The Accounts

Date: 2015-10-07; view: 499.

The proper selection of the accounts into which all transactions of a company are to be classified requires considerable experience. The accounts selected should be those which will reveal information useful to management and others. An excessive number of accounts may be less informative than a smaller number and will normally involve more record-keeping costs. The criteria for selecting the number and types of accounts are the use to which the information is to be put and the accounting data processing system used. There is no one set of accounts which is correct for all purposes.

Contra and Adjunct Accounts. As the need for more detailed informa­tion on past activities has increased, the traditional manual processing method has been expanded by adding adjunct and contra accounts to disclose more completely the details of main accounts. For example, the "Accumulated Depreciation" contra (offsetting) account has been developed in order to maintain a record of both the initial cost of fixed assets and the extent to which they have been used. To illustrate, a record on a building costing $100,000 and subsequently used at the rate of 2% a year could be maintained in two accounts: the main account "Building" and the contra account "Accumulated Depreciation—Build­ing," When the contra account is used, the annual entry to record de­preciation would be:

Depreciation…………………………….. $2,000

Accumulated Depreciation—Building. ……. $2,000

When the building is 10 years old, the main account continues to disclose the original cost of $100,000 as a debit balance and the contra account carries a credit balance of $20,000. The building would be disclosed on a balance sheet as follows:

Building………………………………….$100,000

Less: Accumulated Depreciation. ………. 20,000

Unamortized Cost……………… $80,000

The adjunct account is best typified by the "Freight-in" account, which is a record of the cost of transporting purchased merchandise. Thus, a raw material purchase of $8,900 on which $200 of freight was paid to obtain it has a total cost of $9,100. If it is desired to disclose the details of the cost, the "Freight-in" adjunct account can be used to collect the freight charges and the "Purchases" account to record the invoice price of the "Merchandise" account. On an income statement the freight-in cost would be added to the purchases to reveal the total cost of acquiring the merchandise, as shown below:

Merchandise, at start ofperiod (assume)...................... $ 2,100

Add: Purchases............................... $ 8, 900

Freight-in.................................... 200

Cost of merchandise acquired during period................... 9,100