CHAPTER XV PARTLY REAL AND PARTLY NOMINAL AC COUNTS IN ADJUSTMENT; RELATED INFOR- FOR STUDY IN CONNECTION WITH THE SOLUTION OF 1. Adjustments; why necessary. The accounting for the investment and for the current transactions may be correctly done, as reflected in the Trial Balance; however, the accounts in their present condition, if summarized, would not reflect the true financial condition. This is the result of certain of the accounts being partly Real accounts and partly Nominal accounts. In addition to this mixed condition, there are values in existence which have not been placed on the books. And bringing in these values will materially change the present status of some of the accounts in the Trial Balance, and cause to be raised other accounts which are not now on the books. 2. Inventories.-The value of the Stock of Goods Unsold will affect the various Purchase accounts. An increase in the Inventory, as at the date of accounting, works a reduction of the values debited to the Purchase accounts. A decrease in Inventory, however, works an increase in the values recorded as purchases. The Purchase accounts, when the necessary adjustments have been made, will reflect the Cost of Sales. 3. Supplies unused.-These values receive similar treatment to that extended to the larger inventories-the stock on hand. The accounts affected are the expenses, as well as the temporary assets (Deferred Charges to Expense). 4. Accruals; income.-The accrual of interest on contracts in favor of the business is an income for this period-the complementary debit belonging to the asset group. 5. Accruals; expenses.-The accruals of interest on contracts payable by this business are expenses. The complementary credits belonging to the liability group. 6. Depreciations.-The values in the fixed asset group are subject to change, as a result of wear and tear, lapse of time, et cetera, and the extent of the diminished value for the period is brought into the accounts. Apply the annual rate and use the proper aliquot part for this accounting. 7. Doubtful accounts receivable. This is the initial step to be taken in order to create a reserve for the possible uncollectible balance of one or more of the customers. Three per cent of the sum of the balances due from customers will be the charge against income, and credit to the Reserve account. July, 19— Supplementary Exercise. Problem 21. 31. The firm of Jennings & Mayhew request an accounting of their business as of the close of the month. The Trial Balance of the General Ledger placed on a Working Sheet form is the foundation upon which the final exhibits which will reflect the financial condition and the result of operations will be constructed. This information, modified, as may be necessary, by the consideration and use of the inventories, accruals, and prepaid items of expense will appear in the Balance Sheet, and the Profit and Loss statement. The following information will be recorded in the form of Journal entries, posted to the Working Sheet, also to the Ledger; and new Trial Balances taken. The Trial Balance, as at the close of the postings of the current transactions for July, modified by the Adjustments, will be extended to show the present status of the accounts. After this has been accomplished, the Working Sheet will be completed. The Exhibits will be prepared and the required work submitted for approval. NOTE.-Provision will be made for the possibility of uncollectible accounts by charging the account, Provision for Doubtful Accounts, for an amount equal to 3 per cent of the balances due from customers. Depreciation: Store Fixtures, one month, 10 per cent per annum. The cost of maintaining the delivery department to be charged one-half to the Purchase accounts (onethird to each account)-the other half to be charged to Selling Expense account. This illustrates what is known as "factor on factor." Closing Entries: The information reflected in the Profit and Loss statement will be the basis of Journal entries. When these entries are posted to the General Ledger, the Nominal accounts (expenses and incomes) will be closed out and the Summary account (Profit and Loss account) will close into the Partners' accounts. Submit for Examination: The General and Subsidiary Closing entries, the Working Sheet, the Balance Sheet, and the Profit and Loss statement. NOTE. During the time required by the student to complete the above requirements, it is suggested that some class hours be devoted to the presentation of "Drafts and Trade Acceptances." A general review of the more difficult aspects of accounting, presented up to this time, will prove of inestimable value to the student. CHAPTER XVI INDIVIDUAL DRAFTS; TRADE ACCEPTANCES FOR STUDY AS PREREQUISITE TO CONSIDERATION OF 1. Drafts.—An Individual Draft, as contemplated in this chapter, is an unconditional order in writing addressed by one person to another, signed by the person giving it (called the drawer), requiring the person to whom it is addressed (called the drawee) to pay on demand or at a fixed or determinable future time a sum certain in money to the order of a designated person (called the payee), or to bearer. A Situation where a draft might apply. Amos Smith of Boston buys some of the material needed to operate his factory from Alfred Brown of Pittsburgh, and sells his finished product, in part, to Cyrus Sprague of Cleveland. Smith owes Brown $1,500 nad Sprague owes Smith $2,500. procedure, more or less regular, would be for Sprague to remit his check to Smith. Smith would deposit the check in his bank and then remit his check to Brown. Instead, however, Smith may draw a draft at sight on Sprague for $1,500 and mail it to Brown. Brown will forward it (through his bank) to Cleveland and have it presented to Sprague. Some days later, Brown will be notified of the outcome, that is, whether Sprague honored the draft by paying it or dishonored it by refusing to pay it. The draft might be drawn at a stated number of days after sight, namely, at thirty or sixty days sight, et cetera. 2. Form of sight draft.—The form of the draft, referred to above, could be as follows: |