12. Trade Discounts.—In certain lines of business, particularly in the iron trade, the selling prices are fixed under what is known as the discount method. All articles of iron-ware have a standard list price, and sales are made on the basis of a certain per centage of discount from the list price. This per centage of discount is known as trade discount. Thus, the list price being always the same, the difference be tween the prices paid by a jobber and a retailer is ex pressed by a difference in the trade discounts. The jobber selling to a retailer will quote a price less a trade discount. The trade discount which the job ber gives being less than that which he was allowed,. his profits are represented by the difference.
The advantage of using this method of quoting prices is evident when the expense of getting out a catalog is considered. Since list prices of iron-ware never change, catalogs describing these articles can be printed in quantities. Changes in the price and fluctuations of the market are effected thru increas ing or decreasing the trade discounts. If this prac tice were not adopted it would be necessary for the manufacturer and trader either to get out new cat alogs every time the prices were changed, or else make numerous adjustments in the printed prices in their catalogs.
Another reason for adjusting to market conditions by means of trade discounts, rather than changes in the prices themselves, is to avoid the appearance of raising prices when market conditions improve again.
13. Advantage of discount quotations.—It is evi dent that the seller, in securing orders from customers, will endeavor to allow as little trade discount as pos sible, while the buyers, on their part, try to get as large a trade discount as may be secured under the circumstances. The measure of the trade discounts given and allowed is perhaps an index of the ability of the sales manager to secure the best price for his goods on the one hand and, on the other, an indica tion of the skill of the purchasing agent to obtain the highest trade discounts.
By the use of trade discounts it is easy to record a slight fluctuation in the market price by adding or de ducting an additional percentage to the trade dis count, then making it cumulative; that is to say, add ing one discount to another, or deducting one dis count from several cumulative discounts already of fered. When it is necessary to make discount cal culations it is better to prepare a series of tables, show ing the products to be used for each of the different rates, and in this way save time in computing the va rious items.
14. Valuation of theory which has been expressed that the valuation at which a purchased article is to be recorded is its cash cost laid down for use in a place of business, is applied by accountants to the valuation of assets purchased as an aid in the carrying on of the business. Suppose a manufacturer purchases a boiler for $3,000 and pays $500 to have it transported to his factory. It is evident that the boiler, at its place of manufacture is worth little or nothing to him as an aid to the operation of his busi ness. After he has paid $500 to have it transported to his factory it is still of little value to him until it is set up and in condition to generate steam.
Now, to go one step farther, let us imagine that the manufacturer pays $100 for cement and $400 for labor in excavating and similar work, in order to build a concrete foundation on which to place the boiler. It follows, then, that he should record this boiler as costing $4,000 tho its invoice price was only because $4,000 has been the necessary out-lay 9-• to obtain the service which the boiler will render.
15. Valuation of liabilities.—No particular ques tion arises in connection with the recording of lia bilities. They are fixed quantities owing to others and the full liability must be expressed. Where, however, cash discounts are treated as in Chapter VII the liabilities for goods purchased must be treated accordingly.