Suspense Accounts

Definition of Suspense Accounts—General Purpose

Any account which is used as a place of temporary record for items pending a determination of their final status or allocation may be called a suspense account. The definition points out the general purpose for which such accounts are opened. It frequently becomes necessary to record items on the books as soon as the transactions giving rise to them have taken place. At the time, the information needed to determine their final place of record may be lacking. Stock certificates may find their way into the secretary’s office with the name of the party to whom transferred omitted; cash may be received through the mails with the identity of the sender not disclosed; provision must be made for bad debts before it is known what accounts will prove uncollectible—these and similar items call for record before their final status is determinable.

When cash is either short or over, the Cash Short and Over account serves as a temporary adjustment account. Discrepancies between the book record and the physical inventory of cash due to various causes are temporarily thrown into this account until further information discloses the cause. When it becomes evident that such information cannot be secured, any balance is usually treated as a profit and loss item at the end of the fiscal period. Similarly, discrepancies between the bank’s cash record and that of the business may be thrown into an account called “Bank Adjustments” or some other similar title, to show the nature of the items there recorded. The Petty Cash account, between the periods of its adjustment by means of a replenishing check, is in the nature of a suspense account. Only when an analysis of the petty cash expenditures and the replenishing check are recorded on the books is Petty Cash an asset account. Failure to locate an error in the trial balance is sometimes recorded on the books through the medium of a Trial Balance Adjustment account so as not to carry the difference over into the trial balance of succeeding months. Where such an account is set up it is a suspense account pending the finding of the error.

Again, it may sometimes become necessary to adjust arbitrarily a difference between a controlling account and the total of the ledger which it controls pending the finding of the discrepancies between the two. Thus, an Accounts Receivable Control may not accord with the sum total of the customers’ accounts carried in the sales ledger, and it may be deemed advisable to accept the subsidiary ledger record as correct rather than the figures of the controlling account. The adjusting item is usually incorporated in the controlling account but is in the nature of a suspense item pending the allocation of the difference. As mentioned above, a cash receipt from an unidentified customer must be recorded in a suitably named suspense account. Similarly, unclaimed wages which have been charged on the books to the proper ledger account and credited to cash must be carried until they are called for or until their record may with reasonable certainty be closed on the books. Unclaimed dividends must also be held in suspense until such time as a definite settlement of their disposition may be determined. Advances to subsidiaries when recorded as a charge in open account against the subsidiary are frequently of the nature of suspense items. The subsidiary may settle the account by payment of cash, by payment of its bonds or stock, or the account may not be settled and it then becomes necessary to write it off as a bad debt.

Similarly, purchase invoices and other like items in dispute may be booked as suspense items under suitable titles. However, in cases of this kind it is more usual to hold the invoices until some basis of settlement is reached before recording them on the books. If the fiscal period closes with these items still unsettled, it will be necessary to bring them on the books as contingent liabilities.

The Reserve for Depreciation may be looked upon as a suspense account. The credit entries therein which serve the several purposes explained elsewhere, are in the nature of items belonging to asset accounts which are held in suspense pending the final disposal of all or some part of the asset. This final disposition may take place either because of sale, loss by fire, or the discard of the asset on account of complete depreciation. At such a time it becomes necessary to transfer the portion of the reserve belonging to the asset finally disposed of as a credit to the asset account in order to clear that account of the asset values therein shown.

Reserve for Doubtful Accounts as a Suspense Account

In like manner the Reserve for Doubtful Accounts is a suspense account because at the close of the fiscal period it becomes necessary to make an estimate of the probable amount of uncollectible items in order to appraise correctly the value of outstanding claims against customers. This estimate must be carried as a credit in the Reserve for Doubtful Accounts because at that time it is not known definitely to what particular customers’ accounts it applies. During the following periods, as the information becomes definite as to what accounts are absolutely uncollectible, the credit held temporarily in the reserve account is transferred to the particular customer’s account which has proved uncollectible. Thus, we often speak of charging an uncollectible customer’s account against the reserve, which is another way of saying that we transfer from the reserve a portion of the credit held there in suspense, to the customer’s account after it has been determined to what customer’s account it belongs.

Use of Suspense Ledger

In an effort to keep closer track of doubtful accounts and notes receivable, such accounts are frequently transferred to what is known as a suspense ledger. A fundamental misunderstanding seems to exist with regard to the meaning of such a transfer. A business man often points with pride to the fact that he has transferred a number of items from his regular customers ledger to a suspense ledger, implying thereby a policy of conservatism in the value at which he carries his customers’ accounts on his books. As a matter of fact, the transfer to the suspense ledger in no sense changes the valuation at which the accounts are carried on the books. Separation of the doubtful items from those considered good provides a convenient basis for analysis according to which, at the end of the fiscal period, it will be possible to make a much more accurate and intelligent estimate of the probable loss from uncollectible items. Aside from that and another fact of importance, namely, that by keeping all such accounts in a suspense ledger it becomes much easier to watch them closely, nothing is to be gained by the use of a suspense ledger. As to the proper method of handling this ledger, it is best to carry in conjunction with it a separate control on the general ledger supplementary to the customers ledger controlling account. This would be effected at the time of removing an individual account to the suspense ledger, by transferring the same item from the customers ledger controlling account to the suspense ledger controlling account.

The form of the suspense ledger is somewhat different from that of the regular ledger in that provision is made for gathering information as to the efforts made to collect the items and the result of those efforts. A loose-leaf or card ledger serves the purpose best. While the form is not standardized, such information as the report of the mercantile agency at the time of granting the original credit; the agent in whose hands the account is placed for collection; the date of placing the claim in his hands; his report on his efforts to collect the account; the lawyer to whom the account is given in case suit is brought; the attorney’s report; the name and address of the trustee or receiver in case the customer has gone into bankruptcy; the date of filing a claim with the trustee; the judgment secured; the particulars as to settlement; and provision for additional remarks—all this information is of value and provision should be made to record it. It may also be sometimes desirable to make use of a suspense journal where information in addition to that for which provision has been made on the ledger account can be collated and kept for reference.

Accounts Receivable Hypothecated

In connection with the handling of accounts receivable it may be well to draw attention to the growing practice of discounting open accounts receivable in much the same way in which notes receivable are discounted. In recent years a group of non-professional bankers have initiated this kind of financing. It may sometimes happen that a merchant exhausts his credit with his regular banker and is unable to raise further necessary funds in the usual way. By applying to the so-called commercial credit companies or these non-professional bankers it is frequently possible for him to discount his new accounts as he creates them through current sales to customers and so secure funds for tiding him over a temporary stringency. The practice, however, is looked upon in business and regular banking circles as evidence of the financial instability of the merchant and his probable bankruptcy in the near future. The cost of raising funds in this way is almost prohibitive excepting in cases of dire need and it is not resorted to by business houses whose financial condition is sound.

The practice works out somewhat as follows. A merchant desiring to discount his accounts turns over to the credit company with whom he has made the arrangement, the invoices of all accounts to be discounted as evidence of the sales just made to customers. The credit company on the strength of these invoices advances anywhere from 70% to 80% of their face value, thus maintaining a margin of safety of from 20% to 30%. The charge made is called commission rather than interest, and varies from 2% to 5%. To protect the credit company, frequently such invoices, as they go out to customers, bear a notation to the effect that payment of the bill is to be made to the credit company and not to the merchant selling the goods. An obvious and serious objection to this practice is that it gives the customer information as to the method of financing to which the seller has been reduced. In view of this objection a few bankers are willing for payment to be made as usual to the merchant, who must in turn transfer the identical item or the merchant’s own check for an equivalent amount to the banker. A periodical settlement with the banker secures from him a statement and return of the moneys held by way of margin. The accounts as settled are paid in full to the banker who has previously furnished, say, 70% of their face value in cash to the merchant. The banker thus holds 30% more money than he has furnished to the merchant, and as these margins accumulate it may sometimes happen that the banker is loaning the merchant the latter’s own money. Consequently, it becomes imperative for the merchant to keep careful record of all accounts discounted with, and of their payment to, the banker so that he can protect himself by requiring a settlement as may be shown necessary.

Accounting for Accounts Receivable Discounted

The accounting procedure in keeping track of these items is very similar to that for notes receivable discounted. Inasmuch as the practice does not involve an outright sale of the accounts to the banker, a contingent liability is created in case the customer does not pay his account, which the merchant will have to make good to the banker just as in the case of notes receivable unpaid at maturity. The bookkeeping record of discounted accounts may be considered under four aspects:

1. At the time a group of accounts is discounted the charges are to Cash for the amount of cash received, to Commissions Paid on Discounted Accounts for the amount of commission, and a charge to the Bankers or to a Bankers’ Margin account for the margin. The credit offsetting these debits is to an account called Customers’ Accounts Discounted. No further entry is necessary until the banker’s report of customers’ payments.

2. At the time an account is reported as paid by the banker, the contingent liability thereon as carried in the Customers’ Accounts Discounted account has ceased to exist and a reversing entry becomes necessary, Customers’ Accounts Discounted is charged, and the customer’s account is credited.

3. When an account is not collected and is charged back by the banker, the contingent liability as carried under Customers’ Accounts Discounted becomes a real liability which has to be settled by payment to the banker of the amount of the cash originally advanced by him at the time of discount. At such a time the entry made will be a debit to Customers’ Accounts Discounted offset by credits to Cash and to Bankers or Bankers’ Margin account, as the case may be.

4. At the time of final settlement with the bankers, all that remains to be done is for them to pay over the balance of cash in their hands belonging to the merchant. This balance of cash is reflected by the amount of margins which they have demanded at the time of discount. Hence, on the merchant’s books the transaction will be recorded as a debit to Cash and a credit to Bankers or Bankers’ Margin account.

In order to keep close track of all accounts under discount it is advisable and almost necessary to make use of what may be termed a “discounted accounts register.” Every account, as discounted, should be given a number and entered in numerical sequence in the register. As an account is paid by the customer and reported by the banker it should be there shown as paid. The banker at the time of final settlement must render an accounting for all the accounts not shown as canceled by the register, either in cash or by a return of the claim against the customer.

Numbered Accounts

Allotment of Numbers to Accounts

The allotment of a series of numbers to a certain kind of accounts not only classifies them in an orderly manner by grouping them according to their resemblances and separating them according to their differences, but the notation also greatly facilitates locating them and saves much time and effort in indicating them on vouchers, journal entries, etc. Another advantage is that posting records may be checked as to their general correctness by an official who has only a general knowledge of the system. As an illustration, if the asset accounts have the general classification of 1 and the expense accounts have the general classification of 9, it needs only a cursory survey of voucher, or ledger posting data, to see whether an expense item has been charged to a capital account or vice versa.

The framework of the classification should be so constructed that any account, new or old, not already included in the scheme, can be inserted without disturbing the general order. If this is done, the system can never become obsolete in the sense of becoming impracticable, because changes can be inserted in their appropriate place as soon as they occur.

The different schemes or symbols which have been developed from time to time are the Dewey decimal system with its variations; the mnemonic system; and a combination of the two. The Dewey decimal system is undoubtedly the most complete and highly perfected in theory of any, and, as the name indicates, is a combination of figures and periods giving a symbol of almost unlimited expansion. The use of figures and symbols offers an infinite number of possible combinations, but the straight decimal system is in no way practical for general use, chiefly because a voluminous key is necessary even to interpret the symbol.

The mnemonic system, as its name indicates, was devised for the purpose of supplying a symbol which would be suggestive and which would indicate the object that it was intended to identify. The mnemonic symbol consists of a combination of letters and figures with the occasional use of a period or a dash. In order to classify completely any object in a large system, according to general classifications and special subdivisions, it is sometimes necessary to use five, six, or seven letters to identify one particular piece of machinery. In this case also, the use of a key becomes a necessity. The mnemonic system pure and simple is more often used for identifying machinery and tools or other stock, kept in a factory stock room. It is adapted also to the filing of correspondence.

The two advantages claimed for the mnemonic over the Dewey system are:

The following example shows how easily a machine can be located and described. If:

• M is used for machine
• L for lathes
• C for core ramming machines
• P for power machines
• R for ramming machines

then:

• ML would immediately suggest a lathe
• MCR a core ramming machine
• MPR a power ramming machine
• Etc.

Where there are several styles of the same type of machine, numerals may be added, as MPR₁, MPR₂, etc.

A combination of these two systems which has been applied to large institutions is characterized by grouping all departments which perform the same class of service under one letter of the alphabet, and then numbering their functions. Frederick A. Parkhurst[72] has outlined a very useful system which may be used in a manufacturing or other plant somewhat as follows. Group A with subdivisions would include:

Each department of the factory has an arbitrary letter allotted to it and is always referred to in all records by this letter and number.

The Interstate Commerce Commission uses a numerical system of numbering accounts by first grouping each class under “general accounts”; then under each group of general accounts, special accounts called “primary accounts” are numbered consecutively. These accounts have been analyzed so minutely that not much leeway is given for inserting new accounts and for this reason the method is not so elastic as a good classification requires. Thus, Operating Revenue accounts are classified generally into:

•   I Transportation—Rail Line
•  II Transportation—Water Line
• III Incidental
• IV Joint Facility

The primary accounts under these general subdivisions are numbered as follows:

Operating Expense Accounts are classified under the following general accounts:

The primary accounts under these are numbered from 201 to 462.

Another numerical method which can be used for general businesses and which corresponds somewhat to the above is arranged as follows:

• 100 to  700 Assets and Deferred Charges
• 800 to 1100 Capital Stock, Liabilities, Reserves, and Surplus
• 1500 to 2500 Profit and Loss Accounts

The even hundred accounts are the controlling accounts in the general ledger. The details are carried in subsidiary ledgers and are numbered consecutively from 101 to 199, etc.

This system also is not so elastic as one constructed on the theory of the Dewey decimal system, which may be expanded indefinitely without disarranging the system as a whole. First of all the general ledger accounts may be classified into nine fundamental groups as follows:

• 1 Asset Accounts
• 2 Investments and Treasury Securities
• 3 Prepaid Items
• 4 Liabilities
• 5 Accrued Items
• 6 Valuation Reserves
• 7 Capital and Surplus
• 8 Income
• 9 Expense Accounts

These general groups may be further subdivided indefinitely into groups of nine, keeping in mind continually that the process of division should be from general to special and that the progress should be gradual.

• 1 Asset Accounts
• 11 Fixed Assets
• 111 Land
• 1111 Used and Useful in Operation
• 11111 Details in Subsidiary Books
• 1112 Held for Speculative or Investment Purposes
• 11121 Details in Subsidiary Books
• 11122
• 112 Buildings
• 113 Machinery
• 114 Tools
• 115
• 116
• 117
• 118
• 119
• 12 Current Assets
• 121 Cash in Bank
• 1211 Local Bank
• 1212 New York Bank
• 1213 Chicago Bank
• 122 Petty Cash Fund
• 123 Notes Receivable
• 124 Accounts Receivable
• 125 Merchandise
• 1251 Inventories
• 1252 Purchases Raw Material
• 1253 In Process
• 1254 Finished Goods
• 1255
• 1256
• 126
• 127
• 128
• 129
• 8 Income Accounts
• 81 Sales
• 811 Merchandise
• 8112 By Departments, etc.
• 812 Consignments
• 8121 Details in Subsidiary Records
• 9 Expense Accounts
• 91 Manufacturing
• 911 Prime
• 9111 Wages
• 9112 Freight
• 912 Manufacturing Expenses
• 92 Selling Expenses
• 921 Salaries
• 9211 Details in Subsidiary Records
• 922 Traveling Expenses
• 923 Commissions
• 924 Advertising
• 925 General Selling
• 93 Administrative Expenses
• 94 General Expenses

All accounts under 100 are general ledger accounts, and accounts over 100 are accounts kept in subsidiary records.

From this outline it is apparent that even though each series is limited to nine as in the Dewey decimal system, it may be indefinitely expanded to include a large number of accounts, and will be elastic enough to accommodate any number of future additions to the system. It also classifies accounts so definitely that errors in posting are very rare. A skilled bookkeeper would not be likely to post an income account in any account beginning with 9 for instance.

If this system is used by a large corporation or holding company which operates branches or factories in different sections of the country, all forming part of the general system, letters of the alphabet may be allotted to each factory or branch in addition to the numerical classification. By this means the accounts of each branch may be kept separate on the books of the head office, but the corresponding expense accounts will have the same numbers and may be incorporated in the head office books or balance sheet without any difficulty. This illustrates the principle of grouping all accounts belonging to the same classification and separating all accounts which belong to different units of the same organization.

In establishing a special system of classification for any purpose whatever, the main points to be kept in mind are that the following requirements shall be fully met:

If these general rules are observed, the notation may be numerical or alphabetical, whichever serves the purposes noted above, and also is most easily memorized without the use of an elaborate key to interpret the system.

Adjustment of Fire Losses

The Insurance Contract

A fire insurance policy is a contractual engagement, modified by the conditions stated, to pay or replace, in part or in whole, any loss through fire, covering the property specified for a definite period. The amount to be paid cannot exceed the face value of the policy. The main points covered in the policy are the parties, the property, the risk, the amount, the term, the premium, and the conditions governing. There are three ways in which the contract may be terminated, namely: by expiration, cancellation, or forfeiture. Generally the contract holds good until noon of the day named as the date of expiration. Therefore, if a fire should break out in the forenoon on that day but the greater part of the damage were caused after the noon hour, the whole loss would be covered according to the terms of the policy. The policy can be canceled immediately by the insured by giving notice to the insurance company. The latter, however, must give notice and wait five days before the cancellation will be effective.

In case of cancellation, the premium cost for the expired term is usually higher proportionately than for the whole term; what is known as the “short rate” becoming effective. The causes for the forfeiture of the policy are many and various. Among the reasons are concealment or misrepresentation, or fraud in connection with taking out the policy or in substantiation of claims for losses incurred. Some of the parts of the agreement relative to occupancy, vacancy, change in title, use or allowance of dangerous substances may be the cause. Then again, neglect of the clauses as to the maintenance of an adequate sprinkler system, making provisions for watching the building, etc., may lead to forfeiture.

Requirements in Case of Loss

When a loss occurs the first thing necessary is to give at once a written notice to the insurance company and to endeavor to protect the property from further damage. The next step is to separate the damaged and the undamaged movable property, and to put these two classes in order so as to facilitate checking up. Then follows the making out of an inventory giving accurate details concerning the kind, the amount, the cost, and the damage claimed in respect to the goods. Upon the arrival of the adjuster of the insurance company, adjustment may be made immediately, or it may be a protracted affair, depending on conditions. The insured is required by the terms of the policy to submit a sworn proof of loss within 60 days. This proof must enumerate the facts and beliefs of the insured regarding the origin and time of the fire, the interest the insured has in the property, together with the interest, if any, held by others, the cash value of each item, the sum total of the loss sustained, the encumbrances on the property, other insurance, whether valid or not, a copy of all descriptions and schedules of all the policies, any change in title, use, occupation, location, possession, or exposure of the property since the issuance of the policy. It is also required to state by whom and how the insured building was occupied at the time of the fire. Sometimes the insurance company may require that this proof be verified by plans or specifications of the building, machinery, or fixtures that have been destroyed or damaged. At its option, it may request a certificate from an impartial magistrate or notary public substantiating the correctness and honesty of the claims presented. It is further required that the insured keep himself ready to exhibit any remains of the property in question. He may also be required to submit to an examination under oath and produce at the option of the insurance company any books of account, bills and other vouchers, and permit copies or extracts to be made from them.

Determination of Value of Loss

The insurance policy gives no hard and fast rule regarding the determination of value. The usual phraseology is: “This Company shall not be liable beyond the actual cash value of the property at the time any loss or damage occurs and the loss or damage shall be ascertained or estimated according to such actual cost value, with the proper deduction for depreciation, however caused, and shall in no event exceed what it would then cost the insured to repair or replace the same with material of like kind and quality.”

The insurance company has accordingly the option of using the lower of two bases of settlement, viz.: (1) actual cash value at the time of the fire; or (2) what it would cost the insured party to replace the property lost. The price which governs, cost or selling, will depend upon the nature of the property. As a general rule, it is the cost price. For goods which cannot be readily or advantageously reproduced, like cereals and cotton, the adjustment basis is the local open market price prevailing immediately before the fire. In adjusting values, adequate depreciation allowance is made not only for ordinary wear and tear, but also for losses incidental to changes of fashion, demand, etc.

Adjustment of Differences

Whenever there is a dispute regarding the standards applicable in the adjustment or a disagreement regarding the method by which the standards are applied, one or the other of the parties generally invokes the provisions of the policy for an appraisal. In accordance with the terms of the policy, the insurer and insured may each appoint an appraiser who in turn selects an umpire. This official does not act except when called on for a decision if the appraisers disagree on some point. The appraisers proceed to make a joint appraisement of the damage caused and the value of the loss. If this appraisal is incorporated in a written award and signed by the appraisers, it is binding on both parties, and will be upheld by the courts. This provision is applicable to total and partial losses, but is limited to questions of value and damage. The appraisers are generally experts, but may call in any other person to give testimony. They are not bound by any legal rules of evidence, but may determine their own procedure.

After the value of the loss has been arrived at, by agreement or appraisal, the liability as modified by the conditions or limitations comes up for consideration. There are generally a number of these clauses present in every policy although they are not always in force. One of these is the pro rata or the contributing clause. In the standard policy this clause reads as follows: “This Company shall not be liable under this policy for a greater proportion of any loss ... than the amount hereby insured shall bear to the whole insurance, whether valid or not, or by solvent or insolvent insurers covering such property.” The apportionment of the loss on this basis is often a complicated affair.

Effect of Coinsurance Clause

Another limitation clause is the “coinsurance,” sometimes called the “average clause” or “reduced rate” clause. The object of this clause is to make the relation between value and insurance somewhat more stable and to adjust the rates in accordance with the ascertained probability of big and small losses. The assumption is that partial losses to the property will also be partial losses to the insurance company. Rates can be adjusted in the light of the ascertained probability of the respective occurrence of slight and serious losses, and on the assumption that partial losses to the property will also be only partial losses to the insurance company. This clause does not operate to reduce the insured’s recovery if either the loss or insurance equals or exceeds the named percentage of value. Where applied, it does so only after any apportionment under the contribution clause has been determined.

The effect of the coinsurance clause is usually to make the insured a coinsurer with the company for the difference between an amount limited in the policy and the face of the policy. The limiting amount is usually 80%, though it may be any other agreed per cent. The clause in the policy may read somewhat as follows:

“In consideration of the premium for which this policy is issued, it is expressly stipulated that in event of loss this company shall be liable for no greater proportion thereof than the sum hereby insured bears to eighty per cent of the cash value of the property described herein at the time when such loss shall happen, nor more than the proportion which this policy bears to the total insurance.”

Thus, in order to make the insured a coinsurer, in the event of loss the company’s liability is limited to that proportion which the sum insured bears to 80% of the cash value of the property described in the policy at the time of loss. Where the loss or the insurance equals or exceeds 80% of the value, the clause has no effect; when both are less, the insured and the insurer bear the loss in certain proportions. A few illustrations will show the way in which the liability of the company is determined. In the case of an 80% coinsurance clause, the formula by which the liability can be determined is derived as follows:

• A = the sum insured, i.e., the face of the policy
• B = the amount of the loss
• C = the cash value of the property at the time of the loss
• L = the liability of the company

Then, in accordance with the provisions of the coinsurance clause,

Three applications of the formula will be illustrated. In the first, both the face of the policy and the amount of loss are less than 80% of the cash value of the property. In the second, the policy carries 80% of the value of the property but the loss is less than 80% of the property value. In the third, while the face of the policy is less than 80%, the loss is more than 80% of the property value. From the formula, it is evident that where A is 80% of C, the formula reduces to B; and where B is 80% of C, it reduces to A. It must be borne in mind, however, that the insurance company is never liable for more than the amount insured, i.e., the face of the policy, nor for more than the amount of the loss.

Applying the formula in:

It will be noted in (3) that, inasmuch as the policy is $3,000, only $3,000 can be collected.

When the amount of the liability has been determined, the insurance company has three options:

In most cases the first method is followed.

Method of Record-Keeping to Facilitate Ready Adjustment

Under the standard contract the insurance company must make adjustment within 60 days after the report of the loss. Where no differences exist or only such differences as are capable of easy adjustment between the company and the insured, payment of the loss is usually made without any delay because of the advertising value in the community of a quick adjustment of fire losses. Most of the differences which cause delay in the making of adjustments result from the inability of the insured to prove satisfactorily the amount of his loss. Failure to prove loss usually results from a slipshod manner of keeping the records and a loss of the supporting vouchers. The standard policy provides that the insurance company may require the production of original bills and vouchers to establish the cost of the property destroyed. Where these are not obtainable the process of adjustment may be delayed until data on which to figure the original cost can be secured which is satisfactory both to the insurance company and the insured. Accordingly, in order to secure adjustment of fire losses without delay, the record of all assets should be supported by original vouchers. Where the asset account is a group account, i.e., one composed of numerous pieces of property, a subsidiary ledger or register, or inventory record as it is sometimes called, should be carried, in which appear the details of the group account. If, then, the assets covered by the group account are only partially destroyed, it is then possible readily to determine the cost value of the portion destroyed by comparison with the portion left. In the case of machinery and tools, furniture and fixtures, delivery equipment, etc., the use of such a register is particularly advantageous. If the voucher system of account-keeping is in use, there will be supporting data for all charges to asset accounts and an examination of these will make it possible to determine the legitimacy of all such charges.

Another point to be kept in mind if ready adjustment is desired is to make sure that the policy covering particular property makes a sufficiently definite statement of the property covered so as to indicate clearly the exact property to which the policy applies. Oftentimes policies are taken out on buildings with the description so indefinitely worded that it becomes very difficult, where there are many buildings, to know just what is covered by any particular policy. Where policies are taken out covering new equipment as it is purchased, and at some future time the equipment is moved from building to building, the problem of allocating the policy with the property covered by it becomes particularly difficult. To surmount these difficulties it may be wise even to draw up charts and maps of all buildings and their equipment, indicating on the insurance policies the particular pieces of property covered by them as shown on the map. As mentioned above, clear, businesslike records kept by the insured and properly supported by original data will always make for speedy adjustment of fire losses.

Adjusting Entries for Fire Losses

To make the books record properly the loss suffered by fire, it is necessary to set up a special account called “Fire Loss.” To that account will be charged the full amount of the loss, including any expenses incurred in connection therewith and also the portion of the unexpired insurance premium which is canceled by the fire. This account will be credited with the amount of insurance received or allowed by the insurance company. Stated otherwise, to the account will be transferred the book value of all property destroyed and all expenses in connection with the fire. After the account is credited with the amount of insurance received, the balance shows the net loss suffered by the fire and will be closed directly into surplus so as not to affect the results of the current period’s operations. As a rule, at the time of the loss of a fixed asset, depreciation has accrued from the close of the last fiscal period and this must be taken into consideration in making the adjustments on the books. The amount of such accrued depreciation must be charged to the current period’s Depreciation account because the period must bear its proper proportion of the expense. The offsetting credit to such charge will be made directly to the asset account rather than to its Depreciation Reserve account. The depreciation applicable to the asset destroyed which has accumulated in the past must now be transferred as a credit to the asset account. After such transfer and entry in the asset account of the accrued depreciation, the balance of the asset account shows the appraised value of the asset as at the time of the fire. If this appraised value is accepted as the true value by the insurance company, no further adjustment is needed and this becomes the figure or amount which is transferred to the Fire Loss account. If, however, settlement is made on a lesser valuation, in strict theory, the difference between the book value of the asset and the value accepted as the basis for settlement should be charged to surplus as an adjustment item occasioned by insufficient depreciation charges in former periods. Usually, however, no cognizance is taken of such adjustment and the total book value of the destroyed asset is charged to Fire Loss account.

If the loss is complete or the insurance company makes a settlement of the total amount of the policy, the policy is canceled and all unexpired premiums applicable to it are used up and constitute an additional loss occasioned by fire. The amount of such unexpired premiums is therefore charged to Fire Loss account. If settlement is not made for the total amount of the policy, the amount of the settlement is indorsed on the policy in order to show the amount of insurance still in force for which the company is liable. The due proportion of the unexpired premium will be charged off to Fire Loss account. This proportion will be represented by the ratio of the amount of the settlement to the face of the policy.

In the case of loss of stock-in-trade by fire it is very necessary to have available as the basis for determining the value of the merchandise destroyed the inventory record as at the close of the previous fiscal period. The record of all purchases, purchase returns, sales, and sales returns from then until the time of the fire, and the records of previous years, should also be available in order to determine the average rate of gross profit. If such rate of gross profit is not available, there must be a rate agreed upon by the insured and the company as the basis for settlement. The method of determining the value of the goods on hand at the time of the fire by means of the data just mentioned is explained in full in Volume I, page 506, under the head of “Book or Estimated Inventories.” Here also, as in the case of fixed assets, clear, businesslike records lead to a speedy adjustment of the loss.