CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. 



19 



At the end of the fiscal year sufficient funds should have been reserved to cover the 

 dividend. When the dividend checks are written an entry should be made debiting 

 Dividends Payable account and crediting Bank Account. In case this entry does not 

 close the Dividends Payable account, it should be closed by a debit or credit, as the 

 case may be, to Surplus Adjustment. 



The Dividends Payable account will be carried only by cooperative creameries. 

 It should be constantly borne in mind that the dividends thus provided are not 

 deductible as an expense item in computing the income tax. 



SINKING FUND RESERVE. 



In the by-laws of a large number of creameries there is found a provision for the 

 creation of what is called a sinking fund. This so-called sinking fund is created by 

 withholding from the income distributable to patrons a certain amount per pound of 

 butter fat received. This fund is to be used to pay the expenses of the. creamery. 



Referring to the definition of a sinking fund given on page 9 it is at once evident 

 that the mere withholding from patrons of a certain amount per pound of butter fat 

 received will not establish a sinking fund, or anything which in any way resembles 

 such a fund, inasmuch as the amount provided by the by-laws ha3 not been "with- 

 drawn from the general funds of the business," nor has it been "invested in securities 

 or deposited in a savings account." In reality the only thing which has been accom- 

 plished is the placing of a limit on the operating expenses and the creating of a reserve 

 against which certain expenses are chargeable. Under this method part of the ex- 

 penses are charged into the Loss and Gain account at the end of the year, and another 

 part (those charged to Sinking Fund Reserve) are not. It is then impossible to deter- 

 mine from the books the cost of operating the business without considerable addi- 

 tional work and only an expert bookkeeper is able to prepare a statement which will 

 show the true cost. 



Too little consideration is given to the fact that on account of the variation in the 

 total operating expense from month to month, deductions for expense based on an 

 estimate must necessarily be either more or less than the actual expense. Either will 

 affect the returns from future operations; a deficit will require that deductions be 

 made from income in addition to those necessary for current expenses, and a surplus 

 will make necessary the distribution of the previous year's earnings thus accumulated. 

 For this reason it has been found that the creation of a reserve to meet expenses is 

 extremely undesirable, and it is recommended that the by-laws of creameries operat- 

 ing under this plan be amended, and that such a plan be omitted in the organization 

 of new creameries. This method of controlling expenses serves no useful purpose and 

 the greatest benefits to all concerned would result if it could be replaced by a more 

 modern and efficient one. 



However, numerous creameries will probably retain this clause in their by-laws, 

 and therefore the accounting proeed unnecessary in such cases will be discussed here. 

 When the by-laws contain the provisions just referred to, the term Operating Reserve 

 should be used to indicate the account to which will be credited all income withheld 

 from distributions to patrons for this purpose of meeting expenses. The terms Sinking 

 Fund Reserve (see p. 20) and Sinking Fund must not be used in this connection. 



OPERATING RESERVE. 



Debit: 



Credit; 



1. With all expenditures which this 



1. With amounts Avithheld from distri- 



reserve is created to meet. 



bution to patrons for the purpose 





of meeting expenses. 



