similar information as to the stock. It is evident also that an equally efficacious check could be applied in the counting-house, where both the stock and store of any article would be known, and whence no order to manufacture would proceed until it was shown that the number on hand was not sufficient to meet the demand.

The principles which determine the question of how materials and manufactured articles are to be priced at Survey a survey admit of much discussion, but we Prices. cannot here do more than indicate the general axioms which should be observed in a valuation of Stores and Stock. It is obviously unsound to base a valuation one year upon the cost of production of an article, and another year upon its estimated or even ascertained market value; but, nevertheless, it is to be feared that this is not unfrequently done. The course adopted by most of the best manufacturing firms is to value the stores at the net cost or invoicing price to them, and the manufactured articles on hand at their cost of production, without any addition for profit, or for standing Price should charges as distinguished from factory charges. not include The practice of including in the valuation of

establish

ment charges.

Stock a percentage for establishment expenses

or standing charges is one which cannot be too strongly condemned, if on no other ground than that a business which is really the reverse of profitable might, by the simple device of manufacturing and accumulating a large stock, be made to appear for a time as at any rate self-supporting. That is to say, a business might be made to appear flourishing, while as a matter of fact it was becoming less solvent, by reason of its cash and other available assets being converted into manufactured stock which may never be realizable, and

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123

latent.

by the standing charges (if these are included), which in the absence of bona-fide business transactions would represent losses, being made to figure in the balancesheet as good assets in the shape of stock on hand. Profits are The right principle undoubtedly is that in a manufacturing business a profit should not be considered to have been made until a sale has been effected, or until a contract for the delivery at a future date of goods already manufactured is entered into. But in the case of the production of raw materials and in those exceptional cases in which the stock of manufactured articles could be put upon the market and realized at their normal price, a modification of this principle would seem to be necessary; for in that case the product is generally saleable at an ascertained market price (or, at any rate, at an approximation to it), and it does not seem incorrect to say that the profit which that price leaves has been earned on the production of the commodity and not on its sale. Nevertheless, even in this case, it would probably in the long run prove to be more judicious to price the commodity in the books at its cost, and only to credit profit and loss account with the profit when sales have been effected. In the majority of cases manufactured stock has to be kept till a demand for it arises and orders are received, and in the meantime it may deteriorate or the price may fall, and the system of valuing at cost has the additional advantage, when stocks are held for any length of time, of obviating the necessity for periodical alterations of the valuation and consequent adjustment of the profit and loss account owing to fluctuations in the market price of the commodities. A valuation based upon cost of production (not including in the term, standing

charges and interest on capital) would hold good for a long period of time; so long, in fact, as the article was preserved in its pristine condition, unless improved processes or other causes should so reduce the cost of similar articles, as to render a corresponding reduction of the valuation of the old stock necessary in order to establish the proper relation between it and the new price that would probably rule in the market. Any deterioration which the goods on hand may undergo should, of course, be periodically written off, and when stocks become entirely obsolete they should be reduced to their scrap value. But inordinate reduction in the value of assets is not always a proceeding deserving unqualified approval. It is quite conceivable that by taking undue advantage of facilities and opportunities which may exist at particular periods for writing down the value of assets, the firm or company may be placed in the position during subsequent years of making book gains which would not be realised but for the previous artificial reduction in values. In this way the accounts of the business are apt to prove misleading, and it is well that this effect of excessive reductions in value should not be overlooked. Indeed, its dangers appear to have been recognised by the Legislature, for, under the Companies' Act, 1877, reduction of paid-up capital is limited to the amount which, according to the affidavits of responsible officials, has been lost, or is unrepresented by available assets. The old material on hand should be taken in a stores survey at the market value of such old material, or at the price at which similar old material was last disposed of, unless such price be higher than the market price, in which case the lower value should be taken. It is desirable that in

Loss on

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125

both the Stores and Commercial Ledger old material should be kept in an account distinct from new material. The amount by which stock is to be written down in respect of ascertained depreciation may be debited to profit and loss or subsidiary trading account, Stores and and credited to the Stock account in the Commercial Ledger through the Journal. The warehouseman would pass a stock requisition through the Stock Issued Book to the credit of his Ledger accounts in the same way as if the amount represented withdrawal of stock; and the same procedure applies in the case of reduction in the value of stores.

Stock.

Subsidiary Factory books.

CHAPTER VIII.

CONCLUSION.

Ir remains to refer to some subsidiary books in use in factories and warehouses, and also to some matters which, although they have an important bearing on Factory Accounts, do not properly fall under any of the preceding chapters. We have studiously avoided special reference to these ancillary books and matters, so as not to detract from the main issues of our subject; and we do not now refer to them with a view of attempting to exhaust the catalogue of account-books for which a practical use may be found in a factory. Such an attempt would be altogether futile by reason of the conditions and requirements of individual businesses varying too widely to warrant anything more than a general statement being made of the fundamental principles underlying the economy and routine of a factory-principles to which all details, to be of service, must conform.

In this chapter we shall first describe the method of book-keeping to be adopted in the case of plant or Summary of machinery acquired on terms of deferred payments, and mention a few considerations bearing on the subject of the accounts of Government and municipal factories, and on those of the workshops

Chapter.