ACCOUNTING NOMENCLATURE

NZ Truth, Issue 1196, 1 November 1928, Page 2

ACCOUNTING NOMENCLATURE

(By "Fiat Lux.") "COUNTRY EXHIBITOR," writing from Amberley, asks: "Is it correct to have 'Arrears (of subscriptions) written off' and shown on the expenditure side of a balance-sheet (arrears being moneys not collected and being naturally assets)? Copy of balance-sheet attached herewith." ' As similar questions have been asked on several occasions recently, "Fiat Lux" proposes to answer the query m full, feeling that the subject .. is of more than passing interest to many readers. Firstly, it is essential'to understand just what a balance-sheet is; although many volumes have been written to this end, it is sufficient for the purposes of these notes to state that a balance-sheet is merely a collection of balances of debits and credits remaining m a firm's books after all accounts relating to gains and losses have been eliminated, by transfer to a profit and Joss account. . Thus, a balance-sheet, should contain only balances representing, on the left-hand, side, liabilities, and on the right-hand side, assets. For firms which are engaged m business for profit, a profit and loss account has to be kept;" this contains on the left-hand side all the. losses, such as wages, r rent, etc., whether paid or not at balance date. Similarly, on the right-hand, or credit side, all gains are shown, whether realized m cash or not. , . Consequentfy a profit and loss account bears no relation whatever to cash receipts and cash payments, and must not be confused witlv such. Most concerns, institutions and professional people not m business for mere profits do not raise a profit and loss account, but keep an account which is similar thereto m all respects, except that it is al- • ways called an income and expenditure account. It must be understood. ! that this account contains the whole of the income earned during the year, whether received m cash or not, and expenditure means all expenses incurred, but not necessarily paid m cash at balance day. The so-called balance-sheet which "Country Exhibitor" has forwarded to support his query, is not a balance-sheet^at all, but is merely the income and expenditure account of an agricultural show association; • being equivalent m all respect to a trading concern's profit and loss account, the entries he refers to are properly included therein, since m ; previous years the amounts had. been, included as income and now prove : to be uncollectable. The fundamental differences between a balance-sheet, a profit and loss account and a statement of receipts and payments must be recognized and appreciated by all who would attempt to understand modern published accounts. Unfortunately, too many people dub anything m the shape of published accounts a balance-shest — and there the trouble * starts. . , .

capitJil of £100,000 of which £76,000 are ordinaries and £24,000 tleferreds. Ordinaries to the value of £40,000 are now on offer to the public and the directors reserve the right to issue a further £10,000 m terms of the present prospectus, the remaining £26,000 being held m reserve. Of the deferreds totalling £24,000, £21,257 are to be issued as. fully paid up to the shareholders of the vendor company — Fijian Pineapple Plantations, Limited — m exchange for its whole issued capital and its assets and undertaking, whilst . a further £1950 (fully paid) up may be issued m parcels of £ 650 to the organizing broker upon 20,000, 30.000 and" 40,000 ordinary shares respectively being subscribed. The terms upon which the deferred shares are to be issued certainly mark unmistakably the vendors' faith m the venture and provide that these shares "shall not be entitled to receive any dividend m any year until a dividend of 10 per cent, shall have been paid for that year on the ordinary shares now being issued." ' It is further provided that when a dividend of not less than 10 per cent, has been paid upon the whole of the ordinary and' deferred capi- / tal for one year the deferred shares shall thereupon become and for all purposes be deemed to be . ordinary shares. Heavy block type at the foot of page four of the prospectus upon which the particulars of capital are set out states: "No better proof of, the belief! of the founders of the company m its prospects could be afforded than the facts that they are. receiving no cash payment and that they will receive no dividend until 10 per cent, is paid on thd new capital." '. Now let us read an extract which commences on page 11 of the prospectus and runs, as follows: "Tiio vendor to the company is Fijian ' PineapplePlantations, Limited, whose registered office is at Auckland, New Zealand. The consideration payable to the vendor is the sum of £21,257, which is to be satisfied by the. allotment to the vendor or as It may direct of £21,257 fully paid deferred shares 6f £1 each. \ m the capital of the company. "The company also takes over the •business -of the-vondor as a going conr cern as from August .2, 1928, and assumes all its obligations from that date, any moneys found to be due the vendor to be paid to it within. four

infinitely prefer to put his money into a venture m New Zealand. To be perfectly fair to the promoting or vendor company, however, it has to be stressed that the success or failure of the new venture means a tremendous thing financially and economically not only to the vendor company which is virtually the property of one individual, but also to the Qolony of Fiji. It has to be remembered that whilst subscribers to the present issue may put up and risk £100 or £500 each, the vendor company is backing its faith m the venture, by putting into the pool the whole V ; a.lue of the prpperty (whatever that may be) and cannot get one cent out of It until .new -shareholders have engaged a 10 per cent, dividend j for one year. If the venture should be liquidated at any time the vendor can claim only as an ordinary shareholder. This is indeed a remarkable manifestation of faith in.,the venture which* is not, however, shared by this writer who wants something moro tangible thnn faith to invest upon. Whether this' opinion is shared by the Investing public or not, the fact remains that this Dominion is jn that state whe'-e it reunites capital and still more capital to develop both primary and secondan' industries. Every class of investor h*»is a very wide ranae of choice of N°w Zealand investments from the thousand to one ultra speculative venture to the permanent qji*>. ■ edged Ro«ernm»n{ guaranteed A\/ z per cent, investment. This boiner the case, this critic does not look at nil favorably j^pon overseas rennests for >7ew. Zenlnnd ran'tal, evpn 'honfrh the v«"t.ii'*e ■ should be backed by the faith nf many people.