The value of stock that can be carried, and the control of buying or manufacturing, has a foremost place in counsels of the management. If the working capital of a business remains at more or less the same figure, then, obviously, production (or, with a merchant, buying) must be regulated by sales. For the cash to pay for purchases, or production, comes from sales receipts. A balance between income from sales, and production expenditure (or, with a merchant, purchases), must be, therefore, maintained. The annual balance sheet will reveal the difference in amount between liquid assets (and assets that can be readily realized) and liabilities. But one cannot safely wait for the results of an annual balance sheet, and guesswork should be eliminated in every sphere of business.

Every manager should understand the fundamentals of accountancy, first in his own interest, that he may feel satisfied as to the staff or professional accountant methods; secondly, that he may thoroughly appreciate the significance of financial statements, the bearing of figures, and be able to draw correct conclusions.

Analyses will often reveal, hidden away somewhere in the details, something that had been forgotten, some special expense, transaction, or provision, which gives a different complexion to the year results change in the method of distributing establishment expenses, or in the bookkeeping treatment of certain ” transactions,” the creating of reserves for contingent losses, or the writing back of such reserves when no longer required, and other similar affairs should always be reckoned with in considering departmental results. Otherwise the operation of one year trading may appear to be better, or worse, than is in reality the case.

Departmental managers are very keen on their accounts showing the best results. They may dispute the accountant fairness in allocating establishment overhead expenses or other adjustments, and the manager is often called upon to decide what is strictly reasonable between contending parties; as the final court of appeal he may have to act in this quasi-judicial capacity. Some very nice points arise also on which there may be difference of opinion as to the differentiation of capital and revenue expenditure.

It is not easy to distinguish to what class such expenditure may belong. If it is capital expenditure the year profit and loss account is not affected. Revenue expenditure, on the other hand, decreases the profit. Again, as to the treatment of special expenses, as, for example, heavy advertising, or development expenses, in one year. Is the benefit of that expense worked out in one year, or two years. There are other kinds of expenditure in one year which, it may be argued, is properly chargeable against the profits of the following year.

Suspense accounts created to spread abnormal expenses over a period are justifiable, but, if not rigorously dealt with, dangerous.

The item “Debtors and Debit Balances” in a balance sheet may cover a multitude of sins. So, likewise, the item, “Shares in Other Companies,” appearing among the assets in so many balance sheets, may represent either an under-valuation or an over-valuation.

Another point on which the manager may have to adjudicate is that of Depreciation. There is no one system of writing off depreciation that will apply to every business and to every kind of asset. Every well-conducted business will, of course, make ample provision for the depreciation of every wasting asset, whether securities, buildings, machinery, furniture or fittings, or merchandise. No haphazard method of dealing with depreciation should be tolerated, otherwise confusion will arise and the accounts will only be misleading. Provision for every kind of depreciation should be made each year by charging against the profit and loss account the estimated percentage of depreciation for the year. » Read more: The Manager Accounting Performance