chapter  3
10 Pages

'Corporation Gas works Accounts', Leading article and correspondence, The Accountant, 4 August-8 September, 1888

The erroneous conclusions which Mr. KING has drawn may be proved from his own clearly expressed and perfectly accurate premisses. He says that the liquidation of debt is neither rr.ore nor less than inve,ti111) a portion of the profits made. Quite so. But Mr. KING has had sufficient experience in accounts to know that when a trader (and he will remember he insists on comparing the gas accounts to the accounts of a private individual) invests money he does not, nor should he, charge the money from the credit side of his Cash Book to the debit of his Profit and Loss Accouut. An example in figures is better than an explanation in words. Let us take a case which will be perfectly familar to Mr. KING, and (for the point immediately under consideration) furnish an exact analogy. Suppose that a Manchester manufacturer has a capital of £8o,ooo, and owes a loan of £2o,ooo, that trade is prosperous, and that he decides to pay off the loan by instalments of say £2,ooo a year out of profit$, the resolution would be effected in the following way (all figures being assumed) :- Dr. PROP'IT 4 LOBS ACCOUNT, YEAR Sl/12/87. Cr. ifo M&chillft}", 'PtaDt., &o., I By Amount broosM dotrn '' ~p~OC:::. ~ A&,OOO before DepnoiaU.on .. .110,000

Now, if Mr. KING tries to charge to profit and loss account the £2,ooo instalment of the Joan which may be regarded as a charge precisely similar in substance to a sinking fund contribution, the result will be an absurdity. The amount can only be charged once ; if it is charged to profit and loss the lender remains a creditor for the full amount which is not the fact. The entries for sinking fund in the Manchester Gas Works Profit and Loss Accounts are erroneous, and the same remark applies to the " amount paid over to Sinking Fund Account" in the Waterworks Revenue Accounts, and to the description "Surplus and Sinking Fund" applied to tbe surplus or capital in almost if not quite all the balance sheets of the City Fund as well as the trading departments. There can be no such thing as a debit in a Profit and Loss Account for sinking fund ; and there can be no such thing as a sinking fund on the liabilities' side of a balance sheet unless the fund has been overdrawn.