Accounting for the business which manufactures its own product is a much larger problem than that for the concern which limits its activity to purchase and sale of a stock-in-trade. To the activities of a trading concern the manufacturing business adds those of the factory. Not only must more property, and a larger variety, be kept account of and handled so as to get the most efficient return therefrom, but also in the handling and operation of this property a somewhat distinct type of expenses is incurred. The problems of financial and factory management and control are different and more complicated than those of the trading business. The period between the expenditure of funds for the purchase of materials and the payment of expenses and the receipt of money from the sale of the finished product is much longer. More working capital must therefore be provided and its rate of turnover is less. A larger element of risk enters in. Raw materials must be worked and fashioned, machinery must be employed, a different class of labor must usually be handled, perhaps will have to be trained—these are problems calling for a special type of management for the manufacturing end of the business.
The accounting department must be organized to serve these additional demands and complexities of management and to give the needed information. The amount and cost of the materials consumed in making the product, the labor cost expended on it, and the various items of factory expense incurred, during one period as compared with the same items for previous periods—all must be kept under constant review if successful operation is to be secured.
Expansion of the Purchase Journal
To make this information available as soon as the transactions giving rise to it are entered into, a different method of gathering the information becomes necessary. Because of the fact that the purchase journal is limited to the record of purchases of stock-in-trade, and that information in regard to expenses incurred is not usually brought on the books until payment of them is made, not only do the books fail to give the service which a management has a right to expect of them but they fail to reflect many liabilities at the time they are assumed. Thus a new type of record is needed.
This has led to an extension or expansion of the purchase journal. The way in which this journal can be used so as to analyze purchases of stock-in-trade on a departmental basis has been explained and illustrated in Volume I. This new use of the purchase journal is merely an extension of the principle of analysis there developed. Instead of limiting it to a record of transactions involving purchases of stock-in-trade, every purchase transaction, whether of assets, supplies, or of service of any kind, finds this its place of first record. By introducing sufficient columns, as detailed an analysis of all the purchasing activities of the business can be secured as may be desirable. Furthermore, entry here being made at the time of the purchase rather than at the time of payment for the purchase, the books make available a mass of valuable data needed for purposes of management much sooner than it becomes available under the former restricted use of the purchase journal.
Development of Voucher System
Had the evolution of this record stopped here, the resulting gain would have been secured at high cost. The entry of all expense purchases in the purchase journal creates the necessity of opening accounts on the ledger with numerous creditors for small purchases, as well as the more important items, both to show the liability incurred and to provide a means of canceling it when payment is made. In large corporations, where oftentimes the policy of securing bids on all purchases is followed, resulting in a constant changing of firms from whom purchases are made and no regularly established trade with any of them, the burden of handling the creditors ledger becomes an increasingly heavy one with little or no gain in desirable information furnished by it. Accordingly, a further development took place which eliminated the necessity of opening regular accounts with every creditor, but instead made every transaction, whether one or many were entered into with the same individual, independent of all others. This makes possible the showing of the settlement of that transaction in the place where its original record was made, without opening up a ledger account for it. This use of the purchase journal with some slight additions has given rise to the so-called “voucher system” of handling purchases.
Definition and Description of Voucher
In a broad sense, a voucher is a statement which certifies, i.e., vouches for, the correctness of a transaction. As used in the restricted sense to which it is limited under the voucher system, it is a more or less formal document which shows a receipt for a particular bill of items. As distinguished from a receipt in general, this latter term is applied to all acknowledgments of money paid whether or not for a particular bill; whereas the essence of voucher accounting requires receipts for particular bills. At law a voucher has no more weight than an ordinary receipt, and a signed receipt is only prima facie evidence, capable of refutation, though the burden of proof of non-payment is placed on the complainant.
A formal voucher must therefore provide for a statement of the bill of which payment is being made and a place for acknowledgment of receipt of payment by the payee. Usually provision is made also for: (1) certification of the correctness of the bill by properly authorized house employee and its approval for payment; and (2) a proper distribution on the accounting records of the payments authorized, i.e., an official determination of the debit and credit entries to be made on the books.