Music Trade Review

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THE MUSIC TRADE REVIEW, JUNE, 1941
17
Simplified
Accounting
For a Retail Piano Store as suggested
by a Large Successful Piano Dealer (Continued from June)
r p HE REVIEW takes this opportunity to print in full the
•L proposed simplified accounting system for retail piano
stores as suggested by a successful piano dealer and
distributed to those dealers who attended the recent
Retail Piano Sales Clinics. A part of this enlightening ar-
rticle will be printed in each issue until completed with
the hope that it will prove beneficial to REVIEW readers.
The first instalment was in the June issue. (Editors Note).
ACCRUALS AND PREPAYMENTS
The foregoing is entirey premised upon the accounting for income
and expense on the basis oi accrual accounting for the determination
of gross profit, while cash receipts and disbursements basis is used with
regard to items of expense. It must be recognized that this method
would not provide for an accurate determination of net income, unless
consideration is given to expenses as accrued or as amortized by reason
oi having previously been prepaid.
By accruals arc meant those expenses which have been incurred, or
the benefits oi which have been enjoyed although the obligation has
not been paid therefore not recorded as an expense. This is best ex-
pressed in terms oi taxes on real estate or tangible personalty which
are payable annually premised upon ownership or possession as at a
date in the past. In that case, a monthly charge to operations equal to
one twelfth of the estimated taxes is in order and a liability account
identified as "Accrued Taxes" is to be credited.
Upon payment of the liability, the disbursement of cash would be
charged to "Accrued Taxes." This effectively equalizes expenses over
the months, rather than have the entire item expensed in the month of
payment. The means of entry would, of course be through the journal.
By prepayments are meant the payment of eventual expenses prior
to the period of enjoyment. This is best expressed by reference to pre-
paid fire insurance. Insurance premiums that are of this type represent
advance payments covering one of more years. It is not logical to charge
the current month's operations with the total premium paid, therefore
the premium should, when paid, be charged to "Prepaid Insurance"
and the proportion of such premium that is allocable to each subsequent
month should ratably be charged to operations monthly by joumalizinj
an entry charging expense and crediting "Prepaid Insurance."
These two analogies are mere examples. Similar accruals and pre-
payment exist in each business. Results of operations in any business
are more or less estimates, and the accuracy oi such estimates depends
entirely upon the care and logical thought expressed in the determina-
tion oi prepaid and accrued expenses, so as to cause each period's
operation to be charged with the correct proportion.
ELABORATION
The ioregoing comments with reference to a limited classification of
expenses would, in all probability, provide more information than many
businesses presently obtain. However, it is well recognized that in many
businesses more specific details as to accounting for expenses would be
advisable. This is probably correct in the case of businesses with aggress-
ive management, or businesses wherein the proprietor is not definitely
identified with the business.
In what has been said above, an individually owned proprietorship
would probably obtain sufficient information to manage the business
satisfactorily, however, where the proprietor is not definitely identified
with the business, and therefore not cognizant of the many details incident
thereto, it would probaby be well to have a somewhat greater distribu-
tion of the elements of expenses.
Therefore, using the same books of original entry, however, providing
for expenses to show functional operations classified by the principal
store operations, Exhibit B has been prepared, which, it is to be noted,
carries as part of the cash receipts and disbursements record expenses
under the following categories: Selling, Receiving and Shipping, Adver-
tising, Administrative, Service, Occupancy.
Under each of these categories of expense, space has boen provided
for identifying the sub-natural elements of expense. In other words, under
selling expense in the column provided for "account," a code should be
used which provides for the identification of the type of selling expense
such as salaries, commissions, supplies, services and the like. Similar sub
natural classifications of expense likewise apply to the other general
classifications of expense indicated by the cash receipts and disburse-
ments record.
Expenses which are recorded in the journal should likewise be indi-
cated by code number as to the sub-natural classifications of expense.
This can easily be done by indicating the various types of expense such
as selling, receiving and shipping, advertising and the like, by letters
"A," "B," "C," etc., and by suffixing such number as is provided for by
the following suggested list of expense classifications:
A. SELLING: 1. Salaries; 2. Commissions; 4. Supplies; 10. Depreciation
(Store Equipment); 11. Unclassified General Expenses; 13. Departmental
Rent.
B. RECEIVING AND SHIPPING: 1. Salaries; 5. Services (Outside Dray-
men); 11. Unclassified General Expenses.
C. ADVERTISING: 4. Supplies; 5. Services; 11. Unclassified General
Expenses; 12. Media; 15. Income from cooperative advertising.
D. ADMINISTRATIVE: 1. Salaries; 3. Taxes; 4. Supplies; 5. Services;
6. Traveling; 7. Telephone and telegraph 8. Postage; 9. Insurances
10. Depreciation (Office Fixtures); 11. Uncassified General Expenses;
13. Departmental Rent.
E. SERVICE: 1. Salaries; 2. Commissions; 4. Supplies; 5. Services;
6. Traveling; 11. Unclassified General Expenses; 15. Income from services
rendered (Credit).
F. OCCUPANCY: 1. Salaries; 3. Taxes; 4. Supplies; 5. Services;
9. Insurance; 10. Depreciation (Building); 11. Unclassified General Ex-
penses; 13. Rentals Paid; 14. Light, Heat and Power; 15. Income from
Rent (Credit).
In the foregoing, it will be noted that identification oi the elements of
expense has been by the same number in each category oi expense so
that the subdivisions oi each could be easily memorized. The amount oi
each item of expense in the aggregate for the period would be computed
by summarizing each classification at the bottom of the expense analysis
of the cash receipts and disbursements record.
Comments might well be made with reference to* the types of expenses
referred to above:
SELLING EXPENSE. The items of expenses comprising selling expense
should include all expenses that are directly chargeable to selling ex-
penses. If the business is operated by the proprietor whose efforts are
directly connected with selling expenses, or by the sole stockholder, if
the business is operated as a corporation, such salaries as are paid to
the proprietor or sole stockholder, which would be chargeable to selling
expenses, should be so charged.
It must be recognized that a proprietor of a business or a sole owner
of a corporation, should place himself in the same position as the business
which engages employees to render the service that in that business
is being done by the sole proprietor or sole stockholder. Likewise, ii
the sole proprietor would be entitled to commission for effecting sales,
he should be compensated for such sales as though he were an employee.
The other items comprising selling expense are self-explanatory.
RECEIVING AND SHIPPING EXPENSE. Although salaries are indicated
in this category, it is probable that certain businesses do not have a
separate receiving and shipping clerk, therefore it is optional whether any
salaries should be charged to receiving and shipping expense, if such
receiving and shipping service is rendered by sales employes. However,
if the business justifies the employment oi a receiving and shipping clerk,
the salary should be charged to this expense.
Outside draymen's charges would be charged to receiving and ship-
ping service.
ADVERTISING. The categories oi elements oi advertising expense
constitute supplies which are normal advertising supplies and services
are construed to be services rendered by advertising agencies, while
media represents the cost oi newspaper advertising or radio broadcast-
ing and the like.
ADMINISTRATIVE. Administrative expenses are defined to indicate
all classifications of expense that appertain to the operation of the busi-