Interest accrued on notes receivable and on notes payable On Furniture and Fixtures, % of the cost On Delivery Equipment, 1% of the cost On Warehouse Equipment, 1% of the cost There is a liability of $35 for traveling expenses, and of the traveling salesman's salary for one-fourth of a month. There is also a liability for the salaries of the bookkeeper, the deliveryman, and of the partners, each for one-fourth of a month. 6. Make a statement of Assets and Liabilities. 7. Copy the statements in the blanks after they have been approved by the teacher. Leave spaces for distribution and proof. 8. Close the accounts of the general ledger, except the Capital and Personal accounts of the partners. The Profit and Loss account should be closed by Net Profit placed in red ink on the debit side of the account and brought below the line on the credit side of the account in black ink. 9. Adjust interest between partners and make the necessary entry. 10. a) Close the Profit and Loss account in the usual way after you have posted the entry to it for the adjustment of interest. b) Close the partners' personal accounts into their capital accounts. c) Close the partners' capital accounts. 11. Make a proof trial balance after closing the ledger. To Transfer a Business to a Purchaser. To transfer a business, certain legal steps are necessary to make the transfer valid and certain entries are necessary to show the transfer and to close the books. To Transfer This Business. First, A contract of sale or a bill of sale should be drawn up, showing the assets transferred to the new business, the liabilities assumed by the new business, and the terms of the agreement. It should definitely name the contracting parties, the terms of payment, the consideration, and any other agreements entered into. Second, The real estate can be transferred only by deed, which should be made out and signed and acknowledged by the partners before a notary public. Third, All notes receivable transferred to the new firm should be indorsed by the partnership to the new business. The Entries Necessary include the entry to show the sale of the business, to show the distribution of the Good Will, the entry to show the payment for the purchase of the business, and the entry to give each partner his share of the business. Good Will. Good Will represents the established trade of a business. This may include the location, the standing, the business integrity, trade marks or trade names built up by the business by advertising, and the name of the business itself or the right to use "Successors to" before the name of the old business. It frequently includes, also, a provision that the persons selling shall not engage in the same kind of business in a certain locality for a certain period of time. Good Will, if rightly valued, is an asset and may be included in the accounts whenever an established business is sold to another business. But it must represent actual values, otherwise it is simply a means of increasing the nominal value without an increase in the assets. This is frequently called watered stock, in the case of a corporation. An entirely new business cannot have a Good Will. Good Will is the most permanent kind of an asset as it cannot be sold without selling the business. The business may increase or decrease but that should not change the value of Good Will. It does not show a profit or a loss simply because a business has increased or decreased in value. When a business is sold, Good Will may show a profit if more is received for it than the book value and a loss if less is received for it than the book value. Because Good Will is such an intangible asset, many firms prefer to write a certain amount off each year. If the Good Will is $5000, the business may decide to write it off in ten years. Each year the following entry would be made: Profit and Loss To Good Will To write off of the Good Will. $500 $500 At the end of ten years, the account would be closed. Make the following entries and close accounts as a result of the transfer of the business: 1. Since Good Will for $750 is included in the purchase of the business, an entry must be made to put it on the books. Debit Good Will for that amount and credit each partner's Capital account for one-half of that amount. 2. Debit the Houston Hardware Co. for the assets of the business, including Good Will and excluding cash, and credit each of the assets under the proper account name for the balance as shown on the ledger. The explanation should be To transfer the assets to the Houston Hardware Co. 3. Each liability except that to the partners should be debited and the Houston Hardware Co. credited for the sum. The explanation should be To transfer the liabilities assumed by the Houston Hardware Co. 4. The difference between the debits and the credits to the account of the Houston Hardware Co. is the amount to be paid for the business. Receive a check for $10000 and a note at three months, with interest at 6%, for the balance. Make an entry in the journal for both the check and the note received. Then check the cash entry and enter it in the cash book and check it. Open an account for the Houston Hardware Co. and post the entries that have been made. 5. By agreement, E. B. Gordon has agreed to take the note at its face value in part for his net worth. Make an entry to transfer it to him. 6. Give each partner a check for the balance of his net worth. These two checks should exactly balance the cash book. 7. Rule the cash book and any accounts in the ledger that have not been ruled. 8. Submit all of your books to your teacher for correction. ANALYSIS OF RESULTS Per cent of Profit and of the Cost of Doing Business Based on the Selling Price. In Part II, the method of computing the per cent of the cost of doing business and the per cent of net profit was based on the cost of the goods sold, frequently called the turnover. That is a method very commonly used and in certain businesses is the only one that is used to any extent. But in many businesses the difficulty of ascertaining the total cost, and the fact that selling expenses bear a closer relation to the selling price than to the cost price, makes it advisable to compute both the per cent of cost of doing business and the per cent of profit on the selling price. Other reasons for figuring profits and expenses on the sales are: 1. Total sales can easily be found from the books. Total cost is rarely shown. 2. In many businesses, the selling price is fixed by competition or by trade agreement and it is easier to base the profits on a fixed amount rather than on an indefinite cost. 3. Commissions for selling are always based on the selling price. 4. The ordinary expenses of the business, especially the selling expenses, depend to a large extent on the gross sales. In order to use this method to determine the selling price or to make comparisons, the business must first ascertain the cost of doing business based on sales by comparing the selling expenses and the general expense with the gross sales. Problem: If the gross sales amount to $8000, the selling expenses are $800, and the general expenses are $200, the per cents would be found as follows: Selling Expenses, $800÷Gross Sales, $8000=.10 or 10%. General Expenses, $200÷Gross Sales, $8000=.025 or 24%. These per cents should be worked out from time to time and comparisons made of one fiscal period with another. How to Find the Selling Price. To find the selling price of an article on this basis, the selling price must be used as a base. Using the per cents given above, if an article costs $12.75, the cost of doing business is 10% for the selling expenses, and 24% for the general expenses, and the profit is to be 15% on the sales, the selling price would be found as follows: Let 100% The selling price = = 10% The selling expenses 21% The general expenses 15% The profit = 100% (10%+2%+15%)=724%, the cost price of the goods. $12.75 .725-$17.59, the selling price. As this computing would require a great deal of work, tables have been made for finding the selling price of an article when the total per cent of the cost of doing business and the per cent of profits are given. Exercise 62. Basing the cost of doing business and the profits on the gross sales, work the following problems: 1. The monthly sales of a business were $3750. The cost of doing business was $525. a) Find the per cent of cost of doing business. b) If the business wishes to make a profit of 20%, for what price should an article that cost $9.25 be sold? 2. If the selling expenses are 12%, the general expenses, 5%, and the business wishes to make a profit of 15%, at what price should an article that cost $22.50 be sold? 3. The yearly sales of a business were $38975. The selling expenses were $4592.50 and the general expenses $1875.40. a) Find the per cent of selling expenses. b) Find the per cent of the general expenses. c) If the business wishes to make a profit of 17%, for what price should an article that cost $43.75 be sold? 4. The selling price of an article is $18.50. The cost of doing business is 12% and the average profits on sales is 18%, what is the first cost of the article? CHAPTER XXX CLOSING BY JOURNAL ENTRY The method of closing so far used has been by the ledger transfer method. By this method, all inventories were entered in red ink and brought below on the opposite side in black ink. All profits and losses were entered in red ink to close and taken to the opposite side of the Profit and Loss account in black ink. The net profit was transferred to the proprietor's account by entering it in red ink on the debit side of the Profit and Loss account and transferring it to the credit side of the proprietor's account. This method may be used in a small business if the number of nominal accounts is not large, but if the business is a large one with many nominal accounts, the journal method is a better one. By the Journal Method, nothing that changes an account is entered in any account without first entering it in the journal as a closing entry. No red ink is used except for balancing accounts and for ruling. Asset and liability accounts are balanced in the same way as before by putting Balance in red ink on the smaller side and transferring this balance to the opposite side in black ink. This does not change the account but shows the result of the account in one amount. How to Enter Inventories. Inventories must be entered by journal entry. The inventory of goods on hand is entered by opening a separate account for Merchandise Inventory, as follows: Merchandise Inventory To Purchases This has the same effect as crediting Purchases in red ink for the amount of the inventory and bringing the inventory below in black ink. Since all closing entries use the general columns only, the entries are all given in the two-column journal form. Freight In must be transferred to Purchases by the following entry: To Freight In Returns and Allowances on Purchases and on Sales must be transferred to Sales and Purchases respectively, as follows: |