Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

In Chapter V an effort was made to establish the general principles of valuation as applicable to the main classes of assets found on the average balance sheet. In doing so, the fundamental distinctions between capital and revenue charges were set forth. In the six chapters on depreciation the general principles of depreciation and their application to problems in accounting have been developed, with particular emphasis on the problems of valuation and true costs. It is purposed now to consider in detail the various problems met in the valuation of the individual items found on the commercial balance sheet. It will be necessary also to consider the method of showing these items so as to indicate the basis of valuation and something of the financial policy employed. The various assets will be considered in the order of their appearance on the balance sheet, the arrangement being based on degree of liquidity, beginning with the most liquid. What Cash Includes There is little to be said about the _valuation_ of an asset of such evident and definite value as cash. The problem here is rather one of showing the nature of the asset, although certain principles of valuation under given conditions need also to be considered. The term cash as an item in the balance sheet usually includes all money and whatever serves as money. Thus, all legal tender of the realm, bank notes, checks, bankers’ drafts, postal and express money orders, and occasionally postage stamps and even “IOU’s” are classed as cash. Not all items, however, that may be carried on the books as cash should appear under this caption on the balance sheet. There only the current asset cash should be listed in the group of current assets. All other cash, including that held for specific purposes under deed of trust or otherwise, should, unless it is readily applicable for the cancellation of current liabilities, be shown in some other group. Where the petty cash or working funds of all sorts are operated on the imprest system, the funds should be replenished before the books are closed and should thus be truly valued at their ledger figures. The bank account should be reconciled with the cash book, and the figure should represent the amount at which the item is to be taken into the balance sheet. This means, of course, that all properly authorized claims against cash in bank are to be treated as cash disbursed if they have been regularly issued, whether presented for redemption at the bank or not. Checks written but not yet mailed are not usually treated as cash disbursed because they are still under control. Similarly, items left at the bank for collection and deposit may be counted as cash on hand. If, however, as might happen in exceptional cases, a comparatively large amount represented dishonored items and a second attempt was being made to collect these dishonored items, the better procedure would be to omit them from the cash total and include them with the receivable items. In this connection attention should be called to the practice occasionally met with of holding the cash open for a few days after the closing date for the purpose of making a better showing as to balance on hand by means of new collections. This, of course, is a practice which cannot be countenanced under any circumstances as it is simply an effort to mislead, even though the effect may not always be bad. A balance sheet is a statement of financial condition purporting to be true as on a certain named date. The values shown therein are therefore to be those applicable to, and true on, that date and no other. Stamps Remitted as Cash Some concerns dealing in commodities of small value sold through the mails allow, and even encourage, payment by means of postage stamps, these in turn being used for their own correspondence and parcels post expense. The proper place to record the value of this item at the close of the fiscal period is in the inventory of office supplies or other similar heading instead of treating it as a part of the cash. This necessitates a transfer from cash to office supplies. The transfer can be accomplished in either of two ways without interfering with the usual handling of the cash whereby it is checked against the bank’s record of deposits and checks as explained in Volume I, Chapter XXXV. The customary method is to use the cash book as the place of record for the receipt of stamps and then transfer them to the stamp drawer for office use. All other “cash” being deposited in the bank, the record of cash receipts as shown by the cash book does not thus check against the record of deposits as shown by the bank. To secure this agreement, a check may be made out payable to “Cash,” “Ourselves,” or “Postage,” and passed through the bank periodically as a deposit and so secure the proper agreement between the bank’s record and the concern’s. The record of the check among the cash disbursements thus secures the proper charge to Postage or Office Supplies and also effects the proper agreement between the bank’s record and the concern’s. The use of a “postage” journal, operated on the same lines as the cash book and recording all receipts and disbursements of postage, would accomplish the same purpose and in some circumstances would be advisable. Temporary Cash Disbursements The practice of allowing proprietor, cashier, or others to take cash from the cash drawer and leave a memo of some sort to show responsibility or purpose is to be deprecated. Only where the principle is strictly adhered to of depositing all cash and disbursing only by check and by means of a petty cash fund handled under the imprest method, can adequate control over cash even be approximated. Where, however, such is not the practice, the problem is not that of the valuation of cash, for the memos are not cash, but of the valuation of claims receivable—a subject to be treated later in this chapter. Disposition of Cash Funds In the showing of cash for purposes of management, it is essential to indicate the present disposition made of the various cash funds or to show the immediacy of the control over them. Thus cash should be listed as: