capital account. It should be noted, however, that the dangers of overestimating inherent in such a method make many regard it as a very questionable accounting policy. Conservative accountants usually hold that appreciation is best ascertained by actual sale and that otherwise, only a "paper" profit will result which is not available as dividends. Of course, artificially "writing up" a surplus reserve with such a "paper" profit does not show real conditions. Appreciation can, however, often be recognized correctly, as in the case of quoted securities.

VIII. MANUFACTURING ACCOUNTS.

Special Problem of Manufacturing.

Thus far we have taken it for granted that the business operations of a concern are of a single more or less uniform kind. In the case of the retail firm whose transactions were set forth hypothetically, it was stated that they were the buying and selling of goods. Later we recognized the necessity in many businesses of investing capital not only in goods but in fixed forms such as plant, machinery, tools, etc. Nothing, however, has been said of those cases where a concern is engaged in two or more distinctly different kinds of operations. The grouping of goods account as between various departments-dry goods, groceries and house-wares, was not a recognition of this fact, because the business operations there were of the same kind-purchase and sale-although they dealt with different classes of goods. A concern may, however, have more than one distinct kind of activity. It may engage in manufacturing and may then sell the products of its business. It may be a transportation company and at the same time be engaged in producing articles for shipment, such as coal. In fact there may be various combinations of businesses or kinds of business that are being carried on by the same concern or under substantially identical

conditions. In such cases, there is the same reason for segregating the operations and results of one side of the business from those of another that is recognized in the case of the departmental accounting systems of which we have already spoken. The necessity for such segregation is, however, greater in the latter case than in the former because of the fact that the operations are different in their character, involve different materials and methods, and are carried on by individuals of different classes and abilities. Not only for the purpose of showing which parts of a concern's business are making profits and which ones are incurring losses, but also for that of showing how extensive such relative profits and losses are, a segregation of accounts is desirable. It is further desirable because of the fact that a different system of accounts is needed in the one case from what is called for in the other. To get such a distinct segregation, implies, however, an organization of the business for that purpose. Such an organization may be worked out in any one of several different ways. In order to illustrate what is meant at this point we may assume the example of a concern which is engaged in manufacturing and selling shoes. The accounting for the selling end of the business will naturally be organized on an independent basis, just as the selling department is probably so organized. The same will be true of the manufacturing end which is undoubtedly kept separate from the selling end in organization, and should be treated in the same way from the standpoint of accounting. It may be said generally that there should be a separate organization and a separate accounting system for each separate manufacturing department of the business and that these separate accounting systems should fit into one general system which is calculated to combine the results of the whole and to show exactly how each is related to, what it takes from, and what it furnishes to, the general business. How this can be done, particularly with

reference to manufacturing, presents a more complex problem in accounting organization than any thus far discussed.

Organization of Accounts.

Starting with the general accounting system of the concern, we may suppose that business is opened with a cash capital all paid in and that at the outset it is determined to recognize three distinct departments of the businessA, B and C. The accounts pertaining to capital, cash, etc., are opened in the usual way and of course the same would be true of the plant and property accounts if no process of segregation was attempted. Just here is the first change which must be introduced into our outline of organization. In a former illustration (see p. 80 foregoing) we assumed that Smith & Brown in purchasing a stock of goods decided to put these goods into three classes, groceries, dry goods and house-wares, and when cash was expended after crediting the cash account, instead of debiting a general goods account this general entry in goods was broken up into three separate items-one for house-wares, one for groceries, and one for dry goods. which we supposed to be $2,000 each. It will be recalled that we then reopened these three sections of goods account with a debit entry of $2,000 in each. It is clear that if these departments had been sufficiently different from one another-if, for example, one or two of them had dealt with manufacturing and one had been a retailing processit might have been desirable to make a distinct segregation of this same kind at the outset. Thus, if the three departments A, B, and C spoken of are conceived to be three radically distinct branches of the business, a separate account might be opened with each and might be debited with the sum total set apart for that department out of the capital of the concern which we assumed to be paid up in cash. This is what would be done if the capital

set apart were to be the subject of buying and selling in each department, it being consumed in the course of the manufacturing operation just as goods which are bought at a certain price and are sold or are consumed or dispensed with, so far as the business itself is concerned, in the commercial process. In manufacturing, however, a large amount of fixed capital has to be employed. The concern will undoubtedly determine at the outset about how this fixed capital ought to be distributed or apportioned among the several departments. It will then permit the investment of such capital in the machines, plant and property pertaining to these different departments according to this predetermined proportion. In so doing it will disburse cash which will be simply credited to cash account and debited to the various plant and property accounts in the usual way. These plant and property accounts may be carried in the general ledger just as before (see p. 85 foregoing), in which case, so far as we have gone, the accounting is thoroughly familiar. If the business be broken up into three departments as already supposed, there may be established a separate ledger for each department in which will be opened the various plant and property accounts represented by the fixed capital pertaining to that department. This ledger is then simply a section of the general ledger. The accounts are kept in a separate book but that is merely for the sake of convenience and they might just as well be in the general ledger. If distributed by departments they would however group together the accounts pertaining to departments A, B, and C, so far as the investment of fixed capital was concerned.

Peculiarity of Manufacturing.

It is now possible to note the peculiarity of manufacturing accounts. A plant has been provided and everything made ready for doing certain kinds of work. The accounting will differ from ordinary accounting in that

what is now sought to trace is the process of manufacturing and its effect on the general business. It is also sought, where there is a departmental organization, to trace the relation of each department to the others. Suppose the process of production now begins. It gives rise to outlays for such items as wages, light, fuel, power, etc., and it also results in using up raw materials and in to some extent reducing the value of the fixed capital. What is now to be attempted is to show how these changes in the assets of the concern are represented. Evidently as, say, material is used up, a credit must be given to material account. So also with such items as fuel and the like. These accounts have been debited when the fuel, etc., was bought. They are now credited as the same items are used up or issued for consumption in the business, but how shall the results of such a process be recorded? The next step in the accounting is to establish the corresponding debit entries. This is done by opening accounts corresponding to each of those already existing. Thus, parallel with material account, is opened a "material issued" account. Parallel with fuel account is opened a "fuel issued" account. Parallel with machinery account is opened a "depreciation" account. All these accounts are debited with the same amount that had been credited in the accounts originally opened. They represent the plant, stores, material, etc., that have been used up. In other words they are the expense side of manufacturing. At the same time, as wages are paid, the money will be debited to a wages account and any other expenses that are incurred will be debited to the proper expense account. We now have a set of accounts the debit entries in which, as already stated, represent the expense side of manufacture. We can now open a "manufacturing" account or "production" account. To this will be transferred all of the debit entries represented by the expense items which have been described. The account will be credited with the amount of product turned