American School of Correspondence

“ Having the right to create working capital, the directors also have the right to reduce it whenever, in their judgment, the necessities of the business no longer require its maintenance in the original amount.
A reduction of working capital has the effect of increasing surplus, since surplus is increased by an increase of assets or a decrease of liabilities. To reduce working capital, the account is closed into surplus. It is perhaps necessary to say that the account should not be closed into profit and loss, since it does not represent current profits. ”

“ In the nomenclature of accounting the term voucher is quite commonly used in the same sense as the term receipt. The only distinction appears to be that a voucher is usually understood to be an acknowledgment of the payment of a particular item on account, while a receipt may be an acknowledgment of the payment of money without reference to the item or items covered.
Since the transaction of business began receipts or vouchers in some form have undoubtedly been used. Some form of acknowledgment of money paid has always occupied a place in business. ”

“ Sometimes the term surplus is used to designate a part of the profits set aside for a special purpose, as the creation of a fund to meet an obligation falling due at some future date. When surplus is treated as a special fund, or when it has been provided by resolution of the directors "that a certain sum, or a certain per cent of the profits shall be set aside as a surplus fund," and remaining profits not distributed as dividends may be placed to the credit of an account called Undivided Profits or Undistributed Profits. ”

“ Frequently when a corporation is organized, stock is issued to a promoter as payment for his services. An enterprise may have great latent possibilities provided sufficient capital can be secured for its development, but until the possibilities for making a profit can be clearly shown, it is difficult to interest the investing public. To interest investors in an enterprise yet to be developed requires a special talent not possessed by the average owner of a patent, mine, or process. There are men who possess this special talent and who make a business of promoting companies. ”

“ It is of utmost importance that the cost of manufacture be not understated, for it is on this cost that selling prices will be based. This is one reason why some manufacturers add a small-factory profit. Unless a complete system of cost accounting is maintained, this inventory of goods in process must be an estimate, but the record of goods in process in each department will be of considerable assistance in making the estimate. ”

“ A reserve or reserve fund is a nominal liability artificially created to off-set a decrease in value of an asset. On the principle that an increase of liabilities represents a loss, the amount reserved each year represents a loss, but since the liability created is not a real but a nominal liability it does not affect the real assets of the business. ”

“ Working capital is a liability, which may be termed an assumed or nominal liability. Like capital stock it is a liability only as between the company and its stockholders. It off-sets whatever form of asset—cash or otherwise—that represents proceeds from the sale of treasury stock. The real position of working capital in the balance sheet is that of a capital liability which must be considered before any surplus available for dividends can be said to exist. ”

“ When we pay rent for a store or office we expect that, by reason of our occupancy of that store or office as a place of business, our earnings will be increased in an amount greater than that paid for rent. Promotion expense cannot, in itself, produce earnings. The cash, or other form of asset, received from the sale of stock—the direct result of promotion expense—is off-set by the stock liability created. Earnings to off-set promotion expense must come from future operations of the business. ”

“ Unlike a reserve, a sinking fund has no effect on the apparent profits of the period in which it is created. It does, however, tie up or render unavailable for dividends a certain part of those profits. [238] Whether or not it is carried on the books in a separate account, a sinking fund is a part of the surplus of a business. ”

“ In the belief that a demand exists for a library which shall embrace the best practice in all branches of business—from buying to selling, from simple bookkeeping to the administration of the financial affairs of a great corporation—these volumes have been prepared. ”

“ When we borrow money or discount a note, we do it because we need cash capital, and the interest paid is a capital expense or a direct source of loss. Exchange charged for the collection of notes and drafts belongs in the same class. All interest paid for the use of money, and exchange paid for the collection of notes, drafts, and checks, should be debited to interest account. When we save the discount by prepayment of bills, the discount is earned by the use of capital. All such earnings are a direct source of profit and should be credited to interest account. ”

“ Strictly speaking, promotion fees are as much an expense as the cost of printing the company's prospectus, but to immediately charge it to expense would, in many cases, cause the accounts to show an impairment of capital at the outset. ”

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

“ It has become the custom for corporations to take over such properties, issuing in payment for the same full paid stock greatly in excess of its value. The original owners of the property will in turn donate a certain portion of the stock to the corporation to be sold to provide working capital. This stock then becomes treasury stock and is offered for sale at a liberal discount. The selling of property to a corporation at an inflated value is called the process of watering the stock. It can only be justified when an uncertainty exists as to the actual value of the property acquired. ”

“ When the goods sold are divided into departments, it is here customary to record carefully the purchases and sales for each department. These records are provided for by the use of purchase and sales books having as many columns as there are departments. Let us suppose that the business under consideration is a single proprietorship, and that the goods sold are clothing, shoes, and furnishings. Each class of goods is kept in a separate department, sales and purchases being recorded by departments. ”

“ Fixed assets are those permanent forms of property which are a necessary part of the equipment used for conducting the business—such as real estate, buildings, machinery, etc.
Active or floating assets are those forms of property of which the quantity in our possession varies from day to day—as merchandise, accounts, cash, etc. ”

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

“ When declared, a dividend becomes a debt of the corporation to its stockholders. It is not necessary that the directors declare dividends of all the surplus or net profits. Frequently the by-laws provide that a certain amount be reserved as working capital, and under any circumstances the questions of the advisability of declaring a dividend rests with the directors. They cannot be compelled to declare a dividend unless it can be shown that, in declining to do so, they are acting in bad faith.
20. Stock Dividends. ”

“ Real Account. A real account is a record of transactions with respect to a particular property. Properties which we possess are termed resources or assets; therefore all real accounts are also asset accounts. ”

“ Just what items of income and expenditure enter into trading profits or losses is an important question in the science of accounts. A safe rule to follow is to debit trading account with the cost of goods sold, including cost of preparing them for sale. In a manufacturing business the cost represents cost of raw materials and cost of manufacture. Credit the account with net income from sales, arrived at by deducting from gross sales all returns, allowances, rebates, and cash discounts. ”

“ Debit and credit are the fundamental principles of bookkeeping. The general rules to be followed in debits and credits are:
[39]
Debit cash when you receive it.
Debit a person when you trust him.
Debit a person when you pay him.
Credit cash when you pay it out.
Credit a person when he trusts you.
Credit a person when he pays you.
5. Balance. When the two sides of an account differ in amount, it is said to show a balance. If the debit side of the account is the larger, the difference is a debit balance. If the credit side of the account is the larger, the difference is a credit balance. ”

“ A statement of the assets and liabilities of a business is called a balance sheet. If the assets exceed the liabilities, the difference is the present worth. If the liabilities exceed the assets, the business is insolvent, and the difference or balance shows the amount of insolvency.
The balance sheet is prepared from the ledger balances after the books have been closed. In arranging the accounts on a balance sheet, the assets should be listed first, followed by the liabilities. The balance will agree with the balance shown in the proprietor's or investment account. ”

“ In reality undivided profits is surplus, and the division of the account merely serves to show that the amount credited to surplus is for some reason reserved, while the amount credited to undivided profits is available for dividends whenever the directors may so elect. ”

“ When the price is made, the profits are calculated with the idea that the customer may take advantage of the cash discount; that is, the price after the discount is deducted includes a legitimate profit. We cannot debit the customer with the amount of the bill less the discount, for we do not know that he will take advantage of the discount; and so, the charge to the customer and credit to sales account is an amount which may never be received. ”

“ A non-stock corporation is one organized to further a particular object—as clubs, charitable associations, societies for scientific research, etc.
Stock or business corporations are the ones with which we are chiefly concerned. Such corporations are organized to enable several persons to unite their capital to conduct a legitimate business enterprise and such organization accomplishes two important results; the rights of the members to transfer their interest without affecting the standing of the business, and exemption from personal liability for contracts or acts of the corporation. ”

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

“ In taking an inventory, all goods must be priced at cost—never at the selling price. If selling prices are used, credit is being taken for profits which cannot be earned until the goods are sold. It may even be found advisable at times to list goods at less than cost. Some classes of goods deteriorate; at other times the stock may contain merchandise that was purchased on a high market, on which prices have been materially lowered. To price such goods at actual cost prices is creating fictitious values. ”

“ Speculative—A firm having a surplus not required in the business sometimes invests it outside of the business with the expectation of realizing a profit by selling at an advanced price. They buy grain or provisions, mining or railway stocks, etc. Or an investment may be made in the stock of some manufacturing business to be established in the town, because such an enterprise, if successful, will naturally result in an increase in their own business. ”

“ In opening the books of a corporation it is necessary to first get the capital entered. In a proprietorship, the capital is credited to the owner; in a partnership it is credited to the individual partners. On the books of a corporation an account called capital stock is opened, to which capital is credited. This account is opened in the general ledger and original entries are made in the journal. The manner of making the opening entries depends upon the method of disposing of the capital stock. ”