How to Keep
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H A U LI ERS' ACCOUNTS
S. Howard Withey, F.C.I.
(Senior Fellow of the International Accountants and Executives Corporation) DURING the early days of intensive development in road transport, many operators were content to look upon their individual cash or bank balances as indicating their real financial position, after allowing certain amounts for capital outlay. The extent of the net profit made, or net loss sustained, during any period, was also estimated from the basis of the balance of cash in hand or at the bank.
Subsequent tendencies in the industry, coupled with experience which has been gained during the past year or two, have, however, proved the necessity of the operator having a business chart from which he may readily ascertain all information that is likely to be required concerning his undertaking. This provision is all the more essential in 3,iew of the great expansion which has taken place in the entire commercial and banking credit systems.
, Accountancy System Vital.
The operator should, in fact, look upon his set of account books as his only reliable business chart, but an examination of the bankruptcy files strongly suggests that large numbers of road-transport operators have almost entirely neglected the accountancy side of their businesses. This is an unfortunate state of affairs, for, unless all essential business facts be recorded and systematically summarized in a form easy to understand, it is practically impossible to guard against excessive expenditure.
The transport operator having at the bank a substantial balance in his favour may, nevertheless, be insolvent. He may, for instance, be conducting business with borrowed money, and his total liabilities may be greater than the actual total value of his assets. He may even be sustaming a net loss each year, or withdrawing money from capital account, • instead of from income, or, perhaps, both. Unless, however, a proper set of books be kept, these facts would • not necessarily be revealed in time to aVrvid serious consequences.
Moreover, having regard to the prevailing high level of taxation, it n36 is particularly desirable that the taxpayer should be in a position to take advantage of all statutory deductions which may be made from the stated net profit, thus obtaining the maximum relief from income tax to which be is entitled. At the present time, in order to avoid any arbitrary assessment of his profits by the authorities, and to ensure that he pays no more income tax than he is legally obliged to, the transport operator is practically compelled to seek professional or legal assistance in the computation of tax liabilities.
If a proper set of books be kept, these expenses will be reduced to a minimum and often avoided altogether. The need for a good system of book-keeping is really three-foldit is personal, commercial and legal.
It is personal by reason of the business control and the effective internal check which it affords ; it is commercial because the success of the business depends, to a great extent, on the accuracy of the charges made and the transactions recorded in the books; and it is legal by reason of the penalties which it is possible to avoid in the matter of taxation and in the event of failure.
A Simple Requirement.
As an essential factor in the efficient management of a business, the keeping of appropriate accounts is probably one of the simplest of the practical requirements with which the transport operator is directly con. cerned. Remembering always that the account books are the servants of the business, any alteration or modification of the book-keeping system which May be necessary or desirable can be effected without disturbing in any way the ordinary routine. The chief questions which the transport operator usually asks, relative to his business, may be summarized as follow :— (1) What are the total net receipts for services rendered during the year, or other period, or to date?
(2) What is the total of the purchases, and the total and composition of the expenses in the same period?
(3) What is the total capital outlay, and how is this figure made up?
(4) Is the proportion or percentage of depreciation written off the book value of the assets sufficient to cover wear and tear, obsolescence, lapse of time, etc., and do the charges made for services rendered adequately cover such depreciation and upkeep? (5) Am I making a net profit, or sustaining a net loss, and to what extent?
(6) Does the percentage of profit in relation to turnover compare favourably with that of previous years?
(7) In what directions can economies safely be effected?
(8) What amount is owing by me to sundry trade creditors, and to me by. customers and debtors, and how are these totals made up?
(9) What is the nature and present value of my assets, and the total and composition of my liabilities?
(10) Am I solvent or insolvent, and what is the amount of my real capital, or the extent of the deficiency?
Two Book-keeping Methods.
There are two distinct systems of book-keeping, namely, single-entry and double-entry. The former consists almost entirely of the keeping of personal accounts, but the doubleentry system includes the keeping of a number of subsidiary books, or books of original entry, as well as personal and impersonal accounts. It will be impossible to answer correctly such questions as the above, unless a system of double-entry be in operation.
The essential principle of doubleentry is that every debit entry made in one book or account has its corresponding credit entry in another book or account, and vice versa. The clerical accuracy of the complete set of accounts can then be proved by drawing up a trial balance, showing that the total of all the debit entries exactly equals the total of the credit entries.
From the details enumerated in the trial balance, it will be possible to