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skeleton organization is an overhead expense and it would be unfair to charge the entire cost of such an organization to a single contract when the contractor's entire business consisted of only one operation on hand.

Depreciation

No provision has been made either in the general ledger accounts discussed in Chapters XII and XIII, or in the profit and loss statement, for depreciation, either on construction equipment or office furniture owned by the contractor. Depreciation on equipment for balance sheet purposes is distinctly different from such depreciation for tax purposes. Construction equipment is varied in character and numerous in items, as explained in Chapter VII. The life of the "Heavy Equipment" ranges from one to ten years. The smaller equipment may not outlive one operation, depending upon field conditions. Its value as second-hand equipment is greatly reduced after usage. The cash value of an investment in a variety of equipment will seldom exceed 25% of the purchase price of new equipment. Sales of individual pieces of equipment may yield a greater return, but collectively equipment has no greater value than this percentage. To a going business, the value might be 40% or 50% of its purchase price. It is therefore recommended that for balance sheet purposes the contractor's equipment should be carried at a net book value based on an established percentage of the equipment inventory. The percentage that a particular contractor would fix is a matter of policy for him to decide.

Depreciation on equipment for tax purposes would have to take into consideration the useful life of each piece of equipment and its salvage value at the end. The table in the Appendix is a guide to the period during which different pieces of equipment have a useful value. The salvage value in this table is figured approximately at an average of 25%. In order

properly to determine the depreciation on equipment owned by a contractor, it is therefore necessary to have a record supplementing the books of account. This record would contain a list of the equipment, its purchase price, the amount of depreciation suffered annually and other details essential in a record of this character.

The same distinction between depreciation on a balance sheet and for tax purposes applies to office furniture. A very conservative contractor might capitalize his first investment in office furniture, write it off in a short period of years, and thereafter treat all further purchases as expense items, instead of showing them as assets on his balance sheet. This, too, is a matter of policy for each contractor to decide for himself.

For tax purposes, the office furniture would have to be capitalized and depreciated annually, frequently on the basis of a ten-year life.

CHAPTER XVI

FINANCIAL STATEMENTS
THE BALANCE SHEET

Working Trial Balance

A working trial balance (Form 28) is given on the opposite page to show the successive steps from the trial balance to obtaining the data for the balance sheet. The profit and loss amounts have been shown as they appear in the Profit and Loss account rather than as they would in the other accounts to which postings would be made. It can be readily seen, however, that if the Hudson Construction account had a credit of $89,500 prior to the posting of a profit entry of $105,000, that the balance of the account after the latter amount had been charged to it would be the debit balance of $15,500 appearing in the fifth column.

Preparation and Interpretation

The items on the balance sheet have been numbered for ready identification with those in the last columns of the working trial balance. The majority of the amounts on the balance sheet are self-explanatory.

The amount shown as "Unbilled Construction Costs" represents the debit balance of the Hudson and Hudnut construction accounts, $15,500 and $4,150 respectively. Reference to the statement of uncompleted contracts (Form 24) will show that the "Earned Profit on Work Completed" on the Hudson is $105,000, and the "Application to the Owner" $600,000. The latter figure represents the actual cost of the work, plus the contractor's profit. The actual cost of the work billed to the owner must therefore be $495,000. Otherwise, the profit

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figure of $105,000 is incorrect. The same statement shows the expenditures to have been $510,500. If $495,000 has been billed to the owner, $15,500 represents items of cost which have not been charged to him.

The amount given as a liability to creditors and subcontractors because of unbilled accounts amounting to $22,400, consists of the credit balances of the Williams, Jones, and Ford construction accounts ($5,700, $10,000, and $6,700). Further

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reference to the statement of uncompleted contracts shows the profit on the Williams job to be $30,600 and the "Application to the Owner" $237,600, making the cost of the work billed

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