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THE TRIAL BALANCE 37

The amount due from an individual customer is of little importance in the presentation of a statement showing a firm's financial condition. It is the summary of all the customers' accounts that is significant. It is obvious that for other purposes, however, a knowledge of the amount due from individual customers must be available. In order to serve both of these purposes the controlling account is used.”

The chart also shows that if the business is a manufacturing business and it is desired to maintain a cost system, a separate factory cost ledger may be kept, but that this will be controlled by an account in the general ledger just the same as a subsidiary ledger with customers or creditors would be kept. At this point the system becomes still more complicated by the fact that the number of transactions affecting the cost ledger are so great that it may be necessary to subdivide that ledger and maintain subsidiary cost ledgers for special cost accounts. For instance, a separate ledger might be kept with manufactured parts and another with raw material.

THE TRIAL BALANCE

In preparing a Trial Balance from the general ledger, it will not be necessary to take into consideration any of the subsidiary ledgers unless it is desired to check the controlling accounts with the sum of the balances of the accounts in the subsidiary ledgers. This must be done at the end of each fiscal period. In most cases it is advisable to make this check at least once a month. The professional auditor, however, will never accept a Trial Balance from the general ledger without preparing schedules from all the subsidiary ledgers and making a careful comparison with the controlling account in the general ledger.

The accounts should be so arranged in the ledger that they will be in proper order for the preparation of the statements at the end of the period. The arrangement of the accounts in the Trial Balance is not a matter of great importance; however, the Trial Balance is usually prepared by following the ledger, page by page. Whatever arrangement or classification of accounts has been carried out in the ledger, therefore, will be duplicated in the Trial Balance. If the accounts have been properly arranged in the ledger, the Trial Balance will, therefore, show the accounts arranged in such a manner that it will be an aid in preparing the financial statements.

Too many bookkeepers consider the Trial Balance as an indication of the correctness of their work. This frequently leads to trouble because a Trial Balance, even though it is in balance, will not indicate or detect errors in principle, off-setting errors or errors of omission. The fact is, a Trial Balance is nothing more than a fairly reliable indication of accuracy, and simply shows the equilibrium or equality of debits and credits. Another form of the Trial Balance used by accountants, known as the Working Sheet, will be discussed later.

THE BALANCE SHEET

It has already been stated that the accounts in the ledger should be so arranged as to make it convenient to prepare a Balance Sheet. At this point, the proper arrangement of accounts in the Balance Sheet will be taken up. Conflicting theories exist. First; Accountants in England and America do not agree with reference to the listing of the assets on the debit side of the Balance Sheet and the liabilities on the credit side. English accountants hold that a Balance Sheet is an account rendered by the business to the owner; therefore, the proprietor is credited with his assets and debited with his liabilities. Hence the Balance Sheet shows the liabilities on the debit side and the assets on the credit side. This is just the reverse of the practice by American accountants who hold that a Balance Sheet is a concrete preparation of financial facts, the debit side of the Balance Sheet showing the assets and the credit side, the liabilities. Second; American accountants have not been able to agree as to the arrangement of the assets and liabilities on the Balance Sheet. Some list (a) the fixed assets on the debit side opposed to the fixed liabilities on the credit side, (b) the current assets on the debit side opposed to the current liabilities on the credit side, and (c) the deferred debit items opposed to the deferred credit items, while others arrange the assets and liabilities without regard to any particular classification. Some show the capital or proprietorship accounts first on the credit side, while others show them last. Some show reserves as deductions from assets. Others show them either as liabilities or as a part of the proprietorship section. Regardless of all this difference in opinion, there is gradually coming about a uniformity, and it is to be encouraged at all times. Robert H. Montgomery,” C. P. A., expresses his conception of an ideal Balance Sheet as one which will set forth: I. “The assets, properly valued and grouped, and arranged in the order of their availability. 2. “The liabilities also properly grouped and arranged in the order they will, or should, be discharged. 3. “If possible the excess of the assets or the liabilities should now be shown in order that there may be clearly apparent to anyone interested, the net worth, or capital and surplus, of the enterprise. 4. “A statement showing to whom the excess belongs or by whom it is due. That is, if a corporation, there should be shown the capital stock issued, the addition thereto if a surplus of assets exists, or the deduction therefrom if there is a deficiency.”

A Model Balance Sheet. The Model Balance Sheet illustrated on pages 40 and 41 shows the arrangement of the different classes of real accounts in accordance with a tentative

*Of the firm of Price, Waterhouse & Company.

THE BALANCE SHEET 39

proposal for a uniform system of accounting to be adopted by manufacturing and merchandising concerns. The proposal was made in 1917 by the Federal Reserve Board and is the out growth of the work of the Federal Trade Commission and of Mr. Edward N. Hurley, in particular, who during his entire term of office labored zealously and intelligently for the betterment of business and credit conditions. The Federal Reserve Board in prescribing a uniform Balance Sheet to be used for credit purposes has performed a real service in promoting uniform accounting. In commenting on the model Balance Sheet prescribed, attention should be called to the fact that it would have been better to separate notes and accounts receivable so as to allow a separate deduction for a reserve for bad debts from each. The percentage of loss will not be so great on notes as on open accounts, therefore, the percentage set up as reserves will vary. Note that securities are excluded from the list of “quick” assets, but included in the list of current assets. This is in accordance with Federal Reserve practice, but ordinarily no distinction is made between quick and current assets. No provision for accrued assets is made. In practically every audit, there will be a certain amount of accrued assets. These should always be listed among the current assets and in using the form of Balance Sheet as advocated by the Federal Reserve Board, it is apparent that accrued assets would be listed under the heading of “Other quick assets.” Since provision was made for accrued liabilities on the credit side, one is inclined to think that similar provision should have been made for accrued assets on the debit side. . The accounting student might easily be misled from the fact that fixed assets are all grouped together, followed by reserves for depreciation. It was undoubtedly the intention that the reserves for depreciation should be deducted from the particular fixed asset to which they are applicable. For instance, a reserve for depreciation on machinery is a deduction from the Machinery account on the Balance Sheet and not from the total fixed assets, even though the final results would be the same. Likewise, reserves for depreciation on buildings should be deducted from the asset, buildings. Reserve for depreciation on office furniture and fixture should be deducted from the asset, furniture and fixtures, and so on. On the credit side of the Balance Sheet, there is to be noted a peculiar difference from the usual practice. The intangible asset, good will, is deducted from the net worth. It has been customary to list good will and other similar intangible assets on the asset side of the Balance Sheet separate from either current or fixed assets, usually at the bottom of the statement. While the final results are the same with either method, yet there is no doubting the fact that certain intangible assets, such as good will, may have a definite value, and in that event one can see no objection to their being listed as assets.

ASSETS. Cash: Ia. Cash on hand—currency and coin... . . . . . . . . . Xxxxx. xx Ib. Cash in bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xxxxx. xx Notes and Accounts Receivable: 3. Notes receivable of customers on hand (not past ue). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXXXX. XX 5. Notes receivable discounted or sold with indorsement or guaranty..... . . . . . . . . . . . . . . . xxxxx. xx

7. Accounts receivable, customers (not past due). xxxxx.

9. Notes receivable, customers, past due (cash value, $xx). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . II. Accounts receivable, customers, past due (cash

value, $xxxx). . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxxx. xx Less: XXXXX. XX 13. Provisions for bad debts........ . . . XXXXX. XX 15. Provisions for discounts, freights, allowances, etc................. xxxxx. xx xxxxx. xx Inventories: I7. Raw material on hand. . . . . . . . . . . . . . . . . . . . . . xxxxx. xx 19. Goods in process. . . . . . . . . . . . . . . . . . . . . . . . . . . Xxxxx. xx 2I. Uncompleted contracts. . . . . . . . . . . . xxxxx. xx Less payments on account thereof... xxxxx.xx xxxxx. xx 23. Finished goods on hand. . . . . . . . . . . . . . . . . . . . • XXXXX XX Other Quick Assets (describe fully): - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xxxxx. xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - . . . . . . . . . . XXXXX. XX Total quick assets (excluding all investments). Securities: 25. Securities readily marketable and salable without impairing the business. . . . . . . . . . . . . . . . . XXXXX. XX 27. Notes given by officers, stockholders, or employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XXXXX. XX 29. Accounts due from officers, stockholders, or employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxxx. xx Total current assets. . . . . . . . . . . . . . . . . . . . Fixed Assets: 31. Land used for plant. . . . . . . . . . . . . . . . . . . . . . . . xxxxx. xx 33. Buildings used for plant...... . . . . . . . . . . . . . . . xxxxx. xx 35. Machinery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxxxx. xx 37. Tools and plant equipment. . . . . . . . . . . . . . . . . . XXXXX. XX 39. Patterns and drawings. . . . . . . . . . . . . . . . . . . . . . XXXXX. XX 41. Office furniture and fixtures..... . . . . . . . . . . . . . xxxxx. xx 43. Other fixed assets, if any (describe fully). . . . . . xxxxx. xx - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xxxxx. xx XXXXX. XX Less: 45. Reserves for depreciation...... . . . . . . . . . . . . . . xxxxx. xx Total fixed assets....... . . . . . . . . . . . . . . . .

Deferred Charges:

47. Prepaid expenses, interest, insurance, taxes, etc. xxxxx. Other assets (49). . . . . . . . . . . . . . . . . . . . . . . . . . . XXXXX. Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . .

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(Model Balance Sheet for credit purposes.)

xxxxx.

XX

THE BALANCE SHEET

LIABILITIES.

Notes and Accounts Payable:
Unsecured Notes—
2. Acceptances made for merchandise or raw ma-

terial purchased....: . . . . . . . . . . . . . . . . . . . 4. Notes given for merchandise or raw material purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Notes given to banks for money borrowed..... 8. Notes sold through brokers.... . . . . . . . . . . . . . . Io. Notes given for machinery, additions to plant,

12. Notes due to stockholders, officers, or employees

Unsecured Accounts:
14. Accounts payable for purchases (not yet due).
16. Accounts payable for purchases (past due).....
18. Accounts payable to stockholders, officers, or
employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Secured Liabilities:
20a. Notes receivable discounted or sold with in-
dorsement or guaranty (contra). . . . . . . . . . . .
20b. Customers' accounts discounted or assigned
(contra). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20c. Obligations secured by liens on inventories. ...
200. Obligations secured by securities deposited as
collateral...... . . . . . . . . . . . . . . . . . . . . . . . . . .

22. Accrued liabilities (interest, taxes, wages, etc.)

Other Current Liabilities (describe fully):

Fixed Liabilities:
24. Mortgage on plant (due date). . . . . . . . . . . . . . . .
26. Mortgage on other real estate (due date)......
28. Chattel mortgage on machinery or equipment
(due date). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30. Bonded debt (due date). . . . . . . . . . . . . . . . . . . . .

32. Other fixed liabilities (describe fully):

Total liabilities........ . . . . . . . . . . . . . . . . .

Net Worth:
34. If a corporation—
(a) Preferred stock (less stock in treasury)..
(b) Common stock (less stock in treasury)...

(c) Surplus and undivided profits. . . . . . . . . . Less:

(d) Book value of good will...... xxxxx. xx

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(e) Deficit. . . . . . . . . . . . . . . . . . . . xxxxx. xx

36. If an individual or partnership—
(a)Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(b) Undistributed profits or deficit. . . . . . . . .

Total Liabilities and Net Worth.........

xxxxx.

(Model Balance Sheet for credit purposes.)

... xx

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