A sales transaction handled on a similar basis results in a Sales Discount credit balance representing the excess of the offering of discounts over the amount taken by customers and has to be treated as income additional to the booked sales income.
Inasmuch as the sale or purchase, under this method, must be booked on a cash option basis, this treatment seems to result in a departure from true cost or in the mistake of booking only some of the elements which enter into the cost of merchandise. The price at which a merchant can sell his product must include all direct and indirect costs and provide a margin for profit. The sales discount offered is simply one of these indirect costs. It cannot be more accurately estimated than can the salesman’s salary which is a part of the sale price. It is inconsistent practice to separate the invoice price into two elements and term one real selling price and the other sales discount cost when the real selling price is still a composite item. Rather, the sale should be booked at its full invoiced price and actual costs recorded as they accrue, to be closed out against Sales Income at the end of the fiscal period.
After all, the sales policy of each concern enters largely into the determination of its normal selling price. A concern with a normal credit term of 30 days fixes its sale price on that basis; one with a 60-day credit term will, in determining its sale price, take into account the risk and interest costs of the longer credit period; and one doing a cash business will determine its sale price accordingly. However, as a means of furnishing the information necessary for guidance under a particular sales policy, sales should be recorded on the basis of the normal credit term.
To secure the information sought as to neglected discounts, it is suggested that memorandum accounts be opened for that purpose and entry be made of the expense only when incurred. Thus failure to take a purchase discount would be recorded under these or similar captions:
- Neglected Purchase Discounts
- Reserve for Neglected Purchase Discounts
At the time the books are closed these memorandum accounts would be closed against each other, having served their purpose of giving the desired information through their inclusion in the trial balance submitted to the manager or owner.
Trade Acceptances and Cash Discounts.—Brief mention should perhaps be made of some recent discussions of the probable effect of the extended use of trade acceptances on the practice of allowing cash discounts. Some sellers, to whom the cash discount practice is troublesome and unsatisfactory, welcome the use of trade acceptances as an avenue of escape from the practice. Others have gone so far as to say that the trade acceptance will eventually do away with cash discounts. It should be said that the use of trade acceptances, while attractive from the seller’s standpoint, has not as yet made a strong appeal to buyers, largely because of the fact that it offers little that the open account method does not secure for them and it may, on the other hand, interfere somewhat with the taking of cash discounts.
CHAPTER XLV
BALANCE SHEET VALUATION
The Two Problems of the Balance Sheet.—There are two major problems connected with the balance sheet: (1) the problem of form, and (2) the problem of content. The form of the balance sheet, which was discussed rather fully in [Chapter III], has to do with the arrangement of the items for the purpose of intelligent reading. It deals with the principles in accordance with which the asset, liability, and net worth items are to be marshaled and set up in groups and arranged within the group with a view to facilitating the comparisons between groups and the calculations made in judging the financial condition of the concern.
The second problem of the balance sheet, that of content, which was also mentioned in [Chapter III], concerns itself mainly with the valuation of the items in the balance sheet, assuming of course that all the assets and liabilities are included in the statement. A balance sheet may be correct in form but, unless its content is reliable, it has little or no value when judged from the standpoint of its chief purpose, namely, that of showing the financial condition of the concern. The problem of the form of the balance sheet has to do with the technical or mechanical side of accounting, while the problem of its content or the valuation of its items has to do with the questions of the concern’s financial administration, for the solution of which the accounting department must furnish in proper form the necessary information.