Appreciation in value due to so-called unearned increment is entirely a matter of market value. By this is not meant that the monetary value of this kind of appreciation fluctuates with the market; it accrues from day to day and is just as real as depreciation. Although very real, it does not become realized until the property is disposed of, a thing which is determined by business policy and does not rest on any principles of accountancy. It is not good practice to bring such unrealized values on the books. For a fuller consideration of this phase of the subject, [see Chapter XVII] where the problem is treated in connection with land and real estate.
Depreciation Policy and Stockholders
A final consideration concerns the relation of the depreciation policy to the stockholder. As stated above, a too liberal depreciation policy results in the creation of secret reserves which may be used to the prejudice of the stockholder by an unscrupulous managing clique desirous of buying minority holdings at a depreciated value or of manipulating the stock for speculative purposes. An insufficient depreciation allowance results in a false optimism, a payment of dividends out of capital, and perhaps finally in a wrecking of the property. Except for the transient, speculative shareholder, a fixed depreciation policy based on a conservatively accurate allowance is always for the best interest of the property and its owners.
CHAPTER XII
CASH AND MERCANTILE CREDITS
Introduction
In Chapter V an effort was made to establish the general principles of valuation as applicable to the main classes of assets found on the average balance sheet. In doing so, the fundamental distinctions between capital and revenue charges were set forth. In the six chapters on depreciation the general principles of depreciation and their application to problems in accounting have been developed, with particular emphasis on the problems of valuation and true costs. It is purposed now to consider in detail the various problems met in the valuation of the individual items found on the commercial balance sheet. It will be necessary also to consider the method of showing these items so as to indicate the basis of valuation and something of the financial policy employed. The various assets will be considered in the order of their appearance on the balance sheet, the arrangement being based on degree of liquidity, beginning with the most liquid.
What Cash Includes
There is little to be said about the valuation of an asset of such evident and definite value as cash. The problem here is rather one of showing the nature of the asset, although certain principles of valuation under given conditions need also to be considered.
The term cash as an item in the balance sheet usually includes all money and whatever serves as money. Thus, all legal tender of the realm, bank notes, checks, bankers’ drafts, postal and express money orders, and occasionally postage stamps and even “IOU’s” are classed as cash. Not all items, however, that may be carried on the books as cash should appear under this caption on the balance sheet. There only the current asset cash should be listed in the group of current assets. All other cash, including that held for specific purposes under deed of trust or otherwise, should, unless it is readily applicable for the cancellation of current liabilities, be shown in some other group.
Where the petty cash or working funds of all sorts are operated on the imprest system, the funds should be replenished before the books are closed and should thus be truly valued at their ledger figures. The bank account should be reconciled with the cash book, and the figure should represent the amount at which the item is to be taken into the balance sheet. This means, of course, that all properly authorized claims against cash in bank are to be treated as cash disbursed if they have been regularly issued, whether presented for redemption at the bank or not. Checks written but not yet mailed are not usually treated as cash disbursed because they are still under control. Similarly, items left at the bank for collection and deposit may be counted as cash on hand. If, however, as might happen in exceptional cases, a comparatively large amount represented dishonored items and a second attempt was being made to collect these dishonored items, the better procedure would be to omit them from the cash total and include them with the receivable items. In this connection attention should be called to the practice occasionally met with of holding the cash open for a few days after the closing date for the purpose of making a better showing as to balance on hand by means of new collections. This, of course, is a practice which cannot be countenanced under any circumstances as it is simply an effort to mislead, even though the effect may not always be bad. A balance sheet is a statement of financial condition purporting to be true as on a certain named date. The values shown therein are therefore to be those applicable to, and true on, that date and no other.