Why surplus is not cash; [News items];

              2 HASKINS & SELLS January
Why Surplus Is Not Cash
THE general manager of a public utility
some years ago, while claiming credit
for having originated the standard classi­fication
of accounts for the utility in ques­tion,
admitted in the same breath that he
had never been able to understand why his
company should not have in cash the
amount reflected by the surplus account.
Surplus as used in accounting relates to
value; excess, or free value, as it were. To
assert that surplus may be found only in
cash would be to claim that nothing but
cash has value.
Most business enterprises require cash
for purposes of convenience, since it is the
one thing which passes freely among busi­ness
concerns. But the original cash with
which an organization begins business soon
loses its identity. Some of it passes out
in exchange for merchandise; some is dis­bursed
for services and supplies; some,
perhaps, for construction work, thus hav­ing
been converted into fixed property.
Many transactions might take place
without the creation of any surplus. Cash
may be converted into other forms of
assets; liabilities may be incurred and
liquidated; plants built and stocks of
merchandise laid in, or goods manufac­tured,
without giving rise to a dollar's
worth of surplus.
The essence of surplus is profit and the
essence of profit is sales. Generally speak­ing,
not until goods, services, or privileges
which have been acquired at one price are
disposed of at higher prices is there any
profit. But because all goods are not sold
for cash, it necessarily follows that a part
of the profit which has been added to the
cost of the merchandise purchased must
be found in the accounts not yet collected
from customers or what are commonly
known as accounts receivable. Notes may
even be accepted in settlement of accounts.
There is a regular cycle of cash, goods,
accounts receivable, notes receivable, cash.
The accounts or notes must be reduced
to cash in order that the profit may be
realized, but it must be appreciated that
prior to this point the profit rests either
in accounts or notes.
If it were possible to ear-mark on a
dollar basis the units of investment in a
business there would be, first, the original
cash consisting entirely of dollar units.
Passing into merchandise purchased for
sale the units would still contain a hundred
cents. As the goods were sold at a profit
the units representing the accounts re­ceivable
would contain, say, a dollar and
twenty cents. Some of these units remain
in the accounts receivable; some pass into
the class of notes; others come back into
the cash.
There are now, assuming that some of
the original units were left in the cash, two
classes of units therein; one containing a
hundred cents, or what might be called the