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

Under “Bank” should be indicated how much is held on “current” account and how much is restricted to special purposes. Of the current balance it is desirable to show the portion subject to check for immediate needs and the portion representing surplus funds not immediately needed and therefore held to earn interest. These amounts subject to interest are almost always available on short notice, but usually only with the sacrifice of interest earnings to date. Cash from the sale of capital stock or bond issues, or from the sale of old plant or any portion of it, under authorization from the stockholders that it be held for purchase or construction of new plant, or for other capital purposes, comprises that held for specific purposes. Sometimes even cash in the sinking funds might be included in the list. As it is usually of importance to keep the management informed as to the amounts of cash available for the various purposes stated above, an effort should be made to give this information, without too much detail, in the balance sheet if it is drawn up for internal use. Cash Held Abroad There remains to consider moneys held in a foreign branch and thus subject to fluctuations of exchange. In Chapter XXXI, where the subject of the foreign branch is treated, a full discussion of the problem of exchange in its relation to the accounting records will be given. Here it is sufficient to say that as between countries where exchange rates vary little, the general practice is to use an arbitrary conversion figure for incorporating the results of the foreign branch with those of the head office. This conversion figure applies to cash as well as to all other items. The use of such an arbitrary basis will give substantially correct results under the conditions named. The assets of the foreign branch are the properties, usually and for the most part, of proprietors and stockholders residing in the country of the home office, who are concerned merely with the distribution of the earnings of the foreign branch. Profits are made in one currency to be distributed as dividends in another currency. Hence, the rate of exchange prevailing at the time of closing the books would usually give the most accurate results and should, of course, be used when exchange is not fairly stable between the two countries. It may even be conservative and advisable to set up a reserve for fluctuations in exchange, with the object of absorbing what might otherwise be too great a charge or credit to the current period’s profit and loss if a particularly unfavorable or favorable rate were prevailing on the date of conversion. Accounts and Notes Receivable In the valuation of accounts and notes receivable the problem is largely one of appraising the uncollectible items. The book account and note are intermediate stages in the conversion of merchandise into cash. Were they always worth their face value there would usually be no problem in their valuation except for the element of theoretical interest which is not commonly taken into account by commercial enterprises. In considering this problem of valuation, the question of the correct use of terms arises. For the sake of clearness, when showing the items on the balance sheet, attention will be first directed to this latter phase of the subject. Objection to the Title, Accounts Receivable The governing principle here is that only current items can be included in this group of assets when shown on the balance sheet. In accounting, as in economics, there is no distinctive scientific terminology. The economist makes use, for the most part, of every-day words and phrases. These are often open to misunderstanding and are sometimes capable of being used even for wilful misrepresentation. Recognition of this fact has made necessary a more careful definition of some terms. In the language of the street, almost any claim against outsiders may be spoken of as an “account receivable.” The term is thus so broad as not only to include current claims against customers in regular course of trade, and accrued income, such as rents, commissions, interest, dividends, etc., earned but not yet received, but also to serve as a cloak covering many other kinds of claims and deposits. Among these may be enumerated: