A profit-and-loss account for the firm for the year ending December 31, 1916, shows in the first section of the debit side the cost of the material used dur ing the year's operation, e.g., the raw material, in ventory and the purchases. From this is deducted the raw material inventory as well as the trade dis count allowed on purchases. Other charges follow.
The inventory of raw material on hand at the end of the period is shown as a deduction from the pur chases, tho it could be entered on the credit side of the same section. The result would be the same, but if the percentage of the cost against proceeds is to be obtained, or a comparison of percentages of differ ent periods is to be found, the deduction of these in ventories is preferable to entering them on the credit side.
Goods in process of manufacture are entered on the credit side, because correct results would not be obtained if the expenditure on these goods were charged to the current period, when they are not utilized nor even completed during such period. The balance is carried down as a first charge against the trading section of the profit-and-loss account.
The second section, known as the trading section, contains on the debit side; first, the balance brought down from the manufacturing section, followed by the inventory of finished goods on hand at the be ginning of the period, as well as by all the other items pertaining to the trade.
The credit side shows gross sales from which proper deductions are made for the allowances, leav ing net sales of $548,500. There is shown also the amount of finished goods on hand at the end of the period, giving a gross profit of $50,128 on trading.
This balance is carried forward to the credit side of the third section of the profit-and-loss account. Against this is charged all general items of expendi ture, such as salaries (including the unpaid salaries due to B and C), general insurance, etc., showing the ordinary business profit to be $25,628. This is carried to the credit side of the final section of the profit-and-loss account, and by adding the cash dis count gained, a total of $28,428 is made. Against this amount is charged the interest on the mortgage and general interest, thus leaving a net profit, exclu sive of interest on investment and reserve for bad debts, amounting to $26,478.
The reason for dividing the profit-and-loss account into various sections is to present to the best ad vantage the result of each section.
4. Preparing a appropriation ac profit-and-loss account having been completed the profit-and-loss appropriation account is prepared. This account shows the net profit to be
distributed among the partners, after provision has been made for reserve for bad debts. The credit side shows the net profits from the profit-and-loss account, amounting to $26,478. It shows also interest charged to B, C and D on account of their deficient investment as well as withdrawals, making a total of $27,000. The debit side shows the five per cent re serve for bad debts on notes and accounts receivable, amounting to $4,800; also the interest accrued on A's excess investment, after deducting withdrawals, amounting to $120, leaving a balance of $22,080 for allocation among partners. This net profit is al located according to the provision for dividing profits and losses, namely: to A, 50 per cent, or $11,040; to B, 25 per cent, or $5,520; to C, 15 per cent, or $3,312, and to D 10 per cent, or $2,208.
5. 'Verifying the profit-and-loss account and ex amining financial conditions.—Next the results shown by the profit-and-loss account must be verified and the financial condition of the concern disclosed as well. The balance sheet on page 99 shows this con dition. It will be noticed that the assets are divided into current, fixed and deferred. By deferred as sets is meant outlays made under one period for the benefit of a future period, The item here is the ,unexpired insurance premium amounting to $300. The total assets are $325,378. The total liabilities (divided into current and fixed) amount to $197,000.
The last division of the balance sheet shows the 'proprietorship and reserves. The reserves deducted for the current period are taken off from each asset, while the general reserves created in previous periods are entered on the liability side. The capital left in the business, after adding the profits made during the period, as well as the accrued salaries of B and C, and deducting the excess withdrawals of the other part ners, amounts to $114,978. The problem now re quired is to show the partners' individual capital ac counts, and these are shown on pages 100-101 respec tively. B, C and D's capital accounts are self-explan atory. They show the credit balances to each partner at the beginning of the period, January 1, 1916, to which is added the share of profit made during the pe riod, including in B's and C's accounts the unpaid sal ary, and against which is charged interest. The inter est is debited, if there is a deficiency, or credited if there is an excess of capital. At the end appears the balance of capital in each partner's account.