15. Relation between general accounts and cost ac counts.—From the foregoing discussion the relation between the general books and the cost accounts will be clear. The general accounts, as a rule, concern the operations of an enterprise as a whole. The entries in these books cover the exchange of values between the organization and other organizations or indi viduals. They do not take cognizance, in detail, of inventories, changes in plant valuation, or manufac turing expenses. The cost accounts, on the other hand, are concerned with the movements of values, in detail, within the organization. They are particularly concerned with inventories, depreciation, the distribu tion of manufacturing expense, and similar items.
Cost accounts should be regarded as detailed state ments, or amplifications, of the condensed statements shown in the general accounts. They should give in detail the causes which produce the totals, and should enable the manager to reason intelligently regarding these totals.
It should be carefully noted that, so far as finding the total profit or loss of any enterprise is concerned, cost accounts are not generally necessary. Thus, re ferring to Figure 3 (page 27) , it can be seen that all the items necessary to show profit or loss can be found from the general accounts, except the items of inven tory. As before noted, these inventory values may be found by visual appraisal. In many enterprises this practice still prevails, tho, as has been stated, it is to be recommended only as a check on the more ad vanced inventory methods that have been discussed.
It is customary in most enterprises to show the re sults of the manufacturing and trading parts of the business, by what are called "manufacturing" and "Vading" accounts. On the debit side of the manu facturing account is placed the inventory value of the material in stores and in process at the beginning of the period under consideration, while the value of the same items at the end of the period is placed on the credit side. The difference is the gain or loss in these values. The value of the purchases and the wages paid during this period, with all legitimate manufac turing expenses, are also placed on the debit side. The balance of the account, representing cost of manu facture, is charged to the trading account, on the credit side of which are placed the receipts from sales. The selling and administrative expenses are also charged to the trading account. The difference be tween the two sides of the account shows whether a gain or a loss has resulted during the period under discussion.' To ascertain the total profits, therefore, it is not necessary to know the manufacturing cost of indi vidual pieces of product; only the total cost and total sales are needed, provided an inventory is compiled at the beginning or the end of each period for which a financial statement is made. There are many con cerns in this country that still operate on this plan of selling at market prices, regardless of manufac turing cost; they rely on a periodic inventory to find out whether a loss or gain has occurred. Such an inventory cannot be conveniently made, in most cases, more frequently than semi-annually, and the danger of such a method is self-evident. On the other
hand, many accountants and auditors have little faith in cost-accounting methods ; they prefer to deal with values which are definite, as is the case with direct expenditures for material and wages, and inventory values based on visual examination of the assets. They prefer this method of ascertaining the total cost of the manufactured product.
16. Cost accounts should agree with general ac counts.—A cost system may, therefore, be operated with little relation to the general accounts. It might, indeed, be useful to the shop manager as a guide in operating the factory, and might serve also to fix selling prices, without being closely connected with the general books. It should not be forgotten, how ever, that if the cost system is at all accurate, the sum of the detail values which it shows will agree closely with the corresponding totals as found in the general accounts. It should be noted, also, that the general accounts are the only means available for checking the accuracy of the cost accounts. For this reason the cost accounts should be closely connected with, and merged into, the general accounts. In very simple cases, the general books may include all the detailed costs that are collected.
In a manufacturing business, for instance, the fol lowing accounts might appear among the general ac counts : Machinery and equipment Reserve for depreciation Patterns and drawings Small tools Raw materials Manufactured parts Factory supplies Manufacturing expenses Goods in process Finished products.
Clearly, these accounts must be fed from the cost accounts and it is possible to create such general ac counts as will serve to collect the totals of the cost accounts. If the cost accounting be correct, the totals thus obtained will check closely with the totals that are found directly from the payroll, the cost of purchases, and other accurate sources of value. Thus, the sum of the wages which are charged in the cost accounts against productive orders, and which appear in de tail in the several job accounts, should agree with the total direct payroll as reported by the paymaster. The total manufacturing expense charged in detail thru the cost accounts should agree closely with the totals of such expenses as shown by the purchases and the indirect payroll. The material charges, however, cannot be made to check so exactly, since the element of waste, and similar losses, cannot be accurately evaluated; but even these totals should not differ greatly. If they do the error should be found. In general, of course, the error is more likely to be found in the cost accounts than in the general accounts.
The degree to which the general accounts and the cost accounts may thus interlock will, necessarily, vary with conditions and with the opinions of those con cerned. It seems that, in this country at least, the tendency is toward a closer relationship between the two sets of accounts. This is logical, since, as has been explained, the cost accounts are really an ampli fication of the general statements and should be ac curate enough to check, at least fairly well, with the more accurate general accounts.