19. Treatment of cash discounts on Invoices for purchases are frequently subject to a special discount for prompt payment in cash. The question will arise as to whether the deductions made on the payment of invoices are to be applied to the credit of the materials purchased or are to be treated as secondary income. In favor of the first theory, it is urged that cost means the net cost to the pur chaser, and therefore, the cost of raw r_naterials, as shown in the operating expense account, should be the cost less the cash discount received.
On the other hand, it is contended that the ability to take advantage of cash discounts arises solely from the power of the organization to command the capital necessary to enable it to do so. In fact, it may pay in many instances to borrow the funds necessary to discount bills promptly. Indeed in certain lines of business, the profit obtained from the discounting of bills is greater than the profit on the sale of the mer chandise. If a firm could not borrow the money with which to discount bills, or if it did not have a suffi cient amount of owned capital, it could not secure this advantage. The advantage is therefore one which arises solely because of the presence of a suffi cient amount of capital, either owned or borrowed. If money has been borrowed for this purpose, the cost of the borrowed funds will appear as a deduction from income, or as a non-operating expense. It fol lows then, that the saving made in discounting bills with borrowed funds ought logically to appear as operating income, or as other income. The author favors the second method of treatment.
20. is the cost of the human serv ice rendered in manufacturing the goods, or in pro ducing the service rendered by the undertaking. The
amount charged for labor should include not only the sums actually expended in cash, but also the amount of labor service rendered which may not have been paid for at the date of the accounting.
21. Heat, light and power.—The cost of fuel used in developing the heat, light and power, including freight paid on the coal, the unloading charges thereof, and the cost of bringing the fuel to the point at which it is to be used, figure in the heat, light and power account. In a large manufacturing establish ment, there is usually employed a gang of day la borers, sometimes known as roustabouts, who are en gaged in various odd duties, among which is that of hauling the coal from the storage pile to the stokers or to the boiler room. The amount of labor devoted to this purpose is to be charged to the fuel account. All water used for feed water should also be charged to this account. A rateable proportion of the engi neer's services expended, in the supervision of the boiler room should figure in this account and this is obviously true of the wages of firemen, tenders and oilers.
Many firms keep a heat, light and power account as a clearing account, and distribute it upon some equit able basis at the end of the accounting period over the departments which have received the benefit from it. Thus, for example, if live steam is furnished to any department, it is possible to instal flow meters to determine the amount delivered as a basis for the charge. The various departments will be charged for light on the basis of candle power or kilowatt used in the respective departments. Heat will be charged for on the basis of the radiation surface.' In this manner an attempt will be made to distribute the en