15. True prepaid advertising.—One special case which every bookkeeper will meet arises when an ad vertising outlay is made at the close of a fiscal period for which little or no returns have yet been received. During the last days of December, drygoods mer chants, for instance, advertise their January white sales. Obviously the cost of this advertising cam paign is largely a part of cost of the sales which will be made in January. Only a small part can be said to promote general publicity, and in this way at tract customers to the stores in the closing days of December. Therefore, such an advertising outlay may properly be represented as an asset on December 31.
Some merchants believe that advertisements pub lished, say in December, will not render their full service until after several months have passed. They claim that they are justified in carrying the greater part of such advertising as an asset, even tho the serv ice itself has been fully rendered, since the returns on that service will not be fully realized until a subse quent time. Such cases must be decided upon their merits. The length of time required to make a sale, the character of goods, the class of people likely to become purchasers, must all be considered.
In our illustration we have assumed that the manu facturer expended $1,000 on a campaign, offering special inducements for purchases in the months of January and February of the next year. This $1,00D is undoubtedly an asset to the business at December 31, therefore we have considered our $2,800 charge against advertising as made up of $1,800 of cost of past income, and $1,000 as a cost of future income.
16. Merchandise sales.—The trial balance shows a credit of $560,000 to merchandise sales account, rep resenting the invoice value of the sales for the year. The proprietor has allowed $1,500 as deductions from sales. It is best to record such items separately, so that the proprietor may know how much he is losing, by reason of these allowances.
17. Selling expenses.—Every business engaged in trading will have selling expenses. It is customary to group these in one section of the economic sum mary. The account, "salesmen's traveling expenses" is debited with the cost of salesmen's hotel accommo dations, transportation and the like. Obviously this is a part of the cost of income obtained from sales that are effected, or that will be effected. If a part of this cost applies to the future income, we must de termine how much.
Could these outlays be separated with reference to filled and unfilled orders, the part pertaining to the one, would be treated as expense, and that pertaining to the other, as an asset. Usually this is not prac ticable on any but an arbitrary basis, hence such ex pense is treated entirely as an expense, or entirely as an asset. In the illustration we have treated the whole amount as a selling expense.
18. Outward freight.—This account shows a debit of $1,600. Usually freight on goods shipped to cus tomers is paid by them, or if it is paid by the shipper it is added to the customer's bill and included in the charge to his account. Occasionally, however, by rea
son of special arrangements, a sale may be made f. o. b. destination.
Some business houses sell in this way regularly in order to place all their customers, within a given zone, on an equal footing. Whenever this custom is fol lowed, the cost of the transportation service received is debited to the outward freight account. The bal ance in this account, therefore, is to be interpreted either as a cost of delivering or of selling the goods. In either case it becomes a part of the economic sum mary.
19. commissions account with its balance of $1,500 indicates the amount paid by the manufacturer to his salesmen in commissions on the goods which they have sold. There is also added $3,000 as due to the salesmen on sales which they have made but for which they have not been paid. As these commissions are a part of the expenses of carry ing on the business, they should be considered an ex pense in the year in which they are incurred, conse quently we enter a $3,000 charge against commissions.
20. Office cost of services received from employes in the office appears as a debit to office salaries. It is an administrative service. The debits themselves may be made on either of two bases, as was previously discussed in connection with direct wages. However, if we are to express, first, the full expenses incurred during the year, and secondly, all the liabilities owed at the date of making our state ments, we must add to our figures the amount due but unpaid; the charge against office salaries has accord ingly been increased by $800, which amount is de termined by a reference to the pay-roll record.
21. Office light and heat.—The office light and heat account is debited with the cost of lighting and heat ing service received. If the heating is furnished by the plant which furnishes heat to the factory, an ar bitrary division of these expenses between factory and office is usually made. The basis on which this separation is made forms a part of the subject of cost accounting. If separate heating plants are used, or if meters furnish data on which the separation can be made, this account will include solely the cost of lighting and heating the administration section of our business.
22. is a balance of $1,200 in the stationery account. It is charged at cost with letter heads, billheads and the like. The amount of the in ventory of stationery on hand is legitimately an asset of the business and should be treated as such. In the illustration no inventory is carried since it is assumed that the amount on hand was of little value.
23. General balance of $3,000 rep resents petty expenses which are so small that they do not require separate recording. Telephone, mes senger service, luncheons and the like, make up the usual charge of general expense. Because of the im practicality of analyzing these charges and because most of them are administrative costs, the whole bal ance has been assigned to general administrative ex pense.
24. Cash discount lost, and cash discount gained have been discussed in Chapter VII.