4. Adjustments.—As the reader observed in Chap ter V, the accounting records at any particular mo ment do not give a complete record of the actual con dition of the business. There are certain extraneous items which must be expressed on the books or in the statements drawn off from the books before a com plete record can be obtained. In our discussion of the trial balance, Chapter IX, we indicated certain preliminaries which had to be observed before the trial balance could be drawn off. These preliminaries were those that could be entered up every month, even tho the accounts themselves were not closed out.
There are other adjustments such as inventories and unconsumed expenses which must be included in the statement, tho the actual items do not appear on our books. If statements are prepared yearly, en tries will be made in the book, but full adjustments need not be made monthly.
Referring again to our trial balance, on page 170, let us examine the various economic accounts appear ing thereon, and decide upon their meaning and their relation to the economic summary in which they will be incorporated.
In the trial balance, purchases of materials and supplies and all inventories at the beginning of the year are transferred to the economic summary column as expenses. Inventories at the end of the year are not yet on the books and so must be placed in the adjustment columns. In order to maintain the equilibrium of the trial balance and to express both phases of the transactions recorded there, we pick up the debit in our balance sheet, as will be explained later.
5. Raw material.—As the trial balance illustrates a manufacturing business, we find a raw material in ventory amounting on January 1, to $13,500. The manufacturer has to account for $13,500. His in ventory at the end of the year (December 31) shows that he had on hand material costing $16,750. In addition he received trade discounts on his purchases amounting to $4,000.
It is not customary to record these trade discounts on the books at all, since they do not represent a part of the cost of the goods. They are simply a reduc tion in the price and should be treated as such. In this illustration they have been included in order to bring out the point that, when a manufacturer, buy ing under contracts, receives quantity discounts, he is entitled to record these discounts on his books. He
must have this information available in making future contracts with his creditors. The credit balance of $4,000 is simply a reduction in the cost of the goods.
At the end of the year when statements are pre pared, the inventory of material on hand is an asset and a reduction of the cost charged on our books. The inventory of goods on hand at the beginning of the year becomes, immediately after the first of the year, a charge as expenses of that year.
6. Other inventories.—This manufacturer had $16, 000 worth of supplies on hand at the beginning of the year, and purchased $2,450 worth more. He had on hand at the end of the year supplies to the value of $930. For the present we will consider the economic phases of these new inventories by entering the in ventories in our adjustment column and expressing the credit phase in our economic summary column.
There is another item which enters into the manu facturing cost of our goods, namely, goods in process. At the end of any period of time it is quite probable that a manufacturer will have goods of more or less value, the work on which has not been completed. A certain amount of raw material will have been taken out of stock and put into the process of manufacture.
To this will be added the wages of employes en gaged in working up this raw material, and a cer tain amount of factory supplies, fuel and miscellane ous factory expenses, which are not yet an expense of the business because the manufacturing process is not completed. Neither are they assets in their orig inal form, because they have been taken out of stock and cannot be inventoried as such. To account for these materials and supplies, we carry an inventory account termed "goods in process." At the end of any period the cost value of goods in process becomes a deduction from the charge against manufacturing costs.
In our illustration it is evident that the manufac turer had so few goods in process when his last previ ous trial balance was taken that he did not inventory these goods. At the present time, it is found that he has goods in process to the cost of $5,450. This item is to be considered as a deduction from the cost of manufacture.