Evening star. [volume] (Washington, D.C.) 1854-1972, 1919-07-27
PR OFT AND LOSS ACCRUALS.
BANK ACCOUNTING ETHICS
Inside Information on Technical Subjects
for the Benefit of the General Financial
Fraternity by an Authority.

that days work cost 100000 Have
you no cost in savings deposits for
the 9Th of June? When you discount
ed for johnson & Smith $4,000
note at three months on the 10th of
April and charged then $500 Cor per-
haps s275) is it possible to have
earned it all on the 10th of April,
nothing on the 11th, or on any other
day during the three months to the
10th Of July? Do you suppose that
the insurance company to whom you
pay. in advance, premiums on three
year fire policy takes into its earnings
when received the amount of your
check?
The principle-the right and wrong
of the matter-is so very patent that
discussion seems superfluous. 1t is
difficult to imagine a banker, es-
pecially banker Of parts. so igno-
rant or so narrow as to dispute the
principle. And yet. amazing fact,
they do exist. and declafm. rant and
rage against the principle. On what
grounds. except that to change their
old easy-going. guessing methods of
bookkeeping, is disturbing. too much
trouble.
my figures are near enough to
right. What difference whether I can
or cannot show comparative profit
and loss?" This sort of rejoinder
stamps a banker rather badly. He
may be fool or knave, or both.
Many bankers will cheerfully admit
the necessity of nice precision in the
reports of borrowers. while declining
to admit even the desira bility Of such
in their own. This is most unfair and
decidedly arrogant. Why insist that
a commercial house shall set up a re-
serve for bad debts? Because no
merchant expects to sell on credit
and collect 100 per cent Of his sales.
Has any bank seen a clean sheet on
bad debts? We remember that. rather
than on the day we write OFF losses,
the actual loss was incurred in most
cases on the day we made the loan.
merchant uses past experience to
arrive at the percentage of sales
which proved a loss. A life insurance
company uses past experiences to ar
rive at mortality figures. Why should
not bank use some such comparable
basis? Why not percentage of losses
to average daily loans? 1t is quite
simple.
Honest, But Wrong.
A surprisingly large number of
bankers will honestly contend that
the undivided profits is particularly
intended to provide for bad debts. If
they were consistent they would not
then use this account as a part of
net worth along with capital stock
and surplus.
1t isn't consistent. It isn't logical
it is absurd! What other business
would countenance such thoughts on
the part of bookkeepers?
II, then. we may assume that
banker-a real banker-adnits the
principle of accruing in order to show
correct figures. our problem SINNERS
down to practice-to find a practical
way of accruing.
Fundamentally necessary is a clas-
sification of interest-be airing assets
and liabilities. Banks not operating
on the accrual bases and wishing to
correct the error of their ways by
establishing as of some certain date
the amount Of discount and interest
in suspense, must find out their posi-
ton in that regard.
This is not colossal job, when ap-
preached reasonably. Time loans and
discounts are usually entered in a
ticker in order of maturity; the to-
tails of each days maturity will. or
should. give an aggregate equal to
the general ledger controlling ac-
count.