Expense account

“ In the case of a policy of guaranteeing the quality of a product or its workmanship, after a few years’ experience very accurate estimates can be made of the loss to be expected therefrom, and at the end of a fiscal period the books can be adjusted on that basis just as they are for taxes. A charge to a suitable expense account and a credit to a reserve or accrued account comprises the book entry, with a listing of the reserve as a real liability. ”

“ A nominal account is a record of transactions having to do with profit and loss; a record of a particular class of expenditures from which no direct returns are expected; [71] any impersonal account which does not come under the classification of real or representative accounts.
Example—
We buy coal to be used in heating our building. The coal is not to be resold, but its use is necessary; it is one of the expenses of conducting the business, and we charge the amount to an expense account. Expense is a nominal account kept for the purpose of showing the total expenses of the business. ”

“ By keeping the expense controlling account in the private ledger, the principal can keep private, not only the actual cost of an article, but the percentage of expense and the basis of the expense apportionment. If thought desirable, he can add further amounts for the purpose of establishing a selling price. ”

“ Net sales, less cost of goods sold, represent gross profits. Gross profits, less cost of conducting the business (revenue expenditures) represent net profits.
55. Expense. The broad term expense account represents all revenue expenditures; but in modern bookkeeping the amounts of the different classes of expense are kept separate as far as possible.
Some of the most commonly used divisions of expense are: Rent; Insurance; Taxes, Interest and Discount; Out Freight and Express; Heat and Lights; Labor ”

“ In every business there are certain expense accounts to which charges are infrequent, not more than one charge a month, and in some cases one or two in a year. Examples of these accounts are insurance, taxes, rent, etc. To add columns to an already large voucher register for the accommodation of these few items is impractical, hence the Sundries column is provided for charges to accounts [286] for which special columns are not provided. Space is allowed for entering the names of the accounts, and each item is posted direct to the ledger account.
Fig. 10
Fig. ”

“ Suppose, for example, that a corporation is organized with a capital of $100,000.00 all paid in cash. The promoter is paid a fee of $15,000.00. Profits earned—trading profits—in the first year are $8,000.00, but [222] we have a charge of $15,000.00 for promotion in the expense account. The books show that the company is insolvent, the liabilities being $7,000.00 in excess of the assets, while the business actually is in a healthy condition.
Expenses paid in the regular course of business are expected to be off-set by earnings. ”

“ The net difference between the income and the cost of securing the income, as indicated by the expense accounts, will represent the value added to the assets of the business, and will therefore be reflected tangibly in an increase in the value of the assets by that amount. This increase will usually be reflected either in the cash holdings or in claims against customers. ”

“ Every account showing a debit balance is either an asset or a loss; a “Personal” account showing a debit balance is an asset, an “expense” account showing a debit balance is a loss.
[75]
b. Every account showing a credit balance is either a liability or a profit; a “personal” account showing a credit balance is a liability (something we owe) , any sales account showing a credit balance is a profit.
1. Post Exchange Account. Another name for this account is “Net Worth”, or, if the Exchange is out of debt, “Surplus”. ”

“ 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. ”

“ The account should be charged originally with all such items at full cost. Great care must be exercised in handling repairs and betterments to avoid an inflation of values. The distinction between capital and revenue expenditures as regards all such assets already acquired is usually so slight and uncertain as to justify the establishment of a policy of charging all these to expense. Otherwise, the ease of inflation is apparent. All new purchases should be charged at full cost to the asset. ”

“ In a small plant, where the selling division is conducted through the general office at an expense so small as not to affect the cost of administration over what would be necessary for manufacturing purposes only, or where there is difficulty in separating the selling from the manufacturing expense, the two are often combined as general expense and pro-rated as one account into production costs. ”

“ Interest on borrowed money should not be included. The charges to operating expense on account of repairs should be adequate, and care must be taken to see that charges to the repair accounts do not show a sudden falling off toward the close of the period under review. The reserve for depreciation should be credited with the proper amounts. Sales, effected for a subsequent period, are not to be considered in the accounts of the current period as this would tend to inflate the profits. Shipments made to branch offices or on consignment account should not be regarded as sales. ”

“ Then, if the merchant finds that the expense curing is greater than 50s., is he entitled to increase that charge in the final account with the men?-Yes. The men are only entitled to one half of the net proceeds of the speculation. ”

“ The effect of the order is to require that, if total operating expenses deducted from revenues leaves less than a reasonable return in 1925 or a subsequent year, there shall be deducted from the expense of depreciation in that year, and added to the net earnings, a sum sufficient to make up the deficiency; then, by appropriate book entries, the resulting shortage in depreciation expense is to be made good out of the balance in the reserve account built up in prior years. ”

“ The expense to which this would put you, would be amply compensated by the [Pg 387] profit on the purchase of bills and the regularity of payment. I have taken upon me to act as your agent till I hear from you; and my Secretary, Mr Morris, has hitherto transmitted bills to you on Dr Franklin, on your account, bought at the rate of six shillings and three pence this money for five livres, which makes a saving to you of about twelve per cent. A letter from him containing a state of your account and bills for the last quarter due, will be sent with this. ”

“ Such expenses need not relate directly to the production of income for the business. It is enough that the expense, if 'ordinary and necessary,' is directly connected with or proximately results from the conduct of the business. ”

“ If an expense is capital, it cannot be deducted as 'ordinary and necessary,' either as a business expense under § 162 of the Code or as an expense of 'management, conservation, or maintenance' under § 212. ”

“ Accounting for financial management and accounting for federal income tax purposes both focus on the need for an accurate determination of the net income from operations of a given business for a fiscal period. The approach taken by the Commissioner computes depreciation expense in a manner which is far more likely to reflect correctly the actual cost over the years in which the asset is employed in the business. ”

“ Similarly, the beginner oftentimes confuses the sales income record with the cash record of a cash sale transaction. Also, when cash is disbursed for expense purposes, the decrease in the asset is often confused with the expense record. When an expense is incurred it brings about either a decrease in assets, usually cash if the transaction is settled at once; or an increase in liabilities, usually an accrued expense item if the transaction is not immediately settled. ”

“ Under petitioner's interpretation, the fundamental question whether an expense is properly characterized as a capital outlay which has to be amortized or instead as an ordinary business expense subject to immediate deduction would be answered by simple reference to accounting procedures in the industry. ”

“ There are certain expenses connected inseparably with the construction of any public work, which, on the completion of that work, are not capable of physical identification, but which, nevertheless, belong to and must be a part of the cost of the physical property. These expenses are legitimate; and, as long as the property is operated, a very large part, if not all, of the entire expense remains in the present value of the property as a "going concern." ”

“ Obviously what is an ordinary expense of a given business must depend upon the nature and scope of the business, the nature and occasion of the expenditure, and other considerations which will emerge in each specific case. ”

“ Make your assumptions reasonable as to the turnover and the ratios of expenses and profit to sales. Assume a merchandise turnover of 5, and a gross profit of 40% of sales. From these determine roughly the cost of goods sold, the purchases, and the sales figures. Make reasonable provision for bad debts, depreciation, interest, etc., in accordance with the balance sheet requirements. Make the other expense items whatever amounts are necessary to produce the same net profits as is shown by the comparative balance sheet. ”

“ The latter method is recommended by some writers for the reason that the proprietor's personal expenses, or those of his family, are then separated from the expenses or capital expenditures of the business. As a customer of the business, he is placed on the same basis as any other individual. But the personal account must be closed some time; he must pay it in cash, or close it into profit and loss so that it finally operates to reduce his net investment. ”

“ Under Appropriations, enter all disbursements voted by the Exchange Council for Athletics, Dividends, Sick in Hospital, etc. Under Fixtures should go all expenditures for permanent equipment (new) of the Exchange, and under Maintenance, all money spent for repairs, replacing of old equipment by new, and the like. In the Expense Column we carry such items as wastage, breakage, telephone and telegraph bills, fuel, light, insurance, printing and stationery, and such expendable supplies as twine, paper, etc., as are used in carrying on the business. ”

“ The cost of advertising, the cost of colonization, and canvassing by agents engaged 281in building up the business tributary to the corporation, the cost of developing an efficient business organization and an efficient plant—every possible item of developing the business finds accurate record in the development expense deduced from the accounting records as outlined. ”

“ Any system of cost records is deficient that does not provide for the tabulation of all items entering into the cost of individual units or jobs, in such form as will permit of the computation of the total of such costs for comparison with records of total manufacturing expenditures. Three elements enter into the cost of the finished product—material, labor, and expense. ”

“ In accounting it is often required to divide amounts in certain ratios, as when profits must be apportioned among partners, when insurance, taxes, and other expense charges must be distributed over departments, etc. ”

“ Thus may any Gentleman, with very little trouble, apportion his Income:—and as no two Gentlemen live exactly alike, this Table will shew, by inspection only, what branch of Expense may best be curtailed, so as to afford an addition to any other branch, and still keep his whole Expenses short of his actual Revenue. ”

“ Organization Expense. The group of expenditures explained in Chapter XXXVIII, as incident to the organization of a corporation, is recorded under the title “Organization Expenses” and is classified for purposes of the balance sheet as an asset. It is a kind of asset, however, which has no [Pg 407] tangible value and most businesses desire to consider it more in the nature of a deferred charge to operations. It is recognized that frequently intangible assets add no strength to the business. ”

“ Accrued Expenses represent usually the accumulating but unpaid claims against the business for service rendered it, as distinguished from the Accounts Payable, which usually represent purchases of an asset of one kind or another. Thus the amounts due at a given time to employees for work done since the last date of payment of their wages, salaries, or commissions, to the landowner for the rent of leased premises, to lenders for interest on moneys borrowed, are items properly to be listed under this title. ”

“ D. The compulsory character of the payment imposed both by the governing statute and the economic facts of life. Lincoln concedes, however, 'Compulsion, whether legal or economic, should have no bearing upon the question whether a payment is an expense or a capital expenditure.' [10]
E. The annual accounting concept of the income tax. This factor is relevant when the year of deduction is in issue. It has less consequence in the determination of whether an item is or is not an ordinary expense. ”