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We have now to consider the

ARRANGEMENT OF THE TRADING ACCOUNT

and the utility of the information to be derived therefrom.

The account is divided into three Sections.

Section I. comprises

On the Cr. side-The Sales, and the Stock at the close of the

period.

On the Dr. side-The commencing Stock, the consumption of material and the productive wages.

The items of this section necessarily increase or decrease in proportion to the volume of goods produced.

Section II. comprises

On the Cr. side-The balance brought down from Section I.

On the Dr. side-The various standing expenses of the business;

the manufacturing expenses being kept separate from the non-manufacturing expenses (ie., the warehouse and office expenses and general charges).

The items of this Section do not necessarily vary, whether the volume of production is more or less.

Section III. shews the manner of distributing the net proceeds of the business.

The items comprised in Section I. can be set out in definite quantities in the calculation of the cost of each individual lot of goods manufactured, while those comprised in Section II. can only be stated in the form of a general average based on the whole production (see Cost books) (u).

The balance of Section I. represents the surplus realised from goods sold, over and above the cost of material and wages employed in their manufacture. If the cost prices, rates of wages and sale prices are relatively the same, this balance should year by year represent a similar percentage of the Sales, whether they be more or less. (In the example the percentage is 27). Therefore, any change in this percentage indicates an increase or decrease in the rate of profit obtained on the goods sold, as a result of altered prices.

Any variation in the Standing Expenditure under Section II., unless accounted for by a large increase or decrease of production, or other exceptional cause, indicates economy or extravagance in the working

expenses.

(u) The correspondence between the aggregates of the Trading Account and the individual cost calculations is more clearly shewn in the Departmental accounts hereafter described.

It is obvious that a certain amount of trade must be done before working expenses are earned. After that minimum is passed, any reasonable addition to the sales, at the same prices, will increase the surplus of Section I. without appreciably adding to the expenses under Section II.

The Trading Account arranged in this form, therefore, not only shews the details and the result of past trading, but may be utilised in prospecting the effect upon future profits of any of the following modifications in the business arrangements, viz::

(i.) An increase or decrease of the turnover; affecting chiefly Section I.

(ii.) An increase or decrease of the sale prices; affecting Section I. (iii.) An extension or curtailment of the means of selling goods; affecting both Sections I. and II.

The expense, or the saving, of a traveller's or agent's salary, commission, &c., is set off against the gain or loss resulting from the alteration in the turnover.

(iv.) An extension or curtailment of the means of producing goods, or of the branches or articles of manufacture.

Section I. would be affected by the altered turnover.

Section II. would be affected by any alteration in the means of selling, consequent upon the altered turnover, also by alterations in supervision, as well as in maintaining and turning machinery, &c.

The following items of the Trading Account require separate consideration, viz. :

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DISCOUNT on SALES.-This item is stated under the head of General Charges. It varies according to the volume of trade, but it is not included under Section I. because it is largely affected by the terms of credit granted to customers and their mode of payment. In computing the sale price of goods the full discount (usually 2 per cent.) should be allowed for as a distinct deduction.

DISCOUNT on PURCHASES.—This item also varies according to the volume of trade, but is largely affected by the financial resources of the firm. In calculating the cost of goods manufactured it is usual to charge the full invoice price of material, plus the expenses of transit, brokerage, &c., without regard to discount which may or may not be obtained. This method is fully justified by the fact that the material is often bought and paid for many months before the goods manufactured from it are delivered.

BANK CHARGES are affected by many of the same considerations as Discounts, and are likewise stated under the head of General Charges. Both Discounts and Bank Charges receive further attention subsequently (see Finance).

BAD DEBTS.-This item of course fluctuates, except where a Provision Fund is created, as referred to on page 215, note (s).

DEPARTMENTAL ACCOUNTS.

The treatment of this important subject falls naturally into two division:

(i.) Selling Departments.

(ii.) Manufacturing Departments.

Selling Departments.

On pages 192-3 is given a specimen Departmental Trading Account (note v, page 222), where the firm is supposed to manufacture and sell both yarn and cloth. The three columns respectively show the details and the result of the trading-(i.) of the Yarn Department, (ii.) of the Cloth Department, (iii.) of the whole concern.

To compile this account it is obvious that the various items of income and expenditure, as well as the Stock in each department, must be kept distinct and separate. To do this it is often desirable in large concerns, to keep entirely distinct sets of books, but all that is actually necessary is to separate the details from which the nominal accounts are made up. For instance, each department should have its own Day Books for Purchases, Sales, and Returns, or at any rate these books must be provided with distinct columns for each department. If only one Cash Book is employed, the discounts must be analysed so that the proper amount may be charged to each department, and the Cash Book may be provided with extra columns for this purpose. The discounts may, however, often be divided with sufficient accuracy by charging each department with the ordinary rates allowed on its total purchases and sales. A record must be kept of all goods supplied by one selling department to another, and the Trading Account of each must be charged with the amount, whether for or against. Thus, in the example, the Yarn Department is credited with the amount of yarn supplied to the Cloth Department, viz., £15,116 175. 1od., and the Cloth Department is debited with the like amount.

Manufacturing Departments.

Before describing the preparation of accounts disclosing the profit or loss on the different processes of manufacture, it may be well to clear the way by pointing out certain unfeasible ideas that occur to many book-keepers whose experience is only theoretic, and which usually end in the abandonment of their whole project as hopelessly complicated.

In the first place, accounts of Manufacturing Departments should be entirely supplemental to the Trading Account, and they should neither interfere with, nor form part of the ordinary book-keeping. Much unnecessary complication is introduced into a comparatively simple operation when the details of the Departmental Accounts are mixed up with the books of the counting-house. The intention of including everything in one comprehensive system of double-entry is perfectly right, but the method is altogether injudicious.

Secondly, it is impracticable, as well as useless, to charge each successive department with the value of the goods supplied to it from other departments.

The only plan which is thoroughly workable and satisfactory is briefly as follows:

The foreman of each department keeps a record of work done in the processes under his supervision, and the profit or loss is ascertained by comparing in each case the value of such work done, when calculated at trade prices (note w, page 222), with the proportion of wages and expenses chargeable against the respective department.

Therefore, in addition to the Trading Account, Sections I. and II. (see pages 186-7), all that is required in order to ascertain the profit or loss of the Manufacturing Departments is :

(i.) A record of work done in each department.

(ii.) A departmental analysis of the expenditure comprised in Sections I. and II. of the Trading Account.

The method of ascertaining the amount of work done in each department is described on pages 256-7.

The analysis of expenditure is very easily obtained and on page 196 a specimen Summary of the analysis is given. The headings of the several columns of the Summary indicate the divisions under which the whole expenditure of the concern is to be apportioned.

The column headed GOODS receives the value of the Stock of Goods finished and in process of manufacture at the commencement of the year, also the cost of Raw Material consumed, the cost of Outwork (note x page 222), Packing Materials and Carriage (note y, page 222); in other words, the commencing Stock and the total cost of Material consumed in producing the manufactured article.

The five succeeding columns receive their respective apportionments of expenditure chargeable against the several processes of manufacture carried on in the mill (note z, page 222).

The column headed PATTERN MAKING provides for a distinct and special item of expenditure which, in certain branches of trade, such as high-class worsted manufacturing, is often very large (note a, page 223).

The standing expenses of the warehouse and office and the general charges are not connected with the departments of manufacture, and it is unnecessary therefore to analyse them.

Having before us (i.) the Trading Account, Sections I. and II., (ii.) the value of Work Done in the several departments, (iii.) the Departmental Analysis of the expenditure, we can prepare therefrom, without reference to any other accounts whatever, the Manufacturing Account, Sections I. and II. (see pages 194-5).

The Manufacturing Account, Section I., shewsOn the Cr. side-The year's Sales, and the remaining Stock. On the Dr. side-(i.) The commencing Stock, and the total cost of Material consumed during the year, obtained from column 2 of the analysis, page 196.

(ii.) The expenses of Pattern Making, obtained from column 8 of the analysis, page 196.

(iii.) The charge for Processes of Manufacture at trade prices, obtained from the record of work

done.

The difference between the Dr. and Cr. sides is transferred to the Cr. of Section II., as the gross selling profit, and corresponds in the aggregate with the margin allowed in calculating the prices of goods, between the cost of production and the sale price. The method of calculating piece goods is explained on page 254 (see Piece Cost Book).

The Manufacturing Account, Section I., which is in effect an aggregation of the individual cost calculations, proves conclusively whether those calculations, as a whole, have been realised (note b, page 223).

Any insufficiency in the margin or balance of this account, if not the result of incorrect calculations, can only arise from one of two causes, either that the manufactured goods have been sold too cheaply, or that the raw material from which they have been made has been purchased too dearly (note c, page 223). The insufficiency should, therefore, have been anticipated while making the individual calculations.

It should be clearly understood that this insufficiency cannot be attributed to unprofitable working of the processes of manufacture, as each process is charged at the standard trade price and not at its actual cost.

The Manufacturing Account, Section II., shews—

On the Cr. side-(i.) The gross selling profit, transferred from Section I. (ii.) The profit on the several processes or departments of manufacture (i.e., the Manufacturing or Machinery profit).

(ii1.) The Discount on Purchases, which is so much earned by the counting-house through its financial arrangements.

On the Dr. side-The Warehouse and Office standing expenses, and the General Charges.

The difference between the Dr. and Cr. sides represents the net earnings of the entire concern, and corresponds with the balance of Section II. of the Trading Account, pages 186-7.

The profit on the Processes of Manufacture is ascertained as follows:-The value of Work done under each process, which has been charged to the Dr. of Section I., is entered in the Cr. column. The amount of the Wages and Expenses of each process, obtained from the

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