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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
Object Description
Title |
Why surplus is not cash [News items] |
Author |
Anonymous |
Subject |
Surplus (Accounting) |
Personal Name |
Leo, Robert James Lawrence, Page |
Citation |
Haskins & Sells Bulletin, Vol. 06, no. 01 (1923 January), p. 2-3 |
Date-Issued | 1923 |
Source | Originally published by: Haskins & Sells |
Type | Text |
Collection | Deloitte Digital Collection |
Digital Publisher | University of Mississippi Libraries. Accounting Collection |
Date-Digitally Created | 2009 |
Identifier | HS Bulletin 6-p2 |