Part 27

TRIAL BALANCE Dr. Cr. Capital Stock $30,000.00 Sales 45,411.40 Accounts Receivable $7,190.00 Accounts Payable 2,720.00 General Expense 727.00 Salesmen's Salaries 3,000.00 Salaries, General 3,600.00 Interest and Discount 126.70 Returns and Allowances 942.20 Inventory 9,687.00 Purchases 26,250.00 In-Freight $396.40 Bank 6,470.00 Traveling Expense 1,759.00 Taxes and Insurance 236.50 Real Estate 25,000.00 Fixtures 3,000.00 Surplus 10,000.00 --------- --------- 88,258.10 88,258.10 --------- ---------

Fig. 15-a. Working Balance Sheet ]

WORKING BALANCE SHEET

=15.= A form much used by accountants combines the trial balance with the balance sheet, trading and profit and loss statements. The compilation of the information required for this form is greatly facilitated by a proper classification of accounts in the ledger. The form is known as a working balance sheet.

A working balance sheet is shown in Fig. 15 a. The figures used are taken from the last trial balance shown, and furnish a graphic illustration of the difference between proper and improper classification of accounts. It will be noticed that the first two columns constitute the trial balance. Following this are columns which classify the accounts under the headings of Trading, Profit and Loss, and Balance Sheet. The balance of each account is extended to its proper group.

At the bottom of the form, trading and net profits are extended as a memorandum only. Since no inventory has been taken these figures are not exact, but represent approximate results on the supposition that the inventory would be practically the same as when the last inventory was taken. Of course, if there was a noticeable change in the quantity of merchandise in stock, an estimate would be made and taken into consideration in making this statement of probable profits.

EXERCISE

From the following trial balance, prepare a working balance sheet showing actual gross and net profits.

TRIAL BALANCE Bank $8,460.00 Capital Stock $25,000.00 Sales 11,201.00 Purchases 10,000.00 Returns and Allowances 400.00 Interest and Discount earned 260.00 General Expense 425.00 Salaries 360.00 Rent 300.00 Taxes and Insurance 37.60 Selling Expense 421.00 Inventory (Jan. 1st) 8,864.00 Fixtures 2,500.00 Accounts Receivable 5,680.00 Accounts Payable 1,274.00 Cash in Office 287.40 --------- --------- 37,735.00 37,735.00 Inventory (Feb 1) 9,650.00

COMPARATIVE STATEMENTS

=16.= The trial balances shown in the preceding pages illustrate some of the advantages of properly classified accounts. The information gained can be made of still greater value by the construction of comparative statements; for, as has been stated, the chief value of many of the figures shown lies in the opportunity for comparisons. Statements which permit of comparison of items of a like nature from month to month furnish a valuable survey of the progress of the business.

The following is a trial balance taken from the books of a manufacturing business, and will be used as a basis for the construction of comparative statements.

TRIAL BALANCE

Dr. Cr. Cash in Office $162.50 Bank 8,500.00 Accounts Receivable 7,500.00 Bills Receivable 4,500.00 Inventory, Materials (Jan. 1) 9,500.00 Inventory, Manufactured Goods (Jan. 1) 6,000.00 Real Estate 20,000.00 Machinery and Tools 17,500.00 Furniture and Fixtures 3,500.00 Bills Payable $7,000.00 Accounts Payable 5,000.00 Capital Stock 50,000.00 Surplus 10,000.00 Undivided Profits 900.00 Advertising 1,200.00 Salesmen's Salaries 1,000.00 Salesmen's Expenses 720.00 General Expense 430.00 Interest and Discount 97.50 Salaries Administrative 900.00 Factory Expense 850.00 Factory Labor 1,750.00 Repairs to Machinery 150.00 Depreciation 175.00 Taxes and Insurance 25.00 Material Purchases 4,600.00 In-Freight and Cartage 126.00 Sales 16,491.00 Returns and Allowances 400.00 --------- --------- 89,488.50 89,488.50 --------- ---------

In Fig. 16 a. is shown a working balance sheet in which the accounts as found in the trial balance are segregated in the four groups, Manufacturing, Trading, Profit and Loss, and Balance Sheet. First, the trial balance is entered in the two columns at the left. Next, the manufacturing account is made up by extending the inventory of material at end of preceding period, the manufacturing expense accounts, material purchases and freight on same. This gives the total charges to manufacturing account, but not the month's expenditures, for the present inventory of material must be considered. An inventory shows the value of material in stock to be $4,550.00. Deducting this leaves $12,626.00, the total operating cost for the month. To find the cost of goods completed during the month an inventory is taken of work in process, the amount is deducted from the total operating cost and the result, $9,126.00, represents cost of goods manufactured.

The trading account is now made up, this $9,126.00 taking the place of purchases, and the gross profit is carried to profit and loss account.

The manufacturing, trading, and profit and loss accounts are now ready for analysis, which is made on a percentage basis. In the analysis of the manufacturing account, the total operating cost is used as a basis and the different items of manufacturing cost are figured on this basis. We find that the expense items are 23.3% and the material 76.7% of the total which furnishes a tangible basis for a comparison of the same items in other months. Having the percentage of each item, we can note the fluctuations from month to month, and know where to retrench if any item appears to be increasing too rapidly.

The basis of the analysis of the trading and profit and loss accounts is the turnover. Figuring on this basis, we find the total expenses, exclusive of manufacturing costs, to be 41% of the turnover, and the net profit, 20%. The gross profit is 60% of the turnover. Ordinarily the total expense and net profit would equal the gross profit, but in this case there is a capital profit of $97.50 from interest earned.

Sometimes these comparative percentages are figured on the gross sales, but the turnover is considered the proper basis, for it is less subject to marked fluctuations. The sales in one month may show abnormal profits, while in the next these profits may return to normal. If based on sales, the cost percentages would fluctuate accordingly, when in reality they may have remained stationary.

PROOF WITHOUT A TRIAL BALANCE

=17.= A comparison of the accounts in the last trial balance with the working balance sheet shows them to be arranged in the order in which they would appear in the balance sheet and profit and loss statements.

WORKING BALANCE SHEET ]

Fig. 16a. Working Balance Sheet for a Manufacturing Business ]

It should be remembered that manufacturing and trading accounts are subdivisions of the profit and loss account, and that the profit and loss account is a statement of income and disbursements including differences in inventories.

If it is desired to show the actual condition of the business at the end of each month, the inventory must be added. There may be objections to actually closing the books each month, but the complete statement can be made by adding the current inventories as shown in the working balance sheet illustrated. The amounts of these inventories and the gross and net current profits are, in such cases, memoranda only. The inventories may be arbitrary estimates, and while the results shown may not be exact they will be found of value for purposes of comparison; and care in estimating inventories will greatly increase their value.

Reference to our working balance sheet shows that the profit and loss statements—with current inventories added—agrees with the balance sheet in one respect. The current profit exactly agrees with the difference between assets and liabilities as shown by the balance sheet.

To prove the ledger without the usual trial balance these rules should be followed:

First: Make up trading and profit and loss statements, taking balances direct from the ledger accounts, deducting current inventories.