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UNITED STATES DEPARTMENT OF AGRICULTURE ieee BULLETIN No. 865

Contribution from the Bureau of Markets George Livingston, Chief

Washington, D. C. f August 16, 1920

A CLASSIFICATION OF | LEDGER ACCOUNTS FOR CREAMERIES

By

GEORGE O. KNAPP and BURTON B. MASON, Assistants in Market Business Practice, and A. V. SWARTHOUT Investigator in Market Business Practice

CONTENTS |

Introduction . .. .

Chart of Ledger Recounts Closing the Beoks

Assets Balance Sheet

Liabilities, Reserves, and Net Worth . . Income and Expense Statement .. . Income Accounts Installation of Additional Equipment . Expense Accounts nies The Nature of Bookkeeping

WASHINGTON GOVERNMENT PRINTING OFFICE

UNITED STATES DEPARTMENT OF os oe

Contribution from the Bureau of Markets GEORGE LIVINGSTON, Chief

Washington, D.C. V August 16, 1920

A CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIKES.

By Grorce O. Knapp and Burton B. Mason, Assistants in Market Business Practice, and A. V. SwarrHout, Investigator in Market Business Practice.

CONTENTS.

Page Page libEod ChOME asa ee eater ee ae ee I || Ranh ea bynes oe Soo E A GRHSBnSHBAnBEnaeeacaur 31 Chart of Ledger accounts. ..............2...- Api aClosine ther BOOkSsapanc soos eee eee 31 PSEC Sins etka eR ial is ee Seas ig Ae heal po Ber We alam CONSMeObe ees seen aaan ea certs rare nee 33 Liabilities, Reserves, and Net worth........ 12 | Income and Expense Statement............- 35 TACO ONS CCOUDES a ie oe Bo Soe ane ihn oo 23 | Installation of Additional Equipment....... 36 EXCH SCLACCOUMES ane wcreterinlactie cn cece sects 24 | The Nature of Bookkeeping................. 38

INTRODUCTION.

In presenting this ‘Classification of Ledger Accounts for Cream- eries’’ it is the aim of the Bureau of Markets to emphasize the impor- tance of the use of a definite and logical classification of accounts for keeping the financial records of any business and to describe in detail a classification which can be used advantageously by creameries. The use of such a classification is not only a great aid to the book- keeper in the performance of routine duties, but its consistent use also insures a uniform method of presenting the financial information from year to year regardless of changes in the personnel. The use of these uniform methods by an industry as a whole makes possible the exchange of data regarding business operations, which is of untold value as a guide to efficient operation.

It is felt that the consistent use of the classification described herein will be of great benefit to the entire creamery industry. The explan- atory paragraphs will be found helpful in deciding questions arising from a new or unusual transaction, the necessary entries for which may be unknown to the bookkeeper.

In order to open the Ledger accounts for a set of double-entry books, it is necessary to take a physical inventory of all assets and to take into consideration all lhabilities of the concern. These items

180208°—20—Bull. 865——1

2) BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

should be arranged in the form known as a Balance Sheet, with assets on the left and habilities on the right. (See illustration on p. 34.) The difference between the total assets and total habilities will repre- sent the net worth, either as capital stock, surplus, deficit, or good will. These accounts are described at length under their respective captions. ‘The assets should be arranged in the order of their prob- able cash realization and the habilities in the order of their probable priority as to liquidation. A set of Ledger sheets should be headed with the account captions as shown herein.

The items appearing on the Balance Sheet should then be entered in the Journal,! the amount of each item being posted from the Journal to the proper Ledger account. As succeeding transactions are classified, entered in the Journal, and posted to the proper Ledger accounts, the Ledger will contain a summary of the financial facts of the business, arranged under their proper designation, each summary bemg known in bookkeeping as an account. The various accounts should be classified according to their nature into the following groups, which are defined in order that 1t may be clearly understood how they differ from one another.

Current Assets are items of cash and those which can be readily converted into cash or its equivalent. 3

ized Assets are those of a permanent nature which are used in conducting the business, such as land, buildings, machinery and equipment.

Prepaid Expense is that which is paid in advance of usage.

Current Liabilities are obligations which are due, or about to become due, or are those which are increasing daily but are not payable until some future date.

Reserve accounts are those by means of which a certain amount is set aside out of the earnings of the company for some specific purpose.

Net Worth accounts are those which represent the ownership, including any accumulated profits or losses of the company.

Income accounts are those through which the revenue of the com- pany is reflected.

Hzpense accounts are those which reflect the cost of conducting the business. It should be remembered that the cost of conducting the business may not be actually paid in cash during the period in which the expense is incurred.

Index tabs labeled with the above headings will be found convenient in locating the various Ledger accounts.

The necessity of making the complete segregation of accounts shown in the following charts may be questioned by those who have

1 fee U.S. Department of Agriculture Bulletin No. 559, Accounting Records for Country Creameries, by John R. Humphrey and G. A. Nahstoll. 1917.

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4%

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 8

never recegnized an accounting system as a vital assistance to the management. The real purpose of accounting is not only to show the board of directors, or proprietor, that the business has been conducted at a profit or loss, and that no fraud has been committed, but also to present facts concerning the business in such a manner that the man- agement may direct the operations intelligently.

In securing the very best benefits possible from an adequate account- img system, nothing-can take the place of an independent audit by a reputable firm of public accountants. Some of the advantages to be derived from such an audit may be summarized as follows:

(1) An impartial and disinterested opinion of the general policy and administration of the business is secured.

(2) The financial records are carefully examined, and reports presented in the best possible form.

(8) Opinion is rendered as to whether the methods in use could be improved and whether or not adequate reserves are being accumulated to care for depreciation, bad accounts, etc.

The cost ef such an audit may seem prohibitive to some of the smaller organizations. However, this expense may be somewhat reduced by the formation of a cooperative auditing association, such as is NOW In existence In some sections of the country. It is strongly recommended that an audit of the kind referred te above should be made at the close of the fiscal year.

Probably some organizations will not require all of the accounts shown in this classification. For instance, in a creamery holding no notes, neither the Notes Receivable account nor the Notes Receiv- able Discounted accounts would be used. Also, in small concerns it might be unnecessary to carry separate accounts for factory labor and office salaries, and other similar items. Some organizations may require additional accounts. The discussion in this bulletin should enable any creamery bookkeeper to set up intelligently a complete set of accounts.

By comparison with U.S. Department of Agriculture Bulletin No. 559, it will be noted that some of the procedure outlined therein differs from that described in this publication. These changes have been found desirable after observation of actual cperations extending over a period of several years.

Ef

BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE,

CHART OF LEDGER ACCOUNTS. BALANCE SHEET ACCOUNTS (NOS. A TO I, INCLUSIVE).

ASSETS.

Account No.

A 3.

AA, AGS). A 6. A 7. . Securities: Beste . Fixed

Cre C 2. C 3. C 4. C5. C 6.

. Current -Assets: Avie Av2:

Cashion ‘Eland 2 Ah nee APS See A ear ee ee Bank, Aceount, (manmrezofibamike) 2ee soso eee ee Notes Receivabless tin scaciet Ba ae eet Pena

ad

eee w eee ee wm ewe eee ee ewe seco we wm eee eee ose

Manufactured) Products, Imviemtorys- 2. =) 2 9 ae Operaune Supplies Im ventonyee es cn eee eee

Sunkine Mumdse. Feces eis Sa a ae ee ee Assets:

Lands 2.2 2.2205 2 be ee ee 2 ee ie ager me Seer ites na ae Burldines: 22.2 ks as ee ee ee ee Machinery and: Bquipmiente ss: o- oa.22 6) oo" meee ee Pools Ste SPT, Bs RR AO Fak ree eee ee Motor Vehicles= .2s2 238s cechss aes a Se Office: Furniture and. Equipments .-) a2: 4 a5 ae ee

Prepaid Expenses:

Pr: Dias

1. Vy 74. Bia: F 4. F 5. F 6.

Gols G2. Gass

Prepaid Insurance.) pes 2 es snes eee oe cM IMe ang StatOUeLy ss oe mes ote rey ee oe ae

LIABILITIES, RESERVES, AND Nev WorTH.

. Current Liabilities:

Notes Payable ic. Sit eca cides seeenis eis e ace See eee Aecounts Payables. 233. sc Se sce ce tee ee eee | eee AccoumtssPayable Patrows asec e es sees SAL epee ORES Notes Receivable. Discounted: .24.02 9). ane Aa ee ee ee Collections:on: Notes Discounted 3.8 p72 a e Aecounts Payable Haulers... 0. 2. s.. sce See eee ae

. Aecrued Liabilities:

InterestwAccmiedizis AAPA ase aet See SE ee SAE Eee perear ee pAiGetaes Bayt Ou, foc ofeteicreis's weer soaker pl as ae cee 5a pe eee axes A CCTUCC 5 soccer ea eg en er Se

Reserves:

Teale E2. test

“Reserve tor Doubtiul Accounte:e 22) ence Cee ee ee 2. Reserve for Depreciation on Motor Vehicles.....................-

. Net Worth:

Capital: Stocks.:. fos oc s.6 Sic oy Bs RS ST ee ee eee eee Surpluss like eee deh si cide essen See Oe = See cnet eee eee Loss and, Gain... joi 3 bad So ote See -eeors Oe eee

INCOME AND EXPENSE ACCOUNTS (NOS. J TO P, INCLUSIVE).

INcOME ACCOUNTS.

: UButter Salegs Jf 5 SS ot ae ae: SE ee ee ae ee ee n@ ream Salegi re eae ee oe ete een eae ge ee 7 MOTE Salesperson cy ine ee . Cheese’Salés-.J)..'. 2 neceiesiesoa) See Oe eee » Buttermilk Sales.cc sce eee ee ieee ee

ae

ak al

: Page. Eas Mer chal OSCR Sal Osmeaey ie Sor sence utes « mets es oo a oe ee 24 RG Se DISCouMiMeCCL Cd =. te rosaries) en ee 24 EXPENSE ACCOUNTS. ) L. Raw Material: > WeieAbibters ate Ure aseden eee es ee ee 24 B eos Scum Valli burenasess.0 oe eee See SS i 25 foe Wnudcrpayments and Overpayments .222 ot). 82. he SESS. ee 25 2 utomobulewbruck Operations... 2.02.25 tei ese 26 ioe Repairs Ons utomobrelruckss 222s Feil Oe SPO LS 26 iiGe Depreciatzon-on Automobile Trucks— 22222. 12-2. ee oe ae 26 M. Operating Expense: UE TES IGG OKO E A Se eet See es Sn Ree cee cS wn er ee ee 27 Mi zrrowe4nandehvebicerationm =< 7) eee eis EL fo ee lee 27 M 3. Manuiacturing Supovlies. -.....-..-- Ses eC Rt SS er es 27 INE Glas AE eo SUMSRONO oa 24 2 ON Beira eae Benes tees Oe ere som far Ue § SP sme re erp 27 MeoerMopreciation omeblantiws asiact a. ae ete eee ee ae Sl 28 2 ME Onehogltvep neemente 4s aL a wee et ee re ee 28 3 N. Administration and Selling: Ne resErxresst Preleliteand Drayace snes se. tee pee orto. os ue eee 28 iNeZestelephone, Pelepraph and- Postage. :2< ~ =... 2ee. 2s ee oS. 29 Ngee Othices Salaries salem. Sk ee ee A ee 29 ING Les ON Coup PIlCSeees Pik oe Moe oo ek Begin aha ce Sndeaeeeen a Sees 29 IN KO axese essen eee Sk Ee es Baek ay ene pie eee aeons 29 INE-GRS* GIST RaW ACCS A Se ede gS eae REO an tre Pops fate tart BS ah ce ng Oe PS 29 ING (olin terest inc aS Bee ee ee cp ee eee care ip er 30 NE Oa bossizomsbadsACeQuints cic. 3 4 < oc eee ee anes es 30 ING Ora Miscellaneous lux pense... as 2 oe 5 ig en ye ee ye a 30 O. Purchases: Oxiraiferchandise urchasest 2 2. 522 aes Ue ee es ee a 30 P. Appropriation Accounts: ale sDividendeAppropiauions... sss. 20-02 Se. 26 25.2 ee 31 Pe Cinkin ound: Appropriations i) 22.922 “282. ee eee ne. ole <4 ASSETS. A. CURRENT ASSETS. CasH ON Hanp (A1). | ie DEBIT. | CREDIT. 1. With the total of undeposited checks | 1. With the total of undeposited checks and cash as shown by Balance | and cash at the beginning of the Sheet at the time of opening the period. books. 2. With the total of undeposited checks ‘e and cash at the close of the period. | In order that a complete Trial Balance may be taken from the Ledger, without

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. D

~ K. Miscellaneous Income:

consideration of unposted items in any book of original entry, it is desirable that a Cash on Hand account be opened and maintained in the Ledger. Into this account is posted the amount of actual cash in the office at the time of opening the books and at the close of each accounting period. At the beginning of the following period, this

6 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

amount should be entered as the first item in the Cash Journal, the debit being entered .

in the Cash column, the credit in the General pede column, from which it is posted to this account.

It is always desirable that all cash receipts be depeeed during the accounting period in which they are received, and that all disbursements be made by check. Often, however, small items are paid in cash. Such expenditures should be covered by an order, which is approved by the manager, showing the amount, the date, account chargeable, and any other necessary information, and should be signed by the payee. At the end of each period a check should be drawn for an amount equal to the disbursements. The charge for this check should be made in the Cash Journal

to the various Expense accounts and the cheek must be included in the next bank

deposit. Bank Account (A 2). (Name of bank.) ‘Desir: | CREDIT:

1. With the balance in the bank as 1. With the amount of overdraft as shown by the Balance Sheet at the | shown by the Balance Sheet at the time of opening the books. time of opening the books.

2. With the total of all deposits during | 2. With the total of all amounts dis- the period. | bursed by check during the

3. With interest credited by the bank. period.

3. With interest charged by the bank on overdraft.

This account will appear in the Ledger under the name of the bank and should be debited with the amount of cash on deposit at the beginning of the period. This balance is determined by taking the balance rendered by the bank and deducting therefrom the total of ail outstanding or uncanceled checks. Normally the balance shown by the bank will be in excess of that shown by the organization.

Debits and credits to this account for interest receipts and payments, and exchange charges will arise from debit and credit memoranda submitted by the bank at the time of rendering its statement.

Notes RECEIVABLE (A 3).

DEBIT: CREDIT:

1. With the face value of notes of 1. With amounts paid on notes by others on hand as shown by the their makers, settlements made Balance Sheet at the time of in any other manner or amounts opening the books. charged Loss and Gain as uncol-

2. With the face value ‘of the notes lectable.

received during the period.

When notes are taken in payment for subscription to capital stock the total amount of such notes should be debited to this account. When notes are discounted at the bank, their face value, less the discount charged, should be debited to the Bank Account. This, however, does not change the notes, there being a contraliability to the bank for the full face value of the notes discounted. This lability is further discussed under Notes Receivable Discounted.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. it

Accounts RECEIVABLE ConTro. (A 4).

Desir: | CREDIT:

1. With the total amount charged to 1. At the close of the period with the customers’ individual account as | total amount received from cus- shown by the Balance Sheet at | tomers on account. the time of opening the books. | 2. With any other credits to customers’

2. At the close of the period with the accounts, including the writing off total of all sales charged to cus- | of doubtful accounts. tomers’ accounts during the | period. ;

Tee el as the total of all charges and credits applying to the customers’ indi- vidual accounts constitute the entries to the above account, it is apparent that this account is a control over the customers’ individual accounts. It should in all cases be made to agree with the total of the individual accounts before a Trial Balance is

~taken. The balance, which is the total amount due from customers, must equal the

net total of the balance of the individual amounts.

Patrons’ Accounts RECEIVABLE (A 5).

DEBIT: | CREDIT: 1. With the amount of any purchase by 1. With any payments on account by patrons during the period. patrons.

2. With any deductions from patrons’ vouchers at the time of making settlement.

This is a control account for sales to patrons, and should be operated in a manner similar te Accounts Receivable Control, all sales being posted to accounts from the

sale slip, and the total of these sales being entered in this account irom the Journal.

It may happen that a patron who has furnished only a small amount of butter fat during the period will have purchased from the creamery more than his ede ier will cover. The voucher, however, should be fully made out, showing all amounts

to the patron’s credit and the charges against him, together with the balance due

the creamery. The balance on this account, together with the amount of any new purchases, should be deducted from the next vouchers, or the pation required to

make payment in full. oe

MANUFACTURED Propucts INVENTORY (A 6).

Desir: CREDIT:

1. With the value of all manufactured 1. Immediately after the beginning of products (and merchandise) on a new period with the balance of hand as shown by the Balance this account.

Sheet at the time of opening the books.

2. With the value of all manufactured products (and merchandise) on hand at the close of the fiscal period.

8 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

It is not intended to carry the inventory of manufactured products currently in the Ledger, although at the time of opening the books it is necessary to show this amount in order to arrive at a true basis of the net worth of the organization. The inventory should include products on hand, and any which may have been shipped on consignment and not paid for by the consignee. If part payment has been made on consigned goods, the amount of this payment should be deducted from the inventory.

Under cooperative methods of conducting a creamery, distribution is made to r to patrons for all butter, or other product, actually manufactured during a period, whether or not it has all been sold. This necessitates a slightly different accounting for inventories of manufactured products than is used under the ordinary plan of business operations, the amount of the inventories being credited to Sales accounts at the end of the fiscal period, and charged to these accounts at the beginning of a new period, instead of these entries being made in the Purchases accounts. The following Journal entries will illustrate:

COOPERATIVE CREAMERY.

DEBIT. CREDIT. $350 Manufactured Products Inventory. Buiter Saless ai ao: - oscas seers Scie ee ee $350 To place inventory on books at end of fiscal period before closing books: ‘ DEBIT. CREDIT. $350 Butter Sales. Butter: Inwentony 7552) 2a cee. oe en oe eee $350 To close Butter Inventory account at the beginning of the new fiscal period. PRIVATE CREAMERY. DEBIT. CREDIT. $350 Manufactured Products Inventory. ‘Butter Hat Burchaseses 10. ee ee ene $350 To place inventory on the books at the end of the fiscal period before closing the books. DEBIT. CREDIT. $350 Butter Fat Purchases. Manufactured Products Inventory..--........-.- $350 To close inventory account at the beginning of the new fiscal period. as

OPERATING Suprries INVENTORY (A7).

DEBIT: CREDIT:

1..With the cost of all operating sup- 1. At the close of the period with the plies on hand as shown by the Bal- cost of all operating supplies used ance Sheet at the time of opening during the period. the books. 2. With the cost of all supplies sold or 2. With the cost of all operating sup- disposed of in any other manner.

plies purchased. 3. With all freight, express, and dray- age charges on operating supplies.

— Operating Supplies include such items as fuel, oilsand greases, packages and liners, butter color, salt, glassware, acid, washing powder, etc. An Inventory Report (see U. 8. Department of Agriculture Bulletin No. 559, p. 11) should be kept at all times. The balance on this report must agree with the balance on this account. By reference to the descriptions of the Operating Expense accounts (Nos. M2 and M3) it is easy to determine what account should be charged with the supplies used.

a.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 9

B. SECURITIES. SINKING Funp (B 1).

A sinking fund is an amount of money periodically withdrawn from the business and invested in securities or deposited in a separate bank account for the purpose of meeting a fixed lability at some future time. For the purpose of determining the amount to be set aside each period, reference may be made to any of the published bond tables.

Further discussion of this subject will be found under Sinking Fund Reserve,

page 19. C. FIXED ASSETS.

Lanp (C1). DEBIT: | CREDIT: 1. With the original purchase price of 1. With the total book value of any land land as shown by the Balance sold. . Sheet at the time of opening the books.

2. With all costs pertaining to the origi- | nal purchase.

3. With the cost of any permanent im- provement made subsequent to

the purchase.

Land should be carried on the books at actual costs and should not be increased or decreased because of a change in value. The difference between the selling price and the original cost of any real estate should be debited or credited, as the case may be, to Surplus Adjustment account.

BuiLpines (C2).

i

Desir: | CREDIT:

1. With the original purchase price of | 1. At the time of sale or destruction the buildings as shown by the Bal- with the total book value of any ance Sheet at the time of opening building sold or destroyed. the books.

2. With costs of all new construction.

b

oo

. With the cost of all additions or alter- ations when such costs increase the usefulness of the plant.

. With the excess of the cost of the re- placement over the original cost of the part replaced.

Ho

180208°—20—Bull. 865——2 |

10 “BULLETIN 865, U. S. DEPARTMENT OF. AGRICULTURE.

time, the purchase division of these

r lings.

As the land and buildings are frequently purchased at the same price will include both assets. Care must be exercised that a prope assets is made as depreciation is to be figured only upon the hee Idina:

MACHINERY 4 AND EQUIPMENT (C SE

DEBIT: CREDIT:

1. With the cost of all the machinery 1. With the total book value of any ma- as shown by the Balance Sheet at chimery and equipment that is sold the time of opening the books. or discarded.

2. With the cost of additions cr alter- ations provided the efficiency is materially increased.

3. With freight, express, and drayage | charges on any purehase.

4. With cost of installation.

This account should be charged with the costs of all items of machinery and equip-

ment, whieh, under ordinary cireumstances, will last three years or more, such as engines, boilers, motors, ete. When any article which has been charged to this account is to be e placeds the asset account should be credited with the cost value placed on this item at the time of opening the books or at the time of subsequent purchase. Example: A piece of machinery costing $100 was replaced by anew one costing $150, cash being paid for the new article. The Journal entry would be made as follows:

DEBIT. CREDIT. $100 Reserve for Depreciation on Machinery and Equipment. Machinenyandsliqurputermt.---es-1 2 ee ae S109 (For discarded machine costing $100.) 150 Machinery and Equipment. > BanksAecounta2 3. 2 oa eo 156 (For purchase of new machine.)

To the invoice value of any machinery purchased should be added any expense in- curred, such as freight or installation charges. In case the amount set aside as Re- serve for Depreciation on Plant is not sufficient to cover the original cost of the item replaced, the loss sustained should be charged to an account specifically captioned. Exampie: A boiler costing $150 was completely destroyed by an explosion. At the time the account Reserve for Depreciation on Machimery and Equipment shows a credit balance of $100. It was necessary to pay $200 for a similar boiler. The follow- ing Journal entries should be made:

DEBIT. | CREDIT: $50 Reserve for Depreciation on Machinery and Equipment. 160 Loss, boiler explosion.

Machinery and Equipment......-.-...---.-- $150

(For loss on Machinery and Equipment on account of explosion.)

200 Machinery and Equipment.

Bank account. 2abiie penance ae eee 200

(For purchase of new boiler.)

In the above entries it should be carefully noted that the full amount set aside as 9 Reserve for Depreciation on Machinery and equipment has not been entirely ex- hausted by this loss, inasmuch as this fund is set aside to cover depreciation on all the machinery and equipment, and only the relative proportion applying to the boiler can

be charged to the reserve account.

€.

+ &

CLASSIFICATION OF LEDGER: ACCOUNTS FOR CREAMERIES.

iE.

The account, Loss, boiler explosion, should be-periodically reduced by the following

entry: DEBIT.

$10 Expense, boiler explosion.

Loss,, boiler explosion: .....-. 0... 0.0-.- Lense

CREDIT.

S10

(For periodical charge to amortize loss result- ing from: explosion.)

At theclose of the fiseal yearthe account Expense, boiler explosion, should be car- y } ,

ried to Loss and Gaim account.

Toous (C 4).

Desir: 1. With the estimated: value of all the small tools as shown. by the Balance Sheet at the time of opening the books.

CREDIT: 1. With. the book value of any tool sold and: not.replaced..

This account should include such articles as hammers, wrenches, and small hand tools, which will under ordinary circumstances last for a period of less than three years:

Further discussion. of this subject will be found under Tool Replacement.

The: sup-

ply of tools on hand should be inventoried at least once each year, and any large varia-

tion from this-account should be adjusted.

Moror VEHICLES (GS)...

Desrr:

i. With the cost ef any trucks: as: showm by the Balanee: Sheet at the time of opening the:-books.

2. With the purchase price of new trucks,

| CREDIT:

1. With: the book valwte of trucks: dis- posed: of or destroyed...

Orrick FuRNITURE AND EQUIPMENT (C 6).

Depir:. 1. With tre total costs as shown by the

Balance Sheet at the time of open- 3

ing the books.

2. With additional purchases.

3. With freight, express, or drayage chargresincident to purcnase.

4, With eost.of installation.

’ CREDIT: 1. With the book value of any article sold, discarded, or destroyed.

This aceount should include such articles as desks, filing cases, adding machines, typowriters, ledger, journal binders, etc., which should last for an indefinite period oftime. This equipment should be inventoried every year, and the account adjusted

to agree with the actual value.

12 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

D. PREPAID EXPENSE.

Prepaip INSURANCE (D 1).

DEBIT:

1. With the total amount of fire insur- ance premiums prepaid as shown by the Balance Sheet at the time of opening the books.

2. With the amount of fire insurance premiums paid.

CREDIT: :

1. At the close of the period with the portion of fire insurance premiums expired.

2. With the returned premium when any policy is canceled.

Usually policies run for a year and are paid forinadvance. This payment is charged

to the Prepaid Insurance account and represents an asset value.

The amount is re-

duced periodically by a charge to Insurance Expense, the credit being carried to the

Prepaid Insurance account.

Pr PRINTING AND STATIONERY (D 2).

DEBIT:

1, With the estimated value of the stock.

on hand as shown by the Balance Sheet at the time of opening the books,

2. With the cost of all purchases during the period.

CREDIT:

1. At the close of the period with the estimated value of the amount used during the period.

2. With any amount disposed of other- wise.

It is advisable to carry a Printing and Stationery account, inasmuch as such supplies will be purchased in quantities sufficient to cover several months’ usage. Prorating the expense over the period during which it will be used is preferable to burdening the month in which the purchase is made with the entire cost and thus possibly affecting the profits for the period. In this case Printing and Stationery Inventory account will be credited with the value of the amount used, the corresponding debit being carried to Office Supplies.

LIABILITIES, RESERVES, AND NET WORTH. F. CURRENT LIABILITIES.

Notes PayasBte (F 1).

CREDIT: 1. With the face value of all signed ob- ligations of the organization as

Deni: 1. With the amounts paid in partial or entire settlement of signed obli-

_ gations. shown by the Balance Sheet at the 2. With signed obligations given in re- time of opening books. newal. 2. With the face value of any obliga-

tions subsequently issued.

Should a note be renewed, thus in effect giving a new note for the old note, debit this account for the face value of the old note, and credit the account with the amount of the new note.

A careful record should be maintained of all notes given, showing date issued, to

whom, date of maturity, and rate of interest.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 18

Accounts PAYABLE (F 2).

DEBIT: CREDIT:

1. With payment on account. 1. With amounts due creditors on open

2. With purchased goods returned for accounts at time of opening the ~ credit. books as shown by the Balance : 3. With allowances on purchases. - Sheet.

4, With cash discount on purchases. 2. With the invoice value of merchan-

dise purchased on credit. (Debit the various Inventory or Expense accounts. )

Separate accounts should be opened for firms with which a large credit business is conducted currently. Miscellaneous accounts payable may be handled in one account under the caption Miscellaneous Accounts Payable.

It is not the intention to carry individual Ledger accounts with all the various creditors, owing to the fact that in many cases only a single purchase will be made

is from one concern and that practically all invoices will be paid during the period. Care must be exercised when entering checks to ascertain whether they should be charged to accounts payable when goods are purchased on credit, or to an inventory oz expense account when goods are purchased for cash.

When the invoice has been credited to Accounts Payable, the check given in pay- ment must be charged to Accounts Payable. As the canceled check is a sufficient receipt, it is suggested that invoices be stamped ‘‘ Paid —--_—_—_, 19—,,’’ and filed alphabetically for future reference.

A method preferable to that just described, especially for larger organizations, is the use of a voucher payable register, description of which may be found in most books on accounting.

AccCOUNTS PAYABLE Patrons (F 3).

1. With the amount paid patrons by 1. With the net amount due patrons as <a cash or check. shown by the Balance Sheet at | the time of opening the books. | 2. At the close of the period with the | net amount due patrons for deliv-

Desir: CREDIT: ; eries during the period.

The liability to patrons will be closed at the time payment is made by a debit to | Accounts Payable Patrons, the corresponding credit being made to Cash or Bank Account.

At the time of opening the books, it may occasionally be impracticable to determine the actual amount due the patrons, but this should be estimated as closely as possible, set up asa liability, and then any difference between the estimated and actual amounts should be charged or credited to Surplus Adjustment account. Example: If the estimated amount were $1,350 and the actual amount proved to be $1,410, the Journal entry at the time of payment would be:

DEBIT. CREDIT. $1, 035 Account Payable Patrons. 60 Surplus Adjustment account. Bank Account..... Siavetarsietele singin cieiseet $1, 410

14. BULLETIN. 865, U. S. DEPARTMENT OF AGRICULEURE.

If the estimated amount was $1,410 and the actual amount was $1,350 the entry at the time of payment would be:

DEBIT. CREDIT. $1, 410 Account Payable patrons. Surplus Adjustment account. ........-- $60. - Baark” ACCOM ot = con eee ee 300

In both the above cases the Accounts Payable Patrons: account would be closed. The Surplus Adjustment account should be closed into: Surplus aceount as described on page 22.

Notes: RECEIVABLE DiscouNTED (Tf 4),

DEBIT: ’ CREDIT:

1. With the face value of notes: dis- 1. With the face value of all notes counted whem settled for either by | receivable discounted as shown by maker of through payment by the: the Balance Sheet at the time of organization to the bank. opening the beoks.

2.. With: the face value of all motes

subsequently discounted.

By referring to the explanation under Notes Receivable, it will be noted that men-

tion was made of notes receivable discounted, the proceeds of which were debited to the Bank Account, thus raising a liabhity. Jn case a note that has been discounted is not paid.at maturity, the organization will be obliged to make payment to the bank for the face value of this note, in which case the following entry will be made:

DEsrr. CREDIT. $109: Notes Receivable. Discounted. Bank Accountity= 2 et ee ee _ $106: (For note of James: Benton not settled for by him at maturity.)

In case the note was met at maturity, the following entry would be made:

Dzprr. CREDIT. $100: Notes Receivable Discounted. INetes Receivable. (cic... 02k cee oe OOO (For note of James Benton settled for by him at maturity.)

In both the above cases the liability to the bank*was liquidated-—first, by payment of the obligation by the organization, and second, by the maker. Therefore, Notes Receivable Discounted should be debited im either ease. In the first instamce, how- ever, the concern still owns the note-agaimst James Benton which is an: asset for future disposal, while in the second instance the note will be canceled and returned to the mailer.

When, notes are discounted, the amount of the discount is to be considered as an: expense and charged to an account called Interest. Expense..

Desir. CREDIT. $490 Bank Account. 10 Interest. Notes Receivable Discounted............ $500 (For notes discounted at: bank with 10 per cent diseount.)

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 15

COLLECTIONS ON Notes Discountep (F 5).

DEBIT: CREDIT:

1. With the amount paid to the bank 1. At the end of the period with the to liquidate Notes Receivable total amount deducted from pa- Discounted. trons’ vouchers applying on Notes

Receivable which have been discounted.

In organizing a new association, notes are frequently accepted in payment for subscription to capital stock, and then discounted at the bank, the proceeds being used for the purchase of necessary equipment. In payment of these notes a certain amount is deducted from the patrons’ vouchers each period, and these collections should be paid to the bank to apply on patrons’ notes receivable which have been discounted. In such cases the following Journal entry should be made:

DEBIT. CREDIT. $100 Collections on Notes Discounted. IBY S82 e/a (51 reece eet aie em ig fa epee $100 (For payment to Blank Bank of collections received to date on patrons’ notes discounted.)

It will be evident that when the total of the paymerts to the bank for patrons’ notes previously discounted equals the total of the face value of such notes, this liability will have been liquidated and the canceled notes should be returned to the organiza- tion or to the various makers. At this time an entry should be made debiting Notes Receivable Discounted and crediting Notes Receivable.

Such creameries deduct a certain fixed amount per pound on products delivered by the patrons during the period, the amount so deducted being apphed on the payment of the notes. It is preferable to make this deduction in even dollars—$1, $3, ete.

Accounts PAYABLE Hauters (F 68).

DEBIT: | CrEpIr:

1. With the amount paid haulers. 1. With the amount due haulers as shown by the Balance Sheet at the time of opening the books.

2. With the amount due haulers for Services during the period. (This amount is deducted from the patrons’ vouchers.)

Tn some creameries the patrons employ haulers to deliver their product, the cream- ery paying the hauler, and later this payment is deducted on the patrons’ vouchers. Such disbursements do not constitute an operating expense to the organization. When the creamery makes no charge to the patrons the hauling becomes an operating expense and should be handled as any other expense account. (See p. 26.)

16 BULLETIN 865, U. S, DEPARTMENT OF AGRICULTURE,

G. ACCRUED LIABILITIES.

INTEREST ACCRUED (G1).

DEBIT: CREDIT: f 1. With the interest accrued on notes *1. With the interest received on notes receivable during the period. receivable. 2. With the interest paid on notes pay- 2. With the interest accrued on notes able. payable during the period.

The above method is believed to be advisable for smaller concerns, however. When the amount of interest accrued on either notes receivable or notes payable is consider- able, it is suggested that separate accounts be opened for each of the above items, showing Interest Accrued and Notes Receivable as an asset, and Interest on Notes Payable as a liability. (See also discussion under Interest, p. 30.)

PAYROLL (G 2).

DEBIT: CREDIT: 1. With all amounts paid to employees 1. With the amount of unpaid labor as ior services, including advances. shown by the Balance Sheet at the time of opening the books.

2. With the amount of the pay roll, including all advances, at the close of the period, as shown by the time sheet.

Tt is necessary to include all employees on the pay roll regardless of the department in which they are employed. The following Journal entry, which should be made at the end of each period, will illustrate the operation of this account. Example: The entire pay roll is $400 and $20 has been advanced during the period. -

JOURNAL ENTRIES. Desir. CREDIT. $135 Factory Labor.

265 Office Labor. ; Payrolle 24 2202 esa! ern: Scene eee $400 (For periodical pay roll.) 380 Payroll. Bank: Accoutitsi-nc 4 67 haa ae ee 380

(For payment of periodical pay roll.)

Inasmuch as the $20 was charged to the Payroll account at the time the advance was made, the credit of $380 to the Bank Account will close the Payroll account.

Occasionally an employee may desire an advance on his labor account, in which case the Payroll account should be debited for the amount advanced. It is not considered advisable to carry Ledger accounts with employees because of cash advances, but very careful note should be made of such advances to prevent duplicating the payment.

Should an employee purchase merchandise, the sale should be charged to his per- sonal account. At the end of the period, or whenever the pay roll is made up, a check should be drawn in favor of the employee for the full amount of his wages. The em- ployee should then settle his account in the regular way. By following this procedure the records will reflect clearly the transactions involved.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 1%

The following Journal entry will illustrate this procedure:

DEBIT. CREDIT.

$8.50 John Jones. Merehandise Sales........... .. $8. 50

(For sale of merchandise to John Jones, employee.)

John Jones would then receive his entire wages and would settle for his account by the following transactions:

DEBIT. CREDIT,

$8.50 Cash. J OTMAV TONES een eee een eee ae ae NG $3. 50

(For payment of John Jones’ account.)

Taxes ACCRUED (G 8).

DEBIT: CREDIT: 1. With the amount actually paid for 1. With the amount of accrued taxes taxes. as shown by the Balance Sheet at the time of opening the books. 2. At the close of the period with its proportion of estimated annual taxes.

2

At the beginning of the fiscal year an estimate of the taxes which will become due during the succeeding 12 months should be made. The amount of this estimate, if given careful consideration, can be made to approximate very closely the taxes which are actually assessed. Normally, this amount will show a credit balance which repre- sents the liability for taxes accrued but not due. However, when the tax payment is made during the fiscal year there will be a debit balance. This will be gradually adjusted as the periodical entries are made. Any balance on this account after the yearly taxes have been paid should be transferred at the end of the fiscal year to the

Taxes account. H. RESERVES.

RESERVE FOR Dousrrut Accounts (H 1).

DEBIT: CREDIT: 1. With all accounts charged off as 1, With the amount reserved to cover uncollectible. doubtful accounts as shown by the Balance Sheet at the time of open- ing the books. 2. At the close of each period with its proportion of estimated annual

| loss due to bad accounts.

Any collections received on an account that has been previously charged off should be credited to this account. This periodical charge should be based on the amount of annual sales and previous losses from this source.

180208°—20—Bull. 865——3

at kes BULLETIN .865, U. S.. DEPARTMENT. OF. AGRICULTURR.

RESERVE FOR DEpREcIATION oN Moeror VEHICLES (H 2).

Desir: CreEpIr: 1. With the book value of any item 1. With the amount of reserve as ee discarded or replaced by new by the Balance Sheet at the time

equipment. of opening the books.

2. At the close of the period with the proportion of annual loss resulting from weary, tear, or obsolescence.

3. With the amount received from the -sale of scrapped or discarded equipment.

It is suggested that a rate of not less than 25 per cent be charged off annually.

RESERVE FOR DEPRECIATION ON PLANT (H 3).

DeEsIr: CREDIT: 1. With the book value of any item 1. With the amount of reserve as shown discarded or replaced by new by the Balance Sheet at the time equipment. of opening the books.

2. At the close of the period with the proportion of annual loss due to wear, tear, and obsolescence. ©

3. With the amount received from the sale of any disacrded or scrapped material.

Owing to the conditions existing in some types of plants and tothe peculiar nature of the work involved, the wear and tear on equipment is excessive. Special consid- eration should be given to these plant conditions in order that adequate reserves for depreciation may be provided.

In an organization where a more detailed segregation of accounting data is desired, this account should be replaced by a separate account showing reserves for deprecia- tion on buildings, machinery, equipment, etc.

RESERVE FoR DivipENDS PAYABLE (H 4).

Desir: CREDIT: 1. At the time of payment with the 1. At the close of the period with the total of checks paid to the stock- proportion of the annual dividend

holders as dividends. to the stockholders. (Debit Dividend Appiopuatens

It can be readily understood that those stockholders who have loaned their money

to the organization, taking certificates of stock as security thereon, are entitled to be reimbursed for the use of their money, and in many instances this reimbursement is authorized by the by-laws. However, only those stockholders whose subscriptions have been fully paid should receive any share of the dividend payment. <A periodical entry should be made as follows: DEBIT. CREDIT. $00. Dividend Appropriation. wey = Dividendsbayablets s- see eee $90. (To set aside an amount to be used in paying dividends at the close ‘ of the fiscal year.)

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. £9

At the end of the fiscal year sufficient funds should have been reserved to cover the

- dividend. When the dividend checks are written an entry should be made debiting

Dividends Payable account and crediting Bank Account. In case this entry does not close the Dividends Payable account, it should be closed by a debit or credit, as the case may be, to Surplus Adjustment.

The Denise Payable account will be carried only by cooperative creameries. It should be constantly borne in mind that the dividends thus provided are not deductible as an expense item in computing the income tax.

SINKING FUND RESERVE.

In the by-laws of a large number of ecreameries there is found a provision for the ereation of what is called a sinking fund. This so-called sinking fund is created by withholding from the income distributable to patrons a certain amount per pound of butter fat received. This fund is to be used to pay the expenses of the creamery.

Referring to the definition of a sinking fund given on page 9 it is at once evident that the mere withholding from patrons of a certain amount per pound of butter fat received will not establish a sinking fund, or anything which in any way resembles such a fund, inasmuch as the amount provided by the by-laws has not been ‘‘with- drawn from the general funds of the business,’’ nor has it been ‘‘invested in securities or deposited in a savings account.’’ In reality the only thing which has been accom- plished is the placing of a limit on the operating expenses and the creating of a reserve avainst which certain expenses are chargeable. Under this method part of the ex- penses are charged into the Loss and Gain account at the end of the year, and another part (those charged to Sinking fund Reserve) are not. It is then impossible to deter- mine from the books the cost of operating the business without considerable addi- tional work and only an expert bookkeeper is able to prepare a statement which will show the true cost.

Too little ccnsideration is given to the fact that on account of the variation in the total operating expense from month to month, deductions for expense based on an estimate must necessarily be either more or less than the actual expense. [Either will aiect the returns from future operations; a deficit will require that deductions be made from income in addition to those necessary for current expenses, and a surplus will make necessary the distribution of the previous year’s earnings thus accumulated. Tor this reason it has been found that the creation of a reserve to meet expenses is extremely undesirable, and it is recommended that the by-laws of creameries operat- ing under this plan be amended, and that such a plan be omitted in the organization of new creameries. This method of controlling expenses serves no useful purpose and the greatest benefits to all concerned would result if it could be replaced by a more

modern and efficient one.

However, numerous creameries will probably retain this clause in their by-laws, and therefore the accounting procedure necessary in such cases will be discussed here. When the by-laws contain the provisions just referred to, the term Operating Reserve should be used to indicate the account to which will be credited all income withheld from distributions to patrons fer this purpose of meeting expenses. The terms Sinking TFund Reserve (see p. 20) and Sinking Fund must not be used in this connection.

OPERATING RESERVE.

DeEsir: CREDIT: 1, With all expenditures which this 1. With amounts withheld from distri- reserve is created to meet. bution to patrons for the purpose of meeting expenses.

4

20 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

Unusual losses, new equipment, and other items are frequently included in this .

account, as well as the expense items fer which.the accomumnt.was created. This should never be done. The amounts set aside to defray expenses aré charged into the Loss and Gain account against gross income, and will ordinarily be allowable as a deduc- tion in preparing income tax returns, whereas amounts set aside to provide for unusual items are not allowed as a deduction in preparing such returns, and are not chargeable in the Loss and Gain account against gross income.

Should it be desirable to set up a reserve to meet a contingency which ey arise 1 the future, a special account should be opened for this purpose.

Srinkine [I'unp RESERVE (H 5).

DEBIT: CREDIT:

1. With the amount of the sinking fund 1. With the amount to be set aside when the obligations for which it pericdically to provide for the pay- was created have been paid. ment of a fixed obligation at some (Credit Surplus.) future time.

(Debit Sinking Fund Appropria- tion.)

It should be noted, also, that a Sinking Fund Reserve can be created out of profits, whether or not a sinking fund as described on page 9 has been created.

I. NET WORTH.

CapiTaL Stock (I 1).

DEBIT: CREDIT: 1. With the par value of shares retired 1. With the par value of all shares or canceled. issued as shown by the Balance Sheet at the time of opening the books. 2. With the par value of all shares sold subsequently.

The capital stock of a corporation is divided into shares, each share usually having a designated par value. These shares may be transferred from one individual to another without affecting the capital of the corporation. The ownership of.a share of capital stock is evidenced by a stock certificate.

In organizing a corporation, a subscription list should first be prepared, the signers of which bind themselves by law to purchase the number of shares subscribed. No certificate of stock should be delivered to a stockholder until his subscription has been fully paid. Until such payment is made, a temporary certificate may be given to the subscriber to be exchanged for the regular stock certificate on completion of pay- ment.

When a subscription list has been prepared and the corporation formed on this basis, it is often provided that the subscription may be paid in installments. Tocredit these partial payments direct to the capital stock account is undesirable. In view of this, when the subscription list has been completed an entry should be made debiting Subscription account and crediting Capital Stock account for the amount subscribed. When payments of the subscription are made, either by cash or note, in full or in part, these payments should be credited to Subscription account and not to Capital Stock account. The following entries will illustrate:

3

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. Past

DEBIT CREDIT. _. $10, 000 Subscription account. GapirkepLoc lotr mee sine ig ke AS Sees $10, 000 For subscription shown on subscription list No. 1.

DeEBIT. CREDIT.

$4,000 Cash.

1, 000 Notes Receivable.

Subscription account.....-- mie 32 Bak ere | areas $5, 000

50 per cent payment of the following subscriptions: (List of those making payment.) In case the entire capital stock is paid at one time, the following method might be used. Entries to illustrate issue of capital stock and payment thereof:

DEBIT. : CREDIT. $8,000 Cash. 2,000 Notes Receivable. Caprial: Stock t a2 Matias Fi ei SBS eS ars $10, 000

(Representing payment of capital stock issued to the following:)

When shares of stock are acquired or sold for more or less than par value, the prem- ium or discount should be charged or credited as the case may be to Premium and Discount on Capital Stock account. For example, if a going concern desires to sell additional shares, the shares being above par in value, an entry should be made as follows:

DeBIr. CREDIT. $105 Cash. Capitalll Stock si OF Bl s Et See eae $100 Premium and Discount on Capital Stock........ 5 (For sale of one share of stock at $5 premium.)

Likewise, if shares were sold at a discount, there would be a debit to Premium and Discount on Capital Stock.

The balance in this account should be written off into the Surplus account by periodical charges usually extending over a term of years.

It occasionally happens that capital stock is offered for sale, and is purchased by the organization, to be held for resale at some future date. While this transaction may seem to resemble closely a retirement of the capital stock so purchased, and as such chargeable to the Capital Stock account, accountants generally have preferred to charge a purchase made in this manner to an account called Treasury Stock. In case the purchase was made above par, the entry should be:

DEBIT. CREDIT. $105 Treasury Stock. STS SN es oe ot aa eg ts ee $105 (For purchase of one share of stock from Chas. Brown at $5 premium. ) 4

When Treasury Stock is sold, the total amount received from such sale should be credited to the Treasury Stock account. Although it is not incorrect to charge the par value of this purchase to Capital Stock, it is a procedure not to be recommended.

In case the organization is not a corporation, but a partnership, sole ownership, or association, the Capital Stock account would be replaced by accounts indicating the ownership, membership, or amount of certificate of indebtedness outstanding.

22 BULLETIN 865, U.°S. DEPARTMENT OF AGRICULTURE.

SuRPLuS (f 2.)

DEBIT: CREDIT: 1. With any debit balance of the Loss 1. With the amount of surplus as shown and Gain account at the close of the by the Balance Sheet at the time of fiscal year. opening the books.

2. With the net profit as shown by the credit balance of the Loss and Gain aecount at the close of the fiscal year. ;

Any balance from the Surplus Adjustment account should be carried to the Surplus account at the end of the fiscal year, either as a debit or credit.. In many organiza- tions the Surplus account represents the excess of assets over liabilities and capital stock. However, when a certain amount, commonly called a Reserve ior Sinking Fund (see p. 19), is set aside out of earnings each year to retire the capital stock at a definite time, this reserve, together with the Capital Stock and Surplus, equals the excess of assets. :

When the opening Balance Sheet shows the liabilities, capital stock, and accumu- lated reserves to be in excess of the total assets including good will, the Surplus account will show a debit balance. When this is the case there has evidently been a loss through operation which in reality amounts to an impairment of capital. Theamount of such debit balance should be debited to an account captioned Deficit. At the close of each following fiscal year, the Loss and Gain account and the Surplus Adjust- ment account should be closed into this account until the deficit is written off.

The Deficit account is in reality the debit side of the Surplus account, but should be carried under a different caption. For example, if there is no surplus and a Loss i: sustained during the year, the loss shown by the debit balance of the Loss and Gain account is an impairment of the capital and should be carried to the Deficit account by the following Journal entry:

DEBIT. CREDIT. $1,500 Deficit. Hossand' Gann). ss. cee Tre ee eee eee $1, 500 (To close Loss and Gain into Deficit account. ) If the company makes a net profit of $2,000 during the succeeding ycar, the Journal entry will be as follows:

DebirT. CREDIT. $2,000 Loss and Gain. I EY=) CTs ipa iaee Sipe Pic tr sree aie UNL 3 Mahia Oe bee ions 50 $1, 500 SUEPEUS eet ke ee ee ee 1, 500

(To close the Deficit and Loss and Gain account.)

Loss AND Gatn (I 3).

DEBIT: | Crepit: 1. With the balance of any account 1. With the balances of all Income charged with purchases of raw mater- accounts.

ial for manutacture.

2. At the close of the fiscal year or other accounting period with the debit balance of all Expense ac- counts. |

ee

.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 23

During the year it is frequently found that errors or omissions were made in the work of closing the books for the previous year. These corrections should not be

made through the Loss and Gain account but by making the adjustments direct to

the Surplus account or to a Surplus Adjustment account. Any unusual item of profit or loss, such as might arise from a sale of land, buildings, etc., must not be entered in the Less and Gain aceount, but must be entered in the Surplus account.

By referring to the illustration on page 35, it will be seen that the result of the Income and Expense Statement is the showing of Net Profit. This is the balance of the Loss and Gain account. It is now desirable to show what disposition is made

‘of the net income, and this is effected by the last section of the statement, captioned

Distribution of Net Profit. This is sometimes accomplished by the use of another

account called Undivided Profits. However, it seems that the same results may be

accomplished by the method here shown, without opening the additional account in

the Ledger.

INCOME ACCOUNTS. J. SALES.

ButrerR SAues (J 1).

DeEDIT: CREDIT: 1. With the sale value of any butter 1. At the elose of each period with the that may be returned by a customer. total sales during the period:

2 With the balance at the close of the _ fiseal year. (Credit Loss and Gain.

CREAM SALES (J 2).

DEBIT: CREDIT: i. With the sale value of any cream 1. At the close of the period with the that may be returned by a customer. total sales during the period.

2. With the balance at the close of the fiscal year. (Credit Loss and Gain.)

Mix SaueEs (J 3).

Desir: CREDIT: 1. With the sale value of any milk that 1. At the close of the period, with the may be returned by a customer. total sales during the period. 2. With the balance at the close of the fiscal year. (Credit Loss and

Gain. ) CHEESE SALES (J 4). DEBIT: CREDIT: 1. With the sale value of any cheese 1. At the elose of the period, with the that may be returned by a cus- total sales during the period. tomer. “

2. With the balance at the close of the fiscal year. (Credit Loss.and Gain. )

24.

BULLETIN &65, U. S. DEPARTMENT OF AGRICULTURE.

BUTTERMILK SALES (J 5).

DEBIT:

1. With the sale value of any butter- milk that may be returned by a customer.

2. With the balance at the close of the fiscal year. (Credit Loss and Gain.)

CREDIT: 1, At the close of the period, with the total sales during the period.

K. MISCELLANEOUS INCOME.

MERCHANDISE SALES (K 1).

DEBIT:

1. With the sale value of any merchan- dise that may be returned by a customer.

2. With the balance at the close of fis- cal year. (Credit Loss and Gain.)

This account is to take care of sales of miscellaneous merchandise, such es eggs,.

grain, etc.

CREDIT: 1. At the close of the period, with the total sales during the period.

The credit balances of all Sales eccounts should be credited to Loss and Gain et the close of the fiscal year, thus closing the Sales accounts.

Any sales to patrons of supples, packages and liners, salt, ice, or other merchandise, which are used in the manufacture, packing, or shipping of products should be cred- ited to the Inventory accounts affected, and debited to Patrons’ Accounts Receivable.

Discount ReEcEIvED (K 2).

DEBIT: 1. With the credit balance at the close of the fiscal year. (Credit Loss and Gain.)

CREDIT: 1. With any income arising from cash discounts deducted from invoices paid.

EXPENSE ACCOUNTS.

L. RAW MATERIAL.

Butter Fat PurcwHases (L 1).

DEBIT: 1. With the amount to be paid to the patrons for butter fat delivered during the period.

CREDIT: 1. With the amount of undistributed balance. 2. With the debit balance at the close of the fiscal year. (Debit Loss and Gain.)

e

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 265

There aretwo distinct methods of settling with patrons for deliveries of butter fat. The first method is to pay according to the market quotations regardless of operating expense; the second is to pay the patrons the entire net income, that is, the total

- receipts from product, less the total expense. The second method is to be followed

in nearly all cooperative creameries.

In creameries following the first procedure, the periodical debit to butter-fat pur- chases will be the total of deductions for butter delivered to patrons for hauling, for supplies sold to patrons, for collections on notes, etc., as well 2s payments in cash or by check, as shown by the recapitulation of patrons’ vouchers on the Patrons’ Settle- ment Sheet.

Suppose that the Patrons’ Settlement Sheet at the close of the period shows:

AUMO MING COnbespatdsbyrcheek...). 5 eee h a 5 eres crac Peale $9, 500

BULLET SAIES LORD ALRONS 55 sccm 2S i oer. epee etre Lata Sasser ie a 450

SUpwlaecsOldgOnpatlODs <-> 45 note cre Sees aeine os Se ce eio oa ce 40

The entry would be:

DEBIT. CREDIT.

$9,900. Butter Fat Purchases. Patrons’ Accounts Receivable—Butter Sold........ $490 ANCCOUNtSspayaDlepeatronsi =. saci hey ees 9, 500

The procedure under the second method is fully described on page 20, U. S. De- partment of Agriculture Bulletin 559, ‘‘Accounting Records for Country Cream- eries.’’ However, it has been found desirable to substitute for the account Patrons’ Overdrafts, the account Patrons’ Accounts Receivable, operation of which is des- cribed on page 7 of this bulletin.

Tn some creameries any balance undistributed is allowed to accumulate and is distributed at a later date in the form of a patronage dividend.- When thisis done, the

_ undistributed balance should be credited to an account captioned Patronage Dividend

account and should not be carried forward to the next Operating Statement.

A patronage dividend is in reality a deferred payment and is advised against, 2s it necessitates considerable clerical labor, with no apparent advantage. The Patronage Dividend account would be closed by debit, and the corrésponding credit to the Bank account.

The Undistributed Palance account is not raised in the Ledger, inasmuch as it is immediately closed by a debit, the corresponding credit being carried to Butter Fat Purchases.

However, in preparing a Balance Sheet, such undistributed balance should beshown as a part of the abilities asillustrated on page 34.

Sxim Mitx PurcHasss (L 2).

DEBIT: CREDIT: 1. With the amount due patrons for 1. With the debit balance at the close skim milk purchased during the of the fiscal year. (Debit Loss period. and Gain.)

UNDERPAYMENTS AND OVERPAYMENTS (L 8).

DEBIT: CREDIT: 1. With the amount paid to patrons on 1. With the amount received from pa- account of errors in vouchers. trons on account of errors in vouchers. ;

26 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

Thisaccourt would be used only by creameries operating on the cooperative plan; when it would be shown on the Operating Statement es all other experses.

Should it happen that an error is made in feurirg 2 patron’s voucher, any balance due him should be immediately paid upon verification as te the sccuracy of the claim and the amount carried to the debit of this 2ecourt.

In ease an overpaymert has been made to a patron, he should be induced, if possi- ble, to reimburse the company immediately. Ctherwise the amount will appear as a. deduction on his next voucher, which is undesirable. Such refunds will be a eredit to this account.

The balance oi this account should be carried to Butter Fat Purchases’ account, _ either as 2 debit or credit, as the case may be, before the Loss and Gain accctrt is written up. ;

AvuTomMobiLe Truck OPERATION (IL 4).

DEBIT: | CREDIT: 1. With all expenses incurred for oil, | 1. With the debit balance at the close gasoline, rent, driver’s wages, ot the fiscal year. (Debit Loss license fees, and cleaning. and Gain.)

i

lf the situation warrants, 2 separate labor account under Collection and Delivery Expenses may be maintained, but in most cases this would be an unnecessary segre- gation. The Automobile Truck Operation expense account should show the expense of actual operation, exclusive of repairs. .

REPAIRS ON AUTOMOBILE TRUCK (L 5).

DEBIT: CREDIT: 1. With the cost of all items of repairs 1, With the debit balance at the close on automobile trueks during the ef the fiscal year. (Debit Loss period. and Gain.)

a

Considerable care must be exercised in determining wheat should be charged to thisaccount. These charges should include repairs of all sorts, but should notinclude charges for replacement of entire unit. Additional equipment to a truck increasing its valuation should be charged to Automobile Truck Inventory account.

DEPRECIATION ON AUTOMOBILE Trucks (L 6).

DEBIT: | CREDIT:

1. At the close of the period, with pro- |. 1. With the debit balance at close of portion of annual reserve set aside | the fiscal year. (Debit Loss end to cover the estimated wear and | Gain.) tear on automobile truck. |

| | } I

HAULING EXPENSE.

In some orgainzations this expense, or a part of it, is paid by the patrors. When the entire cost is so paid, the proper method of bookkeeping is described under Accounts Payable Haulers on page 15. However, when any part of this cost is paid by the creamery, an account captioned Hauling Expense should be opened under the Raw Material account. All amounts paid-to haulers would be charged to this account, and all charges to producers would be credited to this account. The debit balance would represent the expense to the creamery of collecting the raw: material.—.

re

_——

CLASSIFICATION OF LEDGER ACCOUNTS FOR CBREAMEREES. 3

M. G@PERATING EXPENSE.

Lapor (M 1). DEBIT: _ CREDIT: 1. With the amount actually earned 1. With the debit balance at the close | pt for the period by all factory em- of the fiscal year. (Debit Loss ployees as shown by the time and Gain.)

sheet. (Credit. Payroll account.)

It will be noticed that this account is not. charged with advances to employees nor with the amount paid to employees, but with the amount actuaily earned during the period. All paymenis, of whatever nature, are charged to Payroll account. (See

p. 16.) PowER AND REFRIGERATION (M 2). |

| Desir: CREDIT: : r I. With the cost of all material of any I. With the debit balance at the end of fe nature used as fuel in producing the fiscal period. (Debit Loss and

power. Gain. )

2. With the cost of electricity used for light and power.

(aN)

. With the cost of water.

4. With cost of all materials used in reirigerating machines or ice boxes (such as ammonia, calcium, ice, etc.).

In those organizations which desire detailed information relative to the cost of power and refrigeration, this account should be replaced by others which will give the de- sired detail.

ManuractuRinG Supprres (M 3).

# DEBIT: . CREDIT:

1. With the cos? of all materials used 1. With debit balance at the end cf the in the process of manufacturing, fiscal period. (Debit Loss and such as packages and mers, salt, Gain.) butter color, starter, ete.

REPAIRS ON PLAN? (M 4). DEBIT: CREDIT: i. With the total amount expended for I. With the debit balance at the close : repairs to buildings, machinery, of the fiscal year. (Debit Loss and 3 and equipment, as shown by in- Gain.)

voice or other vouchers.

~ Considerable care must be exercised in determining what should be charged to this account. These charges should include repairs of all sorts but should not include charges for replacement of entire units. The various invoices covering such ex- penditures should be carefully analyzed and treated individually.

28 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

Another method of taking care of these expenses for repairs to machinery and equip- ment, as well as to buildings, is to set up a Reserve for Depreciation on both these assets sufficient to cover all such expenses. This latter method is being recommended by some accountants.

DEPRECIATION ON Piant (M 5).

*

DEBIT: CREDIT: 1. At the close of the period with the 1. With the debit balance at the close proportion of the annual reserve of the fiscal year. (Debit Loss set aside to cover the estimated and Gain.)

wear, tear, and obsolescence on buildings and machinery and ~ equipment.

The periodical proportion of the wear and tear on the plant is an expense and should be very carefully estimated. The question of the proper rate to apply as a charge for depreciation for an entire plant is one that can hardly be covered by a general statement, as local conditions are rarely comparable. In some instances a machine may last five years; in others it may last hardly a year, depending upon its load and care. The rate of depreciation will vary from 3 per cent in some cases to 20 per cent, depending upon the kind of building and machinery in use.

Toot REPLACEMENT (M 6).

DEBIT: CREDIT: 1. With the total amount expended for 1. With the debit balance at the close small tools during the period. of the fiscal year. (Debit Loss and Gain.)

Inasmuch as the investment in small tools will remain substantially the same at all times, it is suggested that in order to avoid taking an inventory and setting up a Reserve for Depreciation on Tools, all purchases be carried direct to Tool Replacement ex- pense. This method is believed to be much more simple and satisfactory than that of maintaining a depreciation account as in the case of machinery and equipment.

N. ADMINISTRATION AND SELLING.

EXPRESS, FREIGHT, AND DRAYAGE (N 1).

DEBIT: CREDIT:

1. With any cost of freight, express, 1. With the debit balance at close of and drayage on inbound goods the fiscal year. (Debit Loss and when such an expense can not be Gain.) allocated to a particular inventory account.

2. With any cost of freight, express, and drayage on product shipped.

All other charges for freight, express, or drayage should be charged direct to the inventory account for the article purchased.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 29

TELEPHONE, TELEGRAPH, AND PostTaGE (N 2).

DEBIT: CREDIT: 1. With the total amount expended | 1. With the debit balance at close of during the period for items of post- the fiscal year. (Debit Loss and Vo age, telegraph, telephene, and Gain.) messenger fees.

OFFICE SALARIES (N 38).

DEBIT: CREDIT:

1. With any amount actually earned 1. With the debit balance at close of by office employees applying to the fiscal year. (Debit Loss and the period covered by the pay roll. Gain.)

(Credit Payroll account.)

cy For further discussion on handling this account, see Labor Expense and the com- ments under Payroll. . ; OrricE Suppuiss (N 4).

DEBIT: CREDIT: 1. At the close of the period with the 1. With the debit balance at close of estimated amount of printing, sta- the fiscal year. (Debit Loss and tionery, and supplies consumed. Gain.)

(Credit Printing and Stationery Inventory.)

2. With the cost of current purchases of small supplies.

As it is impracticable to determine the exact amount consumed periodically, a iberal estimate of the consumption, rather than an attempt at actual inventory, should | be charged to this account.

Taxes (N53).

DEBIT: ; CREDIT: 1. At the close of the period with the 1. With the debit balance at close of ‘proportion of the annual tax the fiscal year. (Debit Loss and chargeable to the pertod. (Credit Gain.)

Taxes Accrued.) |

INSURANCE (N6).

‘3 ; DEBIT: CREDIT: | 1. At the close of the period with the | 1. With the debit balance at close of ! : proportion of the annual amount the fiscal year. (Debit Loss and chargeable to the period. (Credit Gain.)

Prepaid Insurance.)

.

88: BULLETIN 865, U.S; DEPARTMENT OF AGRICULTURE.

Inreresr (N-7).

|

| DEBIT: : CREDIT: 1. At the close of the: period with the 1.. At the close of the peried with: the interest accrued during the period interest accrued. during the period on Notes Payable. (Credit In- on notes receivable.

terest Accrued.) 2. With the discount charged on notes receivable discounted.

The debits or credits offsetting the entries of interest accrued will be made to the Interest Accrued account. At the close of the fiscal year the debits of this account should be transferred to:the debit of the Loss and Gaim account, and the eredits should be transferred: to-the eredit-of Less and Gain account.

The above method is advisable: for small coneerns.. However, m: case both interest paid and interest earned be considerable, it is suggested that separate accounts be opened for Interest. Expense and Interest. Earned.

Loss From Bap Accounts (N8).

DEBIT: | CREDIT: 1. At the close of the period with the 1. With the debit balance at the close proportion of the estimated annual | of the fiscal year. (Debit Eoss: loss through bad aecounts. (Credit and Gaim.)

Reserve for Doubtful Accounts.)

MiscELLANEOUS EXPENSE (N9).

DEBIT: | CREDIT: 1. With the cost of any items of expense: 1. With the: debit balance: at the close not. chargeable to any ef the fore- of. the fiscal year. (Debit Less going accounts. and. Gain.)

To this account should be charged. donations to charitable organizations and any other expense that can not be charged to any of the other accounts.

O.. PURCHASES. MercHanpisE PurcaasEs (0:1).

|

DEBIT: CREDIT: 1. With the cost of all merchandise 1. With the debit balance at the close purchased for direct sale during of the fiscal year. (Debit Loss the period. and Gain.)

.

_

fe

CLASSIFICATION. OF .LEDGER.ACCOUNTS FOR CREAMERIES. 31

P. APPROPRIATION ACCOUNTS.

DIVIDEND APPROPRIATION (P1).

DEBIT: Creepin 5” 1. At the close of the period with the 1. With the debit balance at the close proportion of annual dividend of the fiscal year. (Debit Loss chargeable to the period. (Credit and Gain.)?

Reserve for Dividends Payable.)

For further discussion, see Reserve for Dividends Payable, page 18.

SINKING FuND APPROPRIATION (P 2).

DEBIT: CREDIT:

1. With the amounts deducted from | 1. With the debit balance at the close gross income as authorized by the of the fiscal year. (Debit Loss by-laws or by order of the Board of and Gain.)?

Directors. (Credit Sinking Fund Reserve. ) |

For further discussion, see Sinking Fund Reserve, page 19. TRIAL BALANCH.

While the Trial Balance is not a financial statement, it serves to prove the postings

.of the entries to the Ledger from the books of original entry. It is a summary of the

various balances as they appear in the Ledger and should be drawn off before closing the Expense and Income accounts into the Loss and Gain account. If no mistake has been made in posting to the Ledger, the total of the debits will equal a total of the credits. A trial balance should always be taken at the end of every period and ail. errors should be located and corrected at once. |

CLOSING THE BOOKS.

Preparatory to closing the books, an inventory should be taken of ail supplies on hand and should be written up In permanent form. With it should be included a schedule of expense items, such as postage, stationery, and supplies on hand, and of the unconsumed balances of such accounts as Prepaid Insurance and Prepaid Taxes.

The balances of alt Expense, Income, and Purchase accounts should be transferred to the Loss and Gain account in order to ascertain the net income or loss for the season’s operation. The accounts should then be ruled, and the balance brought down. This balance is the net income for the year. Against this net income should then be charged the balances of the Dividend Appropriation and Sinking Fund Appropriation aceounts. The balance of the Loss and Gain account should then be transierred to the Surplus account.

After the books are closed and a post-closing Trial Balance has been taken to prove the mechanical accuracy of the work, the various flnancial statements are made up for presentation to the Board of Directors.

2 Care should be exercised that this balance be transferred to Loss and Gain only after the net income has been determined, as shown by the form illustrated on page 35 and 36.

32 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

The i:ollowing Journal entries will illustrate the procedure necessary to close the books: Entry No. 1.

Desir. CREDIT.

000 Butter Sales.

000 Cream Sales.

000 Milk Sales.

000 Cheese Sales.

000 Buttermilk Sales.

000 Merchandise Sales. Less ari dake ge re ie anes eee ye ene ee 000 (To close the Sales accounts into Loss and Gain.)

Entry No. 2. 000 Discount Received. Loss and Gates. 42". = 2 ee ee ee 000 (To close the Discount Received account into Loss and Gain.)

Entry No. 3. 000 Loss and Gain. ; Butter PatePurchascs so Sec2 5 oes... ee eee 000

Skim Milk Purchases) o22.- 2. a eee 000 Merchandise barchases = 0 te eee 000

(To close the Purchase accounts into Loss and Gain.)

Entry No. 4. 000 Loss and Gain.

Labor.Jf. 005999 See Ie Sa AEE 000 Power! and Reiriceration2 st 26. 72 A a eee 000 - Manufacturme Suppless= eis a es See 000 Repairs om Plantenc Seen ses Seo ae ee 000 Tool: Replacement< 2.2232 ee eee 000 Depreciation on Plant222 4 2S See SS - 000 Automobile Truck: O perationgs2 26 = ee eS 000 Repairs on Automobile Trucke.—.._-< --- 32 000 Depreciation on Automobile Truck................- 000 Express, Freight, and Drayave.: _ 225. 5. 35. =seeee 000 Telephone, Telegraph, and Postage...............- 000 Office Salaries i350 Se aaa eis ee 600 Office Supplies: 23222 ss 2 ee ee See 000 Underpayments and Overpayments..............-..- 000 Taxess ¢ 3c tnd ot -excee aes See ee ee 000 Tnsurances:e23.. het a ee ee See 000 Interest.....34 a326so8 5. ota ee Se eee ee 000 ‘Loss from: Bad ACComnts:: :2 25 cr ee ee 000 MisceHaneotiss. 24 $5: o-2enese ee 6 eee eee 000

(To close the Expense accounts into Loss and Gain.) At this point the Loss and Gain account should be ruled and the balance brought down as net income or net loss. The following entry should then be made:

DEBIT. CREDIT. 000 Loss and Gain. Dividend. A ppropriaitons <= ee ee eee 000 Sinkine. Fund Appropriation: .=-._-.-.-s_- #es2-s 000

(To close the Appropriation accounts into Loss and Gain.)

The balance of the Loss and Gain account should then be transferred to the Surplus -

account upon direction of the Board of Directors.

le

SS

re

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 30

BALANCE SHEET.

After closing the Expense and Income accounts into Loss and Gain there will re- main in the Ledger the Asset, Liability, Reserve, and Net Worth accounts, which are the Balance Sheet accounts. As has previously been stated, the Assets accounts should be arranged on the leit-hand side of the Balance Sheet in the order of their probable cash realization and the Liabilities and Net Worth accounts arranged on the right-hand side in the order of their probable priority as to liquidation. The purpose of the Balance Sheet is to present the assets and liabilities of the organization in con- crete form and reveal the net worth as at a certain time. It is one of the most impor- tant statements to be prepared and should show by comparison with former similar statements, the financial progress of the organization.

The following form of a Balance Sheet is recommended as a model to be used in preparing these statements. Attention is invited to the fact that while the Ledger shows the various reserves for depreciation as a credit balance, they are shown on the Balance Sheet as a deduction from assets, and also that while good will may be con- sidered as an intangible asset. it is shown on the credit side of the Balance Sheet as a deduction from the Net Worth accounts. This procedure is in conformity with the recommendation of the Federal Reserve Board.

DEPARTMENT OF AGRICULTURE,

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CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMEREES. 30

INCOME AND EXPENSE STATEMENT.

The Income and Expense Statement is an itemized statement of the entries made to the Loss and Gain account, arranged in such a way as to set forth clearly the results of the operations of the periods involved.

The following form of Income and Expense Statement will be found convenient for exhibiting the operations of the creamery for either a monthly or a yearly period. Whenever possible a monthly statement of income and expense is advised. In the past no standard form of Income and Expense Statement has been used; therefore, this form should fill a very definite need. By its use not only the stockholders and directors may follow the details of the business, but a ready comparison may be made between the costs of operation of various periods.

The amounts shown as sales and purchases in this statement should be net figures. That is, merchandise returned by the buyer should be deducted from the total sales, and merchandise returned by the company to the concern from whom it was pur- chased should be deducted irom the total purchases.

In preparing the trading section of the Income and Expense Statement, it will be found that a space is provided for showing the inventory at the beginning of the period separately from the purchases. If the entries have been made in the order provided, the amount of the inventory existing at the close of the previous period should be the first item in the various Purchase accounts. By deducting this amount from the balance on the Purchase accounts the purchases for the period may be found.

THE BLANK CREAMERY COMPANY, BLANK, VERMONT.

ERCOMe aNd HMaEpense Statement JOR 4-22 2-4 e yee ae , 19—.

ROE ES eC Siete aia rt IE Ev ae Bene IID Psa td ne foe = reeileeencme Sout SHE eee nen dl Hl tree OSS OEURIEOG OAlOS =. names sane erreurs all ee cleo Ce He aia, eee Pigs OS = free

ING RENCE OSs apa aaa Ate emte A ers Sener a ale ie aan Me puove AES eee a Bbeseon c

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Siti MEc PUrelases cassie. co-sceccice-- WPascae ese th ce eRe T ERS Pes thy Vain [lee ee Underpayments and Overpayments-....|/........|......-- en akg al leis eoere reall te eee

sellcallca! Roncyest

Collection Expense: Auto Truck O-peration..........<...-- Vere antes arta Hsia easel ena es ERO UE SHOP ACERE Ons ESI ULG EG ee od a ce petv erent eee lle event Mh Hie yaaa me Depreciation on Auto Trucks......... |

Total Cost. of Raw Material ........ -|

Beis Doe

Power and Refrigeration................| Manufacturing Supplies. .-... ia PANE t cae Ses Repainsonublani eas j2 55 th a ace Depreciation on Plant..................- Tool Replacement .........0...2.--0. 24.

BESESS Oorwroe

Fotal Operating Expetise........... i

Add: Inventory beginning of year...........-- |

Deduct: Inventory end of year.............2-----

Manufacturing Cost of Goods Sold ........ Grossserotitonacesecceicceceoeee or ee

—-

36 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

Income and Expense Statement for 2-4 2=~.-) 2. es , 19—Continued.

Account |

No. Current year. Last year.

GOSS ETO Ge © Tee Cl pee ce ep | eee ec |e Administration and Selling: IBS oR, Peele UNG IDV) cas asoouiiscseaosal > ee hese Telephone, Telegraph, and Postage...... Ff feeeseee ac me ae Rie oscar

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INSTALLATION OF ADDITIONAL EQUIPMENT.

Tt may be well to discuss the procedure to be followed in case additional equipment is installed or new buildings are constructed to accommodate the expansion of the business. This expense may possibly be met by selling more capital stock. How- ever, lf the authorized capital stock has been entirely sold, this procedure would first necessitate recelving approval of the proper State officials to increase the capitaliza- tion. This method of securing additional funds is often impracticable, however, and the amount may be raised by placing a sufficient mortgage on the plant to meet the cost of the proposed expansion. In case the plant is mortgaged, an amount sufficient to liquidate the indebtedness at maturity will necessarily have to be deducted periodically from the gross earnings. This is the proper scope of the sinking fund as referred to in the first paragraph in this discussion. The interest on the mortgage should be paid annualiy and included in the Operating Expense. This amount de- ducted should be regularly deposited in a savings account, and there should in no case ever be a possibility of using this fund to pay current expenses.

However, if neither of the above methods can be adopted, it will then become necessary to anticipate the expansion and withhold periodically a certain amount from the earnings. The amount thus withheld should be deposited in a savings account and not merged with the ordinary bank account. The following entries will illustrate the procedure to raise the reserve and other accounts. Assume that $5,000 is the necessary amount to be raised for the purpose of installing a new refrigerating plant.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 37

DeEBIr. : CREDIT. $1,000 Additional Equipment Appropriation (Kefrigerating Plant). Reserve for Additional Equipment...............-.- $1, 000 (Appropriation of income for purchase of re- © frigerating plant. ) 1, 000 Savings Account. vaio Ne COMM Ta tye tt ot ae nee cn Soe See c ees 1, 000 (To set aside appropriation in special Savings

account. ) The above entries should be made periodically until the necessary amount has been raised. DEBIT. CREDIT, $5, 000 Bank Account. 2 WINS eeAC CO UMN besos a eee en $5, 000 (To withdraw fund from Savings account, making it available for the purchase of refrigerating plant. ) 5, 000 Refrigerating plant. ISSHTK: LGCONIT MS a tates seed abe a see cae eae 5, 000 (For purchase of plant.) 5, 000 Reserve for Additional Equipment. _

(To close Reserve account into Surplus.)

The required Ledger accounts would be:

Savines AccouNT.

DEBIT: CREDIT: 1. With the periodical deposits to apply 1. With the amount withdrawn for the on the purchase of the refrigerating purpose of expansion. plant.

“Any remaining balance should then be carried to the regular checking account by a credit to this account and a debit to the Bank Account.

REFRIGERATING PLANT.

DEBIT: CREDIT: 1. With cost of new equipment at the 1. With the totai book value of any - time of purchase. part of the refrigerating plant sold

or disposed of otherwise.

RESERVE FOR ADDITIONAL EQUIPMENT.

DEBIT: CREDIT:

1. With the purchase price of new 1. With amounts periodically deposited equipment covered by this re- in the Savings account for the serve. (Credit to Surplus.) purpose of expansion.

The balance of this account should be carried to the Surplus Adjustment account.

38 - BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

ADDITIONAL EQUIPMENT APPROPRIATION.

DEBIT: CREDIT: 1. At the close of the period with the 1. With the debit balance at the close proportion to apply to the pur- of the fiscal year. (Debit Loss chase of additional equipment. and Gain.)3

It is suggested that instead of carrying the reserve set up for the purpose of expansion to the Sinking Fund Reserve account, these accounts just illustrated be set up, in order that the books may reveal the entire history of the expansion. As before stated, the sinking fund should be an amount of cash actually set aside to liquidate a fixed liability at some future date. It should never be maintained for the purpose of de- fraying current expenses.

THE NATURE OF BOOKKEEPING.

In order that the procedure herein deseribed may be more clearly understood the nature of bookkeeping is briefly discussed here.* The Standard Dictionary defines bookkeeping as follows:

The art, method, or practice of recording business transactions distinctly and systematically in blank books provided for the purpose, so as to show goods and moneys received, disposed of, and on hand; the credits given, and the assets, liabilities, and general status of the business, person, or house.

Ii bookkeeping is “‘the art of recording business transactions,’’ the account must be considered the material expression of this art, since all bookkeeping eventually centers in the construction of certain accounts which will reflect the result of business transac- tions.

For the purpose of recording and expressing the accounts are classified as:.

‘

‘seneral status of the business,”

Asset Accounts: Representing all values which are owned and invested in the business; or earned, although not received, and those which have been expended for the benefit of a future period.

Liability Accounts: Representing all debts to outsiders due and now payable, due but not yet payable, and incurred to become due and payable at some future date.

Net Worth Accounts: Representing the original proprietorship and the effects of the operations on the proprietorship.?

Since Asset, Liability, and Net Worth accounts are representative of the actual properties themselves, these names are used to designate the properties, as well as their representative accounts.

Since the Assets are all that are owned and the Liabilities are ail obligations to out- siders, the net worth must of necessity be the difference between the first two, or the rights of the proprietorship to the excess thus determined. The following statement, therefore, shows the equality existing beween the total assets on the one side and the sum of the liabilities and net worth on the other.

3 Care should be exercised that this balance be transferred to Loss and Gain only after the net profit has beon determined, as shown by the form illustrated on: pp. 35 and 36.

4 Bookkeeping as discussed herein is limited ta what is known as the double-eniry method.

5 Income and Expense accounts are Net Worth accounts of a temporary nature. They are fully de- scribed on pages 23 to 30 for the purpose of showing the details of the operations and their ultimate effect on net worth.

CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 39

ASseTS= LiaBinirres+ Net WortTsH.

Ali accounts being included in one of these groups, it is evident that all transac- tions must be considered in the hght of their effect on the respective groups.

It is also evident that any transaction affecting one of the groups must likewise produce an equal net change in the other groups, except in a few instances when the transaction by its nature effects a change in the detail of one of the three groups and does not change the total of the affected group. Wemay classify these changes as:

Increase or decrease in assets.

Increase or decrease in Habilities.

Increase or decrease in net worth.

Transfer between items within any one group.

The customary bookkeeping names for these changes are ‘“‘debit’’ and “credit.” These same titles are used to show the side of the account on which the entry is made, debit being used for the left-hand side and credit for the right-hand side. Keeping these names in mind, the statement changes may be classified as follows:

Desir: CREDIT: (1) Increase in assets. (la) Decrease in assets. (2) Decrease in labilities. (2a) Increase in abilities. (3) Decrease in net worth. (3a) Increase in net worth.

It may be well to consider some of the more usual transactions which will arise in a business, and to note the way in which they affect our statement, and the classi- fication shown above.

(1) Capital stock issued upon payment of cash. The result is an increase in the asset Cash and a corresponding increase in the Net Worth account Capital Stock. Using the above table, the transaction would be entered by a debit to Cash (1) and a credit to Capital Stock (3a).§ 38

(2) Capital stock paid for by a note. The result is an increase in the asset Notes Receivable, and an equal increase in the Net Worth account, Capital Stock. There- fore, debit Notes Receivable (1) and credit Capital Stock (3a).

(3) A note receivable is paid in :ash, without interest. There is an increase in the asset Cash and a decrease in the asset Notes Receivable. This is one of the transactions described as being a transfer affecting the detail of one of the three parts of the business statement, and not in any way changing the totals of the part. Being both an increase and a decrease in asset values, we must debit Cash (1), the asset increased, and credit Notes Receivable (1a), the asset decreased.

(4) Purchase of merchandise for cash. The asset Merchandise has increased; the asset Cash has decreased. Applying our table we have a debit to Merchandise (1) and a credit to Cash (Ja).

(5) Purchase of merchandise on account. We have an increase in the asset Mer- chandise and an increase in the Hability Accounts Payable; therefore, we will debit Merchandise (1), and credit Accounts Payable (Za).

(6) Merchandise sold for cash. There isan increase in the asset Cash and a decrease in the asset Merchandise. Debit. Cash (1) and credit Merchandise (1a).’

(7) Merchandise sold on account. There is an increase in the asset Accounts Receivable and a decrease in the asset Merchandise. Debit Accounts Receivable (1) and credit Merchandise (1a).

6 All numbers shown in parentheses thus (37) refer to the number of entry in the table.

7Sales of merchandise or product actually affect two parts of our statement; i. c., that part of the sale price which represents the actual cost of the merchandise is a decrease in the asset, while the part representing profit is an inerease in the net worth. These sales in actual practice are credited to Merchandise Sales and closed into Loss aud Gain account at the end of the fiscal period.

40 BULLETIN 865, U. S. DEPARTMENT OF AGRICULTURE.

(8) Employee is paid wages in cash. There is a decrease in the Net Worth and a decrease in the asset Cash. Wages are a cost of operation and therefore decrease the net worth. They are an expense as distinguished from income. Debit Labor (tem- porary Net Worth account) (3a) and credit Cash (1a).

After this manner, all transactions can be analyzed and classified to indicate the proper entry to be made.

Again referring to our statement, Assets=Liabilities-+Net Worth, and to ane dis- cussion and illustrations which follow the statement, it should be noted that every transaction is composed of two parts, the debits and the credits, and that these two parts are always exactly equal and opposite in their effect.

If, then, we start with any statement, the two sides of which must be equal, and every transaction affecting this statement has its two sides equal, the two sides of the result must be equal. As the sides are called in bookkeeping debit side and credit side, or debit and credit, respectively, we may formulate the following rule: The debits and credits by which any transaction is recorded must be equal.

In this discussion we have considered only the three elements assets, liabilities, and net worth, and have classified the transactions as affecting two or more of these elements. . In observing the changes in net worth, there are other effects to be con- sidered besides the qmeseom that a change has occurred, and the total amount of such change.

It would be possible to discover this effect (in total) by recording the increases and decreases directly in the Net Worth account. However, when we attempt to discover the reasons for the increase or decrease in the total net worth, we are ata loss to do so, for our records have not been arranged so that results can be coliected with proper regard to the relevant cause.

For this reason it is desirable that we introduce another series of accounts called Income and Expense accounts, which are in reality subdivisions of the Net Worth

— gaeccounts.

Into these accounts are entered the various changes which are the result of the business operations, and which either increase or decrease the net worth, the Income accounts showing the increases and the Expense accounts showing the decreases. The net results of these accounts will show, then, the effect, Increase or decrease, on the net worth of che business.

To arrive at the net result of these operations the various Expense accounts should be closed, their total being carried as a debit to the Loss and Gain account and the various Income accounts carried as a credit to the same account. The resulting balance of the Loss and Gain account is the net income or loss for the period. which result should be carried to the Surplus or Deficit accounts by order of the Board of Directors if the concern is a corporation or association, or to the proprietorship account if owned by a partnership or individual.

It will be noted that in making the annual entries to the debit and credit of this account, all the Income and Expense accounts will be balanced or closed. Accounts so closed should be ruled in red ink so that the year’s business will be kept sep arat and distinct from that of the succeeding year.

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