9. Instalment accounts.—In some cases a manu facturer or a trader may sell a customer some miscel laneous items, subject to the usual credit terms, and in his other dealings with the customer, for equipment, allow him to purchase on the instalment plan. When business of this character is done it would seem bet ter to open two accounts ; one, for the sales equipment on the instalment plan; the other, for the sales of ma terials sold on the usual terms of credit.
In such a case as this, great care must be taken that the accounts are properly credited with the cash paid in by the customer arid that no payments received on account of equipment sold, subject to the lease agree ment, should be credited to the regular credit account. The double account will enable the manufacturer or trader to watch very carefully the account of a cus tomer purchasing material or equipment on the in stalment plan in order to see that all payments are promptly made as agreed upon.
10. Sources of future come now to the third class of assets, namely, instruments with which to obtain income in the future. These may be subdivided into: (1) Trading or working assets (2) Prepaid expenses or deferred charges to op eration, and (3) Durable or fixed assets.
11. Trading or working assets of the merchant or manufacturer consist of the mer chandise or finished goods which he holds for sale. Working assets of the manufacturer consist of : (1) all goods which are in the process of manufacture but which are not yet finished; (2) the raw material from which the manufacturer will make similar goods; (3) the fuel and supplies on hand which he will use in the process of manufacture. The items classed as supplies, would include oils, waste, factory stationery and cost records, which are used directly in connection with the manufacturing processes.
In principle, inventories should be valued at cost because their cost is an important part of the cost of the income which will eventually result from the sale of the finished goods the profit represented in which income cannot be computed correctly unless this cost is carried over correctly. Business conserva tism, however, follows the practice of valuing at the market price if that is permanently lower than this cost.
The reader has noted that, at the end of every year, the inventories of material on hand become assets and a deduction in the charge against purchases. Re
ferring to the adjustment column of the working sheet we find the following inventories: Raw material $16,750 Finished goo,ds 20,300 Supplies 930 Packing material 150 Goods in process 5,450 Hence we must treat all these items as assets in our balance sheet, while the respective credits of these ad justments are treated in the income statement or eco nomic summary found in Chapter X.
12. Prepaid expenses.—Prepaid and unexpired ex penses are treated in much the same manner as in ventories. They are assets to be recorded in our bal ance sheet. We picked up the credit by reducing the expense charge in the economic summary. We now pick these items out of the adjustment column and transfer them to the balance sheet column.
13. Durable or durable assets, as their name implies, are the assets by means of which the business is transacted. Their value, for statement purposes, consists of that part of their cost which is assigned to the service they are yet to render.
Considering next the fixed asset accounts, we find that the plant and machinery account represents the cost value of the machinery used in the process of manufacture. The value of this machinery is at least its cost value, but that part of its cost that is assign able to past service, is properly a manufacturing ex pense. If any buildings or machinery are torn down, destroyed, or abandoned as useless, the plant and ma chinery accounts would be credited so that the cost value of these assets on hand is $50,000 for plant and machinery, $49,600 for land and buildings, and $7,000 for furniture and fixtures.
14. these buildings have been erected, or the machinery installed, or any other op erative asset acquired, it is evident that immediately a decrease in the value of these articles begins. They may still be capable of rendering service, but they should not be valued at cost because a part of this cost is assignable to service they have already ren dered. This part is called "depreciation." If we are to determine the true cost of manufacturing we must include the depreciation of our serviceable assets. A technical discussion of the various methods of fig uring this wear or depreciation will be deferred to Chapter XVIII and XIX.