1. C. D. Zimmerman started business with the following: Cash $20,000; stock of goods $15,000; store fixtures $2,000; office equipment $1,500; auto truck, for delivery purposes, $850. The rent for August was paid in advance $300.

2. Paid cash for insurance, one year, on store fixtures $120; on office equipment $96; and for liability insurance on truck $60.

3. Bought merchandise from C. W. Brown & Company, on account $8,500; also from J. M. Spiker & Son, on account $9,500.

5. Sold merchandise to L. D. Smith, on account $3,600. 6. Sold merchandise to Richard Gregg, on account $5,750.

8. Paid cash for the following: Typewriter $120; adding machine $575; cash register $350.

9. Sold merchandise to L. D. Smith for cash $2,000. 10. Bought merchandise from R. L. Long for $5,500, giving a 60-day note in payment.

11. Paid cash for office supplies $100.

12.

Received cash from L. D. Smith in settlement of account $3,600.

13. Paid C. W. Brown & Company in settlement of account $8,500.

15. Bought merchandise from Thomas Quinn for cash $7,800.

16. Sold merchandise to L. D. Smith for $6,700, receiving a 30-day note in payment.

17. Paid an advertising bill $250.

18. Sold merchandise for cash $4,600.

20. Paid cash for general expenses $175.

22. Paid J. M. Spiker & Son, on account $9,500.

30. Paid salaries of salesmen for the month $800; bookkeepers and stenographers $400. The proprietor cashed a check $375, for his personal use.

Requirements:

Equation of Business, Four Divisions, with Classication:

(a) Transfer cost of Mdse. sold to "Current Changes in Capital" section.

(b) Transfer, to the Current Changes in Capital section, the expired insurance, the used advertising, and the used supplies.

(c) Prepare Trial Balance.

(d) Prepare a Balance Sheet.

(e) Prepare a Profit and Loss Statement.

CHAPTER VIII

CONSERVATION OF CAPITAL; DEPRECIATION EXPENSE; RESERVES; SINKING FUND

FOR STUDY AS PREREQUISITE TO CONSIDERATION OF
DEMONSTRATION NO. 8

1. The depreciation of assets.-Reference to this subject was made in the preceding chapter in connection with "the valuation of assets." With few exceptions, fixed or permanent assets—such as buildings, machinery, store fixtures, office fixtures and equipment, delivery equipment, and other assets acquired for use by the business are constantly becoming of less value-depreciating in value, as a result of a number of causes, among which may be mentioned the following: wear and tear from use, exposure to the elements, obsolescence, the lapse of time, functional decay.

The fact that these assets were acquired for use, in operating the business, should not be lost sight of; and, that being true, the depreciation of value, in respect to each asset, is an expense or cost of operation. Since business is departmentalized for various purposes, one being the better classification of expenses, the location and use to which the asset, subject to depreciation, is put must be recognized before a proper record of the extent of depreciation for any period of time can be made. If the methods and policies of a business are determined and put into effect in conjunction with correct accounting principles accurately applied, the depreciation of assets should prove to be no loss; but rather an expense recoverable to the business, later, when the production of the concern, whatever it may be, is distributed to the customers or consumers. Two things stand out in plain view, then, (1) that assets are subject to depreciation; (2) that the depreciation is an expense. Therefore, the expense should be determined and distributed over the period representing the life of the asset.

2. Depreciation, accounting for.-Depreciation being universally recognized as one of the expenses of operating a business, attention is directed to each asset (subject to depreciation) at the time of its purchase, in respect to its probable life (functional); its scrap or break-up value at the time of discontinuing its use; and the selection of the method to be employed in prorating the diminishing value over the various accounting periods. This greatly facilitates the initial steps to be taken leading up to the record of depreciated value.

As stated heretofore, depreciation is undoubtedly an expense, and cannot be considered, under most circumstances, as a loss. In operating a business, supplies of various kinds are consumed and the observer has no difficulty watching the quantity diminish. Consumed supplies are an expense to the business. In operating a business the fixed assets are consumed. It requires a much longer time than is the case with the supplies, but the fact of diminishing value is indisputable. Further, the decrease of value of the fixed assets is so gradual as not to be visible at the time, as is the case with some temporary assets.

Upon the basis of cost, the selling price should be established, the latter being the cost plus the profit. If the cost is reliable it must contain the depreciation factor. If everything is as it should be, the conversion of the salable assets will in time return to the business the expense of depreciation as surely as it returns the original purchase price of the goods, cost of raw material, labor and expense incurred in producing goods, et cetera. The accounting for depreciation requires the record of a debit to some appropriate expense account, such as depreciation of buildings, depreciation of store fixtures, depreciation of auto trucks, et cetera, for the amount of decrease for the period under review. The complementary credit for a like amount will be a reserve; and reserves will be discussed in the following paragraph.

3. Valuation reserves. At the time of recording the debit for depreciation expense, the Asset account which is responsible for the charge may be credited for the decrease. The Asset account will then reflect the newly established book value. This would in effect be a "write-down." And this is not favored, generally, by the business public nor by the accounting profession. The practice prevails of setting up a