Charles E. Sprague

INCOME AND OUTLAY

Abstract: This early address by Sprague, who is acknowledged as a telling influence among pre-classical American accounting practitioners and thinkers, previews the insight and sophistication which is set forth in his famous Philosophy of Accounts.

I cannot agree with those who teach that the profit and loss account contains on one side losses and on the other side profits. There are even purists who object to the title “profit and loss,” on the ground that its two nouns are misplaced, and who would call it “loss and gain,” evidently thinking of it as a column of losses and a column of gains. But if the book-keeping is that of a business concern, then the expenditures made under such heads as Insurance, Interest, Office-Expense, Salaries, Commissions, Brokerage, Rent, &c., are in no sense losses; they are business outlays delibeirately made for the purpose of producing income which it is hoped will exceed the outlay. This is the essence of business as distinguished from private or professional life. Outlay for the sake of income is business; income for the purpose of meeting expenditure is not. Therefore I contend that the profit and loss account is a unit. It is composed of outlay and income, not of losses and gains. When the results of outlay and income have by its agency been compared and the excess ascertained, then and not till then do the books show a profit or a loss. Profit and loss is therefore named in the correct order, since its result is, normally, profit.

Books could be kept and by strict double-entry in which none of these accounts of outlay and income, these tributaries to the profit and loss account should appear. The equation between liabilities plus proprietorship, on the one side, and assets on the other would be preserved just as strictly as now. If an entry comes up involving outlay, and it be asked to whom or what this shall be charged, then, supposing Mr. Smith to be the proprietor, the answer would evidently be, charge it to Mr. Smith, and this would be in a certain way correct; it would bring out correctly the final result, “how much is Mr. Smith worth?” But such a method would possess no advantage over single-entry, except that of furnishing through the trial-balance a proof of accuracy. While indicating the status, it would throw no light on how that status was arrived at; it would be barren of any les-sons to point out the causes of success and of failure. The accounts of which I am speaking are intended to supply just this want. They give the ideal side of events, classifying events by their tendencies rather than by the material and personal elements involved. While they are somewhat artificial, yet they tell, or ought to tell, a true story.

The artificiality of profit and loss and its tributaries results partly from their relation to time. The reciprocal action and relation of outlay and income are continuous, but for convenience we treat them as periodical. We are compelled to cut them into even lengths for purposes of comparison. To make it most efficacious, the profit and loss account should give clearly the amount of each class of outlay and income for a certain unit of time, and in such form that their relations to each other can readily be seen. But if these precepts be not observed to each other can readily be seen. But if these precepts be not observed it is easy to destroy entirely the usefulness of the account. I will speak of some faults in this respect which I have noticed.

A common fault is to make of this account a reservoir into which is thrown in confusion anything, if we don’t know where else to put it. I do not believe in carrying anything “to profit and loss” direct. Nothing should go there except through a regular channel of classification—that is to say, through one of the outlay or income accounts. I would keep profit and loss account closed until at the end of the fiscal period it is reopened by transfers of the balances of its tributaries. It is exasperating, in examing books, to find the usefulness of the profit and loss account muddled away by this practice of carelessly dumping miscellaneous entries into it at all times, so that the important totals of outlay and income are smothered among a mass of unrelated odds and ends. Bad debts are especially apt to be huddled indiscriminately into the reservoir, instead of the more scientific way of offsetting them by a reserve account, which may be based upon judgment as to each doubtful account or upon an assumed percentage. In either case, I think it advisable that the amount so reserved during the period be stated in the profit and loss account in a single net sum. There should be no odds and ends, no etceteras in the profit and loss account, as it exists purely for purposes of classification, so every line in it should comprise an entire class of outlay or income.

I frequently observe that the outlay accounts are insufficiently subdivided: especially is expense account too often made a “reservoir.” No efficient control of expenses can be kept unless they are subdivided to a reasonable degree. If this is done any unusual increase in expenditure of a certain kind attracts attention. If our bills for fuel or for light, or for packing-boxes are greater than last year we ought to know whether the increase is justified by any change in price or in amount required for consumption, while the same increase distributed over the “bunched” expenses and perhaps partly offset by some retrenchments would not attract attention. A firm in New York was robbed of nearly $50,000 in a few years by falsified bills for packing-boxes. It is manifest that the large expense account of this firm was too much “bunched,” otherwise it would have been evident that so many boxes could not possibly have been used. Among my own books (savings-bank) I keep an expense-book, divided under the following heads: Salaries, stationery, advertising, fuel, light, communication and protection, supplies and cleaning, taxes, insurance. Bank Department assessments, legal and miscellaneous. The latter heading very seldom contains an entry. The book is subdivided so that each of these headings occupies as many pages as experience has shown necessary, and a leather tag indexes it at each subdivision. Full particulars of each purchase or other expenditure are given, as in invoice-book, making it easy to refer for comparison of prices or ascertaining the source from which some article had previously been ordered. The expense account in the general ledger is posted monthly without subdivision.

As the outlay and income accounts are statistical they are frequently posted only monthly by totals, especially when the columnar form of posting medium is used. Provided the subdivision be adequate, I prefer it to separate postings. But where this plan of monthly totals is followed another reform may be made. The outlay and income accounts may be put into a tabular form far more compact than that of the account and considerable turning of leaves may be avoided. This tabular statement may thus constitute the profit and loss account. I have employed with success a form something like the following, the outlay accounts above and the income accounts below (Fig. 1).

This form is, I think, more instructive and comprehensive than where each account appears on a separate page. I have not brought in the purchases and sales until the close of the period for obvious reasons. I may say here that it seems to me preferable, in respect to merchandise, to keep the outlay and the income in two separate accounts, purchases and sales or merchandise and sales. This also facilitates the handling of returned goods. Perhaps if this is done, it

82

The Accounting Historians Journal, Fall, 1978 Outlay.

Jan. Feb. March. April. May. June. Total.
Office expense.
Rent.
Advertising.
Brokerage.
Total.
Net profit dis-tributed.
Income.
Jan. Feb. March. April. May. June. Total.
Commissions. Interest. Total. Mdse. profit.
Fig.1.—Form for Outlay and Income Accounts.

would be better to bring into the profit and loss account not the net margin on goods sold, but the entire sales on the one side, and on the other the cost of the goods sold (old inventory + purchases— returned to seller—new inventory.)

(The lecturer further illustrated the tabular form of profit and loss account by two examples from his own experience. The first repre-sented the accounts of a hotel, where an inventory of all property was taken at the close of every month and the outlay and income analyzed. There were no accounts on the ledger in the usual form for outlay or income, but a double page in tabular form, of which the following is a portion:

(A.) (B.) (C.) (D.) (E.)
Inventory Inventory
Cost. Deductions. beginning end of Consumed.
of month. month.
Marketing Groceries Liquors Provisions
Ice
Coal Gas, &c.
Fig. 2.—An Outlay Account for a Hotel

Sprague: Income and Outlay (1889)

The relation of these columns is as follows: (A) — (B) + (C) — (D) = (E).
The other example was from a periodical publishing business. There being no inventory, there were only three columns to each month, but a fourth column gave the accumulated total to and including that month.

May, 1889.
Total out-
Expen- Deduc- Net cost. lay for five
diture. tion. months.
Literary
Artistic
Paper
Composition . . Engraving Press-work Commissions . &c.

Fig. 3—Outlay Account for Periodical.

In this case many questions were asked which resulted in nearly the whole of the system being described, the books being highly specialized and quite unconventional. The principal book of original entry was an interleaved check-book. On the left-hand page, cor-responding to the stub of the ordinary check-book, were the records of deposits and checks, made explicit as to the source from which received and the purpose for which paid. The right-hand page con-tained, first, the petty cash account and then two distributing col-ums, into which all the receipts and payments were side posted: amounts of the same kind being written, not in different columns but in different sections of the same column. The accumulated totals of each were carried forward to the top of corresponding sections on the next page until the close of the month. The two narrow money columns, on the left of Fig. 3, were ruled in very narrow horizontal lines and used for collecting together a few items of the same kind. There is sometimes a subdivision of outlay or income which does not have entries enough to make it worth while to run a separate column or section for it, yet there must, in the tabular form, be a way provided for regularly consolidating these.)

84 The Accounting Historians Journal, Fall, 1978

Receipts.
Subscriptions
Advertise m’ts .
Back numbers.
Current num
bers

Total Income
Deduc- Net for five
tion. proceeds. months.

Fig. 4.— lncome Account of Periodical.

Outlay or income frequently appears in successive stages, as in the following example. In an establishment regularly using coal as one of its branches of outlay, a certain number of tons are

1. Bought and delivered in January.
2. Paid for in February.
3. Consumed during the three months ending with March.

A certain grade of book-keepers would pay no attention to the transaction until the cash payment in February. In a monthly statement of outlay and income it would then appear that there was no outlay for coal in January nor in March. Another book-keeper, of a higher grade perhaps, would make the entry when the coal was bought, thus recognizing the liability correctly, but as to outlay would be equally wrong, as he would show all the outlay to have been in January. A third book-keeper would make consumption his gauge, not delivery nor payment; and he, ascertaining as nearly as possible the amount on hand at the end of each month, and consequently the amount consumed, would spread the outlay over the three months. But in the long run these three would be identical. The book-keeper would be justified in employing all three of these ways of treatment, according to the nature of the case and the importance of the amount. I merely object to such a method as confuses the outlay of different periods where it is important to know it.

So, too, in interest receivable. It assumes the forms of interest ac-crued, interest due and cash, and if an exact account of earnings and assets is to be kept these must be distinct. I do not say it is always necessary to keep such an exact account, for at the best bookkeeping is but an approximation, and no accounts ever were or will be absolutely exact.

(A free discussion followed in which many of the members of the institute participated and which drifted at times far from the subject of the lecture, but was always interesting and instructive. It is noteworthy that the words debtor and creditor, or debit and credit, were not once used in the lecture or in the discussions.)