In our illustration we set aside the following re serves: For bad debts $4,800 For depreciation on plant and machinery 2,250 For depreciation on furniture and fixtures 600 For depreciation on land and buildings 952 We have entered these amounts in the adjustment column to indicate that they are outside items not in the trial balance and have already recorded the charge in the economic summary column. As there are ac counts in the trial balance containing the amounts previously set aside, we may add the new provisions to the previous ones and place the totals in the balance sheet column in order to express the credits.
20. Accruals.—Accruals are items of a slightly dif ferent nature. We know that if one hundred men had worked two days, each at $2 a day, for which they have not been paid, wages amounting to $400 are due them. Hence, we express this debt by an accrued liability, which means that the debt will be payable in the im mediate future. Reserves are offsets to overstate asset accounts and are estimated, while accruals are, as a rule, certainties, and are actual liabilities that will have to be paid within a short time. As we find no previous accrual accounts in our trial balance we extend all our accruals to the balance sheet column to express the assumed liability which they repre sent.
21. Proprietor's the final analysis a business is operated for the benefit of its proprietor. All accounts that point out the progress made by the business, and the amount of profit or loss resulting, are but divisions of the proprietor's account, separated to show the progress of different phases of the busi ness. The net excess of the income accounts over the expense and loss accounts is the amount of profit made during the year. This credit goes to the proprietor to be withdrawn by him or to be added to his invest ment, if he leaves it in the business. Hence, we ad
just the proprietor's account by adding to it the net profit made. determine the amount of this net profit by totaling the debits and credits in our eco nomic summary column and computing their differ ence.
22. is not enough that we list the ac counts and determine the net profit. We must be certain that our work has been correct. To this end we extend the net profit to the balance sheet column, as shown by the credit balance in the economic sum mary column. At the same time we extend the amount of proprietor's withdrawals and his invest ment at the beginning of the year to the balance sheet • column. If our work has been correct the debits and credits of this column should agree.
This will be apparent if one considers that we started out with an equality of debits and credits in our trial balance. We transferred certain accounts having debit or credit balances to the economic sum mary column and substituted for the ones eliminated one account covering their net credit. The fact that certain outside items were included in our figures does not affect the result as, in every case, we recorded a debit and a credit. Hence, our balance sheet col umn is in effect a new trial balance in which certain items have been added, and in which only the net balance of many accounts from the old trial balance is retained.
In our illustration we find that the proprietor has withdrawn $2,075 during the year. While this sum is treated as a decrease in the amount of profits credited to him, it should be noted that it is not a decrease in the amount of the profits themselves. The reader will see that the business made a profit of $22,878. Of this the proprietor has withdrawn $2,075, leaving $20,803 to be added to his investment.
As his investment at the beginning of the year was $86,500, he now has a new investment of $107,303.