Part 36

Preferable claims for taxes, wages, and salaries which must be paid in full out of the assets of the estate, should be deducted from the assets in order to show the net value of the estate available for distribution among ordinary creditors. The details of such claims should be included among the liabilities, but without extending the amounts to the total column.

Claims of secured creditors also are entered on the liabilities side of the statement, but are not carried to the total column. Such claims are deducted from the assets forming the specific security held, the balance only being included among the assets available for distribution and carried to the total assets column.

Partly secured claims are entered among the liabilities, but the amount to which they are secured is deducted, and the balance, which must take the same chances of payment as other unsecured claims, is entered in the liabilities column. The corresponding assets are entered on the assets side but not extended.

A Deficiency Account Which Shows the Causes of Loss ]

These adjustments are necessary to show clearly the net assets that will be available for the ordinary creditors, and the total amount of claims to be satisfied out of these assets.

Every statement of affairs should also have appended to it schedules showing the fullest particulars of the different entries which appear in the statement. The names and addresses of all creditors should be given and the nature of the debt, whether a trading debt or for borrowed money, should be clearly shown. Full particulars of any security held should also be given.

It is much more difficult to ascertain the value of the assets of a bankrupt than the amount of the liabilities. While it is comparatively easy to get at the cost or book value of the assets, if the books have been properly kept, it is usually necessary to write off a considerable portion of this value to arrive at the amount likely to be realized on forced sale. It is usually advisable, therefore, to call in an appraiser, familiar with the line of business involved, to set the values of the assets on the basis of a going business and on forced sale.

By showing the book value of the assets and the values they are expected to realize, the probable deficiency as a result of the liquidation of the estate is readily seen. Book debts should be classified as good, doubtful, and bad. Good debts are extended at face value, doubtful debts at the amount they are expected to realize, while the bad debts are entered on the statement without extending any amounts.

Assets should be listed in the order of their availability, those most readily realized being placed first. At the bottom of the statement, in the form of a note, the dividend available for ordinary creditors, exclusive of expense of realization and liquidation, is shown.

A statement of affairs is shown, Page 27, which will make the explanation clear.

Every statement of affairs should, when possible, be accompanied by a deficiency account. The purpose of the deficiency account is to show, as far as may be, the cause of insolvency. This account is credited with the losses and shrinkage in the estate shown by the statement of affairs, the losses shown by the books, and the withdrawals of the owner or partners. It is debited with the capital at the last known date of solvency, all additions of capital, and all profits shown by the books. The balance is the net amount of the deficiency, and should agree with the amount shown by the statement of affairs. A deficiency account is shown in connection with the illustration of a statement of affairs.

STOCK EXCHANGE BUILDING, CHICAGO, ILL. ]

STOCK BROKERS' ACCOUNTS

=1.= The principal feature of brokerage accounting is that such companies are not supposed to make investments upon their own account, but to act as intermediaries or agents for those who desire either to buy or sell.

Footnote 4:

Copyright, 1909, by American School of Correspondence.

As this is the case, such companies' profits depend entirely upon the commission charged their clients, which is charged whether they buy or sell for a client. There is also a margin of profit on the interest account, as large brokerage firms are enabled to secure money from banks at very favorable rates, sometimes much lower than the regular six per cent charged to customers.

The legitimate broker actually buys and sells, as instructed by his client. If a customer instructs the broker to buy one thousand shares of D. & R. G. preferred at 88½, the customer deposits the margin required by the broker, usually 10 per cent, and the broker at the first opportunity thereafter, buys in open market the one thousand shares of D. & R. G. stock ordered, paying in full for the same. The customer may have a certain time to take up this stock, say thirty or sixty days, but as he is still indebted to the company for ninety per cent of the purchase, he is required to pay six per cent interest upon the deferred payments until such time as the stock is finally taken up and paid for.

LARGE CAPITAL REQUIRED

=2.= It will be seen that in a multitude of transactions of this character, a very large amount of money is required by the broker, to carry on his business successfully. As very few of them have the amount of capital necessary, they resort to bank loans. Banks are very willing to loan money with listed stocks as collateral security, and frequently do so at favorable rates for the broker. This rate is determined by the condition of the money market, but is invariably less than the rate of interest charged to the client.

GRAIN PURCHASES

=3.= Purchases of grain at a stipulated price differ from stock purchases, inasmuch as the full amount of the purchase does not have to be paid until the delivery of the goods, although there are frequently charges, such as storage and insurance, which must be made upon long time purchases. These charges do not accrue, however, until after delivery. If a customer buys fifty thousand bushels of wheat in April for September delivery, the purchase is made by the brokers at the earliest date possible, in order to avoid any fluctuation of the market. When the broker makes the purchase he pays over the amount necessary to secure the same. If the deal is carried through to maturity, the grain is delivered to the broker who has made the purchase for his client, and is in turn delivered to the client upon the payment of the balance due, including all charges upon the same.

It is frequently the case, however, that before the actual delivery takes place, the client has ordered the broker to sell a sufficient amount to cover the deal. This may be either at an advance or a decline from the price purchased, but in either case the broker receives his commissions for both transactions—buying and selling.

BULLS AND BEARS

=4.= Investors who are always figuring upon an advance in prices are termed bulls, and those who are confident of lower prices are termed bears. If a seller sells for future delivery what he does not own, he is termed short and becomes temporarily a buyer, in order that he may have a sufficient amount to fill his orders. If a buyer holds stock or grain for a rise, or contracts for future delivery, he is termed long and becomes temporarily a seller, seeking to bring his holdings down to the normal demand.

EXACT BOOKKEEPING NECESSARY

=5.= It will be seen from the nature of the business that the bookkeeping department must be very exact, careful in its dealings, and as prompt as a bank in its action. Every precaution must be taken to safeguard the broker and protect the customer. The accounts must show, with each transaction, the brokerage or commission charges and, as in active times the transactions are very numerous, they must be quickly and accurately recorded in the books of the company.

BROKER'S COMMISSION