CORPORATION ACCOUNTS
CORPORATIONS
1. A corporation is an artificial body created by statute law and vested with power to act in many respects as an individual—in particular to acquire, hold, and dispose of property, real or personal; to make contracts; to sue and be sued, and the like.
It is a legal entity apart from its members. It may sue without joining its members, and may be sued by others without the necessity of joining its members. It may transfer property and transact all business, not inconsistent with the rights granted by its charter, in its own name. In the transaction of business it is regarded as an individual.
CLASSIFICATION OF CORPORATIONS
2. Corporations may be divided into two general classes—public and private. A public corporation is a political entity organized for the purposes of government—as a city, county, or village. A private corporation is one organized to further the interests of its members. These may be divided into two classes—stock corporations and non-stock corporations.
A stock corporation is one organized for the pecuniary gain of its members.
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.
In a partnership, each individual partner is liable for the debts of the partnership, and any partner can make contracts in the name of the partnership, such contracts becoming obligations of net only the partnership but of each individual partner.
A member or stock holder in a corporation is, as a rule, liable only for the amount of his subscription to the capital stock of the corporation. The exception to this is the organization of certain classes of corporations in which it is provided that a stockholder shall be liable for twice the amount of his stock subscription. National Banks are examples of this class. No stockholder, as such, has the right to make contracts in the name of the corporation, and any contracts he may make are not binding on the corporation. Contracts made in the name of the corporation, to be binding, must be executed by an officer duly authorized to make such contracts.
3. Joint Stock Companies. How distinguished from corporations. A joint stock company is a large partnership in which the capital is divided into shares which are distributed among the partners in proportion to their interests. Joint stock companies differ from corporations and are like partnerships in the following respects:
Each member is liable for the debts of the company, and if he sells his shares he is still liable for the debts which were contracted while he was a shareholder.
Except when otherwise provided by statute, all members must join in any action at law by the company, and if another brings an action against the company he must join as many shareholders as he wishes to hold. In some states the law provides that an action against a joint stock company may be brought in the name of its president or other designated officer representing all the members.
4. Joint Stock Companies. How like Corporations. A joint stock company is like a corporation and differs from a partnership in the following respects:
The shares may be transferred. If a member dies his shares pass to his estate; if bankrupt they pass to his assignee; if he sells his shares they pass to the purchaser. Partners may withdraw and new partners may be admitted without the dissolution of the company. A partnership is dissolved by the withdrawal by death or otherwise of a single partner.
The shareholders do not manage the affairs of the company but elect directors or other officers in whom the management of the business is vested. Members, as such, have no authority to bind the company.
CREATION OF CORPORATIONS
5. A corporation is created by legislative act. Formerly each corporation received a special charter from the legislature of the state, but as the advantages of corporations began to receive universal recognition it was seen that the delays incident to the granting of special charters were bound to work a hardship on those desiring to incorporate. Partly to overcome this, but more particularly to insure uniformity in the rights and privileges of corporations, and to prevent the conferring of special privileges through special charters, the legislature of most states has enacted uniform corporation laws. These statutes prescribe uniform regulations for the organization of corporations. State constitutions now very generally prohibit the granting of special charters to private corporations.
6. Requirements. While every state has its own corporation laws, the requirements of corporations are in many respects uniform. The law usually provides that a certificate of incorporation shall be filed with the secretary of state, or some other designated officer. This certificate must as a rule state:
The name of the corporation;
The place of business, where its principal office is located;
The objects of the corporation, including a statement of the business in which it is to engage;
The amount of the capital stock, and the number and par value of the shares into which it is to be divided;
The period for which the corporation is organized;
The number of its directors and the names of those who are to serve at the outset;
The names and addresses of the original incorporators with the number of shares of the capital stock subscribed for by each.
The form of the certificate required in the state of Illinois is shown in the illustration, p. 4.
STOCKHOLDERS
7. The members of a business corporation are known as stockholders or shareholders. At the time of organization the members subscribe for the shares of the capital stock agreeing to take and pay for them when issued. When the stock has been delivered and paid for, the stockholder is under no further obligation, unless the stock is by statute or contract subject to assessment.
8. Stock Certificate. When a stockholder has paid for his shares a certificate, known as a stock certificate, is issued to him. This certificate is the written evidence issued by the corporation that the person whose name appears therein is registered on the company's books as the owner of shares of the number and par value named.
The owner of a stock certificate can transfer it, and the one to whom it is transferred becomes a stockholder. Such transfers are not complete, however, until registered on the books of the company. A stock certificate is not, strictly speaking, a negotiable instrument, but it is the custom among business men to indorse stock certificates in blank and transfer them from hand to hand as negotiable instruments, until some one inserts his own name and has the transfer registered on the books of the company.
Such indorsement does not make a stock certificate a negotiable instrument, and the purchaser can acquire no better title than is possessed by the seller. Courts have held that the fact that a certificate of stock is not payable to bearer makes it non-negotiable.
CAPITALIZATION
9. This is the term commonly used to designate the amount of stock which the company is authorized to issue. It may have little reference to the amount subscribed or paid in, for most states authorize corporations to begin business as soon as a certain number of shares have been subscribed for, or even when only a small part of the subscriptions have been paid. For instance, a company with an authorized capitalization of $100,000 may be permitted to commence business as soon as $10,000 has been subscribed and $1,000 is actually paid in.
10. Capital and Capital Stock. The capital of a corporation is usually understood to mean its assets, and is a general term covering all of its property of every nature. It has no connection with the capital stock authorized or the number of shares subscribed.
Capital Stock is a term used in many ways each of which implies a different meaning. It may mean the amount which must be paid in before it can transact business as a corporation; it may mean the capital which the corporation is authorized to issue; it may mean the amount subscribed regardless of the amount actually paid in; or it may mean the amount actually paid in regardless of the amount subscribed.
11. Kinds of Stock. As a rule the capital stock of a corporation is of two classes—common and preferred—though not all corporations issue both classes.
Common Stock is the stock of a corporation issued to all stockholders under the same conditions, and which is to share equally in the dividends.
Preferred Stock is stock which gives its owner certain preferences over the owners of common stock. This preference usually consists of a provision for the payment of certain dividends out of the net earnings of the business before any dividends can be paid on common stock. The officers of a corporation have no power to issue preferred stock unless it is provided for in the charter. Preferred stock may, however, be issued with the consent of all common stockholders. Preferred stock falls into subdivisions depending upon its provisions as follows:
Cumulative preferred stock is stock on which the payment of dividends is not dependent upon the earnings of one year. If a dividend is passed in one year or if not paid in full, it must be paid from future earnings before common stock can draw dividends.
Non-cumulative preferred stock is stock which carries a dividend preference only in respect to the earnings of the current year. While dividends are payable prior to dividends on common stock, no liability attaches to the corporation if earnings in any year are insufficient to pay dividends.
Guaranteed Stock is another name for cumulative or non-cumulative preferred stock—any stock on which the payment of dividends is guaranteed.
A corporation may issue more than one series of preferred stock, as first preferred, second preferred, etc. These issues take preference in the payment of dividends in the order of their priority. Dividends must be paid on first preferred before any surplus is available for the payment of dividends on second preferred.
12. Treasury Stock. This is stock subscribed for and issued which has been acquired by the corporation either by purchase or donation. The term is often erroneously applied to that part of the authorized capital stock which has never been issued, and the error has even been made of referring to it as unsubscribed stock. Treasury stock is an asset and should be so treated on the books of the corporation. Unsubscribed or unissued stock is in no sense an asset; or as one writer puts it, no more an asset than the power of a person to issue notes is an asset.
13. Watered Stock. Any stock which is not represented by actual assets is called watered stock. It is usually represented by fictitious assets—as patents, copyrights, franchises, promotion expense, goodwill, etc.
STOCK SUBSCRIPTIONS
14. It is customary for the first board of directors to state by resolution in what manner the stock is to be disposed of; if subscriptions are to be received; if subscriptions are to be paid immediately or in installments. When the certificate of incorporation has been filed the subscription list is opened. This may be in book form, or a written or printed list. The following is a common form of stock subscription:—
We, the undersigned, do hereby subscribe to the capital stock of the————company, organized under the laws of the state of————in the amount set forth below, and severally agree to pay the amount of such subscription as follows:
When the board of directors shall, through its secretary or treasurer, certify that there has been subscribed——% of the authorized capital of $————, then we severally agree to pay——% of said subscriptions, and to pay a further——% on the——day of each month thereafter, until the full amount of such subscriptions shall have been paid.
MANAGEMENT OF CORPORATIONS
15. The affairs of a corporation are managed by its directors who are elected by the stockholders. A director has no authority individually to bind the company. He can only act in conjunction with other directors in regular meeting as provided by the by-laws. The acts of the board are effected by orders or resolutions passed at such meetings. The number of directors constituting the board and the number required to form a quorum is specified in the by-laws. Directors must attend meetings in person to be entitled to vote. They cannot be represented by proxy. Since it is not practicable for the directors to attend to all of the details, they usually delegate to their officers authority to transact all of the every day business of the company. In larger corporations the directors organize themselves into subcommittees as executive committee, finance committee, etc. In small corporations these committees are unnecessary, their acts being performed by the board of directors.
16. Powers of Directors and Officers. The powers of the directors are extensive and are prescribed by the charter and by-laws. The directors have the power to bind the corporation in all its dealings with other persons or corporations. The powers of the stockholders are limited to the election of the directors; but as the directors are elected by a majority of the stockholders, the power to control the corporation through the election of a board of directors who will respect their wishes is thus conveyed to a majority of the stockholders.
Being representatives of the stockholders as a body, the directors must at all times be governed by what they honestly consider the wishes of the majority. Directors have the power to make contracts with the corporation only when they are manifestly fair contracts. For example, when not otherwise provided for, they may fix a fair compensation for their services and for the services of their officers. Except in cases of actual fraud, it is for the majority of stockholders to complain of such contracts, and they have the power to remove offending directors.
Officers of a corporation are its agents and have limited powers, usually prescribed by the by-laws. When not so specified, they are prescribed by the directors. It is not always necessary that all of the powers of an officer be specified in detail. If an officer has been accustomed to perform certain acts with the knowledge and consent of the directors, his acts become binding on the corporation. The title of an office does not necessarily convey any special powers. For example, while it is customary for the directors to confer special powers on the president, his title does not make him, in the corporation's dealings with the public, an agent of higher grade than the secretary, treasurer, or any other officer.
THE SUPERINTENDENT'S OFFICE, DOBIE FOUNDRY & MACHINE CO., NIAGARA FALLS, N. Y.
17. Powers of Corporations. As such, a corporation possesses certain necessary powers, and such other special powers as may be conferred by its charter.
To have a corporate name which can only be changed by law.
To sue and be sued.
To possess a corporate seal.
To appoint the necessary officers for the conduct of its business.
To enact by-laws necessary for the management of its business, for transferring of its stock, for calling of meetings, etc.
To acquire and dispose of such property as may be necessary for the conduct of the business for which it is organized.
To make contracts necessary for the carrying out of its purposes.
In general a corporation can engage in no other business than that specified in its charter, but it is granted certain incidental powers necessary to carry out its original purpose.
18. Stockholder's Rights. Each stockholder has the right to have a certificate of stock issued to him; to vote at meetings of stockholders; to inspect the books of the company; to participate in dividends; to invoke the aid of the courts in restraining the directors from committing a breach of trust.
DIVIDENDS
19. Every business corporation is conducted with a view to earning profits. When such profits are distributed to its stockholders they are called dividends, but stockholders cannot participate in the profits until a dividend has been declared by the directors. The law specifies that dividends must be paid out of the net surplus of the company, and provides a penalty for their payment out of capital. Therefore, before declaring a dividend, the directors must be provided with a balance sheet and use every care to determine that a surplus actually exists. For dividend purposes, surplus is usually considered that part of the profits remaining after paying expenses and providing the necessary reserve to cover depreciation of machinery and buildings and losses from uncollectable accounts. Sometimes a further provision is made in the by-laws for the creation of a sinking fund for the payment of bonds.
The times for the payment of dividends are fixed in the certificate of incorporation or the by-laws. Provision is usually made for the payment of dividends either quarterly, semi-annually, or annually.
Directors have full discretion in the declaration of dividends and, so long as they are acting in good faith, may add profits to capital instead of declaring a dividend. When the directors have, by proper resolution, stated that the surplus, or a part of the surplus, shall be distributed to the stockholders, a dividend is said to have been declared. 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. At their discretion, the directors may, instead of paying a dividend in cash, declare what is known as a stock dividend. When there remains certain unsubscribed stock, or when the corporation is in possession of treasury stock, this stock may be issued to stockholders in payment of dividends. A stock dividend cannot, however, be declared when it would not be proper to declare a cash dividend. The assets must exceed all liabilities, and in determining the existence of a surplus available for dividends, all capital stock that has been issued must be considered as a liability.
CLOSING TRANSFER BOOKS
21. In large companies it is customary for the board of directors to close the stock transfer books a certain number of days prior to the date of payment of a dividend, for the purpose of obtaining the names and addresses of all stockholders. Notices are then sent to all stockholders that a dividend will be paid on a certain date and that the transfer books will be closed for a stated period. Transfer books are also frequently closed for a certain period prior to the annual meeting of the stockholders. The laws of some states provide that only those stockholders whose names have appeared as stockholders on the books of the company for at least thirty days prior to the date of the annual meeting, shall be entitled to vote at said meeting.
STOCKHOLDERS' MEETINGS
22. Meetings of stockholders are, as a rule, held annually, and the date of such meeting is usually specified in the charter. At the annual meeting the board of directors presents, through its president or other officer, a report of the business for the year, accompanied by a financial statement. At this meeting the stockholders elect directors to take the place of those whose terms of office have expired. A stockholder may vote at stockholders' meetings either in person or by proxy, and is entitled to one vote for each share of stock registered in his name at the time of the meeting. Notice of a stockholders' meeting must in all cases be mailed to each stockholder at his last known address, a certain number of days prior to the date of the meeting. This notice is mailed by the secretary of the company.
SALE OF STOCK BELOW PAR
23. Many corporations formed to carry on business of a speculative nature find it difficult to sell stock at par. This is especially true when the assets consist largely of patents, an undeveloped mine, or property of a similar nature. 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. In the purchase of a going business, the real value of the goodwill is largely a matter of opinion, and the judgment of the board of directors of a corporation making such a purchase must be considered as final.
CORPORATION BOOKKEEPING
24. Bookkeeping for a corporation as a record of its business transactions with the public is not different than bookkeeping for a single proprietorship or a partnership. There are, however, certain necessary records peculiar to a corporation, including accounts of a financial nature between the corporation and its stockholders. It is with these records and accounts that we are concerned in this discussion of corporation bookkeeping.
25. Books Required. The books required for corporation records are, Stock Certificate Book, Stock Transfer Book, Stock Ledger, Minute Book, (and in certain cases, Installment Book, Stock Register, and Dividend Book). These are auxiliary books and are known as stock books.
Stock Certificate Book. This is a book of stock certificates, with stubs giving full particulars of each certificate issued. When a stock register is used, the record is posted to it from the stub, otherwise posting is made direct from the stub to the stock ledger.
Stock Transfer Book. This is a book in which is kept a record of all transfers of stock. Each entry is practically a copy of the form of assignment found on the back of the stock certificate. It is supposed that each transfer will be signed by the one transferring the stock, but frequently when certificates are presented with the proper endorsement, the transfer is signed by the one making the transfer as attorney in fact. The transfer book is made with two, and sometimes three, transfers to a page. Transfers are posted to the stock register, when used, or direct to the stock ledger.
Transfer Book
Stock Ledger. This is the book in which an account is kept with each stockholder showing the number of shares held by him. Sometimes the amount is included. When a stockholder receives a certificate of stock it is posted to the credit side of his account in the stock ledger. When he transfers a certificate it is posted to the debit side of his account. A trial balance of the stock ledger should be taken at stated periods, for the stock standing to the credit of the stockholders should equal the total stock outstanding. The stock ledger is supposed to show only the stock issued and the names of its holders. For example, if the authorized stock of a corporation is 1,000 shares and there remains 300 shares unsubscribed, the stock ledger will show 700 shares—the total issued—to the credit of individual stockholders. An account should be opened in the stock ledger with Capital Stock, which account will be debited with all stock issued. This is in effect a representative account since it represents the total stock that should stand to the credit of other accounts in the stock ledger.
Stock Ledger
Minute Book. This is a record book in which the secretary keeps records or minutes of the proceedings of all stockholders' and directors' meetings. This is an official record of the acts of the corporation, and is frequently called for to be introduced in court as evidence. The secretary is custodian of the minute book and should see that it is carefully preserved.
Installment Book. When stock subscriptions are payable in installments, a form of receipt called a scrip or installment certificate is issued. As payments are made they are endorsed on the back of this certificate, and when all payments have been made the scrip is exchanged for a regular stock certificate. These scrip certificates are bound in book form similar to stock certificates.
Sometimes the scrip certificate takes the form of an installment receipt for the amount paid, all receipts being surrendered to the company when payments have been completed.
INSTALLMENT CERTIFICATE
Stock Register. Some large corporations keep, in addition to the stock ledger and transfer books, a stock register which is a complete register of all stock issued. This book is kept by the registrar—usually a trust company or bank. All certificates are entered in the register in numerical order and full particulars of each are given. When a transfer is made both the old and new certificates must be taken to the registrar, who cancels the old and places his indorsement on the new, certifying that it has been registered.
One purpose of having a registrar is to prevent an over-issue of stock. The number of shares shown on the register must not exceed the number of shares which the corporation is authorized to issue.
Stock Register
Dividend Book. When the directors declare a dividend it is necessary to make a list of stockholders entitled to receive a dividend. Large corporations use a special form similar to the one illustrated. It is made either in a book or on loose sheets which are placed in a binder.
Dividend Book
Some stockholders issue written orders to pay all dividends to some other person, which makes it necessary to record on this list the name of the person to whom this dividend is payable, as well as the name of the stockholder.
OPENING ENTRIES
26. 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.
If stock is sold for cash only and the entire amount is subscribed and paid for, the entry is simply
| Cash | $100,000 | ||
| To capital Stock | $100,000 | ||
| Stock subscribed and paid for by the following: | |||
| John Doe | $50,000 | ||
| Richard Roe | 25,000 | ||
| Henry Snow | 25,000 | ||
| as per subscription | |||
| list dated————190——. | |||
If only a part of the authorized stock is subscribed, there are two methods of entering the transaction.
Illustrating the above, we will suppose that the National Manufacturing Co. is organized with a capitalization of $100,000, of which $50,000 is subscribed and paid for in cash. The entries would be:—
| Cash | $50,000 | ||
| To capital stock | $50,000 | ||
| Stock subscribed and paid for by the following: | |||
| John Doe | $25,000 | ||
| Richard Roe | 15,000 | ||
| Henry Snow | 10,000 | ||
| ———— | |||
| Unsubscribed stock | 50,000 | ||
| To capital stock | 50,000 | ||
If stock is not paid for when subscribed or if it is payable in installments the entry is:
| John Doe | 25,000 | |
| Richard Roe | 15,000 | |
| Henry Snow | 10,000 | |
| To capital stock | 50,000 | |
| For subscription to stock as per subscription list. | ||
Or if it is not desired to enter the names of the subscribers an account is opened in the name of subscriptions, and the entry is:
| Subscriptions | 50,000 | |
| To capital stock | 50,000 |
The above entries at once place the entire authorized capital stock on the books. When further subscriptions are made, subscription account is debited and unsubscribed stock is credited. When subscriptions are paid, cash is debited and subscriptions credited.
When subscriptions are payable in regular installments, payments may be credited to subscriptions. The plan is sometimes followed, however, of opening an account for each installment, as Installment No. 1, to which payments are credited. When the installment is fully paid this account would be closed into subscription account.
Or still another formula—when stock has been sold subject to assessments to be made by the board of directors, and an assessment has been called the entry is:
| Assessment No. 1. | $10,000 | |
| To subscriptions | $10,000 | |
| An assessment of 20% as per resolution of the board of directors | ||
| John Doe | 5,000 | |
| Richard Roe | 3,000 | |
| Henry Snow | 2,000 |
When paid, cash is debited and assessment No. 1 is credited. When the next assessment is called an account is opened with assessment No. 2.
27. When a Part of the Stock is Paid for in Property and the Balance in Money. A corporation known as The National Manufacturing Company is formed to take over a manufacturing business owned by John Doe. The capital stock is $100,000 of which Mr. Doe is to receive $50,000 for the assets and goodwill of his business, the company agreeing to assume his liabilities. His statement of affairs shows the following:
| Assets | ||
| Cash in bank | $2,264.00 | |
| Accounts receivable | 4,650.50 | |
| Machinery | 9,000.00 | |
| Manufactured goods | 2,100.00 | |
| Material and supplies | 3,780.00 | |
| Furniture and fixtures | 700.00 | $22,494.50 |
| ———— | ||
| Liabilities | ||
| Accounts payable | 864.20 | 864.20 |
| ———— | ———— | |
| 21,630.30 | ||
Since the net assets are $21,630.30, and the stock to be issued to John Doe is $50,000 the difference, or $28,369.70, represents the amount paid for the goodwill of the business.
The transaction is entered as follows:—
| Property and Goodwill ofthe business of John Doe,transferred to this company asper resolution of the boardof directors, Dec. 21st, 1908. | ||
| Goodwill | $28,369.70 | |
| Cash | 2,264.00 | |
| Accounts receivable | 4,650.50 | |
| Machinery | 9,000.00 | |
| Manufactured goods | 2,100.00 | |
| Material and supplies | 3,780.00 | |
| Furniture and fixtures | 700.00 | |
| Accounts payable | $864.20 | |
| Capital stock | 50,000.00 | |
One half of the capital stock is thus accounted for. The balance is to be subscribed, and when subscribed the entries will be as explained in Art. 26, depending upon whether subscriptions are paid in full or in installments.
28. When Stock is Issued in Payment of Property and a Part of the Stock is to be Donated to the Company. John Doe owns a valuable patent on an automobile attachment and desires to secure capital to carry on its manufacture. He interests Richard Roe and Henry Snow, who agree to assist him to form the National Manufacturing Company to take over his patent and manufacture the attachment. The company is incorporated with an authorized capitalization of $150,000. Roe and Snow agree that Doe shall receive $100,000 full paid stock for his patent, and to subscribe $25,000 each, payable in cash to be used for the purchase of the necessary machinery. John Doe, in turn, agrees to donate $50,000 of his stock to provide working capital. The entries are:
It is decided to sell $30,000 of the treasury stock at 50% of its face value, and subscriptions are received for this amount.
| Subscription to treasury stock | 30,000 | |
| Treasury stock | 30,000 |
Subscription account is debited and treasury stock credited for the full amount since this is the amount of full paid stock to be issued, regardless of the price at which it is sold.
When this stock is paid for, the entry in the cash book on the debit side is:
| Subscriptions to treasury stock | 15,000 |
This leaves a debit balance of $15,000 in the account subscriptions to treasury stock, which represents a discount on the stock sold.
The manner of disposing of this discount depends upon the provisions made by the directors in respect to the creating of working capital.
If their resolution provides that the fund maintained for working capital shall be only such an amount as may be realized from the sale of treasury stock, the discount is disposed of by the following entry:
| Working capital | 15,000 | |
| Subscriptions to treasury stock | 15,000 | |
| Discount on 30,000 treasury stock sold. | ||
Suppose, however, that the directors have provided by resolution for the maintaining of a working capital of $50,000. In that case the liability for the full $50,000 must remain on the books until such time as other provision is made. The entry would then be:
| Bonus | $15,000 | |
| Subscriptions to treasury stock | $15,000 |
The discount is, to all intents, a bonus given to the purchasers, and if, as frequently happens, purchasers are promised a bonus of a share of stock for every share purchased, it would be proper to make the following entry in the first place.
| Subscriptions to treasury stock | 15,000 | |
| Bonus | 15,000 | |
| Treasury stock | 30,000 | |
| Sold 30,000 treasury stock at 50% of face value. | ||
In any dividend distribution the purchasers are entitled to draw dividends on the face value of their stock, since it was issued to them as full paid. It would be manifestly unfair to charge the discount or bonus against profits for the current year, and it is customary to spread it over a period of several years, charging off a certain per cent each year. The bonus account is, in the meantime, carried on the books as an asset, and belongs in the class known as fictitious assets.
Treasury stock is an asset, its real value being the market value of the stock represented. In the event of liquidation of the company, treasury stock would off-set the liability on account of capital stock. When all of the treasury stock is sold the account closes itself; or if it is issued to stockholders in the form of stock dividends, it is closed into profit and loss.
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. Power is usually given the directors to reserve a certain amount for working capital, and even though an actual surplus may exist they have the right to off-set this with a working capital liability instead of declaring a dividend.
29. Premium on Stock. The stocks of many well-managed enterprises sell at a premium. In all such cases the amount received above the par or face value is credited to an account called premium on stock. At the end of the year this account is closed into surplus account. If any such items are standing on the books it can be used to off-set bonus account or organization expenses. It is not proper to close premium account into the current profit and loss account, for while it represents a profit, it is not earned in the regular operations of the business.
30. Reduction of Working Capital. As before stated, so long as working capital remains on the books it must be treated as a liability. 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.
Suppose that in the case of the National Manufacturing Co., it is desired to reduce working capital from $50,000 to $25,000; the entry would be:
| Working capital | $25,000 | |
| Surplus | $25,000 | |
| Working capital reduced by resolution of the board of directors, January 15th, 1909. | ||
ENTRIES IN STOCK BOOKS
31. The entries in the stock books are very simple and are just the opposite of stock entries in the general or financial books of the company. When certificates of stock are issued, an account is opened in the stock ledger with each stockholder, to which is credited the stock issued to him. At the same time an account is opened in this ledger with capital stock which is debited with all stock issued, thus preserving the balance of the stock ledger. Taking the example in Art. 26, when stock is issued—
| We debit— | ||
| Capital stock | $150,000 | |
| We credit— | ||
| John Doe | $100,000 | |
| Richard Roe | 25,000 | |
| Henry Snow | 25,000 |
When the $50,000 stock is donated to the treasury to provide working capital—
| We debit | ||
| John Doe | 50,000 | |
| We credit | ||
| Treasury stock | 50,000 |
and open an account with treasury stock in the stock ledger.
When treasury stock is sold—
| We debit | ||
| Treasury stock | 30,000 | |
| We credit | ||
| Subscribers | 30,000 |
When a stockholder sells a part or all of his shares to another it has no effect on capital stock or treasury stock accounts in the stock ledger. The only change takes place in the accounts of the individual stockholders involved. The stock transferred is debited to the account of the transferor, and credited to the account of the transferee.
Supposing that $30,000 treasury stock was purchased by Henry Benson, George Dennis, and Richard Carpenter, each purchasing $10,000, the stock ledger and stock register—if one is used—would appear as shown in the illustration. Footing the two sides of the stock register we find a balance of 1,300 shares which is the actual amount outstanding, the balance of 200 shares remaining in the treasury. A trial balance also shows that the stock ledger balances with a credit of $20,000 treasury stock.
Stock Ledger
Stock Ledger
AIR-LINE CASH-CARRYING SYSTEM FOR LARGE RETAIL DRUG STORE
Applicable to a Moderate-Sized General Store. Lamson Consolidated Store Service Co.
Stock Register
EXERCISES
1. A corporation is organized with a capital of $50,000.00, divided into 500 shares of $100.00 each. The corporation begins business when 250 shares have been subscribed for. Of this amount A subscribes for 100 shares, B for 100 shares, and C for 50 shares. These shares are paid for in cash within 30 days after the date of subscriptions.
Six months later the balance of the stock is subscribed for, subscriptions being received from A for 50 shares, B, 50 shares, D, 100 shares, and E, 50 shares. C sells 50 shares to B. These new shares are paid for in cash.
Make all entries in general books.
Make all entries in stock books.
2. A, B, and C organize a corporation with an authorized capitalization of $100,000.00, divided into 1,000 shares of $100.00 each. A subscribes for 400 shares, B, 300 shares, and C, 200 shares. The corporation buys from D land and buildings for $20,000.00, paying him $10,000.00 in cash and issuing to him 100 shares of stock.
Subscriptions are paid as follows: A pays $20,000.00 cash and gives his note due in 60 days for $20,000.00; B pays $20,000.00 cash and gives his note for $10,000.00 payable in 30 days; C pays $10,000.00 cash and gives his note for $10,000.00 payable in 10 days.
Make all entries in journal and cash book and post to ledger.
Note.—Land and buildings are grouped under the head of real estate.
3. John Davis and Daniel Greene own the La Belle mine, and to secure capital for its development they decide to organize a mining company and to sell shares. A corporation is organized with a capitalization of $1,000,000.00 in shares of $1.00 each. Of this stock 999,000 shares are issued to Davis and Greene, each receiving an equal number, and they, in turn, deed the La Belle mine to the company. The remaining 1,000 shares are subscribed and paid for by Martin Otis. Davis and Greene donate to the treasury 49,800 shares to be sold for the purpose of securing working capital. The directors, by proper resolution, decide to sell 200,000 shares: 50,000 shares to be sold at 20 cents on the dollar, 50,000 shares at 25 cents, and 100,000 shares at 35 cents. The resolution also provides that the corporation's liability for working capital shall be no more than the amount realized from the sale of treasury stock. Subscriptions are received for the 200,000 shares and payments are made at the prices specified.
Make all necessary entries to get these transactions properly recorded on both the general and stock books.
STOCK ISSUED FOR PROMOTION
32. 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.
In many cases—probably most cases—the owner of the thing to be promoted has no money with which to pay the promoter. Consequently, the promoter first satisfies himself that the enterprise actually holds possibilities of profit and then agrees to accept all or a part of his fees in the stock of the company. The portion of his fee that he is willing to accept in stock, and the number of shares demanded, is governed largely by his own faith in the enterprise. His fee may be a certain per cent on the stock sold, or it may be an arbitrary sum represented by a certain number of shares. When he accepts his entire fee in stock, it may represent from 25 per cent to 50 per cent of the entire capitalization, and while the fee may appear exorbitant when represented by the par value of the stock, its actual value to him is represented by the real value of the stock, or the price at which he could sell it.
Volumes might be written on the subject of promotion, but our special concern is the proper treatment of promotion fees on the books of the company. 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. 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 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. 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.
It has become quite the general custom, therefore, to allow the expense incident to the organization of the company to stand on the books as a fictitious asset, under some such caption as promotion expense, promotion fund, or organization expense. The amount is gradually reduced by charging a stated per cent to profit and loss each year.
There is another special reason why it would be manifestly unfair to immediately charge promotion fees to expense. Suppose a promoter receives 20% of the stock for his services, while the holders of the remaining 80% have paid cash for their shares. Since the 80 per cent paid in cash must earn dividends on the entire 100 per cent of stock, it would be unjust to the holders of the 80 per cent to withhold dividends until the par value of the 20 per cent of stock shall have been added to the assets of the company from profits earned.
The Entry. A patent is owned by Geo. Davis, who secures the services of Wm. Lane to promote a company to undertake its manufacture. The corporation is capitalized at $500,000.00. Davis sells the patent to the company receiving $250,000.00 stock in payment, and Lane receives $25,000.00 stock for promotion, when he has secured subscriptions for the remaining $225,000.00 at par. The entries to record the issue of stock to Lane for promotion are:
The entries for the shares issued to Davis and those sold are the same as previously explained and illustrated.
SURPLUS AND DIVIDENDS
33. The directors are under no obligation to distribute in dividends the profits earned in any one year. Instead, the by-laws usually provide that the decision as to when a dividend shall be declared is to be left entirely to the directors. They have it in their power to retain of the profits such an amount as, in their judgment, is advisable or necessary to safeguard the interests of the company. At the close of the fiscal year it is customary to close profit and loss account, and in a corporation it is closed into surplus.
34. Surplus Sub-divided. 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.
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. Whether or not the surplus should be shown in the balance sheet under these various headings, or all under the general head of surplus, with explanatory notes, is a question which need not concern us at this point.
35. Declaring a Cash Dividend. When a dividend is declared an account should be opened under the caption Dividends Payable or Dividend No. 1., etc. We will suppose that a dividend has been declared out of the profits of the business for the current year. The entry is:—
Profit and Loss
Dividends payable
Dividend of——% declared
by the board of directors
————1909, payable————1909.
When the dividend is paid the entry will be—
Dividends payable
Cash
To pay dividend payable
————1909.
36. Declaring a Stock Dividend. Not all dividends are paid or payable in cash. Sometimes the directors declare a dividend payable in stock and this is known as a stock dividend. There may be treasury stock in possession of the treasurer, and if the books show a surplus, which would make it proper to declare a cash dividend, a dividend may be declared payable in treasury stock. When such a dividend is declared the entry is—
Profit and Loss
Stock dividend
A dividend of——% declared
by the board of directors
————1909 payable————1909,
payment to be made in
treasury stock
Stock dividend
Treasury stock
To pay stock dividend
declared————1909.
The shares are then transferred on the stock books debiting treasury stock and crediting stockholders.
It is not absolutely necessary that a company possess treasury stock to declare a stock dividend. When current profits are large or a surplus, larger than the requirements of the business demand, has been accumulated, a stock dividend may be declared by issuing additional shares, provided the original stock has not all been subscribed for.
If a large surplus has been accumulated and a part of the stock is unsubscribed, a stock dividend would require the following entries:
Surplus
Stock dividend
A stock dividend of——%
declared by the directors————1909
payable in the unissued
stock of this company.
————
Subscriptions
Capital stock
Additional stock subscriptions
received from the following.
————
Stock dividends
Subscriptions
Stock dividend due stockholders
used to off-set subscriptions.
The stock dividend is a device frequently used to conceal actual profits, or to cover up the fact that dividends are being declared in excess of a fixed rate. This is especially true of such public service corporations as lighting companies or street railways. In many cases a company will go through the necessary formalities to increase its capital stock for the purpose of absorbing surplus by means of a stock dividend.
37. Treatment of a Loss. If, during any year, the business has sustained a loss, it will, of course, appear as a balance on the debit side of profit and loss account. This will then be transferred to the debit of undivided profits or surplus, if any, remaining from previous years. For illustration, suppose the books show a surplus of $5,000.00, undivided profits $500.00, loss for the current year $2,500.00, the entry will be:—
| Undivided profits | $500.00 | |
| Surplus | 2,000.00 | |
| Profit and loss | $2,500.00 | |
| Loss for the year. | ||
If there is no surplus remaining from former years, the business is insolvent, in which case the capital is said to be impaired. This can be taken care of in either of two ways. First—by the stockholders subscribing to a fund to cover the deficiency. Second—by a reduction of the capital stock.
EXERCISES
1. David Francis and Henry Harmon own a large tract of timber land in Mexico. In connection with F. B. Walker—a promoter—they organize a corporation to build railways and mills for the purpose of developing the property and to market the timber. The company is capitalized for $1,000,000.00. The land is sold to the corporation for $1,000,000.00, stock for that amount being issued to Francis, Harmon, and Walker. Francis and Harmon each received $400,000.00 and Walker, $200,000.00. This $200,000.00 stock is issued to Walker as his fee for promoting the company. Francis and Harmon each donate 250 shares, of the par value of $100.00 each, to the treasury to be sold to produce working capital.
Make all necessary entries in general books.
2. The profits of a manufacturing company with a paid up capital of $100,000.00, are $9,765.00. The directors, by proper resolution, declare a cash dividend of 6 per cent, set aside a surplus of $3,000.00, and transfer the balance to undivided profits.
Make all necessary entries in general books, showing ledger accounts after payment of dividends.
3. The following year's business of the above company showed a loss of $2,160.00. How is this loss disposed of? Make entries.
4. A company capitalized at $250,000.00 has sold $100,000.00 of its stock, the balance being unsubscribed. Its accumulated surplus is $90,000.00, and the directors declare a stock dividend of 50 per cent to all stockholders. Make all entries.
5. A manufacturing company has a capital stock of $100,000.00. One item in its assets is machinery $26,750.00. The profits for the year are $11,640.00. The directors provide for a reserve for depreciation of machinery of 10% and declare a dividend of 5%.
Make all entries.
CHANGING BOOKS FROM A PARTNERSHIP TO A CORPORATION
38. Wilson, Brackett, and Nixon have been conducting a retail clothing business under a partnership agreement. Appreciating the advantages of a corporate form of organization, they decide to incorporate under the name of the Continental Clothing Company.
The first step necessary to prepare for the incorporation of a partnership is to ascertain the net capital of the business as it stands. Accordingly, an inventory is taken, the books are closed, and a balance sheet prepared with the following results:
| Balance Sheet of Wilson, Brackett, and Nixon | |||
| Assets | |||
| Cash | $1,650.72 | ||
| Bills receivable | $ 1,725.00 | ||
| Accounts receivable | 3,264.18 | 4,989.18 | |
| ———— | |||
| Merchandise inventory | 10,450.00 | ||
| Furniture and fixtures | 4,000.00 | 14,450.00 | $21,089.90 |
| ———— | ———— | ||
| Liabilities | |||
| Bills payable | 3,000.00 | ||
| Accounts payable | 2,089.00 | 5,089.90 | |
| ———— | |||
| Wilson, capital account | 7,000.00 | ||
| Brackett, capital account | 5,000.00 | ||
| Nixon, capital account | 4,000.00 | 16,000.00 | 21,089.90 |
| ———— | ———— | ||
From this balance sheet it is seen that the net capital is $16,000.00, of which Wilson owns $7,000.00, Brackett, $5,000.00, and Nixon, $4,000.00. On this showing, it is decided to form the company with a capital stock of $20,000.00, all of which is to be issued as full paid stock to the partners in proportion to their interests in the partnership.
New books are opened for the corporation and the next step is to transfer the accounts of the partnership to the corporation. An account is opened in the partnership ledger with the Continental Clothing Company and the following entry is made:
| Continental Clothing Co. | $21,089.90 | |
| Cash | $1,650.72 | |
| Bills receivable | 1,725.00 | |
| Accounts receivable | 3,264.18 | |
| Merchandise inventory | 10,450.00 | |
| Furniture and fixtures | 4,000.00 |
The above entry closes all of the asset accounts and shows that they have been transferred to the new company.
The next entry is:
| Bills payable | $3,000.00 | |
| Accounts payable | 2,089.90 | |
| Wilson | 7,000.00 | |
| Brackett | 5,000.00 | |
| Nixon | 4,000.00 | |
| Continental Clothing Co. | $21,089.90 |
The above entry closes the liability and partners' accounts showing that they have been transferred to the new company and also closes the account of the Continental Clothing Co.
39. Entries on the Corporation Books. We are now ready to open the books of the new company. Subscription books are opened and the following subscriptions are received:
| Wilson | 8,750.00 |
| Brackett | 6,250.00 |
| Nixon | 5,000.00 |
The net assets of the partnership are $4,000.00 less than the capital stock of the new company. No money is to be invested to cover this discrepancy, so it will be necessary to account for it on the books by opening a fictitious asset account under some such name as goodwill. Having made this provision, the books of the new company are opened by the following entries:
These entries serve to get the capital stock, also the assets and liabilities of the partnership properly recorded on the books of the new company.
STOCK DONATED TO EMPLOYES
40. A partnership composed of Benson, Black, and Mabley is conducting a retail hardware business. They desire to give their bookkeeper (Parker) an interest in the business. The firm has the following assets and liabilities:
| Assets | ||
| Cash | $3,000.00 | |
| Accounts receivable | 2,000.00 | |
| Merchandise | 15,000.00 | |
| Total assets | $20,000.00 | |
| Liabilities | ||
| Accounts payable | 2,000.00 | |
| Benson capital | 6,000.00 | |
| Black capital | 6,000.00 | |
| Mabley capital | 6,000.00 | |
| Total liabilities | 20,000.00 | |
They incorporate the Benson Company with a capitalization of $40,000.00 divided into 400 shares of $100.00 each. Benson, Black, and Mabley each subscribe for 100 shares, and 20 shares are presented to Parker. The balance of the stock is to remain unsubscribed until such time as it is decided to accept further subscriptions. The business of the partnership is to be accepted by the company in payment of subscriptions which have been made, and which are for 320 shares or $32,000.00. The net assets of the partnership being $18,000.00, goodwill must represent the balance of $14,000.00. The entries on the books of the partnership follow—
| The Benson Co. | $20,000.00 | |
| Cash | $3,000.00 | |
| Accounts receivable | 2,000.00 | |
| Merchandise inv. | 15,000.00 | |
| ———— | ||
| Accounts payable | 2,000.00 | |
| Benson | 6,000.00 | |
| Black | 6,000.00 | |
| Mabley | 6,000.00 | |
| The Benson Co. | 20,000.00 |
41. On Books of the Benson Co. The entries on the books of the new company are the same as in previous illustrations, the stock donated to Parker having been a gift from the partnership and the amount included in the goodwill.
| Subscriptions | 32,000.00 | |
| Capital stock | 32,000.00 | |
| ———— | ||
| Cash | 3,000.00 | |
| Accounts receivable | 2,000.00 | |
| Merchandise inventory | 15,000.00 | |
| Goodwill | 14,000.00 | |
| Accounts payable | 2,000.00 | |
| Subscriptions | 32,000.00 |
42. When the Gift is Made by an Existing Corporation. We will suppose that the Benson Co. wishes to donate 10 shares of stock to each of three employes, A, B, and C. Having 80 shares unsubscribed, the donation will be made from that stock. Supposing that the company has accumulated a surplus, the transaction will be entered on the "books" as follows:
| Subscriptions | 3,000.00 | |
| Capital stock | 3,000.00 | |
| Subscriptions of A, B, & C per subscription book. | ||
| ———— | ||
| Surplus | 3,000.00 | |
| Subscription | 3,000.00 | |
| Surplus appropriated to subscriptions per resolution of the board of directors Jan. 25th, 1909. | ||
The above would be a rather unusual proceeding as the stock is fully paid, though such gifts are sometimes made. The tendency of the present times is toward profit sharing for the employes of corporations. The plan of profit sharing takes many forms, and there are some notable examples among very large corporations which have given employes stock in the corporation, or afforded them an opportunity to acquire stock on very favorable terms.
Among smaller corporations it is quite common to enable employes to acquire its stock subject to certain special conditions. Frequently employes are permitted to subscribe for stock with an agreement that they are to pay no money, but that dividends declared are to be applied to the payment of subscriptions. In this way the stock is made to pay for itself out of its own earnings. Sometimes provision is made for the payment of small annual installments on the subscriptions in addition to applying the dividends. When stock is issued to employes under these conditions, the contract sometimes specifies that in the event of the subscriber leaving its employ before the subscription is paid in full, the ownership of the stock shall revert to the company, and in such cases the stock, until it becomes full paid, is usually placed in the hands of a trustee. The principal object in issuing stock to an employe and surrounding the transaction with these restrictions is, of course, to insure his continuous service by making it an object to him to remain in the employ of the company.
When stock is so issued, the entry is—
Subscriptions
Capital stock
Subscriptions to stock
by employes, said stock
to be issued subject to the
conditions named in the resolution
authorizing its issue,
passed by the board of
directors January 25th, 1909.
The subscription account is left open until such time as it is closed by the payments credited. When a dividend is declared the entries are—
Surplus
Dividends payable
Being a dividend of ——%
declared by the board of
directors on————1909
payable————1909.
————
Dividends payable
Subscriptions
Dividend applied to the
payment of subscriptions.
Another provision sometimes met with in the issue of stock to an employe is that in lieu of an increase in salary he shall receive, at the end of the year, a certain amount in stock. He is then permitted to subscribe for a stated amount of stock and to apply the bonus, or added salary, as a payment. The bonus is usually a stated per cent of sales or of net profits. When such a contingency arises the entry is—
Salaries
John Jones
——% of sales as
per agreement.
Subscriptions
Amt. due applied in
payment of stock subscription.
If he has no account, on the books the transaction may be recorded by one entry—
| Salaries | $1,500.00 | |
| Subscriptions | $1,500.00 | |
| —————— | ||
WHEN STOCK SUBSCRIPTIONS ARE NEVER FULLY PAID
43. Corporations are sometimes organized with all capital stock subscribed but only paid for in part, and the balance of subscriptions never called for. T. C. Harris, John Alfred, and M. B. Hatch organize a company to conduct the business of buying, selling, and renting automobiles with a capital stock of $15,000.00, each subscribing for $5,000.00. A cash payment of 25% is made on the stock and the balance is to be paid in when called for. The entries stand on the books as follows—
| Subscriptions | $15,000.00 | |
| Capital stock | $15,000.00 | |
| Cash | 3,750.00 | |
| Subscriptions | 3,750.00 |
The business prospers to such an extent that the profits provide sufficient money and it is not likely that the stockholders will be called upon for further payments. It is decided to reduce the stock to $5,000.00 and to declare a dividend to make this stock full paid. The entries for these transactions follow:
| Capital stock | 10,000.00 | |
| Subscriptions | 10,000.00 | |
| Capital stock reduced in accordance with resolution of board of directors passed Jan. 27, 1909. | ||
| ———— | ||
| Surplus | 1,250.00 | |
| Dividends payable | 1,250.00 | |
| Dividend declared by board of directors Jan. 27, 1909, payable immediately. | ||
| ———— | ||
| Dividends payable | 1,250.00 | |
| Subscriptions | 1,250.00 | |
| Dividends applied to the payment of stock subscriptions. | ||
The original stock certificates are now surrendered and new ones issued in their place. In the stock ledger the stockholders are debited and capital stock credited for the shares surrendered. Then, capital stock is debited and stockholders credited for the new shares issued.
It might happen that a corporation wishes to reduce the capital stock held by stockholders without having it appear that capital stock has been reduced. This has been done by purchasing its stock and placing it in the treasury. Payment for the stock may be made in cash or notes, or it may be taken from surplus. The entries would be—
| Treasury stock | 10,000.00 | |
| Cash | 10,000.00 | |
| or | ||
| Treasury stock | 10,000.00 | |
| Bills payable | 10,000.00 | |
| or | ||
| Treasury stock | 10,000.00 | |
| Surplus | 10,000.00 |
If the capital stock is to be reduced on the books, capital stock will take the place of treasury stock in these entries as—
| Capital stock | 10,000.00 | |
| Cash | 10,000.00 |
EXERCISES
1. Parsons, Young, and Searles are partners and decide to form a corporation with capital stock of $40,000.00, which is to be issued as full paid stock in exchange for their present business. Each partner is to receive stock in proportion to his interest in the present business. The balance sheet of the partnership is as follows:
| Assets | ||
| Cash | 3,500.00 | |
| Bills receivable | 6,000.00 | |
| Accounts receivable | 6,500.00 | |
| Merchandise | 14,000.00 | |
| ———— | ||
| Total | 30,000.00 | |
| Liabilities | ||
| Bills payable | 4,000.00 | |
| Accounts payable | 2,000.00 | |
| Parsons | 10,000.00 | |
| Young | 8,000.00 | |
| Searles | 6,000.00 | |
| ———— | ||
| Total | 30,000.00 | |
Make entries on books of the partnership.
Make entries on books of the corporation.
A CORNER IN ONE OF THE SHOPS OF BROWNE & SHARPE MANUFACTURING CO., PROVIDENCE, R. I.
2. Hoadley and Stockton are partners and desire to incorporate a company with a capital of $10,000.00 to take over their business. It being necessary to have three incorporators they agree to give Hopper, an employee, 10 shares—$1,000.00—of the stock of the new company. The stock is to be divided equally between Hoadley and Stockton after giving Hopper $1,000.00. The balance sheet of the partnership is as follows:
| Assets | ||
| Cash | $960.00 | |
| Accounts receivable | 1,570.00 | |
| Merchandise | 720.00 | |
| ———— | ||
| Total | $3,250.00 | |
| Liabilities | ||
| Accounts payable | 460.00 | |
| Bills payable | 500.00 | |
| Hoadley | 1,145.00 | |
| Stockton | 1,145.00 | |
| ———— | ||
| Total | 3,250.00 | |
Make all necessary entries on the books of the partnership.
Make open entries on the books of the new company.
3. The National Manufacturing Co., has an authorized capital of $100,000.00 of which $60,000.00 is paid up and $40,000.00 unsubscribed. It is decided to permit employes to subscribe for $10,000.00 of the stock by paying 10 per cent in cash, all dividends declared to be applied to the payment of subscriptions.
What entries are made when this stock is subscribed for?
A 10 per cent dividend being declared at the end of the first year what entry is required?
4. The Atlas Novelty Co. has a capital stock of $50,000.00. All of the stock has been subscribed for, but only 40 per cent has been paid. A surplus of $10,000,00 has been accumulated. It is desired to reduce the stock to $25,000.00 full paid. What is the necessary proceeding, and what entries are required?
5. A company has a capital stock of $50,000.00 full paid, and a surplus of $11,172.00. A stockholder who owns $7,000.00 stock in the company wishes to dispose of his stock and, to secure cash, offers to sell it to the company at par. His offer is accepted and the stock purchased, but the company does not wish to reduce its capitalization. What is the entry?
RESERVES AND THEIR TREATMENT
44. A reserve is an amount retained from current earnings to meet a future contingency. According to a prominent authority whose recent discussions of this subject have attracted attention, a reserve is an expression of the judgment of the accountant as to what amount will be necessary to meet a contingency. Reserves are created for many purposes, among which the following are good examples.
Reserves for bad debts. An amount—usually a stated per cent of accounts receivable—annually set aside to cover losses from uncollectable accounts.
Reserves for depreciation. The plant—buildings and machinery—will wear out, no matter how substantially built. A charge is made against current earnings to create a reserve which will provide for a renewal of the plant, or any part of it, when worn out. Separate reserves are usually maintained for buildings and machinery.
Reserves for Patents, Franchise, Goodwill and similar fictitious assets. An annual charge of an amount sufficient to extinguish the value at which the fictitious asset has been placed on the books.
Reserves for permanent improvements on leased property. Permanent buildings, title to which will revert to the lessor at the expiration of the lease, are sometimes erected on leased property. A reserve is created to absorb the cost of such improvements during the life of the lease.
Reserves for buildings in hazardous undertakings. In certain lines of business, manufacturing plants are erected with the expectation of having a permanent supply of raw material. If the supply gives out, the plant may be valueless for other purposes. Examples are oil wells and mines. A reserve is created to absorb the cost.
The reserve is coming into more general use every year, especially by corporations, whose managers see the necessity of providing for these contingencies. When a machine wears out it must be replaced. If no reserve has been created, the money for its replacement must come from current earnings, or be provided by borrowing money or increasing capital. The better plan is to make provision in advance by creating a reserve.
The amount of the reserve should be the value of the asset, and the sum set aside annually should be sufficient to equal the value of the asset at the end of its estimated life. To illustrate, if a machine is estimated to last 10 years, the annual reserve for depreciation should be 10% of its cost. The reserve is carried on the books as a liability and is an off-set to the asset which it is to replace. If we were to prepare a statement of the value of machinery as shown by the books we would state it in this form—
| Machinery | $20,000 | |
| Less reserve for depreciation | 2,000 | |
| ———— | ||
| $18,000 | ||
This shows the exact amount at which this asset is valued. Taking the illustration referred to—at the end of 10 years the liability reserve for depreciation will equal the asset machinery, and the funds which have been reserved from profits during the past 10 years will be available for the purchase of new machinery.
45. Reserve Funds. A term frequently used to designate a reserve created for a certain purpose is reserve fund. This term is somewhat confusing for when we speak of a fund we are more likely to think of it as an asset than as a liability. When the principle underlying reserves is thoroughly understood, however, it is readily seen that the use of the term reserve fund is merely a question of the use of English and does not affect the principle. 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.
46. Sinking Funds. A sinking fund is an amount set aside out of profits to meet an anticipated liability, or an obligation which is to fall due at some future date. Sinking funds are set aside for such purposes as the payment of bonds at maturity, mortgages, etc. The sinking fund is the amount which, invested at compound interest, will produce the desired amount at the end of the period.
A sinking fund is an asset and may or may not be withdrawn from the business. Frequently a sinking fund is invested in securities, such as government bonds, which are placed in the hands of a trustee, thus insuring against the withdrawal of the funds from actual use in 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. 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.
47. Computing Sinking Funds. The amount necessary to set aside at the end of the year to provide a given sum in a stipulated number of years at a stated rate of interest, compounded annually, may be found as follows:
Divide the interest for one year upon the sum to be accumulated by the compound interest upon $1.00 for the stipulated time. The result will be the amount necessary to invest at the end of each year.
If the amount is to be invested at the beginning of the year, divide the result obtained as above by the amount of $1.00 for one year.
Example. To provide for payment of $50,000.00 at the end of 15 years, what amount must be put into a sinking fund at the end of each year, if the fund is invested to earn 3% compound interest? Interest on $50,000.00 for 1 year at 3% is $1,500.00. Compound interest on $1.00 for 15 years at 3% is .55797. Dividing $1,500.00 by .55797 gives $2,688.32, the amount necessary to put into the fund annually. If this amount is to be invested at the beginning of each year, divide the above result ($2,688.32) by $1.03 (the amount of $1.00 for one year at 3%) and we obtain $2,610.02 the amount needed.
BONDS
48. In the sense here used a bond is the written obligation of a corporation to pay a certain amount at a specified future date. 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.
49. Classes of Bonds. The bonds of corporations are of several classes, as follows:
A first mortgage bond is one secured by first mortgage on the company's property.
A second mortgage bond is one secured by second mortgage. Interest cannot be paid on second mortgage bonds until it has been paid on the first mortgage bonds.
General mortgage bonds are those secured by a general mortgage on all of the company's property.
Collateral bonds are secured by the deposit of collateral security.
A debenture is a bond with no other security than the good name of the company.
Refunding bonds are those issued in place of maturing bonds which the company does not wish to pay in cash.
Equipment bonds are those secured by the rolling stock of a railway, and are also known as car trust certificates.
A gold bond is any form of bond, the terms of which specify that it shall be paid in gold.
Registered bonds are those, the names of the owners of which must be registered on the books of the company. Ownership of a registered bond can be transferred only on the books of the company.
50. Bond Liability. When bonds are issued by a corporation, either public or private, an account is opened under some such caption as bond issue or bonds payable. As fast as bonds are sold the proceeds are credited to this account, which represents a liability. A new account should be opened for each issue of bonds.
The bonds of a given issue will all bear the same date, with interest payable from that date. We will suppose that a corporation issues its bonds for $100,000.00 in denominations of $1,000.00 each. These bonds are dated Feb. 1st, and bear interest at 5 per cent payable annually. They are payable at the end of 10 years from date. The company agrees to maintain a sinking fund of an amount sufficient to pay the bonds at maturity if invested in securities drawing 4 per cent interest, and to invest the fund in such securities which are to be placed in the hands of a trustee.
During the first year bonds are sold in the amounts and under the conditions which follow:
First. On the date of issue $10,000.00 of these bonds are sold at par.
Second. At the end of three months $10,000.00 of the bonds are sold at 101 and accrued interest, yielding $10,225.00 of which $10,000.00 is principal, $100.00 premium, and $125.00 interest.
Third. The next sale is $10,000.00 of the bonds at 98, interest accrued $250.00, yielding $10,050.00 made up of principal $10,000.00, less discount $200.00, and interest $250.00.
Ledger Accounts of a Bond Issue
51. Premium on Bonds. When bonds are sold at a price above par, the premium should be credited to a premium on bonds account. When sold below par, the discount may be charged to the same account.
52. Interest on Bonds. The interest paid on bonds may be charged to an interest on bonds account, which keeps it separate from the regular interest account. When bonds are sold with accrued interest, which is paid by the purchaser, the accrued interest is credited to interest on bonds.
53. Expense of Bond Issue. All expenses incurred in the issue and sale of bonds should be charged to expense of bond issue account. The account can be closed into profit and loss immediately, or it is proper to spread it over the life of the bonds, charging off the proper amount each year. It is also considered proper to charge discount on bonds to this account.
54. Continuing the example in Art. 50, we find that the amount of bonds outstanding is $30,000.00, and a sinking fund must be established which will equal this amount when the bonds mature. Following the rule in Art. 38, we divide the interest on $30,000.00 for one year at 4 per cent ($1,200.00) by the compound interest on $1.00 for 10 years at 4 = (.48024) obtaining as a result $2,498.75, the amount necessary to be invested at the end of each year. This amount must be provided each year for permanent investment to meet the principal and an additional $1,500.00 must be provided each year for interest.
The entries which follow are the ones necessary to record the sales shown in Art. 50.
At the end of the year when the interest is paid and the first installment of the sinking fund is set aside, these entries are made:
| —January 31— | ||
| Interest on bonds | 1,500.00 | |
| Cash | 1,500.00 | |
| ———— | ||
| Sinking fund | 2,498.75 | |
| Cash | 2,498.75 | |
The illustrations (page [240]) show the status of all of these ledger accounts at the end of the year.
MANUFACTURING AND COST ACCOUNTS
55. Manufacturing began in this country many years ago and was for a long time confined to the eastern and New England states. Encouraged and fostered by national, state, and local governments, and by discoveries of sources of supplies, it has extended to all parts of the country. Manufacturing has grown to proportions which place it at the very head of our industries, if we except agriculture, the growth of which has been largely influenced by the progress in manufactures. One result is that the business of manufacturing has perhaps more than any other, attracted capital from great numbers of investors, large and small. Owing to its very nature, manufacturing readily lends itself to the corporate form of organization, and it is for manufacturing that a very great number of corporations have been formed. Manufacturing has, therefore, been selected for a more complete exposition of corporation accounting.
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.
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.
Cost accounting is a profession in itself, and it is not our purpose to discuss, in this paper, all of the details of collecting data in the factory and shop. The purpose of this paper is to show the accounts with which a bookkeeper for a manufacturing business should become familiar. Even when a manufacturer does not maintain a complete cost accounting system the bookkeeper can produce some valuable statistics by a proper arrangement of the accounts.
ACCOUNTS USED
56. For the purpose of illustration we have selected a representative schedule of the accounts of a manufacturing business. The following accounts are those which have a direct bearing on the manufacturing branch of a business and do not include the administrative and selling branches.
FACTORY ASSETS
1. Real Estate. Includes the cost of land and factory buildings.
2. Machinery. Charged with the cost of all machinery including total cost of installation. Freight, cartage, and cost of erecting the machine ready for use should be included.
3. Patterns and Tools. Charged through cash and purchase book for all patterns and tools purchased. Charged through cash book and journal—with proper credit to material and labor accounts—if manufactured in the factory.
4. Material Purchases. Charged through purchase and cash books for all purchases of material that enters into the product. Cost includes charges for delivery. Credited for all material used in the factory. This may be subdivided into several accounts to represent the different classes of material used—as iron, steel, lumber, leather, hardware, etc.
5. Supplies Purchases. Charged through purchase and cash books for all purchases of factory supplies, like oil, waste, belt lacing, and similar items. Credited for all supplies used in the factory.
6. Finished Goods. Charged for all goods finished, usually at cost of manufacture. Sometimes a small factory profit is added. This account represents a purchase account to the commercial department, as it represents the cost of goods to them,
FACTORY EXPENSES
7. Salaries. Charged for salaries of superintendent, assistant superintendent, and factory clerks.
8. Labor. Charged through cash and pay roll books for the amount of all factory pay-rolls.
9. Experimental. Charged through cash and pay-roll books and journal for all labor and material used in experimental work carried on for the purpose of improving the product.
10. General Factory Expense. Charged through cash and purchase books for cost of miscellaneous factory expense items not otherwise accounted for.
11. Power, Heat, and Light. Charged for fuel, oils, water, wages of engineer and firemen, electricity (when purchased), and all other items entering into their cost.
12. Building Maintenance and Repairs. Charged through cash and purchase books for materials purchased specially for repairs to buildings. Charged through journal and pay-roll book for labor and materials or supplies consumed in maintenance and repairs to buildings.
13. Repairs to Machinery. Treated the same as No. 12.
14. Repairs to Patterns and Tools. Treated the same as No. 13.
15. Insurance. Charged through cash book for all premiums paid for insurance on buildings and contents.
16. Taxes. Charged for all state, county, and city taxes.
17. Depreciation of Buildings. An amount charged off each year to cover depreciation.
18. Depreciation of Machinery. Treated the same as No. 17. Depreciation based on estimated life of machine.
19. Depreciation of Patterns and Tools. Treated the same as No. 18.
SUMMARY ACCOUNTS
20. Manufacturing Account. Charged for cost of labor and material consumed in manufacture of goods; charged for proper proportion of all expense accounts; credited with cost of all finished goods. Balance represents cost of all goods in process.
COLLECTING COST STATISTICS
57. Routine Followed. The notes following the names of the accounts in the above schedule explain their purpose and show clearly how charges are made direct to the expense accounts. Further explanations are necessary in regard to charges and credits to manufacturing account.
Labor is easily disposed of as the amount standing to the debit of labor account at the end of the month is transferred to the debit of manufacturing account, closing labor account.
Material charges are more difficult to handle. In all well-regulated factories all material is as carefully accounted for as cash. Proper storage rooms are provided in which all material is stored. These rooms are placed in charge of a man known as stockkeeper or stores clerk, and no one is allowed to take material from the storerooms without first presenting a written order, signed by the foreman, showing for what purpose the material is to be used. This order is retained by the stockkeeper and after he has posted the material to his own records he sends it to the bookkeeper. From these orders, the bookkeeper compiles a record of material withdrawn and, at the end of the month, the amount is debited to manufacturing account and credited to material purchases.
The stockkeeper keeps a record of all material received and delivered and the balance of his accounts shows the quantities of the different materials which he should have in stock. His record should agree with the balance of material purchases account.
When a stockkeeper is not employed it is necessary to have reports from the factory. The bookkeeper should arrange to obtain daily reports from the foremen showing all materials taken into their departments which are to be used in the manufacture of the regular product. If any of this material is to be used for the manufacture of tools or patterns for use in the factory, or for repairs to tools, patterns, machinery, or buildings, it should be noted on the report with a statement of the exact purpose for which it is intended. From these reports, the bookkeeper will compile his material records which will be credited to material purchases, and charged to manufacturing account and the different repair accounts at the end of the month.
Supplies are handled the same as materials, except that where this is a small item it is sometimes treated as an expense account. Where a considerable value is involved it is preferable to consider it as a subdivision of the material account.
The expense accounts must be charged on a percentage basis for the reason that the amounts actually expended vary in different months, and an expense item paid in one month may cover that particular expense for an entire year. Such items are insurance premiums and taxes, paid once a year to cover twelve months. Other expense items like experimental, power, and repairs are difficult to determine for a single month. It is customary to base the charge for these items on the records for the previous year. The amount of such expenses for a year is divided by twelve and each month one twelfth of the amount is charged to the manufacturing account and credited to the expense account. If there is any discrepancy at the end of the year it is adjusted by a debit or credit to finished goods.
Reports should be made daily by all foremen showing exactly what partly finished goods are received in their department and the quantity delivered to the next department. A record of these reports should be kept, which will show at all times the quantity of goods in process in each department. Reports of finished goods received in the stock room will show the quantity manufactured, or rather finished, during the month. See report form illustrated on page 53.
If all goods on which work had been started were finished, the charges to manufacturing account would represent their exact cost, but there is always a certain quantity of goods in various stages of manufacture, and the amount already expended on them must be considered. Therefore an inventory is taken of goods in process. Great care must be exercised, in taking this inventory, that too high a value is not placed on partly finished goods, for if the valuation is too high the apparent cost of finished goods will be less than actual cost. 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.
Daily Report of Work in Process
When the inventory is complete the amount should be deducted from the total debits to manufacturing account, which will show the cost of goods manufactured. This cost should then be credited to manufacturing account and charged to finished goods account. Manufacturing account will now show a debit balance representing cost of goods in process.
This method will produce very satisfactory results for factories in which but one line of goods is manufactured, but does not supply the information required where several styles, sizes, or lines are made. For one line of goods it is only necessary to divide the total cost by the quantity produced, as pounds, feet, dozen, or gross to find the cost of a single unit. In the more complicated business a detailed cost system would be required.
PAY-ROLL RECORDS
58. In connection with the labor account, the manner of keeping the pay-roll record is of considerable importance. Like most other forms of record, pay-roll books are made to suit the needs of the individual concern. For a manufacturing business a feature to be kept in mind is such an arrangement as will give the most complete record of the cost of labor in each separate department. Where men are never transferred from one department to another during a weekly or monthly pay-roll period, this result would be obtained by a simple grouping of the names by departments. In many manufacturing lines, however, workmen are frequently transferred so that to obtain costs for departments it is necessary to provide special forms for distribution.
But why go to the trouble of distributing the pay-roll by departments? That we may more closely watch expenses and costs. The reports which the bookkeeper receives from foremen show quantities of goods passing through each department. If the pay-roll is sectionalized it will enable the bookkeeper to determine the labor cost per unit of goods manufactured in each department. A comparison of these costs from month to month will be of value in showing changes in cost. The form illustrated provides for a business having four departments and paying employes both on piece work and day wage plans.
Pay-roll Register for Time and Piece Work
EXPENSE INVENTORY
59. When the books are closed, it usually happens that certain expense accounts show expenditures for items of expense that are not accrued. Illustrations are insurance and taxes paid yearly in advance. Suppose insurance premiums to the amount of $150.00 are paid on April 1st to cover insurance for one year. If the books are closed July 1st, 9/12 of this amount will have been paid for insurance that we have not received—the premium has not been earned. The inventory will also show unused material which has been charged to such expense accounts as repairs. It is proper to take an inventory of these amounts, treating them as assets in the balance sheet.
To properly record all such unearned expenses and make the books agree with the balance sheet, an account should be opened under the title of Expense Inventory, to which these items will be charged, with corresponding credits to the proper expense accounts. After the books have been closed, these items will be changed to the expense accounts, and credited to expense inventory, closing the latter account.
EXPENSE LIABILITY
60. Certain expenses will have accrued which have not been paid. Such an item is interest on bills payable, bonds, or mortgages, or taxes due and unpaid. These items should be treated as liabilities in the balance sheet. An account called Expense Accrued should be opened and credited with these items, with corresponding debits to expense accounts. When the books have been closed, this account is closed by crediting the items to the expense accounts from which they were received.
BALANCE LEDGER
61. A form of ledger now in quite common use is known as the balance ledger. The form differs from the standard ledger form in being provided with an extra column in the center in which balances are extended. If the bookkeeper when posting, extends the balance after each item is posted, much time is saved in looking up accounts and in taking trial balances. The nature of the account will usually indicate whether there is a debit or credit balance. Accounts in the sales ledger will usually show a debit balance, while one in the purchase ledger will have a credit balance. If the balance is the opposite from what is to be expected it may be indicated by placing the letter D in front of the amount in the balance column for debits, or the letter C after the amount for credits.
WHEEL LATHE SHOP IN THE BALDWIN LOCOMOTIVE WORKS, PHILADELPHIA, PENNA.
Center-Ruled Balance Ledger
SAMPLE TRANSACTIONS
62. The following transactions exhibit the accounts which are special to a manufacturing business without including the commercial accounts which record sales. The manner of keeping those accounts is the same for a manufacturing business as for any other.
Being a business conducted by a corporation these accounts include the stock accounts usually kept in the general books. The auxiliary stock books are omitted, it being felt that the special illustrations of such books will have been sufficient to give the student a thorough understanding of their uses.
The books required in the manufacturing business, omitting sales accounts, are invoice register or purchase book, cash book, journal, pay-roll distribution book, purchase ledger, and general ledger.
A corporation known as the Atlas Manufacturing Co., is organized with an authorized capitalization of $100,000.00, with the provision that business is to begin when $50,000.00 of the stock has been subscribed, and $25,000.00 paid in. The incorporators are Henry Biddle, John Noonan, David Snow, Henry Farwell, and George Dunn. Each incorporator subscribes for $10,000.00 stock payable one-half down and one-half in 30 days. The detailed record follows:
63. Manufacturing Data. The following data has been collected by the bookkeeper from the reports of superintendent and foremen, and from the inventories taken at the end of the month.
| Material issued to factory | 1,003.35 | |
| Material used for building repairs | 50.00 | |
| Inventories | ||
| Supplies | 45.00 | |
| Rent (unexpired) | 300.00 | |
| Power, heat, and light (Coal) | 150.00 | |
| Office supplies | 140.40 | |
| Goods in process—material | 602.00 | |
| Labor | 400.00 | 1,002.00 |
| ——— | ||
We will now close the ledger to ascertain manufacturing results for the month, by making the following adjusting entries in the journal—
Debit Manufacturing Account
for material issued to factory.
Debit Building Maintenance and Repairs
for material used in repairs.
Credit Material Purchases
for both of the above.
Debit Manufacturing Account
for Labor Account
for Supplies used—found by deducting inventory from supplies purchases.
for Salaries Account
for Rent one month
for Power, Heat, and Light—found as above
for Building Repairs
for Office Supplies—found as above
Credit accounts representing above
for amounts charged.
The manufacturing account will now show, on the debit side the total manufacturing expense for the month. The next step is to find the cost of finished goods to be credited to manufacturing account and charged to finished goods account. Our inventory of goods in process, which includes material and labor only, amounts to $1,002.00. The labor account and reports from foremen show that the amount of these items used in the factory is $1,672.30. In round numbers, the former is 60% of the latter, that is, sixty per cent of the work started is still in process. We will assume, therefore, that this is a fair percentage to be used in determining the expense items invested in goods in process. Taking 60% of the total manufacturing expense gives $1,400.13, which, deducted from the total, leaves $933.42 as the cost of finished goods.
In this case the per cent of goods in process is large for the reason that it is the first month of operation. The results in succeeding months will be more nearly equal. If the factory is running regularly, turning out practically the same quantities each month, the quantity of finished goods will just about equal the work started in any one month.
Should we wish to show a factory profit of 10%, it will be necessary to add 10% to the cost of finished goods which will then represent the cost to be used by the sales end of the business. Since we have no account to which this amount can properly be credited, we will open a new account called contingent profits, which will be closed into profit and loss at the end of the year.
Since we are not closing the books for the purpose of making a balance sheet, we do not close the expense accounts into an expense inventory account as explained in article 59. Instead, the balances are allowed to stand until such time as the books are finally closed.
Invoice Register with Distribution Columns.
Invoice Register with Distribution Columns
Check and Disbursement Record
Manufacturing Journal
Manufacturing Journal
Manufacturing General Ledger
Manufacturing General Ledger
Manufacturing General Ledger
Manufacturing General Ledger
Purchase Ledger
Purchase Ledger
General Ledger Trial Balance
Purchase Ledger Statement
EXERCISE
The transactions given in this exercise are a continuation of the business referred in to the preceding articles. During the month of April the following transactions are recorded.
| Material purchases | $2,670.00 | |
| Supplies purchases | 127.50 | |
| Patterns and tools purchases | 150.00 | |
| Cash received on subscriptions | 25,000.00 | |
| Deposited in Bank | 25,000.00 | |
| Checks drawn | ||
| Purchase accounts | 5,500.00 | |
| Salaries | 375.00 | |
| Pay-rolls | 1,670.20 | |
| distributed as follows: | ||
| Labor | $1,652.70 | |
| Machinery repairs | 17.50 | |
| David Snow | 10,000.00 | |
| (Stock purchased at par by Company) | ||
| The following data is obtained from the reports of foremen andinventories taken at the end of the month: | ||
| Material issued to factory to be used in manufacturing goods. | 2,261.00 | |
| Material used in machinery repairs | 16.70 | |
| Inventories, April 30 | ||
| Supplies | 147.00 | |
| Rent (unexpired) | 150.00 | |
| Power, heat, and light (Coal) | 75.00 | |
| Office supplies | 118.40 | |
| Goods in process—material | 615.00 | |
| Labor | 410.00 | 1,025.00 |
| ——— | ||
1. Find value of goods in process, using the same percentages in estimating expense items as shown for material and labor.
2. Make journal entries closing accounts into manufacturing account to show cost of goods completed during the month.
Note:—To find total cost of material and labor, used and partly used, add to the amounts shown for one month the inventory of the same items at end of preceding month.
3. Make trial balance of general ledger after books are closed as shown in model set.
GENERAL OFFICES OF THE A. B. DICK COMPANY, CHICAGO, ILL.