Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…
4. Bank
715 words | Chapter 73
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:
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