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from the accountancy aspect Conclusion of a Series of Six Articles on How to Keep Road transport Operators' Accounts. Previous Contributions Appeared on April /7", June 5, July 3, 17 and 3 AT the close of the year or other accounting period, a number of problems will confront the transport operator. One of these will be the need for determining proper reserves to cover depreciation.
In the case of an operator in business on his own account, it is just as essential that the correct arhounts should be written off the book values, not only of the vehicles, but also of the other assets incidental to the business, as it is in the case of a partnership or a large limited-liability company.
Nevertheless, an examination of the bankruptcy files during the past 10 years, and particularly, those relating to the past six years, strongly suggests that many of the failures could have been altogether avoided if only efficient provision had been made at the end of each financial year for depreciation of assets and other similar charges. The fact that these charges are not borne by payment in actual cash sometimes hides the need for debiting them against the periodical profits, but they are as much a charge against the trading as are, for example, employees' wages.
The Rights of Partners.
In adjusting the rights of two or more partners at the half-yearly or annual balancing, the question of depreciation of the items set out on the assets side of the firm's balance-sheet often assumes a problem of primary import ance. Comparatively speaking, it is rare that the capital of each of the partners is exactly in the same ratio as the share of profits to which each is entitled by deed or other agreement. Consequently, failure to debit every legitimate charge, or to provide for every known or anticipated contingency, may have the unfortunate effect of unduly benefiting one or more partners, at the expense of the others.
Where the business has been converted into a limited-liability company, a serious position is almost bound to arise, sooner or later, unless proper charges against the profits are made each year for depreciation. These charges should be made before any dividend is paid and -before any sum is set aside to a general reserve.
The essential requirement in this matter of depreciation, so far as the operator's books of account are concerned, is that the profit and loss account prepared at stock-taking time must be debited with a sufficient amount, and equitably between oaw working period and another. The three principal methods are as . (1) Each year an equal proportion 1326 may be written off the first cost of the asset, so that at the end of its effective life the value shown in the operator's books will be nil.
(2) A fixed percentage may' be deducted from the gradually diminishing book value of the asset each year, so that at the end of a certain period the value, as shown in the account, will represent a purely realizable or breakup value. This method of dealing with depreciation of motor vehicles is usually readily accepted by the income-tax authorities.
(8) The particular asset or assets may be subjected to a new valuation, and the ascertained depreciation in value then written of the book value and charged against the current year's profits.
The following hypothetical examples will serve to illustrate the practical application of each of the above methods:— Example 1. On January 1, 1936, a transport operator purchased three vehicles at a total cost of £3,500. Their life was estimated to be five years, and it was decided to write off depreciation at a fixed rate per cent, per annum, as per method one. The entries to be made in the asset account while the three vehicles are in commission are shown in Table I.
It will be observed that by this method the sum of £700 would be deducted each year for five years from the book value of the vehicles, and the same amount charged against each year's profits. The figures to be shown on the assets side of each annual balance-sheet would be the book value after writing off depreciation.
. Example 2. On January 1, 1936, a passenger-vehicle operator bought a coach for £1,500 and estimated that it would be worth about £984 at the end of four years. It is decided to write off depreciation at a fixed rate per cent, of the book value each year, as per method two referred to above, and to charge these amounts against the periodical profits. In this example, the desired result would be secured by allowing for depreciation each year at the rate of 10 per cent, on the value of the vehicle as at the beginning of that year.
It would generally be easier to give the percentage than to note the pro
spective value and work out the percentage. At the termination of the four years the account of the asset would appear as in Table IL When vehicles are revalued and the new valuation figure is less than the value shown in the operator's books, the periodical profit and loss account should be debited with the difference, and the vehicles account credited with the same figure. The balance shown in the asset account would then represent the actual current value of the vehicles .(Table III).
Appreciation of the Value.
In the event of the valuation revealing an actual appreciation in the value of the operator's assets, the particular asset accounts could be debited with the difference between the book value and the new valuation figure, and either the periodical profit and loss account, or a general reserve account, credited with a like amount. The balance of the asset account would then represent the actual value of the assets (Table IV).
The chief advantages to be derived from a periodical revaluation of certain troublesome assets at certain periods by a thoroughly experienced and jade pendent valuer may be set out as follow:— The determination of the value of any asset by an unbiased person is usually satisfactory from the viewpoint of the operator, partners, directors, shareholders, etc. The production of a cer/iificate of value given by an acknowledged expert may be readily accepted by the operator's bankers as constituting an adequate guarantee in the matter of overdraft facilities.
All capital issues, whether in the form of shares or debentures, are usually greatly facilitated when the assets of the concern have been valued by a person of repute. Insurance claims are much more likely to meet with success.
Appeals against arbitrary or excessive tax ‘assessments can readily be substantiated and, in the majority of cases, the operator will consequently be in a position to obtain the maximum relief to which he is entitled.
The need for an auditor's report on the current value of the particular assets does not arise, with the additional advanta.ge that the operator, managers, directors, etc., are relieved from any personal responsibility in the matter of certification.