| Sales | $525,600.00 | |||
| Less: | ||||
| Sales Returns | $ 5,000.00 | |||
| Sales Rebates and Allowances | 600.00 | 5,600.00 | ||
| Net Sales | $520,000.00 | |||
| Cost of Goods Sold: | ||||
| Inventory, July 1, 19— | $ 96,670.00 | |||
| Purchases during the year | 350,000.00 | |||
| Freight-In | 1,000.00 | |||
| Insurance (Goods in Transit) | 750.00 | $448,420.00 | ||
| Less: | ||||
| Purchase Returns | $ 1,750.00 | |||
| Final Inventory, June 30, 19— | 105,000.00 | 106,750.00 | ||
| Cost of Goods Sold | 341,670.00 | |||
| Gross Profit | $178,330.00 | |||
| Selling Expenses: | ||||
| Salesmen’s Salaries | $ 20,000.00 | |||
| Advertising | 25,000.00 | |||
| Delivery Expense | 5,000.00 | $ 50,000.00 | ||
| General Administrative Expenses: | ||||
| Office Salaries | $ 10,000.00 | |||
| Stationery and Supplies | 1,500.00 | |||
| Postage | 250.00 | |||
| Telephone and Telegraph | 750.00 | |||
| Light and Heat | 1,750.00 | |||
| Insurance (Stock and Fixtures) | 1,500.00 | |||
| Depreciation: | ||||
| Furniture and Fixtures | $2,000.00 | |||
| Buildings | 1,500.00 | 3,500.00 | ||
| Miscellaneous Expenses | 750.00 | 20,000.00 | ||
| Financial Management Expenses: | ||||
| Interest Paid | $ 250.00 | |||
| Sales Discounts | 5,000.00 | |||
| Bad Debts | 1,000.00 | |||
| Collection Costs | 250.00 | 6,500.00 | ||
| Total Operating Expenses | $ 76,500.00 | |||
| Financial Management Income: | ||||
| Interest Received | $ 1,350.00 | |||
| Purchase Discounts | 3,500.00 | 4,850.00 | ||
| Net Operating Expense | 71,650.00 | |||
| Net Operating Profit | $106,680.00 | |||
| Non-Operating Expense and Income: | ||||
| Income—Interest on Liberty Bonds | $ 2,000.00 | |||
| Expense—Loss on Stocks Sold | 900.00 | 1,100.00 | ||
| Net Profit for the year | $107,780.00 | |||
| Appropriation of Net Profit: | ||||
| J. H. S. Kimball, ⅖ share | $ 43,112.00 | |||
| H. F. C. Morey, ⅗ share | 64,668.00 | $107,780.00 | ||
The Two Methods of Determining Net Profit.—It is particularly important to note that the profit shown by the profit and loss statement must be the same as that developed by the comparative balance sheet, since both cover the same period and constitute merely two ways of developing the same result. For this reason they are valuable in proving the correctness of results, acting as checks against each other. The student must bear in mind, however, that the increase or decrease in net worth as shown by the comparative balance sheet must always be adjusted by taking account of additional investments or withdrawals of capital before the net profit for the period can be determined, and therefore before this figure can be used as a check against the amount of net profit shown by the statement of profit and loss.
The accounting department keeps both classes of records, viz., the asset and liability records and the temporary proprietorship or income and expense records, not because both are needed to develop the amount of net profit—either class would do this—but because both are needed for the additional information which they give and which is valuable and necessary for the intelligent management of the business.
CHAPTER VII
INTERRELATION BETWEEN THE ECONOMIC AND
THE FINANCIAL ELEMENTS OF A BUSINESS,
AND SOME INTER-RATIOS
Various Aspects of the Temporary Proprietorship Records.—The profit and loss statement has been explained as a summary of the temporary proprietorship records kept for the purpose of registering the changes in net worth as they occur from day-to-day, and also for the purpose of noting the source or cause of many of the changes in assets and liabilities. The temporary proprietorship records may be regarded as the chronicle or history of the economic life of the business. The efforts of the business to produce income with the least possible outgo in the form of costs or expenses, may be viewed as the work of forces or agencies striving towards that end. Every effort is offset by the cost of that endeavor, and unless the result of the effort be more than its cost, its aim, viz., the increase of net worth, is not accomplished.
Relation between Profit and Loss and Financial Elements.—These income-producing efforts are the agencies that bring about the changes in the values of assets and liabilities. Expenses and costs are incurred for the purpose of securing income. Every expense or cost that is settled causes a diminution of business assets, usually of the asset cash. If not settled, it causes an increase in the liabilities, usually the accounts payable, for the business becomes bound by or liable for it. Both of these conditions result in a decrease in the net worth.
On the other hand, every item of income, as when a sale of goods is made, is reflected in an increase of assets or a decrease of liabilities. The result of every sale is usually an increase in the cash or in the claims against persons, the accounts receivable. The sale may sometimes result in a lessening of liabilities through a cancellation of the claims of creditors by means of the claims against customers arising out of the sale. This would be true when goods are bought from, and sold to, the same person. Thus there is constantly a direct interrelation between the financial and the profit and loss elements of every business.
Exchanges within the Asset and Liability Groups.—All changes in individual assets and liabilities, however, are not always the result of business or economic forces. There may be an even exchange of one asset for another asset, as when delivery equipment is purchased for cash. The asset Delivery Equipment is increased by the same amount as the asset Cash is diminished. Or if a bill of goods is purchased on credit, an increase of assets is exactly offset by an increase in liabilities. These changes are illustrated in the second example in [Chapter I], showing Runyon’s proprietorship.
It is seen, therefore, that the changes in individual assets and liabilities are not so certain an index of changes in proprietorship as those registered by the temporary proprietorship records. The vital history of a business is its profit and loss record, the story of its economic life. As a means of control this is of first importance because it chronicles the causes of most changes in financial condition. The statement of financial condition may be looked upon as a picture of the framework, the skeleton of the business personality, upon which is superimposed its economic structure. When both the financial framework and the profit and loss summary are given, it is possible with reasonable accuracy to tell the whole history of the business activities for the period covered.
Confusion between Profit and Loss and Balance Sheet Items.—The beginner frequently has trouble in making a proper classification of income items and sometimes of expense items. Take Interest Income as an example. The asset Cash Received is confused with the title Interest Income, which denotes the source of the cash received. The accounting department maintains both types of records. The receipt of cash arising out of interest income would be classified and recorded under two heads: (1) the asset Cash, to indicate the increase in that asset; and (2) the temporary proprietorship record Interest Income, to give the profit and loss information necessary for purposes of management.