An Account of Receipts and Payments,

Is usually a summarized statement taken from the Cash Book and only shows cash transactions. The latter account therefore, as compared with the former, shows only the Cash received or disbursed. There is also a further minor difference. The latter account is in reality the Cash Account or "Cash Book," so the receipts appear on the left hand side the Income and Expenditure Account appears as a Ledger Account or accounts, so the receipts are on the right hand side.

Question 10. In auditing the books of a Manufacturing Establishment, what voucher would you require for Wages paid, and how would you satisfy yourself that the Wages List did not contain the name of fictitious employees?

A.—The answer to this question may be obtained by referring to page 139.

The only satisfactory proof that the Auditor can obtain that Wages are correctly paid, is, where possible, by seeing it done himself, or by insisting that a proper system of internal check is adopted.

The Voucher for Wages paid is primarily the Wages Sheet, confirmed by the cheque drawn on the bank, and strengthened by the evidence that the employees, whose names appear thereon, actually received the cash.

In small establishments the men commonly sign for their Wages, in large ones this is not usual. Sometimes vouchers are given the employees, and these are handed in when they are paid.

CHAPTER XIII.

AUDITING.

Question 1.-Under what circumstances do you consider "Goodwill" or "Patent Rights" Legitimate Assets? As an Auditor how would you advise such Assets being dealt with year by year?

A.- "Goodwill" as an asset, is one which is never or rarely considered as an available asset, in considering the value of the assets of a Company. It may, however, be considered as a "Legitimate Asset" when it represents the cost of the "Goodwill" paid when acquiring a business, even if the shares of the Company then starting have to be considerable "watered" in consequence of the exorbitant or fancy value at which this "Goodwill" has been placed. Frequently, when a partner is retiring, the firm has to pay a sum for his "Goodwill," which then usually appears as an item in the future Balance Sheets. The item "Patent Rights," to be a Legitimate Asset, should represent the amount, less possibly reduction, paid for the Rights of any Patent.

The Auditor would always prefer to see such assets reduced from profit year by year, on the principle that they do not usually represent their actual value. But Assets like these are difficult to value; the "Goodwill" of a business may actually be increasing in value, and on the other hand a Company may be formed to sell goods covered by "Patent Rights" with the understanding that when these Rights terminate their business will cease, so the Shareholders prefer to draw all the profits as they are earned.

The real principle seems to be that with a Company intended to carry on a permanent business, when they have acquired such

assets as "Patent Rights" that they should be written off or reduced yearly, so as to expire when the Rights run out.

Question 2.-Explain fully the items entering into Costs Account in a Manufacturing Business consisting of three Departments, each semi-dependent on the other. Give full particulars as to the method you would pursue to arrive at the Net and the Gross cost of production.

A. The object of the Costs Account is to enable the Manufacturer to ascertain the cost of manufacturing his goods, and their value when finished.

The various items which have to be considered in arriving at this cost are as follows:

(1) Wages or Labour;

(2) The Material used;

(3) The Expenses of the Factory incidental to their manufac

ture.

What may be called the practical method of ascertaining this cost is now receiving some attention at the hands of our Manufacturers. It is admitted that it is only a crude way to take a sample article and to value it by ascertaining the cost, from the report obtained from foremen and expert workmen, and then thereafter to take that as its future value or cost. There are many who keep their books in the most crude way, and look upon highclass Book-keeping as a fad; yet the firm who adopts the best way will hardly be content to go back to old methods.

Most merchants arrive at their gross profit by adding to the cost of the Raw Material the other items mentioned as above, and then deducting therefrom the Material on hand, etc.

The system of Costs Accounts is a practical and accurate method of ascertaining the cost of each article manufactured. As to ascertain the details of "Accounts Receivable" we refer to

the Accounts Receivable Ledger, so to ascertain the details of the manufactured goods we turn to the Costs Ledger.

To answer this question fully would not be possible here, and all that can be attempted is to sketch the outline of the system followed avoiding as far as possible any technical terms.

The books required to collect the items Wages and Material, showing the cost of converting them into the manufactured article

are

An Order Book.

A Wages Register-Stores Register.

A Costs Ledger.

Certain goods are to be manufactured. Each workman keeps a record of his time and shows on a slip the number of hours expended on each job (except he is working on the piece-work principle). Each job is numbered in the Order Book, and it is known by its number. This information, viz., the time on job, is recorded in a Register, and if there are a number of men employed thereon, for convenience sake, a column in Register will be set apart for its use, or it is taken direct from the slips. By this means we arrive at the cost of the Wages.

Similarly when the foreman starts the job he calculates what Material he will require and apportions such to the workmen. This Material is duly charged.

Now, to find the value of item (3): The Expenses of the Factory-this is not as exact an item as the two former, as it can readily be seen that if the Factory is busy the percentage will be lower than if the contrary be the case. A Factory can turn out 10,000 articles at a lower cost than 5,000.

This expenditure must then be estimated and may be understood as follows: If one day's expenditure be estimated at $10.00, and three jobs have been completed with 50, 25 and 25 hours of labour expended on each job, one would be charged $5.00 and the others $2.50 each, this is the principle, though the basis is not a perfect one, and it is hard to find one, as one man's one hour may

be worth, from the work he turns out, another's one and a half hours.

Now, to focus these items and bring them into the books, again not full details but the principle can only be shown.

When the Material is bought it is charged to Merchandise in the General Ledger and charged to Stores in the Costs Book-similarly with the other items. Now let us charge up our jobs in the Costs Ledger. Turn to the Wages Register and charge job with wages, showing time and cost from it. Any other orders can also be charged if we are posting up for a period.

When charging these accounts credit Wages Account.

Similarly charge up items (2) and (3). Let us then assume that the Factory is handing over this work to the Warehouse. The goods will in the Costs Ledger be severally credited to their accounts at the figures therein shown and charged to the General Ledger Account.

The Cost Ledger being kept on the principles of double entry will always balance.

In the General Ledger charge manufactured goods and credit the Costs Ledger Account or Merchandise.

The following entries will explain-purely fanciful figures are used to show how the items are treated: