each item. This exhibit is supplementary to the balance sheet. The con- necting link between this exhibit and the balance sheet is the total of the bills receivable which appears in the balance sheet. Report Form No. 24. (Page 263.) This form is a schedule of accounts receivable and has been favorably considered ; but care must be exercised in qualifying the accounts or you will lay yourself open to criticism. When a report is made at a later date, the accounts which were settled can be shown. A. simple schedule of the ledger folios, names and amounts is generally sufficient. For other forms see previous remarks, and Report Form No. 47. This exhibit is supplementary to the balance sheet. The connect- ing link between this exhibit and the balance sheet is the total of the accounts receivable which appears in the balance sheet. Report Form No. 25. (Page 264.) This form is a schedule of the policies for unexpired insurance and gives the details of each policy. The common method is simply to list the policies similar to Report Form No. 47, showing only the number of the policy, the expiry date, the premium, and the unexpired portion. The connecting link between this exhibit and the balance sheet is the total of unexpired insurance which appears in the balance sheet. Report Form No. 26. (Page 265.) This form is a schedule of bills payable (company's outstanding notes) and the remarks applying to Report Form No. 23 are appro- priate to this exhibit. REPORT FORMS 223 The connecting link between this exhibit and the balance sheet is the total of the bills payable, which appears in the balance sheet. Report Form No. 27. (Page 266.) This form is a schedule of accounts payable. If the company is financially embarrassed, the accounts may be set up to show the urgency of each claim by stating the due date, terms, etc. The connecting link between this exhibit and the balance sheet is the total accounts payable, which appears in the balance sheet. Report Form No. 28. (Page 268.) This form is a balance sheet to be submitted as a part of the report made to the stockholders, fiscal agents, or prospective pur- chasers of an interest in the corporation. The fixed assets and fixed liabilities are set up first because of their relative importance to the clients. The connecting link between this exhibit and Exhibit II is the balance of the surplus account. Report Form No. 29. (Page 270.) This form is a statement of the surplus account and is submitted in connection with the balance sheet Exhibit I, because it is not con- sidered good form to embody statements in the balance sheet. Your attention is directed to the method of entering dividends, plant and equipment charged off, and capital stock donated. The connecting link between this exhibit and Exhibit I is the surplus for the end of the period. The connecting link between this exhibit and Exhibit III is the net profit carried from Exhibit III. The connecting link between this exhibit and Exhibit II is the surplus at the beginning of the period and the surplus at the end of the period. Report Form No. 30. (Page 272.) This form is a statement of profit and loss to be submitted in connection with the other exhibits of this report. 224 ACCOUNTING PRACTICE Your attention is directed to the entries for bad accounts and the amount recovered on bad accounts. It is particularly directed to the method of closing the account, carrying the balance down, and showing items which are not necessarily a part of the business. Interest and discount are financial transactions, and there are many conditions where it is absolutely necessary to show the items as exhibited. When depreciation of an extraordinary character is charged off, such charges are also set up in the same method as the interest and discount. The connecting link between this exhibit and Exhibit II is the net profit, which is carried to the surplus account. The connecting link between this exhibit and Exhibit IV is the gross profit carried from the trading account. Report Form No. 31. (Page 274.) This form is a trading account to be submitted in connection with the other exhibits of this report. The remarks relating to Report Form No. 16 are appropriate to this exhibit. The connecting link between this exhibit and Exhibit III is the gross profit carried to the profit and loss account. The connecting link between this exhibit and Exhibit V is the net cost of manufacturing carried from the manufacturing account. Report Form No. 32. (Page 276.) This form is a manufacturing account submitted in connection with the other exhibits of this report. Your attention is directed to the manner of setting up the sales of waste, which is an offset to the cost of material consumed. Report Form No. 33. (Page 276.) This form is a comparative balance sheet and is supplementary to the other exhibits of this report. The connecting links between this exhibit and the report proper are the various items of the balance sheet for the end of the period, which is Exhibit I, and the balances of surplus for the beginning and end of the period which appear in Exhibit II. REPORT FORMS 225 Reports Forms Nos. 34 to 40 inclusive These forms are similar to the previous forms, excepting that they are a little more complicated. The period covered by this report was three years. The Report Form No. 35 is different from the others because the circumstances called for separate accounts. The Report Form No. 36 is also different for the same reason. This statement shows the real profits and the Report Form No. 43 shows the profits as appearing on the books of the company. The claim that the profits for 1905 was $22 194.33 and for 1906 $15 025.81 is refuted by the copy of the profit and loss account for 1906, which is Exhibit 43. Setting up accounts in the form shown in this report will exhibit the true sources of all items of surplus and profit and loss. Report Form No. 40 illustrates the method of setting up a com- parative balance sheet or statement of assets and liabilities. The latter name applies to this form, because the condensed trial balance for the date of the audit is embodied in the exhibit. Report Form No. 41. (Page 302.) This form is a comparative statement of profit and loss for three years, and illustrates the method of showing the various items, so that a comparison can be made. Your attention is directed to the method of setting up the credits which were deducted from the sales for the year. Report Form No. 42. (Page 304.) This form is a condensed trial balance for the date the audit was made, and should be submitted, if the audit is made a date later than the closing of the books, for the purpose of determining the condi- tion of the business for a client who is a possible purchaser of an interest in the business. Report Form No. 43. (Page 306.) This form is a summary of the profit and loss account as it appeared on the books of the company, and is submitted to illustrate the proper 226 ACCOUNTING PRACTICE method of reporting the results as shown by the books when the books are inaccurate, because of errors of omission or commission. Report Form No. 44. (Page 308.) This form is a statement of the account of the company con- trolled by the vender of the company examined. Report Form No. 45. (Page 309.) This form is a comparative statement of statistics and percentages of interest to the vendee and its importance is evident. Report Form No. 46. (Page 310.) This form is a condensed trial balance and illustrates the method of establishing the equilibrium of the trial balance by adding to the general accounts the totals of the accounts receivable and accounts payable. Report Form No. 47. (Page 311.) This form is a schedule of bills receivable and illustrates the meth- ods of condensing the schedules when full particulars are not essential. Report Form No. 48. (Page 312.) This illustrates the form used when certifying a balance sheet separated from the regular report. It is very acceptable to bankers because it enables them to see at a glance the amount of the current assets and liabilities and fixed assets and liabilities. This balance sheet is compiled from Report Form No 28, page 268. In General Report Results not on Books. — The statement of profit and loss embodied in the report of an audit need not appear in that form on the books of the company in order to certify that the results are as per the hooks. It is essential only that the net results as shown by the report appear on the books. If the net results shown in the report do not coincide with the books, a statement should be added to your report to show wherein the books diflfer from your report. (See Report Form 43.) Percentages of the Various Elements op Cost (simple). Percent- age of Manfg. Cost. Percent- age of Whole Cost. Percent- age of Sales. I. 1 Cost of Material, 198 551 28 57% 53% 45% 2. Cost of Labor, 107 611 .43 31% 29% 24% 3- Manufacturing Expenses, 10 693.77 3% 3% 2% 4- General Expenses, 30 766.55 9% 8% 7% 5- Manufacturing Cost, 347 623.03 100% 93% 78% 6. Selling Expenses: Commission and Guarantee, 28 941 .11 7% 6% 7- Whole Cost, 376 564.14 100% 84% 8. Profits for the year 1 90 1 , 69 471 -37 16% 9- Sales, 446 035.51 100% Report Form No. i. (For report, see Report Forms Nos. 13 and 14.) 227 Percentages of the Various Elements of Cost (Compound). Percent- age of Manfg. Cost. Percent- age of Whole Cost. Percent- age of Sales. Cost of Material, 201 040.69 62% 56% 47% Cost of Labor, loi 342.17 31% 28% 24% Manufacturing Expenses, Manufacturing Cost, 21 874.60 7% 100% 6% 90% 5% 324 257.46 76% Inventory of Merchandise, Dec. 31, 1900, 117 394.11 Purchases of Merchandise during year, Total, 140 291.87 581 943-44 Deduct: Inventory of Mer- chandise, Dec. 31, 1 90 1 , 94 762.18 Cost of Sales, 487 181.26 90% 76% Selling Expenses, Whole Cost, 54 892.13 10% 100% 9% 542 073.39 85% • Profits for the year 1901, 93 874.60 15% Sales for the year 1901, 635 947-99 ■ 100% Re^port Form No. 2. (See also Report Forms Nos. 6 and 15, 16 and 17.) 228 Condensed Statement of Profit and Loss for the Year 1901. Inventory of Merchandise, December 31, 1900, Purchases of Merchandise made during the year, (Less : Purchase Credits for Returns and Allowances.) Total, Less : Inventory of Merchandise December 31, 1 90 1 , 17 691.40 100 471 . 18 118 162.58 19 III. 44 Cost of Sales, General Expenses, Selling Expenses, Whole Cost, Profits for the year 1 90 1 , 99 051 14 II 47769 25 311-87 135 840.70 18 761.15 Sales for 1901 (Less Returns and Allowances), 154 601.85 Report Form No. 3. (For report, see Report Forms Nos. 10, 11 and 12.) 229 Condensed Statement of Profit and Loss for the Year 1901. Inventory of Material, December 31, 1900, Purchases of Material made during 1901 (Less: Purchase Credits for Returns and Al- lowances), Total, Less: Inventory of Material, December 31, 1901, 50 701,80 178 611.85 229 313.65 30 762.37 Cost of Material, Labor, Manufacturing Expenses, General Expenses, 198 551 . 28 107 611 .43 10 693.77 30 766.55 Cost of Manufacturing, Selling Expenses, Commission and Guarantee, 347 623.03 28 941 . II Whole Cost, Profits for the year 1 90 1 , 376 564.14 69 471-37 Sales (Less Returns and Allowances), 446 035.51 Report Form No. 4. (For report on above, see Report Forms Nos. 13 and 14.) 230 Condensed Statement of Profit and Loss for the Year 1901. Inventory of Merchandise and Material, Decem- 141 309.72 ber 31, 1900, Purchases of Merchandise during the year 1901 (Less : Purchase Credits for Returns and Allow- ances) , 201 755-31 Purchases of Material during the year 1901 (Less : Purchase Credits for Returns and Allow- ances), Totals, 194 609.77 537 674.80 Less: Inventory of Merchandise and Material, December 31, 1 90 1 , 123 461.12 Cost of Merchandise and Material, 414 213.68 Labor, 191 604.11 Factory Expenses, 37 692.15 General Expenses, 24 608.21 Selling Expenses, 57 223.44 Whole Cost, 725 341.59 Profits for the Year 1901, 84 367.22 Sales for the year (Less Returns and Allow- ances), 809 708.81 Report Form No. 5. 231 Condensed Statement of Profit and Loss for the Year 1901. Inventory of Material, December 31, 1900, Purchases of Material made during the year 1 90 1 , (Less : Purchase Credits for Returns and Allow- ances) , Total, Less: Inventory of Material, December 31, 1901, Material Consumption, Deduct Offset : Sales of Waste, Cost of Material, Labor, Manufacturing Expenses, Manufacturing Cost of Production, Inventory of Merchandise, December 31, 1900, Purchases of Merchandise made during 1901 (Less: Purchase Credits for Returns and Allow- ances) , Total, Less: Inventory of Merchandise, December 31, 1 90 1, Cost of Sales, Selling Expenses, Whole Cost, Profits for the Year 1901, Sales, (Less: Returns and Allowances), 47 211 201 777.84 248 989.66 39 477-86 209 511.80 8 471 II 201 040.69 loi 342.17 21 874.60 324 257.46 117 394.11 140 291 .87 581 943-44 94 762.18 487 181 26 54 892 13 542 073 39 93 874 60 635 947-99 Report Form No. 6. (For report on above, see Report Forms Nos. 15, 16 and 17.) 232 Condensed Statement op Profit and Loss for the Year 1901. Inventory of Furniture, December 31, 1900, Purchases of Finished Furniture during the Year 1901, Purchases of Unfinished Parts during the Year 1 90 1, Labor: Setting Up and Finishing Furniture Total, Less : Inventory of Furniture, December 31, 1 90 1 , 121 809.15 198 761.13 177 693.55 10 763.88 509 027.71 104 786.22 Cost of Sales, Salary and Wages, Expenses, Whole Cost, Profits for the Year 1 90 1 , 404 241.49 39 72347 49 767.33 493 732 29 49 767.34 Sales, (Less: Returns and Allowances), 543 499-63 Report Form No. 7. (For report on above, see Report Forms Nos. 18 and 19.) 16 233 Condensed Statement of Profit and Loss for the Year 1901. Inventory of Carpets, December 31, 1900, Purchases of Carpets during the Year 1 90 1 (Less : Purchase Credits for Returns and Allowances), Total, Less: Inventory of Carpets, December 31, 1901, 117 322.44 310 267.78 427 590.22 108 427-39 Cost of Carpets, Labor: (Cutting, Fitting and Laying Carpets), Salary and Wages, Expenses, Whole Cost, Profits for the Year 1901, 319 162.83 9 431 29 34 311-28 49 777-65 412 683.05 58 744-22 Sales for the Year 1901, (Less: Returns and Al- lowances), 471 427.27 Report Form No. 8. (For report on above, see Report Forms Nos. 18 and 19.) '34 Condensed Statement of Profit and Loss for the Fiscal Year Ending October 31, 1902. Inventory of Merchandise, October 31, 1901, Purchases of Foreign Merchandise (Less : Credits for Returns and Allowances), Duty, Foreign Freight, etc.. Purchases of Domestic Merchandise (Less: Credits for Returns and Allowances), Total, Deduct: Inventory of Merchandise, October 31, 1902, 127 604.11 304 1 1 1. 82 176 801.15 217 444.26 825 961.34 118 43273 Cost of Sales, Selling Expenses, General Expenses, (Includes Interest and Bad Debts), Whole Cost, Net Profits for the fiscal year ending October 31. 1902, 707 528.61 54 608.15 1 67 846.18 829 982.94 25 376.76 Sales, (Less: Returns and Allowances), 855 359-70 Report Form No. 9. (For report on above, see Report Forms Nos. 20 to 22.) 235 Balance Sheet, Messrs. JOHNSON Assets : Cash on hand December 31, 1901 : First National Bank, Petty Cash, Total, 31 827.54 500.00 32 327-54 1 Bills Receivable as per Exhibit D, ! 1 100,00 Accounts Receivable as per Exhibit E, Sundry Sales Accounts, Edward Davis, Total. 41 397.60 I 000.00 42 397.60 Inventory of Merchandise: (No responsibility assumed for quanti- ties and prices.) 19 III. 44 Unexpired Insurance as per Exhibit F, 1 047.30 Furniture and Fixtures (As per books) , 9 722.38 Total Assets, 105 706.26 Report Form No. 10. 236 AND HILL. Exhibit A. December 31, 1901. Liabilities : Bills Payable as per Exhibit G : Bank Accommodations, Sundry Creditors, Total, Accounts Payable as per Exhibit H, 25 ccc.oo 10 coo.oo 35 000.00 7 321.15 Total Current Liabilities, E. S. Johnson Capital Account: Balance, December 31, 1900, Profits for year. Exhibit B, Total, Less Personal Drawings, Balance, December 31, 1901, David S. Hill Capital Account : Balance, December 31, 1900, Profits for year. Exhibit B, Balance, December 31, 1901, 9 534-13 6 253.72 IS 787-85 2 005.70 42 321.15 37 095.53 12 507-43 13 782.15 49 602.96 Total, 105 706.26 237 Messrs. JOHNSON Profit and Loss Account for th] Debits: General Expenses: Office Salary and Wages, Office and General Expense, Rent, Telephone and Telegrams, Legal Expense, Total, Selling Expenses: Salesmen's Salaries, Salesmen's Expenses, Advertising, Gratis Account, Commission, Total, Balance being Net Profits carried down, 5 471.62 2 113.87 2 000,00 947.60 944.60 8 722.15 10 233.54 3 944." 321.54 2 090.53 II 477-69 25 311-87 18 761.15 Total, 55 550-71 Division of Profits: E. S. Johnson, one third, David S. Hill, two thirds. 6 253.72 12 507-43 Total. 18 761.15 Report Form No. 11. 238 AND HILL. Exhibit B. YEAR ENDING DECEMBER 31, I9OI. Credits: Gross Profits on Trading carried from the Trading Account, Exhibit C, 55 550.71 '■^.^ Total, 55 550-71 Balance carried from above, 18 761.15 Total, 18 761. IS 239 Messrs. JOHNSON Trading Account for the Debits: Inventory of Merchandise, December 31, 1900. (No responsibility assumed for quantities and prices.) Purchases of Merchandise. (Less Purchase Credits for Returns and Allow- ances.) Total, Deduct: Inventory of Merchandise, December 31, 1 90 1. (No responsibility assumed for quantities and prices.) 17 691 100 471 40 18 118 162 19 III 1 •58 •44 Cost of Sales, Balance, being Gross Profits on Trading carried to Profit and Loss Account, Exhibit B, 99 051 55 550 .14 •71 Total, 154 601 .85 Report Form No. 12. 240 AND HILL. Exhibit C. Year Ending December 31, 1901 Credits: Sales of Merchandise, Less : Sales Credits for Returns and Allowances, 157 833.72 3 231.87 Net Sales for the year 1901, 154 601.85 \ Total. 154 601.85 241 THE WILLIAMS Balance Sheet, Assets: Cash on hand, December 31, 1901, Petty Cash Fund, First National Bank, Total, Inventory of Material, (Not responsible for quantities and prices.) Parts and Findings, Sole Leather, Goat Skins, Sundries, Total, Bills Receivable as per Exhibit C, Accounts Receivable as per Exhibit D, Unexpired Insurance as per Exhibit E, Total Assets. 300.00 29 654.18 14 983.11 9 37784 3 225.00 3 176.42 29 954.18 30 762.37 10 000.00 115 49782 371-50 186 585.87 Report Form No. 13. 343 SHOE COMPANY Exhibit A. December 31, 1901. Liabilities: Bills Payable as per Exhibit F, 10 000.00 Accounts Payable as per Exhibit G, 27 601.18 Total Current Liabilities, 37 601.18 Capital Stock: Authorized (1000 Shares @ $100 par value), Unissued, Issued, December 31, 1901, 100 000.00 30 500.00 69 500.00 Surplus Account: Balance, December 31, 1900, Profit for 1 90 1 as per Exhibit B, Balance, December 31, 1901, 10 013.32 69 471-37 79 484.69 Total. 186 58587 243 THE WILLIAMS Manufacturing and Trading Account Debits: Inventory of Material, December 31, 1900. (No responsibility assumed for quantities and prices.) 50 701.80 Purchases of Material made during 1 90 1. (Less: Credits for Returns and Allowances.) Total, 178 611.85 229 313.65 Deduct : Inventory of Material, Decem- ber 31, 1 90 1. (No responsi- bility assumed for quantities and prices). 30 762.37 Cost of Material, 198 551.28 Labor, 107 611.43 Manufacturing Expenses: Rent, Heat, Light and Power, Supervision, Sundry Expenses, Total, 2 500.00 520.00 3 900.05 3 77372 10 693.77 General Expenses: Office Salaries, Office Expenses, General Expenses, Freight and Cartage, Total, 16 229.62 7 947-6o 4 271.83 2 317-50 30 766.55 Commission and Guarantee, 28 941. II Net Profits for the year carried to Exhibit A, 69 471-37 Total, 446 035.51 Report Form No. 14. 244 SHOE COMPANY. Exhibit B. FOR THE Year Ending December 31, 1901. Credits: Sales for the year 1901. Less: Returns and Allowances, 457 433-33 II 397.82 Net Sales for the year 1 90 1 , 446 035.51 \ Total. 446 035.51 245 THE ELLISON Profit and Loss Account for the Debits: Selling Expenses: Salesmen's Salaries, Salesmen's Expenses, Rent of Salesroom, Commission, Delivery Service, Heat, Light and Power, Total, Administration Expenses, Balance, being Net Profits, IS 114. 11 19 837.72 2 001.34 3 925-29 2 972.87 I 005.76 44 857.09 10 035.04 93 874.60 Total, » 148 766.73 Report Form No. 15. 246 MANUFACTURING COMPANY Exhibit 6. Year Ending December 31, 1901. Credits: Gross Profits carried from Trading Account, Exhibit C, 148 766.73 >< Total, 148 766.73 247 THE ELLISON Trading Account for the Debits: Inventory of Merchandise, December 31, 1900. (No responsibility assumed for quantities and prices.) 117 394. II Cost of Production for the year, as per Manufac- turing Account, Exhibit D, 324 257 46 Purchases of Merchandise. (Less : Credits for Returns and Allowances.) Total, 140 291 87 581 943 44 Deduct : Inventory of Merchandise, December 3 1 , 1 90 1. (No responsibility assumed for quantities and prices.) 94 762 18 Cost of Sales, 487 181 .26 Balance being Gross Profit on Trading carried to Exhibit B, 148 766 •73 Total, 635 947 •99 Report Form No. 16. 248 MANUFACTURING COMPANY. Exhibit C. Year Ending December 31, 1901. Credits: Sales, Deduct : Credits for Returns and Allowances, 638 135.15 2 187.16 Net Sales for the year 1901, 635 947-99 "■■'-^.,,, Total, 635 947-99 17 249 THE ELLISON Manufacturing Account for the Debits: Inventory of Material, December 31, 1900, (No responsibility assumed for quantities and prices.) 47 211.82 Purchases of Material. (Less: Credits for Returns and Allowances.) Total, 201 777.84 248 989.66 Deduct: Inventory of Material, December 31, 1 90 1. (No responsibility assumed for quantities and prices.) 39 477-86 Consumption of Material, 209 511 .80 Labor, loi 342.17 Manufacturing Expenses: Supervision, $3 974.16 Heat, Light and Power, i 1 70 . 24 Sundry Expenses, 8 922.37 ' Depreciation, 7 807.83 Total, 21 874.60 Total, 332 728.57 Report Form No. 17. 250' MANUFACTURING COMPANY. Exhibit D. Year Ending December 31, 1901 Credits: Sales of Waste. Balance being Manufacturing Cost carried to Trading Account, Exhibit C, Total, 8 471. II 324 257.46 33^ 728.57 351 THE HOME FURNITURE Profit and Loss Account for the Debits: Furniture. 1 s Carpets. Total. Salary and Wages: General Office Salaries (Prorated on a basis of Gross Sales), Department Salary and Wages. lo 893.74 28 829.73 9 470.80 24 840.48 20 364.54 53 670.21 Expenses : General Expenses (Pro- rated on a basis of Gross Sales), 16 340.61 14 206.20 30 546.81 Sundry Department Expenses, Rent (Based on floor space). Insurance, Warehouse Expense, 12 906.95 II 200.00 3 922.16 5 397-61 15 330.21 10 75500 4 763-71 4 722.53 28 237.16 21 955.00 8 685.87 10 120.14 Net Profits on Furniture, 49 767-34 Net Profits on Carpets, 58 744-22 Total Net Profits, carried to Exhibit A, 108 511.56 Totals, 139 258.14 142 833.15 282 091.29 Report Form No. 18. 252 AND CARPET COMPANY. Exhibit B. Year Ending December 31, 1901. Credits: Gross Profits on Trading, carried from Exhibit C : Furniture, Carpets, Total, Furnitvire. Carpets. Total. 139 25814 142 833.15 282 091.29 \ Totals, 139 258.14 142 833.15 282 091.29 25a THE HOME FURNITURE Trading Account for the Debits: Inventory, December 31, 1900. (No responsibility assumed for quantities and prices.) Furniture Carpets Total 121 809.15 117 322.44 239 131-59 Purchases for the year 1 90 1 . (Less : Returns and Allowances :) Furniture, Parts of Furniture, Carpets, Total, 198 761.13 177 693-55 310 267.78 686 722.46 Labor: Setting up Furniture, Totals, 10 763.88 10 763.88 509 027.71 427 590.22 936 617.93 Deduct: Inventory, December 31, 1 90 1. (No re- sponsibility assumed for quantities and prices.) 104 786.22 108 427-39 213 213.61 Cost of Furniture, 404 241.49 Cost of Carpets, 319 162.83 Cost of Furniture and Carpets, 723 404.32 Labor: Fitting Carpets, 9 43129 9 431-29 Balance, being Gross Profits carried to Exhibit B, 139 258.14 142 833.15 282 091.29 Totals, 543 49963 471 427.27 I 014 926.90 Report Form No. 19. 254 AND CARPET COMPANY. Exhibit C. Year Ending December 31, 1901. Credits: Sales for the year 1 90 1 , Deduct: Returns and Al- lowances, Furniture Carpets Toul 544 687.17 I 187-54 473 540.72 2 113-45 I 018 227.89 3 300.99 Net Sales for the year: Furniture, Carpets, Total. 543 499.63 471 427-27 I 014 926.90 \ 1 543 49963 471 427.27 I 014 926.90 255 Balance Sheet, Messrs. MARSHALL Assets: Cash on hand, October 31, 1902: Petty Cash Bank, Franklin National Bank, Total, Bills Receivable as per Exhibit D, Accounts Receivable: Sales Ledger Balances, Exhibit E, A. W. KUne, R. J. Jones, Total, Inventory, October 31, 1902, (Not responsible for quantities and prices) : Merchandise, Supplies, Total, Unexpired Insurance, as per Exhibit F, Furniture and Fixtures (as per books) , Total. 400.00 30 769.18 32 259.08 500.00 I 100.40 "8 432.73 I 104.14 31 169.18 636.49 33 859-48 119 536.87 I 712.80 II 809.25 198 724.07 Report Form No. 20. 356 AND COMPANY. Exhibit A AS AT October 31, 1902. Liabilities: Bills Payable as per Exhibit G, Accounts Payable as per Exhibit H, 40 000.00 II 367.64 Total Current Liabilities, Capital Stock, Surplus Account : Balance, October 31, 1 90 1 , Profits as per Exhibit B, Balance, October 31, 1902, 21 97967 25 376.76 SI 367-64 100 000.00 47 356.43 \ \ Total, Part of report made December 5, 1902, Certified Public Accountant. 198 724.07 257 Messrs. MARSHALL Profit and Loss Account for the Fiscal Debits : General Expenses: Salary and Wages, Office Expense, Rent, Heat and Light, Insurance and Taxes, General Expenses, Total, Selling Expenses: Salesmen's Salaries, Salesmen's Expenses, Advertising, Commission and Brokerage, Premiums, Gratis Account, ( Total, Bad Debts, as per Exhibit (omitted), Interest and Discount Expense: Interest on Notes and Accounts, Discount on Sales, Total, Balance being Net Profits for the fis- cal year carried to Exhibit A, Total, 29 47361 13 287.93 15 000.00 1 184.22 2 118.69 9 307.18 20 777.84 15 93767 5 1 1 1-44 3 972.15 574.82 8 234.23 3 18715 4 987.16 70 371.63 54 608.15 2 114.80 8 174.3^ 25 376.76 160 6,5.65 Report Form No. 21. 258 A.VD COMPANY. Exhibit B. Year Ending October 31, 1902. Credits: Gross Profits on Trading carried from Trading Account Exhibit C, Recovered on Bad Accounts, Interest and Discount Earnings: Interest on Notes and Accounts, Discount on Purchases, Total. I 147.60 10 765.81 147 83109 901.15 1 1 II 913.41 . Total, Part of report made December 5, 1902, Certified Public Accountant. 160 645.65 ^59 Messrs. MARSHALL Trading Account for the Fiscal Debits: Inventory of Merchandise, October 31, 1901. (No responsibility assumed for quantities and prices.) Purchases of Domestic Merchandise. (Less: Credits for Returns and Allowances.) Purchases of Foreign Merchandise. (Less: Credits for Returns and Allowances.) Duty and Foreign Freight, Total, Deduct: Inventory of Merchandise, October 31, 1902. (No responsibility assumed for quantities and prices.) 127 404 217 644 304 III 176 801 II • 26 82 15 825 961 118 432 34 73 Cost of Sales, Balance being Gross Profits on Trading carried to Profit and Loss, Exhibit B, 707 528 147 831 61 09 Total. 855 359 .70 Report Form No. 22. 260 AND COMPANY. Exhibit C. Year Ending October 31, 1902. Credits: Sales, Deduct: Returns and Allowances, 857 471 10 3 in. 40 Net Sales for the fiscal year, 855 359-70 N. Total. Part of report made December 5, 1902, Certified Public Accountant. 855 359-70 261 Messrs. MARSHALL and COMPANY. Exhibit D. Schedule of Bills Receivable, October 31, 1902. Everett & Kuntz (makers) : 60 day note due November 5, 1907. Indorsed by R. W. Everett and A. W. Kuntz, payable at the Elmore National Bank, with in- terest at 6%, Underbill & Hoag (makers) : 90 day note due November 14, 1907. Indorsed by Amsink & Co. and G. J. Underbill, payable at the First National Bank of Utica, N. Y., with interest at 6%, Edward H. Hammond & Son (makers): Six months note due November 11, 1907. No indorsers, payable at the Oneida National Bank of Utica, N. Y. Interest added to face of note, Total Bills Receivable, 150.00 286.49 636.49 Report Form No. 23. 363 Messrs. MARSHALL and COMPANY. Exhibit E. Schedule op Accounts Receivable October 31, 1902. Ledger FoHo Namb Good Questionable Bad 14 17 19 20 22 24 26 28 37 49 58 104 143 169 184 195 199 205 Rathburn & Back, Armour & Co., Davis & Co., Walker & Co., Davis & Wilson. H. M. Pinch & Sons. A. Wilbur & Co., Washburn Plumbing Co., J. W. Gates & Co., Doolittle & Daws, Gem Iron Co., Marvel Iron Works, A. W. Butler & Co., Wilson Iron Works. Marcy Store Co.. Edwards Supply Co., Halsey & Howe, Amity Iron Co., Total Bad Accounts, Total Questionable Ac- counts, Total Good Accounts, 194.15 310.50 10 761 . 22 I 891.50 3 471-50 1 171.60 4 722.16 2 316.80 2 765.00 2 97403 47.60 117.65 184.05 94.05 40.00 90. 10 7.17 I 100.00 30 578.46 443-35 I 237.27 443-35 30 578.46 Total Accounts Receiv- able, 32 259.08 Report Form No. 24. 263 Messrs. MARSHALL and COMPANY. Exhibit F. Schedule of Insurance Policies, Showing Unexpired Insurance, October 31, 1902. Insurance on Stock: Policy No. 4716835, Queen Insurance Co., for $7 000.00 Expiring January 5, 1905; Term 3 years; Premium, 216.00 Unexpired term, 2 years, 2 mos., and 5 days; Unexpired Premium, Policy No. 3946912, Amaranth Insur- ance Co., for $40 000.00 Expiring January 5, 1907; Term 5 years; Premium, i 800,00 Unexpired term, 4 years, 2 mos., and 5 days; Unexpired Premium, Insurance on Plate Glass: Policy No. 1 392 1 7 5, Wheeling Plate Glass Insurance Co., for $2 000.00 Expiring December 31, 1902; Term, i year; Premium, 36.00 Unexpired term, 2 mos. ; Unexpired Premium, Insurance on Furniture and Fixtures: Policy No. 4962871, Lancaster Insur- ance Co., for $10 000.00 Expiring June 30. 1903; Term i year; Premium, 37 -20 Unexpired term, 8 mos., Unexpired Premium, 157.00 I 525.00 6.00 24.80 Report Form No. 25. 264 Messrs. MARSHALL and COMPANY. Exhibit G. Schedule op Bills Payable October 31, 190a. First National Bank, Accommodation 30 day note, Due November 25, 1902, at First National Bank, First National Bank, Accommodation 90 day note, Due December i, 1902, at First National Bank, American Loan & Trust Co., 6 mos. note, Due January i, 1903, at American National Bank, Total Bills Payable, 10 000.00 20 000.00 10 000.00 40 000.00 Report Form No. 26. 18 Messrs. MARSHALL and COMPANY. Exhibit H. Schedule of Accounts Payable October 31, 1902. Ledger Folio. 17 R. V. Davis & Co., 20 A. W. Bums & Son, 21 G. E. Armstrong & Bro., 23 Newmarket Co., 29 Newhall Ship Chandlery Co. 39 Newton Machine Co., 170 Quaker City Iron Co., 195 Remington & Sherman Co., 204 Rhoades & Maloney, Total Accounts Payable October 31, 1902. I 470 60 5 609.87 94 •75 I 704 •87 422 •71 I 875 .60 10 .00 47 •50 131 •74 11 367 64 Report Form No. 27. 266 Exhibit I. THE WILLIAMS & HENDERSON WOODENWARE COMPANY, PHILADELPHIA. PENNSYLVANIA, Balance Sheet, December 31, 1901. Note: — The above illustrates the method of marking the two-page Ex- hibits when they are bound in a Report. THE WILLIAMS and HENDERSON Philadelphia, Balance Sheet, Assets: Plant and Equipment: Real Estate and Buildings, Machinery, Tools and Movables, Office Furniture and Fixtures, Stable Equipment, Total, Cash on hand, December 31, 1901: Office Bank, Royal National Bank, Total, Accounts Receivable: Sales Ledger, Balance of Control Account, Frederick W. Vincent, Salesmen's Advances, Total as per Exhibit VII, Bills Receivable as per Exhibit VIII, Inventories, December 31, 1901: Merchandise, Material, Supplies, Total, Unexpired Insurance as per Exhibit IX. Total Assets, 341 609 82 139 842 IS 129 395 01 3 981 17 10 401 39 400 00 94 761 .82 no 401 .72 10 000 .00 4 981 .22 207 431 .87 SI 606 .6S 4 122 39 625 229.54 95 161.82 125 382.94 II 500.00 263 160.91 411 .81 I 120 847.02 Report Fojrm No. 28. 268 WOODENWARE COMPANY, Pennsylvania. Exhibit I. Dbcbmbbr 31, 1 90 1. Liabilities: Capital Stock (Authorized 4 000 Shares @ $100), Surplus Account, Balance as per Exhibit II. Bills Payable, as per Exhibit X, Accounts Payable, as per Exhibit XI. Total Current Liabilities, Total. 50 000.00 50 220.35 400 000.00 620 626.67 100 220.35 I 120 847.02 269 THE WILLIAMS and HENDERSON Philadelphia, Surplus Account for the Debits: Dividends : Dividend No. 8, Feb. 12, 1 90 1, 3% $12 000.00 Dividend No. 9, Aug. 10, 1901, 3% 12 000.00 Total, Plant and Equipment charged off as per minutes of meeting of Board of Directors held July 15, 1 90 1, Balance, being Surplus, December 31, 1901, Ex- hibit I, Total, 24 000.00 75 000.94 620 626.67 819 627 .61 Report Form No. 29. 270 WOODENWARE COMPANY, Pennsylvania. Year Ending December 31, 1901. Exhibit II. Credits: Balance of Surplus Account, December 31, 1900, Net Profits for the year 1901 carried from Profit and Loss Account. Exhibit III, Capital Stock Donated, 100 Shares, par value. 750 762.13 58 865.48 10 000.00 371 THE WILLIAMS and HENDERSON Philadelphia, Profit and Loss Account for the . Debits: General Expenses: Office Supplies and Expense, Office Salaries and Wages, Postage, Telegrams and Telephone, Freight and Expressage, Cartage, Sundries, Total, Selling Expenses: Salesmen's Salaries, Salesmen's Expenses, Advertising, Commission and Brokerage, Gratis Account, Sundry Selling Expenses, Total, Bad Accounts, as per Exhibit XII, Balance carried down, 4 743-16 20 692.41 947 -60 1 128.15 3 942.17 4 753-21 5 982.77 10 407.81 5 493 14 5 841.77 11 223.88 I 071-33 3 985-44 42 189.47 38 023.37 I 987.32 49 245-91 Total, 131 446.07 Interest and Discount Expense: Interest on Notes and Accounts, Discount on Sales, Total, Balance, being Net Profits carried to Surplus Account, Exhibit II, 4 722.15 10 777-45 15 499-60 58 865.48 Total, 74 365 08 Report Form No. 30. 273 WOODENWARE COMPANY, Pennsylvania. Exhibit III. Year Ending December 31. 1901 Credits: Gross Profits carried from Trading Account, Exhibit V, Recovered on Bad Accounts, 131 05136 394.71 '\^ Total, 131 446.07 Balance carried from above, Interest and Discount Earnings: Interest on Notes and Accounts, Discount on Purchases, Total, 3 7"-8S 21 407.32 49 245-91 25 119.17 Total, 74 365.08 273 THE WILLIAMS and HENDERSON Philadelphia, Trading Account for the Debits: Inventory of Merchandise, December 31, 1900. (No responsibility assumed for quantities and prices.) Purchases of Merchandise for the year 1 90 1 , Net Cost of Manufacturing carried from the Manufacturing Account, Exhibit IV, Total, Less: Inventory of Merchandise, December 31, 1 90 1. (No responsibility assumed for quantities and prices.) 218 777.40 37 601.22 320 495-57 576 874.19 207 431-87 Cost of Sales, Balance being Gross Profit on Sales carried to Profit and Loss Account, Exhibit II, 369 442.32 131 051-36 Total, 500 493-68 Report Form No. 31, 274 WOODENWARE COMPANY. Pennsylvania. Exhibit IV. Year Ending December 31, 1901. Credits: Sales of Merchandise for the year 1901, Less: Returns and Allowances, 531 827.90 31 334.22 Net Sales of Merchandise, 500 493-68 "\ Total, 500 493-68 27s THE WILLIAMS and HENDERSON Philadelphia, Manufacturing Account for the Debits: Inventory of Material, December 31, 1900. (No responsibility assumed for quantities and prices.) Purchases (Net) for the year 1901, Total, Deduct: Inventory of Material, Decem- ber 31,1901. (No responsibility ' assumed for quantities and prices.) 41 701.50 190 333-11 ' 232 034.61 51 606.65 Cost of Material Consumption, Labor, Manufacturing Expenses: Sundry Expenses and Supplies, Supervision, Salary and Expense, Heat, Light and Power, Insurance and Taxes, Accidents, Repairs and Renewals, Depreciation, Total, 7 575.22 10 954.60 4 777-83 9 662.55 I 471-82 3 788.69 15 786.44 180 427.96 97 542.11 54 017. IS Total, 331 987.22 Report Form No. 32. 276 WOODENWARE COMPANY, Pennsylvania. Exhibit V. Year Ending December 31, 1901. Credits: Sales of Waste, Balance being Net Cost of Manufactur- ing carried to Trading Account, Ex- hibit IV, II 491-65 320 49557 ""x„ Total. 331 987.22 277 THE WILLIAMS and HENDERSON Philadelphia, Comparative Statement of the Assets and Liabilities of the 1900 1901 Assets: Plant and Equipment: Real Estate and Buildings, 516 610.76 341 609.82 Machinery, 147 202.26 139 842.15 Tools and Movables, 136 205.38 129 395-01 Office Furniture and Fix- tures, 4 423.52 3 981.17 Stable Equipment, II 557-IO 10 401.39 Cash on hand. 87 544.38 95 161.82 Bills Receivable, 9 100.00 II 500.00 Accounts Receivable: Sales Ledger, 120 431 . II no 401 . 72 Frederick W. Vincent, 10 000.00 Salesmen's Advances, 3 987.41 4 981.22 Inventories: Material, 41 701-50 51 606.65 Merchandise, 2x8 777.40 207 431-87 Supplies, 3 764.18 4 122.39 Unexpired Insurance, 517.93 411. 81 Totals, I 301 822.93 I 120 847.02 Report Form No. 33. 278 WOODENWARE COMPANY, Pennsylvania. Balance Sheets for December 31, 1900 and 1901. Exhibit VI. 1900 400 000.00 750 762.13 60 000.00 9 I 060 . 80 I 301 822.93 190Z 400 000.00 620 626.67 50 000.00 SO 220.35 I 120 847.02 279 THE WINDHAM FOUNDRY AND MANUFACTURING COMPANY, Report on audit for the three years ending December 31, 1904; December 30, 1905, and December 31, 1906. The books supporting this report are as follows : Cash Books, Nos. 31 and 32; General Journals, Nos. 19, 20, and 21; Purchase Journal, Nos. 8 and 9 ; Sales Books, Nos. 41 to 54; General Ledgers, Nos. 5, 6, and 7; Sales Ledgers, Nos. 20, 21, and 22; Purchase Ledgers, Nos. 10, 11, and 12; Sales Credit Book. No. 8. 19 TEXT OF REPORT CLARENCE M. DAY, CERTIFIED PUBLIC ACCOUNTANT. NEW YORK. New York, April lO, 1907. Mr. Edward H. Henderson, 90 Wall Street, New York. Dear Sir: In accordance with your instructions, I have made an audit of the books and accounts of The Windham Foundry and Manufacturing Company of San Francisco, California, for the three years ending December 31, 1906, and, as a result of said audit, I submit herewith the following exhibits, viz: Exhibit I (page 288), Balance sheet of The Windham Foun- dry and Manufacturing Company on December 31, 1906, Exhibit II (page 290), Statement of Surplus for the three years ending December 31, 1906, Exhibit III (page 292), Statements of Profit and Loss for the three years ending December 31, 1904; December 30, 1905, and December 31, 1906, Exhibit IV (page 294), Statement of the Manufacturing and Trading Accounts for the year ending December 31, 1904, Exhibit V (page 296), Statement of the Manufacturing and Trading Accounts for the year ending December 31, 1905, 283 284 ACCOUNTING PRACTICE Exhibit VI (page 298), Statement of the Manufacturing and Trading Accounts for the year ending December 31, 1906, Exhibit VII (page 300), Comparative Statement of Assets and LiabiHties of Balance Sheets for Decem- ber 31, 1903; December 31, 1904; De- cember 30, 1905; December 31, 1906, and the Trial Balance for April i, 1907, Exhibit VIII (page 302), Comparative Statement of the Profit and Loss for the three years ending Decem- ber 31^ 1906, Exhibit IX (page 304), Condensed Trial Balance for April i, 1907, Exhibit X (page 306), Condensed Statement of the Profit and Loss Accounts (showing the results as they appear on the books of the com- pany) for the year ending December 31, 1906, Exhibit XI (page 308), Condensed Statements of the business done with T. Dixon and Company dur- ing the years 1904 and 1905, and a com- parison of the sales to them and the total sales during the years 1904, 1905, and 1906, and Exhibit XII (page 309), Comparative Statement for the three years ending December 31, 1906, showing per- centages of the expenses and profits to the net sales. In connection with the above, I report for your consideration the following matters: TEXT OF REPORT 285 Real Estate, $72,500.00, The real estate consists of lots Nos. 40, 41, 42, 43, 44, 89, 90, 91, 92, and 93 in block No. 941 of the official city map. There are 500 feet fronting on Lakeview Avenue and 200 feet fronting on Forty- first Street. The entire property is used for factory purposes and the assessed valuation, according to 1906 tax bills, was $70,000.00. Tools and Fixtures, $g,i5g.oi. The value of tools and fixtures is taken from the ledger account for tools and fixtures. The account is composed mainly of purchases of small tools, factory and office fixtures. No provision has been made for depreciation out of the earnings during the period exam- ined, and no renewals or replacements were charged against profit and loss. In my opinion, the value is excessive. Patterns, $32,^66.67. The vakie of patterns is taken from the ledger account for pat- terns.. The account is composed of charges for patterns purchased and manufactured, and in addition to these charges are the following entries : December 15, 1904, Increased valuation in Pattern Account, $3,182.92 December i, 1905, Increased valuation in Pattern Account, 2,329.97 November 10, 1906, Increased valuation in Pattern Account, 1,573.94 These entries do not appear to have been authorized, for I examined the minute book and found nothing relating to them in the minutes of the meetings of the Board of Directors. In my opinion, the valuation is excessive, for no provision was made for depreciation. Register Account Machines, Patterns, etc., $12,^58.85. This account is carried on the ledger at the valuation stated, and is composed of the following items, valued as per books: 286 ACCOUNTING PRACTICE Model Carfare Register Patents and Designs, $6,ooo.cx) Special Machinery for making Registers, 4,190.00 Patterns, etc., used in making Registers, 2,312.85 Valuation increased without authority, 456.00 Total (as per books), $12,958.85 In my opinion, the valuation on the above is excessive, because no provision was made for depreciation. Wagons, Carts, and Mules, $592.50, An inventory of wagons, carts, mules, harness, and appurtenances was taken on December 31, 1906, and I was informed that the inven- tory was appraised. I have examined the clerical accuracy of the inventory, but assume no responsibility for the quantities and prices. Inventories, December ^i, igo6, $52,^28.84. No responsibility is assumed for the quantities and prices of these inventories. Fronts. An entry was made charging the profit and loss account for 1905, and crediting the profit and loss account for 1906 with $1,500. This item was not considered when compiling the statements embodied in this report. Sales to T. Dixon and Company. Exhibit XI shows a comparison between the total sales and the sales made to T. Dixon and Company. Earning Capacity. The relation of the earnings to the capital stock for the three years under examination is entitled to serious consideration. Espe- cially in view of these facts: the capital stock has been increased TEXT OF REPORT 287 without increasing the working capital, and no provision was made for depreciation. The earnings for the year 1904 were .0072;^ of the capital stock; the earnings for the year 1905 were .1347^^ of the capital stock; the earnings for the year 1906 were .0551^1^ of the capital stock, and the average earnings for the three years were .o655 $272 263.78 $270 889.92 $226 164.07 Report Form No. 41. 30a AND MANUFACTURING COMPANY, California. Profit and Loss. December 31, 1906. Exhibit VIII. Credits Sales for the Year, Less Credits for: Returns and Allowances, Deductions, Freight, etc., Register Rebates, Net Sales for the Year, Pool Tax, Interest Account, 1904 281 496.66 6 463 .61 2 878.08 272 154.97 [08.81 $272 263.78 190S 278 149.68 3 932.18 3 664.68 I 493-86 269 058 .96 I 486.50 344.46 $270 889.92 1906 237 72797 5 4811S 2 857.74 3 47471 225 91437 249.70 $226 164.07 303 THE WINDHAM FOUNDRY San Francisco, Condensed Trial Balance, DEBITS. Plant Equipment (as per books) : Real Estate, loi 440.00 Tools and Fixtures, 9 15901 Patterns, Machinery, etc.. 32 966.67 Register Account, Machines, Patterns, etc.. 12 958.85 Wagons, Carts, Mules, etc.. Total, 567-50 157 092.03 Inventory, December 31, 1906 (as per books). 52 728.84 Cash Balance, April i, 1907 (cer- tified). 5 710.27 Bills Receivable, as per Exhibit (omitted) , 636.49 Accounts Receivable: Customers, 30 804.84 Samples, 207 .82 Metropolitan Impt. Co., I 246.42 Total, 32 259.08 Deductions Freight, etc., 791-65 Labor — Molders, II 371.85 " Finishers, 5 36769 " Miscellaneous, 8 281. II " • Pattern Makers, 574-34 Fuel Account, 2 333-71 Iron Account, 3 138-50 Merchandise, 7 178.30 Special Merchandise, 9 971.26 Expense, 2 620. 16 Stable Expense, 675-35 Real Estate Expense, I 502.22 Insurance, 889.52 Total, 54 695.66 $303 122.37 Report Form No. 42. 304 AND MANUFACTURING COMPANY. California. April 1, 1907. Exhibit IX. CREDITS. Capital Stock Issued, Mortgage on Real Estate, Accounts Payable, as per Exhibit (omitted) : Purchase Accounts, Stockholders, Total, Profit and Loss Accounts, Sales Account, Interest Account, 1 32737 2 439 84 173 800.00 50 000.00 3 767-21 7 226.57 68 298.74 29.85 $303 122.37 .305 THE WINDHAM FOUNDRY San Francisco, Condensed Statement of the (Showing results as they For the Year Ending DEBITS. Register Rebates for account of 1 905 , I 493-86 Expense Item for account of 1905, 47.90 Bad Accounts, as per Exhibit (omitted), 287.43 Transferred to Profit and Loss for the year 1 906 (carried below) , I 500.00 Dividends: 12% to Stockholders, as per Exhibit (omitted), 12% to Stockholders, as per Exhibit (omitted), Total, 15 360.00 I 320.00 16 680.00 Balance of Account of Profits for 1905 (carried below). 4 001 .64 $24 010.83 Balance of Profit and Loss, Decem- ber 31, 1906, 15 025.81 $15 025.81 Report Form No. 43. 306 AND MANUFACTURING COMPANY, California. Profit and Loss Accounts appear on the books.) December 31, 1906. Exhibit X. CREDITS. Balance, December 30, 1905, 22 194.33 Pool Tax, for account of 1905, I 486.50 Dividends Waived: J. J. Baxter, 30.00 J.T. Shieller. 30.00 R. N. Smith, 150.00 Perry Belmont, 120.00 Total, 330.00 ^ . $24 010.83 Balance of Account of Profits for 1905 (from above), 4 001 .64 Profits of 1905 carried from above I 500 00 Interest Account for 1906, 249.70 Profits on Manufacturing and Trad- ing for 1906, 7 700.53 Increased Valuation placed on Pat- tern Account, I 573-94 $15 025.81 307 Exhibit XI. THE WINDHAM FOUNDRY and MANUFACTURING COMPANY, San Francisco, California. Condensed Statements of the Business Done with T. Dixon & Com- pany During the Years 1904 and 1905. Balance, December 31, 1903, Sales, etc., during 1904, Cash, Sundry Credits, Total Credits, Balance, December 31, 1904, Sales, etc., during 1905, Cash, Sundry Credits, 65 677.98 70 780.85 4 910. 56 145 735.99 150 646.55 71 163.0*0 68 375.70 136.458.83 14 187.72 140 681 . 55 • - . • 154 869.27 139 538.70 Balance, December 30, 1905, $15 330.57 .- . Comparison of Total Sales and Sales to T. Dixon & Co. Sales T. Dixon & Co. 1904 1 00 <; 272 154-97 ^269 058.96 225 914-37 145 375-99 140 681 . 55 92 610.73 1Q06 Three Years, $767 128.30 $378 668.27 Report Form No. 44. 308: Exhibit Xll. THE WINDHAM FOUNDRY and. MAS^UFACXURING COMPANY, San Francisco, California. Comparative Statement for the Three; Years Ending December 31, 1906, Showing the Percentages of the Expenses and Profits to the Net Sales. Material, Labor, Expense, Profits, Bad Accounts, Gross Sales, Allowances, etc., Net Sales, Interest, 1904 Amount 150 097.10 103 351-00 •17 847.00 926.45 42.23 281 496.66 9 341.69 272 154.97 108.81 Percent, of net , sales ■55151 37975 06557 00340 00015 03432 190S Amount 131 803.72 103 726.59 17 411 .08 17 465.11 483.42 278 149.68 9 090.72 269 058.96 344.46 Percent of net sales .48987 •38551 .06471 .06491 .00179 ,02379 [906 Amount 102 867.19 97 905-63 17 441.02 7 66?. 80 287.43 237 727-97 II 813.60 225 .914.37 249.70 Percent. of net sales .45533 •43337 .07720 .03392 .00127 05229 Report Form No. 45. 309 THE JAMES BOAK CORPORATION. Condensed Trial Balance, December 5, 1905. Folio 10 Bond Account, 500.00 15 Bills Receivable, 8 910.00 20 Revenue Account, 40 70 1. .60 25 Office Expense, 2 140.60 28 Salary, 10 407.15 30 Cash, 2 .000.00 35 Stationery and Supplies, 310. IS 40 Interest and Discount, I 105.10 45 Commission, 405.11 SO Heat and Light, III. 10 60 Bad Accounts, 47.00 70 Insurance, 99.01 80 Bills Payable, 5 000.00 91 Capital, 50 000.00 Totals, 24 930.12 96 806.70 Accounts Receivable, 104 711-23 Accounts Payable, 32 834.65 Totals, 129 641.35 j 129 641.35 Report Form No. 46. 310 Messrs. DEMPSEY & COTTON. Schedule of Bills Receivable, December 31, 1905. Maker Time Due date Amount Davis & Clark, 3 mos. Jan. 15, 1906 900.00 James Brice & Co., 30 days 14 10, " 500.00 A. W. Voss, 60 " " 31. " 100.00 Samuel Ross, 90 " Feb. II, " 875.00 Henry Morgan, 3 mos. Mch. IS. " I 000.00 Clark & Price, 3 " Feb. 5. " 400.00 Samuel Desevee, 30 days •• 15. *' 900.00 Frank & Engle, 60 " •• 10, •• I 000 00 R. W. Bums & Son, 30 " Jan. IS. " 100.00 Kelley & Cole, 3 mos. «> 31. " • I 000.00 Jones & Warren, , 4 •• 31. " 400.00 Lewis & Fowler, 3 " •• 16. •• i I 000.00 Washburn & Klare, 30 days Feb. 4, " 100.00 Total, 8 275.00 Report Form No. 47. 3" CLARENCE M. DAY, CERTIFIED PUBLIC ACCOUNTANT, lOO BROADWAY. New York, April 5, 1902. THE WILLIAMS 8c HENDERSON WOODENWARE COMPANY, Philadelphia Pennsylvania. Assets: Cash on Hand and in Bank, Bills Receivable, Accounts Receivable, Inventory of Material and Merchandise, Unexpired Insurance, Real Estate and Buildings, Machinery and Equipment, Total Assets, $ 95 161.82 II 500.00 125 382.94 263 160.91 411. 81 $341 609.82 283 619.72 $ 495617.48 $ 625 229.54 $1 120 847.02 Liabilities: Accounts Payable, Bills Payable, Surplus, Capital Stock, Total Liabilities, $ 50 220.35 50 000.00 $620 626.67 406 000.00 $ 100 220.35 $1 020 626.67 $1 120 847.02 I hereby certify that the foregoing statement, in my opinion, correctly sets forth the financial condition of The Williams & Henderson Wooden ware Com- pany as at the close of business on December 31, 1901. Certified Public Accountant. Report Form No. 48. 312 INDEX Accommodation paper, 78. Account current, 77. Accounts payable, schedule of, 208-9, 266. verifying, 41, Accounts receivable, 42. schedule of, 263. verifying, 40. Accrued taxes, 80. Adjustments to ledger, 15, 40. Administration expenses, 80, 145. Amplified trial balance, 77, Analysis for a summary account, 27. Analysis sheet, 28, 31, 35. deciding headings for, 29. Analyzing account, 27. ledger, 54. extensive accounts, 3;^. Arrangement of exhibits, 85. Arranging the books, 7. Arranging the working papers, 14. Assets and habilities, fixed, 7. Audit of the cash, 17. Auditing a trading business, 5. Auditing a manufacturing business. 4. Auditor's duty, 26. Automatic cost system, 130. Bad debts collected, 79. written off, 79. Balance sheet, 52, 236, 242, 256, 268, 278, 288, 300. intermediate, 52. verifying, 40. Balancing the each, 18. Bank column on cash book, 70. Basic cost, 134, 135. Basis of computations (cost finding) , 91 . of percentages, 100. Beginning to operate the cost system, 119. to use cost system forms, 118. 21 3 Bills payable, schedule of, 265. verifying, 41. Bills receivable, discounted, 77. schedule of, 262, 311. verifying, 40. Binding reports, 86. Block a ledger, 60. when to, 63. Bonds of a new corporation, 44. outstanding, verifying, 42. verifying, 40. Branch office accounts, 75. Building and machinery repairs, 164. supplies, 168. Business done, condensed statement of, 227, 228, 229, 230, 231, 232, 234. 23s, 306, 308. Capital accounts, 7. Capital stock, 44. verifying, 42. Capitalization, entries for, 43. Carton cost system, working instruc- tions of, 130. Cash, verifying, 40. Cash book, 198, 202. Cash fund, 69. Cash payables, 71. Cash payments entry, 71. Cash receipts entry, 69. Cash sales, 70. Certificate from banks, 18. Certificate of indebtedness, verifying, 42. Certified balance sheet, 51. Character of business, 3. Charge sHp, 182, 183. Charges for freight, 107. Charges, planning, 105. Chart of cost system, 93. Check marks, 85. Checking, 86. 13 314 INDEX Checks outstanding, i8. Classes of expenditures, 94. Closing books of corporations, 85. of partnerships, 85. Cloth estimating sheet, 212. Collection of bad debts, 79. Colored pencils, 26. Combining card board, 133. Commencing the cost system, 119. Commission on sale of capitalization, 79- Comparative balance sheet, 278, 300. Comparative condensed trial balance, 39- Comparative statements, 52, 302. Comparative statistics, 309. Completed cost sheets, 99. Comprehensive analysis, 27, 34. Computing costs, 116, 117, 125. no system, 125. Concrete plan of operating cost system, 94. Condensed statement of profit and loss, 109, no. III, 112, 113. of business done, 227, 228, 229, 230, 231, 232, 234, 235, 306, 308. Condensed trial balance, 38, 304, 310. Control accounts, 82. Control of material, 119. Control sheet, 204, 205. Controlling accounts, planning of, 93. Corporations, closing books of, 85. new, 44. Cost, estimating, 13. finding, 89, 116, 117. of manufacturing typewriters, es- timating, 126. Costs, computing, 116, 117, 125. no system, 125. Cost journal, 192. Cost sheet, 180, 186, 191, 193, 213. Cost sheets, completed, 99. Cost system, beginning to operate, 119. commencing of , 119. concrete plan of operating, 94. entries for general books, 95. forms, beginning to use, 118. installing of, 118. operating of , 93, 98, 129. method of, 93, 98. plan of, 93, 98. ! Cost system, planning of, 93, 102. putting in operation of, 119. what is a, 89. Cost systems, 89. figures on ledger, 95. for carton factory, 128. cotton mill, 135. drug laboratory, 146. silk mill, 152. woolen mill, 154. lithographing, 161. kinds of, 91. Cotton, 135. Cotton mill cost system, working in- structions, 140. Cotton waste, 135. Cutting lumber in circles, 121. Daily balance sheet, 72, Dates used in report, 84. Deciding heading for analysis sheet, 29. Department expenses, 81, 145, 164. provision for, 102. Department cost system, 91. Department cost sbeet, 193. Department pay rolls, 115. Department supplies, 167. Deposits not on cash book, 24. Differences on a ledger, 54. Discount, interest and, 39. verifying unexpired, 41. Discount column in cash book, 70, Distributing unproductive labor and expense, 115. Dividends, from investments, 80. paid, 39. waived, 80. Division of expenses, 145, Drug cost system, working instruc- tions, 148. Elements of cost, 89. Emulsions, 148, envelope for, 185. Entries for capitalization, 43. for general books (cost system), 95. Envelope for assembling charges, 134. Estimating cost, 13. of manufacturing typewriters, 126. Excessive valuation of inventories, 83. Exchange, 71. INDEX 315 Exhibit, 78. what is an, 78. Expense account (cost system), 98. Expense cost, 145, 151. Expenses, provision for, 10 1. Expenses and profits, 157. Factory expenses, 81. provision for, 102. and suppHes, 106, 165. Factory records, 105. Factory supplies, 167. Figuring of charge for lumber, 121. of pay roll, 120, 121. of square stock, 121. Financial audit, 37. plan of, 37. Finding of material cost, 118. of labor cost, 119. Finished product, 169. First audit of a new corporation, 44. Fiscal periods, 51. Fixed assets and liabilities, 7. Foreman's wages, 104. Form of certificate, 52. of report, 52, 86. Frame spinning, 137. Fraud and embezzlement, 26. Futures, 157. General audit, 3. plan of, 9. General books and a cost system, 10 1, General expense supplies, 168. General expenses, 81, 145, 165. provision for, 102. General ledger index, 73. General suggestions for audit, 14. General system, planning a, 65. Gifts to a corporation, 80. Good will, 81. Grouping the books, 7. Heat, light, and power, 106, 164. supplies of, 168. Home office expenses, 80. Idle periods, 100. Important features of a business, no, III. Improved voucher system, 74. Inactive periods, 100. Installing a cost system, 118. Insurance, verifying unexpired, 41. Insurance and taxes, 165. Interest and discount, 39. Interest on capital, 84. Interested parties, 43. Intermediate balance sheets, 52. Invective language, 49. Inventories, verifying, 41. Inventory, 84. for cost system, 167. taking, 119. when to take an, 119. Items not deposited, 24. Items previously charged capitaliza tion, 83. Kinds of cost systems, 91. Labor, 104. cost of, 142, 150, 166. finding, 119. in trading account, 79, 112. on ledger, 98, 102. Letter heading, 86. Light and power, 106. Loans, verifying, 42. Locating differences, 54. Long term expenses, 73, 168, Looking over plant, 103. Lumber, figuring charge for, 121. Machinery expense, 151. Machine costs, 93. Machine hour, 93. Machine shop expense, 106. Main exhibits, 85. Making adjustments to ledger, 46. Making cloth, 139. Making notes, 48. Making paste, 133. Making plan of audit, 9. Making yam, 137. Manufacturing account, 250, 276. Manufacturing and trading, account of, 244, 294, 296, 298. report on, 50. Manufacturing business, auditing a, 4. report on, 50. Material, 97, 104, 118. classification of, 167. consumed of, 149, 150. 3i6 INDEX Material, cost of, 145. finding, 118. received, 148. Merchandise, 169. Method of operating cost system, 93, 98. Mill expenses, 145. Mixing glue, 133. Monthly entries, 72. Monthly statements, 200, 206. Mule spinning, 137. New corporations, 44. Notes, 42, 48. Nominal accounts, 7. Non-productive labor, 105. Opening cotton, 135. Opening a new ledger, 73. Operating, report on, 51. Operating cost systems, 93, 98, 129. Opinions, 48. Order of work, 13. Order tag, 181. * Outline of auditing cash, 17. Partnerships, closing books of, 85. Pay roll, 119, 129, 166. account, 98. detail of, 120. figuring of , 120, 121. summary of, 184, Percentage costs, 91, 100, loi, 108, 114. Percentages, use of , 116, 117. verifying, 10 1. Performing a financial audit, 3. a general audit, 3. Periodical audits, 26. Perpetual inventory, 106. Personal accounts, 7. Petty cash fund, 69. Picker tickets, 189. Planning of a general system, 65. of charges, 105. of controlling accounts, 93. of cost system, 93, 102. Plan of financial audit, 37. of general audit, 9. of operating cost system, 93, 98. Plant and equipment written off, 79. Power, 106. Preliminary expenses, 44. Prime costs, 90. Process cost, 91. Productive labor, 104. time card, 174, 175. Production ledger, 10 1. Profit and loss, 42. account, 238, 246, 252, 258, 272, 292, 302, condensed statement of, 109, 110, III, 112, 113. Promoter's expenses, 44, 80. Proof of cost system, 100. Property, verifying, 41. Provisional account, 73, 194. Provision for department expenses, 102. for expenses, 10 1. for factory expenses, 102. for general expenses, 102. for selling expenses, 102. Purchase journal, 68, 196, 201. Purchase ledger column, 70. Purchases, 43, 67. in report, 84. Putting cost system in operation, 119. Quarterly statements, 136. Queries, 85. Real accounts, 39. Receipts on account of mortgages, 24. Received registry sheet, 132, • Receiving book, 176. Reconciliation of cash payments and vouchers, 22. of cash receipts and deposits, 24. of check book and bank vouchers, 22. of check book and pass book, 23. of payments and checks, 21. of receipts and deposits, 23. Register number, 107, Registering material, 107, Registering sheet, 176. Relation of profits to investment, 82. Report on manufacturing and trading, so- on manufacturing business, 50. on operating, 51. on several plants, 52. INDEX 317 Report on trading business, 49. on treasurer's accounts, 51. preparing, 48. Reports in general, 51. Report text, 282. Roving, 143. Salary and wages, ^^. Sales, 43. Sales journal, 67, 197. Sales ledger column, 70. Sales of waste, 1 1 1 . Sales office, 166. Schedule, 78. of accounts payable, 208-9, 266. of accounts receivable, 263. of bills payable, 265. of bills receivable, 262, 311. of unexpired insurance, 264. what is a, 78. Schemes for simplifying work, 120. Section a ledger, 57. Selling expenses, iii, 165, 168. provision for, 102. Selling price, 109, 116, 117. Shipments of medicine, 151. Shoddy making, 158. Shop order, 91. Simple analysis, 27, 28. Source of statements, 86. Spinning, 143. Square stock, 122. Statement, 78. what is a, 78. Statements made by others, 86. Stock card, 108, 179. Stocks, verifying, 40. Store room, 107. Summary of analysis, 36. of analysis sheets, $$. of cash book, 19. of check book, 19. of pass book, 20. Supplies, 84, 90. Surplus account, 270, 290. Surplus, verifying, 42. Surrendered capitalization, 80. Tags, 188, 190. Taking an inventory for cost system, 119. Taxes, insurance and, 165. Time cards, 131, 132, 173, 174, i 5. Trading account, 240, 248, 254, 260, 274. Trading business, auditing of, 5. report on, 49. Transportation of figures, 56. Treasurer's accounts, report on, 51. Trial balance, amplified, 77. condensed, 38, 304, 310. Trying cost system forms, 118, 119. Twister ticket, 189. Unexpired discount, 80. verifying of, 41. Unexpired insurance, 78. schedule of, 264. verifying of, 41. Unproductive labor, 105, 164. Use of percentages, 116, 117. Vendor's agreement, 44. Verifying accounts payable, 41. accounts receivable, 40. balance sheet, 40.' bills payable, 41. bills receivable, 40. bonds, 40. bonds outstanding, 42. capital stock, 42. cash, 40. certificate of indebtedness, 42. inventories, 41. loans, 42. percentages, 10 1. property, 41. stocks, 40. surplus, 42. unexpired discount, 41. unexpired insurance, 41. Voucher check, 82. Voucher record, 74. Voucher register, 68. Voucher system, improved, 74. Vouching payments, 21, 25, 26. Wages of foreman, 104. Waste, 135. Warper ticket, 189. Weaving, 143. Weekly closing, 129. Weekly time card, 175. What is a cost system ? 89. 3i8 INDEX What is a schedule? 78, a statement? 78. an exhibit? 78. When to block a ledger, 63. to take an inventory, 119. Woolen mill cost system, working in- structions, 154. Wool sorting and washing, 157, Work in process, 98. in process account, 96. in process inventory, 168. Work order, 132, 177, 178. Work purchased, 89. Working instructions for carton cost system, 130. for cotton mill cost system, 140. for drug cost system, 148. for woolen mill cost system, 154. Working papers, 14. Yam estimating sheet, 211. Yarn made from waste, 145. Yam supplementary wages, 144. Yam supplies, 144. (1) UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY Return to desk from which borrowed. This book is DUE on the last date stamped below. .Sjgy^ FEB 18 1948 13Jan'57FC REC'D LD 28 1956 JAN 3 1966 6 REC LOAN DEPT. LD 21-100m-9,'47(A5702sl6)476 8 D 9 PM YC 91258 ^ 236292