In order to remedy this admitted overstatement, it is sometimes sug gested that a reserve shall be raised, out of the profit and loss account, sufficient to cancel the excess of profits shown. The fact that it should be necessary to make such a reserve must reflect on the methods employed, and in times of depression there will be a disposition to ignore its necessity altogether. It would appear, therefore, that the only safe general rule is, to omit the division between manufacturing profits and trading profits in the system of accounts proper, leaving such comparisons to be made outside the books, possibly concurrently with the costing system in force. The reason frequently adduced in favour of distinguishing between these two portions of profit is, that it is beneficial for the manufacturer to know how the cost to him of the goods he makes compares with what they would cost him if pur chased ready made; the argument is admittedly a sound one, but the com parison here suggested can be made outside the hocks, without involving any of the dangers of unsound finance which an adoption of the separation in the actual books may tend to bring about.
Where the business is one of a simple character, using but little plant, working mainly " to order," and riot to produce stock for a warehouse, it may be possible to render the manufacturing and trading accounts in the form of one statement only ; this involves, however, no difference in the principles upon which the accounts should be prepared, beyond the fact that in amal gamating the two accounts, the credit entry in the manufacturing account, and the corresponding debit entry in the trading account, representing total cost of goods manufactured are extinguished.
The financial principles by which the accountant to a manufacturing undertaking should be guided in preparing a profit and loss account, are in the main the same as in any other business, but some of the more important counsels may perhaps be mentioned :— 1. Stock on hand (whether finished, partly finished., or in a raw state) should never exceed its cost price, and no profit should be taken credit for until the goods are sold.
2. Sufficient depreciation must invariably be allowed in the case of buildings, plant, and all other assets the value of which steadily decreases.
3. Loose tools and patterns should be written off as they become worn out or useless; the former are perhaps best dealt with as stock on hand, and made the subject of a periodical revaluation at the time of stocktaking ; while the latter must generally be regarded as a more or less ephemeral type of asset, and should be rapidly depre ciated. They are frequently valueless within two years of their
construction.
The question of depreciation in regard to manufacturing businesses is a wide one, but the vital necessity of this charge against profits is frequently imperfectly grasped. The estimated life of the asset should be the basis on which it should be written off, and the annual (or other) transfer against profits should be designed to reduce the book value of the asset to what it would fetch as scrap iron, or other its residual value, by the date at which its usefulness as a productive machine is nil. Depreciation is sometimes effected by writing off a fixed percentage on the original cost, or, again, by a fixed percentage on the diminishing value shown by each year's balance sheet ; the annuity method is useful where the life of the asset is expected to be a long one, and the question of interest enters into calculation, while the effect ing of a sinking fund policy with an insurance company is a method which at once entails a regular charge for depreciation of existing assets, and provides a sum of money for the purchase of fresh assets to replace them on their extinction. A depreciation reserve is sometimes built up, in preference to actual writing down of the asset, but, provided the amount of the reserve be deducted in the balance sheet from the figure at which the asset stands, the practical result is the same in both cases. The method to be selected in any particular case is largely a matter of choice, but in every case it is imperative that adequate depreciation shall be provided for, and the calculations in connection with it should err, if at all, on the side of generosity. Depre ciation should not, in a company, be regarded as an appropriation of profits, and one which arises for consideration after shareholders' dividends have been paid, but as a necessary expense before profits are ascertained. A periodical revaluation of plant, machinery, and other assets is useful in order to check the basis upon which depreciation is being charged, but such revaluations, including as they do the effect of external fluctuations in the current price of similar assets, are themselves rarely a fair basis upon which to depreciate an asset.
The Itatistical books kept by a manufacturer are usually numerous, and their form varies greatly according to the class of business. The books usually employed are (a) Office.
1. Register of quotations supplied to customers.