CLASSIFICATION OF LEDGER ACCOUNTS FOR CREAMERIES. £9 
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 Denise 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 ecreameries there is found a provision for the 
ereation 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 has 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 
avainst 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 ccnsideration 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 
aiect 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. 
Tor 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 procedure necessary 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 fer this purpose of meeting expenses. The terms Sinking 
TFund Reserve (see p. 20) and Sinking Fund must not be used in this connection. 
OPERATING RESERVE. 
DeEsir: CREDIT: 
1, With all expenditures which this 1. With amounts withheld from distri- 
reserve is created to meet. bution to patrons for the purpose 
of meeting expenses. 
