3. Accounts Receivable to Sales. The fraction represented by dividing the amount of outstanding accounts at the end of the year by the volume of sales during the year, indicates the portion of sales which has not yet been collected in cash. If this fraction is multiplied by the length of the fiscal period, expressed in months, and the result compared with the normal credit term allowed customers, it will indicate the trend of collections. For example, if the outstanding accounts at the close of the period are $150,000, the sales for the year are $1,200,000, and the normal credit period is 30 days, it will be seen that by the above ratios the $150,000 of outstanding accounts represents on the average the sales for approximately 1½ months
 | 150,000 |  | |
| ———— | × 12 months = 1½ months. | ||
| 1,200,000 | |||
Since the credit term is only 30 days, the indication is that collections are slow and should be pushed more vigorously. It must be understood that this ratio indicates merely a trend and must be judged in the light of other significant facts in the business.
4. Profits to Net Worth. The net profit for the period divided by the net worth at the beginning of the period is used to indicate the per cent of earnings on the capital invested.
Other Ratios.—For the purpose of watching the progress of business operations, it is customary to develop the following ratios:
- 1. Cost of goods sold to net sales.
- 2. Gross profit to net sales.
- 3. Selling expenses to net sales.
- 4. General administrative expenses to net sales.
- 5. Net financial management expenses to net sales.
- 6. Net profit to net sales.
These ratios, set up each fiscal period and compared with similar ratios for previous periods, indicate very definitely the trend of income and expenses and are useful in the determination of business policies.
CHAPTER VIII
THE ACCOUNT
The Goal of Account-Keeping.—Throughout the preceding chapters constant reference has been made to records or data of the business furnished by the accounting department. Knowing the use made of these data in the compilation of financial and profit and loss summaries, we shall trace the process of gathering that information in exactly reverse order; first, through the ledger, where it is grouped and summarized in accounts and made ready for the preparation of statements; then into the books of original entry, where the information is first sorted and classified for posting to the proper ledger accounts, with a view always to fit it ultimately into the final statements of financial and business condition; and finally, to the business papers arising out of the transactions, which are the basis or first source of all accounting records.
The Ledger and Its Content.—The ledger may be defined as the book of accounts. In it are collected most of the data needed for the final statements showing the financial condition of the business. By means of its account titles, it makes an analytical record of all transactions, according to the information desired, and through the mechanism of the account it groups and summarizes all data affecting each particular account, thus furnishing the proprietor with totals instead of items. In the ledger, therefore, must be kept two main classes of accounts, viz., those used for making up the balance sheet and those used for making up the profit and loss statement. The one group shows assets and liabilities, and the other temporary proprietorship increases and decreases brought about by the receipt of income and the payment of expenses. The ultimate or net proprietorship is determined by the summarization of all temporary accounts in the way shown in preceding chapters.