Part 28

Second: Make up balance sheet using current inventories in listing assets.

If the current profit and loss agrees with the difference between assets and liabilities the ledger may be assumed to be in balance. This is, in effect, a sectional trial balance, since the accounts in the trial balance are all represented in the two statements. The reliability of this proof is not affected by the fact that the inventories are arbitrary—and perhaps inaccurate—since the same amounts are used in both the balance sheet and profit and loss statement.

BOOK INVENTORIES

=18.= To make the foregoing plan still more effective, perpetual inventories should be carried in the ledger. A perpetual or book inventory is an account showing the value of merchandise received, sold, and on hand. If an accurate account is kept of merchandise received and sold, the perpetual inventory will show the amount that should be in stock. To prove the accuracy of the account, it is necessary to take an actual inventory of the merchandise in stock, just as it is necessary to count the cash before we can know that the amount on hand agrees with the cash account.

A detailed perpetual inventory should be kept on cards or in a loose leaf book. A card or sheet is used for each article or class of material carried in stock. The sheets or cards should be arranged alphabetically according to the names of the articles. To make the system effective one person should have charge of these records and no goods should be taken from stock without an order or other proper record.

At the end of the month the receipts will be shown by the purchase accounts. The deliveries will be tabulated from the cards, and the necessary adjustments made on the ledger account. Adjustments should be made by journal entry debiting inventory accounts and crediting trading account for increase in inventory, and vice versâ for decrease in inventory.

Fig. 18 a. is a typical form of stock ledger sheet for a loose leaf book. The form should in all cases be made to suit the requirements of the business in which it is to be used.

Fig. 18 b. is a card form of stock ledger which gives more detailed information about the article in stock. On the top line is recorded the name of the article, size or kind, where kept, and date of verification of the record. The second line gives the unit and maximum and minimum limits. The unit represents the unit in which the article is bought—as pounds, tons, dozen, feet, yards, etc. It is customary to establish a minimum limit, below which the stock is not allowed to go before re-ordering, and a maximum limit of a quantity sufficient for the needs of the business. The record of receipts and disbursements includes a detailed record of cost, including freight and cartage, and columns for costs per unit. This makes it possible to calculate the value of the stock in hand without referring elsewhere for prices.

In some lines of business it is possible to ascertain the quantities sold, at the end of each month, from the sales records. This applies where an article is sold in but one grade or size, and necessitates keeping sales records which show sales of each article. An example is the coal business. For such a business a card like the one shown in Fig. 18 c. can be used to good advantage. This provides for a monthly record of purchases and sales.

Fig. 18 a. Loose Leaf Stock Ledger ]

In this illustration the manner of indexing is shown. The cards are first arranged alphabetically under the names of the articles. If there is more than one size, the cards bearing the records of a certain article are filed in the order of their sizes. Indexed in this manner any card that may be desired is quickly found.

Fig. 18 b. Stock Ledger Card ]

Fig. 18 c. Stock Ledger Card and Indexes ]

DEMONSTRATION OF PROOF WITHOUT A TRIAL BALANCE

=19.= Taking the accounts in the following trial balance, a model ledger is illustrated which demonstrates the manner of proving the ledger without the aid of the conventional trial balance. It is assumed, of course, that a book inventory or stock ledger is kept, and in this demonstration the figures showing the change in inventory are used. Only the ledger is illustrated, it being expected that the student will understand the necessary journal adjusting entries.

TRIAL BALANCE

Cash in Office $575.00 Bank 8,750.00 Accounts Receivable 8,871.00 Bills Receivable 5,000.00 Inventory (Jan. 1) 12,500.00 Furniture and Fixtures 2,250.00 Bills Payable $4,000.00 Accounts Payable 3,325.00 Capital Stock $25,000.00 Purchases $6,750.00 Sales 15,000.00 Advertising 960.00 Salesmen's Salaries 450.00 Traveling Expense 190.00 Office Expense 46.50 Office Salaries 225.00 General Expense 34.20 Rent 175.00 Taxes and Insurance 21.30 Discounts Allowed 47.90 Interest Paid 33.10 Interest and Discount Earned 54.00 Administrative Salaries 500.00

On Feb. 1st the inventory shows a decrease of $3,500.00. A reserve of 3% on accounts receivable is to be created to provide for uncollectible accounts. To make these adjustments the following journal entries will be required:

Trading a/c 3,500.00 To Inventory 3,500.00 Decrease in Inventory

A study of this entry will show that the result is the same if we make up the trading account by using purchases and adding or subtracting the decrease or increase in inventory, or if the preceding inventory is added and present inventory is deducted. The result in either case is the turnover and the above entry makes the necessary adjustment in the inventory account without closing the account through the trading account.

The entry for the reserve for uncollectible accounts is

Profit and Loss 266.13 To Reserves 266.13 Reserve of 3% to provide for uncollectible accounts.

At the end of the next month this account will be adjusted by charging or crediting the amount necessary to maintain the total at the desired percentage of accounts receivable.

UNDERWOOD TYPEWRITERS USED IN MELBOURNE UNIVERSITY COMMERCIAL EXAMINATIONS ]

Ledger with Accounts Classified ]

Ledger with Accounts Classified ]

Ledger with Accounts Classified ]

Ledger with Accounts Classified ]