Again, a statement of the condition of the business as it exists today may be taken from the accounting record and made into a balance sheet.
In practice these two methods must be combined to produce an accurate and satisfactory balance sheet. All records which come as a matter of the regular business transactions will be recorded currently and will be adjusted at the end of the statement period according to their relations with the outside factors which are the result of an actual inventory. If the proprietor wishes to be certain of the valuation which he is placing on his assets he would verify the book records by an actual inventory. This actual inven tory is, however, seldom required and indeed can sel dom be made conveniently.
8. Limitations upon the balance bal ance sheet is at best a scientific estimate of the financial condition of a business concern. The basis of valuation of those assets which represent returned capital should be costs. However, public accountants and business men value such assets as a rule at cost or market whichever is lower. This rule is based on conserv atism, since it is safer to understate rather than to overstate the financial condition of a business concern.
The term "market" referred to means the market in which the merchant or manufacturer would buy his goods or his materials and supplies; and not that in which he would sell.
9. balance many accounts are carried on the books, it is seldom pos sible to give each separate asset or liability account a position in the balance sheet. If this were done the statement would become so large and so crowded with relatively unimportant details that the main data which that statement should furnish would be ob scured. In fact it is better to present the balance sheet in a sufficiently condensed form so that tend encies and relations, as between groups of assets and liabilities, are indicated. For the details of any of these groups supplementary lists may be attached, giving whatever information may be desired.
10. Balance sheet reader noted that in the working sheet on page 170, a column was provided for the accounts which represented assets, liabilities and proprietorship. The accounts as pre sented there mean little because they are a mere list ing of things owned and things owed. Each of the accounts must be analyzed and classified if we are to determine the financial condition of the business.
The balance sheet on page 233 is presented in such form as to point out the ability of the business to con tinue its present line of work. The current assets are listed first, then the other working assets, and finally the fixed assets, in order to bring out the fact that the business is well supplied with current funds with which to meet its liabilities, and that it has a supply of working assets with which to continue the manufacturing operations. The supply of working
assets may seem small; but the current assets are high enough so that more working assets may be pur chased as they are needed.
Taking up the details of preparation the first item on the list represents current assets consisting of cash, notes receivable, accounts receivable, and inventory of finished goods, amounting to $203,800. Current lia bilities which must be met out of these current assets, amount to only $190,675. As a matter of fact these current assets must be decreased by the amount which will be lost from bad debts. This would leave $193, 600 as opposed to $190,675 in liabilities if this esti mate is correct.
Of course, the liabilities need not all be met in the immediate future, consequently part of the current as sets may be deflected to the purchase of further work ing assets. Notes receivable discounted are deducted from the notes receivable, and are given a place in the balance sheet to indicate the contingent liability which may arise in connection with them. It is well to ap pend a foot note to the balance sheet calling atten tion to all such contingent liabilities.
In order that all statements and records may be completed, proprietorship transactions are shown in detail. The profits for the year which were obtained from the economic summary have been carried to the balance sheet in total. The withdrawals of such profits by the proprietor have been listed as a deduc tion and the net amount of profit recorded as an addi tion to proprietor's investment.
11. Supplementary the trial bal ance is drawn off there will frequently be found sev eral entries which should have been made or errors which must be corrected. It is customary to draft these in memorandum form and incorporate the data in the statements. After the statements are balanced and we are certain that no more such entries will be necessary, we may put the entries in our journal and post them to the ledger. At the same time the trial balance should be changed to cover these adjustments.
12. Proving Chapter X the reader noted how the accuracy of the working sheet was proved by extending the total of the economic summary column and totaling the latter. Statements, are proved by carrying the net profit from the economic summary to the balance sheet. If the asset side of the latter equals the liability and capital side, the work has been correct.