Accounts: Their Construction and Interpretation for Business Men and Students of Affairs

By William Morse Cole | Go to book overview

CHAPTER NINE
THE GENERAL CHARACTERISTICS AND THE INTERPRETATION OF BALANCE SHEETS

PERHAPS the best way to apply the truths discussed in the last two chapters is to take an imaginary balance sheet and see what criticism can be applied to it. As a preliminary to this, however, it is desirable to examine in detail some general facts about the most common items appearing on balance sheets. We will use, for a basis, a comparison of imaginary balance sheets for three years. (See page 86.)

It was suggested in Chapter VII that the name by which an account is called is of far less importance than its disposition in closing the books for the year, - that is, determining whether its amount shall go into the income sheet or into the balance sheet, shall be charged to capital or to revenue. This suggests the necessity of getting behind the returns in any corporation statement. The first items on a manufacturing balance sheet are usually Real Estate and Plant. Though ordinarily they should be separated, they may here be considered together. The obvious questions in connection with them are, first, what is the basis of the valuation, and, secondly, what is the allowance for depreciation. Of the valuation usually no judgment can be formed unless one can examine the property itself. On the second question, however, means can often be found for forming some judgment. The figures of the balance sheets given below indicate that in the year 1907 $20,000 was allowed for depreciation and was set aside as a special fund for repairs or replacement; for, on comparing the sheets for the two years, we see that the Real Estate and Plant items have been written off to the amount of $20,000, and that a depreciation fund is among the assets. This depreciation fund must be a real thing, for it could not appear among the assets under the name of a fund under any other conditions - unless, indeed, the books lie. All the resource accounts except a possible profit and loss deficit, which is a resource only as it explains or satisfies the stockholders as to what has become of their property,

-85-

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