| Goods on hand at the beginning, July 1, 1921 | $ 8,500.00 | |
| Goods bought during the year | 22,362.50 | |
| Total goods to be accounted for | $30,862.50 | |
| Goods accounted for, now on hand | 10,260.00 | |
| Goods accounted for, by being sold | $20,602.50 | |
| Selling price of goods sold | $28,465.20 | |
| Cost price of goods sold, as above | 20,602.50 | |
| Profit from sales | $ 7,862.70 | |
| Expenses of doing business: | ||
| Clerk hire | $3,050.50 | |
| Other expenses | 2,405.45 | |
| Depreciation | 52.50 | |
| Total expenses | 5,508.45 | |
| Net profit, or increase in net worth | $ 2,354.25 | |
The technical form of the summary of the temporary proprietorship elements will be presented in the next chapter.
CHAPTER VI
THE PROFIT AND LOSS SUMMARY
Type of Information Needed.—The need and purpose of the information to be furnished by the temporary proprietorship records was pointed out in [Chapter V]. Without information of this sort, proper control of business operations cannot be exercised. These records supply a summarized picture of the activities of the business during a definite period, which have as their goal the increase in proprietorship—the making of a profit. In attaining this goal, two main types of activities or operations are entered into, usually classified under the heads of: (1) income or earnings, by which is meant those activities which immediately and directly increase proprietorship; and (2) expenses or outgo, comprising those activities which decrease proprietorship. Expenses are the costs incurred in securing income, and are therefore deductions from it. A fuller explanation of these terms will now be given.
Income.—Income is usually of two types: operating and non-operating. These terms are always relative; that is, what is an operating income in one business may be a non-operating income in another business. The term “operating income” is used to indicate the main sources of income in a given business. It is always the duty of the accounting department to indicate the sources of income. Thus in a trading or mercantile business, the selling of goods to customers is the main source of income. In a professional business, the selling of services, often titled “professional fees,” is the main source; in a brokerage or commission business, commissions earned; in institutions, tuition and other fees; in a financial business, interest earnings; in a society, membership fees. These are typical titles for indicating the main source of income in the several kinds of undertakings mentioned.
While sales are the major source of income in a trading concern, there may be supplementary sources. It may own stocks and bonds from which income may be derived. In a manufacturing or mining enterprise the company may own dwelling houses and rent them to its employees. Conditions of travel and communication may also force it to provide stores, places of amusement, and so forth for its workers. From all these supplementary activities it will derive income. As it was not organized primarily for these purposes, but chiefly to manufacture, or mine a commodity, the income from these collateral activities is classed as non-operating income.
The distinction, then, between operating and non-operating income is, as mentioned above, always a relative one and will be determined in any given instance on the basis of major activities and supplementary or minor activities. Some of the titles under which income is recorded will now be explained:
Sales. Under this title is recorded the amount of sales of the stock-in-trade in a merchandising or manufacturing concern. The two elements included here, namely, the decrease of the asset merchandise and the increase of proprietorship—the true income element—will be discussed later.
Sales Returns. This title does not represent income but, as its name indicates, shows the amount of the goods sold which have been returned because of dissatisfaction with the quality or condition of the goods or some error in sending the wrong kind.
Sales Allowances. These are similar to sales returns in that they indicate a deduction from the sales income for the allowances made to the purchasers who for one reason or another have just cause to be dissatisfied with the goods but agree to retain them providing an allowance from the original selling price is made.